Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

FORM 10-K

x

Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended SEPTEMBER 30, 20182020

-or-

-or-

o

Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                 to

Commission File Number: 000-55084

PRUDENTIAL BANCORP, INC.

(Exact Name of Registrant as Specified in its Charter)

PENNSYLVANIA


(State or other jurisdiction of incorporation or organization)

46-2935427


(IRS Employer Identification No.)

1834 WEST OREGON AVENUE

19145

PHILADELPHIA, PENNSYLVANIA

(Zip Code)

(Address of Principal Executive Offices)

Registrant'sRegistrant’s telephone number: (including area code)(215) (215755-1500

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Trading Symbol (s)

Name of Each Exchange on Which Registered

Common Stock (par value $0.01 per share)

PBIP

The Nasdaq Stock Market, LLC

Securities registered pursuant to Section 12(g) of the Act:NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES oNOx

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES oNOx

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. YESx NO o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check markcheckmark whether the registrantRegistrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).YESx NO o

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

Large Accelerated Filer  o

Accelerated Filer    x

Non-Accelerated Filer  o

Smaller Reporting Company  x

Emerging Growth  Company  o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). YES o NO x

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

Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES  NO 

The aggregate market value of the voting stock held by non-affiliates of the Registrant based on the closing price of $18.14$14.80 on March 29, 2018,31, 2020, the last business day of the Registrant'sRegistrant’s second quarter was approximately $156.4$115.2 million (9,007,996)(8,202,479 shares issued and outstanding less approximately 389,000418,000 shares held by affiliates at $18.14$14.80 per share). Although directors and executive officers of the Registrant and certain employee benefit plans were assumed to be "affiliates" of the Registrant for purposes of the calculation, the classification is not to be interpreted as an admission of such status.

As of the close of business on December 3, 2018,9, 2020 there were 8,929,1298,098,675 shares of the Registrant'sRegistrant’s Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

1.Portions of the Definitive Proxy Statement for the 20182021 Annual Meeting of Shareholders are incorporated by reference into Part III, Items 10-14 of this Form 10-K.

Table of Contents

Prudential Bancorp, Inc. and Subsidiaries

FORM 10-K INDEX

For the Fiscal Year Ended September 30, 20182020

Page
PART I

Page

PART I

Item 1.

Business1

Item 1.

Business

4

Item 1A.

Risk Factors

42

37

Item 1B.

Unresolved Staff Comments

52

46

Item 2.

Properties

47

Item 2.3.

PropertiesLegal Proceedings

52

48

Item 3.

Legal Proceedings54
Item 4.

Mine Safety Disclosures

55

49

PART II

Item 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

56

49

Item 6.

Selected Financial Data

58

50

Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

60

53

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

74

64

Item 8.

Financial Statements and Supplementary Data

75

64

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

133

109

Item 9A.

Controls and Procedures

133

109

Item 9B.

Other Information

110

Item 9B.

Other Information

134

PART III

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

135

111

Item 11.

Executive Compensation

111

Item 11.

Executive Compensation135
Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

135

111

Item 13.

Certain Relationships and Related Transactions, and Director Independence

136

112

Item 14.

Principal Accounting Fees and Services

136

112

PART IV

Item 15.

Exhibits and Financial Statement Schedules

136

113

Item 16.

Form 10-K Summary

138

115

Signatures

Signatures139

2

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Forward-looking Statements.

Forward-looking Statements.

In addition to historical information, thisThis Annual Report on Form 10-K includes certain "forward-looking statements" based on management's current expectations. Prudential Bancorp, Inc.’s (the “Company” or “Prudential Bancorp”) actual results could differ materially, as such term is defined inmay be  deemed to contain “forward-looking statements” within the Securities Actmeaning of 1933, as amended, and the Securities Exchange Act of 1934, as amended, from management's expectations. These forward looking statements are intended to be covered by the safe harbor for forward looking statements provided by the Private Securities Litigation Reform Act of 1995. Such forward-lookingThese 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, expectations or predictions of future financial or business performance, conditions relating to Prudential Bancorp, Inc. (the “Company” or “Prudential Bancorp”). These forward-looking statements include statements with respect to the Company’s beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, that are subject to significant risks and uncertainties, and are subject to change based on various factors (some of which are beyond the Company’s control). The words “may,” “could,” “should,” “would,” “will,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan” and similar expressions are intended to identify forward-looking statements.

In addition to factors previously disclosed in the reports filed by Prudential Bancorp with the Securities and Exchange Commission (“SEC”) and those identified elsewhere in this Form 10-K, the following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance: the strength of the United States economy in general and the strength of the local economies in which the Company conducts its operations; general economic conditions,conditions; the scope and duration of the COVID-19 pandemic; the effects of the COVID-19 pandemic, including on the Company’s credit quality and operations as well as its impact on general economic conditions; legislative and regulatory changes including actions taken by governmental authorities in response to the COVID-19 pandemic; monetary and fiscal policies of the federal government,government; changes in tax policies, rates and regulations of federal, state and local tax authorities including the effects of the Tax Reform Act; changes in interest rates, deposit flows, the cost of funds, demand for loan products and the demand for financial services, in each case as may be affected by the COVID-19 pandemic, competition, changes in the quality or composition of the Company'sCompany’s loan, investment and mortgage-backed securities portfolios,portfolios; geographic concentration of ourthe Company’s business; fluctuations in real estate values; the adequacy of loan loss reserves; the risk that goodwill and intangibles recorded in the Company’s financial statements will become impaired; changes in accounting principles, policies or guidelines and other economic, competitive, governmental and technological factors affecting the Company'sCompany’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.

3

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PART I

Item 1. Business

General

Prudential Bancorp is a Pennsylvania corporation that was incorporated in June 2013. It is the successor corporation to Prudential Bancorp, Inc. of Pennsylvania (“Old Prudential Bancorp”), the former stock holding company for Prudential Bank (the “Bank” or “Company” and formally known as “Prudential Savings Bank”), a Pennsylvania-chartered, FDIC-insured savings bank, after the completion in October 2013 of the mutual-to-stock conversion of Prudential Mutual Holding Company (the “MHC”), the former mutual holding company for the Bank.

The mutual-to-stock conversion was completed on October 9, 2013. In connection with the conversion, Prudential Bancorp sold 7,141,602 shares of common stock at $10.00 per share in a public offering. In addition, 2,403,207 shares were issued in exchange for the outstanding shares of common stock of Old Prudential Bancorp held by shareholders other than the MHC. Each share of Old Prudential Bancorp’s common stock owned by the public was exchanged for 0.9442 shares of Prudential Bancorp common stock. Gross proceeds from the conversion and offering were approximately $71.4 million. Upon completion of the offering and the exchange, 9,544,809 shares of common stock of Prudential Bancorp were issued and outstanding.

1

As of January 1, 2017, the Company completed its acquisition of Polonia Bancorp, Inc. (“Polonia Bancorp”) and Polonia Bank, Polonia’s wholly owned subsidiary. Polonia Bancorp and Polonia Bank were merged with and into the Company and the Bank, respectively. Under the terms of the Merger Agreement, shareholders of Polonia had the option to receive $11.09 per share in cash or 0.7460 of a share of Prudential common stock for each share of Polonia common stock, subject to allocation provisions to assure that, in the aggregate, Polonia shareholders received total merger consideration that consisted of 50% stock and 50% cash. As a result of Polonia shareholder stock and cash elections and the related proration provisions of the Merger Agreement,merger agreement, Prudential Bancorp issued approximately 1,274,197 shares of its common stock and approximately $18.9 million in the merger.

Financial information as of and for the year ended September 30, 2014 presented in this annual report is derived from the consolidated financial statements of Prudential Bancorp.

Prudential Bancorp’s business activity primarily consists of the ownership of the Bank’s common stock. Prudential Bancorp does not own or lease any property. Instead, it uses the premises, equipment and other property of the Bank. Accordingly, the information set forth in this annual report, including the consolidated financial statements and related financial data, relates primarily to the Bank. As a bank holding company, Prudential Bancorp is subject to the regulation of the Board of Governors of the Federal Reserve System (“Federal Reserve Board”).

The Company’s results of operations are primarily dependent on the results of the Bank. As of September 30, 2018,2020, the Company, on a consolidated basis, had total assets of approximately $1.1$1.2 billion, total deposits of approximately $784.3$770.9 million, and total stockholders’ equity of approximately $128.4$129.1 million.

The Bank is a community-oriented savings bank headquartered in South Philadelphia which was originally organized in 1886 as a Pennsylvania-chartered building and loan association known as “The South Philadelphia Building and Loan Association No. 2.” The Bank grew through a number of mergers with other mutual institutions with the last merger being with Polonia Bank completed in January 2017. The Bank converted to a Pennsylvania-chartered savings bank in August 2004. The banking office network currently consists of the headquarters and main office and 9nine additional full-service branch offices. Seven of the banking offices are located in Philadelphia (Philadelphia County), one is in Drexel Hill, Delaware County and one is in Huntingdon Valley, Montgomery County, Pennsylvania. The Bank maintains ATMs at all of the banking offices. WeThe Bank also provideprovides on-line and mobile banking services.

We are primarily engaged in attracting deposits from the general public and using those funds to invest in loans and securities. The Company’s principal sources of funds are deposits, repayments of loans and mortgage-backed securities, maturities and calls of investment securities and interest-bearing deposits, funds provided from operations and funds borrowed from the Federal Home Loan BankBank(”FHLB”) of Pittsburgh. These funds are primarily used for the origination of various loan types including single-family residential mortgage loans, construction and land development loans, non-residential or commercial real estate mortgage loans, home equity loans and lines of credit, commercial business loans and consumer loans. Traditionally, the Bank focused on originating long-term, single-family residential mortgage loans for portfolio, althoughportfolio. However, in recent years the focus has shifted in recent years to emphasizeemphasizing commercial real estate and construction and land development lending. Construction and land development loans increased from $22.4$21.8 million or 6.8%6.2% of the total

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loan portfolio at September 30, 2016 to $260.6 million or 38.0% of the total loan portfolio at September 30, 2014 to $160.22020. The Company also increased, on a dollar basis, its commercial real estate loans from $79.9 million or 24.1%22.7% of the total loan portfolio at September 30, 2018. The Company also increased its commercial real estate loans from $16.12016 to $139.9 million or 4.9%20.4% of the total loan portfolio at September 30, 2014 to $119.5 million or 18.0% of the total loan portfolio at September 30, 2018.2020. See “-AssetLending Activities” and “-Asset Quality”and “-Lending Activities”.

2

The investment and mortgage-backed securities portfolio increaseddecreased by $126.3$138.2 million to $366.0$443.2 million at September 30, 20182020 from $239.7$581.5 million at September 30, 2017.2019. This increasedecrease was primarily due to increased purchasessales and paydowns  of corporate bonds and guaranteed mortgage-backed securities. The Company recorded approximately $376,000$6.0 million in lossesgains on sale of investment and mortgage-backed securities during fiscal 2018.2020. At September 30, 2018,2020, the investment and mortgage-backed securities available for sale had an aggregate net unrealized lossgain of $10.5$13.4 million compared with thean aggregate net unrealized lossgain of $1.7$10.3 million as of September 30, 2017,2019, which was primarily due to recent increasesdecreases in the yield on longer term U.S. Treasury bond yields which resulted in a decreasean increase in the fair value of our available-for-sale securities.

At September 30, 2018,2020, the Company’s non-performing assets totaled $14.4$13.0 million or 1.3%1.1% of total assets as compared to $15.6$14.3 million or 1.7%1.1% of total assets at September 30, 2017.2019. Non-performing assets at September 30, 20182020 included five construction loans aggregating $8.8$8.5 million, 3228 one-to-four family residential loans aggregating $2.9$3.1 million one single-family residential investment property loan in the amount of $156,000 and fivefour commercial real estate loans aggregating $1.7$1.4 million. Non-performing assets atThere was no real estate acquired through foreclosure or deed-in-lieu as of September 30, 2018 also included real estate owned consisting of two single-family residential properties with an aggregate carrying value of $1.0 million.2020.  At September 30, 2018,2020, the Company had 10four loans aggregating $6.2totaling $5.0 million that were classified as troubled debt restructurings (“TDRs”). Five of such loans aggregating $650,000 were performing in accordance with the restructured terms as of September 30, 2018 and were accruing interest. One TDR is on non-accrual and consists of a $449,000$415,000 loan secured by a single-family property. A second TDRresidential property and is on non-accrual and consists of a $156,000 loan secured by various commercial and residential properties.performing in accordance with the restructured terms. The three remaining TDRs totaling $4.9$4.6 million are also classified as non-accrual and are a part of a lending relationship totaling $10.7$10.4 million (after taking into account the previously disclosed $1.9 million write-down recognized during the quarter ending March 31, 2017 related to this borrowing relationship).The primary project of the borrower (the development of a 169-unit townhouse project in Bristol Borough, Pennsylvania) is the subject of litigation between the Bank and the borrower. SubsequentAs previously disclosed, subsequent to the commencement of the litigation, previously disclosed, the borrower filed for bankruptcy under Chapter 11 (Reorganization) of the federal bankruptcy code in June 2017. The Bank has moved the underlying litigation noted above with the borrower and the Bank from state court to the federal bankruptcy court in which the bankruptcy proceeding is being heard. The state litigation is stayed pending the resolution of the bankruptcy proceedings. Nine units have been sold in the project and a portion of the proceeds have been applied against the outstanding debt.As of September 30, 2018,2020, the Company had reviewed $14.3$13.0 million of loans for possible impairment of which $13.4$13.0 million was classified substandard compared to $19.7$15.5 million reviewed for possible impairment and $15.0$13.9 million of which was classified substandard as of September 30, 2017.2019. The allowance for loan losses totaled $5.2$8.3 million, or 0.9%1.4% of total loans and 38.6%63.7% of total non-performing loans (which included loans acquired from Polonia Bank at their fair value) at September 30, 2018.2020. See “-Asset Quality”.

The main office is located at 1834 West Oregon Avenue, Philadelphia, Pennsylvania and the Company’s telephone number is (215) 755-1500.

3

The Company files with the Securities and Exchange Commission (“SEC”) and makes available, free of charge, through its website, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements on Schedule 14A, and all amendments to those reports as soon as reasonably practicable after the reports are electronically filed with the SEC. These reports can be obtained on the Company’s website at https://www.psbanker.com by following the link, “About Us,” followed by “Investor Relations.” The information contained on or connected to our website is not incorporated by reference into this Annual Report on Form 10-K.

Market Area and Competition

Most of Prudential Bancorp’s business activities are conducted within a few hours’ drive from Philadelphia and include eastern Pennsylvania, New Jersey, Delaware and southern New York.

We face substantial competition from other financial institutions in our service area, especially from many local community banks, as well as many local credit unions. Competition among financial institutions is based upon a number of factors, including the quality of services rendered, interest rates offered on deposit accounts, interest rates charged on loans and other credit services, service charges, the convenience of banking facilities, locations and hours of operation

5

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and, in the case of loans to larger commercial borrowers, applicable lending limits. Many of the financial institutions with which we compete have greater financial resources than we do, and offer a wider range of deposit and lending products.

We believe that an attractive niche exists serving small to medium-sized business customers not adequately served by our larger competitors, and we will seek opportunities to build commercial relationships to complement our retail strategy. We believe small to medium-sized businesses will continue to respond in a positive manner to the attentive and highly personalized service we provide.

Lending Activities

General. At September 30, 2018,2020, the net loan portfolio totaled $602.9$588.3 million or 55.8%48.1% of total assets. The Company has changed its lending philosophy and increased its investment in loans for construction and land development and commercial real estate which comprised 42.0%in the aggregate 58.5% of the loan portfolio at September 30, 2018.2020. Management believes it has the expertise to underwrite these types of loans which management believes will add toenhance the Company’s earnings while reducing interest rate risk due to the generally shorter contractual maturity of such loans. TheAt September 30, 2020, the Company still holds $324.9held $233.9 million of residential real estate loans collateralized by one-to-four family, also known as “single-family”, residential properties secured by properties located primarily in the Company’s market area.

The types of loans that we may originate are subject to federal and state banking laws and regulations. Interest rates charged by us on loans are affected principally by the demand for such loans and the supply of money available for lending purposes and the rates offered by competitors. These factors are, in turn, affected by general and economic conditions, the monetary policy of the federal government, including the Federal Reserve Board, legislative tax policies and governmental budgetary matters.

4

Loan Portfolio Composition. The following table shows the composition of the loan portfolio by type of loan at the dates indicated.

  September 30, 
  2018  2017  2016  2015  2014 
  Amount  %  Amount  %  Amount  %  Amount  %  Amount  % 
  (Dollars in Thousands) 
Real estate loans:                                        
One-to-four family residential (1) $324,865   48.82% $351,298   53.83% $233,531   66.36% $259,163   78.40% $282,637   85.47%
Multi-family residential  34,355   5.16%  21,508   3.30%  12,478   3.55%  6,249   1.90%  7,174   2.17%
Commercial real estate  119,511   17.96%  127,644   19.56%  79,859   22.69%  25,799   7.80%  16,113   4.87%
Construction and land development  160,228   24.08%  145,486   22.29%  21,839   6.21%  38,953   11.78%  22,397   6.77%
Total real estate loans  638,959   96.03%  645,936   98.98%  347,707   98.81%  330,164   99.89%  328,321   99.28%
Loans to financial institutions  6,000   0.90%  -   -   -   -   -   -   -   - 
Commercial business  17,792   2.67%  488   0.07%  99   0.03%  0   0.00%  1,976   0.60%
Leases  1,687   0.25%  4,240   0.65%  3,286   0.93%  0   0.00%  0   0.00%
Consumer  953   0.14%  1,943   0.30%  799   0.23%  392   0.12%  399   0.12%
Total loans  665,391   100.00%  652,607   100.00%  351,891   100.00%  330,556   100.00%  330,696   100.00%
Less:                                        
Undisbursed portion of                                        
loans in process  54,474       73,858       5,371       17,097       9,657     
Deferred loan costs  2,818       2,940       (1,697)      (2,104)      (2,449)    
Allowance for loan losses  5,167       4,466       3,269       2,930       2,425     
Net loans $602,932      $571,343      $344,948      $312,633      $321,063     

September 30, 

 

2020

2019

2018

2017

2016

 

    

Amount

    

%

    

Amount

    

%

    

Amount

    

%

    

Amount

    

%

    

Amount

    

%

 

(Dollars in Thousands)

 

Real estate loans:

  

  

  

  

  

  

  

  

  

  

One-to-four family residential (1)

$

233,872

 

34.13

%  

$

268,780

 

37.95

%  

$

324,865

 

48.82

%  

$

351,298

 

53.83

%  

$

233,531

 

66.36

%

Multi-family residential

 

31,100

 

4.54

%  

 

30,582

 

4.32

%  

 

34,355

 

5.16

%  

 

21,508

 

3.30

%  

 

12,478

 

3.55

%

Commercial real estate

 

139,943

 

20.42

%  

 

128,521

 

18.15

%  

 

119,511

 

17.96

%  

 

127,644

 

19.56

%  

 

79,859

 

22.69

%

Construction and land development

 

260,648

 

38.04

%  

 

253,368

 

35.77

%  

 

160,228

 

24.08

%  

 

145,486

 

22.29

%  

 

21,839

 

6.21

%

Total real estate loans

 

665,563

 

97.13

%  

 

681,251

 

96.19

%  

 

638,959

 

96.03

%  

 

645,936

 

98.98

%  

 

347,707

 

98.81

%

Loans to financial institutions

 

6,000

 

0.88

%  

 

6,000

 

0.85

%  

 

6,000

 

0.90

 

 

 

 

Commercial business

 

12,916

 

1.88

%  

 

19,630

 

2.77

%  

 

17,792

 

2.67

%  

 

488

 

0.07

%  

 

99

 

0.03

%

Leases

 

176

 

0.02

%  

 

518

 

0.07

%  

 

1,687

 

0.25

%  

 

4,240

 

0.65

%  

 

3,286

 

0.93

%

Consumer

 

604

 

0.09

%  

 

834

 

0.12

%  

 

953

 

0.14

%  

 

1,943

 

0.30

%  

 

799

 

0.23

%

Total loans

 

685,259

 

100.00

%  

 

708,233

 

100.00

%  

 

665,391

 

100.00

%  

 

652,607

 

100.00

%  

 

351,891

 

100.00

%

Less:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Undisbursed portion of loans in process

 

86,862

 

  

 

114,528

 

  

 

54,474

 

  

 

73,858

 

  

 

5,371

 

  

Deferred loan costs

 

1,794

 

  

 

2,856

 

  

 

2,818

 

  

 

2,940

 

  

 

(1,697)

 

  

Allowance for loan losses

 

8,303

 

  

 

5,393

 

  

 

5,167

 

  

 

4,466

 

  

 

3,269

 

  

Net loans

$

588,300

 

  

$

585,456

 

  

$

602,932

 

  

$

571,343

 

  

$

344,948

 

  

(1)Includes home equity loans totaling $3.3 million, $4.1 million, $4.9 million, $6.5 million $3.8 million, $4.1 million and $5.0$3.8 million as of September 30, 2020, 2019, 2018, 2017 2016, 2015 and 2014,2016, respectively. Also includes lines of credit totaling $7.8 million, $8.5 million, $10.2 million, $14.1 million $7.4 million, $8.5 million and $10.0$7.4 million as of September 30, 2020, 2019, 2018, 2017 and 2016, 2015 and 2014, respectively.

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Contractual Terms to Final Maturities.The following table shows the scheduled contractual maturities of loans as of September 30, 2018,2020, before giving effect to net items. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less. The amounts shown below do not take into account loan prepayments.

One-to-Four

Construction

Loans to

Family

Multi-family

Commercial

and Land

financial

Commercial

    

Residential

    

Residential

    

Real Estate

    

Development

    

institutions

    

Business

    

Leases

    

Consumer

    

Total

 One-to-Four       Construction Loans to          
 Family Multi-family Commercial and Land financial Commercial        
 Residential  Residential  Real Estate  Development  institutions  Business  Leases  Consumer  Total 
 (In Thousands) 
Amounts due after September 30, 2018 in:                                    

(In Thousands)

Amounts due after September 30, 2020 in:

One year or less $13,974  $4,940  $5,113  $95,319  $-  $1,483  $392  $31  $121,252 

$

7,369

$

1,910

$

5,248

$

120,945

$

$

7,248

$

69

$

9

$

142,798

After one year through two years  3,620   956   1,932   33,468   -   -   894   67   40,937 

 

9,017

 

639

 

13,370

 

74,475

 

 

3,418

 

107

 

18

 

101,044

After two years through three years  5,274   1,554   3,065   13,989   -   7,128   401   31   31,442 

 

18,230

 

14,492

 

2,560

 

10,000

 

 

 

 

17

 

45,299

After three years through five years  28,307   7,273   16,607   -   -   2,315   -   93   54,595 

 

15,020

 

3,121

 

32,028

 

11,365

 

 

1,024

 

 

52

 

62,610

After five years through ten years  77,409   18,205   71,250   3,148   6,000   6,866   -   239   183,117 

 

53,583

 

9,258

 

67,961

 

43,863

 

6,000

 

1,226

 

 

254

 

182,145

After ten years through fifteen years  34,225   974   5,690   -   -   -   -   83   40,972 

 

22,055

 

51

 

13,071

 

 

 

 

 

254

 

35,431

After fifteen years  162,056   453   15,854   14,304   -   -   -   409   193,076 

 

108,598

 

1,629

 

5,705

 

 

 

 

 

 

115,932

Total $324,865  $34,355  $119,511  $160,228  $6,000  $17,792  $1,687  $953  $665,391 

$

233,872

$

31,100

$

139,943

$

260,648

$

6,000

$

12,916

$

176

$

604

$

685,259

5

The following table shows the dollar amount of all loans due after one year from September 30, 2018,2020, as shown in the table above, which have fixed interest rates or which have floating or adjustable interest rates.

     Floating or    
  Fixed-Rate  Adjustable-Rate  Total 
  (In Thousands) 
          
One-to-four family residential (1) $233,962  $76,929  $310,891 
Multi-family residential  27,140   2,275   29,415 
Commercial real estate  89,693   24,705   114,398 
Construction and land development  64,909   -   64,909 
Loans to financial institutions  6,000   -   6,000 
Commercial business  9,174   7,135   16,309 
Leases  1,295   -   1,295 
Consumer  858   64   922 
Total $433,031  $111,108  $544,139 

(1) Includes home equity loans and lines of credit.

Floating or

    

Fixed-Rate

    

Adjustable-Rate

    

Total

(In Thousands)

One-to-four family residential (1)

$

180,741

$

45,762

$

226,503

Multi-family residential

 

27,523

 

1,667

 

29,190

Commercial real estate

 

84,235

 

50,460

 

134,695

Construction and land development

 

4,143

 

135,560

 

139,703

Loans to financial institutions

 

6,000

 

 

6,000

Commercial business

 

1,630

 

4,038

 

5,668

Leases

 

107

 

 

107

Consumer

 

591

 

4

 

595

Total

$

304,970

$

237,491

$

542,461

(1)Includes home equity loans and lines of credit.

TheBank originates construction and development loans and commercial real estate loans with fixed rates and shorter contractual maturities (than is generally the case for residential mortgage loans). To a lesser extent, mortgage loans are originated for sale on the secondary market in order to mitigate interest rate risk and to increase non-interest income.

Loan Originations. The Bank’s lending activities are subject to underwriting standards and loan origination procedures established by our boardBoard of directorsDirectors and management. Loan originations are obtained through a variety of

7

Table of Contents

sources, including existing customers as well as new customers obtained from referrals and local advertising and promotional efforts. Consumer loan applications are taken at any of our offices while loan applications for all other types of loans, including home equity and home equity linelines of credits,credit, are taken only at our main office. All loan applications are processed and underwritten centrally at our executive office in Huntingdon Valley, Pennsylvania.

Single-family residential mortgage loans are generally written on standardized documents used by the Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie Mac”) and Federal National Mortgage Association (“FNMA” or “Fannie Mae”). Property valuations of loans secured by real estate are undertaken by independent third-party appraisers approved by the board of directors and are reviewed internally before acceptance. At both September 30, 20182020 and September 30, 2017,2019, the Company had no residential real estate loans in portfolio that would be considered subprime loans, which we define as mortgage loans advanced to borrowers who do not qualify for loans bearing market interest rates because of problems with their credit history.  The Bank does not originate and has not in the past originated subprime loans.

We also purchase participation interests in larger balance loans, typically commercial real estate and construction and land development loans, from other financial institutions in our market area. Such participations are reviewed for compliance, are underwritten independently in accordance with our underwriting criteria and are approved before they are purchased by the Management Loan Committee and one of the following: the President’s Committee, the Executive Committee or the full board, basedBoard, depending upon the dollar amount of the participation interest being purchased. Generally, loan purchases have been without any recourse to the seller.seller, but on occasion we have obtained such provisions. However, we actively monitor the performance of such loans through the receipt of regular updates, including inspection reports, from the lead lender regarding the loan’s performance, discussing the loan with the lead lender on a regular basis and receiving copies of updated financial statements of the borrower from the lead lender. These loans are subjected to regular internal reviews in accordance with our loan policy.

6

The Bank typically holds a 100% interest in construction and land development loans. The Bank has in the past and currently reserves the option to sell participation interests. We generally have sold participation interests in loans only when a loan would exceed the Bank’s internal and/or legal loans to one borrower limits. With respect to the sale of participation interests in loans, we have typically received commitments to purchase the participation interests offered prior to the time the loan is closed. See “-Lending Activities - Construction and Land Development Lending.”

As part of the Bank’s loan policy, we are permitted, to make loans to one borrower and related entities in an aggregate amount of up to 15% of the capital accounts of the Bank which consist of the aggregate of its capital, surplus, undivided profits, capital securities and allowance for loan losses. At September 30, 2018,2020, the Bank’s internal “guidance” limit is $15.0 million to one borrower or borrowing relationship as a threshold. The Bank is permitted to exceed such limit in certain situations subject to the (i) approval of the Board of Directors and (ii) subject to the overall legal/regulatory lending limit which was calculated to be $17.3$19.8 million at September 30, 2018.2020. At September 30, 2018,2020, our three largest loans to one borrower and related entities amounted to $18.5 million, $16.0 million $14.4 million and $14.3$15.0 million. The largest relationship is with a real estate developer in northern New Jersey and consists of a multi-family residential housing construction project, two commercial real estate loans and a personal line of credit. The second largest relationship consists of a participation interest in a commercial real estate loan secured by a 70 unit residential building in Westfield, New Jersey. The second largest relationship consist of a participation interest in a $16.0 million commercial line of credit secured by commercial real estate in central and northern New Jersey. The third largest relationship consists of a participation interest in a construction loan to construct a 30 story, 102 unit mixed-use luxury apartment building in Manhattan, New York. The three relationships are all performing in accordance with contractual terms. For more information regarding these loans, see-Lending Activities - Construction and Land Development Lending.”

7

8

The following table shows our total loans originated, purchased, sold and repaid during the periods indicated.

  Year Ended September 30, 
  2018  2017  2016 
  (In Thousands) 
Loan originations (1)            
One-to-four family residential $15,366  $16,643  $12,269 
Multi-family residential  17,321   4,426   7,936 
Commercial real estate  10,361   43,360   57,630 
Construction and land development  58,554   143,001   4,742 
Loans to financial institutions  6,000   -   - 
Commercial business  15,950   -   99 
Leases  -   3,568   3,725 
Consumer  56   7,615   863 
Total loan originations  123,608   218,613   87,264 
Loans acquired from Polonia Bancorp merger  -   160,157   - 
Total loans originated and purchased  123,608   378,770   87,264 
Loans transferred to real estate owned  1,289   -   581 
Loan principal repayments  90,589   149,413   53,965 
Total loans sold and principal repayments  91,878   149,413   54,546 
Decrease due to other items, net (2)  (141)  (2,959)  (403)
Net increase (decrease) in loan portfolio $31,589  $226,398  $32,315 

Year Ended September 30, 

    

2020

    

2019

    

2018

(In Thousands)

Loan originations (1)

One-to-four family residential

$

45,276

$

16,376

$

15,366

Multi-family residential

 

9,256

 

5,481

 

17,321

Commercial real estate

 

11,400

 

2,347

 

10,361

Construction and land development

 

77,224

 

72,714

 

58,554

Loans to financial institutions

 

 

 

6,000

Commercial business

 

7,199

 

4,000

 

15,950

Consumer

 

108

 

56

 

56

Total loan originations

 

150,463

 

100,974

 

123,608

Loans transferred to real estate owned

 

183

 

 

1,289

Loan principal repayments and sales

 

144,944

 

119,016

 

90,589

Total loans sold and principal repayments

 

145,127

 

119,016

 

91,878

Increase (decrease) due to other items, net (2)

 

(2,492)

 

566

 

(141)

Net increase (decrease) in loan portfolio

$

2,844

$

(17,476)

$

31,589

(1)Includes loan participations with other lenders.

(2)Other items consist of the undisbursed portion of loans in process, deferred fees and the allowance for loan losses.

One-to-Four Family Residential Mortgage Lending. AOne of the Bank’s primary lending activityactivities continues to be the origination or purchase of loans secured by first mortgages on one-to-four family residential properties located in the Company’s market area. Our single-family residential mortgage loans are obtained through the lending department and branch personnel, and to a lesser extent, through correspondents.personnel. The balance of such loans has increased, on a dollar basis, but decreased as a percentage of portfolio basis, from $282.6$233.5 million or 85.5%66.4% of total loans at September 30, 20142016 to $324.9$233.9 million, or 48.8%34.1% of total loans at September 30, 2018.2020. The percentage of total loans as well as the total amount that such loans have represented of the loan portfolio has decreased (excluding the effects of the acquisition of Polonia Bank) as our focus has shifted to the origination of commercial real estate loans and construction and land development loans.

Single-family residential mortgage loans generally are underwritten on terms and documentation conforming to guidelines issued by Freddie Mac and Fannie Mae. We have historically retained for portfolio a substantial portion of the single-family residential mortgage loans that we originate, including our jumbo residential mortgage loans, only selling certain long-term, fixed-rate loans bearing interest rates below certain levels established by the board.Board. We service all loans that we have originated. We currently offer adjustable-rate mortgage and balloon loans, which are structured as shorter term fixed-rate loans (generally 10 years or less) followed by a final payment of the full amount of the principal due at the maturity date. Due to the interest rate environment, originations of such loans have been limited in recent years. At September 30, 2018, $76.92020, $47.7 million, or 24.7%20.4%, of our one-to-four family residential loan portfolio consisted of adjustable-rate loans, including hybrid loans. We also originate fixed-rate, fully amortizing mortgage loans with maturities of 15, 20 or 30 years, for resale in the secondary market.

8

While continuing to operate in the historically low current interest rate environment and to assist in the implementation of our asset/liability management policy, we have placed an emphasis on the origination of single-family mortgage loans to be sold in the secondary markets.

We underwrite one-to-four family residential mortgage loans with loan-to-value ratios of up to 95%, provided that the borrower obtains private mortgage insurance on loans that exceed 80% of the appraised value or sales price, whichever is less, of the secured property. We also require that title insurance, hazard insurance and, if appropriate, flood insurance be maintained on all properties securing real estate loans. A licensed appraiser appraises all properties securing one-to-four family first mortgage loans. Our mortgage loans generally include due-on-sale clauses which provide us with

9

the contractual right to deem the loan immediately due and payable in the event the borrower transfers ownership of the property.

Our single-family residential mortgage loans also include home equity loans and lines of credit, which amounted to $4.9$3.3 million and $10.2$7.8 million, respectively, at September 30, 2018.2020. The unused portion of home equity lines was $6.2$5.9 million at such date. Our home equity loans are fully amortizing and have terms to maturity of up to 20 years. While home equity loans also are secured by the borrower’s residence, we generally obtain a second mortgage position on these loans. Our lending policy providesrequires that our home equity loans have loan-to-value ratios, when combined with any first mortgage, of a maximum 80% or less at time of origination, although the preponderance of our home equity loans have combined loan-to-value ratios of 75% or less at time of origination. We also offer home equity revolving lines of credit with interest tied to theWall Street Journal prime rate plus a stipulated margin. Generally, we have a second mortgage on the borrower’s residence as collateral on our home equity lines. In addition, our home equity lines generally have loan-to-value ratios (combined with any loan secured by a first mortgage) of 75% or less at time of origination. Our customers may apply for home equity lines as well as home equity loans at any banking office. While there has been decline in some collateral values due to the continued weak real estate market, we believe our conservative underwriting guidelines have minimized our exposure in this regard.

Construction and Land Development Lending. We have maintained our emphasis on construction and land development loansloan originations because construction loans have shorter terms to maturity, provide an attractive yield and generally have either higher fixed interest rates or adjustable interest rates. At September 30, 2018,2020, our construction and loan development loans amounted to $160.2$260.6 million, or 24.1%38.0% of our total loan portfolio. This amount includes $54.4$86.9 million of undisbursed loans in process. The average size of our construction and land development loans, excluding loans to our largest lending relationship, was approximately $3.9$2.3 million at September 30, 2018.2020. Our construction loan portfolio has increased substantially since September 30, 20142016 when construction loans amounted to $22.4$21.8 million or 6.8%6.2% of our total loan portfolio as compared to $160.2 million or 24.1% ofportfolio.

Other than our total loan portfolio at September 30, 2018.

Loansparticipations, loans to finance the construction of condominium projects or single-family homes and subdivisions are generally offered to experienced builders in our primary market area with whom we have an established relationship. Residential construction and development loans are offered with terms of up to 36 months although typically the terms are 12 to 24 months. The maximum loan-to-value limit applicable to these loans is 75% of the appraised post construction value and the policy does not require amortization of the principal during the term of the loan. We often establish interest reserves and obtain personal and corporate guarantees as additional security on the construction loans. Interest reserves are used to pay the monthly interest payments during the development phase of the loan and are treated as an addition to the loan balance. Interest reserves pose an additional risk to the Company if it does not become aware of deterioration in the borrower’s financial condition before the interest reserve is fully utilized. In order to help monitor the risk, financial statements and tax returns are obtained from borrowers on an annual basis. Additionally, construction loans are reviewed at least annually pursuant to a third partythird-party loan review. Construction loan proceeds are disbursed periodically in increments as construction progresses and as inspection by approved appraisers or loan inspectorsinspector warrants. Construction loans are negotiated on an individual basis but typically have floating rates of interest based upon theWall Street Journal prime rate plus a stipulated margin. Additional fees may be charged as funds are disbursed. In addition to interest payments during the term of the construction loan, we typically require that payments to reduce the principal outstanding be made as units are completed and released. Generally, such principal payments must be equal to 110% of the amount attributable to the acquisition and development of the lot plus 100% of the amount attributable to construction of the individual home. We typically permit a pre-determined limited number of model homes to be constructed on an unsold or “speculative” basis. All other units must be pre-sold before we will disburse funds for construction. Construction loans also include loans to acquire land and loans to develop the basic infrastructure, such as roads and sewers. The majority of the construction loans are secured by properties located in our primary lending area.

9

Set forth below is a brief description of the five largest construction loans or loan relationships.

The largest construction loan is in the amount of $14.3$14.9 million of which $1.6$13.6 million had been disbursed as of September 30, 2018.2020. This loan was originated in January 2018 and is a participation interest in a $73.0 million loan purchasedparticipated from another financial institution. The proceeds were used to construct a 30 story, 102-unit mixed use luxury

10

apartment building in Manhattan, New York. The project was 11.5%approximately 78% complete as of September 30, 2018.2020. The loan is performing in accordance with its contractual terms.

The second largest construction loan is in the amount of $10.0$19.4 million of which $10.0$3.9 million had been disbursed as of September 30, 2018.2020. This loan was originated in March 2017August 2019 and is a participation interest in a $35.1of $7.4 million loan purchased fromwas sold to another financial institution.institution, reducing our position to $12.0 million. The proceeds wereare being used to acquire landconstruct 90 apartments and construct a 312 unit garden apartment complex located21 townhomes in Winslow Township, New Jersey.Philadelphia, Pennsylvania. The project was approximately 7.0% complete as of September 30, 2018.2020. The loan is performing in accordance with its contractual terms.

The third largest construction loan is in the amount of $10.0 million of which $9.5$9.9 million had been disbursed as of September 30, 2018.2020. This loan was originated in January of 2017. The proceeds are being used to construct 66 residential units and 9,000 square feet of retail space in Jersey City, New Jersey. The project was approximately 99.0% complete as of September 30, 2018.2020. The loan is performing in accordance with its contractual terms.

The fourth largest construction loan is also in the amount of $10.0 million of which $9.0$8.8 million had been disbursed as of September 30, 2018.2020. The loan was originated in March of 2017February 2019 and is a participation interest in a $24.0$30.0 million loan purchased from another financial institution. The proceeds are being used to construct a six story building with 150214 apartment units and 3,500 square feet of retail space in East Orange,Dover, New Jersey. The project was 83.3%approximately 98.0% complete as of September 30, 2018.2020. The loan is performing in accordance with its contractual terms.

The fifth largest construction loan is in the amount of $9.0$10.0 million of which $8.2$8.8 million had been disbursed as of September 30, 2018. The2020. This loan was originated in March 2017February 2019 and is a participation interest in a $18.8$28.0 million loan purchasedparticipated from another financial institution. The proceeds are beingwere used to construct 89 multi-family rental units and seven retail/office unitsa 198 unit residential apartment complex in Newark,Warren County, New Jersey. The project was 91.0%approximately 59.0% complete as of September 30, 2018.2020. The loan is performing in accordance with its contractual terms.

Construction financing is generally considered to involve a higher degree of credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property’s value at completion of construction compared to the estimated costs, including interest, of construction and other assumptions. Because of the uncertainties inherent in estimating construction costs, as well as the market value of the completed project and the effects of governmental regulation on real property, it is relatively difficult to evaluate accurately the total funds required to complete a project and the completed project loan-to-value ratio. Additionally, if the estimate of value proves to be inaccurate, we may be confronted with a project, when completed, having a value less than the loan amount. Furthermore, because construction loans require active monitoring of the building process, including cost comparisons and on-site inspections, these loans are more difficult and costly to monitor.

10

Multi-Family Residential and Commercial Real Estate Loans. At September 30, 2018,2020, multi-family residential and commercial real estate loans amounted in the aggregate to $153.9$171.0 million or 23.1%25.0% of the total loan portfolio.

The commercial real estate and multi-family residential real estate loan portfolio consists primarily of loans secured by small office buildings, strip shopping centers, small apartment buildings and other properties used for commercial and multi-family purposes located in the Company’s market area. At September 30, 2018,2020, the average commercial and multi-family real estate loan size was approximately $956,000. The$1.2 million. At September 30, 2020, the largest relationship consistconsists of a participation interest in a $16.0 million commercial real estate loan secured by a 70 unit residential building located in Westfield, New Jersey.Jersey. The second largest multi-family residential or commercial real estate loan at September 30, 20182020 was a $11.7$11.5 million fixed-rate loan secured by 38a 316 unit luxury condominium buildingapartment complex located in Brooklyn,East Rutherford, New YorkJersey with retail space on the first floor. Substantially all of the properties securing the multi-family residential and commercial real estate loans are located in the Company’s primary lending area.

Although terms for commercial real estate and multi-family residential loans vary, our underwriting standards generally allow for terms up to 15 years with loan-to-value ratios of not more than 75%. Most of the loans are structured with balloon payments of 10 years or less and amortization periods of up to 25 years. Interest rates are either fixed or adjustable, based upon designated market indices such as theWall Street Journal prime rate plus a stipulated margin or,

11

with respect to our multi-family residential loans, the Average Contract Interest Rate for previously occupied houses as reported by the Federal Housing Finance Board. In addition, fees are charged to the borrower at the origination of the loan.

Commercial real estate and multi-family residential real estate lending involves different risks than single-family residential lending. These risks include larger loans to individual borrowers and loan payments that are dependent upon the successful operation of the project or the borrower’s business. These risks can be affected by supply and demand conditions in the project’s market area for rental housing units, office and retail space and other commercial space. We attempt to minimize these risks by limiting loans to proven businesses, only considering properties with existing operating performance which can be analyzed, using conservative debt coverage ratios in our underwriting, and periodically monitoring the operation of the business or project and the physical condition of the property.

Various aspects of commercial and multi-family loan transactions are evaluated in an effort to mitigate the additional risk in these types of loans. In our underwriting procedures, consideration is given to the stability of the property’s cash flow history, future operating projections, current and projected occupancy levels, location and physical condition. Generally, we impose a debt service ratio (the ratio of net cash flows from operations before the payment of debt service to debt service) of not less than 120%. We also evaluate the credit and financial condition of the borrower, and if applicable, the guarantor. With respect to loan participation interests we purchase, we underwrite the loans as if we were the originating lender. Appraisal reports prepared by independent appraisers are reviewed by us prior to the closing of the loan.

During the past year,In recent years, the Company has shifted its emphasis to originate for portfolio more multi-family residential and commercial real estate loans, due to their higher yieldyields and shorter duration. Although some delinquencies have existedoccured with respect to these types of loans in our portfolio, no losses have been incurred over the past several years.

11

Consumer Lending Activities. We offer various types of consumer loans such as loans secured by deposit accounts and unsecured personal loans. Consumer loans are originated primarily through existing and walk-in customers and direct advertising. At September 30, 2018, $953,000, or 0.1% of the total loan portfolio consisted of consumer loans.

Consumer loans generally have higher interest rates and shorter terms than residential loans. However, consumer loans have additional credit risk due to the type of collateral securing the loan or in some cases the absence of collateral.

Commercial Business Loans. At September 30, 2018,2020, commercial business loans amounted to $17.8$12.9 million, or 2.7%1.9% of our loan portfolio.

Commercial business loans are made to small to mid-sized businesses in our market area primarily to provide working capital. Small business loans may have adjustable or fixed rates of interest and generally have terms of three years or less but may be as long as 15 years. Our commercial business loans have historically been underwritten based on the creditworthiness of the borrower and generally require a debt service coverage ratio of at least 120%. In addition, we generally obtain personal guarantees from the principals of the borrower with respect to commercial business loans and frequently obtain real estate as additional collateral.

Consumer Lending Activities. We offer various types of consumer loans such as loans secured by deposit accounts and unsecured personal loans. Consumer loans are originated primarily through existing and walk-in customers and direct advertising. At September 30, 2020, $604,000, or 0.1% of the total loan portfolio consisted of consumer loans.

Consumer loans generally have higher interest rates and shorter terms than residential loans. However, consumer loans have additional credit risk due to the type of collateral securing the loan or in some cases the absence of collateral.

Loans to Financial Institutions. At September 30, 2020, we had one loan in the amount of $6.0 million to a financial institution.

Leases.The Company purchases small business equipment leases through a relationship with a local lender specializing in originating such loans. These leases are purchased based on the remaining cash flow’s present value on an agreed upon yield. This lender provides the servicing for the leases purchased.

Loan Approval Procedures and Authority. Our Board of Directors establishes the Bank’s lending policies and procedures. Our various lending policies are reviewed at least annually by our management team and the boardBoard in order to consider modifications as a result of market conditions, regulatory changes and other factors.

The Company maintains separate loan approval committees with tiered levels of approvals.approval authority. The Management Loan Committee, comprised of the Chief Operating Officer (“COO”), the Chief Lending Officer (“CLO”),

12

the Chief Credit Officer (“CCO”), the Chief Financial Officer (“CFO”), the Compliance Risk Officer (“CRO”) and the Controller has lending approval authority of up to $3.0 million. The next tier in the approval process, with an approval range of $3.0 million to $7.5 million, is the President’s Loan committee, comprised of the Chief Executive Officer (“CEO”) and the COO. All loans in excess of $7.5 million must be presented to the full boardBoard of directorsDirectors for approval. All loans submitted to the top two tiers of approval must be recommended for approval by the Management Loan Committee. For single-familySingle-family residential loans originated for sale into the secondary market are processed through underwriting software and are reviewed for approval by two senior officers in the credit department.

Asset Quality

General. One of our key objectives has been, and continues to be, maintaining a high level of asset quality. In addition to maintaining credit standards for new originations which we believe are prudent, we are proactive in our loan monitoring, collection and workout processes in dealing with delinquent or problem loans. We have also retained an independent, third party to undertake periodic reviews of the credit quality of a random sample of new loans as well as all of our major loans on at least an annual basis.

12

Reports listing all delinquent accounts are generated and reviewed by management on a monthly basis. These reports include information regarding all loans 30 days or more delinquent as to principal and/or interest and all real estate owned properties and are provided to the Board of Directors. The procedures we take with respect to delinquencies vary depending on the nature of the loan, period and cause of delinquency and whether the borrower is habitually delinquent. When a borrower fails to make a required payment on a loan, we take a number of steps to have the borrower cure the delinquency and restore the loan to current status. We generally send the borrower a written notice of non-payment after the loan is first past due. Our guidelines provide that telephone, written correspondence and/or face-to-face contact will be attempted to ascertain the reasons for delinquency and the prospects of repayment. When contact is made with the borrower at any time prior to foreclosure, we will attempt to obtain full payment, work out a repayment schedule with the borrower to avoid foreclosure or, in some instances, accept a deed in lieu of foreclosure. In the event payment is not then received or the loan is not otherwise satisfied, additional letters and telephone calls generally are made. If the loan is still not brought current or satisfied and it becomes necessary for us to take legal action, which typically occurs after a loan is 90 days or more delinquent, we will commence foreclosure proceedings against any real property that secures the loan. If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before foreclosure sale, the property securing the loan generally is sold at foreclosure and, if purchased by us, becomes real estate owned. Since there has not been a significant increase in recent years in the one-to-four family residential loans that are 90 days past due, the Company was not adversely impacted by any recent government programs related to the foreclosure process.

On loans where the collection of principal or interest payments is doubtful, the accrual of interest income ceases (“non-accrual” loans). On loans 90 days or more past due as to principal and/or interest payments, our policy is to discontinue accruing additional interest and reverse any interest previously accrued. On occasion, this action may be taken earlier if the financial condition of the borrower raises significant concern with regard to his/her ability to service the debt in accordance with the terms of the loan agreement. Interest income is not accrued on these loans until the borrower’s financial condition and payment record demonstrate an ability to service the debt.

Property acquired by the Bank through foreclosure is initially recorded at the lower of cost, which is the carrying value of the loan, or fair value at the date of acquisition, which is fair value of the related assets at the date of foreclosure, less estimated costs to sell. Thereafter, if there is a further deterioration in value, we charge earnings for the diminution in value. The Bank’s policy is to obtain an appraisal on real estate subject to foreclosure proceedings prior to the time of foreclosure if the property is located outside the Company’s market area or consists of other than single-family residential property. We obtain re-appraisals on a periodic basis, generally on at least an annual basis, on foreclosed properties. We also conduct inspections on foreclosed properties.

We account for our impaired loans in accordance with generally accepted accounting principles. An impaired loan generally is one for which it is more likely than not, based on current information, that the lender will not collect all the amounts due under the contractual terms of the loan. Large groups of smaller balance, homogeneous loans are collectively evaluated for impairment. Loans collectively evaluated for impairment include smaller balance commercial real estate loans, residential real estate loans and consumer loans. These loans are evaluated as a group because they have

13

similar characteristics and performance experience. Larger commercial real estate, construction and land development and commercial business loans are individually evaluated for impairment on at least a quarterly basis by management. All loans classified as substandard as part of the loan review process or due to delinquency status are evaluated for potential impairment. There were $16.0$13.0 million of loans evaluated for impairment as of September 30, 20182020 (of which $10.7$10.5 million is related to one relationship), consisting of $8.7$8.5 million of construction and land development loans, $3.3$3.1 million of one-to-four family residential loans $1.9and $1.4 million of commercial real estate loans and $298,000 of multi-family residential loans. Although no specific allocations were applied to these loans, there were partial charge-offs totaling $137,000$144,000 incured during fiscal 2018.2020. As of September 30, 2018,2020, there were twenty-sixtwenty-one loans totaling $4.7$11.4 million designated as special mention loans consisting of eight non-residential real estate loans aggregating $1.9$10.0 million and 18thirteen single-family residential loans aggregating $2.8$1.4 million. As of September 30, 20172019, there were ninetwenty-one loans totaling $3.1$5.5 million designated as special mention loans, consisting of six non-residential real estate loans aggregating $1.5 million, one residential investment property aggregating $1.4$3.7 million and twofifteen single-family residential loans aggregating $275,000.

13

$1.8 million.

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

When an insured institution classifies one or more assets, or portions thereof, as “substandard” or “doubtful,” it is required that a general valuation allowance for loan losses be established for loan losses in accordance with established methodology. General valuation allowances represent loss allowances which have been established to recognize the inherent losses associated with lending activities, but which, unlike specific allocations, have not been allocated to particular problem assets. When an insured institution classifies one or more assets, or portions thereof, as “loss,” it is required to charge off such amount.

Our allowance for loan losses includes a portion which is allocated by type of loan, based primarily upon our periodic reviews of the risk elements within the various categories of loans. The specific components relate to certain impaired loans. The general components cover non-classified loans and are based on historical loss experience adjusted for qualitative factors in response to changes in risk and market conditions. Our management believes that, based on information currently available, the allowance for loan losses is maintained at a level which covers all known and inherent losses that are both probable and reasonably estimable at each reporting date. However, actual losses are dependent upon future events and, as such, further additions to the level of the allowance for loan losses may become necessary.

We review and classify assets on no less frequently than a quarterly basis and the Board of Directors is provided with reports on our classified and criticized assets. We classify assets in accordance with the management guidelines described above. At September 30, 20182020 and 2017,2019, we had no assets classified as “doubtful” or “loss” and $16.0$13.0 million and $16.6$15.5 million, respectively, of assets classified as “substandard.” In addition, there were $4.7$11.4 million and $3.1$5.5 million of loans designated as “special mention” as of September 30, 20182020 and 2017,2019, respectively.

In response to the current situation surrounding the COVID-19 pandemic, the Company is providing assistance to its customers in a variety of ways.   The Company  participated in the Paycheck Protection Program offered under the CARES Act as a Small Business Administration (“SBA”) lender. During the quarter ended June 30, 2020, we had originated 63 requests for Paycheck Protection Program (“PPP”) loans totaling approximately $5.1 million. These loans were sold during the quarter ended September 30, 2020 at a net gain of $111,000.  We are working closely with our loan

14

14

customers to effectively manage our portfolio through the ongoing uncertainty surrounding the duration, impact and government response to the crisis.

The CARES Act provided guidance around the modification of loans as a result of the COVID-19 pandemic, which outlined, among other criteria, that short-term modifications made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This includes short-term modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers are considered current under the CARES Act and related regulatory guidance if they are less than 30 days past due on their contractual payments at the time a modification program is implemented. During the year ended September 30, 2020, the Company made COVID-19 pandemic related modifications on 160 loans aggregating to $149.7 million. All of these borrowers had resumed making payments as of September 30, 2020. Loan modifications in accordance with the CARES Act and related regulatory guidance are still subject to an evaluation in regard to determining whether or not a loan is deemed to be impaired. Two participation interests in commercial real estate loans aggregating $10.0 million, or 1.5% of total loans, each entered into a subsequent deferral period during October 2020.  With respect to one of the two loan participations on deferral in the amount of $3.0 million, the Company was granted a put option as an integral part of the purchase of the participation from the lead lender. The Company has notified the lead lender that it is exercising the put option. These deferments were not considered to be TDRs as of September 30, 2020 as all applicable borrowers were current as of December 31, 2019 and the request for the deferments were related to the current economic conditions caused by the COVID-19 pandemic, and not by underlying weaknesses within the respective loans.

Delinquent Loans. The following table shows the delinquencies in the loan portfolio as of the dates indicated.

September 30, 2020

September 30, 2019

30-89

90 or More Days

30-89

90 or More Days

Days Overdue

Overdue

Days Overdue

Overdue

Number

Principal

Number

Principal

Number

Principal

Number

Principal

    

of Loans

    

Balance

    

of Loans

    

Balance

    

of Loans

    

Balance

    

of Loans

    

Balance

 September 30, 2018  September 30, 2017 
 30-89 90 or More Days 30-89 90 or More Days 
 Days Overdue  Overdue  Days Overdue  Overdue 
 Number Principal Number Principal Number Principal Number Principal 
 of Loans  Balance  of Loans  Balance  of Loans  Balance  of Loans  Balance 
 (Dollars in Thousands) 
                 
One- to-four family residential  10  $1,037   32  $2,079   23  $1,746   21  $2,675 

(Dollars in Thousands)

One-to-four family residential

8

$

523

20

$

2,153

7

$

750

20

$

3,246

Multi-family residential  -   -   -   -   -   -   -   - 

 

 

 

 

 

 

 

 

Commercial real estate  1   722   5   1,454   3   1,000   4   1,487 

 

2

 

2,301

 

4

 

1,417

 

 

 

4

 

1,417

Construction and land development  -   -   5   8,750   -   -   5   8,724 

 

 

 

5

 

8,525

 

 

 

5

 

8,750

Commercial business  -   -   -   -   -   -   -   - 

 

 

 

 

 

 

 

 

Consumer  4   116   -   -   2   69   -   - 

 

 

 

 

 

2

 

95

 

 

Total delinquent loans  15  $1,875   42  $12,283   28  $2,815   30  $12,886 

 

10

$

2,824

 

29

$

12,095

 

9

$

845

 

29

$

13,413

Delinquent loans to total net loans  0.31%      2.04%      0.49%      2.26%    

 

0.48

%  

 

  

 

2.06

%  

 

  

 

0.14

%  

 

  

 

2.29

%  

 

  

Delinquent loans to total loans  0.28%      1.85%      0.43%      1.97%    

 

0.41

%  

 

  

 

1.77

%  

 

  

 

0.12

%  

 

  

 

1.89

%  

 

  

Non-Performing Loans and Real Estate Owned. The following table sets forth information regarding non-performing loans and real estate owned. The Company’s general policy is to cease accruing interest on loans which are 90 days or more past due and to reverse all accrued interest. At September 30, 2018,2020, all of the loans listed as 90 or more days past due in the table above were in non-accrual status. At September 30, 2018,2020, the Company had tenfour loans aggregating $6.2$5.0 million that were classified as TDRs. As of September 30, 2018, five of the TDRs were performing in accordance with their restructured terms. Three2020, three of such loans aggregating $4.9$4.5 million as of September 30, 2018 were classified as non-performing and are related to one lending relationship. OneThe remaining TDR is also on non-accrual and consists of a $449,000$415,000 loan secured by a single-family property. The remaining TDR is on non-accrual and consists of a $156,000 loan secured by various commercial and residential properties.

The following table shows the amounts of non-performing assets (defined as non-accruing loans, accruing loans 90 days or more past due as to principal or interest and real estate owned) at the dates indicated. There were no loans more

15

15

  September 30, 
  2018  2017  2016  2015  2014 
  (Dollars in Thousands) 
Non-accruing loans:                    
One-to-four family residential $3,012(1) $5,107(1) $4,244(1) $3,547(1) $5,002(1)
Multi-family residential  -   -   -   -   - 
Commercial real estate  1,627(1)  1,566(1)  1,346(1)  1,589(1)  877(1)
Construction and land development  8,750(1)  8,724(1)  10,288(1)  8,796   - 
Commercial business  -   -   -   -   - 
Consumer  -   -   -   -   - 
Total non-accruing loans  13,389   15,397   15,878   13,932   5,879 
Accruing loans 90 days or more past due:                    
One-to-four family residential  -   -   -   -   - 
Multi-family residential  -   -   -   -   - 
Commercial real estate  -   -   -   -   - 
Construction  -   -   -   -   - 
Commercial business  -   -   -   -   - 
Consumer  -   -   -   -   - 
Total accruing loans 90 days or more past due  -   -   -   -   - 
Total non-performing loans (2)  13,389   15,397   15,878   13,932   5,879 
Real estate owned, net (3)  1,026   192   581   869   360 
Total non-performing assets $14,415  $15,589  $16,459  $14,801  $6,239 
Total non-performing loans as a percentage of loans  2.22%  2.69%  4.56%  4.21%  1.83%
Total non-performing loans as a  percentage of total assets  1.24%  1.71%  2.84%  2.86%  1.12%
Total non-performing assets as a  percentage of total assets  1.33%  1.73%  2.94%  3.04%  1.19%

(1) Includes at: (i) September 30, 2018, $5.5 millionTable of TDRs that were classified non-performing consisting of two construction and land development loans aggregating $4.2 million, two one-to-four family loans aggregating $606,000 and one commercial real estate loans aggregating $712,000; (ii) September 30, 2017, $5.7 million of TDRs that were classified non-performing consisting of a $3.6 million construction and land development loan, a $1.4 million one-to-four family loan and five commercial real estate loans aggregating $1.6 million; (iii) September 30, 2016, $5.7 million of TDRs that were classified non-performing consisting of a $3.6 million construction and land development loan, a $1.4 million one-to-four family loan and a $729,000 commercial real estate loan; (iv) September 30, 2015, $5.8 million of TDRs that were classified non-performing consisting of a $3.6 million construction and land development loan, a $1.4 million one-to-four family loan and a $737,000 commercial real estate loan; and (v) September 30, 2014, $2.4 million of TDRs that were classified non-performing consisting of a $1.5 million one-to-four family loan and a $877,000 commercial real estate loan.Contents

(2) Non-performing loans consist of non-accruing loans plus accruing loansthan 90 days delinquent as to principal and/or more past due.interest and continuing to accrue interest at any of the dates presented in this table.

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

September 30, 

2020

    

2019

    

2018

    

2017

    

2016

(Dollars in Thousands)

Non-accruing loans:

    

One-to-four family residential

$

3,095

(1)

$

3,712

(1)

$

3,012

(1)

$

5,107

(1)

$

4,244

(1)

Commercial real estate

 

1,417

(1)

 

1,473

(1)

 

1,627

(1)

 

1,566

(1)

 

1,346

(1)

Construction and land development

 

8,525

(1)

 

8,750

(1)

 

8,750

(1)

 

8,724

(1)

 

10,288

(1)

Total non-accruing loans

 

13,037

 

 

13,935

 

 

13,389

 

 

15,397

 

 

15,878

 

Other real estate owned, net (2)

 

 

 

348

 

 

1,026

 

 

192

 

 

581

 

Total non-performing assets

$

13,037

 

$

14,283

 

$

14,415

 

$

15,589

 

$

16,459

 

Total non-performing loans as a percentage of loans

 

2.22

%  

 

2.38

%  

 

2.22

%  

 

2.69

%  

 

4.56

%  

Total non-performing loans as a percentage of total assets

 

1.07

%  

 

1.08

%  

 

1.24

%  

 

1.71

%  

 

2.84

%  

Total non-performing assets as a percentage of total assets

 

1.07

%  

 

1.11

%  

 

1.33

%  

 

1.73

%  

 

2.94

%  

(1)16Includes at: (i) September 30, 2020, $5.0 million of TDRs that were classified non-performing consisting of two construction and land development loans in the amount of $3.8 million, one one-to-four family loan in the amount of $415,000 and one commercial real estate loans in the amount of $705,000; (ii) September 30, 2019, $5.4 million of TDRs that were classified non-performing consisting of two construction and land development loans in the amount of $4.2 million, one one-to-four family loans aggregating $432,000 and one commercial real estate loan in the amount of $705,000; (iii) September 30, 2018, $5.5 million of TDRs that were classified non-performing consisting of two construction and land development loans in the amount of $4.2 million, two one-to-four family loans aggregating $606,000 and one commercial real estate loan in the amount of $712,000; (iv) September 30, 2017, $5.7 million of TDRs that were classified non-performing consisting of a $3.6 million construction and land development loan, a $1.4 million one-to-four family loan and five commercial real estate loans aggregating $1.6 million; (v) September 30, 2016, $5.7 million of TDRs that were classified non-performing consisting of a $3.6 million construction and land development loan, a $1.4 million one-to-four family loan and a $729,000 commercial real estate loan.
(2)Real estate owned balances are shown net of related loss allowances and consist solely of real property.

Interest income on non-accrual loans is recognized on the cash basis until either the loan is paid-in full or the Bank determines after a significant payment history has been achieved to warrant the involved loan being classified as a performing loan and being returned to accruing status. There was $85,000$13,000 of such interest recognized during fiscal 20182020 while there was $123,000, $85,000, $161,000 and $175,000 of such interest recognized for non-accrual loans for fiscal 2019, fiscal 2018, fiscal 2017 and fiscal 2016, respectively. Approximately $744,000$748,000 in additional interest income would have been recognized during the year ended September 30, 20182020 if these loans had been performing during fiscal 2018.

2020.

At September 30, 2018,2020, the Company’s non-performing assets totaled $14.4$13.0 million or 1.3%1.1% of total assets as compared to $15.6$14.3 million or 1.7%1.1% of total assets at September 30, 2017.2019. Non-performing assets at September 30, 20182020 included five construction loans aggregating $8.7$8.5 million, 32 one-to-four family28 single-family residential loans aggregating $2.9$3.1 million, one single-family residential investment property loan in the amount of $156,000 and fivefour commercial real estate loans aggregating $1.6 million. Non-performing assets at September 30, 2018 also included real estate owned consisting of two single-family residential properties with an aggregate carrying value of $1.0$1.4 million. At September 30, 2018,2020, the Company had 10four loans aggregating $6.2$5.0 million that were classified as TDRs. FiveTDRs, four of such loans aggregating $650,000 were performingwhich are included in accordance with the restructured terms as of September 30, 2018 and were accruing interest.non-performing assets. One TDR is on non-accrual and consists of a $449,000$415,000 loan secured by a single-family property. A second TDR is on non-accrual and consists of a $156,000 loan secured by various commercial and residential properties. The three remaining TDRs totaling $4.9$4.5 million are also classified as non-accrual and are a part of a lendingborrowing relationship totaling $10.7 million (after taking into account the previously disclosed $1.9 million write-down recognized during the quarter ending March 31,fiscal 2017 related to this borrowing relationship). The primary project of the borrower (the development of a 169 unit169-unit townhouse project in Bristol Borough, Pennsylvania) is the subject of litigation between the Bank and the borrower. Subsequent to the commencement of the litigation, previously disclosed, the borrower filed for bankruptcy under Chapter 11 (Reorganization) of the federal bankruptcy code in JuneSeptember 2017. The Bank has moved

16

the underlying litigation noted above with the borrower and the Bank from state court to the federal bankruptcy court in which the bankruptcy proceeding is being heard. The state litigation is stayed pending the resolution of the bankruptcy proceedings. As of September 30, 2018, the Company had reviewed $16.0 million of loans for possible impairment compared to $19.7 million reviewed for possible impairment as of September 30, 2017.

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

The carrying value of loans is periodically evaluated and the allowance is adjusted accordingly. The establishment of the allowance for loan losses is significantly affected by management judgment and uncertainties and there is a likelihood that different amounts would be reported under different conditions or assumptions. Various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses. Such agencies may require us to make additional provisions for estimated loan losses based upon judgments that differ from those of management. Loans acquired from Polonia Bancorp amounted to $160.8 million offor which there is no allowance for loan losses because these loans were recorded at fair value upon completion of the merger. A general credit mark of $2.3 million was recorded in connection with completion of the acquisition and is being amortized over 30 years. As of September 30, 2018,2020, our allowance for loan losses of $5.2$8.3 million was 0.9%1.4% of total loans receivable and 38.6%63.7% of non-performing loans.

17

Charge-offs on loans totaled $137,000$144,000 and $2.0 million$38,000 for the years ended September 30, 20182020 and 2017,2019, respectively. The charge-offs during fiscal 2017 were primarily the result of one borrowing relationship described in “-Non-performing Assets and Real Estate Owned” Section. Management tookhas taken a prudent approach in writing down all substandard loans to the net realizable value of the applicable underlying collateral.

Management will continue to monitor and modify the allowance for loan losses as conditions dictate. However, based on its comprehensive analysis, management believes that the amount maintained in the allowance for loan losses as of September 30, 2020 is adequate to absorb probable losses inherent in the portfolio. No assurances can be given that the level of allowance for loan losses will cover all of the inherent losses on our loans or that future adjustments to the allowance for loan losses will not be necessary if economic and other conditions differ substantially from the economic and other conditions used by management to determine the current level of the allowance for loan losses.

17

The following table shows changes in the allowance for loan losses during the periods presented.

18

At or For the Year Ended September 30, 

 

    

2020

    

2019

    

2018

    

2017

    

2016

 

(Dollars in Thousands)

 

Total loans outstanding at end of period

$

685,259

$

708,233

$

665,391

$

652,607

$

351,891

Average loans outstanding

 

583,367

 

587,102

 

588,493

 

487,999

 

327,877

Allowance for loan losses, beginning of period

 

5,393

 

5,167

 

4,466

 

3,269

 

2,930

Provision for loan losses

 

3,025

 

100

 

810

 

2,990

 

225

Charge-offs:

 

  

 

  

 

  

 

  

 

  

One-to-four family residential

 

3

 

7

 

114

 

140

 

11

Multi-family residential and commercial real estate

 

 

 

 

���

 

Commercial business

 

15

 

 

 

 

Construction and land development

 

 

 

12

 

1,819

 

Leases

 

 

31

 

 

 

Consumer

 

126

 

 

11

 

16

 

Total charge-offs

 

144

 

38

 

137

 

1,975

 

11

Recoveries on loans previously charged off

 

29

 

164

 

28

 

182

 

125

Allowance for loan losses, end of period

$

8,303

$

5,393

$

5,167

$

4,466

$

3,269

Allowance for loan losses as a percent of total loans

 

1.39

%  

 

0.91

%  

 

0.85

%  

 

0.78

%  

 

0.94

%

Allowance for loan losses as a percent of non-performing loans

 

63.68

%  

 

38.70

%  

 

38.59

%  

 

29.01

%  

 

20.59

%

Ratio of net charge-offs (recoveries) during the period to average loans outstanding during the period

 

0.02

%  

 

(0.02)

%  

 

0.02

%  

 

0.37

%  

 

(0.03)

%

  At or For the Year Ended September 30, 
  2018  2017  2016  2015  2014 
  (Dollars in Thousands) 
Total loans outstanding at end of period $665,391  $652,607  $351,891  $330,556  $330,696 
Average loans outstanding  588,493   487,999   327,877   323,398   319,126 
Allowance for loan losses, beginning of period  4,466   3,269   2,930   2,424   2,353 
Provision for loan losses  810   2,990   225   735   240 
Charge-offs:                    
One-to-four family residential  114   140   11   384   215 
Multi-family residential and commercial real estate  -   -   -   -   - 
Construction and land development  12   1,819   -   -   - 
Commercial business  -   -   -   -   - 
Consumer  11   16   -   -   - 
Total charge-offs  137   1,975   11   384   215 
Recoveries on loans previously charged off  28   182   125   155   46 
Allowance for loan losses, end of period $5,167  $4,466  $3,269  $2,930  $2,424 
                     
Allowance for loan losses as a percent of total loans  0.85%  0.78%  0.94%  0.93%  0.75%
Allowance for loan losses as a percent of non-performing loans  38.59%  29.01%  20.59%  21.03%  41.24%
Ratio of net charge-offs during the period to average loans outstanding during the period  0.02%  0.37%  -0.03%  0.07%  0.05%

The following table shows how the allowance for loan losses is allocated by type of loan at each of the dates indicated.

September 30, 

 

2020

2019

2018

2017

2016

 

Loan

Loan

Loan

Loan

Loan

 

Category

Category

Category

Category

Category

 

as a % of

as a % of

as a % of

as a % of

as a % of

 

Amount of

Total

Amount of

Total

Amount of

Total

Amount of

Total

Amount of

Total

 

    

Allowance

    

Loans

    

Allowance

    

Loans

    

Allowance

    

Loans

    

Allowance

    

Loans

    

Allowance

    

Loans

 

 September 30, 
 2018  2017  2016  2015  2014 
    Loan     Loan     Loan     Loan     Loan 
    Category     Category     Category     Category     Category 
 Amount as a % Amount as a % Amount as a % Amount as a % Amount as a % 
 of of Total of of Total of of Total of of Total of of Total 
 Allowance  Loans  Allowance  Loans  Allowance  Loans  Allowance  Loans  Allowance  Loans 
 (Dollars in Thousands) 

(Dollars in Thousands)

 

One-to-four family residential $1,325   48.80% $1,241   53.80% $1,624   66.40% $1,636   78.40% $1,663   85.47%

$

1,877

34.1

%  

$

1,002

38.0

%  

$

1,325

48.8

%  

$

1,241

53.8

%  

$

1,624

66.4

%

Multi-family residential  347   5.20%  205   3.30%  137   3.50%  66   1.90%  66   2.17%

 

460

 

4.5

%  

 

315

 

4.3

%  

 

347

 

5.2

%  

 

205

 

3.3

%  

 

137

 

3.5

%

Commercial real estate  1,154   18.00%  1,201   19.60%  859   22.70%  231   7.80%  122   4.87%

 

1,989

 

20.4

%  

 

1,257

 

18.1

%  

 

1,154

 

18.0

%  

 

1,201

 

19.6

%  

 

859

 

22.7

%

Construction and land development  1,554   24.10%  1,358   22.20%  318   6.20%  725   11.80%  323   6.77%

 

2,888

 

38.0

%  

 

2,034

 

35.8

%  

 

1,554

 

24.1

%  

 

1,358

 

22.2

%  

 

318

 

6.2

%

Commercial business  187   2.70%  4   0.10%  1   0.00%  -   0.00%  15   0.60%

 

194

 

1.9

%  

 

206

 

2.8

%  

 

187

 

2.7

%  

 

4

 

0.1

%  

 

1

 

%

Loans to financial institutions  64   0.90%  -   0.00%  -   0.00%  -   0.00%  -   0.00%

 

89

 

0.9

%  

 

63

 

0.8

%  

 

64

 

0.9

%  

 

 

%  

 

 

%

Leases  18   0.20%  23   0.70%  21   0.90%  -   0.00%  -   0.00%

 

3

 

0.1

%  

 

5

 

0.1

%  

 

18

 

0.2

%  

 

23

 

0.7

%  

 

21

 

0.9

%

Consumer  17   0.10%  24   0.30%  10   0.30%  4   0.10%  4   0.12%

 

6

 

0.1

%  

 

13

 

0.1

%  

 

17

 

0.1

%  

 

24

 

0.3

%  

 

10

 

0.3

%

Unallocated  501   -   410   -   299   -   268   -   231   - 

 

797

 

 

498

 

 

501

 

 

410

 

 

299

 

Total allowance for loan losses $5,167   100.00% $4,466   100.00% $3,269   100.00% $2,930   100.00% $2,424   100.00%

$

8,303

 

100.0

%  

$

5,393

 

100.0

%  

$

5,167

 

100.0

%  

$

4,466

 

100.0

%  

$

3,269

 

100.0

%

19

The aggregate allowance for loan losses increased by $701,000$2.9 million from September 30, 20172019 to September 30, 2018,2020, due to a provision of $810,000, partially offset by$3.0 million combined with a net charge off of $109,000$115,000 recorded during the period. The aggregate allowance for loan losses increased by $1.2 million$226,000 from September 30, 20162018 to September 30, 2017,2019, due to a provision of $3.0 million, partially offset by$100,000 combined with a net charge offrecovery of $1.8 million$126,000 recorded during the period. Substantially all of the charge offs for fiscal 2017 related to one borrowing relationship. Fluctuations in the allowance may occur based on management’s consideration of the known and inherent losses in the loan portfolio that are reasonably estimable as well as current qualitative and quantitative risk factors at the time of the analysis.

18

Investment Activities

General. We invest in securities in accordance with policies approved by our boardBoard of directors.Directors. The investment policy designates the President, COO, CFO and Controller as the Investment Committee, which is authorized by the boardBoard to make the Bank’s investments consistent with the investment policy. The Board of Directors of the Bank reviews all investment activity on a monthly basis.

The investment policy is designed primarily to manage the interest rate sensitivity of the assets and liabilities, to generate a favorable return without incurring undue interest rate and credit risk, to complement the lending activities and to provide and maintain liquidity. The current investment policy generally permits investments in debt securities issued by the U.S. government and U.S. agencies, municipal bonds, and corporate debt obligations, as well as investments in preferred and common stock of government agencies and government sponsored enterprises such as Fannie Mae, Freddie Mac and the Federal Home Loan Bank of Pittsburgh (federal agency securities) and, to a lesser extent, other equity securities. Securities in these categories are classified as “investment securities” for financial reporting purposes. The policy also permits investments in mortgage-backed securities, including pass-through securities issued and guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae as well as collateralized mortgage obligations (“CMOs”) issued or backed by securities issued by these government sponsored agencies.

Ginnie Mae is a government agency within the Department of Housing and Urban Development which is intended to help finance government-assisted housing programs. Ginnie Mae securities are backed by loans insured by the Federal Housing Administration, or guaranteed by the Department of Veterans Affairs. The timely payment of principal and interest on Ginnie Mae securities is guaranteed by Ginnie Mae and backed by the full faith and credit of the U.S. Government. Freddie Mac is a private corporation chartered by the U.S. Government. Freddie Mac issues participation certificates backed principally by conventional mortgage loans. Freddie Mac guarantees the timely payment of interest and the ultimate return of principal on participation certificates. Fannie Mae is a private corporation chartered by the U.S. Congress with a mandate to establish a secondary market for mortgage loans. Fannie Mae guarantees the timely payment of principal and interest on Fannie Mae securities. Freddie Mac and Fannie Mae securities are not backed by the full faith and credit of the U.S. Government.

Investments in mortgage-backed securities involve the risk that actual prepayments will be greater than estimated prepayments over the life of the security, which may require adjustments to the amortization of any premium or accretion of any discount relating to such instruments thereby changing the net yield on such securities. There is also reinvestment risk associated with the cash flows from such securities or in the event such securities are redeemed by the issuer. In addition, the market value of such securities may be adversely affected by changes in interest rates. Further, privately issued mortgage-backed securities and CMOs also have a higher risk of default due to adverse changes in the creditworthiness of the issuer. Management’s practice is generally to not invest in such securities. See further discussion in Note 5 of the Notes to Consolidated Financial Statements included in Item 8 herein.

20

The Company has a portfolio of corporate debt securities with an investment grade rating from at least one national rating agency: Standard and Poors, Moody’s, Fitch and/or Kroll. In purchasing these types of securities, the Company looks for known publicly trading entities along with utilizing the credit department to underwrite each issuing entity as if it were a direct commercial loan. The mortgage-backed securities consist both of mortgage pass-through and cmosCMOs guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac.

The Company has portfolio municipal and government subdivisions securities which are graded at least “A” by at least one national rating agency. The securities are exempt from taxation.

At September 30, 2018,2020, the investment and mortgage-backed securities portfolio amounted to $366.0$443.2 million or 33.9%36.2% of total assets at such date. The largest component of the securities portfolio as of September 30, 20182020 consisted of mortgage-backed securities which amounted to $193.1$240.4 million or 52.8%54.2% of the securities portfolio at September 30, 2018.2020. In addition, we invest in corporate debt, state and political subdivisions, U.S Government and agency obligations and to a significantly lesser degree, other securities.

19

The securities are classified at the time of acquisition as available for sale, held to maturity or trading. Securities classified as held to maturity must be purchased with the intent and ability to hold that security until its final maturity, and can be sold prior to maturity only under rare circumstances. Held to maturityHeld-to-maturity securities are accounted for based upon the amortized cost of the security. Available for saleAvailable-for-sale securities can be sold at any time based upon needs or market conditions. Available for saleAvailable-for-sale securities are accounted for at fair value, with unrealized gains and losses on these securities, net of income tax provisions, reflected as accumulated other comprehensive income. At September 30, 2018, we2020, the Company had $59.9$22.9 million of investment and mortgage-backed securities classified as held to maturity, $306.2$420.3 million of investment and mortgage-backed securities classified as available for sale and no securities classified as trading securities. At September 30, 2018,2020, we had no investments in a single issuer other than securities issued by U.S. Government agencies ofor U.S. Government sponsored enterprises, which had an aggregate Book Valuebook value in excess of 10% of the Company’s stockholdersstockholders’ equity.

The following table sets forth certain information relating to the investment and mortgage-backed and equity securities portfolios at the dates indicated.indicated.

21

    

September 30, 

2020

2019

2018

Amortized 

Fair

Amortized

Fair 

Amortized

Fair 

    

Cost

    

 Value

    

 Cost

    

Value

    

 Cost

    

Value

(In Thousands)

Mortgage-backed securities - U.S. Government agencies

$

230,647

$

240,659

$

367,154

$

375,818

$

199,229

$

193,133

U.S. Government and agency obligations

 

23,241

 

23,630

 

68,309

 

68,207

 

59,062

 

54,445

Corporate debt securities

 

78,764

 

81,783

 

67,360

 

69,539

 

75,622

 

73,083

State and political subdivisions

 

97,175

 

98,622

 

68,383

 

68,765

 

42,652

 

41,416

Total debt securities

 

429,827

 

444,694

 

571,206

 

582,329

 

376,565

 

362,077

Equity securities

 

6

 

51

 

6

 

95

 

6

 

37

Total investment and mortgage-backed securities

$

429,833

$

444,745

$

571,212

$

582,424

$

376,571

$

362,114

  September 30, 
  2018  2017  2016 
  Amortized  Fair  Amortized  Fair  Amortized  Fair 
  Cost  Value  Cost  Value  Cost  Value 
  (In Thousands) 
Mortgage-backed securities - U.S. Government agencies $199,229  $193,133  $126,459  $125,423  $97,289  $98,506 
U.S. Government and agency obligations  59,062   54,445   59,625   57,840   54,487   54,793 
Corporate debt securities  75,622   73,083   34,500   34,400   25,411   26,053 
State and political subdivisions  42,652   41,416   20,781   20,842   -   - 
Total debt securities  376,565   362,077   241,365   238,505   177,187   179,352 
FHLMC preferred stock  6   37   6   76   6   42 
Total investment and mortgage-backed securities $376,571  $362,114  $241,371  $238,581  $177,193  $179,394 

The following tables settable sets forth the amortized cost of investment and mortgage-backed securities which mature during each of the periods indicated and the weighted average yields for each range of maturities at September 30, 2018.2020.

    

Amounts at September 30, 2020 Which Mature In

 

Over 

Over Five 

 

One Year

Weighted 

One Year

Weighted

Years 

Weighted 

Over 

Weighted 

Weighted 

 

 or 

Average

 Through 

 Average 

Through 

Average 

Ten 

Average 

Average

 

   

Less

   

 Yield

   

Five Years

   

Yield

   

Ten Years

   

Yield

   

Years

   

Yield

   

Total

   

 Yield

 

 Amounts at September 30, 2018 Which Mature In 
      Over One     Over Five            
    Weighted Year Weighted Years Weighted Over Weighted     Weighted 
 One Year Average Through Average Through Average Ten Average     Average 
 or Less  Yield  Five Years  Yield  Ten Years  Yield  Years  Yield  Total  Yield 
 (Dollars in Thousands)      

 

(Dollars in Thousands)

Bonds and other debt securities:                                        

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

U.S. Government and agency obligations $2,000   5.43% $-   -  $11,000   2.57% $46,062   2.51% $59,062   2.63%

$

 

$

 

$

1,000

 

4.44

%  

$

22,241

 

2.70

%  

$

23,241

 

2.79

%

Mortgage-backed securities  -   -   2   2.40%  171   4.09%  199,056   2.97%  199,229   2.97%

 

 

 

6

 

4.18

%  

 

107

 

3.25

%  

 

230,534

 

2.76

%  

 

230,647

 

2.76

%

Corporate debt securities  1,002   1.74%  7,541   3.47%  63,073   3.98%  4,006   5.63%  75,622   3.99%

 

 

 

28,495

 

4.46

%  

 

50,269

 

4.62

%  

 

 

 

78,764

 

4.56

%

State and political subdivisions  -   -   -   -   14,483   2.86%  28,169   4.05%  42,652   3.64%

 

 

 

5,739

 

2.89

%  

 

8,498

 

3.04

%  

 

82,938

 

3.36

%  

 

97,175

 

3.30

%

Total $3,002   -  $7,543   3.47% $88,727   3.62% $277,293   3.05% $376,565   3.20%

$

 

$

34,240

 

4.36

%  

$

59,874

 

3.62

%  

$

335,713

 

3.16

%  

$

429,827

 

3.26

%

22

20

The following table sets forth the purchases and principal repayments of our mortgage-backed securities at amortized cost during the periods indicated.

    

At or For the  Year Ended September 30, 

    

2020

    

2019

    

2018

 At or For the 
 Year Ended September 30, 
 2018  2017  2016 
 (Dollars in Thousands) 

 

(Dollars in Thousands)

Mortgage-backed securities at beginning of period $126,459  $97,289  $69,917 

$

367,154

$

199,229

 

$

126,459

Purchases of mortgage-backed securities available for sale  98,128   48,212   49,639 

 

56,472

 

221,606

 

98,128

Sale of mortgage-backed securities available for sale  (4,840)  (5,421)  (11,560)

 

(85,978)

 

(33,149)

 

(4,840)

Maturities and repayments  (20,411)  (13,871)  (10,768)

 

(108,569)

 

(22,443)

 

(20,411)

Amortizations of premiums and discounts, net  (107)  250   61 

 

1,568

 

1,911

 

(107)

Mortgage-backed securities at end of period $199,229  $126,459  $97,289 

$

230,647

$

367,154

$

199,229

Weighted average yield at end of period  2.97%  2.59%  2.38%

 

2.78

%  

 

3.15

%

2.97

%  

Sources of Funds

General. Deposits, loan repayments and prepayments, proceeds from sales of loans, cash flows generated from operations and FHLB advances are the primary sources of funds for use in lending, investing and for other general purposes.

Deposits. We offer a variety of deposit accounts with a range of interest rates and terms. Deposits consist of checking, both interest-bearing and non-interest-bearing, money market, savings and certificate of deposit accounts. At September 30, 2018, 28.1%2020 65.0% of the funds deposited with the Bank were in core deposits, which are deposits other than certificates of deposit.

The flow of deposits is influenced significantly by general economic conditions, changes in money market rates, prevailing interest rates and competition. DepositsRetail deposits are obtained predominantly from the areas where the branch offices are located. We have historically relied primarily on customer service and long-standing relationships with customers to attract and retain these deposits; however, market interest rates and rates offered by competing financial institutions significantly affect the Company’s ability to attract and retain deposits. The interest rates offered on deposits are competitive in the market place.

The Bank uses traditional means of advertising its deposit products, including broadcast and print media and generally does not solicit deposits from outside its market area.

At September 30, 2018,2020, jumbo CDscds (certificates of deposit of $100,000 or more) amounted to $444.4$178.2 million, of which $345.5$121.4 million are scheduled to mature within twelve months subsequent to such date. At September 30, 2018,2020, the weighted average remaining period until maturity of the certificate of deposit accounts was 8.211.3 months. During fiscal 2018,2020, jumbo CDscds from government agencies and other financial institutions and to a lesser extent, brokered deposits, were utilized to fund growth.

23

21

The following table shows the distribution of, and certain other information relating to, deposits by type of deposit, as of the dates indicated.

    

September 30, 

 

2020

2019

2018

 

% of Total 

% of Total

% of Total

 

    

Amount

    

Deposits

    

Amount

    

 Deposits

    

Amount

    

 Deposits

 

 September 30, 
 2018  2017  2016 
 Amount  % of Total
Deposits
  Amount  % of Total
Deposits
  Amount  % of Total
Deposits
 
 (Dollars in Thousands) 

 

(Dollars in Thousands)

Certificate accounts:                        

Less than 1.00% $57,843   7.38% $62,523   9.83% $111,899   28.75%

$

95,739

 

12.42

%  

$

14,341

 

1.86

%  

$

57,843

 

7.76

%

1.00% - 1.99%  264,535   33.73%  294,860   46.36%  98,921   25.42%

 

66,034

 

8.57

%  

 

180,761

 

23.45

%  

 

264,535

 

35.49

%

2.00% - 2.99%  222,617   28.39%  36,942   5.81%  13,117   3.37%

 

75,206

 

9.75

%  

 

284,909

 

36.96

%  

 

222,617

 

29.86

%

3.00% - 3.99%  18,825   2.40%  -   0.00%  -   0.00%

3.00% - 3.40%

 

32,631

 

4.23

%  

 

33,172

 

4.30

%  

 

18,825

 

2.53

%

Total certificate accounts $563,820   71.90% $394,325   62.00% $223,937   57.54%

$

269,610

 

34.97

%  

$

513,183

 

66.57

%  

$

563,820

 

71.90

%

                        

Transaction accounts:                        

Savings  91,489   11.67%  101,743   16.00%  70,924   18.22%

$

224,435

 

29.11

%  

$

81,874

 

10.62

%  

$

91,489

 

12.27

%

Checking:                        

Non-Interest-bearing  13,620   1.74%  9,375   1.47%  3,804   0.98%

Non-interest-bearing

 

30,002

 

3.89

%  

 

15,974

 

2.07

%  

 

13,620

 

1.83

%

Interest-bearing  49,209   6.27%  54,267   8.53%  34,984   8.99%

 

135,797

 

17.61

%  

 

58,647

 

7.61

%  

 

49,209

 

6.60

%

Money market  66,120   8.43%  76,272   11.99%  55,552   14.27%

 

111,105

 

14.41

%  

 

75,766

 

9.83

%  

 

66,120

 

8.87

%

Total transaction accounts $220,438   28.10% $241,657   38.00% $165,264   42.46%

$

501,339

 

65.03

%  

$

232,261

 

30.13

%  

$

220,438

 

28.10

%

Total deposits $784,258   100.00% $635,982   100.00% $389,201   100.00%

$

770,949

 

100.00

%  

$

745,444

 

96.69

%  

$

784,258

 

105.21

%

The following table shows the average balance of each type of deposit and the average rate paid on each type of deposit for the periods indicated.

    

Year Ended September 30, 

 

2020

2019

2018

 

Average 

Average 

Average 

 

Average 

Interest

Rate

Average

Interest

Rate 

Average 

Interest 

Rate 

 

    

Balance

    

 Expense

    

 Paid

    

 Balance

    

 Expense

    

Paid

    

Balance

    

Expense

    

Paid

 

 Year Ended September 30, 
 2018  2017  2016 
 Average
Balance
  

Interest

Expense

  Average
Rate Paid
  Average
Balance
  

Interest

Expense

  Average
Rate Paid
  Average
Balance
  

Interest

Expense

  Average
Rate Paid
 
 (Dollars in Thousands) 

 

(Dollars in Thousands)

Savings $105,665  $66   0.06% $97,710  $51   0.05% $73,030  $83   0.11%

$

83,757

$

38

 

0.05

%

$

88,049

$

124

 

0.14

%

$

105,665

$

66

 

0.06

%

Interest-bearing checking and money market accounts  121,954   247   0.20%  127,172   197   0.15%  92,751   165   0.18%

 

245,421

 

2,045

 

0.83

%

 

125,148

 

899

 

0.72

%

 

121,954

 

247

 

0.20

%

Certificate accounts  454,554   7,073   1.56%  325,824   3,682   1.13%  211,517   2,613   1.24%

 

413,308

 

8,819

 

2.13

%

 

555,004

 

12,137

 

2.19

%

 

454,554

 

7,073

 

1.56

%

Total interest-bearing deposits  682,173  $7,386   1.08%  550,706  $3,930   0.71%  377,298  $2,861   0.76%

 

742,486

$

10,902

 

1.47

%

 

768,201

$

13,160

 

1.71

%

 

682,173

$

7,386

 

1.08

%

                                    

Non-interest-bearing deposits  12,416       1.06%  13,390       0.70%  6,618       0.75%

 

22,966

 

15,493

 

12,416

Total deposits $694,589          $564,096          $383,916         

$

765,452

 

1.42

%

$

783,694

 

1.68

%

$

694,589

 

1.06

%

24

The following table shows the deposit cash flows during the periods indicated.

    

Year Ended September 30, 

    

2020

    

2019

    

2018

 Year Ended September 30, 
 2018  2017  2016 
 (In Thousands) 

 

(In Thousands)

Deposits made $894,105  $678,878  $364,745 

$

2,110,071

$

1,302,749

 

$

894,105

Deposits acquired (Polonia Bank)  -   172,243   - 
Withdrawals  (749,331)  (606,984)  (343,535)

 

(2,089,115)

 

(1,346,326)

 

(749,331)

Interest credited  3,502   2,644   2,917 

 

4,549

 

4,763

 

3,502

Total increase in deposits $148,276  $246,781  $24,127 

Total (decrease) increase in deposits

$

25,505

$

(38,814)

 

$

148,276

22

The following table presents, by various interest rate categories and maturities, the amount of certificates of deposit at September 30, 2018.2020.

 Maturing in the 12 Months Ending September 30, 

Maturing in the 12 Months Ending September 30, 

Certificates of Deposit 2019  2020  2021  Thereafter  Total 

2021

    

2022

    

2023

    

Thereafter

    

Total

 (In Thousands) 

(In Thousands)

Less than 1.00% $55,775  $2,068  $-  $-  $57,843 

$

86,633

$

5,131

$

1,658

$

2,317

$

95,739

1.00% - 1.99%  194,729   47,832   9,379   12,595   264,535 

 

41,119

 

13,094

 

6,102

 

5,719

 

66,034

2.00% - 2.99%  160,427   25,071   9,439   27,680   222,617 

 

41,192

 

24,337

 

6,477

 

3,200

 

75,206

3.00% - 3.40%  1,057   450   1,058   16,260   18,825 

 

1,610

 

779

 

16,152

 

14,090

 

32,631

Total certificate accounts $411,988  $75,421  $19,876  $56,535  $563,820 

$

170,554

$

43,341

$

30,389

$

25,326

$

269,610

The following tables show the maturities of our certificates of deposit of $100,000 or more at September 30, 2018,2020, by time remaining to maturity.

     Weighted 
Quarter Ending: Amount  Avg Rate 
  (Dollars in Thousands) 
December 31, 2018 $150,162   1.62%
March 31, 2019  110,825   1.82%
June 30, 2019  48,828   2.04%
September 30, 2019  35,674   2.05%
After September 30, 2019  98,872   2.12%
Total certificates of deposit with balances of $100,000 or more $444,361   1.86%

    

    

Weighted

Quarter Ending:

    

Amount

    

Avg Rate

 

 

(Dollars in Thousands)

December 31, 2020

$

73,425

 

0.64

%

March 31, 2021

 

23,819

 

1.71

%

June 30, 2021

 

13,981

 

1.74

%

September 30, 2021

 

10,150

 

1.04

%

After September 30, 2021

 

56,864

 

2.27

%

Total certificates of deposit with balances of $100,000 or more

$

178,239

 

1.41

%

25

Borrowings. From time to time we utilize advances from the Federal Home Loan BankFHLB of Pittsburgh as an alternative to retail deposits to fund the operations as part of the operating and liquidity strategy. See “Liquidity and Capital Resources” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operation. These FHLB advances are collateralized primarily by certain mortgage loans and mortgage-backed securities and secondarily by an investment in capital stock of the Federal Home Loan BankFHLB of Pittsburgh. There are no specific credit covenants associated with these borrowings. FHLB advances are made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. The maximum amount that the Federal Home Loan BankFHLB of Pittsburgh will advance to member institutions, including the Bank, fluctuates from time to time in accordance with the policies of the Federal Home Loan BankFHLB of Pittsburgh. At September 30, 2018,2020, the Company had $154.7$285.3 million in outstanding advances with the FHLB, and in addition had the ability to obtain additional advances in the amount of $265.7$103.4 million. The Bank utilized the FHLB advances to fund an investment leverage strategy along with funding growth in the loan and investment portfolios.

The following table shows certain information regarding short-term borrowings (one year or less) at or for the dates indicated:

    

At or For the Year Ended September 30, 

 

    

2020

    

2019

    

2018

 

 At or For the Year Ended September 30, 
 2018  2017  2016 
 (Dollars in Thousands) 

(Dollars in Thousands)

 

FHLB advances:            

Average balance outstanding $18,933  $21,784  $20,000 

$

66,735

$

31,158

$

18,933

Maximum amount outstanding at any month-end during the period  30,200   35,000   8,975 

 

115,000

 

90,000

 

30,200

Balance outstanding at end of period  10,000   20,000   20,000 

 

25,000

 

90,000

 

10,000

Average interest rate during the period  2.31%  1.31%  1.17%

 

1.58

%  

 

2.53

%  

 

1.81

%

Weighted average interest rate at end of period  1.81%  0.84%  1.23%

 

0.39

%  

 

2.32

%  

 

2.31

%

23

The following table shows certain information regarding long-term borrowings at or for the dates indicated:

Lomg-term FHLB advances: Maturity range weighted average Stated interest rate range      

    

Maturity Range

    

Weighted Average

    

Stated Interest Rate Range

    

At September 30, 

Description from to interest rate  from  to  2018  2017 

    

from

    

to

    

Interest Rate

    

from

    

to

    

2020

    

2019

           (Dollars in Thousands) 

(Dollars in Thousands)

Fixed Rate - Advances 15-Nov-18 9-May-24  2.43%  1.38%  3.23% $99,358  $88,795 

9-Oct-20

21-May-24

 

2.55

%  

1.42

%  

3.23

%  

$

244,286

$

256,654

Fixed Rate - Amortizing 18-Nov-19 15-Aug-23  2.71%  1.53%  3.11%  45,325   5,523 

26-Oct-20

15-Aug-23

 

2.83

%  

1.94

%  

3.11

%  

 

15,967

 

30,250

Total             $144,683  $94,318 

  

  

 

  

 

  

 

  

$

260,253

$

286,904

Subsidiaries

The Company has only one direct subsidiary: Prudential Bank. The Bank’s sole subsidiary as of September 30, 20182020 was PSB Delaware, Inc. (“PSB”), a Delaware-chartered corporation established to hold investment securities. As of September 30, 2018,2020, PSB had assets of $155.9$266.7 million primarily consisting of mortgage-backed and investment securities. We may consider the establishment of one or more additional subsidiaries in the future.

26

Employees and Human Capital Resources

Employees

At September 30, 2018,2020, we had 7991 full-time employees, and fourtwo part-time employees. None of such employees are represented by a collective bargaining group, and we believe that the Company’s relationship with its employees is good. We believe our ability to attract and retain employees is a key to the Bank’s success. Accordingly, we strive to offer competitive salaries and employee benefits to all employees and monitor salaries in our market areas.

REGULATION

General

The Bank is a Pennsylvania-chartered savings bank and is subject to extensive regulation and examination by the Pennsylvania Department of Banking and Securities (the “Department”) and by the Federal Deposit Insurance Corporation ( the “FDIC”), and is also subject to certain requirements established by the Federal Reserve Board. The federal and state laws and regulations which are applicable to banks regulate, among other things, the scope of their business, their investments, their reserves against deposits, the payment of dividends, the timing of the availability of deposited funds and the nature and amount of and collateral for certain loans. There are periodic examinations by the Department and the FDIC to test the Bank’s compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulation, whether by the Department, the FDIC, the Federal Reserve Board or the Congress could have a material adverse impact on Prudential Bancorp and the Bank and their respective operations.

Federal law provides the federal banking regulators, including the FDIC and the Federal Reserve Board, with substantial enforcement powers. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders, and to initiate injunctive actions against banking organizations and institution-affiliated parties, as defined. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities.

Prudential Bancorp is a registered as bank holding company under the Bank Holding Company Act and is subject to regulation and supervision by the Federal Reserve Board and by the Department. Prudential Bancorp files annually a report of its operations with, and is subject to examination by, the Federal Reserve Board and the Department. This

24

regulation and oversight is generally intended to ensure that Prudential Bancorp limits its activities to those allowed by law and that it operates in a safe and sound manner without endangering the financial health of the Bank.

The common stock of Prudential Bancorp is registered with the Securities and Exchange Commission (“SEC”)SEC under the Securities Exchange Act of 1934. Prudential Bancorp is subject to the proxy and tender offer rules, insider trading reporting requirements and restrictions, and certain other requirements under the Securities Exchange Act of 1934. Prudential Bancorp’s common stock is listed on the Nasdaq Global Market under the symbol “PBIP.” The Nasdaq Stock Market listing requirements impose additional requirements on us, including, among other things, rules relating to corporate governance and the composition and independence of our boardBoard of directorsDirectors and various committees of the board,Board, such as the audit committee.

27

Certain of the regulatory requirements that are applicable to the Bank and Prudential Bancorp are described below. This description of statutes and regulations is not intended to be a complete explanation of such statutes and regulations and their effects on the Bank and Prudential Bancorp and is qualified in its entirety by reference to the actual statutes and regulations.

2018 Regulatory Reform

In May 2018 the Economic Growth, Regulatory Relief and Consumer Protection Act (the “2018 Act”), was enacted to modify or remove certain financial reform rules and regulations, including some of those implemented under the Dodd-Frank Act.Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). While the 2018 Act maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects of the regulatory framework for small depository institutions with assets of less than $10 billion and for large banks with assets of more than $50 billion. Many of these changes could result in meaningful regulatory relief for community banks such as Home Federalthe Bank.

The 2018 Act, among other matters, expands the definition of qualified mortgages which may be held by a financial institution and simplifies the regulatory capital rules for financial institutions and their holding companies with total consolidated assets of less than $10 billion by instructing the federal banking regulators to establish a single “Community Bank Leverage Ratio” of between 8 and 10 percent to replace the leverage and risk-based regulatory capital ratios. The Act also expands the category of holding companies that may rely on the “Small Bank Holding Company and Savings and Loan Holding Company Policy Statement” (the “SBHC Policy”) by raising the maximum amount of assets a qualifying holding company may have from $1 billion to $3 billion. This expansion also excludes such holding companies from the minimum capital requirements of the Dodd-Frank Act. In addition, the 2018 Act includes regulatory relief for community banks regarding regulatory examination cycles, call reports, the Volcker Rule (proprietary trading prohibitions), mortgage disclosures and risk weights for certain high-risk commercial real estate loans.

It is difficult at this time to predict when or how anythe new standards under the 2018 Act will ultimately be applied to usaffect the Bank or what specific impact the 2018 Act and the yet-to-be-writtenrecently promulgated implementing rules and regulations will have on community banks.

2010 Regulatory Reform

On July 21, 2010, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”).into law. The Dodd-Frank Act imposes new restrictions and an expanded framework of regulatory oversight for financial institutions, including depository institutions. The law also established an independent federal consumer protection bureau within the Federal Reserve Board. The following discussion summarizes significant aspects of the law that may affect the Bank and Prudential Bancorp. Many regulations implementing these changes have been promulgated, so we cannot determine the full impact on our business and operations at this time.

The following aspects of the financial reform and consumer protection act are related to the operations of the Bank:

•           A new independent consumer financial protection bureau was established, the Consumer Financial Protection Bureau (“CFPB”) within the Federal Reserve Board, empowered to exercise broad regulatory, supervisory and enforcement authority with respect to both new and existing consumer financial protection laws. Smaller financial institutions, like the Bank, are subject to the supervision and enforcement of their primary federal banking regulator with respect to the federal consumer financial protection laws.

28A new independent consumer financial protection bureau was established, the Consumer Financial Protection Bureau (“CFPB”) within the Federal Reserve Board, empowered to exercise broad regulatory, supervisory and enforcement authority with respect to both new and existing consumer financial protection laws. Smaller financial institutions, like the Bank, are subject to the supervision and enforcement of their primary federal banking regulator with respect to the federal consumer financial protection laws.

25

•           Tier 1 capital treatment for “hybrid” capital items like trust preferred securities was eliminated subject to various grandfathering and transition rules.

•           The prohibition on paymentTable of interest on demand deposits was repealed.Contents

•           Deposit insurance on most accounts increased to $250,000.

•           The deposit insurance assessment base calculation now equals the depository institution’s total assets minus the sum of its average tangible equity during the assessment period.

•           The minimum reserve ratio of the Deposit Insurance Fund increased to 1.35 percent of estimated annual insured deposits or assessment base; however, the FDIC is directed to “offset the effect” of the increased reserve ratio for insured depository institutions with total consolidated assets of less than $10 billion.

Tier 1 capital treatment for “hybrid” capital items like trust preferred securities was eliminated subject to various grandfathering and transition rules.
The prohibition on payment of interest on demand deposits was repealed.
Deposit insurance on most accounts increased to $250,000.
The deposit insurance assessment base calculation now equals the depository institution’s total assets minus the sum of its average tangible equity during the assessment period.
The minimum reserve ratio of the Deposit Insurance Fund increased to 1.35 percent of estimated annual insured deposits or assessment base; however, the FDIC is directed to “offset the effect” of the increased reserve ratio for insured depository institutions with total consolidated assets of less than $10 billion.

The following aspects of the financial reform and consumer protection act are related to the operations of Prudential Bancorp:

•           
The Federal Deposit Insurance Act was amended to direct federal regulators to require depository institution holding companies to serve as a source of strength for their depository institution subsidiaries.
The SEC is authorized to adopt rules requiring public companies to make their proxy materials available to shareholders for nomination of their own candidates for election to the board of directors.
Public companies are now required to provide their shareholders with a non-binding vote: (i) at least once every three years on the compensation paid to executive officers, and (ii) at least once every six years on whether they should have a “say on pay” vote every one, two or three years.
A separate, non-binding shareholder vote is now required regarding golden parachutes for named executive officers when a shareholder vote takes place on mergers, acquisitions, dispositions or other transactions that would trigger the parachute payments.
Securities exchanges are now required to prohibit brokers from using their own discretion to vote shares not beneficially owned by them for certain “significant” matters, which include votes on the election of directors and executive compensation matters.
Stock exchanges are prohibited from listing the securities of any issuer that does not have a policy providing for (i) disclosure of its policy on incentive compensation payable on the basis of financial information reportable under the securities laws, and (ii) the recovery from current or former executive officers, following an accounting restatement triggered by material noncompliance with securities law reporting requirements, of any incentive compensation paid erroneously during the three-year period preceding the date on which the restatement was required that exceeds the amount that would have been paid on the basis of the restated financial information.
Disclosure in annual proxy materials will be required concerning the relationship between the executive compensation paid and the financial performance of the issuer.
Item 402 of Regulation S-K promulgated by the SEC will be amended to require companies to disclose the ratio of the Chief Executive Officer’s annual total compensation to the median annual total compensation of all other employees.
Smaller reporting companies are exempt from complying with the internal control auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act.

26

Table of strength for their depository institution subsidiaries.Contents

•           The SEC is authorized to adopt rules requiring public companies to make their proxy materials available to shareholders for nomination of their own candidates for election to the board of directors.

•           Public companies are now required to provide their shareholders with a non-binding vote: (i) at least once every three years on the compensation paid to executive officers, and (ii) at least once every six years on whether they should have a “say on pay” vote every one, two or three years.

•           A separate, non-binding shareholder vote is now required regarding golden parachutes for named executive officers when a shareholder vote takes place on mergers, acquisitions, dispositions or other transactions that would trigger the parachute payments.

•           Securities exchanges are now required to prohibit brokers from using their own discretion to vote shares not beneficially owned by them for certain “significant” matters, which include votes on the election of directors and executive compensation matters.

•           Stock exchanges are prohibited from listing the securities of any issuer that does not have a policy providing for (i) disclosure of its policy on incentive compensation payable on the basis of financial information reportable under the securities laws, and (ii) the recovery from current or former executive officers, following an accounting restatement triggered by material noncompliance with securities law reporting requirements, of any incentive compensation paid erroneously during the three-year period preceding the date on which the restatement was required that exceeds the amount that would have been paid on the basis of the restated financial information.

•           Disclosure in annual proxy materials will be required concerning the relationship between the executive compensation paid and the financial performance of the issuer.

29

•           Item 402 of Regulation S-K promulgated by the SEC will be amended to require companies to disclose the ratio of the Chief Executive Officer’s annual total compensation to the median annual total compensation of all other employees, commencing with fiscal years starting after January 1, 2017.

Regulation of Prudential Bank

Pennsylvania Banking Law. The Pennsylvania Banking Code of 1965 (the “Banking Code”) contains detailed provisions governing the organization, location of offices, rights and responsibilities of directors, officers, employees and members, as well as corporate powers, savings and investment operations and other aspects of the Bank and its affairs. The Banking Code delegates extensive rulemaking power and administrative discretion to the Department so that the supervision and regulation of state-chartered savings banks may be flexible and readily responsive to changes in economic conditions and in savings and lending practices.

One of the purposes of the Banking Code is to provide savings banks with the opportunity to be competitive with each other and with other financial institutions existing under other Pennsylvania laws and other state, federal and foreign laws. A Pennsylvania savings bank may locate or change the location of its principal place of business and establish an office anywhere in Pennsylvania, with the prior approval of the Department.

The Department generally examines each savings bank not less frequently than once every two years. Although the Department may accept the examinations and reports of the FDIC in lieu of its own examination, the present practice is for the Department to alternate conducting examinations with the FDIC. The Department may order any savings bank to discontinue any violation of law or unsafe or unsound business practice and may direct any director, trustee, officer, attorney or employee of a savings bank engaged in an objectionable activity, after the Department has ordered the activity to be terminated, to show cause at a hearing before the Department why such person should not be removed.

Insurance of Accounts. The deposits of the Bank are insured to the maximum extent permitted by the Deposit Insurance Fund and are backed by the full faith and credit of the U.S. Government. The Dodd-Frank Act increased deposit insurance on most accounts to $250,000. As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, insured institutions. It also may prohibit any insured institution from engaging in any activity determined by regulation or order to pose a serious threat to the FDIC. The FDIC also has the authority to initiate enforcement actions against savings institutions.

The Dodd Frank Act raises the minimum reserve ratio of the Deposit Insurance Fund from 1.15% to 1.35% and requires the FDIC to offset the effect of this increase on insured institutions with assets of less than $10 billion (small institutions). In March 2016, the FDIC adopted a rule to accomplish this by imposing a surcharge on larger institutions commencing when the reserve ratio reaches 1.15% and ending when it reaches 1.35%. The reserve ratio reached 1.15% effective as of June 30, 2016. This surcharge period became effective July 1, 2016 and is expected to end by December 31, 2018.ended on September 30, 2018 when the reserve ratio reached 1.36%. Small institutions will receive credits for the portion of their regular assessments that contributed to growth in the reserve ratio between 1.15% and 1.35%. The credits will apply to reduce regular assessments by 2.0 basis points for quarters when the reserve ratio is at least 1.38%.

As of June 30, 2019 the reserve ratio reached 1.40% and small bank assessment credits were applied to FDIC insurance invoices. The Bank received a credit of $216,000.

Effective July 1, 2016 the FDIC adopted changes that eliminated its risk-based premium system. The FDIC assesses deposit insurance premiums on the assessment base of a depository institution, which is their average total asset reduced by the amount of its average tangible equity. For a small institution (one with assets of less than $10 billion) that has been federally insured for at least five years, effective July 1, 2016, the initial base assessment rate ranges from 3 to 30 basis points, based on the institution’s CAMELS composite and component ratings and certain financial ratios: its leverage ratio; its ratio of net income before taxes to total assets; its ratio of nonperforming loans and leases to gross assets; its ratio of other real estate owned to gross assets; its brokered deposits ratio (excluding reciprocal deposits if the institution is well capitalized and has a CAMELS composite rating of 1 or 2); its one year asset growth ratio (which penalizes growth adjusted for mergers in excess of 10%); and its loan mix index (which penalizes higher risk loans based on historical industry charge off rates).  The initial base assessment rate is subject to downward adjustment (not below 1.5%) based on the ratio of unsecured debt the institution has issued to its assessment base, and to upward adjustment (which can cause the rate to exceed 30 basis points) based on its holdings of unsecured debt issued by other insured institutions. Institutions with assets of $10 billion or more are assessed using a scorecard method. In addition, all institutions with deposits insured by the FDIC are required to pay assessments to fund interest payments on bonds issued by the Financing Corporation, a

27

mixed-ownership government corporation established to recapitalize a predecessor to the Deposit Insurance Fund. These assessments will continue until theThe Financing Corporation bonds maturematured in 2019.

30

The FDIC may terminate the deposit insurance of any insured depository institution, including the Bank, if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC. Management is not aware of any existing circumstances which could result in termination of the Bank’s deposit insurance.

Recent Regulatory Capital RegulationsRequirements.. In July of 2013 Unless a community bank qualifies and elects to comply with the respective U.S.community bank leverage ratio (the “CBLR”) requirement described below, federal banking agencies issued final rules implementing Basel III and the Dodd-Frank Actregulations require Federal Deposit Insurance Corporation-insured depository institutions to meet several minimum capital requirements to be fully-phased in on a global basis on January 1, 2019. The new regulations establish a new tangible common equity capital requirement, increase the minimum requirement for the current Tier 1 risk-weighted asset (“RWA”) ratio, phase out certain kinds of intangibles treated as capital and certain types of instruments and change the risk weightings of certain assets used to determine required capital ratios. The new common equity Tier 1 capital component requires capital of the highest quality – predominantly composed of retained earnings and common stock instruments. For community banks, such as the Bank,standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5% became effective on January 1, 2016. The new, a Tier 1capital to risk-based assets of 6.0%, a total capital rules also increased the current minimumto risk-based assets ratio of 8.0% and a Tier 1 capital to average assets leverage ratio fromof 4.0% to 6.0% beginning on January 1, 2016.. In addition, in order to make capital distributions and pay discretionary bonuses to executive officers without restriction, an institution must also maintain greater than 2.5% in common equity attributable to a capital conservation bufferbuffer.

Effective January 1, 2020, qualifying community banking organizations may elect to comply with a greater than 9% community bank leverage ratio (the “CBLR”) requirement in lieu of the currently applicable requirements for calculating and reporting risk-based capital ratios. The CBLR is equal to Tier 1 capital divided by average total consolidated assets. In order to qualify for the CBLR election, a community bank must (i) have a leverage capital ratio greater than 9 percent, (2) have less than $10 billion in average total consolidated assets, (3) not exceed certain levels of off-balance sheet exposure and trading assets plus trading liabilities and (4) not be an advanced approaches banking organization. A community bank that meets the above qualifications and elects to utilize the CBLR is considered to have satisfied the risk-based and leverage capital requirements in the generally applicable capital rules and is also considered to be phased in from January 1, 2016 until January 1, 2019. The new rules also increase the risk weights for several categories of assets, including an increase from 100% to 150% for certain acquisition, development and construction loans and more than 90-day past due exposures. The new capital rules maintain the general structure of“well capitalized” under the prompt corrective action rules (described below), but incorporaterules. As of September 30,2020, the new common equity Tier 1 capital requirement andBank had not elected to be subject to the increased Tier 1 RWA requirement into the prompt corrective action framework.CBLR requirement.

Regulatory Capital Requirements. Federally insured state-chartered non-member banks and savings banks are required to maintain minimum levels of regulatory capital. Current FDIC capital standards require these institutions to satisfy a common equity Tier 1 capital requirement, a leverage capital requirement and a risk-based capital requirement. The common equity Tier 1 capital component generally consists of retained earnings and common stock instruments and must equal at least 4.5% of risk-weighted assets. Leverage capital, also known as “core” capital, must equal at least 3.0% of adjusted total assets for the most highly rated state-chartered non-member banks and savings banks. Core capital generally consists of common stockholders’ equity (including retained earnings). An additional cushion of at least 100 basis points is required for all other non-member banks and savings banks, which effectively increases their minimuminstruments. Tier 1 leverage ratio to 4.0% or more. Under the FDIC’s regulations, the most highly-rated banks are those that the FDIC determines are strong banking organizationcapital is generally defined as common equity Tier 1 and are rated compositeadditional Tier 1 under the Uniform Financial Institutions Rating System.capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Under the risk-based capital requirement, “total” capital (a combination of core and “supplementary” capital) must equal at least 8.0% of “risk-weighted” assets.. The FDIC also is authorized to impose capital requirements in excess of these standards on individual institutions on a case-by-case basis.

31

In determining compliance with the risk-based capital requirement, a savings bank is allowed to include both core capital and supplementary capital in its total capital, provided that the amount of supplementary capital included does not exceed the savings bank’s core capital. Supplementary capital generally consists of general allowances for loan losses up to a maximum of 1.25% of risk-weighted assets, together with certain other items. In determining the required amount of risk-based capital, total assets, including certain off-balance sheet items, are multiplied by a risk weight based on the risks inherent in the type of assets. The risk weights range from 0% for cash and securities issued by the U.S. Government or unconditionally backed by the full faith and credit of the U.S. Government to 100% for loans (other than qualifying residential loans weighted at 80%) and repossessed assets.assets and to 150% for certain acquisition, development and construction loans and more than 90-day past due exposures.

Savings banks must value securities available for sale at amortized cost for regulatory capital purposes. This means that in computing regulatory capital, savings banks should add back any unrealized losses and deduct any unrealized gains, net of income taxes, on debt securities reported as a separate component of capital, as defined by generally accepted accounting principles.

28

At September 30, 2018,2020, the Bank exceeded all of its regulatory capital requirements, with Tier 1, Tier 1 common equity, Tier 1 (to risk-weighted assets) and total risk-based capital ratios of 11.86%10.51%, 18.73%16.88%, 18.73%16.88% and 19.56%18.08%, respectively.

Any savings bank that fails any of the capital requirements is subject to possible enforcement action by the FDIC. Such action could include a capital directive, a cease and desist order, civil money penalties, the establishment of restrictions on the institution’s operations, termination of federal deposit insurance and the appointment of a conservator or receiver. The FDIC’s capital regulations provide that such actions, through enforcement proceedings or otherwise, could require one or more of a variety of corrective actions.

Department Capital Requirements. The Bank is also subject to more stringent Department capital guidelines. Although not adopted in regulation form, the Department utilizes capital standards requiring a minimum of 6% leverage capital and 10% risk-based capital. The components of leverage and risk-based capital are substantially the same as those defined by the FDIC. At September 30, 2018,2020, the Bank’s capital ratios exceeded each of its capital requirements.

Prompt Corrective Action. The following table shows the amount of capital associated with the different capital categories set forth in the prompt corrective action regulations.regulations(and does not take into account the potential determination to elect to use the CBLR.

32

Total

Tier 1

Tier 1

Tier 1

Capital Category

Risk-Based
Capital

Risk-Based
Capital

Total

Common Equity
Capital

Leverage
Capital

Tier 1

Tier 1

Tier 1

Risk-Based

Risk-Based

Common Equity

Leverage

Capital Category

Capital

Capital

Capital

Capital

Well capitalized

10% or more

8% or more

6.5% or more

5% or more

Adequately capitalized

8% or more

6% or more

4.5% or more

4% or more

Undercapitalized

Less than 8%8

%  

Less than 6%6

%  

Less than 4.5%4.5

%  

Less than 4%4

%

Significantly undercapitalized

Less than 6%6

%  

Less than 4%4

%  

Less than 3%3

%  

Less than 3%3

%

In addition, an institution is “critically undercapitalized” if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%. Under specified circumstances, a federal banking agency may reclassify a “well capitalized” institution as adequately capitalized and may require an adequately capitalized institution or an undercapitalized institution to comply with supervisory actions as if it were in the next lower category (except that the FDIC may not reclassify a significantly undercapitalized institution as critically undercapitalized).

An institution generally must file a written capital restoration plan which meets specified requirements within 45 days of the date that the institution receives notice or is deemed to have notice that it is undercapitalized, significantly undercapitalized or critically undercapitalized. A federal banking agency must provide the institution with written notice of approval or disapproval within 60 days after receiving a capital restoration plan, subject to extensions by the agency. An institution which is required to submit a capital restoration plan must concurrently submit a performance guaranty by each company that controls the institution. In addition, undercapitalized institutions are subject to various regulatory restrictions, and the appropriate federal banking agency also may take any number of discretionary supervisory actions.

At September 30, 2018,2020, the Bank was deemed to be a “well capitalized” institution for purposes of the prompt corrective action regulations and as such is not subject to the above mentioned restrictions.

29

Summary of Capital Positions.The table below sets forth the Company and the Bank’s capital position relative to its respective regulatory capital requirements at September 30, 2018.2020.

              To Be 
              Well Capitalized 
              Under Prompt 
        Required for Capital  Corrective Action 
  Actual  Adequacy Purposes(1)  Provisions 
  Amount  Ratio  Amount  Ratio  Amount  Ratio 
  (Dollars in Thousands) 
                   
Tier 1 capital (to average assets)                        
Company $129,890   12.51%  N/A   N/A   N/A   N/A 
Bank  123,199   11.86  $41,542   4.00% $51,928   5.0%
Tier 1 Common (to risk-weighted assets)                        
Company  129,890   19.74   N/A   N/A   N/A   N/A 
Bank  123,199   18.73   29,603   4.5   42,759   6.5 
Tier 1 capital (to risk-weighted assets)                        
Company  129,890   19.74   N/A   N/A   N/A   N/A 
Bank  123,199   18.73   26,313   6.0   39,470   8.0 
Total capital (to risk-weighted assets)                        
Company  135,374   20.58   N/A   N/A   N/A   N/A 
Bank  128,683   19.56   52,627   8.0   65,783   10.0 

    

To Be

 

Well Capitalized

 

Under Prompt

 

Required for Capital

Corrective 

 

Adequacy 

Action

 

    

Ratio

    

Purposes

    

Provisions

 

 

September 30, 2020:

Tier 1 capital (to average assets)

 

  

 

  

 

 

  

Company

10.34

%  

N/A

 

 

N/A

Bank

10.51

%  

4.0

%  

 

5.0

%

Tier 1 Common (to risk-weighted assets)

  

 

  

 

  

Company

17.21

%  

 

N/A

 

N/A

Bank

16.88

%  

 

4.5

%

 

6.5

%

Tier 1 capital (to risk-weighted assets)

  

 

  

 

  

Company

17.21

%  

 

N/A

 

N/A

Bank

16.88

%  

 

6.0

%

 

8.0

%

Total capital (to risk-weighted assets)

  

 

  

 

  

Company

18.41

%  

 

N/A

 

N/A

Bank

18.08

%  

8.0

%

10.0

%

September 30, 2019:

Tier 1 capital (to average assets)

 

  

 

  

 

 

  

Company

10.89

%  

N/A

 

 

N/A

Bank

10.49

%  

4.0

%  

 

5.0

%

Tier 1 Common (to risk-weighted assets)

  

 

  

 

  

Company

18.43

%  

 

N/A

 

N/A

Bank

18.10

%  

 

4.5

%  

 

6.5

%  

Tier 1 capital (to risk-weighted assets)

  

 

  

 

  

Company

18.43

%  

 

N/A

 

N/A

Bank

18.10

%  

 

6.0

%  

 

8.0

%  

Total capital (to risk-weighted assets)

  

 

  

 

  

Company

19.27

%  

 

N/A

 

N/A

Bank

18.94

%  

 

8.0

%  

 

10.0

%  

(1)The Company is not subject to the regulatory capital ratios imposed by Basel III on bank holding companies because the Company was deemed to be a small bank holding company as of September 30, 2018.2020.

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Activities and Investments of Insured State-Chartered Banks and Savings Banks.The activities and equity investments of FDIC-insured, state-chartered banks and savings banks are generally limited to those that are permissible for national banks. Under regulations dealing with equity investments, an insured state bank or savings bank generally may not directly or indirectly acquire or retain any equity investment of a type, or in an amount, that is not permissible for a national bank. An insured state bank is not prohibited from, among other things:

•           acquiring or retaining a majority interest in a subsidiary;

•           
acquiring or retaining a majority interest in a subsidiary;
investing as a limited partner in a partnership the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such limited partnership investments may not exceed 2% of the bank’s total assets;
acquiring up to 10% of the voting stock of a company that solely provides or reinsures directors’, trustees’ and officers’ liability insurance coverage or bankers’ blanket bond group insurance coverage for insured depository institutions; and
acquiring or retaining the voting shares of a depository institution if certain requirements are met.

30

Table of which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such limited partnership investments may not exceed 2% of the bank’s total assets;Contents

•           acquiring up to 10% of the voting stock of a company that solely provides or reinsures directors’, trustees’ and officers’ liability insurance coverage or bankers’ blanket bond group insurance coverage for insured depository institutions; and

•           acquiring or retaining the voting shares of a depository institution if certain requirements are met.

The FDIC has adopted regulations pertaining to the other activity restrictions imposed upon insured state-chartered banks and savings banks and their subsidiaries. Pursuant to such regulations, insured state banks and savings banks engaging in impermissible activities may seek approval from the FDIC to continue such activities. State banks and savings banks not engaging in such activities but that desire to engage in otherwise impermissible activities either directly or through a subsidiary may apply for approval from the FDIC to do so; however, if such bank fails to meet the minimum capital requirements or the activities present a significant risk to the FDIC insurance funds, such application will not be approved by the FDIC. Pursuant to this authority, the FDIC has determined that investments in certain majority-owned subsidiaries of insured state-chartered banks and savings banks do not represent a significant risk to the deposit insurance funds. Investments permitted under that authority include real estate activities and securities activities.

Restrictions on Capital Distributions. Under federal rules, an insured depository institution may not pay any dividend if payment would cause it to become undercapitalized or if it is already undercapitalized. In addition, federal regulators have the authority to restrict or prohibit the payment of dividends for safety and soundness reasons. The FDIC also prohibits an insured depository institution from paying dividends on its capital stock or interest on its capital notes or debentures (if such interest is required to be paid only out of net profits) or distributing any of its capital assets while it remains in default in the payment of any assessment due the FDIC. The Bank is currently not in default in any assessment payment to the FDIC. Pennsylvania law also restricts the payment and amount of dividends, including the requirement that dividends be paid only out of accumulated net earnings.

Incentive Compensation. Guidelines adopted by the federal banking agencies pursuant to the FDIA prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal stockholder.

In January 2010, the FDIC announced that it would seek public comment on whether banks with compensation plans that encourage risky behavior should be charged higher deposit assessment rates than such banks would otherwise be charged. The comment period ended in February 2010. As of September 30, 2018,2020, a final rule has not been adopted.

34

In June 2010, the federal banking agencies issued comprehensive guidance on incentive compensation policies (the “Incentive Compensation Guidance”) intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The Incentive Compensation Guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors. Any deficiencies in compensation practices that are identified may be incorporated into the organization’s supervisory ratings, which can affect its ability to make acquisitions or perform other actions. The Incentive Compensation Guidance provides that enforcement actions may be taken against a banking organization if its incentive compensation arrangements or related risk-management control or governance processes pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.

In April 2011, the federal banking agencies and the SEC jointly published proposed rulemaking designed to implement provisions of the Dodd-Frank Act prohibiting incentive compensation arrangements that would encourage inappropriate risk taking. Those proposed regulations apply only to a financial institution or its holding company with $1 billion or more of assets. In June 2016, the federal banking agencies and the SEC published a new proposed rule to implement these provisions.

The scope and content of the U.S. banking regulators’ policies on incentive compensation are continuing to develop. It cannot be determined at this time whether a final rule will be adopted and whether compliance with such a final rule will adversely affect the ability of Prudential Bancorp and the Bank to hire, retain and motivate their key employees.

31

Privacy Requirements.Federal law places limitations on financial institutions like the Bank regarding the sharing of consumer financial information with unaffiliated third parties. Specifically, these provisions require all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of personal financial information with unaffiliated third parties. The Bank currently has a privacy protection policy in place and believes such policy is in compliance with applicable regulations.

Anti-Money Laundering. Federal anti-money laundering rules impose various requirements on financial institutions to prevent the use of the U.S. financial system to fund terrorist activities. These provisions include a requirement that financial institutions operating in the United States have anti-money laundering compliance programs, due diligence policies and controls to ensure the detection and reporting of money laundering. Such compliance programs supplement existing compliance requirements, also applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control Regulations. The Bank  has established policies and procedures to ensure compliance with the federal anti-money laundering provisions.

UDAP and UDAAP. Recently, banking regulatory agencies have increasingly used a general consumer protection statute to address “unethical” or otherwise “bad” business practices that may not necessarily fall directly under the purview of a specific banking or consumer finance law. The law of choice for enforcement against such business practices has been Section 5 of the Federal Trade Commission Act (the “FTC Act”), which is the primary federal law that prohibits unfair or deceptive acts or practices, referred to as UDAP, and unfair methods of competition in or affecting commerce. “Unjustified consumer injury” is the principal focus of the FTC Act. Prior to the Dodd- Frank Act, there was little formal guidance to provide insight to the parameters for compliance with UDAP laws and regulations. However, UDAP laws and regulations have been expanded under the Dodd-Frank Act to apply to “unfair, deceptive or abusive acts or practices,” referred to as UDAAP, which have been delegated to the CFPB for supervision. The CFPB has published its first Supervision and Examination Manual that addresses compliance with and the examination of UDAAP. The potential reach of the CFPB’s broad new rulemaking powers and UDAAP authority on the operations of financial institutions offering consumer financial products or services, including the Bank is currently unknown.

35

Community Reinvestment Act. All insured depository institutions have a responsibility under the Community Reinvestment Act and related regulations to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. An institution’s failure to comply with the provisions of the Community Reinvestment Act could result in restrictions on its activities. The Bank received a “satisfactory”“needs to improve” Community Reinvestment Act rating in its most recently completed examination.

Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan Bank of Pittsburgh, which is one of 11 regional Federal Home Loan Banks. Each Federal Home Loan Bank serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds from the sale of consolidated obligations of the Federal Home Loan Bank System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the board of directors of the Federal Home Loan Bank.

As a member, the Bank is required to purchase and maintain stock in the Federal Home Loan Bank of Pittsburgh in an amount in accordance with the Federal Home Loan Bank’s capital plan and sufficient to ensure that the Federal Home Loan Bank remains in compliance with its minimum capital requirements. At September 30, 2018,2020, the Bank was in compliance with this requirement.

Federal Reserve Board System. The Federal Reserve Board requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts, which are primarily checking and NOW accounts, and non-personal time deposits. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy the liquidity requirements that are imposed by the Department. At September 30, 2018,2020, the Bank was in compliance with these reserve requirements. On March 15, 2020, the Federal Reserve Board reduced reserve requirement to 0% effective as of March 26, 2020, which eliminated reserve requirements for all depository institutions.

32

Regulation of Prudential Bancorp

Bank Holding Company Act Activities and Other Limitations. Under the Bank Holding Company Act, Prudential Bancorp must obtain the prior approval of the Federal Reserve Board before it may acquire control of another bank or bank holding company, merge or consolidate with another bank holding company, acquire all or substantially all of the assets of another bank or bank holding company, or acquire direct or indirect ownership or control of any voting shares of any bank or bank holding company if, after such acquisition, Prudential Bancorp would directly or indirectly own or control more than 5% of such shares.

36

Federal statutes impose restrictions on the ability of a bank holding company and its nonbank subsidiaries to obtain extensions of credit from its subsidiary bank, on the subsidiary bank’s investments in the stock or securities of the holding company, and on the subsidiary bank’s taking of the holding company’s stock or securities as collateral for loans to any borrower. A bank holding company and its subsidiaries are also prevented from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property, or furnishing of services by the subsidiary bank.

A bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it has been the policy of the Federal Reserve Board that a bank holding company should stand ready to use available resources to provide adequate capital to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company’s failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve Board to be an unsafe and unsound banking practice or a violation of the Federal Reserve Board regulations, or both. The Dodd-Frank Act included a provision that directs federal regulators to require depository institution holding companies to serve as a source of strength for their depository institution subsidiaries. To date, no regulations have been promulgated to implement that provision.

Non-Banking Activities. The business activities of Prudential Bancorp, as a bank holding company, are restricted by the Bank Holding Company Act. Under the Bank Holding Company Act and the Federal Reserve Board’s bank holding company regulations, bank holding companies may only engage in, or acquire or control voting securities or assets of a company engaged in:

•           banking or managing or controlling banks and other subsidiaries authorized under the Bank Holding Company Act; and

•           any Bank Holding Company Act activity the Federal Reserve Board has determined to be so closely related that it is incidental to banking or managing or controlling banks.

banking or managing or controlling banks and other subsidiaries authorized under the Bank Holding Company Act; and
any Bank Holding Company Act activity the Federal Reserve Board has determined to be so closely related that it is incidental to banking or managing or controlling banks.

The Federal Reserve Board has determined by regulation that certain activities are closely related to banking including operating a mortgage company, finance company, credit card company, factoring company, trust company or savings association; performing certain data processing operations; providing limited securities brokerage services; acting as an investment or financial advisor; acting as an insurance agent for certain types of credit-related insurance; leasing personal property on a full-payout, non-operating basis; providing tax planning and preparation services; operating a collection agency; and providing certain courier services. Moreover, as discussed below, certain other activities are permissible for a bank holding company that becomes a financial holding company.

Financial Holding Companies. Bank holding companies may also engage in a broad range of activities under a type of financial services company known as a “financial holding company.” A financial holding company essentially is a bank holding company with significantly expanded powers. Financial holding companies are authorized by statute to engage in a number of financial activities previously impermissible for bank holding companies, including securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; and merchant banking activities. The Federal Reserve Board and the Department of the Treasury are also authorized to permit additional activities for financial holding companies if the activities are “financial in nature” or “incidental” to financial activities. A bank holding company may become a financial holding company if each of its

33

subsidiary banks is well capitalized, well managed, and has at least a “satisfactory” Community Reinvestment Act rating. A financial holding company must provide notice to the Federal Reserve Board within 30 days after commencing activities previously determined by statute or by the Federal Reserve Board and Department of the Treasury to be permissible. Prudential Bancorp has not submitted notices to the Federal Reserve Board of its intent to be deemed a financial holding company. However, it is not precluded from submitting a notice in the future should it wish to engage in activities only permitted to financial holding companies.

37

Regulatory Capital Requirements. The Federal Reserve Board has adopted capital adequacy guidelines pursuant to which it assesses the adequacy of capital in examining and supervising a bank holding company and in analyzing applications to it under the Bank Holding Company Act. The Federal Reserve Board’s capital adequacy guidelines for bank holding company, on a consolidated basis, are similar to those imposed on the Bank by the FDIC. See “-Regulation of Prudential Savings Bank - Capital Requirements.” Moreover, certain of the bank holding company capital requirements promulgated by the Federal Reserve Board in 2013 became effective as of January 1, 2016. Those requirements establish four minimum capital ratios that Prudential Bancorp had to comply with as of that date as set forth in the table below. However, in May 2016, amendments to the Federal Reserve Board’s SBHC Policy became effective which increased the asset threshold to qualify to utilize the provisions of the SBHC Policy from $500 million to $1.0 billion. Subsequently, as part of the 2018 Act, the threshold was increased to $3.0 billion. Bank holding companies which are subject to the SBHC Policy are not subject to compliance with the regulatory capital requirements set forth in the table below until they exceed $3.0 billion in assets. As a consequence, as of September 30, 2018,2020, Prudential Bancorp was not required to comply with the requirements set forth below until such time that its consolidated total assets exceed $3.0 billion or the Federal Reserve Board determines that Prudential Bancorp is no longer deemed to be a small bank holding company. However, if Prudential Bancorp had been subject to the requirements, it would have been in compliance with such requirements.

Capital Ratio

Regulatory Minimum

Capital Ratio

Regulatory Minimum

Common Equity Tier 1 Capital

4.5

4.5

%

Tier 1 Leverage Capital

4.0

4.0

%

Tier 1 Risk-Based Capital

6.0

6.0

%

Total Risk-Based Capital

8.0

8.0

%

The leverage capital requirement is calculated as a percentage of total assets and the other three capital requirements are calculated as a percentage of risk-weighted assets. For a more detailed discussion of the 2013 capital rules, see “Recent Regulatory Capital Regulations” under “Regulation of Prudential Savings Bank” above.

Restrictions on Dividends and Repurchases. Prudential Bancorp’s ability to declare and pay dividends may depend in part on dividends received from the Bank. The Banking Code regulates the distribution of dividends by savings banks and states, in part, that dividends may be declared and paid out of accumulated net earnings, provided that the bank continues to meet its surplus requirements. In addition, dividends may not be declared or paid if the Bank is in default in payment of any assessment due the FDIC.

A Federal Reserve Board policy statement on the payment of cash dividends states that a bank holding company should pay cash dividends only to the extent that the holding company’s net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the holding company’s capital needs, asset quality and overall financial condition. The Federal Reserve Board’s policy statement also provides that it would be inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends. Furthermore, under the federal prompt corrective action regulations, the Federal Reserve Board may prohibit a bank holding company from paying any dividends if the holding company’s bank subsidiary is classified as “undercapitalized.” See “-Regulation of Prudential Savings Bank - Prompt Corrective Action” above.

38

Section 225.4(b)(1) of Regulation Y promulgated by the Federal Reserve Board requires that a bank holding company that is not well capitalized or well managed, or that is subject to any unresolved supervisory issues, provide prior notice to the Federal Reserve Board for any repurchase or redemption of its equity securities for cash or other value that would reduce by 10 percent or more the bank holding company’s consolidated net worth aggregated over the preceding 12-month period. The Federal Reserve Bank may disapprove such a purchase or redemption if it determines that the

34

proposal would constitute an unsafe or unsound practice or would violate any law, regulation, Federal Reserve Board order or any condition imposed by, or written agreement with, the Federal Reserve Board.

Federal Securities Laws. Prudential Bancorp’s common stock is registered with the SEC under Section 12(b) of the Securities Exchange Act of 1934. Prudential Bancorp is subject to the proxy and tender offer rules, insider trading reporting requirements and restrictions, and certain other requirements under the Securities Exchange Act of 1934.

The Sarbanes-Oxley Act. As a public company, Prudential Bancorp is subject to the Sarbanes-Oxley Act of 2002 which addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. As directed by the Sarbanes-Oxley Act, our principal executive officer and principal financial officer are required to certify that our quarterly and annual reports do not contain any untrue statement of a material fact. The rules adopted by the SEC under the Sarbanes-Oxley Act have several requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of our internal control over financial reporting; they have made certain disclosures to our auditors and the audit committee of the Board of Directors about our internal control over financial reporting; and they have included information in our quarterly and annual reports about their evaluation and whether there have been changes in our internal control over financial reporting or in other factors that could materially affect internal control over financial reporting.

Volcker Rule Regulations. Regulations adopted by the federal banking agencies to implement the provisions of the Dodd-Frank Act commonly referred to as the Volcker Rule became effective on April 1, 2015 with full compliance being phased in over a period ending on July 21, 2016. The regulations contain prohibitions and restrictions on the ability of financial institutions holding companies and their affiliates to engage in proprietary trading and to hold certain interests in, or to have certain relationships with, various types of investment funds, including hedge funds and private equity funds. Prudential Bancorp is in compliance with the various provisions ofRecently promulgated federal regulations exclude from the Volcker Rule regulations.

restrictions community banks with $10 billion or less in total consolidated assets and total trading assets and liabilities of five percent or less of total consolidated assets. Prudential Bancorp qualifies for the exclusion from the Volcker Rule restrictions.

Limitations on Transactions with Affiliates. Transactions between insured financial institutions and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of an insured financial institution is any company or entity which controls, is controlled by or is under common control with the insured financial institution. In a bank holding company context, the bank holding company of an insured financial institution (such as Prudential Bancorp) and any companies which are controlled by such holding company are affiliates of the insured financial institution. Generally, Section 23A limits the extent to which the insured financial institution or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of such institution’s capital stock and surplus, and contains an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus. Section 23B applies to “covered transactions” as well as certain other transactions and requires that all transactions be on terms substantially the same, or at least as favorable to the insured financial institution, as those provided to a non-affiliate. The term “covered transaction” includes the making of loans to, purchase of assets from and issuance of a guarantee to an affiliate and similar transactions. Section 23B transactions also include the provision of services and the sale of assets by an insured financial institution to an affiliate.

39

In addition, Sections 22(g) and (h) of the Federal Reserve Act place restrictions on loans to executive officers, directors and principal stockholders. Under Section 22(h), loans to a director, an executive officer and to a greater than 10% stockholder of an insured financial institution, and certain affiliated interests of either, may not exceed, together with all other outstanding loans to such person and affiliated interests, the insured financial institution’s loans to one borrower limit (generally equal to 15% of the institution’s unimpaired capital and surplus). Section 22(h) also requires that loans to directors, executive officers and principal stockholders be made on terms substantially the same as offered in comparable transactions to other persons unless the loans are made pursuant to a benefit or compensation program that (i) is widely available to employees of the institution and (ii) does not give preference to any director, executive officer or principal stockholder, or certain affiliated interests of either, over other employees of the insured financial institution. Section 22(h) also requires prior board approval for certain loans. In addition, the aggregate amount of extensions of credit by an insured financial institution to all insiders cannot exceed the institution’s unimpaired capital and surplus. Furthermore, Section 22(g) places additional restrictions on loans to executive officers. At September 30, 2018,2020, the Bank was in compliance with the above restrictions.

35

TAXATION

Federal Taxation

General. Prudential Bancorp and the Bank are subject to federal income taxation in the same general manner as other corporations with some exceptions listed below. The following discussion of federal, state and local income taxation is only intended to summarize certain pertinent income tax matters and is not a comprehensive description of the applicable tax rules. During fiscal 2018,2020, the Internal Revenue Service had concluded an audit of the Company’s tax returns for the year ended September 30, 20142016 and no adverse findings were noted. The federal and state income tax returns for taxable years through September 30, 20142016 have been closed for purposes of examination by the Internal Revenue Service and the Pennsylvania Department of Revenue.

Prudential Bancorp files a consolidated federal income tax return with the Bank and its subsidiary, PSB. Any distributions made by Prudential Bancorp to its shareholders generally will be treated as cash dividends and not as a non-taxable return of capital to shareholders for federal and state tax purposes.

Method of Accounting. For federal income tax purposes, Prudential Bancorp and the Bank report income and expenses on the accrual method of accounting and file their federal income tax return on a fiscal year basis.

Bad Debt Reserves. The Small Business Job Protection Act of 1996 eliminated the use of the reserve method of accounting for bad debt reserves by savings associations, effective for taxable years beginning after 1995. Prior to that time, the Bank was permitted to establish a reserve for bad debts and to make additions to the reserve. These additions could, within specified formula limits, be deducted in arriving at taxable income. As a result of the Small Business Job Protection Act of 1996, savings associations must use the specific charge-off method in computing their bad debt deduction beginning with their 1996 federal tax return. In addition, federal legislation required the recapture over a six year period of the excess of tax bad debt reserves at December 31, 1995 over those established as of December 31, 1987.

40

Taxable Distributions and Recapture. Prior to the Small Business Job Protection Act of 1996, bad debt reserves created prior to January 1, 1988 were subject to recapture into taxable income if the Bank failed to meet certain thrift asset and definitional tests. New federal legislation eliminated these savings association related recapture rules. However, under current law, pre-1988 reserves remain subject to recapture should the Bank make certain non-dividend distributions or cease to maintain a bank charter.

At September 30, 2018,2020, the total federal pre-1988 reserve was approximately $6.6 million. The reserve reflects the cumulative effects of federal tax deductions by the Bank for which no federal income tax provisions have been made.

Alternative Minimum Tax. The Internal Revenue Code imposes an alternative minimum tax at a rate of 20% on a base of regular taxable income plus certain tax preferences. The alternative minimum tax is payable to the extent such alternative minimum tax income is in excess of the regular income tax. Net operating losses, of which the Bank has none, can offset no more than 90% of alternative minimum taxable income. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years. The Bank has not been subject to the alternative minimum tax.

Corporate Dividends Received Deduction. Prudential Bancorp may exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of corporations. The corporate dividends received deduction is 80% in the case of dividends received from corporations which a corporate recipient owns less than 80%, but at least 20% of the distribution corporation. Corporations which own less than 20% of the stock of a corporation distributing a dividend may deduct only 70% of dividends received.

State and Local Taxation

Pennsylvania Taxation. Prudential Bancorp is subject to the Pennsylvania Corporate Net Income Tax and the Capital Stock and Franchise Tax. The Corporation Net Income Tax rate for 20182020 is 9.99% and is imposed on unconsolidated taxable income for federal purposes with certain adjustments. In general, the Capital Stock and Franchise

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Tax is a property tax imposed on a corporation’s capital stock value at a statutorily defined rate, such value being determined in accordance with a fixed formula based upon average net income and net worth.

PrudentialThe Bank is subject to tax under the Pennsylvania Mutual Thrift Institutions Tax Act, as amended to include thrift institutions having capital stock. Pursuant to the Mutual Thrift Institutions Tax, the tax rate is 11.50%. The Mutual Thrift Institutions Tax exempts Prudential Savings from other taxes imposed by the Commonwealth of Pennsylvania for state income tax purposes and from all local taxation imposed by political subdivisions, except taxes on real estate and real estate transfers. The Mutual Thrift Institutions Tax is a tax upon net earnings, determined in accordance with generally accepted accounting principles with certain adjustments. The Mutual Thrift Institutions Tax, in computing income according to generally accepted accounting principles, allows for the deduction of interest earned on state and federal obligations, while disallowing a percentage of a thrift’s interest expense deduction in the proportion of interest income on those securities to the overall interest income of the Bank. Net operating losses, if any, thereafter can be carried forward three years for Mutual Thrift Institutions Tax purposes.

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Item 1A. Risk Factors.Factors

In analyzing whether to make or to continue on investment in our securities, investors should consider, among other factors, the following risk factors.

Risks Related to the COVID-19 Pandemic

The global COVID-19 pandemic has adversely affected, and will likely continue to adversely affect, our business, financial condition, liquidity and results of operations and the ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the COVID-19 pandemic and the actions taken by governmental authorities in response to the pandemic.

The Company believes the worldwide COVID-19 pandemic has negatively affected our business and is likely to continue to do so. The outbreak has caused significant volatility and disruption in the financial markets both in the United States and globally. In our market area, stay-at-home orders and travel restrictions, and similar orders imposed across the United States to restrict the spread of COVID-19, resulted in significant business and operational disruptions, including business closures, supply chain disruptions, and significant layoffs and furloughs. Local jurisdictions have subsequently lifted stay-at-home orders and moved to phased reopening of businesses, although capacity restrictions and health and safety recommendations that encourage continued physical distancing and working remotely have limited the ability of businesses to return to pre-pandemic levels of activity. If COVID-19, or another highly infectious or contagious disease, continues to spread or the response to contain it is unsuccessful, we could continue to experience material adverse effects on our business, financial condition, liquidity, and results of operations. The extent of such effects will depend on future developments which are highly uncertain and cannot be predicted, including the geographic spread of the novel coronavirus, the overall severity of the disease, the duration of the outbreak, the measures that may be taken by various governmental authorities in response to the outbreak (such as continued quarantines and travel restrictions or the re-imposition of such measures) and the possible further impacts on the global economy. The Company's operations may also be disrupted if significant portions of its workforce are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic, and the Company has already temporarily limited access to certain of its branches and offices. In response to the pandemic, the Company has also offered fee waivers, payment deferrals, and other expanded assistance to small business and personal lending customers. Future governmental actions may require these and other types of customer-related responses.

The continued spread of COVID-19 and the efforts to contain the virus, including stay-at-home orders and travel restrictions, could, among other things: (1) cause changes in consumer and business spending, borrowing and saving habits, which may affect the demand for loans and other products and services the Company offers, as well as the creditworthiness of potential and current borrowers; (2) cause the Company’s borrowers to be unable to meet existing payment obligations, particularly those borrowers that may be disproportionately affected by business shut downs and travel restrictions, resulting in increases in loan delinquencies, problem assets, and foreclosures; (3) cause the value of collateral for loans, especially real estate, to decline in value; (4) result in the imposition of limitations on the Company’s ability to foreclose on properties during the COVID-19 pandemic; (5) result in the decline in the value of the investment securities portfolio

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as well as the impairment of the value of investment securities; (6) reduce the availability and productivity of the Company’s employees; (7) require the Company to increase its allowance for loan losses; (8) cause the Company’s vendors and counterparties to be unable to meet existing obligations to the Company; (9) adversely impact the business and operations of third-party service providers that perform critical services for our business; (10) impede our ability to close mortgage loans, if appraisers and title companies are unable to perform their functions; and (11) and reduce the net worth and liquidity of loan guarantors, impairing their ability to honor commitments to us.

The Company’s operations substantially depend on the management skills of the Company’s senior management and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to the COVID-19 pandemic could harm the Company’s ability to operate its business or execute its business strategy. The Company may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.

Any one or a combination of the above events could have a material, adverse effect on the Company’s business, financial condition, and results of operations.

Risks Related To Our Lending Activities

Our non-performing assets expose us to increased risk of loss

loss.

At September 30, 2018,2020, we had total non-performing assets of $14.4$13.0 million, or 1.33%1.07% of total assets as compared to $15.6$14.3 million or 1.70%1.11% of total assets as of September 30, 2017.2019. Our non-performing assets adversely affect our net income in various ways. We do not accrue interest income on non-accrual loans and no interest income is recognized until the loan is performing and the financial condition of the borrower supports recording interest income on a cash basis. We must reserve for probable losses, which are established through a current period charge to income in the provision for loan losses, and from time to time, write down the value of properties in our other real estate owned portfolio to reflect changing market values. Additionally, there are legal fees associated with the resolution of problem assets as well as carrying costs such as taxes, insurance and maintenance related to our other real estate owned. Further, the resolution of non-performing assets requires the active involvement of management, which can distract us from the overall supervision of operations and other income-producing activities of the Bank. Finally, if our estimate of the allowance for loan losses is inaccurate, we will have to increase the allowance accordingly. At September 30, 2018,2020, our allowance for loan losses amounted to $5.2$8.3 million, or 1.4% of total loans and 63.7% of non-performing loans, compared to $5.4 million, or 0.9% of total loans and 38.6% of non-performing loans, compared to $4.5 million, or 0.8% of total loans and 29.0%38.7% of non-performing loans at September 30, 2017.

2019.

Higher loan losses could require us to increase our allowance for loan losses through a charge to earnings

When we loan money, we incur the risk that our borrowers will not repay their loans. We reserve for loan losses by establishing an allowance through a charge to earnings. The amount of this allowance is based on our assessment of loan losses inherent in our loan portfolio. The process for determining the amount of the allowance is critical to our financial results and condition. It requires subjective and complex judgments about the future, including forecasts of economic or market conditions that might impair the ability of our borrowers to repay their loans. We might underestimate the loan losses inherent in our loan portfolio and have loan losses in excess of the amount reserved. We might increase the allowance because of changing economic conditions. For example, in a rising interest rate environment, borrowers with adjustable-rate loans could see their payments increase. There may be a significant increase in the number of borrowers who are unable or unwilling to pay their loans, resulting in our charging off more loans and increasing our allowance. In addition, when real estate values decline, the potential severity of loss on a real estate-secured loan can increase significantly, especially in the case of loans with high combined loan-to-value ratios. The continued weaknessWeakness in the national economy and the economies of the areas in which our loans are concentrated could result in an increase in loan delinquencies, foreclosures or repossessions, resulting in the increased charge-off amounts and the need for additional loan loss provisions in future periods. In addition, our determination as to the amount of our allowance for loan losses is subject to review by our primary banking regulators, the Department and the FDIC, as part of their examination process, which may result in the establishment of an additional provision based upon the judgment of such agencies after a review of the information available at the time of its examination. Our allowance for loan losses amounted to 0.9%1.4% of total loans and 38.6%63.7% of non-performing loans at September 30, 2018.2020. Our allowance for loan losses at September 30, 20182020 may not be sufficient to

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cover future loan losses. A large loss could deplete the allowance and require an increased provision to replenish the allowance, which would negatively affect earnings.

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Our existing residential mortgage loans exposes us to lending risks, and the geographic concentration of our loan portfolio and lending activities makes us vulnerable to a downturn in the local economy.

At September 30, 2018, $324.92020, $233.9 million, or 48.8 %34.1% of our loan portfolio, was secured by one-to-four family real estate. One-to-four family residential mortgage lending is generally sensitive to regional and local economic conditions that significantly impact the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict. The decline in residential real estate values as a result of the downturn in our local housing market that occurred in the recent yearspast in many cases reduced the value of the real estate collateral securing these types of loans. Declines in real estate values could cause some of our residential mortgages loans to be inadequately collateralized, which would expose us to a greater risk of loss if we seek to recover on defaulted loans by selling the real estate collateral. Real estate values are affected by various factors, including supply and demand, changes in general or regional economic conditions, interest rates, governmental rules or policies and natural disasters. Future weakness in economic conditions also could result in reduced loan demand and a decline in loan originations. In particular, a significant decline in real estate values would likely lead to a decrease in new construction, commercial real estate and residential mortgage loan originations and increased delinquencies and defaults in our real estate loan portfolio.

Our increased emphasis on originating construction and land development and commercial real estate loans may expose us to increased lending risks.

At September 30, 2018, $160.22020, $260.6 million, or 24.1%38.0%, of our loan portfolio consisted of construction and land development loans, including loans for the acquisition and development of property, and $119.5$139.9 million, or 18.0%20.4%, of our loan portfolio consisted of commercial real estate loans. Construction financing is generally considered to involve a higher degree of credit risk than long-term financing on improved, owner-occupied residential real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property’s value at completion of construction compared to the estimated costs, including interest, of construction and other assumptions. Additionally, if the estimate of value proves to be inaccurate, we may be confronted with a project, when completed, having a value less than the loan amount. We have attempted to minimize these risks by generally concentrating on residential construction loans in our market area to contractors with whom we have established lending relationships and by selling, with respect to larger construction and land development loans, participation interests in order to reduce our exposure. Likewise, commercial real estate loans generally expose a lender to a greater risk of loss than one-to-four family residential loans. Repayment of commercial real estate loans generally is dependent, in large part, on sufficient income from the property or business to cover operating expenses and debt service. Commercial real estate loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one-to-four family residential mortgage loans. Changes in economic conditions that are out of the control of the borrower and lender could impact the value of the security for the loan, the future cash flow of the involved property, or the marketability of a construction project with respect to loans originated for the acquisition and development of property. Additionally, any decline in real estate values may be more pronounced with respect to commercial real estate properties than residential properties. Also, many of construction borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a residential mortgage loan.

In recent periods, the majority of our non-performing assets have related to construction loans. At September 30, 2018,2020, five construction loans aggregating $8.7$8.5 million were considered non-performing and on non-accrual status. All of these construction loans were related to a loanone lending relationship consisting of nine loans with a total principal balance outstanding of $10.7$10.5 million, all of which were deemed non-performing as of such date. In addition, non-performing assets at September 30, 2018 included 33 one-to-four family loans aggregating $3.0 million, five commercial real estate loans aggregating $1.7 million and real estate owned of $1.0 million.

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Imposition of limits by the bank regulators on commercial and multi-family real estate lending activities could curtail our growth and adversely affect our earnings.

In 2006, the FDIC, the FRB and the Office of the Comptroller of the Currency (collectively, the “Agencies”) issued joint guidance entitled “Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices” (the “CRE Guidance”). Although the CRE Guidance did not establish specific lending limits, it provides that a bank’s commercial real estate lending exposure could receive increased supervisory scrutiny where total non-owner-occupied commercial real estate loans, including loans secured by apartment buildings, investor commercial real estate, and

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construction and land loans, represent 300% or more of an institution’s total risk-based capital, and the outstanding balance of the commercial real estate loan portfolio has increased by 50% or more during the preceding 36 months. Our level of commercial real estate and multi-family loans represents 217.4%327.1% of the Bank’s total risk-based capital at September 30, 2018.

2020.

In December 2015, the Agencies released a new statement on prudent risk management for commercial real estate lending (the “2015 Statement”). In the 2015 Statement, the Agencies, among other things, indicate the intent to continue “to pay special attention” to commercial real estate lending activities and concentrations going forward. If the FDIC, our primary federal banking regulator, were to impose restrictions on the amount of commercial real estate loans we can hold in our portfolio, for reasons noted above or otherwise, our earnings would be adversely affected.

We have a high concentration of loans secured by real estate in our market area; adverse economic conditions in our market area have adversely affected, and may continue to adversely affect, our financial condition and result of operations

operations

Substantially all of our loans are to individuals, businesses and real estate developers located in Pennsylvania, New Jersey, New York and Delaware and our business depends significantly on general economic conditions in these market areas. Severe declines in housing prices and property values have been particularly acute in our primary market areas in recent years. A deterioration in economic conditions or a prolonged weakness in the economic recovery in our primary market areas could result in the following consequences, any of which could have a material adverse effect on our business:

Loan delinquencies may increase;
Problem assets and foreclosures may increase;
Demand for our products and services may decline;
The carrying value of our other real estate owned may decline; and
Collateral for loans made by us, especially real estate, may continue to decline in value, in turn reducing a customer’s borrowing power, and reducing the value of assets and collateral associated with our loans.
Loan delinquencies may increase;
Problem assets and foreclosures may increase;
Demand for our products and services may decline;
The carrying value of our other real estate owned may decline further; and
Collateral for loans made by us, especially real estate, may continue to decline in value, in turn reducing a customer’s borrowing power, and reducing the value of assets and collateral associated with our loans.

The Company’s credit standards and its on-going credit assessment processes might not protect it from significant credit losses.

The Company assumes credit risk by virtue of making loans and extending loan commitments and letters of credit. We manage our credit risk through a program of underwriting standards, the review of certain credit decisions and a continuous quality assessment process of credit already extended. Our exposure to credit risk is managed through the use of consistent underwriting standards that emphasize local lending while avoiding highly leveraged transactions as well as excessive industry and other concentrations. The Company’s credit administration function employs risk management techniques to help ensure that problem loans and leases are promptly identified. While these procedures are designed to provide us with the information needed to implement policy adjustments where necessary and to take appropriate corrective actions, there can be no assurance that such measures will be effective in avoiding undue credit risk.

We are subject to environmental liability risk associated with the Bank’s lending activities.

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A significant portion of our loan portfolio is secured by real estate, and we could become subject to environmental liabilities with respect to one or more of these properties. During the ordinary course of business, we may foreclose on and take title to properties securing defaulted loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous conditions or toxic substances are found on these properties, we may be liable for remediation costs, as well as for personal injury and property damage, civil fines and criminal penalties regardless of when the hazardous conditions or toxic substances first affected any particular property. Environmental laws may require us to incur substantial expenses to address unknown liabilities and may materially reduce the affected property’s value or limit

40

our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Although we have policies and procedures to perform an environmental review before initiating any foreclosure on nonresidential real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on us.

Risks Related to Market Interest Rates

A significant percentage of our assets is invested in securities which typically have a lower yield than our loan portfolio.

Our results of operations are substantially dependent on our net interest income. At September 30, 2018, $415.82020, $562.5 million or 38.546.0 % of our assets was invested in investment securities, certificates of deposit, cash and amounts due from banks. These investments yield substantially less than the loans we hold in our portfolio. The weighted average yield on such assets for the year ended September 30, 20182020 was 2.83%2.82% as compared to 4.31% for loans. Accordingly, our net interest margin is lower than it would have been if a higher proportion of our interest-earning assets consisted of loans. In addition, at September 30, 2018, $306.22020, $420.4 million, or 83.6%94.8% of our investment securities, are classified as available for sale and reported at fair value with unrealized gains or losses excluded from earnings and reported in other comprehensive income, which affects our reported equity. Accordingly, given the material size of the investment securities portfolio classified as available for sale and due to possible mark-to-market adjustments of that portion of the portfolio resulting from market conditions, we may experience greater volatility in the value of reported equity. Moreover, given that we actively manage our investment securities portfolio classified as available for sale, we may sell securities which could result in a realized loss, thereby reducing our net income.

While we intend to invest a greater proportion of our assets in loans with the goal of increasing our net interest margin and net interest income, we may not be able to increase originations of loans that are acceptable to us.

Our success depends on hiring and retaining certain key personnel.

Our performance largely depends on the talents and efforts of highly skilled individuals. We rely on key personnel to manage and operate our business, including major revenue generating functions such as loan and deposit generation, as well as operational functions such as regulatory compliance and information technology. The loss of key staff may adversely affect our ability to maintain and manage these functions effectively, which could negatively affect our revenues. In addition, loss of key personnel could result in increased recruiting and hiring expenses, which could cause a decrease in our net income. Our continued ability to compete effectively depends on our ability to attract new employees and to retain and motivate our existing employees.

Higher interest rates would hurt our profitability

Management is unable to predict fluctuations of market interest rates, which are affected by many factors, including inflation, recession, unemployment, monetary policy, domestic and international disorder and instability in domestic and foreign financial markets, and investor and consumer demand. Our primary source of income is net interest income, which is the difference between the interest income generated by our interest-earning assets (consisting primarily of single-family residential loans) and the interest expense generated by our interest-bearing liabilities (consisting primarily of deposits). The level of net interest income is primarily a function of the average balance of our interest-earning assets, the average balance of our interest-bearing liabilities, and the spread between the yield on such assets and the cost of such liabilities. These factors are influenced by both the pricing and mix of our interest-earning assets and our interest-bearing liabilities which, in turn, are impacted by such external factors as the local economy, competition for loans and deposits, the monetary policy of the Federal Open Market Committee of the Federal Reserve Board (the “FOMC”), and market interest rates. The FOMC raisedlowered the federal funds rate three times to datenear zer percent in 2018 and may implement an additional increase as of the end of December 2018.

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2020.

A sustained increase in market interest rates could adversely affect our earnings. A significant portion of our loans have fixed interest rates (or, if adjustable, are initially fixed for periods of five to 10 years) and longer terms than our deposits and borrowings. Our net interest income could be adversely affected if the rates we pay on deposits and borrowings increase more rapidly than the rates we earn on loans. As a result of our historical focus on the origination of one-to-four family residential mortgage loans, which focus has been emphasized in recent years due to asset quality issues experienced by our construction and land development lending activities, the majority of our loans have fixed interest rates. In addition, a large percentage of our investment securities and mortgage-backed securities have fixed interest rates and are classified as held to maturity. As is the case with many banks and savings institutions, our emphasis on increasing the development of core deposits, those with no stated maturity date, has resulted in our interest-bearing liabilities having a shorter duration than our assets. As of September 30, 2018, 35.2%2020, 22.1% of our loan portfolio had maturities of 10 years or more. Furthermore, at such date, only $113.9$358.6 million or 17.1%52.3% of the loans due after September 30, 20172020 bear adjustable interest rates. At September 30, 2018, 28.1%2020, 65.0% of our deposits had no stated maturity date and 73.1%63.2% consisted of certificates of deposit with maturities of one year or less. This imbalance can create significant earnings volatility because interest rates

41

change over time and are currently at historical low levels. As interest rates increase, our cost of funds will increase more rapidly than the yields on the bulk of our interest-earning assets. In addition, the market value of our fixed-rate assets for example, our investment and mortgage-backed securities portfolios, would decline if interest rates increase. For example, we estimate that as of September 30, 2018,2020, a 200 basis point increase in interest rates would have resulted in our net portfolio value declining by approximately $40.1$8.5 million or 2.9%1.3%. Net portfolio value is the difference between incoming and outgoing discounted cash flows from assets, liabilities and off-balance sheet contracts.

The fair value of our investment securities can fluctuate due to market conditions outside of our control.

As of September 30, 2020, the fair value of our investment securities portfolio was approximately $420.4 million. We have historically taken a conservative investment strategy, with concentrations of securities that are backed by government sponsored enterprises. Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities. These factors include, but are not limited to, rating agency actions in respect of the securities, defaults by the issuer or with respect to the underlying securities, and changes in market interest rates and continued instability in the capital markets. Any of these factors, among others, could cause other-than-temporary impairments and realized and/or unrealized losses in future periods and declines in other comprehensive income, which could have a material adverse effect on us. The process for determining whether impairment of a security is other-than-temporary usually requires complex, subjective judgments about the future financial performance and liquidity of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security.

Risks Related to Laws and Regulations

Changes in laws and regulations and the cost of regulatory compliance with new laws and regulations may adversely affect our operations and/or increase our costs of operations.

The Company and the Bank are subject to extensive regulation, supervision and examination by the PA Department and the FDIC. Such regulation and supervision governs the activities in which an institution and its holding company may engage and are intended primarily for the protection of insurance funds and the depositors and borrowers of the Bank rather than for holders of our common stock. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the level of our allowance for loan losses. These regulations, along with the currently existing tax, accounting, securities, insurance, monetary laws, rules, standards, policies, and interpretations control the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations. Further, changes in accounting standards can be both difficult to predict and involve judgment and discretion in their interpretation by us and our independent accounting firms. These changes could materially impact, potentially even retroactively, how we report our financial condition and results of our operations as could our interpretation of those changes.

The Dodd-Frank Act is significantly changing the current bank regulatory structure and affects the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently, many ofregulations. It will be some time before the details and much of the impactfull effect of the Dodd-Frank Act may notand the regulations thereunder can be known for many months or years.

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assessed.

The Dodd-Frank Act created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit "unfair, deceptive or abusive" acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks with more than $10 billion in assets. Banks with $10 billion or less in assets continue to be examined for compliance with the consumer laws by their primary bank regulators.

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The Dodd-Frank Act requires minimum leverage (Tier 1) and risk-based capital requirements for bank holding companies and savings and loan holding companies that are no less than those applicable to banks, which could limit our ability to borrow at the holding company level and invest the proceeds from such borrowings as capital in the Bank, and will exclude certain instruments that previously have been eligible for inclusion by bank holding companies as Tier 1 capital, such as trust preferred securities.

The full impactTable of the Dodd-Frank Act on our business will not be known until all of the regulations implementing the statute are adopted and implemented. As a result, we cannot at this time predict the extent to which the Dodd-Frank Act will impact our business, operations or financial condition. However, compliance with these new laws and regulations may require us to make changes to our business and operations and will likely result in additional costs and divert management’s time from other business activities, any of which may adversely impact our results of operations, liquidity or financial condition. However, in February 2017, the President issued an executive order that a policy of his administration would be making regulation efficient, effective, and appropriately tailored, and directed certain regulatory agencies to review and identify laws and regulations that inhibit federal regulation of the U.S. financial system in a manner consistent with the policies stated in the executive order. Any changes in laws or regulation as a result of this review could result in a repeal, amendment to or delayed implementation of the Dodd-Frank Act.Contents

We have become subject to more stringent capital requirements, which may adversely impact our return on equity, require us to raise additional capital, or constrain us from paying dividends or repurchasing shares.

In July 2013, the federal banking agencies approved a new rule that has substantially amended regulatory risk-based capital rules. The final rule implements the regulatory capital reforms from the Basel Committee on Banking Supervision (“Basel III”) and changes required by the Dodd-Frank Act.

The final rule includes new minimum risk-based capital and leverage ratios, which were effective for us on January 1, 2016, and refines the definition of what constitutes “capital” for calculating these ratios. The new minimum capital requirements are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from prior rules); and (iv) a Tier 1 leverage ratio of 4%. The final rule also requires unrealized gains and losses on certain “available-for-sale” securities holdings to be included for calculating regulatory capital requirements unless a one-time opt-out is exercised. Prudential Savings elected to opt out of the requirement under the final rule to include certain “available-for-sale” securities holdings for calculating its regulatory capital requirements. The final rule also establishes a “capital conservation buffer” of 2.5%, and, when fully phased in, will. As a result, in the followingBanks minimum ratios:capital ratios are as follows: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 to risk-based assets capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement began being phased-in January 2016 at 0.625% of risk-weighted assets and will increase each year untilbecome fully implementedphased in January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that can be utilized for such actions.

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We have analyzed the effects ofare in compliance with these new capital requirements on a fully phased-in basis, and we believe that we meet all of these new requirements, including the full 2.5% capital conservation buffer, as if these new requirements had been in effect as of September 30, 2018.

2020.

The application of more stringent capital requirements could, among other things, result in lower returns on equity, require the raising of additional capital, and result in regulatory actions if we were to be unable to comply with such requirements. Furthermore, the imposition of liquidity requirements in connection with the implementation of Basel III could result in our having to lengthen the term of our funding, restructure our business models, and/or increase our holdings of liquid assets. Implementation of changes to asset risk weightings for risk-based capital calculations, items included or deducted in calculating regulatory capital and/or additional capital conservation buffers could result in management modifying its business strategy, and could limit our ability to make distributions, including paying dividends or repurchasing shares. Specifically, beginning in 2017, the Bank’s ability to pay dividends is limited if it does not have the capital conservation buffer required by the new capital rules, which may further limit our ability to pay dividends to stockholders.

Proposed and final regulations could restrict our ability to originate and sell loans.

The Consumer Financial Protection Bureau has issued a rule designed to clarify for lenders how they can avoid legal liability under the Dodd-Frank Act, which would hold lenders accountable for ensuring a borrower’s ability to repay a mortgage. Loans that meet this “qualified mortgage” definition will be presumed to have complied with the new ability-to-repay standard. Under the Consumer Financial Protection Bureau’s rule, a “qualified mortgage” loan must not contain certain specified features, including:

excessive upfront points and fees (those exceeding 3% of the total loan amount, less “bona fide discount points” for prime loans);
interest-only payments;
negative amortization; and
terms of longer than 30 years.

Also, to qualify as a “qualified mortgage,” a loan must be made to a borrower whose total monthly debt-to-income ratio does not exceed 43%. Lenders must also verify and document the income and financial resources relied upon to qualify the borrower on the loan and underwrite the loan based on a fully amortizing payment schedule and maximum interest rate during the first five years, taking into account all applicable taxes, insurance and assessments.

In addition, the Dodd-Frank Act requires the regulatory agencies to issue regulations that require securitizes of loans to retain “not less than 5% of the credit risk for any asset that is not a qualified residential mortgage.” The regulatory agencies have issued a final rule to implement this requirement. The final rule provides that the definition of “qualified residential mortgage” includes loans that meet the definition of qualified mortgage issued by the Consumer Financial Protection Bureau.

The final rule could have a significant effect on the secondary market for loans and the types of loans we originate, and restrict our ability to make loans. Similarly, the Consumer Financial Protection Bureau’s rule on qualified mortgagesFederal Reserve Board policy could limit our ability to pay dividends to our shareholders.

The Federal Reserve Board has issued a policy statement regarding the payment of dividends and the repurchase of shares of common stock by bank holding companies. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. These regulatory policies could affect our ability to pay dividends, repurchase shares of common stock or desireotherwise engage in capital distributions.

Risks Related to make certain types of loans or loans to certain borrowers, which could limit our growth or profitability.

48

Our Business and Industry Generally

We are a community bank and our ability to maintain our reputation is critical to the success of our business

business.

We are a community bank, and our reputation is one of the most valuable components of our business. A key component of our business strategy is to rely on our reputation for customer service and knowledge of local markets to expand our presence by capturing new business opportunities from existing and prospective customers in our current market and contiguous areas. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates. If our reputation is negatively affected by the actions of our employees, by our inability to conduct our operations in a manner

43

that is appealing to current or prospective customers, or otherwise, our business and, therefore, our operating results may be materially adversely affected.

Strong competition within our market area could hurt our profits and slow growth

growth.

We face intense competition in making loans, attracting deposits and hiring and retaining experienced employees. This competition has made it more difficult for us to make new loans and attract deposits. Price competition for loans and deposits sometimes results in us charging lower interest rates on our loans and paying higher interest rates on our deposits, which reduces our net interest income. Competition also makes it more difficult and costly to attract and retain qualified employees. Some of the institutions with which we compete have substantially greater resources and lending limits than we have and may offer services that we do not provide. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Our profitability depends upon our continued ability to compete successfully in our market area.

Our success depends on hiring and retaining certain key personnel.

Our performance largely depends on the talents and efforts of highly skilled individuals. We are subjectrely on key personnel to environmental liability risk associated with the Bank’s lending activities.

A significant portion ofmanage and operate our business, including major revenue generating functions such as loan portfolio is secured by real estate, and we could become subject to environmental liabilities with respect to one or more of these properties. During the ordinary course of business, we may foreclose on and take title to properties securing defaulted loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous conditions or toxic substances are found on these properties, we may be liable for remediation costs,deposit generation, as well as for personal injuryoperational functions such as regulatory compliance and property damage, civil fines and criminal penalties regardlessinformation technology. The loss of when the hazardous conditions or toxic substances first affected any particular property. Environmental lawskey staff may require us to incur substantial expenses to address unknown liabilities and may materially reduce the affected property’s value or limitadversely affect our ability to use or sell the affected property.maintain and manage these functions effectively, which could negatively affect our revenues. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Although we have policiesloss of key personnel could result in increased recruiting and procedures to perform an environmental review before initiating any foreclosure on nonresidential real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazardhiring expenses, which could havecause a material adverse effect on us.

The fair value of our investment securities can fluctuate due to market conditions outside of our control

As of September 30, 2018, the fair value of our investment securities portfolio was approximately $362.1 million. We have historically taken a conservative investment strategy, with concentrations of securities that are backed by government sponsored enterprises. Factors beyond our control can significantly influence the fair value of securitiesdecrease in our portfolionet income. Our continued ability to compete effectively depends on our ability to attract new employees and can cause potential adverse changes to the fair value of these securities. These factors include, but are not limitedretain and motivate our existing employees.

Risks Related to rating agency actions in respect of the securities, defaults by the issuer or with respect to the underlying securities, and changes in market interest rates and continued instability in the capital markets. Any of these factors, among others, could cause other-than-temporary impairments and realized and/or unrealized losses in future periods and declines in other comprehensive income, which could have a material adverse effect on us. The process for determining whether impairment of a security is other-than-temporary usually requires complex, subjective judgments about the future financial performance and liquidity of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security.

49

Operational Matters

If the Company fails to maintain an effective system of internal controls, it may not be able to accurately report its financial results or prevent fraud. As a result, current and potential shareholders could lose confidence in the Company’s financial reporting, which could harm its business and the trading price of its common stock.

The Company has established a process to document and evaluate its internal controls over financial reporting in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations, which require annual management assessments of the effectiveness of the Company’s internal controls over financial reporting. In this regard, management has, among other things, dedicated internal resources and engaged outside consultants to (i) assess and document the adequacy of internal controls over financial reporting, (ii) take steps to improve control processes, where appropriate, (iii) validate through testing that controls are functioning as documented and (iv) implement a continuous reporting and improvement process for internal control over financial reporting. Although the Company’s management and audit committee believe that its system of internal controls is effective, the Company cannot be certain that these measures will ensure that the Company implements and maintains adequate controls over its financial processes and reporting in the future. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm the Company’s operating results or cause the Company to fail to meet its reporting obligations. If the Company fails to correct any issues in the design or operating effectiveness of internal controls over financial reporting, or fails to prevent fraud, current and potential shareholders could lose confidence in the Company’s financial reporting, which could harm its business and the trading price of its common stock.

The Company is subject to a variety of operational risks, including reputational risk, legal and compliance risk, and the risk of fraud or theft by employees or outsiders.

outsiders.

The Company is exposed to many types of operational risks, including reputational risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, and unauthorized transactions by employees or operational errors, including clerical or record-keeping errors or those resulting from faulty or disabled computer or telecommunications systems. Negative public opinion can result from its actual or alleged conduct in any number of activities, including lending practices, corporate governance and acquisitions and from actions taken by government regulators and community

44

organizations in response to those activities. Negative public opinion can adversely affect its ability to attract and keep customers and can expose the Company to litigation and regulatory action.

Because the nature of the financial services business involves a high volume of transactions, certain errors may be repeated or compounded before they are discovered and successfully rectified. The Company’s necessary dependence upon automated systems to record and process its transaction volume may further increase the risk that technical flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect. The Company also may be subject to disruptions of its operating systems arising from events that are wholly or partially beyond its control (for example, computer viruses or electrical or telecommunications outages), which may give rise to disruption of service to customers and to financial loss or liability. The Company is further exposed to the risk that its external vendors may be unable to fulfill their contractual obligations (or will be subject to the same risk of fraud or operational errors by their respective employees as the Company is) and to the risk that its (or its vendors’) business continuity and data security systems prove to be inadequate. The occurrence of any of these risks could result in a diminished ability of the Company to operate its business, potential liability to clients, reputational damage and regulatory intervention, which could adversely affect its business, financial condition and results of operations, perhaps materially.

50

The Company relies on other companies to provide key components of its business infrastructure.

Third parties provide key components of the Company’s business infrastructure, for example, system support and network access. While the Company has selected these third party vendors carefully, it does not control their actions. Any problems caused by these third parties, including those resulting from their failure to provide services for any reason or their poor performance of services, could adversely affect the Company’s ability to deliver products and services to its customers and otherwise conduct its business. Replacing these third party vendors could also entail significant delay and expense.

The Company’s operations may be adversely affected by cyber security risks.

In the ordinary course of business, the Company collects and stores sensitive data, including proprietary business information and personally identifiable information of our customers and employees in systems and on networks. In some cases, this confidential or proprietary information is collected compiled, processed, transmitted or stored by third parties on our behalf. The secure processing, maintenance and use of this information is critical to operations and our business strategy. The Company has invested in accepted technologies, and continually reviews processes and practices that are designed to protect our networks, computers and data from damage or unauthorized access. Despite these security measures, the Company’s computer systems and infrastructure or those of third parties used by us to compile, process or store such information may be vulnerable to attacks by hackers or breached due to employee error, malfeasance, or other disruptions. A breach of any kind could compromise systems and the information stored there could be accessed, damaged or disclosed. A breach in security could result in legal claims, regulatory penalties, disruption in operations, and damage to the Company’s reputation, which could adversely affect our business.

Our ability to successfully compete may be reduced if we are unable to make technological advances.

advances.

The banking industry is experiencing rapid changes in technology. In addition to improving customer services, effective use of technology increases efficiency and enables financial institutions to reduce costs. As a result, our future success will depend in part on our ability to address our customers’ needs by using technology. We cannot assure you that we will be able to effectively develop new technology-driven products and services or be successful in marketing these products to our customers. Many of our competitors have far greater resources than we have to invest in technology.

Risks Related to Accounting Matters

We expect that implementation of a new accounting standard could require us to increase our allowance for loan losses and may have a material adverse effect on our financial condition and results of operations.

The Financial Accounting Standards Board (“FASB”) has adopted a new accounting standard that will be effective for the Bank for our first fiscal year beginning after December 15, 2019.on October 1, 2023. This standard, referred to as Current Expected

45

Credit Loss, or CECL, will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for loan losses. This will change the current method of providing allowances for loan losses that are probable, which we expect may require us to increase our allowance for loan losses, and to greatly increase the data we would need to collect and review to determine the appropriate level of the allowance for loan losses. Any increase in our allowance for loan losses, or expenses incurred to determine the appropriate level of the allowance for loan losses, may have a material adverse effect on our financial condition and results of operations.

51

If our intangible assets, including goodwill, are either partially or fully impaired in the future, it would decrease earnings.

Federal Reserve Board policy could limit

We are required to test our ability to pay dividends togoodwill and other identifiable intangible assets for impairment on an annual basis and more regularly if indicators of impairment exist. The impairment testing process considers a variety of factors, including the current market price of our shareholders.

The Federal Reserve Board has issuedcommon stock, the estimated net present value of our assets and liabilities and information concerning the terminal valuation of similar insured depository institutions. Future impairment testing may result in a policy statement regardingpartial or full impairment of the paymentvalue of dividendsour goodwill or other identifiable intangible assets, or both. If an impairment determination is made in a future reporting period, our earnings and the repurchasebook value of shares of common stock by bank holding companies. In general, the policy provides that dividends shouldthese intangible assets will be paid only out of current earnings and only if the prospective rate of earnings retentionreduced by the holding company appears consistent withamount of the organization’s capital needs, asset quality and overall financial condition. These regulatory policies could affectimpairment. However, the recording of such an impairment loss would have no impact on the tangible book value of our ability to pay dividends, repurchase shares of common stock or otherwise engageour regulatory capital levels.

Other Risks Related to our Business

We may be required to transition from the use of the LIBOR interest rate index in capital distributions.the future.

We have certain FHLB advances, brokered deposits, loans and investment securities indexed to LIBOR to calculate the loan interest rate. The continued availability of the LIBOR index is not guaranteed after 2021. We cannot predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR or whether any additional reforms to LIBOR may be enacted. At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR (with the exception of overnight repurchase agreements, which are expected to be based on the Secured Overnight Financing Rate, or SOFR). The language in our LIBOR-based contracts and financial instruments has developed over time and may have various events that trigger when a successor rate to the designated rate would be selected. If a trigger is satisfied, contracts and financial instruments may give the calculation agent discretion over the substitute index or indices for the calculation of interest rates to be selected. The implementation of a substitute index or indices for the calculation of interest rates under our loan agreements with our borrowers may result in our incurring significant expenses in effecting the transition, may result in reduced loan balances if borrowers do not accept the substitute index or indices, and may result in disputes or litigation with customers over the appropriateness or comparability to LIBOR of the substitute index or indices, which could have an adverse effect on our results of operations.

Legal and regulatory proceedings and related matters could adversely affect us.

We have been and may in the future become involved in legal and regulatory proceedings. We consider most of the proceedings to be in the normal course of our business or typical for the industry; however, it is inherently difficult to assess the outcome of these matters, and we may not prevail in any proceedings or litigation. There could be substantial costs and management diversion in such litigation and proceedings, and any adverse determination could have a materially adverse effect on our business, reputation, or our financial condition and results of our operations.

Item 1B. Unresolved Staff Comments.

Comments

Not applicable.

46

Item 2. Properties

We currently conduct business from our main office and nine banking offices. On January 1, 2017, the Company completed its acquisition of Polonia Bancorp and Polonia Bank, Polonia Bancorp’s wholly owned subsidiary. The acquisition added five banking offices to our existing properties. The financial center at our Old City location was closed on March 31, 2018. The following table sets forth the net book value of the land, building and leasehold improvements and certain other information with respect to our offices at September 30, 2018.2020.

52

    

Net Book Value

Date of 

 of Property and

Lease

 Leasehold

Amount of

Description/Address

    

Leased/Owned

    

Expiration

    

Improvements

    

Deposits

(In Thousands)

Main Office

 

Owned

 

N/A

$

120

$

418,505

1834 West Oregon Avenue

Philadelphia, PA 19145

Huntingdon Valley Executive Office

 

Owned

 

N/A

 

2,960

 

31,310

3993 Huntingdon Pike

Huntingdon Valley, PA 19006

Broad Street Financial Center

 

Owned

 

N/A

 

161

 

49,621

1722 South Broad Street

Philadelphia, PA 19145

Pennsport Financial Center

 

Owned

 

N/A

 

12

 

38,382

238A Moore Street

Philadelphia, PA 19148

Drexel Hill Financial Center

 

Leased

 

Sep-21

 

14

 

91,586

1270 Township Line Road

Drexel Hill, PA 19026

Center City Financial Center

 

Leased

 

Oct-22

 

64

 

15,955

1500 JFk Boulevard

Philadelphia, PA 19103

Alleghney Financial Center

 

Owned

 

N/A

 

786

 

47,387

2644-56 E Alleghney Avenue

Philadelphia, PA 19134

Spring Garden Financial Center

 

Owned

 

N/A

 

1,387

 

44,615

2133-35 Spring Garden Street

Philadelphia, PA 19130

Richmond Financial Center

 

Owned

 

N/A

 

208

 

5,225

4800 Richmond Street

Philadelphia, PA 19137

Frankford Financial Center

 

Owned

 

N/A

 

389

 

28,363

8000 Frankford Avenue

Philadelphia, PA 19136

Total

$

6,101

$

770,949

47

Description/Address Leased/Owned Date of
Lease
Expiration
 Net Book Value
of Property and
Leasehold
Improvements
  Amount of
Deposits
 
      (In Thousands) 
Main Office Owned N/A $168  $501,549 
1834 West Oregon Avenue            
Philadelphia, PA 19145            
             
Huntingdon Valley Executive Office Owned N/A  3,088   41,957 
3993 Huntingdon Pike            
Huntingdon Valley, PA 19006            
             
Broad Street Financial Center Owned N/A  176   50,644 
1722 South Broad Street            
Philadelphia, PA 19145            
             
Pennsport Financial Center Owned N/A  20   39,759 
238A Moore Street            
Philadelphia, PA 19148            
             
Drexel Hill Financial Center Leased Sep-21  32   27,132 
1270 Township Line Road            
Drexel Hill, PA 19026            
             
Center City Financial Center Leased Oct-22  131   15,619 
1500 JFk Boulevard            
Philadelphia, PA 19103            
             
Alleghney Financial Center Owned N/A  820   48,861 
2644-56 E Alleghney Avenue            
Philadelphia, PA 19134            
             
Spring Garden Financial Center Owned N/A  1,447   28,228 
2133-35 Spring Garden Street            
Philadelphia, PA 19130            
             
Richmond Financial Center Owned N/A  217   4,437 
4800 Richmond Street            
Philadelphia, PA 19137            
             
Frankford Financial Center Owned N/A  406   26,072 
8000 Frankford Avenue            
Philadelphia, PA 19136            
             
Total     $6,505  $784,258 

53

Item 3. Legal Proceedings

As previously disclosed in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, onOn March 31, 2016, Island View Properties, Inc., trading as t/a Island View Crossing II LP (“Island View Crossing”), and Renato J. Gualtieri (collectively, the “Gualtieri Parties”(“Plaintiffs”) filed suit (the “Philadelphia Litigation”)a complaint against the Bank in the Court of Common Pleas of Philadelphia PennsylvaniaCounty (the “Court”“CCP Action”), against asserting, among other things, that the Bank seeking damages in anbreached various loan agreements and related agreements for a development known as Island View Crossing. In its complaint, Plaintiffs seek the amount in excess of $27.0$27 million. The lawsuit asserts allegations related to a loan granted by the BankCompany filed objections to the Gualtieri Parties to develop a 169-unit townhouse and condominium project located in Bristol Borough in Bucks County, Pennsylvania (the “Project”).

In May 2016, the Bank filed a motion with the courtcomplaint seeking to dismiss the majoritysignificant portions of claims asserted in the Philadelphia Litigation. InPlaintiffs’ claims. On August 31, 2016, the Court dismissed athe majority of the Gualtieri Parties’ claims. The Bank has also counterclaimed againstAfter that order, the Gualtieri PartiesCompany filed an answer denying Plaintiffs’ claims as well as a counterclaim seeking damages for failure to satisfypay the nineoutstanding loans extended thereto and not completing the project. Discovery was ongoing and a trial was scheduled for failure to complete the Project. In FebruaryOctober 2, 2017. On June 30, 2017, the Court stayed the Philadelphia Litigation pending possible resolution of the Litigation. No resolution was obtained and the stay has expired.

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

Shortly after the Court lifted the stay in the Philadelphia Litigation, the Gualtieri Parties and Affiliated Entities filed for bankruptcy under Chapter 11. The Bank has removed the underlying Philadelphia Litigation from state court to the federal bankruptcy court. As the Philadelphia Litigation is in its early stages, no prediction can be made as to the outcome thereof. However, the Bank believes that it has meritorious defenses to the remaining claims under the Philadelphia Litigation and it intends to vigorously defend the case.

In addition, as thea Chapter 11 bankruptcy is in its early stages, no prediction can be made as to the outcome thereof. However,and on or about July 18, 2017, the Bank believes that it has meritorious challengesremoved the CCP Action to the Chapter 11 bankruptcy filed by the Gualtieri Parties and Affiliated Entities. The Bank recently filed a motion in the federal bankruptcy court seeking to convert the bankruptcy to a Chapter 7 proceeding or in the alternative to appoint a Chapter 11 trustee to preserve the assets securing the Bank’s loans with the Gualtieri Parties and Affiliated Entities.

(the “Removed Action”).

Within the bankruptcy, Island View Crossing II, as the debtor and the Chapter 11 Trustee, filed a separate adversary proceeding against the Bank seeking to avoid certain collateral mortgages made by Island View Crossing as well as seeking to avoid certain loans made to Island View Crossing II including, but not limited to, a $1.4 million loan and a $5.5 million loan. The complaint was filed on or about December 3, 2018. 2018 and that action was ultimately consolidated with the Removed Action.

The Companydiscovery phase of litigation has concluded. A mediation was conducted on September 24, 2020, which did not result in a settlement.  Currently, the parties have each filed motions for summary judgment with the Court where final responses to each of the motions  is evaluatingdue in January 2021.  A pretrial conference with the matter. Court will be conducted at some point after that date.  

Given the relatively early stagesstage of the case and the complaint just being filed,pending motions, we are unable to determine the likelihood of an unfavorable outcome at this time. The Company,Bank, however, intends to vigorously defend against all claims.

On June 30, 2017, Calnshire Estates filed a voluntary petition for relief under Chapter 11 of the claim.United States bankruptcy code. On or about December 18, 2017, the bankruptcy court converted the matter from a Chapter 11 to a Chapter 7 proceeding. On December 20, 2017, the Court appointed Bonnie Finkel as the Chapter 7 Trustee for the bankruptcy estate.

On or about June 28, 2019, the Trustee filed an adversary proceeding against the Bank in the bankruptcy court seeking, among other things, a declaratory judgment that certain obligations of Calnshire Estates to Prudential are null and void. The Trustee also asserted various causes of action for breach of contract, breach of fiduciary duty and equitable subordination.

On August 26, 2019, the Bank filed a motion to dismiss a number of the claims filed by the Trustee. The Court granted the motion in many respects but allowed the Trustee to amend.  The Trustee thereafter filed an amended complaint where the Bank filed a motion to dismiss the amended complaint. The Trustee then filed  a response to the motion. The parties thereafter entered into settlement discussions where an agreement in principal has been reached with terms favorable to the Bank. The parties are in the midst of drafting the settlement agreement.

On June 30, 2017, Steeple Run filed a voluntary petition for relief under Chapter 11 of the United States bankruptcy code. On or about December 18, 2017, the bankruptcy court converted the matter from a Chapter 11 to a Chapter 7 proceeding. On December 20, 2017, the Court appointed Bonnie Finkel as the Chapter 7 Trustee for the bankruptcy estate.

On or about June 28, 2019, the Trustee filed an adversary proceeding against the Bank in bankruptcy court asserting, among other things, various causes of action for breach of contract, breach of fiduciary duty and equitable subordination in connection with a loan agreement.

On August 26, 2019, the Bank filed a motion to dismiss a number of the claims filed by the Trustee. The Court granted the motion in many respects but allowed the Trustee to amend.  The Trustee thereafter filed an amended complaint

48

where the Bank filed a motion to dismiss the amended complaint. The Trustee then filed a response to the motion. The parties thereafter entered into settlement discussions where an agreement in principal has been reached with terms favorable to the Bank. The parties are in the midst of drafting the settlement agreement.

Prudential Bancorp is involved in various legal proceedings occurring in the ordinary course of business. Management of the Company, based on discussions with litigation counsel, does not believe that such proceedings will have a material adverse effect on the financial condition or operations of Prudential Bancorp. There can be no assurance that any of the outstanding legal proceedings to which the Company is a party will not be decided adversely to the Company's interests and have a material adverse effect on the financial condition and operations of the Company.

54

Item 4.Item 4. Mine Safety Disclosures

Not applicable

55

PART II

Item 5.Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

(a)       Our common stock is traded on the NASDAQ Global Market (NASDAQ) under the symbol “PBIP”. At December 1, 2018,2020, there were approximately 357396 registered shareholders of record, not including the number of persons or entities whose stock is held in nominee or "street" name through various brokerage firms and banks.

The following table shows the quarterly high and low trading prices of our stock, reported on the NASDAQ Stock Market, and the amount of cash dividends declared per share for each of the quarters in fiscal 20182020 and 2017:2019:

  Stock Price  Cash
dividends
 
  High  Low  per share 
Quarter ended:            
September 30, 2018 $19.84  $16.84  $0.40 
June 30, 2018  19.87   16.86   0.05 
March 31, 2018  18.75   16.04   0.05 
December  31, 2017  18.96   17.23   0.20 

    

    

Cash 

Stock Price

dividends

Quarter ended:

    

High

    

Low

    

per share

September 30, 2020

$

12.66

$

9.53

$

0.07

June 30, 2020

 

14.29

 

9.90

 

0.07

March 31, 2020

 

18.58

 

10.26

 

0.50

December 31, 2019

 

18.59

 

16.51

 

0.07

  Stock Price  Cash
dividends
 
  High  Low  per share 
Quarter ended:            
September 30, 2017 $18.96  $18.51  $0.03 
June 30, 2017  18.48   18.13   0.03 
March 31, 2017  18.13   17.68   0.03 
December 31, 2016  17.39   17.04   0.03 

    

Cash 

Stock Price

dividends

Quarter ended :

    

High

    

Low

    

per share

September 30, 2019

$

18.80

$

15.21

$

0.05

June 30, 2019

 

19.57

 

16.39

 

0.50

March 31, 2019

 

18.54

 

16.34

 

0.05

December 31, 2018

 

18.15

 

13.92

 

0.05

(b)Not applicable

56

(c)The Company’s repurchases of equity shares for the fourth quarter of fiscal year 2020 were as follows:

    

    

    

Total Number

    

of Shares

Purchased as

Part of

Maximum Number

Total

Publicly

of Shares that May

Number of

Average

Announced

Yet Be Purchased

Shares

Price Paid

Plans or

Under Plans or

Period

Purchased

Per Share

Programs (1)

Programs (1)

July 1 - 31, 2020

$

407,600

August 1 - 31, 2020

 

31,929

10.99

 

31,929

 

375,671

49

September 1 - 30, 2020

 

10,430

10.07

 

10,430

 

365,241

42,359

$

10.76

42,359

(b)Not applicable

(c)The Company’s repurchases of equity shares for the fourth quarter of fiscal year 2018 were as follows:

Period Total
Number of
Shares
Purchased
  Average
Price Paid
Per Share
  Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs (1)
  Maximum Number
of Shares that May
Yet Be Purchased
Under Plans or
Programs (1)
 
July 1 - 31, 2018  -  $-   -   127,529 
August 1 - 31, 2018  31(2) $18.48   -   127,529 
September 1  - 30, 2018  62,388(1) $17.89   -   64,871 
   62,419             

(1)On July 15, 2015,June 18, 2020, the Company announced that the Board of Directors had approved a secondfourth stock repurchase program authorizing the Company to repurchase up to 850,000407,000 shares of common stock, approximately 10%5% of the Company’s then outstanding shares upon completion of the first repurchase program.shares.

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

57

Item 6. Selected Financial Data

Set forth below is selected financial and other data of Prudential Bancorp. Reference is made to the consolidated financial statements and related notes contained in Item 8 which provide additional information.

At September 30, 

    

2020

    

2019

    

2018

    

2017

    

2016

 At September 30, 
 2018  2017  2016  2015  2014 
 (Dollars in Thousands) 

(Dollars in Thousands)

Selected Financial and Other Data:                    

Total assets $1,081,170  $899,540  $559,480  $487,189  $525,483 

$

1,223,353

1,289,434

$

1,081,170

$

899,540

$

559,480

Cash and cash equivalents  48,171   27,903   12,440   11,272   45,382 

 

117,081

 

47,968

 

48,171

 

27,903

 

12,440

Investment and mortgage-backed securities:                    

 

  

 

  

 

  

 

  

 

  

Held-to-maturity  59,852   61,284   39,971   66,384   80,840 

 

22,860

 

68,635

 

59,852

 

61,284

 

39,971

Available-for-sale  306,187   178,402   138,694   77,483   57,817 

 

420,415

 

512,822

 

306,187

 

178,402

 

138,694

Loans receivable, net  602,932   571,343   344,948   312,633   321,063 

 

588,300

 

585,456

 

602,932

 

571,343

 

344,948

Deposits  784,258   635,982   389,201   365,074   391,025 

 

770,949

 

745,444

 

784,258

 

635,982

 

389,201

FHLB advances  154,683   114,318   50,638   -   340 

 

285,254

 

376,904

 

154,683

 

114,318

 

50,638

Non-performing loans  13,389   15,397   15,878   13,932   5,880 

 

13,037

 

13,936

 

13,389

 

15,397

 

15,878

Non-performing assets  14,415   15,589   16,459   14,801   6,240 

 

13,037

 

14,284

 

14,415

 

15,589

 

16,459

Total stockholders’ equity, substantially restricted  128,409   136,179   114,002   117,001   129,425 

 

129,117

 

139,611

 

128,409

 

136,179

 

114,002

Banking offices  10   11   6   7   7 

 

10

 

10

 

10

 

11

 

6

50

  Year Ended September 30, 
  2018  2017  2016  2015  2014 
  (Dollars in Thousands, except per share data) 
Selected Operating Data:                    
Total interest income $34,851  $26,343  $17,483  $16,680  $16,465 
Total interest expense  10,137   5,266   3,326   3,430   3,401 
Net interest income  24,714   21,077   14,157   13,250   13,064 
Provision for loan losses  810   2,990   225   735   240 
Net interest income after provision for loan losses  23,904   18,087   13,932   12,515   12,824 
Total non-interest income  2,500   2,198   1,337   3,008   1,111 
Total non-interest expense  15,639   16,566   11,290   13,175   11,465 
Income before income taxes  10,765   3,719   3,979   2,348   2,470 
Income tax expense  3,701   941   1,259   116   690 
Net income $7,064  $2,778  $2,720  $2,232  $1,780 
Basic earnings  per share $0.80  $0.33  $0.37  $0.27  $0.20 
Diluted earnings  per share $0.78  $0.32  $0.36  $0.27  $0.19 
Dividends paid per common share $0.70  $0.12  $0.12  $0.27  $0.06 
                     
Selected Operating Ratios(1):                    
Average yield earned on interest-earning assets  3.77%  3.65%  3.40%  3.38%  3.28%
Average rate paid on interest-bearing liabilities  1.23   0.82   0.80   0.90   0.89 
Average interest rate spread(2)  2.55   2.83   2.60   2.49   2.39 
Net interest margin(2)  2.68   2.92   2.75   2.69   2.61 
Average interest-earning assets to average interest-bearing liabilities  111.81   111.83   124.28   128.72   130.51 
Net interest income after provision for loan losses to non-interest expense  152.85   109.18   123.40   94.99   111.85 
Total non-interest expense to total average assets  1.60   2.10   2.11   3.42   2.21 
Efficiency ratio(3)  57.47   71.18   72.87   81.04   80.88 
Return on average assets  0.72   0.35   0.51   0.58   0.34 
Return on average equity  5.45   2.16   2.36   2.37   1.38 
Average equity to average total assets  13.28   16.31   21.55   24.39   24.79 

Year Ended September 30, 

 

    

2020

    

2019

    

2018

    

2017

    

2016

 

(Dollars in Thousands, except Per Share Data)

 

Selected Operating Data:

 

Total interest income

$

42,227

$

44,040

$

34,851

$

26,343

$

17,483

Total interest expense

 

19,425

 

19,289

 

10,137

 

5,266

 

3,326

Net interest income

 

22,802

 

24,751

 

24,714

 

21,077

 

14,157

Provision for loan losses

 

3,025

 

100

 

810

 

2,990

 

225

Net interest income after provision for loan losses

 

19,777

 

24,651

 

23,904

 

18,087

 

13,932

Total non-interest income

 

8,103

 

3,094

 

2,500

 

2,198

 

1,337

Total non-interest expense

 

16,725

 

16,270

 

15,639

 

16,566

 

11,290

Income before income taxes

 

11,155

 

11,475

 

10,765

 

3,719

 

3,979

Income tax expense

 

1,600

 

1,945

 

3,701

 

941

 

1,259

Net income

$

9,555

$

9,530

$

7,064

$

2,778

$

2,720

Basic earnings per share

$

1.12

$

1.09

$

0.80

$

0.33

$

0.37

Diluted earnings per share

$

1.12

$

1.07

$

0.78

$

0.32

$

0.36

Dividends paid per common share

$

0.71

$

0.65

$

0.70

$

0.12

$

0.12

Selected Operating Ratios(1):

 

  

 

  

 

  

 

  

 

  

Average yield earned on interest-earning assets

 

3.54

%  

 

3.92

%  

 

3.77

%  

 

3.65

%  

 

3.40

%

Average rate paid on interest-bearing liabilities

 

1.79

 

1.91

 

1.23

 

0.82

 

0.80

Average interest rate spread(2)

 

1.75

 

2.01

 

2.55

 

2.83

 

2.60

Net interest margin(2)

 

1.92

 

2.20

 

2.68

 

2.92

 

2.75

Average interest-earning assets to average interest-bearing liabilities

 

109.69

 

111.46

 

111.81

 

111.83

 

124.28

Net interest income after provision for loan losses to non-interest expense

 

118.25

 

151.51

 

152.85

 

109.18

 

123.40

Total non-interest expense to total average assets

 

1.33

 

1.38

 

1.60

 

2.10

 

2.11

Efficiency ratio(3)

 

54.12

 

58.43

 

57.47

 

71.18

 

72.87

Return on average assets

 

0.79

 

0.81

 

0.72

 

0.35

 

0.51

Return on average equity

 

6.88

 

7.06

 

5.45

 

2.16

 

2.36

Average equity to average total assets

 

11.04

 

11.47

 

13.28

 

16.31

 

21.55

(Footnotes on next page)

58

51

Table of Contents

  

At or For the

Year Ended September 30,

 
  2018  2017  2016  2015  2014 
Asset Quality Ratios(4):                    
Non-performing loans as a percent of total loans receivable(5)  2.22%  2.67%  4.60%  4.21%  1.83%
Non-performing assets as a percent of total assets(5)  1.33   1.73   2.94   3.04   1.19 
Allowance for loan losses as a percent of non-performing loans  38.59   29.01   20.59   21.03   41.24 
Allowance for loan losses as a percent of total loans  0.85   0.78   0.94   0.93   0.75 
Net charge-offs to average loans receivable  0.02   0.37   -0.03   0.07   0.05 
                     
Capital Ratios(4):                    
Tier 1 leverage ratio                    
Company  12.51%  14.81%  20.41%  23.73%  22.39%
Bank  11.86   13.59   18.15   19.50   17.95 
                     
Tier 1 common risk-based capital ratio                    
Company  19.74   23.94   38.57   50.63   N/A 
Bank  18.73   21.97   34.36   41.66   N/A 
                     
Tier 1 risk-based capital ratio                    
Company  19.74   23.94   38.57   50.63   57.21 
Bank  18.73   21.97   34.36   41.65   40.52 
                     
Total risk-based capital ratio                    
Company  20.58   24.83   39.70   51.98   58.28 
Bank  19.56   22.86   35.49    43.00   41.59 

__________________

At or For the Year Ended September 30,

 

    

2020

    

2019

    

2018

    

2017

    

2016

 

Asset Quality Ratios(4):

 

Non-performing loans as a percent of total loans receivable(5)

2.22

%  

2.38

%  

2.22

%  

2.69

%  

4.56

%

Non-performing assets as a percent of total assets(5)

 

1.07

 

1.11

 

1.33

 

1.73

 

2.94

Allowance for loan losses as a percent of non-performing loans

 

63.68

 

38.70

 

38.59

 

29.01

 

20.59

Allowance for loan losses as a percent of total loans

 

1.39

 

0.91

 

0.85

 

0.78

 

0.94

Net charge-offs to average loans receivable

 

0.02

 

(0.02)

 

0.02

 

0.37

 

(0.03)

Capital Ratios(4) (6):

 

  

 

  

 

  

 

  

 

  

Tier 1 leverage ratio

 

  

 

  

 

  

 

  

 

  

Company

 

10.34

%  

10.89

%  

12.51

%  

14.81

%  

20.41

%

Bank

 

10.51

 

10.49

 

11.86

 

13.59

 

18.15

Tier 1 common risk-based capital ratio

 

  

 

  

 

  

 

  

 

  

Company

 

17.21

 

18.43

 

19.74

 

23.94

 

38.57

Bank

 

16.88

 

18.10

 

18.73

 

21.97

 

34.36

Tier 1 risk-based capital ratio

 

  

 

  

 

  

 

  

 

  

Company

 

17.21

 

18.43

 

19.74

 

23.94

 

38.57

Bank

 

16.88

 

18.10

 

18.73

 

21.97

 

34.36

Total risk-based capital ratio

 

  

 

  

 

  

 

  

 

  

Company

 

18.41

 

19.27

 

20.58

 

24.83

 

39.70

Bank

 

18.08

 

18.94

 

19.56

 

22.86

 

35.49

(1)With the exception of end of period ratios, all ratios are based on average monthly balances during the indicated periods.

(2)Average interest rate spread represents the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities. Net interest margin represents net interest income as a percentage of average interest-earning assets.

(3)The efficiency ratio represents the ratio of non-interest expense divided by the sum of net interest income and non-interest income.

(4)Asset quality ratios and capital ratios are end of period ratios, except for net charge-offs to average loans receivable.

(5)Non-performing assets generally consist of all loans on non-accrual, loans which are 90 days or more past due as to principal or interest, and real estate acquired through foreclosure or acceptance of a deed-in-lieu of foreclosure. Non-performing assets and non-performing loans also include loans classified as TDRs due to being recently restructured and placed on non-accrual in connection with such restructuring. The TDRs in most cases are performing in accordance with their restructured terms. It is the Company’s policy to cease accruing interest on all loans which are 90 days or more past due as to interest and/or principal.
(6)The Company is not subject to the regulatory capital ratios imposed by Basel III on bank holding companies because the Company is deemed to be a small bank holding company.

59

52

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

At September 30, 2018,2020, we had total assets of $1.1$1.2 billion, including total net loans of $602.9$588.3 million, and $366.0 million ofaggregate investment and mortgage-backed securities of $443.2 million, total deposits of $784.3$770.9 million and total stockholders’ equity of $128.4$129.1 million.

The Company conducts community banking activities by accepting deposits and making loans secured by properties located primarily in our market area. Our lending products consist of residential mortgage loans, including loans for sale in the secondary market, along with commercial real estate, multi-family residential and construction loans. The Company also originates commercial business and consumer loans in an effort to maintain strong customer relationships.

The worldwide COVID-19 pandemic has caused significant volatility and disruption in the financial markets both in the United States and globally. We are working with both residential and commercial borrowers to help them meet the unexpected financial challenges stemming from the COVID-19 pandemic and will continue to do so.

Despite the challenging current market and economic conditions, the Company continues to maintain capital substantially in excess of regulatory requirements.

This Management’s Discussion and Analysis section is intended to assist in understanding the financial condition and results of operations of Prudential Bancorp. The results of operations of Prudential Bancorp are primarily dependent on the results of the Bank. The information contained in this section should be read in conjunction with our consolidated financial statements and the accompanying notes to the consolidated financial statements contained in Item 8 of this Annual Report on Form 10-K.

Critical Accounting Policies

In reviewing and understanding financial information for Prudential Bancorp, you are encouraged to read and understand the significant accounting policies used in preparing our financial statements. These policies are described in Note 2 of the notes to our consolidated financial statements included in Item 8 hereof. The accounting and financial reporting policies of Prudential Bancorp conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and to general practices within the banking industry. Accordingly, the financial statements require certain estimates, judgments and assumptions, which are believed to be reasonable, based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities as well as contingent assets and contingent liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented. The following accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results. These policies require numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations which may significantly affect our reported results and financial condition for the period or in future periods.

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

60

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

53

methodology as a measurement of how current circumstances are affecting the loan portfolio. Included in these qualitative factors are:

·Levels of past due, classified, criticized and non-accrual loans, troubled debt restructuringsTDRs and loan modifications;
·Nature and volume of loans;
·Changes in lending policies and procedures, underwriting standards, collections, charge-offs and recoveries and for commercial loans, the level of loans being approved with exceptions to lending policy;
·Experience, ability and depth of management and staff;
·National and local economic and business conditions, including various market segments;segments, especially in light of the COVID-19 pandemic on both the national and local economies;
·Quality of the Company’s loan review system and degree of Board oversight;
·Concentrations of credit and changes in levels of such concentrations; and
·Effect of external factors on the level of estimated credit losses in the current portfolio.

In determining the allowance for loan losses, management has established both specific and general pooled allowances. Values assigned to the qualitative factors and those developed from historic loss experience provide a dynamic basis for the calculation of reserve factors for both pass-rated loans (general pooled allowance) and for criticized and classified loans. The amount of the specific allowance is determined through a loan-by-loan analysis of certain large dollar commercial real estate loans. Loans not individually reviewed are evaluated as a group using reserve factor percentages based on historical loss experience and the qualitative factors described above. In determining the appropriate level of the general pooled allowance, management makes estimates based on internal risk ratings, which take into account such factors as debt service coverage, loan-to-value ratios and external factors. Estimates are periodically measured against actual loss experience.

This evaluation is inherently subjective as it requires material estimates including, among others, exposure at default, the amount and timing of expected future cash flows on impaired loans, value of collateral, estimated losses on our commercial, construction and residential loan portfolios and historical loss experience. All of these estimates may be susceptible to significant change. While management analyzed its allowance in light of the COVID-19 pandemic, such analysis will need to be continually refined and reviewed in light of the ongoing nature of the effects of the COVID-19 pandemic.

While management uses the best information available to make loan loss allowance evaluations, adjustments to the allowance may be necessary based on changes in economic and other conditions or changes in accounting guidance. In addition, the Department and the FDIC, as an integral part of their examination processes, periodically review our allowance for loan losses. The Department and the FDIC may require the recognition of adjustments to the allowance for loan losses based on their judgment of information available to them at the time of their 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 affect earnings in future periods.

Investment and Mortgage-Backed Securities Available for Sale.Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated using quoted prices of securities with similar characteristics or discounted cash flows and are classified within Level 2 of the fair value hierarchy. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy, although there were no securities with that classification as of September 30, 20182020 or 2017. 2019.

61

54

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. In light of the COVID-19 pandemic, management is taking into account the effects the pandemic may have on securities and their impairment. The Company determines whether the unrealized losses are temporary or are considered other than temporary. The Company determines whether the unrealized losses are temporary in accordance with U.S. GAAP.  The evaluation is based upon factors such as the creditworthiness of the issuers/guarantors, the underlying collateral, if applicable, and the continuing performance of the securities. In addition, the Company also considers the likelihood that the security will be required to be sold by a regulatory agency, our internal intent not to dispose of the security prior to maturity and whether the entire cost basis of the security is expected to be recovered. In determining whether the cost basis will be recovered, management evaluates other facts and circumstances that may be indicative of an other-than-temporary impairment condition. This includes, but is not limited to, an evaluation of the type of security, length of time and extent to which the fair value has been less than cost, and near-term prospects of the issuer.

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

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

Business Combinations -Derivatives. AtThe Company uses interest rate swaps and caps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the datepayment of acquisitioneither fixed or variable-rate amounts in exchange for the receipt of variable or fixed-rate amounts from a counterparty, respectively. The Company uses interest rate swaps to manage its exposure to changes in fair value. Interest rate swaps designated as fair value hedges involve the receipt of variable-rate payments from a counterparty in exchange for the Company recordsmaking fixed-rate payments over the assets and liabilitieslife of the acquired companies onagreements without the Consolidated Statement of Financial Condition at their estimated fair value. The results of operations for acquired companies are included in the Company’s Consolidated Statements of Operations beginning at the acquisition date. Expenses arising from acquisition activities are recorded in the Consolidated Statements of Operations during the period incurred. The difference between the purchase price and the fair valueexchange of the net assets acquired (including identified intangibles) is recorded as goodwill.

underlying notional amount.

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

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

62

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

55

Recent Accounting Pronouncements

Information regarding recent accounting pronouncements is included in Note 2 to the Consolidated Financial Statementsconsolidated financial statements set forth in Item 8 hereto.

Derivative Financial Instruments, Contractual Obligations and Other Off Balance Sheet Arrangements.

Arrangements

Derivative financial instruments include futures, forwards, interest rate swaps, option contracts, and other financial instruments with similar characteristics. To remain competitive in our local lending area and to support the Company’s asset/liability positioning, on occasion the Bank enters into interest rate swap contracts to control its funding costs.

In addition, these instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition. Commitments to extend credit generally have fixed expiration dates and may require additional collateral from the borrower if deemed necessary. Commitments to extend credit are not recorded as an asset or liability by us until the instrument is exercised.

Commitments

The following table summarizes our outstanding commitments to originate loans and to advance additional amounts pursuant to outstanding letters of credit, lines of credit and undisbursed construction loans at September 30, 2018.2020.

Total

    

Amount of Commitment Expiration - Per Period

Amounts

Less than

1-3

3-5

After 5

    

Committed

    

1 Year

    

Years

    

Years

    

Years

 Total Amount of Commitment Expiration - Per Period 
 Amounts Less than 1-3 3-5 After 5 
 Committed  1 Year  Years  Years  Years 
 (In Thousands) 

(In Thousands)

Letters of credit $1,642  $410  $1,232  $-  $- 

$

1,119

$

1,119

$

$

$

Lines of credit  51,844   4,526   431   17,108   29,779 

 

40,121

 

4,556

 

23,226

 

507

 

11,832

Undisbursed portions of loans in process  54,474   21,770   17,821   1,974   12,909 

 

86,863

 

19,949

 

36,238

 

3,378

 

27,298

Commitments to originate loans  40,433   37,505   0   2,928   - 

 

29,925

 

29,925

 

 

 

Total commitments $148,393  $64,211  $19,484  $22,010  $42,688 

$

158,028

$

55,549

$

59,464

$

3,885

$

39,130

63

Contractual Cash Obligations

The following table summarizes our contractual cash obligations at September 30, 2018.2020.

    

    

Less than

    

1-3

    

3-5

    

After 5

Total

1 Year

Years

Years

Years

    Payments Due By Period 
    Less than 1-3 3-5 After 5 
 Total  1 Year  Years  Years  Years 
 (In Thousands) 

(In Thousands)

Certificates of deposit $563,820  $411,988  $95,297  $56,535  $- 

$

269,610

$

170,553

$

74,937

$

24,120

$

Advances from FHLB  144,683   20,167   38,738   80,778   5,000 

 

260,254

 

23,175

 

169,081

 

67,998

 

Total long-term debt  708,503   432,155   134,035   137,313   5,000 

 

529,864

 

193,728

 

244,018

 

92,118

 

Short-term borrowings, FHLB  10,000   10,000   -   -   - 

 

25,000

 

25,000

 

 

 

Advances from borrowers for taxes and insurance  2,083   2,083   -   -   - 

 

2,798

 

2,798

 

 

 

Operating lease obligations  2,324   321   503   516   984 

 

1,506

 

210

 

429

 

451

 

416

Total contractual obligations $722,910  $444,559  $134,538  $137,829  $5,984 

$

559,168

$

221,736

$

244,447

$

92,569

$

416

64

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

56

interest margin. 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.

  Year Ended September 30, 
  2018  2017  2016 
        Average        Average        Average 
  Average     Yield/  Average     Yield/  Average     Yield/ 
  Balance  Interest  Rate  Balance  Interest  Rate  Balance  Interest  Rate 
  (Dollars in Thousands) 
Interest-earning assets:                                    
Investment securities (1) $155,154  $4,862   3.23% $60,094  $2,004   3.52% $57,433  $1,550   2.70%
Mortgage-backed securities  153,056   4,078   2.66%  151,430   3,963   2.62%  114,709   2,973   2.59%
Loans receivable (2)  588,493   25,367   4.31%  487,999   20,107   4.12%  327,877   12,909   3.94%
Other interest-earning assets  26,963   544   2.02%  22,361   269   1.20%  13,103   51   0.39%
Total interest-earning assets  923,666   34,851   3.77%  721,884   26,343   3.65%  513,122   17,483   3.41%
Non-interest-earning assets  51,683           65,485           21,622         
Total assets $975,349          $787,369          $534,744         
Interest-bearing liabilities:                                    
Savings accounts $105,665  $66   0.06% $97,710  $51   0.05% $73,030  $83   0.11%
Checking and money market accounts  121,954   247   0.20%  127,172   197   0.15%  92,751   165   0.18%
Certificate accounts  454,554   7,073   1.56%  325,824   3,682   1.13%  211,517   2,613   1.24%
Total deposits  682,173   7,386   1.08%  550,706   3,930   0.71%  377,298   2,861   0.76%
FHLB advances  143,913   2,751   1.91%  94,816   1,336   1.41%  35,585   465   1.31%
Total interest-bearing liabilities  826,086   10,137   1.23%  645,522   5,266   0.82%  412,883   3,326   0.81%
Non-interest-bearing liabilities  19,702           13,390           6,618         
Total liabilities  845,788           658,912           419,501         
Stockholders' equity  129,561           128,457           115,243         
Total liabilities and stockholders' equity $975,349          $787,369          $534,744         
Net interest-earning assets $97,580          $76,362          $100,239         
                                     
Net interest income, interest rate spread     $24,714   2.55%     $21,077   2.83%     $14,157   2.60%
Net interest margin (3)          2.68%          2.92%          2.76%
Average interest-earning assets to average interest-bearing liabilities          111.81%          111.83%          124.28%

_______________________

 

Year Ended September 30, 

 

2020

2019

2018

 

Average

Average

Average

 

Average

Yield/

Average

Yield/

Average

Yield/

 

Balance

    

Interest

    

Rate

    

Balance

    

Interest

    

Rate

    

Balance

    

Interest

    

Rate

 

(Dollars in Thousands)

 

Interest-earning assets:

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Investment securities (1)

$

224,716

$

6,942

 

3.09

%  

$

191,214

$

6,822

 

3.57

%  

$

155,154

$

4,862

 

3.23

%

Mortgage-backed securities

 

318,069

 

9,198

 

2.89

%  

 

300,318

 

9,561

 

3.18

%  

 

153,056

 

4,078

 

2.66

%

Loans receivable (2)

 

583,367

 

25,140

 

4.31

%  

 

587,102

 

26,736

 

4.55

%  

 

588,493

 

25,367

 

4.31

%

Other interest-earning assets

 

62,509

 

947

 

1.51

%  

 

45,895

 

921

 

2.01

%  

 

26,963

 

544

 

2.02

%

Total interest-earning assets

 

1,188,661

 

42,227

 

3.54

%  

 

1,124,529

 

44,040

 

3.92

%  

 

923,666

 

34,851

 

3.77

%

Cash and non-interest bearing balances

Non-interest-earning assets

 

69,492

 

 

 

51,811

 

 

 

51,683

 

  

 

  

Total assets

$

1,258,153

$

1,176,340

$

975,349

 

  

 

  

Interest-bearing liabilities:

 

  

 

  

  

 

  

 

  

  

 

  

 

  

 

  

Savings accounts

$

83,757

$

38

0.05

%  

$

88,049

$

124

0.14

%  

$

105,665

$

66

 

0.06

%

Checking and money market accounts

 

245,421

 

2,045

0.83

%  

 

125,148

 

899

0.72

%  

 

121,954

 

247

 

0.20

%

Certificate accounts

 

413,308

 

8,819

2.13

%  

 

555,004

 

12,137

2.19

%  

 

454,554

 

7,073

 

1.56

%

Total deposits

 

742,486

 

10,902

1.47

%  

 

768,201

 

13,160

1.71

%  

 

682,173

 

7,386

 

1.08

%

FHLB advances

 

341,154

 

8,523

2.50

%  

 

240,739

 

6,130

2.55

%  

 

143,913

 

2,751

 

1.91

%

Advances from Federal Home Loan Bank

Advances from borrowers for taxes and insurance

Total interest-bearing liabilities

 

1,083,640

 

19,425

1.79

%  

 

1,008,940

 

19,290

1.91

%  

 

826,086

 

10,137

 

1.23

%

Non-interest-bearing liabilities:

 

35,665

 

 

32,443

 

 

19,702

 

  

 

  

Non interest-bearing demand accounts

Other liabilities

Total liabilities

 

1,119,305

 

 

1,041,383

 

 

845,788

 

  

 

  

Stockholders' equity

 

138,848

 

 

134,957

 

 

129,561

 

  

 

  

Total liabilities and stockholders' equity

$

1,258,153

$

1,176,340

$

975,349

 

  

 

  

Net interest-earning assets

$

105,021

$

115,589

$

97,580

 

  

 

  

Net interest income, interest rate spread

$

22,802

1.75

 

$

24,750

2.00

%  

 

$

24,714

 

2.55

%  

Net interest margin (3)

 

 

1.92

%  

 

 

2.20

%  

 

  

 

  

 

2.68

%  

Average interest-earning assets to average interest-bearing liabilities

 

 

109.69

%  

 

 

111.46

%  

 

  

 

  

 

111.81

%  

(1)Tax exemptTax-exempt yields have been adjusted to a tax-equivalent basis.
(2)Includes nonaccrual loans during the respective periods. Calculated net of deferred fees and discounts, loans in process and the allowance for loan losses.
(3)Equals net interest income divided by average interest-earning assets.

65

Rate/Volume Analysis. The following table shows the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities affected our interest income and expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in rate, which is the change in rate multiplied by prior year volume, and (2) changes in

57

volume, which is the change in volume multiplied by prior year rate. The combined effect of changes in both rate and volume has been allocated proportionately to the change due to rate and the change due to volume.

2020 vs. 2019

    

2019 vs. 2018

Increase (Decrease) Due to

Increase (Decrease) Due to

Total

Total

Rate/

Increase

Rate/

Increase

    

Rate

    

Volume

    

Volume

    

(Decrease)

    

Rate

    

Volume

    

Volume

    

(Decrease)

 2018 vs. 2017  2017 vs. 2016 
 Increase (Decrease) Due to     Increase (Decrease) Due to    
 Rate  Volume  Rate/
Volume
  Total
Increase
(Decrease)
  Rate  Volume  Rate/
Volume
  Total
Increase
(Decrease)
 
 (In Thousands) 

(In Thousands)

Interest income:                                

  

  

  

  

  

  

  

  

Investment securities $(175) $3,351  $(318) $2,858  $365  $72  $17  $454 

$

(915)

$

1,195

$

(160)

$

120

$

518

$

1,166

$

275

$

1,959

Mortgage-backed securities  72   43   1   116   29   952   9   990 

 

(880)

 

565

 

(48)

 

(363)

 

795

 

3,924

 

765

 

5,484

Loans receivable, net  928   4,141   191   5,260   601   6,304   293   7,198 

 

(1,421)

 

(170)

 

(5)

 

(1,596)

 

1,432

 

(60)

 

(3)

 

1,369

Other interest-earning assets  182   55   37   274   107   36   75   218 

 

(228)

 

334

 

(80)

 

26

 

(3)

 

382

 

(2)

 

377

Total interest income  1,007   7,590   (89)  8,508   1,102   7,364   394   8,860 

 

(3,444)

 

1,924

 

(293)

 

(1,813)

 

2,742

 

5,412

 

1,035

 

9,189

Interest expense:                                

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Savings accounts  5   5   -   10   (45)  28   (13)  (30)

 

(85)

 

(7)

 

5

 

(87)

 

87

 

(12)

 

(17)

 

58

Checking and money market accounts (interest-bearing and non-interest bearing)  65   (7)  (3)  55   (23)  61   (9)  29 

 

146

 

862

 

138

 

1,146

 

612

 

11

 

28

 

651

Certificate accounts  1,388   1,455   548   3,391   (223)  1,412   (120)  1,069 

 

(294)

 

(3,099)

 

75

 

(3,318)

 

2,868

 

1,564

 

633

 

5,065

Total deposits  1,458   1,453   545   3,456   (291)  1,501   (142)  1,068 

 

(233)

 

(2,244)

 

218

 

(2,259)

 

3,567

 

1,563

 

644

 

5,774

FHLB advances  476   692   247   1,415   36   774   61   871 

 

(116)

 

2,557

 

(47)

 

2,394

 

913

 

1,851

 

615

 

3,379

Total interest expense  1,934   2,145   792   4,871   (255)  2,275   (81)  1,939 

 

(349)

 

313

 

171

 

135

 

4,480

 

3,414

 

1,259

 

9,153

Increase (decrease) in net interest income $(927) $5,445  $(881) $3,637  $1,357  $5,089  $475  $6,921 

$

(3,095)

$

1,611

$

(464)

$

(1,948)

$

(1,738)

$

1,998

$

(224)

$

36

Comparison of Financial Condition at September 30, 20172020 and September 30, 20162019

At September 30, 2018, theThe Company had total assets of $1.1$1.2 billion at September 30, 2020 compared to $1.3 billion at September 30, 2019.  At September 30, 2020, the investment portfolio had decreased by $138.3 million to $443.2 million as compared to $899.5$581.5 million at September 30, 2017, an increase of $181.6 million or 20.2%. At September 30, 2018, the investment securities portfolio increased by $126.4 million to $367.6 million as compared to September 30, 20172019 primarily as a result of the purchaseinvestment securities sales, calls and paydowns of investment grade corporate bonds and U.S. government agencyamortizing mortgage-backed securities.  Net loans receivable increased $31.6slightly by $2.8 million to $602.9$588.3 million at September 30, 20182020 from $571.3$585.5 million at September 30, 2017.2019 due primarily to the continued intense competition for quality loans combined with the uncertain economic climate created by the COVID-19 pandemic.  In addition, the Company sold a $14.0 million package of long-term, fixed-rate mortgage loans as part of its strategy to address interest-rate margin compression as well as sold the PPP loans generated in the third quarter of fiscal 2020 as discussed below.

Total liabilities were $1.1 billion at both September 30, 2020 and September 30, 2019.  Deposits increased by $25.5 million to $770.9 million at September 30, 2020 from $745.4 million at September 30, 2019.  The increase was primarily due to increases in commercial real estatedemand deposit and construction loans, reflecting our continued emphasis of increasing our investment in such loans. Cash and cash equivalents increased $20.3money market products.  FHLB borrowings decreased by $91.7 million to $48.2 million.

Total liabilities increased by $189.4 million to $952.8$285.3 million at September 30, 20182020 from $763.4$376.9 million at September 30, 2017. Total deposits increased $148.3 million, consisting primarily of certificates of deposit, which were used to fund asset growth2020 as well as meet short-term liquidity needs. At September 30, 2018, the Company hadallowed higher costing FHLB advances outstanding of $154.7 million,borrowings to run-off as compared to $114.3 million at September 30, 2017. The increase in the level of borrowings was primarily due to match funding of loan originations as well as to funding purchases of investment securitiesthey mature in order to lock in the yield with minimal interest rate risk as partreduce its cost of the Company’s asset/liability management strategy. All of the borrowings had maturities of less than six years.funds.  

66

Total stockholders’ equity decreased by $7.8$10.5 million to $128.4$129.1 million at September 30, 20182020 from $136.2$139.6 million at September 30, 2017.2019. The decrease was primarily due to a reduction intreasury stock purchases, net of stock plan activity, totaling $9.5 million.  During the fair market value of available for sale securities as offiscal year ended September 30, 2018 due to rising market rates2020, the Company repurchased 829,388 shares at an average cost of $12.70, which resulted in a substantial increase in the Company’s accumulated other comprehensive loss.is well below book value per share.  Also contributing to the decrease were dividend payments totaling $6.3$6.2 million consisting of both regular quarterly dividends totaling $0.20 per share for fiscal 2018 as well as special dividends of $0.15 and $0.35 per share declaredcombined with  an aggregate $4.1 million decrease in the firstfair market value of interest rate swaps and fourthavailable for sale securities which significantly reduced other comprehensive income (loss).  The decrease in the fair value of the interest rate swaps was due to the large decrease in market rates of interest during the second and third quarters respectively, of fiscal 2018.2020.  These decreases were partially offset by net income of $9.6 million for the fiscal year ended September 30, 2020.

.

58

Results of Operations for the Years Ended September 30, 2018, 20172020, 2019 and 2016

2018

General.

20182020 vs. 2017.2019. For the fiscal year ended September 30, 2018,2020, the Company recognized net income of $9.6 million, or $1.12 per diluted share, as compared to net income of $9.5 million, or $1.07 per diluted share, for the fiscal year ended September 30, 2019.

2019 vs. 2018. For the fiscal year ended September 30, 2019, the Company recognized net income of $9.5 million, or $1.07 per diluted share, as compared to net income of $7.1 million, or $0.78 per diluted share, as compared to net income of $2.8 million, or $0.32 per diluted share for the fiscal year ended September 30, 2017. Both fiscal year periods included significant one-time charges. Fiscal year 2017 results included a one-time $2.5 million pre-tax expense related to the acquisition of Polonia Bancorp which was completed as of January 1, 2017 as well as a $1.9 million non-cash pre-tax charge-off associated with a large lending relationship.2018. Fiscal year 2018 results reflected the effect of a $1.8 million non-cash charge in the first quarter of the fiscal year related to the revaluation of the Company’s deferred tax assets due to the enactment of the Tax Cuts and Jobs Act in December 2017 which significantly reduced the corporate income tax rate applicable to the Company.

Net Interest Income.

20172020 vs. 2016.2019. For the fiscal year ended September 30, 2017, the Company recognized2020, net interest income of $2.8was $22.8 million or $0.32 per diluted share, as compared to net income$24.8 million for fiscal 2019. The decrease primarily was due to a decrease of $2.5$1.6 million, or $0.36 per diluted share6.0%, in interest on loans combined with a $136,000 or 0.7% increase in interest expense. The weighted average yield on interest-earning assets decreased by 38 basis points, to 3.54%, for the fiscal year ended September 30, 2016. The2020 from 3.92% for fiscal year 2017 results included a one-time $2.7 million pre-tax expense related2019 primarily due to the  Polonia Bancorp acquisition as well asreduction in market yields of interest which created downward pressure on our yields in all interest-earning asset categories, in particular commercial real estate and construction loans which generally bear adjustable rates.  The increase in interest expense was due to a $1.9$74.7 million non-cash pre-tax charge-off associated with a large lending relationship. Increased profitabilityincrease in the average balance of interest-bearing liabilities used to fund growth during fiscal 2020. The weighted average cost of borrowings and deposits decreased by 12 basis points to 1.79% for fiscal 2020 from 1.91% for fiscal 2019.

2019 vs. 2018. For the fiscal year ended September 30, 2017 was primarily attributable to an increase in net interest income.

Net Interest Income.

2018 vs. 2017. For the year ended September 30, 2018,2019, net interest income increased by $37,000 to $24.7$24.8 million as compared to $21.1$24.7 million for fiscal 2017.2018. The increase reflected an $8.5$9.2 million, or 32.3%26.4%, increase in interest income partiallyin fiscal 2019, was offset by a $4.9$9.2 million, increase, or 92.5%90.3%, increase in interest paid on deposits and borrowings. The increase in interest income for the year ended September 30, 2018 was primarily due to the increase in the weighted average balancesbalance of earning assets combined withand the increasing aggregate balance ofemphasis on increased investment in commercial real estate and construction loans in the loan portfolio as well as the rising interest rate environment.and land development loans. The average balance of interest-earning assets increased by $201.8$200.9 million, or 28.0%21.8%, to $ 923.7 million for the year ended September 30, 2018 from $721.9 million for the year ended September 30, 2017.fiscal 2018. The weighted-average yield on interest-earning assets increased by 1215 basis points to 3.77%3.92% for the fiscal year ended September 30, 2018 as compared to 3.65%2019 from 3.77% for fiscal 2017. However, the2018. The weighted average cost of borrowings and deposits increased to 1.23%1.91% during the fiscal year ended September 30, 20182019 from 0.82%1.23% for fiscal year 20172018 primarily due to significant growth in the balance of both our certificates of deposit and FHLB borrowings in order to fund our asset growth combined with increases in market rates of interest. As a result, our net interest, margin declined to 2.68%reflecting in part the competitive market for the year ended September 30, 2018 from 2.92% for fiscal year 2017.

67

2017 vs. 2016. For the year ended September 30, 2017, net interest income increased to $21.1 million as compared to $14.2 million for the same period in fiscal 2016. The increase reflected an $8.9 million, or 50.7%, increase in interest income, partially offset by a $1.9 million increase, or 58.3%, in interest paid on deposits, and borrowings. The increase in net interest income for fiscal 2017 was primarily due to the increaseparticularly time deposits, in the weighted average balanceareas in which the Company operates, as well increases in market rates of earning assets reflecting in large part the addition of earning assets acquired as of January 1, 2017 upon completion of the Polonia Bancorp acquisition. The weighted average yield on interest-earning assets increased 25 basis points to 3.65% while the cost of funds increased only 1 basis point to 0.82%.

interest.

Provision for Loan Losses.

20182020 vs. 20172019. The Company establishedrecorded provisions for loan losses of  $3.0 million for the fiscal year ended September 30, 2020, compared to a $100,000 provision for loan losses for fiscal 2019, primarily due to the continued uncertainty associated with the economic effects of the COVID-19 pandemic, especially in light of the increasing level of cases of COVID-19 in recent months, and the potential credit deterioration caused thereby. Minimal delinquencies had occurred as of September 30, 2020 due to the effects of the COVID-19 pandemic. There were no loan deferments outstanding as of September 30, 2020 and all existing deferrals had ended by September 30, 2020 compared to loans on deferral totaling $149.7 million, or 21.6% of total loans at June 30, 2020.  Two participation interests in commercial real estate loans aggregating $10.0 million, or 1.5% of total loans, each entered into a subsequent deferral period during October 2020.  With respect to one of the two loan participations on deferral in the amount of $3.0 million, the Company was granted a put option as an integral part of the purchase of the participation from the lead lender. The Company has notified the lead lender that it is exercising the put option. These deferments were not considered to be TDRs as of September 30, 2020 as all applicable borrowers were current as of December 31, 2019 and the request for the deferments were related to the current economic conditions caused by the COVID-19 pandemic, and not by underlying weaknesses within the respective loans. Notwithstanding the foregoing, the Company believes there is a material risk that credit losses and non-performing assets may increase due to current economic conditions. During the fiscal year ending September 30, 2020,

59

the Company recorded charge offs of  $145,000 and recoveries aggregating $30,000. During the fiscal year ended September 30, 2019, the Company recorded two charge offs amounting to $38,000. Recoveries of  $166,000 were recognized during the fiscal year ended September 30, 2019.

The allowance for loan losses totaled $8.3 million, or 1.4% of total loans and 63.7% of total non-performing loans at September 30, 2020 as compared to $5.4 million, or 0.9% of total loans and 38.7% of total non-performing loans at September 30, 2019. The Company believes that the allowance for loan losses at September 30, 2020 was sufficient to cover all inherent and known losses associated with the loan portfolio at such date.

2019 vs. 2018. The Company recorded a provision for loan losses of $100,000 for the fiscal year ended September 30, 2019, compared to a provision for loan losses of $810,000 for fiscal 2018 primarily due to the slight decrease in the size of the loan portfolio and to a lesser degree, the recoveries received on previously charged-off loans, partially offset by the shift in the loan portfolio’s composition. During the fiscal year ending September 30, 2019, the Company recorded charge offs amounting to $38,000 and recoveries of $166,000. During the fiscal year ended September 30, 2018, primarily due to the increase in commercial and construction loans. For the year ended September 30, 2017, the Company established a provision for loan losses of $3.0 million. The large provision during the year ended September 30, 2017 was primarily due to the $1.9 million non-cash charge-off incurred in the quarter ended March 31, 2017 related to the lending relationship which involved the planned development of 169 residential lots. The Bank and the borrower are in litigation and no resolution of the situation has been arrived at as of the date hereof in part due to the bankruptcy filing by the borrower effected in June 2017. In light of the status of both the litigation as well as the progress of construction of the project, the Company recorded a $1.9 million non-cash charge-off during the quarter ended March 31, 2017. The remaining portioncharge offs of the provision recorded during the year ended September 30, 2017 was related to the increase in the outstanding balance$137,000 and recoveries of loans. The loans acquired from Polonia Bancorp initially did not have any impact on the allowance for loan losses, because they were acquired at their fair value. Any write-downs to fair value were reflected in the one-time merger-related charge. In the event that the credit quality of any loans acquired from Polonia Bancorp credit should deteriorate in the future, additional provisions may be required. See “Item 3. Legal Proceedings”.

$28,000.

The allowance for loan losses totaled $5.4 million, or 0.9% of total loans and 38.7% of total non-performing loans (which includes loans acquired from Polonia Bancorp, as of January 1, 2017 at their fair value) at September 30, 2019 as compared to $5.2 million, or 0.9% of total loans and 38.6% of total non-performing loans (which included loans acquired from Polonia Bank at their fair value) at September 30, 2018 as compared to $4.5 million, or 0.8% of total loans and 29.0% of total non-performing loans at September 30, 2017.2018. The Company believes that the allowance for loan losses at September 30, 20182019 was sufficient to cover all knowninherent and inherentknown losses associated with the loan portfolio at such date.

2017 vs. 2016. The Company established a provision for loan losses of $3.0 million for the year ended September 30, 2017 primarily due to the aforementioned $1.9 million charge-off as compared to $325,000 for fiscal year 2016. The allowance for loan losses totaled $4.5 million, or 0.8% of total loans and 29.0% of total non-performing loans (which included loans acquired from Polonia Bancorp at their fair-value) at September 30, 2017 as compared to $3.3 million, or 0.9% of total loans and 20.6% of total non-performing loans at September 30, 2016.

68

Non-interest Income.

20182020 vs. 2017.2019. With respect to the year ended September 30, 2018,2020, non-interest income amounted to $2.5$8.1 million compared with $2.2$3.1 million for fiscal 2017.2019. The increase experienced in fiscal 2108the 2020 period was primarily attributable to the recognitiongain on sale of $808,000 ininvestment securities totaling  $6.0 million compared to gains of totaling $1.1 million during the third quarter of fiscal 2018 associated with the unwinding of two cash flow hedges.2019.  The hedgesinvestment securities sales were unwoundconsummated to lockrecognize gains in the embedded gains of the hedge instruments. These gains were partially offset by losses incurred on the sale of securities yielding below current market yieldsportfolio in order to better positiontake advantage of the securities portfoliohistorically low interest rate environment which has resulted in a rising rate environment. The proceeds fromsignificant appreciation in the sales were used to invest in higher yielding loan and investment products.fair value of such investments.

20172019 vs. 2016.2018. With respect to the year ended September 30, 2017,2019, non-interest income amounted to $2.2$3.1 million compared with $1.3$2.5 million for fiscal 2016.2018. The increase experienced in 2017the 2019 period was primarily attributable to the additionrecognition of five full-service financial centers, along withgain on sale of investment securities in fiscal the related customer deposit base (increased ATM fees2019 as well as account service charges and transaction fees), acquired from Polonia Bancorp along with an increased returncompared to a loss incurred on bank owned life insurance (“BOLI”) as a resultthe sale of available-for-sale securities in fiscal 2018. Non-interest income in fiscal 2018 included the increase in the amount of BOLI due to the purchaserecognition of an additional $10.0 millionaggregate of BOLI in$808,000 of gains resulting from the first quarterunwinding of the fiscal year.

two cash flow hedges.

Non-interest Expense.

20182020 vs. 2017.2019. For the fiscal year ended September 30, 2018,2020, non-interest expense decreased $927,000,increased $660,000 to $15.6$16.7 million, compared to $16.6in fiscal 2019. The increase was due in largepart to the hiring of additional personnel in our lending operations to support our expanded lending activities.  Partially offsetting this increase for the fiscal year ended September 30, 2020 was a decrease in occupancy and advertising expense as the Company maintained its focus on the continued implementation of operating efficiencies. The continued improvement of the Company’s efficiency ratio reflects the success of management’s efforts.  The efficiency ratio for the fiscal year ended September 30, 2020 improved to 54.1% from 58.4% for fiscal 2019.

2019 vs. 2018. For  the fiscal year ended September 30, 2019, non-interest expense increased $631,000, to $16.1 million compared to $15.6 million for fiscal year 2017.2018. The primary reason for the higher level of non-interest expense experienced during the year ended September 30, 2017,2019, as compared to fiscal year 2018, was the one-time merger-related chargehiring of additional personnel for our lending operations and an increase in the 2017 period of approximately $2.5 million, pre-tax, incurred inFDIC deposit insurance expense. In connection with the completionBank’s increased emphasis on the origination of commercial real estate and construction and land development loans and the Polonia Bancorp acquisitionattendant increase in January 2017,such portfolios, the decline being partially offset primarily by Bank has expanded its lending department operations. Partially offsetting these

60

increases were decreases in employee expensesprofessional fees and professional services.

2017 vs. 2016.For the year ended September 30, 2017, non-interestoccupancy expense increased $5.3 million, to $16.6 million compared to $11.3 million for fiscal year 2016. The primary reason for the increase for year ended September 30, 2017 as compared to fiscal year 2016 was the additional operating expense resulting from the Polonia Bancorp acquisition which added five financial centers to our branch network as well as additional personnel. In addition, the Company recorded a one-time merger related chargemaintained its focus on the continued implementation of approximately $2.5 million, pre-tax, during the quarter ended March 31, 2017.operating efficiencies.

Income Tax Expense.Expense.

20182020 vs. 20172019. For the year ended September 30, 2018,2020, the Company recorded income tax expense of $1.6 million, compared to $1.9 million for fiscal 2019. The reduction in income tax expense in fiscal 2020 was primarily due to tax benefits recognized as a result of stock compensation plans.

2019 vs. 2018. For the year ended September 30, 2019, the Company recorded income tax expense of $1.9 million, compared to $3.7 million resultingfor fiscal 2018. The reduction in an effectiveincome tax expense in fiscal 2019 primarily reflected the benefit throughout fiscal 2019 associated with the fully implemented decrease in the federal statutory income tax rate, of %, comparedeffective January 1, 2018, reducing the Company’s statutory tax rate to $941,000 for fiscal 2017.21%. The $3.7 million tax expense for the fiscal year ended September 30, 2018 included a one-time non-cash charge of $1.8 million related to a revaluation of the Company’s deferred tax assets due to the Tax Cuts and Jobs Acttax legislation enacted in December 2017 that reduced the statutory corporatefederal income tax rate from 35% to 21%. DuringHowever, since the Company has a September 30 fiscal 2018, commencing withyear, the quarter ended December 31, 2017,decrease in the Company’s statutory corporate income tax rate was reduced to 24.25% as compared to companies which are calendar year tax reporting companies whose statutory rate decreased to 21% starting January 1, 2018. Effectivenot fully phased in until October 1, 2018,2018.

COVID-19 Related Information

As noted above, in response to the Company’s statutory tax rate was reducedcurrent situation surrounding the COVID-19 pandemic, the Company is providing assistance to 21%.its customers in a variety of ways.   The Company’s tax obligationCompany  participated in the PPP loan program offered under the CARES Act as a Small Business Administration (“SBA”) lender. During the quarter ended June 30, 2020, we had originated 63 requests for PPP loans totaling approximately $5.1 million. These loans were sold during the yearquarter ended September 30, 2017 was reduced significantly due2020 at a net gain of $111,000.  No additional PPP loans were originated during the fourth quarter of fiscal 2020. We are working closely with our loan customers to effectively manage our portfolio through the ongoing uncertainty surrounding the duration, impact and government response to the one-time merger-related chargecrisis.

The primary method of relief is to allow the borrower to defer their loan payments for three months (and extending the term of the loan accordingly). The CARES Act and regulatory guidelines suspend temporarily the determination of certain loan modifications related to the Polonia Bancorp acquisition and a one-time loan write-down described previously, both of whichCOVID-19 pandemic from being treated as TDRs. See “Business Lending Activities - Asset Quality” above”.

While the Company’s banking operations were recorded duringnot restricted by the three months ended March 31, 2017.

2017 vs. 2016. For the year ended September 30, 2017,government stay-at-home orders, the Company recorded income tax expense of $941,000 resulting in an effective tax rate of 25.3%, comparedtook steps to $1.3 millionprotect its employees and an effective tax rate of 31.6%customers by providing for fiscal 2016. The effective tax rateremote working for many employees, enhancing cleaning procedures for the year ended September 30, 2017 was lower dueCompany’s offices, in particular its branch offices, requiring face masks to be worn by employees and maintaining appropriate  social distancing in our offices. The Company continues to assess and monitor the increased tax-free income from BOLI combined with tax benefits associated with the exercise of stock optionsCOVID-19 pandemic and the vesting of restricted stock awards.will take additional such steps as are necessary to protect its employees and assist its depositor and borrower customers during this difficult time.

69

Liquidity and Capital Resources

Liquidity is the ability to maintain cash flows that are adequate to fund operations and meet other obligations on a timely and cost effectivecost-effective basis in various market conditions. The ability of the Company to meet its current financial obligations is a function of balance sheet structure, the ability to liquidate assets and the availability of alternative sources of funds. To meet the needs of the clients and manage the risk of the Company, the Company engages in liquidity planning and management.

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 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 September 30, 2018,2020, our cash and cash equivalents amounted

61

to $48.2$117.1 million. In addition, our available for saleavailable-for-sale investment and mortgage-backed securities amounted to an aggregate of $306.2$420.4 million at September 30, 2018.

2020.

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 September 30, 2018,2020, we had certificates of deposit maturing within the next 12 months amounting to $412.0$121.4 million. We anticipate that a significant portion of the maturing certificates of deposit will be redeposited with us unless we determine to lower rates to below those of our competition in order to facilitate the reduction of higher cost deposits during periods when there is excess cash on hand or in order to satisfy our asset/liability goals. There were no deposits as of September 30, 20182020 requiring the pledging of collateral.

In addition to cash flows from loan and securities payments and prepayments as well as from sales of available for sale securities, we have significant borrowing capacity available to fund liquidity requirements should the need arise. As of September 30, 2018,2020, the Bank had $265.7$103.4 million of available borrowing capacity from the FHLB of Pittsburgh along with a line of credit that has been established with the Federal Reserve Bank of Philadelphia and a $12.5 million line of credit with Atlantic Community Bankers Bank.Bank (“ACBB”). In addition, the Bank has the ability to generate brokered certificates of deposit (and has used such deposits on occasion, including in fiscal 2018)2020).

The Company is a separate legal entity from the Bank and must provide for its own liquidity and pay its own operating expenses. Sources of capital and liquidity for the Company include distributions from the Bank and the issuance of debt or equity securities. At September 30, 2020, the Company (on an unconsolidated basis) had liquid assets of $1.0 million.

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

Impact of Inflation and Changing Prices

The consolidated financial statements, accompanying notes, and related financial data of Prudential Bancorp presented in Item 8, Financial Statements and Supplementary Data, in Part II of this Annual Report on Form 10-K have been prepared in accordance with U.S. GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering the changes in purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of operations. Most of our assets and liabilities are monetary in nature; therefore, the impact of interest rates has a greater impact on our performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

70

Exposure to Changes in Interest Rates

Gap Analysis.The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive” and by monitoring the Bank’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 table on the next page sets forth the amounts of our interest-earning assets and interest-bearing liabilities outstanding at September 30, 2018,2020, 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

62

contractual maturity of the asset or liability. The table sets forth an approximation of the projected repricing of assets and liabilities at September 30, 2018,2020, 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 6.4%12.0% to 30.7%32.4%. The annual prepayment rate for mortgage-backed securities is assumed to range from 0.9%0.5% to 17.3%43.0%. 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 an internal analysis of our accounts up to a maximum of ten years.

More than

More than

More than

3 Months

3 Months

1 Year

3 Years

More than

Total

    

or Less

    

to 1 Year

    

to 3 Years

    

to 5 Years

    

5 Years

    

Amount

(Dollars in Thousands)

Interest-earning assets(1):

 

  

 

  

 

  

 

  

 

  

 

  

Investment and mortgage-backed securities

$

31,507

$

63,714

$

69,828

$

107,628

$

153,366

$

426,043

Loans receivable(2)

 

169,594

 

99,265

 

173,603

 

70,749

 

85,186

 

598,397

Other interest-earning assets (3)

 

114,300

 

1,106

 

498

 

498

 

 

116,402

Total interest-earning assets

$

315,401

$

164,085

$

243,929

$

178,875

$

238,552

$

1,140,842

Interest-bearing liabilities:

 

  

 

  

 

  

 

  

 

  

 

  

Savings accounts

$

4,748

$

13,348

$

19,607

$

55,957

$

130,775

$

224,435

Checking and money market accounts

 

7,440

 

22,319

 

21,062

 

138,641

 

87,442

 

276,904

Certificate accounts

 

36,585

 

83,975

 

73,729

 

75,321

 

 

269,610

Advances from Federal Home Loan Bank

 

5,403

 

22,928

 

163,924

 

92,998

 

 

285,253

Real estate tax escrow accounts

 

2,798

 

 

 

 

 

2,798

Total interest-bearing liabilities

$

56,974

$

142,570

$

278,322

$

362,917

$

218,217

$

1,059,000

Interest-earning assets less interest-bearing liabilities

$

258,427

$

21,515

$

(34,393)

$

(184,042)

$

20,335

$

81,842

Cumulative interest-rate sensitivity gap(4)

$

258,427

$

279,942

$

245,549

$

61,507

$

81,842

 

  

Cumulative interest-rate gap as a percentage of total assets at September 30, 2020

 

21.12

%  

 

22.88

%  

 

20.07

%  

 

5.03

%  

 

6.69

%  

 

  

Cumulative interest-earning assets as a percentage of cumulative interest-bearing liabilities at September 30, 2020

 

553.59

%  

 

240.29

%  

 

151.38

%  

 

107.32

%  

 

107.73

%  

 

  

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     More than  More than  More than       
  3 Months  3 Months  1 Year  3 Years  More than  Total 
  or Less  to 1 Year  to 3 Years  to 5 Years  5 Years  Amount 
  (Dollars in Thousands) 
Interest-earning assets(1):                        
Investment and mortgage-backed securities $5,317  $31,320  $40,965  $77,378  $211,059  $366,039 
Loans receivable(2)  145,628   89,907   148,286   95,747   123,364   602,932 
Other interest-earning assets (3)  45,714   -   8,940   249   -   54,903 
Total interest-earning assets $196,659  $121,227  $198,191  $173,374  $334,423  $1,023,874 
                         
Interest-bearing liabilities:                        
Savings accounts $3,007  $8,049  $13,606  $13,131  $59,073  $96,866 
Checking and money market accounts  3,724   11,172   18,428   14,886   61,685   109,895 
Certificate accounts  171,281   240,708   95,296   56,535   -   563,820 
Advances from Federal Home Loan Bank  3,725   13,187   36,852   65,863   35,056   154,683 
Real estate tax escrow accounts  2,083   -   -   -   -   2,083 
Total interest-bearing liabilities $183,820  $273,116  $164,182  $150,415  $155,814  $927,347 
                         
Interest-earning assets less interest-bearing liabilities $12,839  $(151,889) $34,009  $22,959  $178,609  $96,527 
                         
Cumulative interest-rate sensitivity gap(4) $12,839  $(139,050) $(105,041) $(82,082) $96,527     
                         
Cumulative interest-rate gap as a percentage of total assets at September 30, 2018  1.19%  -12.86%  -9.72%  -7.59%  8.93%    
                         
Cumulative interest-earning assets as a percentage of cumulative interest-bearing liabilities at September 30, 2018  106.98%  69.57%  83.09%  89.36%  110.41%    

(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, loans receivable includes non-performing loans, gross of the allowance for loan losses undisbursed loan funds,and unamortized discounts and deferred loan fees.
(3)Includes restricted stock in the FHLB of Pittsburgh and ACBB.
(4)Interest-rate sensitivity gap represents the difference between total interest-earning assets and total interest-bearing liabilities.

Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as 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

63

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.

72

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 September 30, 20182020 and reflects the changes to NPV as a result of immediate and sustained changes in interest rates as indicated.

Change in     

 

Interest Rates    NPV as % of Portfolio 

NPV as % of Portfolio

In Basis Points Net Portfolio Value  Value of Assets 

Net Portfolio Value

Value of Assets

 

(Rate Shock) Amount  $ Change  % Change  NPV Ratio  Change 

    

Amount

    

$Change

    

% Change

    

NPV Ratio

    

Change

 

 (Dollars in Thousands) 
           

(Dollars in Thousands)

 

300 $105,350  $(58,209)  -35.59%  10.91%  -4.27%

$

152,313

$

(118)

 

(0.08)

%  

13.30

%  

0.97

%

200 $122,951  $(40,608)  -24.83%  12.29%  -2.89%

$

160,921

$

8,490

 

5.57

%  

13.61

%  

1.28

%

100 $140,741  $(22,818)  -13.95%  13.59%  -1.59%

$

159,785

$

7,354

 

4.82

%  

13.19

%  

0.86

%

Static $163,559  $-   ---   15.18%  --- 

$

152,431

$

 

 

12.33

%  

(100) $176,893  $13,334   8.15%  15.91%  0.73%

$

148,334

$

(4,097)

 

(2.69)

%  

11.78

%  

(0.55)

%

(200) $178,019  $14,460   8.84%  15.69%  0.51%

$

166,013

$

13,582

 

8.91

%  

12.96

%  

0.63

%

(300) $176,144  $12,585   7.69%  15.28%  0.10%

$

188,616

$

36,185

 

23.74

%  

14.49

%  

2.16

%

At September 30, 2017,2019, the Company’s NPV was $167.7$159.6 million or 18.6%12.5% of the market value of assets. Following a 200 basis point increase in interest rates, the Company’s “post shock” NPV would have been $133.6$133.0 million or 16.0%11.0% of the market value of assets, a decline of approximately 20.4%16.7%. The change in the NPV ratio or Company’s sensitivity measure was a decrease of 259151 basis points.

As is the case with the GAP Table, certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in NPV 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.

73

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Exposure to Changes in Interest Rates.”

74

Item 8. Financial Statements and Supplementary Data

64

Graphic

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of Prudential Bancorp, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated statements of financial condition of Prudential Bancorp, Inc. and subsidiary (the “Company”) as of September 30, 20182020 and 2017,2019, and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders' equity, and changes of cash flow for each of the three years in the period ended September 30, 2018,2020, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 20182020 and 2017,2019, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2018,2020, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of September 30, 2018, based on criteria established inInternal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated December 14, 2018, expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

We have served as the Company's auditor since 2009.

Graphic

/s/ SR Snodgrass, PC.

Cranberry Township, Pennsylvania

December 14, 201818, 2020

Graphic

75

65

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the BoardTable of Directors of Prudential Bancorp, Inc.Contents

Opinion on the Internal Control over Financial Reporting

We have audited Prudential Bancorp, Inc.'s (the “Company”) internal control over financial reporting as of September 30, 2018, based on criteria established inInternal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2018, based on criteria established inInternal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statements of financial condition of the Company as of September 30, 2018 and 2017, and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended September 30, 2018, of the Company and our report dated December 14, 2018, expressed an unqualified opinion. 

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Report onManagement’s Report of Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

76

Definition and Limitations of Internal Control over Financial Reporting

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ SR Snodgrass, PC

Cranberry Township, Pennsylvania

December 14, 2018

77

PRUDENTIAL BANCORP, INC.

CONSOLIDATED STATEMENTSTATEMENTS OF FINANCIAL CONDITION

  September 30, 
  2018  2017 
  (Dollars in Thousands) 
ASSETS        
         
Cash and amounts due from depository institutions $2,457  $2,274 
Interest-bearing deposits  45,714   25,629 
         
Total cash and cash equivalents  48,171   27,903 
         
Certificates of deposit  1,604   1,604 
Investment and mortgage-backed securities available for sale (amortized cost—September 30, 2018, $316,719; September 30, 2017, $180,087)  306,187   178,402 
Investment and mortgage-backed securities held to maturity (fair value—September 30, 2018, $55,927; September 30, 2017, $60,179)  59,852   61,284 
Loans receivable—net of allowance for loan losses (September 30, 2018, $5,167; September 30, 2017, $4,466)  602,932   571,343 
Accrued interest receivable  3,825   2,825 
Real estate owned  1,026   192 
Restricted bank stock—at cost  7,585   6,002 
Office properties and equipment—net  7,439   7,804 
Bank owned life insurance (BOLI)  28,691   28,048 
Deferred income taxes, net  4,655   4,091 
Goodwill  6,102   6,102 
Core deposit intangible  571   709 
Prepaid expenses and other assets  2,530   3,231 
TOTAL ASSETS $1,081,170  $899,540 
         
LIABILITIES AND STOCKHOLDERS' EQUITY        
         
LIABILITIES:        
Deposits:        
Non-interest-bearing $13,677  $9,375 
Interest-bearing  770,581   626,607 
Total deposits  784,258   635,982 
Advances from Federal Home Loan Bank -Short Term  10,000   20,000 
Advances from Federal Home Loan Bank - Long Term  144,683   94,318 
Accrued interest payable  3,232   1,933 
Advances from borrowers for taxes and insurance  2,083   2,207 
Accounts payable and accrued expenses  8,505   8,921 
         
Total liabilities  952,761   763,361 
         
STOCKHOLDERS' EQUITY:        
Preferred stock, $.01 par value, 10,000,000 shares authorized; none issued  -   - 
Common stock, $.01 par value, 40,000,000 shares authorized; 10,819,006 issued and 8,987,356 outstanding at September 30, 2018; 10,819,006 issued and 9,008,125 outstanding  at September 30, 2017  108   108 
Additional paid-in capital  118,345   118,751 
Treasury stock, at cost: 1,831,650 shares  at September 30, 2018 and 1,810,881 shares at September 30, 2017  (27,744)  (26,707)
Retained earnings  45,854   44,787 
Accumulated other comprehensive loss  (8,154)  (760)
         
Total stockholders' equity  128,409   136,179 
         
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,081,170  $899,540 

September 30, 

2020

    

2019

(Dollars in Thousands)

ASSETS

  

  

Cash and amounts due from depository institutions

$

2,781

$

2,395

Interest-bearing deposits

 

114,300

 

45,573

 

  

 

  

Total cash and cash equivalents

 

117,081

 

47,968

Certificates of deposit

 

2,102

 

2,351

Investment and mortgage-backed securities available for sale at fair value

 

420,364

 

512,822

Investment and mortgage-backed securities held to maturity (fair value—September 30, 2020, $24,330; September 30, 2019, $69,507)

 

22,860

 

68,635

Equity securities

51

95

Loans receivable—net of allowance for loan losses (September 30, 2020, $8,303; September 30, 2019, $5,393)

 

588,300

 

585,456

Accrued interest receivable

 

4,699

 

4,549

Real estate owned

 

 

348

Restricted bank stock—at cost

 

12,532

 

16,406

Office properties and equipment—net

 

7,129

 

7,206

Bank owned life insurance (BOLI)

 

32,498

 

31,841

Deferred income taxes, net

 

3,902

 

2,358

Goodwill

 

6,102

 

6,102

Core deposit intangible

 

340

 

448

Prepaid expenses and other assets

 

5,393

 

2,849

TOTAL ASSETS

$

1,223,353

$

1,289,434

 

 

  

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

  

 

  

 

48.09%

 

45.40%

LIABILITIES:

 

  

 

  

Deposits:

 

  

 

  

Non-interest-bearing

$

30,002

$

16,949

Interest-bearing

 

740,947

 

728,495

Total deposits

 

770,949

 

745,444

Advances from Federal Home Loan Bank - Short Term

 

25,000

 

90,000

Advances from Federal Home Loan Bank - Long Term

 

260,253

 

286,904

Accrued interest payable

 

3,374

 

4,328

Advances from borrowers for taxes and insurance

 

2,798

 

2,332

Interest rate swap contracts

 

20,960

 

11,241

Accounts payable and accrued expenses

 

10,902

 

9,574

Total liabilities

 

1,094,236

 

1,149,823

STOCKHOLDERS’ EQUITY:

 

  

 

  

Preferred stock, $.01 par value, 10,000,000 shares authorized; NaN issued

 

 

Common stock, $.01 par value, 40,000,000 shares authorized; 10,819,006 issued and 8,138,675 outstanding at September 30, 2020; 10,819,006 issued and 8,889,447 outstanding  at September 30, 2019

 

108

 

108

Additional paid-in capital

 

118,270

 

118,384

Treasury stock, at cost: 2,680,331 shares  at September 30, 2020 and 1,929,559 shares at September 30, 2019

 

(39,207)

 

(29,698)

Retained earnings

 

52,889

 

49,625

Accumulated other comprehensive (loss) income

 

(2,943)

 

1,192

Total stockholders’ equity

 

129,117

 

139,611

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$

1,223,353

$

1,289,434

See notes to consolidated financial statements.

78

66

PRUDENTIAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

  Years Ended September 30, 
  2018  2017  2016 
  (Dollars in Thousands Except Per Share Amounts) 
INTEREST INCOME:            
Interest and fees on loans $25,367  $20,107  $12,909 
Interest on mortgage-backed securities  4,077   2,947   2,494 
Interest and dividends on investments  5,015   3,180   1,979 
Interest on interest-bearing deposits  392   109   101 
             
Total interest income  34,851   26,343   17,483 
             
INTEREST EXPENSE:            
Interest on deposits  7,386   3,930   2,861 
Interest on advances from FHLB - short term  347   184   95 
Interest on advances from FHLB - long term  2,404   1,152   370 
             
Total interest expense  10,137   5,266   3,326 
             
NET INTEREST INCOME  24,714   21,077   14,157 
             
PROVISION FOR LOAN LOSSES  810   2,990   225 
             
NET INTEREST  INCOME AFTER PROVISION FOR LOAN LOSSES  23,904   18,087   13,932 
             
NON-INTEREST INCOME:            
Fees and other service charges  668   655   464 
Gain on sale of mortgage-backed securities available for sale  (376)  235   418 
Gain on sale of loans  -   52   11 
Swap income  1,122   -   - 
Earnings from BOLI  639   677   333 
Other  447   579   111 
             
Total non-interest income  2,500   2,198   1,337 
             
NON-INTEREST EXPENSES:            
Salaries and employee benefits  8,273   7,468   6,518 
Data processing  733   697   456 
Professional services  1,866   1,433   1,075 
Office occupancy  1,079   962   670 
Depreciation  625   553   325 
Director compensation  234   282   424 
Federal Deposit Insurance Corporation premiums  278   162   396 
Real estate owned expense  176   (13)  19 
Advertising  246   214   103 
Merger related expenses  -   2,486   300 
Core deposit amortization  138   112   - 
Other  1,991   2,210   1,004 
             
Total non-interest expenses  15,639   16,566   11,290 
             
INCOME BEFORE INCOME TAXES  10,765   3,719   3,979 
             
INCOME TAXES:            
Current  2,429   801   1,275 
Deferred  expense (benefit)  1,272   140   (16)
             
Total  3,701   941   1,259 
             
NET INCOME $7,064  $2,778  $2,720 
             
BASIC EARNINGS PER SHARE $0.80  $0.33  $0.37 
             
DILUTED EARNINGS PER SHARE $0.78  $0.32  $0.36 
             
DIVIDENDS PER SHARE $0.70  $0.12  $0.12 

Years Ended September 30, 

2020

    

2019

    

2018

(Dollars in Thousands Except Per Share Amounts)

INTEREST INCOME:

Interest and fees on loans

$

25,141

$

26,737

$

25,367

Interest on mortgage-backed securities

 

9,197

 

9,561

 

4,077

Interest and dividends on investments

 

6,942

 

6,782

 

5,015

Interest on interest-bearing deposits

 

947

 

960

 

392

Total interest income

 

42,227

 

44,040

 

34,851

INTEREST EXPENSE:

 

  

 

  

 

  

Interest on deposits

 

10,902

 

13,160

 

7,386

Interest on advances from FHLB - short term

 

1,056

 

790

 

347

Interest on advances from FHLB - long term

 

7,467

 

5,339

 

2,404

Total interest expense

 

19,425

 

19,289

 

10,137

NET INTEREST INCOME

 

22,802

 

24,751

 

24,714

PROVISION FOR LOAN LOSSES

 

3,025

 

100

 

810

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

 

19,777

 

24,651

 

23,904

NON-INTEREST INCOME:

 

  

 

  

 

  

Fees and other service charges

 

540

 

661

 

668

Gain (loss) on sale of investment and mortgage-backed securities available for sale

 

5,993

 

1,057

 

(376)

Holding (loss) gain on equity securities

 

(44)

 

58

 

Gain on sale of loans

 

488

 

9

 

Swap (loss) income

 

(56)

 

158

 

1,122

Earnings from bank owned life insurance

 

656

 

645

 

639

Other

 

526

 

506

 

447

Total non-interest income

 

8,103

 

3,094

 

2,500

NON-INTEREST EXPENSES:

 

  

 

  

 

  

Salaries and employee benefits

 

9,562

 

8,857

 

8,273

Data processing

 

857

 

789

 

733

Professional services

 

1,698

 

1,460

 

1,866

Office occupancy

 

856

 

968

 

1,079

Depreciation

 

484

 

619

 

625

Director compensation

 

246

 

255

 

234

Federal Deposit Insurance Corporation deposit insurance premiums

 

701

 

472

 

278

Real estate owned expense

 

165

 

81

 

176

Advertising

 

186

 

279

 

246

Core deposit amortization

 

108

 

123

 

138

Other

 

1,862

 

2,162

 

1,991

Total non-interest expenses

 

16,725

 

16,065

 

15,639

INCOME BEFORE INCOME TAXES

 

11,155

 

11,680

 

10,765

INCOME TAXES:

 

  

 

  

 

  

Current

 

2,045

 

2,338

 

2,429

Deferred (benefit) expense

 

(445)

 

(188)

 

1,272

Total income tax expense

 

1,600

 

2,150

 

3,701

NET INCOME

$

9,555

$

9,530

$

7,064

BASIC EARNINGS PER SHARE

$

1.12

$

1.09

$

0.80

DILUTED EARNINGS PER SHARE

$

1.12

$

1.07

$

0.78

DIVIDENDS PER SHARE

$

0.71

$

0.65

$

0.70

See notes to consolidated financial statements.

79

67

PRUDENTIAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) INCOME

  Years Ended September 30, 
  2018  2017  2016 
  (Dollars in thousands) 
          
Net income $7,064  $2,778  $2,720 
             
Unrealized holding (loss) gain on available-for-sale securities  (9,077)  (2,830)  1,801 
             
Tax effect  1,906   962   (612)
             
Reclassification adjustment for net gains (losses) realized in net income  310   (235)  (418)
             
Tax effect  (65)  80   142 
             
Unrealized holding gain (loss) on interest rate swaps  599   705   (202)
             
Tax effect  (126)  (240)  69 
             
Reclassification adjustment for gain on interest rate swap  (808)  -   - 
             
Tax effect  170   -   - 
             
Total other comprehensive (loss) income  (7,091)  (1,558)  780 
             
Comprehensive (loss) income $(27) $1,220 $3,500 

Years Ended September 30, 

2020

    

2019

    

2018

(Dollars in Thousands)

Net income

$

9,555

$

9,530

$

7,064

 

  

 

  

 

  

Unrealized holding gain (loss) on available-for-sale securities

9,141

21,871

(9,077)

Tax effect

(1,920)

(4,593)

1,906

Reclassification adjustment for net securities (gains) losses realized in net income

(5,993)

(1,057)

310

Tax effect

1,259

222

(65)

 

 

 

  

Unrealized holding (loss) gain on interest rate swaps

 

(8,382)

 

(8,952)

 

599

 

  

 

  

 

  

Tax effect

 

1,760

 

1,880

 

(126)

 

  

 

  

 

  

Reclassification adjustment for gain on interest rate swaps

 

 

 

(808)

 

  

 

  

 

  

Tax effect

 

 

 

170

 

  

 

  

 

  

Total other comprehensive income (loss)

 

(4,135)

 

9,371

 

(7,091)

 

  

 

  

 

  

Comprehensive income (loss)

$

5,420

$

18,901

$

(27)

See notes to consolidated financial statements

80

68

PRUDENTIAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

                 Accumulated    
     Additional  Unearned        Other  Total 
  Common  Paid-In  ESOP  Treasury  Retained  Comprehensive  Stockholders' 
  Stock  Capital  Shares  Stock  Earnings  Income (Loss)  Equity 
  (Dollars in Thousands) 
BALANCE, SEPTEMBER 30, 2015 $95  $95,286  $(4,926) $(14,691) $41,219  $18  $117,001 
                             
Net income                  2,720       2,720 
Other comprehensive income                      780   780 
Dividends paid ($0.12 per share)                  (895)      (895)
Purchase of treasury stock (445,881 shares)              (7,047)          (7,047)
Stock option expense      455                   455 
Restricted shares award expense      462                   462 
Treasury stock used for employee benefit plan (41,800 shares)      (640)      640           - 
ESOP shares committed to be released (32,064 shares)      150   376               526 
                             
BALANCE, September 30, 2016  95   95,713   (4,550)  (21,098)  43,044   798   114,002 
                             
Net income                  2,778       2,778 
Other comprehensive loss                      (1,558)  (1,558)
Dividends paid ($0.12 per share)                  (1,035)      (1,035)
Issuance of common stock  13   21,801                   21,814 
Purchase of treasury stock (43,735 shares)              (1,083)          (1,083)
Terminate ESOP (303,115 shares)      733   4,456   (5,189)          - 
Treasury stock used for employee benefit plan (35,234 shares)      (663)      663           - 
Stock option expense      531                   531 
Restricted shares award expense      578                   578 
ESOP shares committed to be released (8,879 shares)      58   94               152 
BALANCE, September 30, 2017  108   118,751   -   (26,707)  44,787   (760)  136,179 
                             
Net income                  7,064       7,064 
Other comprehensive loss                      (7,091)  (7,091)
Dividends paid ($0.70 per share)                  (6,300)      (6,300)
Purchase of treasury stock (223,520 shares)              (4,037)          (4,037)
Treasury stock used for employee benefit plan (202,751 shares)      (1,511)      3,000           1,489 
Stock option expense      540                   540 
Restricted shares award expense      565                   565 
Reclassification due to change in federal tax rate                  303   (303)  - 
                             
BALANCE, September 30, 2018 $108  $118,345  $-  $(27,744) $45,854  $(8,154) $128,409 

Additional

Other

Total

Common

Paid-In

Treasury

Retained

Comprehensive

Stockholders’

    

Stock

    

Capital

Stock

    

Earnings

    

Income (Loss)

    

Equity

(Dollars in Thousands)

BALANCE, September 30, 2017

$

108

$

118,751

$

(26,707)

$

44,787

$

(760)

$

136,179

Net income

 

 

 

  

 

7,064

 

  

 

7,064

Other comprehensive loss

 

 

 

  

 

  

 

(7,091)

 

(7,091)

Dividends paid ($0.70 per share)

 

 

 

 

(6,300)

 

  

 

(6,300)

Purchase of treasury stock (223,520 shares)

 

 

 

(4,037)

 

  

 

  

 

(4,037)

Treasury stock used for employee benefit plan (202,751 shares)

 

 

(1,511)

 

3,000

 

  

 

  

 

1,489

Stock option expense

 

 

540

 

  

 

  

 

  

 

540

Restricted share award expense

565

 

  

 

  

565

Reclassification due to change in federal tax rate

 

  

 

303

 

(303)

BALANCE, September 30, 2018

 

108

 

118,345

 

(27,744)

 

45,854

 

(8,154)

 

128,409

Net income

 

 

 

 

9,530

 

  

 

9,530

Other comprehensive income

 

 

 

  

 

  

 

9,371

 

9,371

Dividends paid ($0.65 per share)

 

 

 

 

(5,784)

 

  

 

(5,784)

Purchase of treasury stock (207,543 shares)

 

 

 

(3,648)

 

  

 

  

 

(3,648)

Treasury stock used for employee benefit plan (109,634 shares)

 

 

(1,154)

 

1,694

 

  

 

  

 

540

Stock option expense

 

 

573

 

  

 

  

 

  

 

573

Restricted shares award expense

 

 

620

 

  

 

  

 

  

 

620

Reclassification for adoption of ASU 2016-01

 

  

 

25

 

(25)

BALANCE, September 30, 2019

 

108

 

118,384

 

(29,698)

 

49,625

 

1,192

 

139,611

Net income

 

  

 

9,555

 

  

 

9,555

Other comprehensive income

 

  

 

  

 

(4,135)

 

(4,135)

Dividends paid ($0.71 per share)

 

  

 

(6,216)

 

  

 

(6,216)

Purchase of treasury stock (829,388 shares)

 

(10,534)

 

  

 

  

 

(10,534)

Treasury stock used for employee benefit plan (78,616 shares)

 

(811)

 

1,025

 

  

 

  

 

214

Stock option expense

 

353

 

  

 

  

 

  

 

353

Restricted shares award expense

 

344

 

 

  

 

  

 

344

Reclassification for adoption of ASC Topic 842

 

  

 

(75)

 

(75)

BALANCE, September 30, 2020

$

108

$

118,270

$

(39,207)

$

52,889

$

(2,943)

$

129,117

See notes to consolidated financial statements.

81

69

PRUDENTIAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES OF CASH FLOW

  Years Ended September 30, 
  2018  2017  2016 
  (Dollars in Thousands) 
OPERATING ACTIVITIES:            
Net income $7,064  $2,778  $2,720 
Adjustments to reconcile net income to net cash provided by operating activities:            
Provision for loan losses  810   2,990   225 
Depreciation  625   553   325 
Net (amortization) accretion of premiums/discounts  (633)  349   (151)
Amortization of core deposit premium  138   112   - 
Earnings on BOLI  (639)  (677)  (333)
(Accretion) amortization of deferred loan fees and costs  (72)  (31)  177 
Compensation expense of ESOP  -   152   526 
Loss (gain) on sale of investment and mortgage-backed securities  376   (235)  (418)
Writedown of real estate owned  175   -   - 
Gain on sale of real estate owned  (45)  (46)  (56)
Gain on sale of loans  -   (52)  (11)
Proceeds from the sale of loans held for sale  -   2,686   461 
Originations of loans held for sale  -   (2,634)  (450)
Share-based compensation expense  1,105   1,109   917 
Deferred income tax expense (benefit)  1,272   140   (16)
Changes in assets and liabilities which provided (used) cash:            
Accrued interest payable  1,299   530   112 
Other,  net  (172)  (912)  (262)
Accrued interest receivable  (1,000)  (897)  (263)
Net cash provided by operating activities  10,303   5,915   3,503 
INVESTING ACTIVITIES:            
Purchase of investment and mortgage-backed securities held to maturity  (4,480)  (22,647)  (30,500)
Purchase of investment and mortgage-backed securities available for sale  (115,555)  (57,814)  (49,639)
Purchase of corporate debt bonds  (43,299)  (24,381)  (25,495)
Principal collected on loans  90,589   150,561   53,965 
Principal payments received on investment and mortgage-backed securities:            
Held-to-maturity  1,254   1,255   56,988 
Available for sale  15,015   19,228   4,348 
Loans originated or acquired  (123,608)  (218,611)  (87,264)
Purchase of certificates of deposit  -   498   (2,351)
Redemption of certificates of deposit  -   (249)  498 
Purchase of Federal Home Loan Bank stock  (6,780)  (140)  (2,094)
Proceeds from redemption of Federal Home Loan Bank stock  5,197   -   - 
Proceeds from sale of investment and mortgage-backed securities  11,052   20,863   11,560 
Proceeds from sale of Polonia Bancorp, Inc.'s investment portfolio acquired  -   67,154   - 
Proceeds from sale of real estate owned  407   438   925 
Acquisition, net of cash  -   3,966   - 
Purchase of bank owned life insurance  -   (10,000)  - 
Purchases of equipment  (260)  (308)  (177)
Net cash used in investing activities  (170,468)  (70,187)  (69,236)

82

PRUDENTIAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGESCASH FLOWS

Years Ended September 30, 

2020

    

2019

    

2018

(Dollars in Thousands)

OPERATING ACTIVITIES:

  

Net income

$

9,555

$

9,530

$

7,064

Adjustments to reconcile net income to net cash provided by operating activities:

 

  

 

  

 

  

Depreciation

 

484

 

619

 

625

Net amortization/accretion of premiums/discounts and other amortization

 

(1,934)

 

(2,407)

 

(495)

Earnings on BOLI

 

(656)

 

(645)

 

(639)

Provision for loan losses

3,025

100

810

Accretion of deferred loan fees and costs

 

(76)

 

(136)

 

(72)

(Gain) loss on sale of real estate owned

 

(99)

 

46

 

(45)

(Gain) loss on sale of investment and mortgage-backed securities

 

(5,993)

 

(1,057)

 

376

Write-down of real estate owned

 

125

 

75

 

175

Gain on sale of loans

 

(488)

 

(9)

 

Proceeds from the sale of loans

 

31,774

 

612

 

Originations of loans held for sale

 

(12,192)

 

(603)

 

Share-based compensation expense

 

697

 

1,193

 

1,105

Holding losses (gains) on equity securities

45

 

(58)

 

Deferred income tax (benefit) expense

 

(445)

 

(188)

 

1,272

Changes in assets and liabilities which provided (used) cash:

 

  

 

  

 

  

Accrued interest receivable

 

(150)

 

(724)

 

(1,000)

Accrued interest payable

 

(954)

 

1,096

 

1,299

Other, net

 

(430)

 

543

 

(172)

Net cash provided by operating activities

 

22,288

 

7,987

 

10,303

INVESTING ACTIVITIES:

 

  

 

  

 

  

Purchase of investment and mortgage-backed securities available for sale

 

(175,710)

 

(280,303)

 

(158,854)

Purchase of investment and mortgage-backed securities held to maturity

 

(2,500)

 

(11,849)

 

(4,480)

Loans originated or acquired

 

(138,272)

 

(100,371)

 

(123,608)

Principal collected on loans

 

113,170

 

118,404

 

90,589

Principal payments received on investment and mortgage-backed securities:

 

  

 

  

 

  

Held-to-maturity

 

48,216

 

3,002

 

1,254

Available-for-sale

 

138,074

 

24,091

 

15,015

Redemption (purchase) of certificates of deposit

 

249

 

(747)

 

Proceeds from sale of investment and mortgage-backed securities

 

142,055

 

75,639

 

11,052

Proceeds from redemption of FHLB stock

 

10,905

 

5,145

 

5,197

Purchase of FHLB stock

 

(7,031)

 

(13,966)

 

(6,780)

Purchase of BOLI

 

 

(2,500)

 

Proceeds from sale of real estate owned

 

505

 

557

 

407

Purchases of equipment

 

(407)

 

(386)

 

(260)

Net cash provided by (used in) investing activities

 

129,254

 

(183,284)

 

(170,468)

70

PRUDENTIAL BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWFLOWS (continued)

  Year Ended September 30, 
  2018  2017  2016 
  (Dollars in thousands) 
          
FINANCING ACTIVITIES:            
Net decrease in demand deposits, NOW accounts, and savings accounts  (21,241)  (21,609)  (3,548)
Net increase in certificates of deposit  169,821   96,147   27,675 
Net (decrease) increase in FHLB short-term borrowings  (10,000)  (7,000)  20,000 
Proceeds from FHLB long-term borrowings  93,300   17,249   33,245 
Repayment of borrowing from Federal Home Loan Bank  (42,475)  (3,393)  (2,607)
Purchase treasury stock  (2,548)  (6,272)  (7,047)
Cash dividends paid  (6,300)  (1,035)  (895)
Release unallocated shares from ESOP  -   4,456   - 
Repayment of remaining principal balance of ESOP loan  -   733   - 
(Decrease) increase in advances from borrowers for taxes and insurance  (124)  459   78 
Net cash provided by financing activities  180,433   79,735   66,901 
NET INCREASE IN CASH AND CASH EQUIVALENTS  20,268   15,463   1,168 
CASH AND CASH EQUIVALENTS—Beginning of year  27,903   12,440   11,272 
             
CASH AND CASH EQUIVALENTS—End of year $48,171  $27,903  $12,440 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:            
Interest paid on deposits and advances from Federal Home Loan Bank $9,601  $4,736  $3,214 
             
Income taxes paid $2,700  $1,080  $600 
             
SUPPLEMENTAL DISCLOSURES OF NONCASH ITEMS:            
             
Real estate acquired in settlement of loans $1,373  $-  $581 
Acquisition of noncash assets and liabilities :            
Assets acquired:            
Investment securities      67,154     
Loans      160,785     
Premises      6,702     
Core deposit intangible      822     
Goodwill      6,102     
Bank owned life insurance      4,316     
Deferred tax assets      3,492     
FHLB stock      3,399     
Other assets      2,273     
Total assets     $255,045     
Liabilities assumed:            
Deposits     $172,243     
Advances      57,232     
Other liabilities      7,722     
Total liabilities assumed     $237,197     
Net non-cash assets acquired     $17,848     
Cash acquired     $22,911     

Year Ended September 30, 

2020

    

2019

    

2018

(Dollars in thousands)

FINANCING ACTIVITIES:

Net increase (decrease) in demand deposits, NOW accounts, and savings accounts

269,078

 

11,816

 

(21,241)

Net (decrease) increase in certificates of deposit

(243,573)

 

(50,501)

 

169,821

Net (decrease) increase in FHLB short-term advances

(65,000)

 

80,000

 

(10,000)

Proceeds from FHLB advances - long term

 

175,997

 

93,300

Repayment of FHLB advances - long term

(26,650)

 

(33,575)

 

(42,475)

Increase in advances from borrowers for taxes and insurance

466

249

(124)

Cash dividends paid

(6,216)

 

(5,784)

 

(6,300)

Purchase treasury stock

(10,534)

 

(3,108)

 

(2,548)

Net cash (used in) provided by financing activities

(82,429)

 

175,094

 

180,433

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

69,113

 

(203)

 

20,268

CASH AND CASH EQUIVALENTS—Beginning of period

47,968

 

48,171

 

27,903

CASH AND CASH EQUIVALENTS—End of period

$

117,081

$

47,968

$

48,171

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

  

 

  

 

  

Cash paid during the period for:

Interest paid on deposits and advances from FHLB

$

20,379

$

18,531

$

9,601

Income taxes paid

$

3,070

$

2,409

$

2,700

SUPPLEMENTAL DISCLOSURES OF NONCASH ITEMS:

 

  

 

  

 

  

Loans transferred to other real estate owned

$

183

$

$

1,373

Lease adoption:

Right of use lease asset

1,415

Lease liability

1,536

See notes to consolidated financial statements.

83

71

PRUDENTIAL BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED SEPTEMBER 30, 20182019 AND 20172018

1.1.      NATURE OF OPERATIONS AND BASIS OF PRESENTATION

Prudential Bancorp, Inc. (the “Company”) is a Pennsylvania corporation that was incorporated in June 2013 to be the successor corporation of Prudential Bancorp, Inc. of Pennsylvania (“Old Prudential Bancorp”), the former stock holding company for Prudential Bank (the “Bank”), a Pennsylvania-chartered, FDIC-insured savings bank with ten10 full service branches in the Philadelphia area. The Bank‘sBank’s primary federal banking regulator is the Federal Deposit Insurance Corporation. The Bank is principally in the business of attracting deposits from its community through its branch offices and investing those deposits, together with funds from borrowings, and operations, primarily in single-family residential loans.loans and investments. The Bank’s sole subsidiary as of September 30, 20182020 was PSB Delaware, Inc. (“PSB”), a Delaware-chartered corporation established to hold certain investments. As of September 30, 2018,2020, PSB had total assets of $156.7$266.7 million primarily consisting of investment and mortgage-backed securities.

Most of the Company’s business activities are conducted within a few hours’ drive from Philadelphia and include eastern Pennsylvania, Delaware, New Jersey and southern New York.

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

2.

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation –The accompanying consolidated financial statements include the accounts of the Company and the Bank.  All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates in the Preparation of Financial StatementsThe preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The most significant estimates and assumptions in the consolidated  financial statements are recorded in the allowance for loan losses, the fair value of financial instruments, other than temporary impairment of securities, goodwill and valuation of deferred tax assets. Actual results could differ from those estimates.

Cash and Cash EquivalentsFor purposes of reporting cash flows, cash and cash equivalents include cash and amounts due from depository institutions and interest-bearing deposits with original maturities of less than 90 days.

Certificates of Deposit—The Bank may purchase certificates of deposit issued by FDIC-insured banks in amounts of up to $249,000 and with maturities of between one to five years.

Investment Securities and Mortgage-Backed SecuritiesManagement classifies and accounts for debt securities as follows:

Held to Maturity—Debt securities that management has the positive intent and ability to hold until maturity are classified as held to maturity and are carried at their remaining unpaid principal balance, net of unamortized premiums or unaccreted discounts. Premiums are amortized and discounts are accreted using the interest method over the estimated remaining term of the underlying security.

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Available for Sale—Debt and equity securities that will be held for indefinite periods of time, including securities that may be sold in response to changes in market interest or prepayment rates, needs for liquidity, and changes in the availability and the yield of alternative investments, are classified as available for sale. These assets are carried at fair value. Fair value is determined using public market prices, dealer quotes, and prices obtained from independent pricing services that may be derivable from observable and unobservable market inputs. Unrealized gains and losses are excluded from earnings and are reported net of tax as a separate component of stockholders’ equity until realized. Realized gains or losses on the sale

72

of investment and mortgage-backed securities are reported in earnings as of the trade date and determined using the adjusted cost of the specific security sold. Premiums are amortized and discounts are accreted using the interest method over the estimated remaining term of the underlying security.

Equity Securities— Equity securities are held at fair value.  Holding gains and losses and dividends are recorded as components of non-interest income.

Other-than-temporary impairment —Management—Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market conditions 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, management performs an evaluation of the specific events attributable to the market decline of the security. Management considers the length of time and extent to which the security’s fair 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. Management also considers as part of the evaluation its intention whether or not to sell the security until its market value has recovered to a level at least equal to the amortized cost. When management 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-down is measured based on the fair value of the security at the time the Company determines the decline in value is other-than-temporary.

Loans ReceivableLending consists of various loan types including single-family residential mortgage loans, construction and land development loans, non-residential or commercial real estate mortgage loans, home equity loans and lines of credit, commercial business loans, and consumer loans and the loans are stated at their unpaid principal balances, net of unamortized net fees/costs.Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding unpaid principal balance adjusted for unearned income, the allowance for loan losses and any unamortized deferred fees or costs.

Loan Origination and Commitment FeesManagement defers loan origination and commitment fees, net of certain direct loan origination costs. The balance is accreted into income as a yield adjustment over the life of the loan using the level-yield method.

Interest on LoansManagement recognizes interest on loans on the accrual basis. Income recognition is discontinued when a loan becomes 90 days or more delinquent.delinquent as to interest and/or principal. Any interest previously accrued is deducted from interest income. Such interest ultimately collected is credited to income when loans are no longer 90 days or more delinquent.

Allowance for Loan LossesLosses— The allowance for loan losses represents the amount which management estimates is adequate to provide for probable losses inherent in its loan portfolio as of the Consolidated Statement of Financial Condition date.  The allowance method is used in providing for loan losses.  Accordingly, all loan losses are charged to the allowance, and all recoveries are credited to it.  The allowance for loan losses is established through a provision for loan losses charged to operations.  The provision for loan losses is based on management’s periodic evaluation of individual loans, economic factors, past loan loss experience, changes in the composition and volume of the portfolio, and other relevant factors, both qualitative and quantitative.  The estimates used in determining the adequacy of the allowance for loan losses, including the amounts and timing of future cash flows expected on impaired loans, are particularly susceptible to changes in the near term.

Impaired loans are loans for which it is not probable to collect all amounts due according to the contractual terms of the loan agreements.  Management individually evaluates such loans for impairment and does not aggregate loans by major risk classifications.  Factors considered by management in determining impairment include payment status and collateral value.  The amount of impairment for impaired loans is determined by the difference between the present value of the expected cash flows related to the loans, using the original interest rate, and their recorded value, or as a practical expedient in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loans.  When foreclosure is probable, impairment is measured based on the fair value of the collateral.

85

73

Mortgage loans and consumer loans are comprised of large groups of smaller balance homogeneous loans which are evaluated for impairment collectively.  Loans that experience insignificant payment delays, which are defined as delays of less than 90 days, generally are not classified as impaired.  Management determines the significance of payment delays on a case-by-case basis taking into consideration all of the circumstances surrounding the loan and the borrower including the length of the delay, the borrower’s prior payment record, and the amount of shortfall in relation to the principal and interest owed.

Real Estate OwnedReal estate acquired through, or in lieu of, loan foreclosure is recorded at fair value at the date of acquisition, less estimated selling costs, establishing a new basis. Costs related to the development and improvement of real estate owned properties are capitalized and those relating to holding the properties are charged to expense.  After foreclosure, a valuation is periodically performed by management and a write-down is recorded, if necessary, by a charge to operations if the carrying value of a property exceeds its fair value less estimated costs to sell.

Restricted Bank Stock –Restricted bank stock includes Federal Home Loan Bank of Pittsburgh (“FHLB”) and Atlantic Community Bankers Bank (“ACBB”) stock and is classified as a restricted equity security because ownership is restricted and there is no established market for its resale.  FHLB and ACBB stock is carried at cost and is evaluated for impairment when certain conditions warrant further consideration.

The Bank is a member of the Federal Home Loan BankFHLB of Pittsburgh and as such, is required to maintain a minimum investment in stock of the Federal Home Loan BankFHLB that varies with the level of advances outstanding with the Federal Home Loan Bank.FHLB.  The stock is bought from and sold to the Federal Home Loan BankFHLB based upon its $100 par value.  The stock does not have a readily determinable fair value and as such is classified as restricted stock, carried at cost and evaluated for impairment by management.  The stock’s value is determined by the ultimate recoverability of the par value rather than by recognizing temporary declines. The determination of whether the par value will ultimately be recovered is influenced by criteria such as the following: (a) the significance of the decline in net assets of the Federal Home Loan BankFHLB as compared to the capital stock amount and the length of time this situation has persisted; (b) commitments by the Federal Home Loan BankFHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance; (c) the impact of legislative and regulatory changes on the customer base of the Federal Home Loan Bank;FHLB; and (d) the liquidity position of the Federal Home Loan Bank.FHLB.

The Federal Home Loan BankFHLB of Pittsburgh continues to report net income, continues to declare quarterly cash dividends and had its Aaa bond rating affirmed by Moody’s and its AA+ rating affirmed by Standard and Poor’s during 20182020 and remained unchanged as of September 30, 2018.With2020. With consideration given to these factors, management concluded that the stock was not impaired at September 30, 20182020 or 2017.2019.

In 2018, the Bank purchased $90,000 of stock in Atlantic Community Bankers BankACBB to support a $12.5 million line of credit. The line has not been drawn on.

Office Properties and EquipmentLand is carried at cost. Office properties and equipment are recorded at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the expected useful lives of the assets. The costs of maintenance and repairs are expensed as they are incurred, and renewals and betterments are capitalized and depreciated over their useful lives.  The estimated useful life is generally 10-39 years for office properties and 1-7 years for furniture and equipment.

Cash Surrender Value of Life Insurance—The Company funds the policy premiums for life insurance covering the lives of certain officers and directors of the Bank. The bank owned life insurance policies (“BOLI”) provide an attractive tax-exempt return to the Company and is being used by the Company to fund various employee benefit plans and arrangements.  The BOLI is recorded at its cash surrender value.

Dividend Payable – Upon declaration of a dividend, a payable is established with a corresponding reduction to retained earnings at the declaration date. There was no0 dividend payable as of September 30, 20182020 or 2017.2019.  The Company paid $6.3$6.2 million, $1.0$5.8 million, and $895,000$6.3 million in cash dividends during the fiscal years ended September 30, 2018, 20172020, 2019 and 2016,2018, respectively.

Goodwill – Goodwill represents the excess of cost over the identifiable net assets of businesses acquired. Goodwill is

74

recognized as an asset and is to be reviewed for impairment annually as of March 31 and between annual tests when events and circumstances indicate that impairment may have occurred.occurred. The Company’s goodwill and intangible assets are related to the acquisition of Polonia Bancorp on January 1, 2017.

86

Share-Based Compensation– The Company accounts for stock-based compensation issued to employees, directors, and where appropriate non-employees, in accordance with U.S. GAAP.  Under fair value provisions, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the appropriate vesting period using the straight-line method.  The amount of stock-based compensation recognized at any date must at least equal the portion of the grant date fair value of the award that is vested at that date and as a result it may be necessary to recognize the expense using a ratable method.  Determining the fair value of stock-based awards at the date of grant requires judgment, including estimating the expected term of the stock options and the expected volatility of the Company’s stock. In addition, judgment is required in estimating the amount of stock-based awards that are expected to be forfeited. If actual results differ significantly from these estimates or different key assumptions were used, it could have a material effect on the Company’s Consolidated Financial Statements. See Note 13 of the Notes to Consolidated Financial Statements for additional information regarding stock-based compensation.

Treasury Stock – Common stock held in treasury is accounted for using the cost method, which treats stock held in treasury as a reduction to total stockholders’ equity. During the year ended September 30, 2018,2020, the Company repurchased 223,520829,388 shares of common stock at an average price per share of $18.08.$12.65. The shares may be purchased in the open market or in privately negotiated transactions from time to time depending upon market conditions and other factors over a one-year period or such longer period of time as may be necessary to complete such repurchases.

Comprehensive Income—Management presents in the consolidated statements of comprehensive income those amounts arising from transactions and other events which currently are excluded from the statements of operations and are recorded directly to stockholders’ equity. For the fiscal years ended September 30, 2018, 20172020, 2019 and 2016,2018, the components of comprehensive income were net income, unrealized holding (loss) gain, net of income tax (benefit) expense, on available for sale securities and reclassifications related to realized gains on sale of securities recognized in earnings, net of tax, and unrealized holdings (loss)gain, net of tax, on the fair value of interest rate swaps.  Reclassifications are made to avoid double counting in comprehensive income items which are displayed as part of net income for the period.

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

 

In evaluating the Company’s ability to recover deferred tax assets, management considers all available positive and negative evidence, including past operating results and forecast of future taxable income.  In determining future taxable income, management makes 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 management to make judgments about future taxable income and are consistent with the plans and estimates the Company uses to manage the business.  Any reduction in estimated future taxable income may require management to record an additional valuation allowance against the 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.

Transfers and Servicing of Financial Assets and Extinguishments of LiabilitiesManagement recognizes the financial and servicing assets it controls and the liabilities it has incurred, and will derecognize financial assets when control has been surrendered, and derecognize liabilities when extinguished. Servicing assets and other retained interests in the transferred assets are measured by allocating the previous carrying amount between the assets sold, if any, and retained interests, if any, based on their relative fair values at the date of transfer.

Interest Rate Swap Agreement-For asset/liability management purposes, the Company uses interest rate swap agreements

75

to hedge various exposures or to modify interest rate characteristics of assets and liabilities. Interest rate swaps are contracts in which a series of interest rate flow is exchanged over a prescribed period.  The notional amount on which the interest payments are based is not exchanged.  These swap agreements are derivative instruments and generally convert a portion of the Company’s variable-rate debt to a fixed ratefixed-rate (cash flow hedge) and convert a portion of its fixed-rate loans to a variable rate (fair value hedge).

87

For the fair value hedges, changes in the fair value of the interest rate swap are expected to be “perfectly effective” in offsetting changes in the fair value of the hedged item, thus no portion of the change in market value is anticipated to be recognized in earnings.

For cash flow hedges, the net settlement (upon close-out or termination) that offsets changes in the value of the hedged debt is deferred and amortized into net interest income over the life of the hedged debt.  For fair value hedges, the net settlement (upon close-out or termination) that offsets changes in the value of the loans adjusts the basis of the loans and is deferred and amortized to loan interest income over the life of the loans.  The portion, if any, of the net settlement amount that did not offset changes in the value of the hedged asset or liability is recognized immediately in noninterestnon-interest income.

Interest rate derivative financial instruments receive hedge accounting treatment only if they are designated as a hedge and are expected to be, and are, effective in substantially reducing interest rate risk arising from the assets and liabilities identified as exposing the Company to risk.  Those derivative financial instruments that do not meet specified hedging criteria would be recorded at fair value, with changes in fair value recorded in income.  If periodic assessment indicates derivatives no longer provide an effective hedge, the derivative contracts would be closed out and settled, or classified as a trading activity.

Loans Acquired - Loans acquired including loans that have evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that the Company will be unable to collect all contractually required payments receivable, are initially recorded at fair value (as determined by the present value of expected future cash flows) with no valuation allowance. Loans are evaluated individually to determine if there is evidence of deterioration of credit quality since origination. The difference between the undiscounted cash flows expected at acquisition and the investment in the loan, or the “accretable yield,” is recognized as interest income on a level-yield method over the life of the loan. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “non-accretable difference,” are not recognized as a yield adjustment or as a loss accrual or a valuation allowance. Increases in expected cash flows subsequent to the initial investment are recognized prospectively through adjustment of the yield on the loan over its remaining estimated life. Decreases in expected cash flows are recognized immediately as impairment. Any valuation allowances on these impaired loans reflect only losses incurred after acquisition.  Loans acquired with evidence of deterioration of credit quality since origination were not material.

For purchased loans acquired that are not deemed impaired at acquisition, credit discounts representing the principal losses expected over the life of the loan are a component of the initial fair value. Loans are aggregated and accounted for as a pool of loans if the loans being aggregated have common risk characteristics. Subsequent to the purchase date, the methods utilized to estimate the required allowance for credit losses for these loans is similar to originated loans; however, the Company records a provision for loan losses only when the required allowance exceeds any remaining credit discounts. The remaining differences between the purchase price and the unpaid principal balance at the date of acquisition are recorded in interest income over the life of the loans.

Business Combinations -At the date of acquisition the Company records the assets and liabilities of the acquired companies on the Consolidated Statement of Financial Condition at their estimated fair value. The results of operations for acquired companies are included in the Company’s Consolidated Statements of Operations beginning at the acquisition date. Expenses arising from acquisition activities are recorded in the Consolidated Statements of Operations during the period incurred.The difference between the purchase price and the fair value of the net assets acquired (including identified intangibles) is recorded as goodwill.

Reclassification of Comparative Amounts -Certain items previously reported have been reclassified to conform to the current year’s reporting format. Such reclassifications did not affect consolidated net statement of operations or consolidated stockholders’ equity.

88

Recently Adopted Accounting Pronouncements

In August 2017,Effective October 1, 2019, the FASB issuedCompany adopted ASU 2017-12,2016-02 Derivatives– Leases. This Update and Hedging (Topic 850),all subsequent ASUs that modified Topic 842 set forth a new lease accounting model for lessors and lessees. For lessees, virtually all leases will have to be recognized on the balance sheet by recording a right-of-use asset and lease liability. Subsequent accounting for

76

leases varies depending on whether the lease is an operating lease or a finance lease. The accounting provided by a lessor is largely unchanged from that applied under the existing guidance. The ASU requires additional qualitative and quantitative disclosures with the objective of which isenabling users of financial statements to improveassess the financial reportingamount, timing and uncertainty of hedging relationships to better portraycash flows arising from leases. The Update and its related amendments resulted in the economic results of an entity’s risk management activities in its financial statements. In addition, the amendments in this Update make certain targeted improvements to simplify the application and disclosure of the hedge accounting guidance in current general accepted accounting principles. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020. Early application is permitted in any period after issuance. For cash flow and net investment hedges existing at the date of adoption, an entity should apply a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earningsrecognition, as of the beginningOctober 1, 2019, of the fiscal year that an entity adopts the amendments in this Update. The amended presentationoperating right-of-use assets totaling $1.5 million and disclosure guidance is required only prospectively. The Company early adopted the ASU during the quarter ended June 30, 2018. There was not a significant impact on the Company’s financial statements.

In February 2018, the FASB issued ASU 2018-02,Income Statement – Reporting Comprehensive Income (Topic 220), to allow a reclassification from accumulated other comprehensive incomeoperating lease liabilities totaling $1.6 million. A $75,000 prior period adjustment to retained earnings for stranded tax effects resulting fromwas recognized as of October 1, 2019. The Company has presented the Tax Cuts and Jobs Act. The amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. The amendmentsnecessary disclosures in this Update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this Update is permitted, including adoption in any interim period, (1) for public business entities for reporting periods for which financial statements have not yet been issued and (2) for all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this Update should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. On January 1, 2018, the Company adopted this standard which resulted in a reclassification of $303,000 between accumulated other comprehensive income (loss) and retained earnings on the consolidated statement of financial condition.Note 8.

Recent Accounting Pronouncements Not Yet Adopted

In May 2014, the FASB issued ASU 2014-09,Revenue from Contracts with Customers (a new revenue recognition standard). The Update’s core principle is that a company will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this Update specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. In August 2015, the FASB issued ASU 2015-14,Revenue from Contracts with Customers (Topic 606) deferring the effective date of ASU 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Since the guidance scopes out revenue associated with financial instruments, including loan receivables and investment securities, we do not expect the adoption of the new standard, or any of the amendments, to result in a material change from our current accounting for revenue because the majority of the Company's revenue is not within the scope of Topic 606.  However, we do expect that the standard will result in new disclosure requirements, which are currently being evaluated.

In January 2016, the FASB issued ASU 2016-01,Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This Update applies to all entities that hold financial assets or owe financial liabilities and is intended to provide more useful information on the recognition, measurement, presentation, and disclosure of financial instruments. Among other things, this Update (a) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (b) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (c) eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (d) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (e) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (f) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (g) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The update is not expected to have a significant impact on the Company’s financial statements.

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

In June 2016, the FASB issued ASU 2016-13,Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations.  The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset.  The income statement will be affected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. This Update defers the effective date of ASU 2016-13 is effective for annualSEC filers that are eligible to be smaller reporting companies, non-SEC filers, and interim periodsall other companies to fiscal years beginning after December 15, 2019, and early adoption is permitted for annual and2022, including interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted.within those fiscal years. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15,Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues with the objective of reducing diversity in practice. Among these include recognizing cash payments for debt prepayment or debt extinguishment as cash outflows for financing activities; cash proceeds received from the settlement of insurance claims should be classified on the basis of the related insurance coverage; and cash proceeds received from the settlement of bank-owned life insurance policies should be classified as cash inflows from investing activities while the cash payments for premiums on bank-owned policies may be classified as cash outflows for investing activities, operating activities, or a combination of investing and operating activities. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments in this Update should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The update is not expected to have a significant impact on the Company’s financial statements.

90

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

In January 2017, the FASB issued ASU 2017-04,Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unitsunit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In November 2019, the FASB issued ASU 2019-10, Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), which deferred the effective date for ASC 350, Intangibles – Goodwill and Other, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. This updateUpdate is not expected to have a significant impact on the Company’s financial statements.

In February 2017, the FASB issued ASU 2017-05,Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20).The amendments in this Update clarify what constitutes a financial asset within the scope of Subtopic 610-20. The amendments also clarify that entities should identify each distinct nonfinancial asset or in-substance nonfinancial asset that is promised to a counterparty and to derecognize each asset when the counterparty obtains control. There is also additional guidance provided for partial sales of a nonfinancial asset and when derecognition, and the related gain or loss, should be recognized. The amendments in this Update are effective at the same time as the amendments in Update 2014-09. Therefore, for public entities, the amendments are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. The update is not expected to have a significant impact on the Company’s financial statements.

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

In May 2017, the FASB issued ASU 2017-09,Compensation – Stock Compensation (Topic 718), which affects any entity that changes the terms or conditions of a share-based payment award.  This Update amends the definition of modification by qualifying that modification accounting does not apply to changes to outstanding share-based payment awards that do not affect the total fair value, vesting requirements, or equity/liability classification of the awards.  The amendments in this Update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for (1) public business entities for reporting periods for which financial statements have not yet been issued and (2) all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this Update should be applied prospectively to an award modified on or after the adoption date. This update is not expected to have a significant impact on the Company’s financial statements.

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In February 2018, the FASB issued ASU 2018-03,Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10), to clarify certain aspects of the guidance issued in ASU 2016-01. (1) An entity measuring an equity security using the measurement alternative may change its measurement approach to a fair value method in accordance with Topic 820,Fair Value Measurement, through an irrevocable election that would apply to that security and all identical or similar investments of the same issuer. Once an entity makes this election, the entity should measure all future purchases of identical or similar investments of the same issuer using a fair value method in accordance with Topic 820. (2) Adjustments made under the measurement alternative are intended to reflect the fair value of the security as of the date that the observable transaction for a similar security took place. (3) Remeasuring the entire value of forward contracts and purchased options is required when observable transactions occur on the underlying equity securities. (4) When the fair value option is elected for a financial liability, the guidance in paragraph 825-10- 45-5 should be applied, regardless of whether the fair value option was elected under either Subtopic 815-15,Derivatives and Hedging—Embedded Derivatives, or 825-10,Financial Instruments—Overall. (5) Financial liabilities for which the fair value option is elected, the amount of change in fair value that relates to the instrument specific credit risk should first be measured in the currency of denomination when presented separately from the total change in fair value of the financial liability. Then, both components of the change in the fair value of the liability should be remeasured into the functional currency of the reporting entity using end-of-period spot rates. (6) The prospective transition approach for equity securities without a readily determinable fair value in the amendments in Update 2016-01 is meant only for instances in which the measurement alternative is applied. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018. All entities may early adopt these amendments for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, as long as they have adopted Update 2016-01. The update is not expected to have a significant impact on the Company’s financial statements.

In June 2018, the FASB issued ASU 2018-07,Compensation – Stock Compensation (Topic 718), which simplified the accounting for nonemployee share-based payment transactions. The amendments in this update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The amendments in this Update improve the following areas of nonemployee share-based payment accounting; (a) the overall measurement objective, (b) the measurement date, (c) awards with performance conditions, (d) classification reassessment of certain equity-classified awards, (e) calculated value (nonpublic entities only), and (f) intrinsic value (nonpublic entities only). The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In August 2018, the FASB issued ASU 2018-13,Fair Value Measurement (Topic 820): Disclosure Framework – Changes the Disclosure Requirements for Fair Value Measurements.  The Update removes the requirement to disclose the amount of and reasons for transfers between Level I and Level II of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level III fair value measurements. The Update requires disclosure of changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level III fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level III fair value measurements. This Update is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In May 2019, the FASB issued ASU 2019-05, Financial Instruments – Credit Losses, Topic 326, which allows entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost upon adoption of the new credit losses standard. To be eligible for the transition election, the existing financial asset must otherwise be both

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3.

within the scope of the new credit losses standard and eligible for the applying the fair value option in ASC 825-10-3. The election must be applied on an instrument-by-instrument basis and is not available for either available-for-sale or held-to-maturity debt securities. For entities that elect the fair value option, the difference between the carrying amount and the fair value of the financial asset would be recognized through a cumulative-effect adjustment to opening retained earnings as of the date an entity adopted ASU 2016-13. Changes in fair value of that financial asset would subsequently be reported in current earnings. For entities that have not yet adopted ASU 2016-13, the effective dates and transition requirements are the same as those in ASU 2016-13. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In November 2019, the FASB issued ASU 2019-08, Compensation ‒ Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606), which requires entities to measure and classify share-based payments to a customer, in accordance with the guidance in ASC 718, Compensation ‒ Stock Compensation. The amendments in that Update expanded the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees and, in doing so, superseded guidance in Subtopic 505-50, Equity ‒ Equity-Based Payments to Non-Employees. The amount that would be recorded as a reduction in revenue would be measured based on the grant date fair value of the share-based payment, in accordance with Topic 718. The grant date is the date at which a supplier and customer reach a mutual understanding of the award’s key terms and conditions. The award’s classification and subsequent measurement would be subject to ASC 718 unless the award is modified or the grantee is no longer a customer. For entities that have not yet adopted the amendments in Update 2018-07, the amendments in this Update are effective for (1) public business entities in fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, and (2) other than public business entities in fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. For entities that have adopted the amendments in Update 2018-07, the amendments in this Update are effective in fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. An entity may early adopt the amendments in this Update, but not before it adopts the amendments in Update 2018-07. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In November 2019, the FASB issued ASU 2019-10, Financial Instruments ‒ Credit Losses (Topic 326),Derivatives and Hedging (Topic 815), and Leases (Topic 842). The Update defers the effective dates of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. This Update also amends the mandatory effective date for the elimination of Step 2 from the goodwill impairment test under ASU No. 2017-04, Intangibles ‒ Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (Goodwill), to align with those used for credit losses. Furthermore, the ASU provides a one-year deferral of the effective dates of the ASUs on derivatives and hedging and leases for companies that are not public business entities. The Company qualifies as a smaller reporting company and does not expect to early adopt these ASUs.In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, FinancialInstruments – Credit Losses, to clarify its new credit impairment guidance in ASC 326, based on implementation issues raised by stakeholders. This Update clarified, among other things, that expected recoveries are to be included in the allowance for credit losses for these financial assets; an accounting policy election can be made to adjust the effective interest rate for existing troubled debt restructurings based on the prepayment assumptions instead of the prepayment assumptions applicable immediately prior to the restructuring event; and extends the practical expedient to exclude accrued interest receivable from all additional relevant disclosures involving amortized cost basis. The effective dates in this Update are the same as those applicable for ASU 2019-10. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), to simplify the accounting for income taxes, change the accounting for certain tax transactions, and make minor improvements to the codification. This Update provides a policy election to not allocate consolidated income taxes when a member of a consolidated tax return is not subject to income tax and provides guidance to evaluate whether a step-up in tax basis of goodwill relates to a business combination in which book goodwill was recognized or a separate transaction. The Update also changes current guidance for making an intra period allocation if there is a loss in continuing operations and gains outside of continuing operations; determining when a deferred tax liability is recognized after an investor in a foreign entity transitions to or from the equity method of accounting; accounting for tax law changes and year-to-date losses in interim periods; and determining how to apply the income tax guidance to franchise taxes that are partially based on income. For public business entities, the amendments in this Update are effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2020.

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For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In January 2020, the FASB issued ASU 2020-4, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, March 2020, to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Also, entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met, and can make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities upon issuance through December 31, 2022. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

3.      EARNINGS PER SHARE

Basic earnings per share is computed based on the weighted average number of common shares outstanding. Diluted earnings per share is computed based on the weighted average number of common shares outstanding and common share equivalents (“CSEs”) that would arise from the exercise of dilutive securities.

shares.

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

Year Ended September 30, 

2020

2019

2018

 Year Ended September 30, 
 2018  2017  2016 
 (Dollars in Thousands Except Per Share Data) 
 Basic  Diluted  Basic  Diluted  Basic  Diluted 
             

(Dollars in Thousands Except Per Share Data)

Basic

    

Diluted

    

Basic

    

Diluted

    

Basic

    

Diluted

Net income $7,064  $7,064  $2,778  $2,778  $2,720  $2,720 

$

9,555

$

9,555

$

9,530

$

9,530

$

7,064

$

7,064

                        

Weighted average common shares outstanding  8,855,938   8,855,938   8,316,638   8,316,638   7,417,044   7,417,044 

 

8,538,006

 

8,538,006

 

8,777,794

 

8,777,794

 

8,855,938

 

8,855,938

                        

Effect of CSEs  -   204,175   -   357,871   -   217,701 

 

0

 

24,470

 

0

 

158,083

 

0

 

204,175

                        

Adjusted weighted average common shares used in earnings per share computation  8,855,938   9,060,113   8,316,638   8,674,509   7,417,044   7,634,745 

 

8,538,006

 

8,562,476

 

8,777,794

 

8,935,877

 

8,855,938

 

9,060,113

                        

Earnings per share $0.80  $0.78  $0.33  $0.32  $0.37  $0.36 

$

1.12

$

1.12

$

1.09

$

1.07

$

0.80

$

0.78

As of September 30, 2018, 2017,2020, 2019, and 2016,2018, there were 282,728, 550,833 and 666,526 555,185 and 554,445 shares, respectively, of common stock respectively, subject to options with an exercise price less than the then current market value, as of such dates and which were included in the computation of diluted earnings per share. At September 30, 2018, 20172020, 2019 and 2016,2018, there were 288,530, 242,201 and 202,500 367,379 and 367,464 shares, respectively, that had exercise prices greater than the current market value and are considered anti-dilutive.

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4.      ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) INCOME

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

Year Ended September 30, 

2020

2020

2020

2019

2019

2019

(Dollars in Thousands)

Total 

Total 

accumulated

accumulated

Unrealized gain

Unrealized gain (loss)

other

Unrealized gain

Unrealized gain (loss)

other

(loss) on AFS

on interest rate swaps

comprehensive

(loss) on AFS

on interest rate

comprehensive

securities (a)

    

(a)

    

income (loss)

    

securities (a)

    

swaps (a)

    

loss

Beginning Balance, October 1

$

8,098

$

(6,906)

$

1,192

$

(8,320)

$

166

$

(8,154)

Other comprehensive (loss) income before reclassification

 

7,221

 

(6,622)

 

599

 

17,278

 

(7,072)

 

10,206

Amount reclassified from accumulated other comprehensive income

 

(4,734)

 

0

 

(4,734)

 

(835)

 

0

 

(835)

Reclassification for net gains recorded in net income

0

(25)

0

(25)

Ending Balance, September 30

$

10,585

$

(13,528)

$

(2,943)

$

8,098

$

(6,906)

$

1,192

  Year Ended September 30, 
  2018  2018  2018  2017  2017  2017 
  Unrealized gain
(loss) on AFS
securities (a)
  Unrealized gain (loss)
on interest rate swaps
(a)
  Total other
comprehensive
loss
  Unrealized gain
(loss) on AFS
securities (a)
  Unrealized gain (loss)
on interest rate
swaps (a)
  Total other
comprehensive
loss
 
Beginning Balance $(1,091) $           331  $(760) $931  $           (133) $798 
Other comprehensive (loss) income before reclassification  (7,171)  473   (6,698)  (1,867)  464   (1,403)
Amount reclassified from accumulated other comprehensive income  245   (638)  (393)  (155)  -   (155)
Total other comprehensive income (loss)  (6,926)  (165)  (7,091)  (2,022)  464   (1,558)
Recassification due to change in federal income tax rate  (303)  -   (303)  -   -   - 
Ending Balance $(8,320) $166  $(8,154) $(1,091) $331  $(760)

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

Year Ended September 30, 

2018

2018

2018

(Dollars in Thousands)

Total 

accumulated

Unrealized gain

Unrealized gain (loss)

other

(loss) on AFS

on interest rate swaps

comprehensive

    

securities (a)

    

(a)

    

gain (loss)

Beginning Balance

$

(1,091)

$

331

$

(760)

Other comprehensive (loss) income before reclassification

 

(7,171)

 

473

 

(6,698)

Amount reclassified from accumulated other comprehensive income

 

245

 

(638)

 

(393)

Reclassification for net gains recorded in net income

 

(303)

 

 

(303)

Ending Balance

$

(8,320)

$

166

$

(8,154)

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

The following table presents significant amounts reclassified out of each component of accumulated othercomprehensiveother comprehensive (loss) income for the years ended September 30, 20182020, 2019 and 2017:2018.

Year Ended September 30, 

2020

2020

2020

2019

2019

2019

(Dollars in Thousands)

    

Securities

    

Swaps

    

Total

    

Securities

    

Swaps

    

Total

Unrealized gain (losses)

$

5,993

(1)

$

0

(2)

$

5,993

$

1,057

(1)

$

0

(2)

$

1,057

Income taxes

 

(1,259)

(3)

 

0

(3)

 

(1,259)

 

(222)

(3)

 

0

(3)

 

(222)

$

4,734

$

0

$

4,734

$

835

$

0

$

835

  Year Ended September 30, 
  2018  2018  2018  2017  2017  2017 
        (Dollars in Thousands)       
  Securities  Swaps  Total  Securities  Swaps  Total 
Unrealized (losses) gain $(310)(1) $808 (2) $498  $235 (1) $           -  $235 
Income taxes  65 (3)  (170)(3)  (105)  (80)(3)  -   (80)
  $(245) $638  $393  $155  $-  $155 

80

Year Ended September 30, 

2018

2018

2018

(Dollars in Thousands)

    

Securities

    

Swaps

    

Total

Unrealized gain (losses)

$

(310)

(1)

$

808

(2)

$

498

Income taxes

 

65

(3)

 

(170)

(3)

 

(105)

$

(245)

$

638

$

393

(1)Recorded as a lossgain (loss) on the sale of investment securitiesmortgage-backed securities.
(2)Recorded as swap income(loss) income.
(3)Recorded as income tax benefit (expense)expense.

94

5.5.     INVESTMENT AND MORTGAGE-BACKED SECURITIES

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

September 30, 2020

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

    

Cost

    

Gains

    

Losses

    

Value

 September 30, 2018 
    Gross Gross    
 Amortized Unrealized Unrealized Fair 
 Cost  Gains  Losses  Value 
 (Dollars in Thousands) 

(Dollars in Thousands)

Securities Available for Sale:                

  

  

  

  

U.S. government and agency obligations $25,562  $-  $(1,391) $24,171 

$

22,241

$

153

$

$

22,394

State and political subdivisions  22,078   -   (542)  21,536 

 

79,099

 

1,940

 

(1,418)

 

79,621

Mortgage-backed securities - U.S. government agencies  193,451   77   (6,168)  187,360 

226,863

9,774

(71)

236,566

Corporate debt securities  75,622   -   (2,539)  73,083 

 

78,764

 

3,564

 

(545)

 

81,783

Total debt securities available for sale  316,713   77   (10,640)  306,150 

$

406,967

$

15,431

$

(2,034)

$

420,364

                
FHLMC preferred stock  6   31   -   37 
                
Total securities available for sale $316,719  $108  $(10,640) $306,187 
                

Securities Held to Maturity:                

 

  

 

  

 

  

 

  

U.S. government and agency obligations $33,500  $85  $(3,311) $30,274 

$

1,000

$

236

$

$

1,236

State and political subdivisions  20,574   2   (696)  19,880 

 

18,076

 

925

 

0

 

19,001

Mortgage-backed securities - U.S. government agencies  5,778   148   (153)  5,773 

 

3,784

 

309

 

 

4,093

                

Total securities held to maturity $59,852  $235  $(4,160) $55,927 

$

22,860

$

1,470

$

$

24,330

95

The Company recognized a holding loss on equity securities of $44,000 for the year ended September 30, 2020.  A Holding gain of $58,000 was recognized for the year ended September 30, 2019.

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Table of Contents

  September 30, 2017 
     Gross  Gross    
  Amortized  Unrealized  Unrealized  Fair 
  Cost  Gains  Losses  Value 
  (Dollars in Thousands) 
Securities Available for Sale:                
U.S. government and agency obligations $26,125  $9  $(335) $25,799 
Mortgage-backed securities - U.S. government agencies  119,456   146   (1,475)  118,127 
Corporate debt securities  34,500   185   (285)  34,400 
Total debt securities  180,081   340   (2,095)  178,326 
                 
FHLMC preferred stock  6   70   -   76 
                 
Total securities available for sale $180,087  $410  $(2,095) $178,402 
                 
Securities Held to Maturity:                
U.S. government and agency obligations $33,500  $229  $(1,688) $32,041 
State and political subdivisions  20,781   165   (104)  20,842 
Mortgage-backed securities - U.S. government agencies  7,003   304   (11)  7,296 
                 
Total securities held to maturity $61,284  $698  $(1,803) $60,179 

September 30, 2019

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

    

Cost

    

Gains

    

Losses

    

Value

(Dollars in Thousands)

Securities Available for Sale:

  

  

  

  

U.S. government and agency obligations

$

24,960

$

3

$

(98)

$

24,865

State and political subdivisions

47,909

 

484

 

(747)

 

47,646

Mortgage-backed securities - U.S. government agencies

 

362,342

8,836

(406)

370,772

Corporate debt securities

 

67,360

 

2,217

 

(38)

 

69,539

Total debt securities available for sale

$

502,571

$

11,540

$

(1,289)

$

512,822

Securities Held to Maturity:

 

  

 

  

 

  

 

  

U.S. government and agency obligations

$

43,349

$

181

$

(188)

$

43,342

State and political subdivisions

 

20,474

 

645

 

 

21,119

Mortgage-backed securities - U.S. government agencies

 

4,812

 

238

 

(4)

 

5,046

Total securities held to maturity

$

68,635

$

1,064

$

(192)

$

69,507

As of September 30, 2018,2020, the Bank maintained $130.5securities with a fair value of $197.5 million in a safekeeping account at the FHLB of Pittsburgh used for collateral as aand convenience. The Bank is notonly required to maintain anyhold $93.0 million as specific collateral for its borrowings; therefore thesethe $104.5 million excess securities are not restricted and could be sold or transferred if needed.

The following table shows the gross unrealized losses and related fair values of the Company’s available for sale investment securities, aggregated by investment category and the length of time that individual securities had been in a continuous loss position at September 30, 2018:2020:

96

Less than 12 months

More than 12 months

Total

Gross

Gross

Gross

Unrealized

Fair

Unrealized

Fair

Unrealized

Fair

    

Losses

    

Value

    

Losses

    

Value

    

Losses

    

Value

(Dollars in Thousands)

Securities Available for Sale:

State and political subdivisions

$

(126)

$

10,735

$

(1,292)

$

24,510

$

(1,418)

$

35,245

Mortgage-backed securities -U.S. government agencies

 

(66)

 

10,025

 

(5)

 

584

 

(71)

 

10,609

Corporate debt securities

 

(545)

 

16,472

 

 

 

(545)

 

16,472

Total securities available for sale

$

(737)

$

37,232

$

(1,297)

$

25,094

$

(2,034)

$

62,326

  Less than 12 months  More than 12 months  Total 
  Gross     Gross     Gross    
  Unrealized  Fair  Unrealized  Fair  Unrealized  Fair 
  Losses  Value  Losses  Value  Losses  Value 
  (Dollars in Thousands) 
Securities Available for Sale:                        
U.S. government and agency obligations $(89) $4,479  $(1,302) $19,692  $(1,391) $24,171 
State and political subdivisions  (542)  21,536   -   -   (542)  21,536 
Mortgage-backed securities -U.S. government agencies  (1,821)  92,851   (4,347)  86,268   (6,168)  179,119 
Corporate debt securities  (1,719)  58,753   (820)  14,330   (2,539)  73,083 
                         
Total securities available for sale $(4,171) $177,619  $(6,469)

 $120,290  $(10,640) $297,909 
                         
Securities Held to Maturity:                        
U.S. government and agency obligations $-  $-  $(3,311) $27,190  $(3,311) $27,190 
Mortgage-backed securities -U.S.s government agencies  (106)  2,630   (46)  930   (152)  3,560 
State and political subdivisions  (234)  11,238   (463)  6,618   (697)  17,856 
                         
Total securities held to maturity $(340) $13,868  $(3,820) $34,738  $(4,160) $48,606 
                         
Total $(4,511) $191,487  $(10,289) $155,028  $(14,800) $346,515 

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

The Company assesses the credit loss by considering whether (1) the Company has the intent to sell the security, (2) it is more likely than not that it will be required to sell the security before recovery, or (3) it does not expect to recover the entire amortized cost basis of the security. The Company bifurcates the OTTI impact on impaired securities where impairment in value was deemed to be other than temporary between the component representing credit loss and the component representing loss related to other factors. The portion of the fair value decline attributable to credit loss must

82

be recognized through a charge to earnings. The credit component is determined by comparing the present value of the cash flows expected to be collected, discounted at the rate in effect before recognizing any OTTI with the amortized cost basis of the debt security. The Company uses the cash flow expected to be realized from the security, which includes assumptions about interest rates, timing and severity of defaults, estimates of potential recoveries, the cash flow distribution from the bond indenture and other factors, then applies a discount rate equal to the effective yield of the security. The difference between the present value of the expected cash flows and the amortized book value is considered a credit loss. The fair value of the security is determined using the same expected cash flows; the discount rate is a rate the Company determines from the open market and other sources as appropriate for the security. The difference between the fair value and the security’s remaining amortized cost is recognized in other comprehensive income (loss).

For the years ended September 30, 2018, 20172020, 2019 and 2016,2018, the Company determined that no OTTI had occurred within the investment and mortgage-backmortgage-backed securities portfolios.

97

U.S. Government and agency obligations –obligations–The Company’s investments reflected in the tables above in U.S. Government sponsored enterprise notesobligations consist of debt obligations of the FHLB and Federal Farm Credit System (“FFCS”). These securities are typically rated AAA by one of the internationally recognized credit rating services. There were seven0 securities in a gross unrealized loss position having an aggregate depreciation of $1.4 million or 5.4% from the Company’s amortized cost basis. The unrealized losses on these debt securities relate principally to the changes in market interest rates in the financial markets and are not as a result of projected shortfall of cash flows.at September 30, 2020. In addition, the Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell the securities. As such, the Company anticipates it will recover the entire amortized cost basis of the securities. As a result, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2018.

Mortgage-backed securities – U.S. Government agency issued mortgage-backed securitiesgovernment agencies — At September 30, 2018,2020, the gross unrealized loss in U.S. governmentGovernment agency issued mortgage-backed securities in the category of experiencing a gross unrealized loss was $6.3 million$71,000 or 3.2%0.0% from the Company’s amortized cost basis and consisted of 875 securities. These securities represent asset-backed issues that are issued or guaranteed by a U.S. Government sponsored agency or carry the full faith and credit of the United States through a government agency and are currently rated AAA by at least one bond credit rating agency. The unrealized losses on these debt securities relate principally to the changes in market interest rates in the financial markets and are not as a result of projected shortfall of cash flows. The Company anticipates it will recover the entire amortized cost basis of the securities. As a result, the Company doesdid not consider these investments to be other-than-temporarily impaired at September 30, 2018.

2020.

Corporate debt securities — At September 30, 2018,2020, the gross unrealized loss in corporate debt securities in the category of experiencing a gross unrealized loss was $2.5 million$545,000 or 3.4%0.7% from the Company’s amortized cost basis and consisted of 375 securities. The unrealized losses on these debt securities relates principally to the changes in market interest rates in the financial markets and are not as a result of projected shortfall of cash flows. In addition, the Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell the securities. As such, the Company anticipates it will recover the entire amortized cost basis of the securities. As a result, the Company doesdid not consider these investments to be other-than-temporarily impaired at September 30, 2018.

2020.

State and political subdivision debt securities — At September 30, 2018,2020, the gross unrealized loss in state and political subdivision debt securities was $1.2$1.4 million or 2.9%1.8% from the Company’s amortized cost basis and consisted of seven7 securities. The unrealized losses on these debt securities relate principally to the changes in market interest rates in the financial markets and are not as a result of projected shortfall of cash flows. In addition, the Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell the securities. As such, the Company anticipates it will recover the entire amortized cost basis of the securities. As a result, the Company doesdid not consider these investments to be other-than-temporarily impaired at September 30, 2018.2020.

98

83

The following table shows the gross unrealized losses and related fair values of the investment securities, aggregated by investment category and length of time that individual securities have been in a continuous loss position at September 30, 2017:2019:

Less than 12 months

More than 12 months

Total

Gross

Gross

Gross

    

Unrealized

    

Fair

    

Unrealized

    

Fair

    

Unrealized

    

Fair

Losses

Value

Losses

Value

Losses

Value

 Less than 12 months  More than 12 months  Total 
 Gross     Gross     Gross    
 Unrealized Fair Unrealized Fair Unrealized Fair 
 Losses  Value  Losses  Value  Losses  Value 
 (Dollars in Thousands) 

(Dollars in Thousands)

Securities Available for Sale:                        

 

  

 

  

 

  

 

  

 

  

US government and agency obligations $(335) $20,655  $-  $-  $(335) $20,655 

$

(3)

$

6,997

$

(95)

$

3,866

$

(98)

$

10,863

State and political subdivisions

(4)

 

890

 

(743)

23,784

 

(747)

 

24,674

Mortgage-backed securities - US government agencies  (1,135)  77,176   (340)  11,684   (1,475)  88,860 

 

(86)

 

50,057

 

(320)

 

37,056

 

(406)

 

87,113

Corporate debt securities  (285)  22,511   -   -   (285)  22,511 

 

(13)

 

1,989

 

(25)

 

3,014

 

(38)

 

5,003

                        

Total securities available for sale $(1,755) $120,342  $(340) $11,684  $(2,095) $132,026 

$

(106)

$

59,933

$

(1,183)

$

67,720

$

(1,289)

$

127,653

                        

Securities Held to Maturity:                        

 

  

 

  

 

  

 

  

 

  

 

  

U.S. government and agency obligations $(1,688) $28,813  $-  $-  $(1,688) $28,813 

$

(188)

$

14,811

$

0

$

0

$

(188)

$

14,811

Mortgage-backed securities - US government agencies  (11)  1,176   -   -   (11)  1,176 

 

(4)

 

794

 

 

 

(4)

 

794

State and political subdivisions  (104)  7,854   -   -   (104)  7,854 
                        

Total securities held to maturity $(1,803) $37,843  $-  $-  $(1,803) $37,843 

$

(192)

$

15,605

$

$

$

(192)

$

15,605

                        

Total $(3,558) $158,185  $(340) $11,684  $(3,898) $169,869 

$

(298)

$

75,538

$

(1,183)

$

67,720

$

(1,481)

$

143,258

The amortized cost and fair value of debt securities by contractual maturity are shown below. Expected maturities as of September 30, 20182020 will differ from contractual maturities because of call provisions in the securities. Mortgage-backed securities were not included as the contractual maturity is generally irrelevant due to the borrowers’ right to prepay without pre-payment penalty which results in significant prepayments.

September 30, 2020

Held to Maturity

Available for Sale

    

Amortized

    

Fair

    

Amortized

    

Fair

Cost

Value

Cost

Value

 September 30, 2018 
 Held to Maturity  Available for Sale 
 Amortized Fair Amortized Fair 
 Cost  Value  Cost  Value 
 (Dollars in Thousands) 
Due within one year $2,000  $2,004  $1,002  $994 

(Dollars in Thousands)

Due after one through five years  -   -   7,541   7,287 

$

5,739

$

6,213

$

28,495

$

29,529

Due after five through ten years  25,484   24,296   63,079   60,807 

 

8,313

 

8,727

 

51,454

 

53,546

Due after ten years  26,590   23,854   51,640   49,702 

 

5,024

 

5,297

 

100,155

 

100,723

                

Total $54,074  $50,154  $123,262  $118,790 

$

19,076

$

20,237

$

180,104

$

183,798

During the fiscal years ended September 30, 20182020, 2019 and 2017,2018, the Company recorded realized gross gains of $6.1 million, $1.3 million and $-0-, respectively. The Company recorded gross losses of ($376,000)$68,000, $280,000 and gross gains of $235,000,$376,000, respectively, and grossfor the same periods. Gross proceeds from the from the sale of investment and mortgage-backed securities of $11.1$142.1 million, $75.6 million and $20.9$11.1 million, respectively.

99

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Table of Contents

6.

6.      LOANS RECEIVABLE

Loans receivable consist of the following:

September 30, 

September 30, 

    

2020

    

2019

 September 30, 
 2018  2017 
 (Dollars in Thousands) 

(Dollars in Thousands)

One-to-four family residential $324,865  $351,298 

$

233,872

$

268,780

Multi-family residential  34,355   21,508 

 

31,100

 

30,582

Commercial real estate  119,511   127,644 

 

139,943

 

128,521

Construction and land development  160,228   145,486 

 

260,648

 

253,368

Loans to financial institutions  6,000   - 

 

6,000

 

6,000

Commercial business  17,792   488 

 

12,916

 

19,630

Leases  1,687   4,240 

 

176

 

518

Consumer  953   1,943 

 

604

 

834

        

Total loans  665,391   652,607 

 

685,259

 

708,233

        

Undisbursed portion of loans-in-process  (54,474)  (73,858)

 

(86,862)

 

(114,528)

Deferred loan fees  (2,818)  (2,940)

 

(1,794)

 

(2,856)

Allowance for loan losses  (5,167)  (4,466)

 

(8,303)

 

(5,393)

        

Net loans $602,932  $571,343 

$

588,300

$

585,456

The Company originates loans to customers located primarily in its market area of eastern Pennsylvania, Delaware, New Jersey and southern New York. The ultimate repayment of these loans at September 30, 20182020 is dependent, to a certain degree, on the state of the local economy and real estate market.

market in these areas.

The following table summarizes the loans individually and collectively evaluated for impairment by loan segment at September 30, 2018:2020:

    

One- to

    

    

    

    

    

Loans to

    

    

    

four-

Multi-family

Commercial

Construction and

Commercial

financial

family residential

residential

real estate

land development

business

institutions

Leases

Consumer

Unallocated

Total

 One- to
four
family residential
  Multi-family
residential
  Commercial
real estate
  Construction and
land development
  Loans to
financial
institutions
  Commercial
business
  Leases  Consumer  Total 
 (Dollars in Thousands) 
                   

(Dollars in Thousands)

Allowance for loan losses:

Individually evaluated for impairment

$

$

0

$

$

$

$

0

$

0

$

0

$

$

Collectively evaluated for impairment

1,877

460

1,989

2,888

194

89

3

6

797

8,303

Total ending allowance balance

$

1,877

$

460

$

1,989

$

2,888

$

194

$

89

$

3

$

6

$

797

$

8,303

Loans:

Individually evaluated for impairment $5,081  $298  $1,919  $8,750  $-  $-  $-  $-  $16,048 

$

3,095

$

0

$

1,417

$

8,525

$

$

0

$

0

$

0

$

13,037

Collectively evaluated for impairment  319,784   34,057   117,592   151,478   6,000   17,792   1,687   953   649,343 

 

230,777

 

31,100

 

138,526

 

252,123

 

12,916

 

6,000

 

176

 

604

 

672,222

Total loans $324,865  $34,355  $119,511  $160,228  $6,000  $17,792  $1,687  $953  $665,391 

$

233,872

$

31,100

$

139,943

$

260,648

$

12,916

$

6,000

$

176

$

604

$

685,259

The following table summarizes the loans individually and collectively evaluated for impairment by loan segment at September 30, 2017:2019:

100

One- to

Loans to

four-

Multi-family

Commercial

Construction and

Commercial

financial

    

family residential

    

residential

    

real estate

    

land development

    

business

    

institutions

Leases

    

Consumer

Unallocated

    

Total

(Dollars in Thousands)

Allowance for loan losses:

Individually evaluated for impairment

$

$

$

$

$

$

0

$

0

$

$

$

Collectively evaluated for impairment

1,002

315

1,257

2,034

206

63

5

13

498

5,393

Total ending allowance balance

$

1,002

$

315

$

1,257

$

2,034

$

206

$

63

$

5

$

13

$

498

$

5,393

Loans:

Individually evaluated for impairment

$

4,827

$

0

$

1,965

$

8,750

$

0

$

0

$

0

$

0

$

15,542

Collectively evaluated for impairment

 

263,953

 

30,582

 

126,556

 

244,618

 

19,630

 

6,000

 

518

 

834

 

692,691

Total loans

$

268,780

$

30,582

$

128,521

$

253,368

$

19,630

$

6,000

$

518

$

834

$

708,233

85

Table of Contents

  One- to four-
family
residential
  Multi-family
residential
  Commercial
real estate
  Construction
and
land development
  Commercial
business
  Leases  Consumer  Total 
  (Dollars in Thousands) 
                         
Individually evaluated for impairment $8,277  $317  $2,337  $8,724  $-  $-  $10  $19,665 
Collectively evaluated for impairment  343,021   21,191   125,307   136,762   488   4,240   1,933  $632,942 
Total loans $351,298  $21,508  $127,644  $145,486  $488  $4,240  $1,943  $652,607 

The loan portfolio is segmented at a level that allows management to monitor risk and performance. Management evaluates all loans classified as substandard or lower and loans delinquent 90 or more days for potential impairment. Loans are considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.

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

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of September 30, 2020:

Impaired

Loans with

Impaired Loans with

No Specific

  

  

Specific Allowance

Allowance

Total Impaired Loans

(Dollars in Thousands)

Unpaid

Recorded

Related

Recorded

Recorded

Principal

    

Investment

    

Allowance

    

Investment

    

Investment

    

Balance

One-to-four family residential

$

0

$

0

$

3,095

$

3,095

$

3,482

Commercial real estate

 

0

 

0

 

1,417

 

1,417

 

1,600

Construction and land development

 

0

 

0

 

8,525

 

8,525

 

10,906

Total

$

0

$

0

$

13,037

$

13,037

$

15,988

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of September 30, 2018:2019:

Impaired

  

Loans with

  

  

Impaired Loans with

No Specific

Specific Allowance

 

Allowance

 

Total Impaired Loans

      Impaired      
      Loans with      
 Impaired Loans with No Specific      
 Specific Allowance  Allowance  Total Impaired Loans 
 (Dollars in Thousands) 
          Unpaid 
 Recorded Related Recorded Recorded Principal 
 Investment  Allowance  Investment  Investment  Balance 

(Dollars in Thousands)

Unpaid  

Recorded

 

Related

 

Recorded

 

Recorded

 

Principal

    

Investment

    

Allowance

    

Investment

    

Investment

    

Balance

One-to-four family residential $           -  $           -  $5,081  $5,081  $5,432 

$

0

$

0

$

4,827

$

4,827

$

5,179

Multi-family residential  -   -   298   298   298 
Commercial real estate  -   -   1,919   1,919   2,057 

 

0

 

0

 

1,965

 

1,965

 

2,125

Construction and land development  -   -   8,750   8,750   11,131 

 

0

 

0

 

8,750

 

8,750

 

11,131

Consumer  -   -   -   -   - 
Total $-  $-  $16,048  $16,048  $18,918 

$

0

$

0

$

15,542

$

15,542

$

18,435

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

101

86

Table of Contents

        Impaired       
        Loans with       
  Impaired Loans with  No Specific       
  Specific Allowance  Allowance  Total Impaired Loans 
  (Dollars in Thousands) 
              Unpaid 
  Recorded  Related  Recorded  Recorded  Principal 
  Investment  Allowance  Investment  Investment  Balance 
One-to-four family residential $           -  $           -  $8,277  $8,277  $9,245 
Multi-family residential  -   -   317   317   317 
Commercial real estate  -   -   2,337   2,337   2,449 
Construction and land development  -   -   8,724   8,724   11,105 
Commercial business  -   -   10   10   10 
Total $-  $-  $19,665  $19,665  $23,126 

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

Year Ended September 30, 2020

Average

Income

Recorded

Income Recognized

Recognized on

    

Investment

    

on Accrual Basis

    

Cash Basis

 September 30, 2018 
 Average
Recorded
Investment
  Income Recognized
on Accrual Basis
  Income
Recognized on
Cash Basis
 
 (Dollars in Thousands) 

(Dollars in Thousands)

One-to-four family residential $5,741  $           24  $           59 

$

3,825

$

13

$

26

Multi-family residential  306   21   - 

 

56

 

0

 

0

Commercial real estate  2,557   40   7 

 

1,549

 

0

 

1

Construction and land development  8,743   -   - 

 

8,685

 

0

 

0

Commercial business  -   -   - 

 

2

 

0

 

0

Consumer  -   -   - 

 

24

 

0

 

0

Total $17,347  $85  $66 

Total impaired loans

$

14,140

$

13

$

27

102

Year Ended September 30, 2019

Average

Income

Recorded

Income Recognized

Recognized on

    

Investment

    

on Accrual Basis

    

Cash Basis

(Dollars in Thousands)

One-to-four family residential

$

4,685

$

77

$

22

Multi-family residential

 

145

 

10

 

Commercial real estate

 

2,139

 

36

 

4

Construction and land development

 

8,751

 

 

Total impaired loans

$

15,720

$

123

$

26

Year Ended September 30, 2018

Average

Income

Recorded

Income Recognized

Recognized on

    

Investment

    

on Accrual Basis

    

Cash Basis

(Dollars in Thousands)

One-to-four family residential

$

5,741

$

24

$

59

Multi-family residential

306

21

0

Commercial real estate

 

2,557

 

40

 

7

Construction and land development

 

8,743

 

0

 

0

Total

$

17,347

$

85

$

66

  September 30, 2017 
  Average
Recorded
Investment
  Income Recognized
on Accrual Basis
  Income
Recognized on
Cash Basis
 
  (Dollars in Thousands) 
One-to-four family residential $6,096  $           89  $           91 
Multi-family residential  321   23   - 
Commercial real estate  2,459   49   12 
Construction and land development  9,163   -   - 
Commercial business  -   -   - 
Consumer  5   -   - 
Total $18,044  $161  $103 

  September 30, 2016 
  Average
Recorded
Investment
  Income Recognized
on Accrual Basis
  Income
Recognized on
Cash Basis
 
  (Dollars in Thousands) 
One-to-four family residential $5,099  $           129  $           101 
Multi-family residential  344   24   - 
Commercial real estate  3,565   96   12 
Construction and land development  9,604   -   62 
Commercial business  8   -   - 
Total $18,620  $249  $175 

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

The following tables present the classes of the loan portfolio in which a formal risk weighting system is utilized summarized by the aggregate “Pass” and the criticized category of “special mention”, and the classified categories of “substandard”

87

“substandard” and “doubtful” within the Bank’s risk rating system. The Bank had no loans classified as “doubtful” or “loss” at either of the dates presented.

103

September 30, 2020

Special

    

Pass

    

Mention

    

Substandard

    

Doubtful

    

Total

(Dollars in Thousands)

One-to-four residential

$

229,361

$

1,416

$

3,095

$

0

$

233,872

Multi-family residential

 

31,100

 

0

 

0

 

0

 

31,100

Commercial real estate

 

128,527

 

9,999

 

1,417

 

0

 

139,943

Construction and land development

 

252,123

 

0

 

8,525

 

0

 

260,648

Loans to financial institutions

 

6,000

 

0

 

0

 

0

 

6,000

Commercial business

 

12,916

 

0

 

0

 

0

 

12,916

Total

$

660,027

$

11,415

$

13,037

$

0

$

684,479

September 30, 2019

    

    

Special

    

    

    

Pass

    

Mention

    

Substandard

    

Doubtful

    

Total

(Dollars in Thousands)

One-to-four residential

$

262,164

$

1,789

$

4,827

$

0

$

268,780

Multi-family residential

 

30,582

 

0

 

0

 

0

 

30,582

Commercial real estate

 

122,838

 

3,718

 

1,965

 

0

 

128,521

Construction and land development

 

244,618

 

0

 

8,750

 

0

 

253,368

Loans to financial institutions

6,000

 

0

 

0

 

0

 

6,000

Commercial business

 

19,630

 

0

 

0

 

0

 

19,630

Total

$

685,832

$

5,507

$

15,542

$

0

$

706,881

  September 30, 2018 
     Special        Total 
  Pass  Mention  Substandard  Doubtful  Loans 
  (Dollars in Thousands) 
One-to-four residential $317,033  $2,751  $5,081  $-  $324,865 
Multi-family residential  34,057   -   298   -   34,355 
Commercial real estate  115,670   1,922   1,919   -   119,511 
Construction and land development  151,478   -   8,750   -   160,228 
Loans to financial institutions  6,000   -   -   -   6,000 
Commercial business  17,792   -   -   -   17,792 
Total $642,030  $4,673  $16,048  $-  $662,751 

  September 30, 2017 
     Special        Total 
  Pass  Mention  Substandard  Doubtful  Loans 
  (Dollars in Thousands) 
One-to-four residential $343,021  $1,635  $6,642  $-  $351,298 
Multi-family residential  21,191   -   317   -   21,508 
Commercial real estate  125,307   1,449   888   -   127,644 
Construction and land development  136,762   -   8,724   -   145,486 
Commercial business  488   -   -   -   488 
Total $626,769  $3,084  $16,571  $-  $646,424 

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

104

September 30, 2020

    

    

Non-

    

Performing

Performing

Total

(Dollars in Thousands)

Leases

$

176

$

0

$

176

Consumer

 

604

 

0

 

604

Total

$

780

$

0

$

780

September 30, 2019

    

    

Non-

    

Performing

Performing

Total

(Dollars in Thousands)

Leases

$

518

$

0

$

518

Consumer

 

834

 

0

 

834

Total

$

1,352

$

0

$

1,352

88

Table of Contents

  September 30, 2018 
     Non-  Total 
  Performing  Performing  Loans 
  (Dollars in Thousands) 
One-to-four family residential $321,853  $3,012  $324,865 
Leases  1,687   -   1,687 
Consumer  953   -   953 
Total $324,493  $3,012  $327,505 

  September 30, 2017 
     Non-  Total 
  Performing  Performing  Loans 
  (Dollars in Thousands) 
One-to-four family residential $346,191  $5,107  $351,298 
Leases  4,240   -   4,240 
Consumer  1,943   -   1,943 
Total $352,374  $5,107  $357,481 

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is due. The following tables present the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrualnon-accrual loans:

September 30, 2020

    

    

    

    

    

    

    

90 Days+

3089 Days

90 Days +

Total

Total

Non-

Past Due

Current

Past Due

Past Due

Past Due

Loans

Accrual

and Accruing

 September 30, 2018 
              90 Days+ 
    30-89 Days 90 Days + Total Total Non- Past Due 
 Current  Past Due  Past Due  Past Due  Loans  Accrual  and Accruing 
 (Dollars in Thousands) 

(Dollars in Thousands)

One-to-four family residential $321,749  $1,037  $2,079  $3,116  $324,865  $3,012  $             - 

    

$

231,196

$

523

$

2,153

$

2,676

$

233,872

$

3,095

$

0

Multi-family residential  34,355   -   -   -   34,355   -   - 

 

31,100

 

0

 

0

 

0

 

31,100

 

0

 

0

Commercial real estate  117,335   722   1,454   2,176   119,511   1,627   - 

 

136,225

 

2,301

 

1,417

 

3,718

 

139,943

 

1,417

 

0

Construction and land development  151,478   -   8,750   8,750   160,228   8,750   - 

 

252,123

 

0

 

8,525

 

8,525

 

260,648

 

8,525

 

0

Commercial business  17,792   -   -   -   17,792   -   - 

 

12,916

 

0

 

0

 

0

 

12,916

 

0

 

0

Loans to financial institutions  6,000   -   -   -   6,000   -   - 

 

6,000

 

0

 

0

 

0

 

6,000

 

0

 

0

Leases  1,687   -   -   -   1,687       - 

 

176

 

0

 

0

 

0

 

176

 

0

 

  

Consumer  837   116   -   116   953   -   - 

 

604

 

0

 

0

 

0

 

604

 

0

 

0

Total Loans $651,233  $1,875  $12,283  $14,158  $665,391  $13,389  $- 

$

670,340

$

2,824

$

12,095

$

14,919

$

685,259

$

13,037

$

0

105

September 30, 2019

    

    

    

    

    

    

    

90 Days+

3089 Days

90 Days +

Total

Total

Non-

Past Due

Current

Past Due

Past Due

Past Due

Loans

Accrual

and Accruing

(Dollars in Thousands)

One-to-four family residential

$

264,784

$

750

$

3,246

$

3,996

$

268,780

$

3,712

$

0

Multi-family residential

 

30,582

 

0

 

0

 

0

 

30,582

 

0

 

0

Commercial real estate

 

127,104

 

0

 

1,417

 

1,417

 

128,521

 

1,473

 

0

Construction and land development

 

244,618

 

0

 

8,750

 

8,750

 

253,368

 

8,750

 

0

Commercial business

 

19,630

 

0

 

0

 

0

 

19,630

 

0

 

0

Loans to financial institutions

6,000

 

0

 

0

 

0

 

6,000

 

0

 

0

Leases

 

518

 

0

 

0

 

0

 

518

 

0

 

  

Consumer

 

739

 

95

 

0

 

95

 

834

 

0

 

0

Total Loans

$

693,975

$

845

$

13,413

$

14,258

$

708,233

$

13,935

$

0

  September 30, 2017 
                    90 Days+ 
     30-89 Days  90 Days +  Total  Total  Non-  Past Due 
  Current  Past Due  Past Due  Past Due  Loans  Accrual  and Accruing 
  (Dollars in Thousands) 
One-to-four family residential $346,877  $1,746  $2,675  $4,421  $351,298  $5,107  $             - 
Multi-family residential  21,508   -   -   -   21,508   -   - 
Commercial real estate  125,157   1,000   1,487   2,487   127,644   1,566   - 
Construction and land development  136,762   -   8,724   8,724   145,486   8,724   - 
Commercial business  488   -   -   -   488   -   - 
Leases  4,240   -   -   -   4,240   -   - 
Consumer  1,874   69   -   69   1,943   -   - 
Total Loans $636,906  $2,815  $12,886  $15,701  $652,607  $15,397  $- 

Interest income on nonaccrualnon-accrual loans would have increased by approximately $744,000, $636,000,$748,000, $786,000, and $604,000,$744,000, during fiscal years ended September 30, 2018, 2017,2020, 2019, and 2016,2018, respectively, if these loans would have performed in accordance with their original terms.

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

Commercial real estate loans entail significant additional credit risks compared to one-to-four family residential mortgage loans, as they generally involve large loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment experience on loans secured by income-producing properties typically depends on the successful operation of the related real estate project and/or business operation of the borrower who is also the primary

89

occupant, and thus may be subject to a greater extent to the effects of adverse conditions in the real estate market and in the economy in general. Commercial business loans typically involve a higher risk of default than residential loans of like duration since their repayment is generally dependent on the successful operation of the borrower’s business and the sufficiency of collateral, if any. Land acquisition, development and construction lending exposes us to greater credit risk than permanent mortgage financing. The repayment of land acquisition, development and construction loans depends upon the sale of the property to third parties or the availability of permanent financing upon completion of all improvements. These events may adversely affect the borrower and the value of the collateral property.

The following tables summarize the primary segments of the allowance for loan losses, segmented into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of September 30, 2018, 20172020, 2019 and 2016.2018. Activity in the allowance is presented for the years ended September 30, 2018, 2017,2020, 2019 and 2016:2018:

106

Year Ended September 30, 2020

    

One- to

    

Multi-

    

    

Construction

    

    

Loans to

    

    

    

    

four-family

family

Commercial

and land

Commercial

financial

residential

residential

real estate

development

business

institutions

Leases

Consumer

Unallocated

Total

(In Thousands)

ALLL balance at September 30, 2019

$

1,002

$

315

$

1,257

$

2,034

$

206

$

63

$

5

$

13

$

498

$

5,393

Charge-offs

(3)

(15)

(126)

(144)

Recoveries

14

9

6

29

Provision

864

145

732

854

3

26

(11)

113

299

3,025

ALLL balance at September 30, 2020

$

1,877

$

460

$

1,989

$

2,888

$

194

$

89

$

3

$

6

$

797

$

8,303

  September 30, 2018 
  One- to
four-family
residential
  Multi-
family
residential
  Commercial
real estate
  Construction
and land
development
  Commercial
business
  Loans to
financial
institutions
  Leases  Consumer  Unallocated  Total 
  (In Thousands) 
ALLL balance at September 30, 2017 $1,241  $205  $1,201  $1,358  $4  $-  $23  $24  $410  $4,466 
Charge-offs  (114)  -   -   (12)  -   -   -   (11)  -   (137)
Recoveries  28   -   -   -   -   -   -   -   -   28 
Provision  188   142   (47)  208   183   64   (5)  5   72   810 
ALLL balance at September 30, 2018 $1,343  $347  $1,154  $1,554  $187  $64  $18  $18  $482  $5,167 
                                         
Individually evaluated for impairment $-  $-  $-  $-  $-  $-  $-  $-  $-  $- 
Collectively evaluated for impairment  1,343   347   1,154   1,554   187   64   18   18   482   5,167 

  September 30, 2017 
  One- to
four-family
residential
  Multi-
family
residential
  Commercial
real estate
  Construction
and land
development
  Commercial
business
  Leases  Consumer  Unallocated  Total 
  (In Thousands) 
ALLL balance at September 30, 2016 $1,627  $137  $859  $316  $1  $21  $10  $298  $3,269 
Charge-offs  (140)  -   -   (1,819)  -   -   (16)  -   (1,975)
Recoveries  182   -   -   -   -   -   -   -   182 
Provision  (428)  68   342   2,861   3   2   30   112   2,990 
ALLL balance at September 30, 2017 $1,241  $205  $1,201  $1,358  $4  $23  $24  $410  $4,466 
                                     
Individually evaluated for impairment $-  $-  $-  $-  $-  $-  $-  $-  $- 
Collectively evaluated for impairment  1,241   205   1,201   1,358   4   23   24   410   4,466 

Year Ended September 30, 2019

    

One- to

    

Multi-

    

    

Construction

    

    

Loans to

    

    

    

    

four-family

family

Commercial

and land

Commercial

financial

residential

residential

real estate

development

business

institutions

Leases

Consumer

Unallocated

Total

(In Thousands)

ALLL balance at September 30, 2018

$

1,325

$

347

$

1,154

$

1,554

$

187

$

64

$

18

$

17

$

501

$

5,167

Charge-offs

(7)

(31)

(38)

Recoveries

164

164

Provision

(480)

(32)

103

480

19

(1)

18

(4)

(3)

100

ALLL balance at September 30, 2019

$

1,002

$

315

$

1,257

$

2,034

$

206

$

63

$

5

$

13

$

498

$

5,393

  September 30, 2016 
  One- to
four-family
residential
  Multi-
family
residential
  Commercial
real estate
  Construction
and land
development
  Commercial
business
  Leases  Consumer  Unallocated  Total 
  (In Thousands) 
ALLL balance at September 30, 2015 $1,636  $66  $231  $725  $           -  $-  $ 4 $ 268 $ 2,930
Charge-offs  (11)  -   -   -   -   -   -   -   (11)
Recoveries  105   -   -   20   -   -   -   -   125 
Provision  (103)  71   628   (429)  1   21   6   30   225 
ALLL balance at September 30, 2016 $1,627  $137  $859  $316  $1  $21  $10  $298  $3,269 
                                     
Individually evaluated for impairment $-  $-  $-  $-  $-  $-  $-  $-  $- 
Collectively evaluated for impairment  1,627   137   859   316   1   21   10   298   3,269 

107

September 30, 2018

    

One- to

    

Multi-

    

    

Construction

    

    

Loans to

    

    

    

four-family

family

Commercial

and land

Commercial

financial

residential

residential

real estate

development

business

institutions

Leases

Consumer

Unallocated

Total

(In Thousands)

ALLL balance at September 30, 2017

$

1,241

$

205

$

1,201

$

1,358

$

4

$

0

$

23

$

24

$

410

$

4,466

Charge-offs

(114)

0

0

(12)

0

0

0

(11)

(137)

Recoveries

28

0

0

0

0

0

0

0

28

Provision

170

142

(47)

208

183

64

(5)

4

91

810

ALLL balance at September 30, 2018

$

1,325

$

347

$

1,154

$

1,554

$

187

$

64

$

18

$

17

$

501

$

5,167

Individually evaluated for impairment

$

0

$

0

$

0

$

0

$

0

$

0

$

0

$

0

$

0

$

Collectively evaluated for impairment

 

1,325

 

347

 

1,154

 

1,554

 

187

 

64

 

18

 

17

 

501

 

5,167

Loans acquired in the merger with Polonia Bancorp were recorded at fair value with no carryover of the related allowance for loan losses. Management measured loan fair values based on loan file reviews, appraised collateral values, expected cash flows, and historical loss factors of Polonia Bank. The fair value of the loans acquired was $160.8 million net of a $4.6 million discount.discount of which $2.5 million of the discount remained as of September 30, 2020. The discount is accreted to interest income over the remaining contractual life of the loans.loans acquired. All loans that had a loan to value loan-to-value

90

ratio of greater than 80% were determined to have sufficient collateral to recover the carrying amount. Thus, none of the loans acquired were considered to be purchased credit-impaired loans and any possible loss would be considered immaterial.

Management established a provision for loan losses of $810,000, $3.0 million, $100,000 and $225,000 during$810,000 for the years ended September 30, 2018, 20172020, 2019 and 2016,2018, respectively. The provision for loan losses was deemed necessary for fiscal 20182020 primarily due to the increasecontinued uncertainty associated with the economic effects of the COVID-19 pandemic, especially in light of the aggregateincreasing level of commercial and construction loans outstandingcases of COVID-19 in recent months, and the levelpotential credit deterioration caused thereby. Minimal delinquencies have occurred as of charge-offs incurred during fiscal 2018.September 30, 2020 due to the effects of the COVID-19 pandemic. There were no loan deferments outstanding as of September 30, 2020 and all existing deferrals had ended by September 30, 2020. The Company believes that the allowance for loan losses at September 30, 20182020 was sufficient to cover all inherent and known losses associated with the loan portfolio at such date. At September 30, 2018,2020, the Company’s non-performing assets totaled $14.4$13.0 million or 1.3%1.1% of total assets as compared to $15.6$14.3 million or 1.7%1.1% of total assets at September 30, 2017.2019. Non-performing assets at September 30, 20182020 included five5 construction loans aggregating $8.7$8.5 million, 3228 one-to-four family residential loans aggregating $2.9$3.1 million one single-family residential investment property loan in the amount of $156,000 and five4 commercial real estate loans aggregating $1.6$1.4 million. Non-performing assets atThere was no real estate acquired through foreclosure or deed-in-lieu as of September 30, 2018 also included real estate owned consisting of two single-family residential properties with an aggregate carrying value of $1.0 million.2020.  At September 30, 2018,2020, the Company had 104 loans aggregating $6.2totaling $5.0 million that were classified as troubled debt restructurings (“TDRs”). Five of such loans aggregating $650,000 were performing in accordance with the restructured terms as of September 30, 2018 and were accruing interest. OneNaN TDR is on non-accrual and consists of a $449,000$415,000 loan secured by a single family property. One TDRsingle-family residential property and is on non-accrual and consists of a $156,000 loan secured by various commercial and residential properties.performing in accordance with the restructured terms. The three3 remaining TDRs totaling $4.9$4.6 million are also classified as non-accrual and are a part of a lending relationship totaling $10.6$10.4 million (after taking into account athe previously disclosed $1.9 million write-down recognized during the quarter ending March 31, 2017 related to this borrowing relationship).The primary project of the borrower (the development of a 169-unit townhouse project in Bristol Borough, Pennsylvania) is the subject of litigation between the Bank and the borrower. SubsequentAs previously disclosed, subsequent to the commencement of the litigation, the borrower filed for bankruptcy under Chapter 11 (Reorganization) of the federal bankruptcy code in June 2017. The Bank has moved the underlying litigation noted above with the borrower and the Bank from state court to the federal bankruptcy court in which the bankruptcy proceeding is being heard. The state litigation is stayed pending the resolution of the bankruptcy proceedings. AsNine units have been sold in the project and a portion of September 30, 2018, the Company had reviewed $19.2 million of loans for possible impairment of which $14.3 million was classified substandard compared to $19.7 million reviewed for possible impairment and $12.7 million of which was classified substandard as of September 30, 2017.

proceeds have been applied against the outstanding debt.Management will continue to monitor and modify the allowance for loan losses as conditions dictate. No assurances can be given that the level of the allowance for loan losses will cover all of the inherent losses on the loans or that future adjustments to the allowance for loan losses will not be necessary if economic and other conditions differ substantially from the economic and other conditions used by management to determine, in part the current level of the allowance for loan losses.

The following tables set forth a summary of the TDRs activity for the year ended September 30, 2016. There were no TDRs approved in 20182020, 2019 or 2017.2018. All of the existing TDRs involved changes in the interest rates on the loans; no debt was forgiven. At September 30, 2018,2020, out of the 10 then existingfour then-existing TDR loans, five were performing and the remaining fiveall were classified as non-performing.

There were no TDRs established during the years ended September 30, 2018 or 2017.

108

  As of and for the Year Ended September 30, 2016 
  Restructured Current Period 
(Dollar Amounts in Thousands) Number of
Loans
  Pre-
Modification
Outstanding
Recorded
Investment
  Post-
Modification
Outstanding
Recorded
Investment
 
          
One-to-four family residential             1  $           482  $           482 
   1  $482  $482 

At September 30, 2018,2020, the Company had twenty-three consumer mortgages14 one-to-four family residential loans with a carrying amount of $1.4$1.0 million that are secured by residential real estate property for which foreclosure proceedings are in process according to local jurisdictions.

7.

91

7.OFFICE PROPERTIES AND EQUIPMENT

Office properties and equipment are summarized by major classifications as follows:

September 30, 

    

2020

    

2019

 September 30, 
 2018  2017 
 (Dollars in Thousands) 
     

(Dollars in Thousands)

Land $1,437  $1,437 

$

1,437

$

1,437

Buildings and improvements  7,449   7,449 

 

7,449

 

7,449

Furniture and equipment  3,417   3,158 

 

4,046

 

3,639

        

Total  12,303   12,044 

 

12,932

 

12,525

Accumulated depreciation  (4,864)  (4,240)

 

(5,803)

 

(5,319)

        

Total office properties and equipment, net of accumulated depreciation $7,439  $7,804 

$

7,129

$

7,206

For the years ended September 30, 2018, 20172020, 2019 and 2016,2018, depreciation expense amounted to $625,000, $553,000$484,000, $619,000 and $325,000,$625,000, respectively.

.

Lease expense was $360,000, $383,000 and $352,000 for the years ended September 30, 2018, 2017 and 2016, respectively. The Company has executed certain lease commitments is obligated to pay: $321,000 for fiscal year 2019, $250,000 for fiscal year 2020, $253,000 for fiscal year 2021, $256,000 for fiscal year 2022, $260,000 for fiscal year 2023 and $984,000 thereafter.

109

8.      DEPOSITS

Deposits consist of the following major classifications:

September 30, 

September 30, 

 

2020

2019

 

    

Amount

    

Percent

    

Amount

    

Percent

 

 September 30, 
 2018  2017 
 Amount Percent Amount Percent 
 (Dollars in Thousands) 
         

(Dollars in Thousands)

 

Non-interest-bearing checking accounts $13,620   1.7% $9,375   1.5%

$

30,002

 

3.9

%  

$

16,949

 

2.2

%

Interest-bearing checking accounts  49,209   6.3%  54,267   8.5%

 

135,797

 

17.6

 

58,647

 

7.9

Money market deposit accounts  66,120   8.4%  76,272   12.0%

 

111,105

 

14.4

 

75,766

 

10.2

Passbook, club and statement savings  91,489   11.7%  101,743   16.0%

 

224,435

 

29.1

 

80,899

 

10.9

Certificates maturing in six months or less  301,184   38.4%  154,750   24.3%

 

125,165

 

16.2

 

294,343

 

39.5

Certificates maturing in more than six months  262,636   33.5%  239,575   37.7%

 

144,445

 

18.8

 

218,840

 

29.3

                

Total $784,258   100.0% $635,982   100.0%

$

770,949

 

100.0

%  

$

745,444

 

100.0

%

The amount of scheduled maturities of certificate accounts was as follows:

 September 30, 2018 
 (Dollars in Thousands) 
   

September 30, 2020

    

(Dollars in Thousands)

One year or less $           411,988 

$

170,554

One through two years  75,421 

 

43,341

Two through three years  19,876 

 

30,389

Three through four years  29,059 

 

18,647

Four through five years  27,476 

 

6,679

    

Total $563,820 

$

269,610

Certificates of deposit of $250,000 or more at September 30, 20182020 and 20172019 totaled $81.9$76.6 million and $28.9$182.8 million, respectively. Included in certificates of deposit are brokered deposits at September 30, 2020 and 2019 totaling $63.4 million and $153.1 million, respectively.

92

Interest expense on deposits was comprised of the following:

Year Ended September 30, 

    

2020

    

2019

    

2018

 Year Ended September 30, 
 2018  2017  2016 
 (Dollars in Thousands) 

(Dollars in Thousands)

Checking and money market deposit accounts $247  $192  $165 

$

2,045

$

899

$

247

Passbook, club and statement savings accounts  66   55   83 

 

38

 

124

 

66

Certificate accounts  7,073   3,683   2,613 

 

8,819

 

12,137

 

7,073

Total $7,386  $3,930  $2,861 

$

10,902

$

13,160

$

7,386

110

9.9.     ADVANCES FROM FEDERAL HOME LOAN BANK – SHORT TERM

The yearyears ended September 30, 2020 and 2019 outstanding balances and related information of short-term borrowings from the FHLB of Pittsburgh are summarized follows:

(Dollar Amounts in Thousands) 2018  2017 
       
Balance at year-end $10,000  $20,000 
Average balance outstanding $18,933  $21,784 
Maximum month-end balance $30,200  $35,000 
Weight-average rate at year-end  2.31%  1.31%
Weight-average rate during the year  1.81%  0.84%

    

At or For the Year Ended September 30, 

 

    

2020

    

2019

    

2018

 

(Dollars in Thousands)

 

FHLB advances:

Average balance outstanding

$

66,735

$

31,158

$

18,933

Maximum amount outstanding at any month-end during the period

 

115,000

 

90,000

 

30,200

Balance outstanding at end of period

 

25,000

 

90,000

 

10,000

Average interest rate during the period

 

1.58

%  

 

2.53

%  

 

1.81

%

Weighted average interest rate at end of period

 

0.39

%  

 

2.32

%  

 

2.31

%

As of September 30, 2018,2020, the $25.0 million borrowing consisted of one $10.0 million 30 day1 90-day FHLB advance associated with an interest rate swap contract with a weighted average effective cost of 270 basis points.

contract.

As of September 30, 2017,2019, the $20.0$90.0 million borrowing consisted of two $10.0 million 30 day7 30-day FHLB advances associated with an interest rate swap contract with a weighted average effective cost of 125 basis points.

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

contracts.

The Company maintains borrowing facilities with the FHLB of Pittsburgh, ACBB and the Federal Reserve Bank of Philadelphia and the terms and interest raterates are subject to change on the date of execution.execution of borrowings. Available borrowings are based on collateral with the facility. The Company maintains unsecured borrowing facilities with ACBB and PNC for $12.5 million and $10.0 million, respectively.

10.

93

10.     ADVANCES FROM FEDERAL HOME LOAN BANK – LONG TERM

Pursuant to collateral agreements with the FHLB of Pittsburgh, advances are secured by a blanket collateral pledge

of loans heldloansheld by the Bank and qualifying fixed-income securities and FHLB stock. The long-term advances outstanding as of September 30, 20182020 are as follows:

Lomg-term FHLB advances: Maturity range Weighted average  Stated interest rate range       

Maturity range

Weighted average

Stated interest rate range

Description from to interest rate  from  to  2018  2017 

    

from

    

to

    

interest rate

    

from

    

to

    

2020

    

2019

            (Dollars in Thousands) 

(Dollars in Thousands)

Fixed Rate - Amortizing 1-Oct-18 30-Sep-19  1.53%  1.53%  1.53% $1,639  $3,549 

 

1‑Oct‑19

 

30‑Sep‑20

 

%  

%  

%  

$

0

$

236

Fixed Rate - Amortizing 1-Oct-20 30-Sep-21  2.68%  1.94%  2.83%  23,288   - 

 

1‑Oct‑20

 

30‑Sep‑21

 

2.77

%  

1.94

%  

2.83

%  

 

5,179

 

14,354

Fixed Rate - Amortizing 1-Oct-21 30-Sep-22  2.80%  1.99%  3.05%  11,848   - 

 

1‑Oct‑21

 

30‑Sep‑22

 

2.84

%  

1.99

%  

3.05

%  

 

5,523

 

8,729

Fixed Rate - Amortizing 1-Oct-22 30-Sep-23  2.88%  1.94%  3.11%  8,550   1,974 

 

1‑Oct‑22

 

30‑Sep‑23

 

2.89

%  

1.94

%  

3.11

%  

 

5,265

 

6,931

Total   2.71%         $45,325  $5,523 

 

  

 

  

 

2.83

%  

  

 

  

$

15,967

$

30,250

                    
Fixed Rate - Advances 1-Oct-17 30-Sep-18                 $35,271 
Fixed Rate - Advances 1-Oct-18 30-Sep-19  1.75%  1.40%  2.66% $18,528   18,578 

Fixed Rate - Advances 1-Oct-19 30-Sep-20  2.62%  1.38%  3.06%  12,413   12,467 

 

1‑Oct‑19

 

30‑Sep‑20

 

%  

%  

%  

$

0

$

12,304

Fixed Rate - Advances 1-Oct-20 30-Sep-21  2.45%  1.42%  2.92%  3,037   3,057 

 

1‑Oct‑20

 

30‑Sep‑21

 

2.37

%  

1.42

%  

2.92

%  

 

17,996

 

18,017

Fixed Rate - Advances 1-Oct-21 30-Sep-22  2.28%  1.94%  3.23%  23,380   19,422 

 

1‑Oct‑21

 

30‑Sep‑22

 

2.31

%  

1.94

%  

3.23

%  

 

63,293

 

63,336

Fixed Rate - Advances 1-Oct-22 30-Sep-23  2.70%  2.18%  3.15%  37,000   - 

 

1‑Oct‑22

 

30‑Sep‑23

 

2.52

%  

2.00

%  

3.22

%  

 

94,999

 

94,999

Fixed Rate - Advances 1-Oct-23 30-Sep-24  3.20%  3.20%  3.20%  5,000   - 

 

1‑Oct‑23

 

30‑Sep‑24

 

2.88

%  

2.38

%  

3.20

%  

 

67,998

 

67,998

Total   2.43%         $99,358  $88,795 

 

  

 

  

 

2.55

%  

  

 

  

$

244,286

$

256,654

                    
   2.52%      Total  $144,683  $94,318 

 

2.57

%  

 

Total

$

260,253

$

286,904

111

Advances from the FHLB of Pittsburgh with coupon rates ranging from 1.38%1.42% to 3.23% are as follows.

Weighted Average

 

Maturity in Fiscal

    

Amount

    

Coupon Rate

 

    Weighted Average 
Maturity Amount  Coupon Rate 
 (Dollars in Thousands) 
     
2019 $33,819              2.13%
2020  26,772   2.66%

(Dollars in Thousands)

 

2021  13,096   2.71%

$

28,185

 

2.44

%

2022  27,310   2.37%

 

67,285

 

2.32

2023  38,686   2.71%

 

96,785

 

2.51

2024  5,000   3.20%

 

67,998

 

2.88

 $144,683   2.52%

$

260,253

 

2.57

The Bank maintains a blanket collateral pledge agreement using qualifying loans with the FHLB of Pittsburgh for future borrowing needs. At September 30, 2018,2020, the Bank had the ability to obtain $265.7$103.4 million of additional FHLB advances.

11.

11.    INCOME TAXES

The Company files a consolidated federal income tax return. The Company uses the specific charge-off method for computing reserves for bad debts. Generally this method allows the Company to deduct an annual addition to the reserve for bad debtdebts equal to its net charge-offs.

The provision for income taxes for the fiscal years ended September 30, 2020, 2019 and 2018 consists of the following:

 Year Ended September 30, 
 2018  2017  2016 
 (Dollars in Thousands) 
       

Current:            

 

  

 

  

 

  

Federal expense $2,429  $801  $1,275 

$

1,952

$

2,133

$

2,429

State expense

93

 

205

 

Total current taxes  2,429   801   1,275 

 

2,045

2,338

2,429

            

 

  

 

  

 

  

Change in corporate tax rate  1,756   -   - 

 

0

 

0

 

1,756

Deferred income tax expense (benefit)  (484)  140   (16)

 

(445)

 

(188)

 

(484)

Total income tax provision $3,701  $941  $1,259 

$

1,600

$

2,150

$

3,701

112

94

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

September 30, 

September 30, 

    

2020

    

2019

 September 30, 
 2018  2017 
 (Dollars in Thousands) 

(Dollars in Thousands)

Deferred tax assets:        

 

  

 

  

Allowance for loan losses $1,445  $1,675 

$

2,071

$

1,488

Non-accrual interest  312   349 

Nonaccrual interest

 

561

 

487

Accrued vacation  29   12 

 

16

 

7

Capital loss carryforward  356   476 

 

4

 

121

Post-retirement benefit plans  85   98 
Split dollar life insurance  10   15 

 

9

 

9

Unrealized losses on available for sale securities  2,212   569 

Post-retirement benefits

 

72

 

76

Realized loss on equity securities

3

 

Unrealized losses on interest rate swaps

3,596

1,836

Deferred compensation  838   1,439 

 

781

 

809

Goodwill  80   148 

 

58

 

69

Purchase accounting adjustments  -   731 

Other

 

48

 

64

Employee benefit plans  239   90 

 

187

 

216

Other  55   254 
Total deferred tax assets  5,661   5,856 

 

7,406

 

5,182

Valuation allowance  (356)  (378)

 

(4)

 

(121)

Total deferred tax assets, net of valuation allowance  5,305   5,478 

 

7,402

 

5,061

        

 

  

 

  

Deferred tax liabilities:        

 

  

 

  

Property  179   332 

 

137

 

141

Unrealized gains on interest rate swaps  44   171 

Realized gain on equity securities

19

Unrealized gains on available for sale securities

2,813

2,153

Purchase accounting adjustments  59   - 

 

321

 

215

Deferred loan fees  368   884 

 

229

 

175

Total deferred tax liabilities  650   1,387 

 

3,500

 

2,703

Net deferred tax asset $4,655  $4,091 

Net deferred tax assets

$

3,902

$

2,358

The Company establishes a valuation allowance for deferred tax assets when management believes that the deferred tax assets are not likely to be realized either through a carry back to taxable income in prior years, future reversals of existing taxable temporary differences, and, to a lesser extent, future taxable income. The valuation allowance totaled $356,000$4,000 and $378,000$121,000 at September 30, 20182020 and 2017,2019, respectively.

113

95

The income tax expense differs from that computed at the statutory federal corporate tax rate as follows:

Year Ended September 30, 

2020

2019

2018

    

    

Percentage

    

    

Percentage

    

    

Percentage

 

of Pretax

of Pretax

of Pretax

 

Amount

Income

Amount

Income

Amount

Income (Loss)

 

 Amount  Percentage
of Pretax
Income
  Amount  Percentage
of Pretax
Income
  Amount  Percentage
of Pretax
Income (Loss)
 
 Dollars in Thousands) 

(Dollars in Thousands)

 

Tax at statutory rate $2,611   24.3% $1,265  34.0% $1,353   34.0%

$

2,343

21.0

%  

$

2,453

 

21.0

%  

$

2,611

 

24.3

%

Adjustments resulting from:                        

 

  

  

 

  

 

  

 

 

  

State tax expense

93

0.8

162

1.3

0

0

Change in corporate tax rate  1,756   16.2   -   -   -   - 

 

0

0

 

0

 

0

 

1,756

 

16.2

Valuation allowance  -   -   -   -   (156)  (3.9)
Tax exempt income  (77)  (0.7)  (109)  (2.9)  -   - 

 

(537)

(4.8)

 

(313)

 

(2.7)

 

(77)

 

(0.7)

Nondeductible merger expenses  -   -   80   2.1   -   - 

Capital gain from sale of securities

 

(117)

(1.0)

 

0

 

0

 

0

 

0

Income from bank owned life insurance  (155)  (1.4)  (230)  (6.2)  (113)  (2.8)

 

(138)

(1.2)

 

(135)

 

(1.1)

 

(155)

 

(1.4)

Employee benefit plans  (134)  (1.2)  (39)  (1.1)  151   3.8 

 

(27)

(0.3)

 

(27)

 

(0.2)

 

(134)

 

(1.2)

Other  (300)  (2.9)  (26)  (0.6)  24   0.5 

 

(17)

(0.2)

 

10

 

0.1

 

(300)

 

(2.9)

                        

Income tax expense $3,701   34.3% $941   25.3% $1,259   31.6%

$

1,600

14.3

%  

$

2,150

 

18.4

%  

$

3,701

 

34.3

%

On December 22, 2017, federal tax reform legislation, commonly referred to as the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), was enacted. The Tax Act makes broad and complex changes to the U.S. tax code that affected our income tax rate in fiscal 2018. The Tax Act reduced the U.S. federal corporate tax rate from 34% to 21%. As a result, the Company was required to re-measure, through income tax expense, the deferred tax assets and liabilities using the enacted rate at which they are expected to be recovered or settled. The re-valuationrevaluation of the net deferred tax asset resulted in additional income tax expense of $1.8 million for the fiscal year ended September 30, 2018.

There is currently no liability for uncertain tax positions and no known unrecognized tax benefits. The Company recognizes, when applicable, interest and penalties related to unrecognized tax benefits in the provision for income taxes in the Consolidated Statements of Operations as a component of income tax expense. During fiscal 2017, the Internal Revenue Service conducted an audit of the Company’s tax returns for the year ended September 30, 2014, and no adverse findings were reported. The Company’s federal and state income tax returns for taxable years through September 30, 20142016 have been closed for purposes of examination by the Internal Revenue Service and the Pennsylvania Department of Revenue.

12.

12.     REGULATORY CAPITAL REQUIREMENTS

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory – and possibly additional discretionary – actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and the Bank’s classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of Tier 1 capital (as defined in the regulations) to average assets (as defined) and risk-weighted assets (as defined), Tier 2 common capital (as defined) to risk-weighted assets  and of total capital (as defined) to risk-weighted assets. Management believes, as of September 30, 20182020 and 2017,2019, that the Company and the Bank met all regulatory capital adequacy requirements to which they each are subject.

114

To be categorized as well capitalized, the Bank must maintain the minimum Tier 1 capital, Tier 1 common equity, Tier 1 risk-based and total risk-based ratios as set forth in the table below.The Company is not subject to the regulatory

96

capital ratios imposed by Basel III on bank holding companies because the Company is deemed to be a small bank holding company.

The Company’s and the Bank’s actual capital amounts and ratios are also presented in the following table:

To Be

 

Well Capitalized

 

Under Prompt

 

Required for Capital

Corrective Action

 

Actual

Adequacy Purposes

Provisions

 

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

 

        To Be 
        Well Capitalized 
        Under Prompt 
      Required for Capital Corrective Action 
 Actual  Adequacy Purposes  Provisions 
 Amount  Ratio  Amount  Ratio  Amount  Ratio 
 (Dollars in Thousands) 
September 30, 2018:             

 

(Dollars in Thousands)

September 30, 2020:

 

  

 

  

 

  

 

  

 

  

  

Tier 1 capital (to average assets)                        

 

  

 

  

 

  

 

  

 

  

  

Company $129,890   12.51%  N/A   N/A   N/A   N/A 

$

125,618

 

10.34

%  

 

N/A

 

N/A

N/A

N/A

  

Bank  123,199   11.86  $41,542   4.0% $51,928   5.0%

 

123,185

 

10.51

$

46,867

 

4.0

%  

$

58,584

5.0

%

Tier 1 Common (to risk-weighted assets)                        

 

  

 

 

  

 

  

  

  

Company  129,890   19.74   N/A   N/A   N/A   N/A 

 

125,618

 

17.21

 

N/A

 

N/A

N/A

N/A

  

Bank  123,199   18.73   29,603   4.5   42,759   6.5 

 

123,185

 

16.88

 

32,841

 

4.5

47,437

6.5

  

Tier 1 capital (to risk-weighted assets)                        

 

  

 

  

 

  

 

  

  

  

Company  129,890   19.74   N/A   N/A   N/A   N/A 

 

125,618

 

17.21

 

N/A

 

N/A

N/A

N/A

  

Bank  123,199   18.73   26,313   6.0   39,470   8.0 

 

123,185

 

16.88

 

43,788

 

6.0

58,384

8.0

  

Total capital (to risk-weighted assets)                        

 

  

 

  

 

  

 

  

  

  

Company  135,374   20.58   N/A   N/A   N/A   N/A 

 

134,389

 

18.41

 

N/A

 

N/A

N/A

N/A

  

Bank  128,683   19.56   52,627   8.0   65,783   10.0 

 

131,956

 

18.08

 

58,384

 

8.0

72,980

10.0

  

                        
September 30, 2017:                        

 

  

 

  

 

  

 

  

  

  

September 30, 2019:

 

  

 

  

 

  

 

  

  

  

Tier 1 capital (to average assets)                        

 

  

 

  

 

  

 

  

  

  

Company $130,128   14.81%  N/A   N/A   N/A   N/A 

$

131,859

 

10.89

%  

 

N/A

 

N/A

N/A

N/A

  

Bank  119,189   13.59  $35,093   4.0% $43,866   5.0%

 

129,486

 

10.49

$

49,386

 

4.0

%  

$

61,732

5.0

%

Tier 1 Common (to risk-weighted assets)                        

 

  

 

 

  

 

  

  

  

Company  130,128   23.94   N/A   N/A   N/A   N/A 

 

131,859

 

18.43

 

N/A

 

N/A

N/A

N/A

  

Bank  119,189   21.97   24,411   4.5   35,260   6.5 

 

129,486

 

18.10

 

32,190

 

4.5

46,497

6.5

  

Tier 1 capital (to risk-weighted assets)                        

 

  

 

  

 

  

 

  

  

  

Company  130,128   23.94   N/A   N/A   N/A   N/A 

 

131,859

 

18.43

 

N/A

 

N/A

N/A

N/A

  

Bank  119,189   21.97   32,548   6.0   43,397   8.0 

 

129,486

 

18.10

 

28,613

 

6.0

42,920

8.0

  

Total capital (to risk-weighted assets)                        

 

  

 

  

 

  

 

  

  

  

Company  134,963   24.83   N/A   N/A   N/A   N/A 

 

137,842

 

19.27

 

N/A

 

N/A

N/A

N/A

  

Bank  124,024   22.86   43,397   8.0   54,247   10.0 

 

135,469

 

18.94

 

57,227

 

8.0

71,534

10.0

  

13.

13.     EMPLOYEE BENEFITS

The Bank is a member of a multi-employer (under the provisions of the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code of 1986) defined benefit pension plan covering all employees meeting certain eligibility requirements. The Bank’s policy is to fund pension costs accrued. The expense relating to this plan for the years ended September 30, 2020, 2019 and 2018 2017was $743,000, $632,000 and 2016 was $441,000, $379,000 and $256,000, respectively. There are no collective

97

bargaining agreements in place that require contributions to the plan. Additional information regarding the plan as of September 30, 20182020 is noted below:

Legal Name of PlanPentegra Defined Benefit Plan for Financial
Institutions
Plan Employer Identification Number13-5645888
The Company's Contribution for the year ended September 30, 2018$                                 379,000
Are Company's Contributions more than 5% of total contributions?No
Funded Status88.80%

Pentegra Defined
Benefit Plan for

 

Legal Name of Plan

    

Financial Institutions

Plan Employer Identification Number

 

13-5645888

The Company's Contribution for the year ended September 30, 2020

$

743,000

Are Company's Contributions more than 5% of total contributions?

 

No

Funded Status

 

85.09

%

115

The Pentegra Defined Benefits Plan for Financial Institutions is a single plan under Internal Revenue Code Section 413(c) and, as a result, all of the assets stand behind all of the liabilities. Accordingly, under the plan, contributions made by a participating employer may be used to provide benefits to participants of other participating employers. DuringIn November 2016, participation in the plan by Bank employees was frozen in an effort to reduce expenses on a going forward basis.

The Bank also has a defined contribution plan for employees meeting certain eligibility requirements. The defined contribution plan may be terminated at any time at the discretion of the Bank. There was an expense of $102,000were expenses relating to this plan for the year ended September 30, 2018. There was no expense relating to the plan for 2017 and 2016.

As of December 31, 2016, the Boards of Directors of the Company and the Bank voted to terminate the Bank’s employee stock ownership plan (“ESOP”) effective December 31, 2016. The final allocation was made to the individual participants during December 2017. The expense relating to the ESOP for thefiscal years ended September 30, 2020, 2019 and 2018 2017of $231,000, $126,000 and 2016 was $-0-, $152,000 and $526,000,$102,000, respectively.

The Company maintains the 2008 Recognition and Retention Plan (“RRP”) which is administered by a committee of the Board of Directors of the Company. The RRP provides for the grant of shares of common stock of the Company to officers, employees and directors of the Company. In order to fund the grant of shares under the RRP, the 2008 RRP purchased 213,528 shares (on a converted basis) of the Company’s common stock in the open market for an aggregating cost of approximately $2.5 million, at an average purchase price per share of $11.49. The Company made sufficient contributions to the 2008 RRP to fund these purchases. During February 2015, shareholders approved the 2014 Stock Incentive Plan (the “2014 SIP”). As part of the 2014 SIP, a maximum of 285,655 shares of common stock can be awarded as restricted stock awards or units, of which 233,500 shares were awarded during February 2015. In August 2016, the Company granted 7,473 shares under the 2008 RRP and 3,027 shares under the 2014 SIP. In March 2017, the Company granted 17,128 shares under the 2014 SIP. In March 2018, the Company granted 8,209 shares under the 2008 RRP and 18,291 shares under the 2014 SIP. Shares subject to awards under either plan generally vest at the rate of 20% per year over five years.

During the year ended September 30, 2018, approximately $565,000 was recognized in compensation expense for the RRP. Tax benefits of $200,000 were recognized during the year ended September 30, 2018. During the year ended September 30, 2017, approximately $578,000 was recognized in compensation expense for the RRP. Tax benefits of $286,000 were recognized during the year ended September 30, 2017. During the year ended September 30, 2016, approximately $463,000 was recognized in compensation expense for the RRP. Tax benefits of $219,000 were recognized during the year ended September 30, 2016. At September 30, 2018, approximately $1.3 million of additional compensation expense for the shares awarded related to the RRP remained unrecognized. The weighted average period over which this expense will be recognized is 2.3 years.

A summary of the Company’s non-vested stock award activity for the yearsyear ended September 30, 2018 and 20172020 is presented in the following table:

  Year Ended
September 30, 2018
 
  Number of
Shares
  Weighted Average
Grant Date Fair Value
 
       
Non-vested stock awards at beginning of year  142,594  $           12.79 
Issued  26,500   18.46 
Forfeited  (5,243)  11.91 
Vested  (46,935)  12.16 
Non-vested stock awards at the end of the period  116,916  $14.36 

Year Ended

September 30, 2020

Number of

Weighted Average

    

Shares

    

Grant Date Fair Value

Non-vested stock awards at October 1, 2019

 

68,980

$

15.05

Granted

 

 

Forfeited

 

(1,800)

 

18.46

Vested

 

(44,124)

 

13.49

Non-vested stock awards at September 30, 2020

 

23,056

$

17.78

116

  Year Ended
September 30, 2017
 
  Number of
Shares
  Weighted Average
Grant Date Fair Value
 
       
Nonvested stock awards at beginning of year  172,788  $           12.03 
Issued  17,128   17.43 
Forfeited  (1,467)  10.47 
Vested  (45,855)  11.72 
Nonvested stock awards at the end of the period  142,594  $12.79 

  Year Ended
September 30, 2016
 
  Number of
Shares
  Weighted Average
Grant Date Fair Value
 
       
Nonvested stock awards at beginning of year  241,428  $           11.74 
Issued  10,500   14.42 
Forfeited  (30,180)  11.92 
Vested  (48,960)  11.60 
Nonvested stock awards at the end of the period  172,788  $12.03 

The Company maintains the 2008 Stock Option Plan (the “Option Plan”) which authorizes the grant of stock options to officers, employees and directors of the Company to acquire shares of common stock with an exercise price at least equal to the fair market value of the common stock on the grant date. Options generally become vested and exercisable at the rate of 20% per year over five years and are generally exercisable for a period of ten years after the grant date. A total of 533,808 (on a converted basis) shares of common stock were approved for future issuance pursuant to the Option Plan. As of September 30, 2018, all of the options had been awarded under the Option Plan. The 2014 SIP reserved up to 714,145 shares for issuance pursuant to options. Options to purchase 605,000 shares were awarded during February 2015

98

pursuant to the 2014 SIP. During August 2016, the Company granted 18,866 shares under the Option Plan and 8,634 shares under the 2014 SIP. In March 2017, the Company granted 22,828 shares under the 2014 SIP. In May 2017, the Company granted 25,000 shares under the 2014 SIP and 283 shares under the Option Plan. In March 2018, the Company granted 159,265 shares under the 2014 SIP and 18,235 shares under the Option Plan.

In July 2019, the Company granted 39,702 shares under the 2014 SIP. In September 2020, the Company granted 12,500 shares under the 2014 SIP.

A summary of the status of the Company’ stock options under the Option Plan and the 2014 SIP as of September 30, 2018, 2017, and 20162020 and changes during the yearsyear ended September 30, 2018, 2017, and 20162020 are presented below:

 Year Ended
September 30, 2018
 
 Number of
Shares
  Weighted Average
Exercise Price
 
     
Options outstanding at beginning of year  922,564  $           12.04 

Year Ended

September 30, 2020

    

Number of

    

Weighted Average

Shares

Exercise Price

Options outstanding at October 1, 2019

 

793,034

$

13.86

Granted  177,500   18.46 

 

12,500

 

10.00

Exercised  (216,796)  11.76 

 

(45,276)

 

8.39

Forfeited  (14,242)  11.90 

 

(189,000)

 

11.97

Outstanding at the end of the period  869,026   13.32 
Exercisable at the end of the period  451,899  $11.45 

Outstanding at September 30, 2020

 

571,258

$

14.58

Exercisable at September 30, 2020

 

397,465

$

13.45

117

  Year Ended
September 30, 2017
 
  Number of
Shares
  Weighted Average
Exercise Price
 
       
Options outstanding at beginning of year  921,909  $           11.70 
Granted  47,828   17.92 
Exercised  (43,890)  11.41 
Forfeited  (3,283)  11.84 
Outstanding at the end of the period  922,564   12.04 
Exercisable at the end of the period  554,802  $11.47 

  Year Ended
September 30, 2016
 
  Number of
Shares
  Weighted Average
Exercise Price
 
       
Options outstanding at beginning of year  1,074,430  $           11.92 
Granted  27,500   14.42 
Exercised  (99,545)  11.45 
Forfeited  (80,476)  11.52 
Outstanding at the end of the period  921,909   11.70 
Exercisable at the end of the period  467,397  $11.40 

The weighted average remaining contractual term of the outstanding options was approximately 6.56.1 years for options outstanding as of September 30, 2018.

2020.

The estimated fair value of options granted during fiscal 2009 was $2.98 per share, $2.92 for options granted during fiscal 2010, $3.34 for options granted during fiscal 2013, $4.67 for the options granted during fiscal 2014, $4.58 for options granted during fiscal 2015, $2.13 for options granted during fiscal 2016, $3.18 for options granted during fiscal 2017, and $3.63 for options granted to dateduring fiscal 2018 and $3.38 for options granted in fiscal 2018.2019. The fair value for grants made in fiscal 20182017 was estimated on the date of grant using the Black-Scholes pricing model with the following assumptions: an exercise and fair value of $17.43, term of seven years, volatility rate of 14.37%, interest rate of 2.22% and a yield rate of 0.69%. The fair value for grants made in fiscal 2018 was estimated on the date of grant using the Black-Scholes pricing model with the following assumptions: an exercise and fair value of $18.46, term of seven years, volatility rate of 15.90%, interest rate of 2.82% and a yield rate of 1.08%.

The fair value for grants made in fiscal 2019 was estimated on the date of grant using the Black-Scholes pricing model with the following assumptions: an exercise and fair value of $18.16, term of seven years, volatility rate of 17.76%, interest rate of 1.87% and a yield rate of 1.10%. The fair value for grants made in fiscal 2020 was estimated on the date of grant using the Black-Scholes pricing model with the following assumptions: an exercise and fair value of $10.00, term of seven years, volatility rate of 33.22%, interest rate of 0.41% and a yield rate of 2.80%.

During the year ended September 30, 2018, $540,000 was recognized in compensation expense for the Option Plan and the 2014 SIP. A tax benefit of $137,000 was recognized during the year ended September 30, 2018. During the year ended September 30, 2017, $531,0002020, $353,000 was recognized in aggregate compensation expense for the Option Plan and the 2014 SIP. A tax benefit of $146,000 was recognized during the year ended September 30, 2017. During the year ended September 30, 2016, $455,0002019, $573,000 was recognized in aggregate compensation expense for the Option Plan and the 2014 SIP. A tax benefit of $155,000 was recognized duringDuring the year ended September 30, 2016.2018, $540,000 was recognized in aggregate compensation expense for the Option Plan and the 2014 SIP. At September 30, 2018,2020, approximately $1.3$423,000 million of additional compensation expense for awarded options remained unrecognized. The weighted average period over which this expense will be recognized is approximately 2.22.8 years.

118

14.    INTEREST RATE SWAP AGREEMENTS

The Company uses interest rate swaps and caps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the payment of either fixed or variable-rate amounts in exchange for the receipt of variable or fixed-rate amounts from a counterparty, respectively. The Company uses interest rate swaps to manage its exposure to changes in fair value. Interest rate swaps designated as fair value hedges involve the receipt of

99

Table of Contents

14.INTEREST RATE SWAP AGREEMENTS

variable-rate payments from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without the exchange of the underlying notional amount.

The Company has contracted with a third party to participate in interest rate swap contracts. One of the swaps is aThere are thirteen additional cash flow hedge associated with a $10.0 million FHLB advancehedges tied to wholesale funding at September 30, 2018. There were two cash flow hedges associated with $20.0 million of FHLB advances at September 30, 2017.2020. These interest rate swaps involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixedfixed-rate payments. During the fiscal year ended September 30, 2018, $48,0002020, $4,000 of expense was recognized as ineffectiveness through earnings, while $12,000 of income was recognized as ineffectiveness through interest income, while none was recognized as ineffectiveness through earnings during the year ended September 30, 2017. The two cash flow hedge interest rate swaps from the 2017 period were unwound during June 2018 at a pre-tax gain of $808,000.fiscal 2019. There was 0 such expense in 2018. There were nine9 interest rate swaps designated as fair value hedges involving the receipt of variable-rate payments from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements that were applicable to two4 loans and seven7 investment securities as of September 30, 2018.2020 and there were 9 interest rate swaps designated as fair value hedges involving the receipt of variable-rate payments from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements that were applicable to 3 loans and 7 investment securities 3 loans and 7 investments at September 30, 2019. The fair value of the swaps is recorded in the other assetsliabilities section of the balance sheet.

statement of financial condition.

Below is a summary of the interest rate swap agreements and the terms as of September 30, 20182020 and 2017.2019.

  Hedged Notional  Pay  Receive Maturity Unrealized 
  Item Amount  Rate  Rate Date Gain (Loss) 
  (Dollars in Thousands) 
                
Interest rate swap contract FHLB Advance $10,000   2.70% 1 Mth Libor 10-Apr-25 $35 
Interest rate swap contract State and political subdivision  1,705   3.06% 3 Mth Libor 15-Feb-27  (19)
Interest rate swap contract State and political subdivision  2,825   3.06% 3 Mth Libor 1-Apr-27  (31)
Interest rate swap contract State and political subdivision  5,000   3.07% 3 Mth Libor 1-Jan-28  (57)
Interest rate swap contract State and political subdivision  1,235   3.07% 3 Mth Libor 1-Mar-28  (14)
Interest rate swap contract State and political subdivision  4,500   3.07% 3 Mth Libor 1-May-28  (52)
Interest rate swap contract State and political subdivision  3,305   3.05% 3 Mth Libor 1-Feb-27  (32)
Interest rate swap contract State and political subdivision  3,000   3.06% 3 Mth Libor 15-Oct-27  (32)
Interest rate swap contract Commercial loan  8,300   5.74% 1 Mth Libor +250 bp 13-Jun-25  - 
Interest rate swap contract Commercial loan  1,100   4.10% 1 Mth Libor +276 bp 1-Aug-26  - 
                   
                $(202)

2020

Hedged

Notional

Pay Rate

Receive

Maturity Date

Unrealized

Item

    

Amount

    

from

    

to

    

Rate

    

from

    

to

Loss

(Dollars in thousands)

State and political subdivisions

$

21,570

 

3.06

%  

3.07

%  

3 Mth Libor

1-Feb-27

1-May-28

$

(3,834)

Commercial loans

 

23,656

 

4.10

%  

5.74

%  

1 Mth Libor +225 to 276 bp

13-Jun-25

1-Aug-26

 

30 day wholesale funding

90,000

1.36

%  

2.70

%  

1 Mth Libor

15-Feb-24

12-Jun-26

(6,157)

90 day wholesale funding

135,000

2.51

%  

2.78

%  

3 Mth Libor

11-Jan-24

27-Mar-24

(10,969)

  

 

  

 

  

 

  

  

$

(20,960)

2019

Hedged

Notional

Pay Rate

Receive

Maturity Date

Unrealized

Item

    

Amount

    

from

    

to

    

Rate

    

from

    

to

    

Loss

(Dollars in thousands)

FHLB advance

$

10,000

 

2.70

%

2.70

%

1 Mth Libor

10-Apr-25

10-Apr-25

$

(719)

State and political subdivisions

21,570

3.06

%

3.07

%

3 Mth Libor

1-Feb-27

1-May-28

(2,502)

Commercial loans

 

17,229

 

4.10

%

5.74

%

1 Mth Libor +250 to 276 bp

13-Jun-25

1-Aug-26

30 day wholesale funding

65,000

1.94

%  

2.51

%  

1 Mth Libor

15-Feb-24

12-Jun-26

(1,415)

90 day wholesale funding

135,000

2.51

%  

2.78

%  

3 Mth Libor

11-Jan-24

27-Mar-24

(6,605)

$

(11,241)

119

    2017 
  Hedged Notional  Pay  Receive Maturity Unrealized 
  Item Amount  Rate  Rate Date Gain 
          (Dollars in Thousands)     
                
Interest rate swap contract FHLB advances $10,000   1.15% 1 Mth Libor 6-Apr-21 $217 
Interest rate swap contract FHLB advances  10,000   1.18% 1 Mth Libor 13-Jun-21  223 
Interest rate swap contract Commercial loan  1,100   4.10% 1 Mth Libor +276 bp 1-Aug-26  62 
                   
                $502 

15.15.     COMMITMENTS AND CONTINGENT LIABILITIES

At September 30, 2018,2020, the Company had $40.4$29.9 million in outstanding commitments to originate fixed and variable-rate loans with market interest rates ranging from 4.25%3.25% to 6.25%4.75%. At September 30, 2017,2019, the Company had $45.9$32.4 million in outstanding commitments to originate fixed and variable-rate loans with market interest rates ranging from 4.75%1.99% to 5.50%6.50%. The aggregate undisbursed portion of loans-in-process amounted to $54.5$86.9 million and $73.9$114.5 million, respectively, at September 30, 20182020 and 2017.

2019.

The Company also had commitments under unused lines of credit of $51.9$40.1 million as of September 30, 20182020 and $7.4$37.5 million as of September 30, 20172019 and letters of credit outstanding of $1.6$1.1 million as of September 30, 20182020 and $1.4$1.5 million as of September 30, 2017. The increase in unused commitments as of September 30, 2018 was primarily the result of five loans with unused commitments totaling $37.0 million, as of such date.

2019.

The Company is subject to various pending claims and contingent liabilities arising in the normal course of business which are not reflected in the accompanying consolidated financial statements. Management considers that the aggregate liability, if any, resulting from such matters will not be material.

100

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 September 30, 2018,2020, the exposure, which represents a portion of credit risk associated with the sold interests, amounted to $1.5$1.0 million. This exposure is for the life of the related loans and payables, on the Company’s proportionate share, as actual losses are incurred.

The Company is involved in various legal proceedings occurring in the ordinary course of business. Management of the Company, based on discussions with litigation counsel, does not believe that such proceedings will have a material adverse effect on the financial condition or operations of the Company. ThereHowever, there can be no assurance that any of the outstanding legal proceedings to which the Company is party will not be decided adversely to the Company’s interest and have a material adverse effect on the financial condition and operations of the Company.

16.

16.    FAIR VALUE MEASUREMENT

The fair value estimates presented herein are based on pertinent information available to management as of September 30, 20182020 and 2017,2019, respectively. Although management is not aware of any factors that would significantly affect the fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

120

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

The three broad levels of hierarchy are as follows:

Level 1Quoted prices in active markets for identical assets or liabilities.

Level 2Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

Those assets as of September 30, 2018 which are to be measured at fair value on a recurring basis are as follows:

  Category Used for Fair Value Measurement 
  Level 1  Level 2  Level 3  Total 
  (Dollars in Thousands) 
             
Assets:                
Securities available for sale:                
U.S. Government and agency obligations $-  $24,171  $             -  $24,171 
State and political subdivisions  -   21,536   -   21,536 
Mortgage-backed securities - U.S. Government agencies  -   187,360   -   187,360 
Corporate bonds  -   73,083   -   73,083 
FHLMC preferred stock  37   -   -   37 
Interest rate swap contracts  -   225   -   225 
Total $37  $306,375  $-  $306,412 

Those assets as of September 30, 20172020 which are measured at fair value on a recurring basis are as follows:

  Category Used for Fair Value Measurement 
  Level 1  Level 2  Level 3  Total 
  (Dollars in Thousands) 
             
Assets:                
Securities available for sale:                
U.S. Government and agency obligations $-  $25,799  $             -  $25,799 
Mortgage-backed securities - U.S. Government agencies  -   118,127   -   118,127 
Corporate bonds  -   34,400   -   34,400 
FHLMC preferred stock  76   -   -   76 
Interest rate swap contracts  -   502   -   502 
Total $76  $178,828  $-  $178,904 

121

Category Used for Fair Value Measurement

    

Level 1

    

Level 2

    

Level 3

    

Total

(Dollars in Thousands)

Assets:

  

  

  

  

Securities available for sale:

  

  

  

  

U.S. Government and agency obligations

$

$

22,394

$

$

22,394

State and political subdivisions

 

 

79,621

 

 

79,621

Mortgage-backed securities - U.S. Government agencies

 

 

236,566

 

 

236,566

Corporate bonds

 

 

81,783

 

 

81,783

Equity security - FHLMC preferred stock

 

51

 

 

 

51

Total

$

51

$

420,364

$

$

420,415

Liabilities:

Interest rate swap contracts

$

$

20,960

$

$

20,960

Total

$

$

20,960

$

$

20,960

101

Those assets as of September 30, 2019 which are measured at fair value on a recurring basis are as follows:

Category Used for Fair Value Measurement

    

Level 1

    

Level 2

    

Level 3

    

Total

(Dollars in Thousands)

Assets:

  

  

  

  

Securities available for sale:

  

  

  

  

U.S. Government and agency obligations

$

$

24,865

$

$

24,865

State and political subdivisions

 

47,646

 

 

47,646

Mortgage-backed securities - U.S. Government agencies

 

 

370,772

 

 

370,772

Corporate bonds

 

 

69,539

 

 

69,539

Equity security - FHLMC preferred stock

 

95

 

 

 

95

Total

$

95

$

512,822

$

$

512,917

Liabilities:

Interest rate swap contracts

$

$

11,241

$

$

11,241

Total

$

$

11,241

$

$

11,241

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

Investments and Mortgage-Backed Securities

The fair value of investment securities and mortgage-backed securities is based on quoted market prices, dealer quotes, and prices obtained from independent pricing services.

Impaired Loans

Collateral dependent impaired loans are based on the fair value of the collateral which is based on appraisals and would be categorized as Level 2 measurement. In some cases, adjustments are made to the appraised values for various factors including the age of the appraisal, age of the comparable included in the appraisal, and known changes in the market and in the collateral. These adjustments are based upon unobservable inputs, and therefore, the fair value measurement has been categorized as a Level 3 measurement. These loans are reviewed for impairment and written down to their net realizable value by charges against the allowance for loan losses. The collateral underlying these loans had a fair value of $14.3$13.0 million and $19.7$15.5 million at September 30, 20182020 and 2017,2019, respectively.

Real Estate Owned

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

Summary of Non-Recurring Fair Value Measurements

  At September 30, 2018 
  (Dollars in Thousands) 
  Level 1  Level 2  Level 3  Total 
Impaired loans $             -  $             -  $16,048  $16,048 
Real estate owned  -   -   1,026   1,026 
Total $-  $-  $17,074  $17,074 

  

At September 30, 2017

(Dollars in Thousands)

 
  Level 1  Level 2  Level 3  Total 
Impaired loans $             -  $             -  $19,665  $19,665 
Real estate owned  -   -   192   192 
Total $-  $-  $19,857  $19,857 

122

102

At September 30, 2020

(Dollars in Thousands)

    

Level 1

    

Level 2

    

Level 3

    

Total

Impaired loans

$

$

$

13,037

$

13,037

Other real estate owned

 

 

 

 

Total

$

$

$

13,037

$

13,037

At September 30, 2019

(Dollars in Thousands)

    

Level 1

    

Level 2

    

Level 3

    

Total

Impaired loans

$

$

$

15,542

$

15,542

Other real estate owned

 

 

 

348

 

348

Total

$

$

$

15,890

$

15,890

The following tables provide information describing the valuation processes used to determine nonrecurring fair value measurements categorized within level 3 of the fair value hierarchy:

 At September 30, 2018 
 (Dollars in Thousands) 
    Valuation   Range/
 Fair Value  Technique Unobservable Input Weighted Ave.

At September 30, 2020

(Dollars in Thousands)

Valuation

Range/

    

Fair Value

    

Technique

    

Unobservable Input

    

Weighted Ave.

Impaired loans $16,048  Property appraisals (1) (3) Management discount for selling costs, property type and market volatility (2) 6%  to 8% discount / 6%

$

13,037

 

Property appraisals (1) (3)

 

Management discount for selling costs, property type and market volatility (2)

 

6% to 9% discount / 7%

Real estate owned $1,026  Property appraisals (1) (3) Management discount for selling costs, property type and market volatility (2) 18% discount

Other real estate owned

$

 

Property appraisals (1) (3)

 

Management discount for selling costs, property type and market volatility (2)

 

22% discount

  At September 30, 2017 
  (Dollars in Thousands) 
     Valuation   Range/
  Fair Value  Technique Unobservable Input Weighted Ave.
Impaired loans $19,665  Property appraisals (1) (3) Management discount for selling costs, property type and market volatility (2) 6% to 57%  discount / 7%
Real estate owned $192  Property appraisals (1) (3) Management discount for selling costs, property type and market volatility (2) 10% discount

At September 30, 2019

(Dollars in Thousands)

Valuation

Range/

    

Fair Value

    

Technique

    

Unobservable Input

    

Weighted Ave.

Impaired loans

$

15,542

 

Property appraisals (1) (3)

 

Management discount for selling costs, property type and market volatility (2)

 

6% to 9% discount / 7%

Other real estate owned

$

348

 

Property appraisals (1) (3)

 

Management discount for selling costs, property type and market volatility (2)

 

22% discount

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

The fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or

103

estimation methodologies may have a material effect on the estimated fair value amounts.

123

        Fair Value Measurements at 
        September 30, 2018 
  Carrying  Fair          
  Amount  Value  (Level 1)  (Level 2)  (Level 3) 
  (Dollars in Thousands)    
Assets:                    
Cash and cash equivalents $48,171  $48,171  $48,171  $-  $- 
Certificates of deposit  1,604   1,604   1,604   -   - 
Investment and mortgage-backed securities available for sale  306,187   306,187   37   306,150   - 
Investment and mortgage-backed securities held to maturity  59,852   55,927   -   55,927   - 
Loans receivable, net  602,932   598,596   -   -   598,596 
Accrued interest receivable  3,825   3,825   3,825   -   - 
Restricted stock  7,585   7,585   7,585   -   - 
Interest rate swap contracts  225   225   -   225   - 
Bank owned life insurance  28,691   28,691   28,691   -   - 
                     
Liabilities:                    
Checking accounts  62,886   62,886   62,886   -   - 
Money market deposit accounts  60,686   60,686   60,686   -   - 
Passbook, club and statement savings accounts  96,866   96,866   96,866   -   - 
Certificates of deposit  563,820   569,375   -   -   569,375 
Accrued interest payable  3,232   3,232   3,232   -   - 
Advances from FHLB -short-term  10,000   10,000   10,000       - 
Advances from FHLB -long-term  144,683   141,116   -   -   141,116 
Advances from borrowers for taxes and insurance  2,083   2,083   2,083   -   - 

124

        Fair Value Measurements at 
        September 30, 2017 
  Carrying  Fair          
  Amount  Value  (Level 1)  (Level 2)  (Level 3) 
  (Dollars in Thousands)    
Assets:                    
Cash and cash equivalents $27,903  $27,903  $27,903  $-  $- 
Certificates of deposit  1,604   1,604   1,604   -   - 
Investment and mortgage-backed securities available for sale  178,402   178,402   76   178,326   - 
Investment and mortgage-backed securities held to maturity  61,284   60,179   -   60,179   - 
Loans receivable, net  571,343   575,876   -   -   575,876 
Accrued interest receivable  2,825   2,825   2,825   -   - 
Restricted stock  6,002   6,002   6,002   -   - 
Interest rate swap contracts  502   502   -   502   - 
Bank owned life insurance  28,048   28,048   28,048   -   - 
                     
Liabilities:                    
Checking accounts  63,642   63,642   63,642   -   - 
Money market deposit accounts  76,272   76,272   76,272   -   - 
Passbook, club and statement savings accounts  101,743   101,743   101,743   -   - 
Certificates of deposit  394,325   398,078   -   -   398,078 
Accrued interest payable  1,933   1,933   1,933   -   - 
Advances from FHLB -short-term  20,000   20,000   20,000   -   - 
Advances from FHLB -long-term  94,318   93,579   -   -   93,579 
Advances from borrowers for taxes and insurance  2,207   2,207   2,207   -   - 

Cash and Cash Equivalents—For cash and cash equivalents, On a prospective basis, the carrying amount is a reasonable estimate of fair value.

Certificates of deposit—For certificates of deposit, the carrying amount is a reasonable estimate of fair value.

Investments and Mortgage-Backed SecuritiesThe fair value of investment securities and mortgage-backed securities is based on quoted market prices, dealer quotes, and prices obtained from independent pricing services.

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

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

Restricted StockThe carrying amount of restricted stock approximates fair value, and considers the limited marketability of such securities. Restricted stock is classified within level 2 of the fair value hierarchy.

Bank Owned Life InsuranceThe fair value of bank owned life insurance is based on the cash surrender value obtained fromfinancial instruments using an independent advisor that are be derivable from observable market inputs.

125

Checking Accounts, Money Market Deposit Accounts, Passbook Accounts, Club Accounts, Statement Savings Accounts, and Certificates of DepositThe fair value of passbook accounts, club accounts, statement savings accounts, checking accounts, and money market deposit accounts is the amount reportedexit price notion for disclosure purposes in the financial statements. The Company estimated the fair value of certificates of deposit is based on market rates currently offered for deposits of similar remaining maturity.

Advancesguidance from Federal Home Loan Bank (short-term)TheASC 820-10, Fair Value Measurements, which defines fair value of advances from FHLB isas the amount payable on demandprice which would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the reportingmeasurement date.

Advances from Federal Home Loan Bank (long-term)The There is no active observable market for sale information on community bank loans and, thus, Level 3 fair value procedures were utilized, primarily in the use of advances from FHLB is the amount payable on demand at the reporting date.present value techniques incorporating assumptions that market participants would use in estimating fair values.

Fair Value Measurements at

Carrying

Fair

September 30, 2020

    

Amount

    

Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

(Dollars in Thousands)

Assets:

 

  

 

  

 

  

 

  

 

  

Investment and mortgage-backed securities held to maturity

$

22,860

$

24,330

$

$

24,330

$

Loans receivable, net

588,300

593,768

593,768

Liabilities:

  

  

  

  

  

Certificates of deposit

269,610

278,224

278,224

Advances from FHLB -long-term

260,253

274,172

274,172

Fair Value Measurements at

Carrying

Fair

September 30, 2019

    

Amount

    

Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

(Dollars in Thousands)

Assets:

 

  

 

  

 

  

 

  

 

  

Investment and mortgage-backed securities held to maturity

$

68,635

$

69,507

$

$

69,507

$

Loans receivable, net

585,456

585,476

585,476

Liabilities:

  

  

  

  

  

Certificates of deposit

513,183

529,099

529,099

Advances from FHLB -long-term

286,904

293,839

293,839

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

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

Interest rate swap contracts – For interest rate swap contracts, the fair values of derivative contracts are based upon the estimated amount the Company would receive or pay to terminate the contracts or agreements, taking into account underlying interest rates, creditworthiness of underlying customers for credit derivatives and, when appropriate, the creditworthiness of the counterparties.

Commitments to Extend Credit and Letters of CreditThe majority of the Bank’s commitments to extend credit and letters of credit carry current market interest rates if converted to loans. Because commitments to extend credit and letters of credit are generally unassignable by either the Bank or the borrower, they only have value to the Bank and the borrower. The estimated fair value approximates the recorded deferred fee amounts, which are not significant.

17.17.     GOODWILL AND OTHER INTANGIBLE ASSETS

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

Balance

Balance

October 1,

Additions/

September 30, 

Amortization

    

2019

    

Adjustments

    

Amortization

    

2020

    

Period

 Balance       Balance   
 October 1, Additions/     September 30, Amortization
 2017  Adjustments  Amortization  2018  Period
      (Dollars in Thousands)   

(Dollars in Thousands)

Goodwill $6,102  $             -  $-  $6,102   

$

6,102

$

0

$

$

6,102

 

  

Core deposit intangible  709   -   (138)  571  10 years

 

448

 

0

 

(108)

 

340

 

10 years

 $6,811  $-  $(138) $6,673  

$

6,550

$

0

$

(108)

$

6,442

 

  

104

As of September 30, 2018,2020, the future fiscal periods amortization expense for the core deposit intangible is:

 (In Thousands) 
2019 $123 
2020  108 

(In Thousands)

    

2021  93 

$

93

2022  78 

 

78

2023  64 

 

64

2024

 

49

2025

 

34

Thereafter  105 

 

22

 $571 

$

340

126

18.BUSINESS COMBINATIONS

On January 1, 2017, the previously announced proposed acquisition (the “Merger”) of Polonia Bancorp pursuant to the Agreement of Plan of Merger by and between Polonia Bancorp and

18.     LEASES

Operating leases in which the Company datedis the lessee are recorded as operating lease Right of June 2, 2016 (the “ Merger Agreement”Use ("ROU") was completed. The shareholders of Polonia Bancorp had the option to receive $11.09 per share in cash or 0.7460 of a share of Company common stock for each share of Polonia Bancorp common stock held thereby, subject to allocation provisions to assure that, in the aggregate, Polonia Bancorp shareholders received total merger consideration that consisted of 50% stock and 50% cash. As a result of Polonia Bancorp shareholder stock and cash elections and the related proration provisions of the Merger Agreement, the Company issued 1,274,197 shares of its common stock and approximately $18.9 million was paid in cash for the Merger.

In connection with the Merger, the consideration paid and the estimated fair value of identifiable assets and operating lease liabilities, assumedincluded in other assets and other liabilities, respectively, on the consolidated statement of financial condition. The Company does not currently have any finance leases. Operating lease ROU assets represent the right to use an underlying asset during the lease term and operating lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized as of the date of adoption of ASU 2016-02 based on the Merger are summarized in the following table:

(Dollars in Thousands)   
Consideration paid:    
Common stock issued (1,274,197 shares) at a fair value per share of $17.12 per share. $21,814 
Cash for common stock exchanged  18,944 
Cash in lieu of fractional shares  1 
   40,759 
Assets acquired:    
Cash and due from banks  22,911 
Investments available for sale  67,154 
Loans  160,785 
Premises and equipment  6,702 
Deferred taxes  3,492 
Bank owned life insurance  4,316 
Core deposit intangible  822 
Restricted stock  3,399 
Other assets  2,273 
Total assets  271,854 
     
Liabilities assumed:    
Deposits  172,243 
FHLB advances, short-term  7,000 
FHLB advances, long -term  50,232 
Other liabilities  7,722 
Total liabilities  237,197 
Net assets acquired  34,657 
Goodwill resulting from the acquisition $6,102 

127

The following table summarizes the fairpresent value of the assets acquired andremaining lease payments using a discount rate that represents the liabilities assumed as ofCompany's incremental borrowing rate at the date of acquisitioninitial application.

Operating lease expense, which is comprised of Polonia Bancorp. The core deposit intangible is being amortized over 10 years using an accelerated method. Goodwill is not amortized, but instead is evaluated annually for impairment.

(Dollars in Thousands, Except Per Share Data)

Purchase Consideration

Polonia Bancorp Common Stock:   
Total shares of common stock outstanding  3,416,311 
Common stock issued capital  1,708,155 
Shares redeemed for cash capital  1,708,156 
     
Prudential common stock issued (conversion rate 0.7460)  1,274,197 
Prudential closing price at December 31, 2016 $17.12 
     
Cash-out rate paid per share for Polonia Bancorp common stock $11.09 
     
Purchase consideration assigned to Polonia Bancorp shares exchanged for Company common stock $21,814 
Cash paid to Polonia Bancorp shareholders for Polonia Bancorp shares $18,944 
Cash paid for fractional shares $1 
  $40,759 
     
Net Assets Acquired    
     
Polonia Bancorp stockholders' equity  37,101 
Core deposit intangible asset  822 
Estimated adjustments to reflect assets acquired at fair value:    
Investment securities  (781)
Portfolio loans  (4,643)
Allowance for loan and lease losses  1,002 
Premises  2,850 
Other assets  (73)
Deferred taxes  505 
Total fair value adjustment to assets acquired  (318)
Estimated adjustments to reflect liabilities assumed at fair value:    
Time deposits  (894)
Borrowings  (1,232)
Total fair value adjustment to liabilities assumed  (2,126)
Total net assets acquired  34,657 
Goodwill resulting from merger  6,102 

128

Pro Forma Income Statements (unaudited)

The following pro forma income statements for the year ended September 30, 2017 and 2016 presents pro forma results of operationsamortization of the combined institution (Polonia BancorpROU assets and the Company) hadimplicit interest accreted on the merger occurredoperating lease liability, is recognized on October 1, 2015. The pro forma income statement adjustments are limited toa straight line basis over the effectslease term of fair value mark amortizationthe operating lease, and accretion and intangible asset amortization. No cost savings or additional merger expenses have been includedis recorded in office occupancy expense in the pro forma resultsconsolidated statements of operationsoperations. The leases relate to Bank branches with remaining lease terms of generally five to nine years.

Lease expense was $236,000, $304,000 and $360,000 for the years ended September 30, 20172020, 2019 and 2016.2018, respectively. The Company has executed certain lease commitments and is, as a result, obligated to pay the following amounts: $253,000 for fiscal year 2021, $256,000 for fiscal year 2022, $260,000 for fiscal year 2023, $263,000 for fiscal 2024, $276,000 for fiscal 2025 and $484,000 thereafter

  Actual from       
  Acquistion date       
  through  Twelve Months ended 
  September 30,  September 30, 
  2017  2017  2016 
(Dollars in Thousands, Except Per Share Data)            
             
Net interest income $3,467  $22,551  $29,702 
Provision for loan and leases losses  -   2,990   2,990 
Net interest income after provision for loan and lease losses  3,467   19,561   26,712 
Non-interest income  250   2,205   3,365 
Non-interest expense  2,380   20,287   29,229 
Income before income taxes  1,337   1,479   848 
Income tax expense  455   225   81 
Net income $882  $1,254  $767 
Per share data            
Weighed average basic shares outstanding  8,316,638   8,316,638   8,691,241 
Dilutive shares  357,871   357,871   224,037 
Adjusted weighted-average dilutive shares  8,674,509   8,674,509   8,915,278 
Basic earnings per common share $0.11  $0.15  $0.09 
Dilutive earnings per common share $0.10  $0.14  $0.09 
             
Non-recurring merger costs included in the table above     $3,559  $723 

As of September 30, 2020, operating lease ROU assets were $1.3 million and operating lease liabilities were $1.4 million.

The following table summarizes other information related to our operating leases:

(a)

September 30, 2020

Weighted-average basis shares outstanding for both periods reflected are the Company’s weighted-average shares plus the 1,274,197, shares that were issued as consideration for the Merger. The dilutive shares reflect the Company’s estimated diluted shares for the periodremaining lease term - operating leases in years

7.25

Weighted-average discount rate - operating leases

2.0

%

The following table presents aggregate lease maturities and obligations as of September 30, 2020:

(Dollars in Thousands)

    

2021

$

210

2022

 

213

2023

 

216

2024

 

220

2025

 

231

2025 and thereafter

416

Total lease payments

1,506

Less: interest

 

103

105

Present value of lease liabilities

129

$

1,403

19.

19.     PRUDENTIAL BANCORP, INC. (PARENT COMPANY ONLY)

STATEMENT OF FINANCIAL CONDITION

September 30,

    

2020

    

2019

 2018  2017 
 (Dollars in Thousands) 

(Dollars in Thousands)

Assets:        

 

  

 

  

Cash $5,435  $9,792 

$

955

$

1,004

Investment in Bank  121,718   125,240 

 

126,684

 

137,238

Other assets  1,256   1,147 

 

1,478

 

1,369

Total assets $128,409  $136,179 

$

129,117

$

139,611

        

Stockholders' equity:        

 

  

 

  

Preferred stock  -   - 

$

$

Common stock  108   108 

 

108

 

108

Additional paid-in-capital  118,345   118,751 

 

118,270

 

118,384

Treasury stock  (27,744)  (26,707)

 

(39,207)

 

(29,698)

Retained earnings  45,854   44,787 

 

52,889

 

49,625

Accumulated other comprehensive loss  (8,154)  (760)
        

Accumulated other comprehensive (loss) income

 

(2,943)

 

1,192

Total stockholders' equity $128,409  $136,179 

$

129,117

$

139,611

INCOME STATEMENT OF OPERATIONS

For the year ended September 30,

    

2020

    

2019

    

2018

 2018  2017  2016 
 (Dollars in Thousands)    
       

(Dollars in Thousands)

Interest on ESOP loan $-  $59  $247 

$

$

$

59

Equity in the undistributed earnings of the Bank  7,465   3,255   2,911 
Other income  -   -   - 
            

Equity in the earnings of the Bank

 

9,959

 

9,954

 

7,465

Total income  7,465   3,314   3,158 

 

9,959

 

9,954

 

7,524

            

Professional services  168   369   161 

 

168

 

168

 

168

Other expense  362   413   376 

 

344

 

369

 

362

            

Total expense  530   782   537 

 

512

 

537

 

530

            

Income before income taxes  6,936   2,532   2,621 

 

9,447

 

9,417

 

6,936

            

Income tax benefit  (128)  (246)  (99)

 

(108)

 

(113)

 

(128)

            

Net income $7,064  $2,778  $2,720 

$

9,555

$

9,530

$

7,064

130

106

CASH FLOWS

For the year ended September 30,

    

2020

    

2019

    

2018

 2018  2017  2016 
 (Dollars in Thousands)    

(Dollars in Thousands)

Operating activities:            

 

  

 

  

 

  

Net income $7,064  $2,778  $2,720 

$

9,555

$

9,530

$

7,064

Other, net  (204)  46   (579)

 

52

 

(115)

 

(108)

Equity in the undistributed earnings of the Bank  (7,465)  (3,255)  (2,911)

 

(9,959)

 

(9,954)

 

(7,465)

            

 

  

 

  

 

  

Net cash used in operating activities  (605)  (431)  (770)

 

(352)

 

(539)

 

(509)

            
Investing activities:            
Repayments received on ESOP loan  -   5,277   341 
Acquisitions, net of cash  -   3,966   - 
            
Net cash provided by investing activities  -   9,243   341 
            

 

  

 

  

 

  

Financing activities:            

 

  

 

  

 

  

Purchase of treasury stock  2,548   (4,526)  (7,047)

 

(10,481)

 

(3,108)

 

(2,548)

Cash dividends paid  (6,300)  (1,035)  (895)

 

(6,216)

 

(5,784)

 

(6,300)

            
Net cash used in financing activities  (3,752)  (5,561)  (7,942)
            
Net (decrease) increase in cash and cash equivalents  (4,357)  3,251   (8,371)
            

Dividends from the Bank

 

17,000

 

5,000

 

5,000

Net cash provided by (used in) financing activities

 

303

 

(3,892)

 

(3,848)

 

  

 

  

 

  

Net decrease in cash and cash equivalents

 

(49)

 

(4,431)

 

(4,357)

 

  

 

  

 

  

Cash and cash equivalents, beginning of year  9,792   6,541   14,912 

 

1,004

 

5,435

 

9,792

            

 

  

 

  

 

  

Cash and cash equivalents, end of year $5,435  $9,792  $6,541 

$

955

$

1,004

$

5,435

131

20.20.     CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)

Unaudited quarterly financial data for the years ended September 30, 2018, 2017,2020, 2019, and 20162018 is as follows:

September 30, 2020

September 30, 2019

1st

2nd

3rd

4th

1st

2nd

3rd

4th

    

Qtr

    

Qtr

    

Qtr

    

Qtr

    

Qtr

    

Qtr

    

Qtr

    

Qtr

 September 30, 2018  September 30, 2017 
 1st 2nd 3rd 4th 1st 2nd 3rd 4th 
 Qtr  Qtr  Qtr  Qtr  Qtr  Qtr  Qtr  Qtr 
 (Dollars in Thousands, Except Per Share Data) 
                 

(Dollars in Thousands, Except Per Share Data)

Interest income $8,036  $8,355  $8,931  $9,529  $4,505  $6,671  $7,430  $7,737 

$

11,827

$

11,010

$

9,791

$

9,599

$

10,001

$

11,134

$

11,273

$

11,631

Interest expense  1,900   2,127   2,709   3,401   858   1,373   1,377   1,656 

 

5,484

 

5,222

 

4,486

 

4,233

 

3,986

 

4,811

 

5,058

 

5,434

Net interest income  6,136   6,228   6,222   6,128   3,647   5,298   6,053   6,081 

 

6,343

 

5,788

 

5,305

 

5,366

 

6,015

 

6,323

 

6,215

 

6,197

Provision for loan losses  210   150   325   125   185   2,365   30   410 

 

125

 

500

 

750

 

1,650

 

0

 

0

 

0

 

100

Net interest income after provision for loan losses  5,926   6,078   5,897   6,003   3,462   2,933   6,023   5,671 

 

6,218

 

5,288

 

4,555

 

3,716

 

6,015

 

6,323

 

6,215

 

6,097

Non-interest income  415   567   985   533   358   518   625   699 

 

832

 

2,668

 

3,762

 

841

 

380

 

542

 

1,187

 

985

Non-interest expense  4,043   3,869   3,770   3,957   2,720   6,763   3,500   3,587 

 

4,021

 

4,460

 

3,996

 

4,248

 

3,992

 

4,146

 

4,190

 

3,696

Income (loss) before income tax expense  2,298   2,776   3,112   2,579   1,100   (3,312)  3,148   2,783 

Income before income tax expense

 

3,029

 

3,496

 

4,321

 

309

 

2,403

 

2,719

 

3,212

 

3,386

Income tax expense (benefit)  2,264   619   676   142   370   (1,171)  1,031   711 

 

566

 

572

 

701

 

(239)

 

429

 

380

 

582

 

799

Net income $34  $2,157  $2,436  $2,437  $730  $(2,141) $2,117  $2,072 

$

2,463

$

2,924

$

3,620

$

548

$

1,974

$

2,339

$

2,630

$

2,587

                                

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Per share:                                

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Earnings (loss) per share - basic $0.00  $0.24  $0.28  $0.27  $0.09  $(0.27) $0.25  $0.26 
Earnings (loss) per share - diluted $0.00  $0.24  $0.26  $0.26  $0.09  $(0.27) $0.25  $0.24 

Earnings per share - basic

$

0.28

$

0.33

$

0.44

$

0.07

$

0.22

$

0.27

$

0.30

$

0.30

Earnings per share - diluted

$

0.28

$

0.32

$

0.44

$

0.07

$

0.22

$

0.26

$

0.29

$

0.29

Dividends per share $0.20  $0.05  $0.05  $0.40  $0.03  $0.03  $0.03  $0.03 

$

0.07

$

0.50

$

0.07

$

0.07

$

0.05

$

0.05

$

0.50

$

0.05

  September 30, 2016 
  1st  2nd  3rd  4th 
  Qtr  Qtr  Qtr  Qtr 
  (Dollars in Thousands, Except Per Share Data) 
             
Interest income $4,056  $4,366  $4,474  $4,587 
Interest expense  800   849   824   853 
Net interest income  3,256   3,517   3,650   3,734 
Provision for loan losses  0   75   150   0 
Net interest income after provision for loan losses  3,256   3,442   3,500   3,734 
Non-interest income  274   209   400   454 
Non-interest expense  2,896   2,796   2,815   2,783 
Income  before income tax expense  634   855   1,085   1,405 
Income tax expense(benefit)  221   307   308   423 
Net income $413  $548  $777  $982 
                 
Per share:                
Earnings per share - basic $0.05  $0.08  $0.10  $0.14 
Earnings per share - diluted $0.05  $0.07  $0.10  $0.14 
Dividends per share $0.03  $0.03  $0.03  $0.03 

107

September 30, 2018

1st

2nd

3rd

4th

    

Qtr

    

Qtr

    

Qtr

    

Qtr

(Dollars in Thousands, Except Per Share Data)

Interest income

$

8,036

$

8,355

$

8,931

$

9,529

Interest expense

 

1,900

 

2,127

 

2,709

 

3,401

Net interest income

 

6,136

 

6,228

 

6,222

 

6,128

Provision for loan losses

 

210

 

150

 

325

 

125

Net interest income after provision for loan losses

 

5,926

 

6,078

 

5,897

 

6,003

Non-interest income

 

415

 

567

 

985

 

533

Non-interest expense

 

4,043

 

3,869

 

3,770

 

3,957

Income before income tax expense

 

2,298

 

2,776

 

3,112

 

2,579

Income tax expense

 

2,264

 

619

 

676

 

142

Net income

$

34

$

2,157

$

2,436

$

2,437

  

 

  

 

  

 

  

Per share:

 

  

 

  

 

  

 

  

Earnings per share - basic

$

$

0.24

$

0.28

$

0.27

Earnings per share - diluted

$

$

0.24

$

0.26

$

0.26

Dividends per share

$

0.20

$

0.05

$

0.05

$

0.40

Due to rounding, the sum of the earnings per share in individual quarters may differ from reported amounts.

132

108

Table of Contents

Item 9.

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

Not Applicable.

Item 9A.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Management evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of September 30, 2018.2020. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the 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 Securities and Exchange Commission'sSEC's rules and regulations and are operating in an effective manner.

Management's Report of Internal Control over Financial Reporting. Management is responsible for designing, implementing, documenting, and maintaining an adequate system of internal control over financial reporting, as such term is defined in the Securities Exchange Act of 1934. An adequate system of internal control over financial reporting encompasses the processes and procedures that have been established by management to:

·maintain records that accurately reflect the Company'sCompany’s transactions;
·prepare financial statement and footnote disclosures in accordance with U.S. GAAP that can be relied upon by external users; and
·prevent and detect unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.

Management conducted an evaluation of the effectiveness of the Company's internal control over financial reporting based on the criteria in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation under the criteria in Internal Control-Integrated Framework, management concluded that internal control over financial reporting was effective as of September 30, 2018.2020. Furthermore, during the conduct of its assessment, management identified no material weakness in its financial reporting control system.

The Board of Directors of Prudential Bancorp, through its Audit Committee, provides oversight to management’s conduct of the financial reporting process. The Audit Committee, which is composed entirely of independent directors, is also responsible for the appointment of the independent registered public accounting firm. The Audit Committee also meets with management, the internal audit staff, and the independent registered public accounting firm throughout the year to provide assurance as to the adequacy of the financial reporting process and to monitor the overall scope of the work performed by the internal audit staff and the independent public accountants.

Because of its inherent limitations, the disclosure controls and procedures may not prevent or detect misstatements. A control system, no matter how well conceived and operated, can only provide reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

109

/s/Dennis Pollack

/s/Jack E. Rothkopf

Dennis Pollack

Jack E. Rothkopf

President and Chief Executive Officer

Senior Vice President,

Chief Financial Officer and Treasurer

133

Changes in Internal Controls over Financial Reporting. No change in the internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934) occurred during the fourth quarter of fiscal 20182019 that has materially affected, or is reasonably likely to materially affect, the internal control over financial reporting.

Item 9B. Other Information

Not applicable.

134

110

PART III

Item 10. Directors, Executive Officers and Corporate Governance

The information required herein is incorporated by reference from the sections captioned "Information with Respect to Nominees for Director, Continuing Directors and Executive Officers" and "Beneficial Ownership of Common Stock by Certain Beneficial Owners and Management – Section 16(a) Beneficial Ownership Reporting Compliance" in the Company'sCompany’s Definitive Proxy Statement for the Annual Meeting of Shareholders to be held onin February 20, 2019,2021, is expected to be which filed with the Securities and Exchange Commission on or about January18, 2019within 120 days of September 30, 2020 ("Definitive Proxy Statement").

The Company has adopted a code of ethics policy, which applies to its principal executive officer, principal financial officer, principal accounting officer, as well as its directors and employees generally. The Company will provide a copy of its code of ethics to any person, free of charge, upon request. Any requests for a copy should be made to the shareholder relations administrator, Prudential Bancorp, Inc., 1834 West Oregon Avenue, Philadelphia, Pennsylvania 19145. In addition, a copy of the Code of Ethics is available at the Company’s website atwww.prudentialbanker.com under the Investor Relations menu.

Item 11. Executive Compensation

The information required herein is incorporated by reference from the sections captioned "Management Compensation" and "Compensation Committee Interlocks and Insider Participation" in the Company'sCompany’s Definitive Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Security Ownership of Certain Beneficial Owners and Management. Information regarding security ownership of certain beneficial owners and management is incorporated by reference to “Beneficial Ownership of Common Stock by Certain Beneficial Owners and Management” in the Definitive Proxy Statement.

Equity Compensation Plan Information. The following table provides information as of September 30, 20182020 with respect to shares of common stock that may be issued under the existing equity compensation plans, which consist of the 2008 Stock Option Plan, the 2008 Recognition and Retention Plan and the 2014 Stock Incentive Plan, all of which were approved by the Company’s shareholders. The share amounts set forth below with respect to the 2008 Stock Option Plan and the 2008 Recognition and Retention Plan have been adjusted for the exchange of shares in connection with the second-step conversion completed on October 9, 2013, at an exchange ratio of 0.9442 of a share of Company common stock for each share of Old Prudential Bancorp common stock held by other than Prudential Mutual Holding Company.

Plan Category 

Number of securities to be
issued upon exercise of
outstanding options, warrants

and rights

(a)

  

Weighted-average
exercise price of
outstanding options,

warrants and rights

(b)

  

Number of securities remaining
available for future issuance
under equity compensation
plans (excluding securities
reflected in column (a))

(c)

 
Equity compensation plans approved by security holders  985,942(1) $13.44(1)  336,229 
Equity compensation plans not approved by security holders         
Total  985,942  $13.44   336,229 

___________________

    

    

    

Number of

securities remaining

Number of

available for

securities to be

Weighted-

future issuance

issued upon

average

under equity

exercise of

exercise price of

compensation

outstanding

outstanding

plans (excluding

options,

options,

securities

warrants  

warrants and

reflected in

and rights

rights

column (a))

Plan Category

(a)

(b)

(c)

Equity compensation plans approved by security holders

594,314

(1)

$

14.71

(1)

480,827

Equity compensation plans not approved by security holders

Total

594,314

$

13.96

480,827

(1)Includes 116,91623,056 shares subject to restricted stock grants which were not vested as of September 30, 2018.2020. The weighted average exercise price excludes such restricted stock grants.

(2)135Grants can only be made pursuant to the 2014 Stock Incentive Plan.

111

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required herein is incorporated by reference from the sections captioned "Management Compensation – Related Party Transactions" and “Information with Respect to Nominees for Director, Continuing Directors and Executive Officers” in the Definitive Proxy Statement.

Item 14. Principal Accounting Fees and Services

The information required herein is incorporated by reference from the section captioned "Ratification of Appointment of Independent Registered Public Accounting Firm (Proposal Two) – Audit Fees" in the Definitive Proxy Statement.

112

PART IV

Item 15. Exhibits, Financial Statement Schedules

(a)Documents Filed as Part of this Report.

(1)The following financial statements are incorporated by reference from Item 8 hereof:

Consolidated Statements of Financial Condition

78

Consolidated Statements of Operations

79

Consolidated Statement of Comprehensive Income (Loss)

80

Consolidated Statements of Changes in Stockholders' Equity

81

Consolidated Statements of Cash Flows

82

Notes to Consolidated Financial Statements

84

(2)All schedules for which provision is made in the applicable accounting regulation of the SEC are omitted because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements and related notes thereto.

(3)The following exhibits are filed as part of this Form 10-K, and this list includes the Exhibit Index.

Exhibit No.

Description

3.1

Articles of Incorporation of Prudential Bancorp, Inc. (1)

3.2

Bylaws of Prudential Bancorp, Inc. (1)(2)

4.0

4.1

Form of Stock Certificate of Prudential Bancorp, Inc. (1)

Description of the Registrant’s securities registered pursuant to Section 12 of the Securities Exchange Act of 1934 filed herewithin.

10.1

Amended and Restated Post Retirement Agreement between Prudential Savings Bank and Joseph W. Packer, Jr. (2)(3)*

10.2

Amended and Restated Split-Dollar Collateral Assignment with Joseph W. Packer, Jr. and Diane B. Packer (2)Packer(3)*

10.3

Amended and Restated Split-Dollar Collateral Assignment with Joseph W. Packer,    Jr. (2)(3)*

10.4

Amendment No. 1 to Split-Dollar Agreement between the Bank and Joseph W.    Packer, Jr. (2)(3)*

10.5

Settlement Agreement, dated November 7, 2008, by and among Prudential Mutual Holding Company, Prudential Bancorp, Inc. of Pennsylvania, Prudential Savings Bank, Stilwell Value Partners, I, L.P., Stilwell Partners L.P., Stilwell Value LLC, Joseph Stilwell and John Stilwell (3)(4)

10.6

Prudential Bancorp, Inc. of Pennsylvania 2008 Stock Option Plan (4)(5)*

10.7

Prudential Bancorp, Inc. of Pennsylvania 2008 Recognition and Retention Plan and Trust Agreement (4)(5)*

10.8

136

10.8Amendment No.2 to Split-Dollar Agreement between the Bank and Joseph W. Packer, Jr. (5)*(6)

10.9

Endorsement Split Dollar Insurance Agreement dated June 1, 2017 between Jack Rothkopf and Prudential Savings Bank (6)(7)*

10.10

2014 Stock Incentive Plan (7)Plan(8)*

10.11

Severance Agreement between Prudential Savings Bank and Jack E. Rothkopf (8)(9)*

10.12

Separation Agreement between Prudential Bancorp, Inc., Prudential Savings Bank and Joseph R. Corrato (9)(10)*

10.13

Amended and Restated Employment Agreement between Prudential Bancorp, Inc., Prudential Savings Bank and Dennis Pollack (12)(11)*

10.14

Retirement agreement between Prudential Bancorp, Inc., Prudential Savings Bank and Thomas A. Vento (11)(12)*

10.15

Amendment No. 1 to the Amended and Restated Employment Agreement between Prudential Bancorp, Inc., Prudential Bank and Dennis Pollack (13)*

10.16

Employment Agreement between Prudential Bancorp, Inc., Prudential Savings Bank and Anthony V. Migliorino (12)(11)*

113

Exhibit No.

Description

10.17

Amendment No. 1 to the Employment Agreement between Prudential Bancorp, Inc., Prudential Bank and Anthony V. Migliorino (13)*

10.18

Split Dollar Endorsement Agreement dated June 1, 2017 between Dennis Pollack and the Bank (6)(7)*

10.19

Split Dollar Endorsement Agreement dated June 1, 2017 between Anthony V. Migliorino and the Bank (6)(7)*

10.20

Amendment No. 2 to the Employment Agreement between Prudential Bancorp, Inc., Prudential Bank and Anthony V. Migliorino (14)*

10.21

31.1

Severance Agreement between Prudential Savings Bank andKevin Gallagher(15)*

31.1Section 1350 Certification of the Chief Executive Officer

31.2

Section 1350 Certification of the Chief Financial Officer

32.0

Section 906 Certification

101.INS

101

XBRL Instance Document.

The following financial statements from the Company’s Annual Report on Form 10-K for the year ended September 30, 2020, formatted in Inline XBRL: (i) Consolidated Statements of Financial Condition, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Unaudited Consolidated Financial Statements, tagged as blocks of text and including detailed tags.

101.SCH

XBRL Taxonomy Extension Schema Document.

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document.

101.LAB

XBRL Taxonomy Extension Label Linkbase Document.

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document.

101.DEF

XBRL Taxonomy Extension Definitions Linkbase Document.

104

Cover Page Interactive Data (formatted as Inline XBRL and contained in Exhibit 101.

*

*

Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K pursuant to Item 15(b) hereof.

(1)Incorporated by reference from the Company's Registration Statement on Form S-1 (SEC File No. 333-189321) filed with the SEC on June 14, 2013.

(2)Incorporated by reference from the Current Report on Form 10-K of Prudential Bancorp, Inc. dated February 19, 2020 and filed with the SEC on February 21, 2020 (SEC File No. 000-51214).
(3)Incorporated by reference from the Current Report on Form 8-K, of Prudential Bancorp, Inc. of Pennsylvania dated November 19, 2008 and filed with the SEC on November 25, 2008 (SEC File No. 000-51214).

(4)(3)Incorporated by reference from the Current Report on Form 8-K of Prudential Bancorp, Inc. of Pennsylvania, dated November 7, 2008 and filed with the SEC on November 7, 2008 (SEC File No. 000-51214).

(5)(4)Incorporated by reference from Appendices A (2008 Stock Option Plan) and B (2008 Recognition and Retention Plan and Trust Agreement”) of the definitive proxy statement of Prudential Bancorp, Inc. of Pennsylvania (SEC File No. 000-51214) filed with the SEC on November 26, 2008.

(6)(5)Incorporated by reference from the Annual Report on Form 10-K of Prudential Bancorp, Inc. of Pennsylvania for the year ended September 30, 2012 filed with the SEC on December 21, 2012 (SEC File No. 000-51214)

(7)(6)Incorporated by reference from the Current Report on Form 8-K of Prudential Bancorp, Inc. of Pennsylvania dated June 1, 2017 and filed with the SEC on June 6,1, 2017 (SEC File No. 000-51214).

(8)137

(7)Incorporated by reference from Appendix A of the definitive proxy statement of Prudential Bancorp, Inc. filed with the SEC on December 30, 2014 (SEC File No. 000-55084).

(9)(8)Incorporated by reference from the Current Report on Form 8-K of Prudential Bancorp, Inc. dated December 28, 2015 and filed with the SEC on December 28, 2015 (SEC File No. 000-55084).

114

(10)(9)Incorporated by reference from the Current Report on Form 8-K of Prudential Bancorp, Inc. dated May 3, 2016 and filed with the SEC on May 3, 2016 (SEC File No. 000-55084).

(11)(10)Incorporated by reference from the Current Report on Form 8-K of Prudential Bancorp, Inc. dated May 16,December 19, 2016 and filed with the SEC on May 16,December 22, 2016 (SEC File No. 000-55084).

(12)(11)Incorporated by reference from the Quarterly Report on Form 10-K of Prudential Bancorp, Inc. for the quarter ended December 31, 2015 filed with the SEC on February 9, 2016 (SEC File No. 000-55084).

(12)Incorporated by reference from the Current Report on Form 8-K of Prudential Bancorp, Inc. dated December 19, 2016 and filed with the SEC on December 23, 2016 (SEC File No. 000-55084).

(13)Incorporated by reference from the Current Report on Form 8-K of Prudential Bancorp, Inc. dated November 17, 2017 and filed with the SEC on November 22, 2017 (SEC File No. 000-55084).

(14)Incorporated by reference from the Current Report on Form 8-K of Prudential Bancorp, Inc. dated August 15, 2018 and filed with the SEC on August 15, 2018 (SEC File No. 000-55084).

(b)

(15)Incorporated by reference from the Current Report on Form 8-K of Prudential Bancorp, Inc. dated March 26, 2018 and filed with the SEC on March 30, 2018 (SEC File No. 000-55084).

Exhibits

(b)Exhibits

The exhibits listed under (a)(3) of this Item 15 are filed herewith.

(c)

(c)

Reference is made to (a)(2) of this Item 15.

Item 16. Form 10-K Summary

None

138

115

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

December 14, 201818, 2020

By:

By:

/s/Dennis PollackS/DENNIS POLLACK

Dennis Pollack

President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

/s/ Bruce E. Miller

December 14, 201818, 2020

Bruce E. Miller

Chairman of the Board

/s/ A. J. Fanelli

December 14, 201818, 2020

A. J. Fanelli

Director

/s/ John C. Hosier

December 14, 201818, 2020

John C. Hosier

Director

/s/ Francis V. MulcahyRaymond J. Vanaria

December 14, 201818, 2020

Francis V. Mulcahy

Raymond J. Vanaria

Director

/s/ Dennis Pollack

December 14, 201818, 2020

Dennis Pollack

Director, President and Chief Executive President

/s/ Jack E. Rothkopf

December 14, 201818, 2020

Jack E. Rothkopf

Senior Vice President, Chief Financial Officer, Treasurer

Chief Accounting Officer

139

116