Prudential Bancorp 10Q 2018 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 2018
	OR
¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from to
	Commission file number: 000-55084

Prudential Bancorp, Inc.

(Exact Name of Registrant as Specified in Its Charter)

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

1834 West Oregon Avenue Philadelphia, Pennsylvania		19145 Zip Code
(Address of Principal Executive Offices)

(215) 755-1500

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

xYes ¨ No

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

¨ Yes x No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practical date: as of July 31, 2018, 10,819,006 shares were issued and 9,008,836 were outstanding.

PRUDENTIAL BANCORP, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

		Page

PART I	FINANCIAL INFORMATION:

Item 1.	Consolidated Financial Statements

	Unaudited Consolidated Statements of Financial Condition June 30, 2018 and September 30, 2017	1

	Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2018 and 2017	2

	Unaudited Consolidated Statements of Comprehensive Income (Loss) for for the Three and Nine Months Ended June 30, 2018 and 2017	3

	Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended June 30, 2018 and 2017	4

	Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2018 and 2017	5

	Notes to Unaudited Consolidated Financial Statements	7

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	46

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	61

Item 4.	Controls and Procedures	61

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	62

Item 1A.	Risk Factors	63

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	63

Item 3.	Defaults Upon Senior Securities	63

Item 4.	Mine Safety Disclosures	63

Item 5.	Other Information	63

Item 6.	Exhibits	64

SIGNATURES		64

PRUDENTIAL BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

	June 30,			September 30,
	2018			2017
	(Dollars in Thousands, Except Per Share Data)
ASSETS

Cash and amounts due from depository institutions	$	2,403		$	2,274
Interest-bearing deposits		33,652			25,629

Total cash and cash equivalents		36,055			27,903

Certificates of deposit		1,604			1,604
Investment and mortgage-backed securities available for sale (amortized cost— June 30, 2018, $278,428; September 30, 2017, $180,087)		270,275			178,402
Investment and mortgage-backed securities held to maturity (fair value— June 30, 2018, $54,884; September 30, 2017, $60,179)		58,127			61,284
Loans receivable—net of allowance for loan losses (June 30, 2018, $5,041; September 30, 2017, $4,466)		602,455			571,343
Accrued interest receivable		3,670			2,825
Real estate owned		85			192
Federal Home Loan Bank stock—at cost		7,909			6,002
Office properties and equipment—net		7,549			7,804
Bank owned life insurance		28,533			28,048
Prepaid expenses and other assets		1,574			3,231
Goodwill		6,102			6,102
Intangible assets		605			709
Deferred tax assets-net		4,315			4,091
TOTAL ASSETS	$	1,028,858		$	899,540

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES:
Deposits:
Noninterest-bearing	$	14,322		$	9,375
Interest-bearing		700,731			626,607
Total deposits		715,053			635,982
Advances from Federal Home Loan Bank (short-term)		35,000			20,000
Advances from Federal Home Loan Bank (long-term)		129,164			94,318
Accrued interest payable		2,179			1,933
Advances from borrowers for taxes and insurance		3,808			2,207
Accounts payable and accrued expenses		12,137			8,921

Total liabilities		897,341			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 9,008,836 outstanding at June 30, 2018; 10,819,006 issued and 9,008,125 outstanding at September 30, 2017		108			108
Additional paid-in capital		118,141			118,751
Treasury stock, at cost: 1,810,170 shares at June 30, 2018 and and 1,810,881 shares at September 30, 2017		(27,155	)		(26,707	)
Retained earnings		47,023			44,787
Accumulated other comprehensive loss		(6,600	)		(760	)

Total stockholders' equity		131,517			136,179

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	1,028,858		$	899,540

See notes to unaudited consolidated financial statements.

PRUDENTIAL BANCORP, INC AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended June 30,					Nine Months Ended June 30,
	2018			2017		2018			2017
	(Dollars in Thousands, Except Per Share Data)
INTEREST INCOME:
Interest on loans	$	6,485		$	5,647	$	18,853		$	14,062
Interest on mortgage-backed securities		1,060			802		2,753			2,179
Interest and dividends on investments		1,189			926		3,198			2,263
Interest on interest-bearing assets		197			55		518			102

Total interest income		8,931			7,430		25,322			18,606

INTEREST EXPENSE:
Interest on deposits		1,932			1,002		4,915			2,690
Interest on advances from Federal Home Loan Bank(short-term)		43			-		184			-
Interest on advances from Federal Home Loan Bank(long-term)		734			375		1,637			918

Total interest expense		2,709			1,377		6,736			3,608

NET INTEREST INCOME		6,222			6,053		18,586			14,998

PROVISION FOR LOAN LOSSES		325			30		685			2,580

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		5,897			6,023		17,901			12,418

NON-INTEREST INCOME:
Fees and other service charges		177			179		505			472
Gain on sale of loans, net		-			3		-			52
Gain (loss) on the sale of investment securities		(376	)		70		(376	)		70
Swap income		925			-		1,087			-
Income from bank owned life insurance		160			229		480			506
Other		99			144		271			400

Total non-interest income		985			625		1,967			1,500

NON-INTEREST EXPENSE:
Salaries and employee benefits		2,042			1,884		6,053			5,593
Data processing		180			175		545			481
Professional services		431			230		1,625			1,018
Office occupancy		266			274		845			701
Depreciation		157			158		469			399
Director compensation		56			57		176			218
Deposit insurance premium		90			52		231			93
Advertising		61			92		173			158
Merger-related expense		-			-		-			2,663
Core deposit amortization		34			37		105			75
Other		453			541		1,460			1,582

Total non-interest expense		3,770			3,500		11,682			12,981

INCOME BEFORE INCOME TAXES		3,112			3,148		8,186			937

INCOME TAXES:
Current expense		1,096			941		2,366			769
Deferred (benefit) expense		(420	)		90		1,193			(539	)

Total income tax expense		676			1,031		3,559			230

NET INCOME	$	2,436		$	2,117	$	4,627		$	707

BASIC EARNINGS PER SHARE	$	0.28		$	0.25	$	0.52		$	0.08

DILUTED EARNINGS PER SHARE	$	0.26		$	0.25	$	0.50		$	0.08

DIVIDENDS PER SHARE	$	0.05		$	0.03	$	0.30		$	0.09

See notes to unaudited consolidated financial statements.

PRUDENTIAL bancorp, inc. and subsidiarIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

	Three months ended June 30,						Nine months ended June 30,
	2018			2017			2018			2017
	(Dollars in Thousands)
Net income	$	2,436		$	2,117		$	4,627		$	707

Unrealized holding gains (losses) on available-for-sale securities		(1,996	)		1,120			(6,699	)		(2,881	)
Tax effect		275			(381	)		1,407			979
Reclassification adjustment for net security losses (gains) realized in net income		310			(70	)		310			(70	)
Tax effect		(65	)		24			(65	)		24
Unrealized holding (losses) gains on interest rate swaps		(47	)		(91	)		187			701
Tax effect		16			31			(39	)		(238	)
Reclassification adjustment for gains on interest rate swap		(808	)		-			(808	)		-
Tax effect		170			-			170			-

Total other comprehensive income (loss)		(2,145	)		633			(5,537	)		(1,485	)

Comprehensive income (loss)	$	291		$	2,750		$	(910	)	$	(778	)

See notes to unaudited consolidated financial statements.

PRUDENTIAL bancorp, inc. and subsidiarIES

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

														Accumulated
			Additional			Unearned								Other			Total
	Common		Paid-In			ESOP		Treasury			Retained			Comprehensive			Stockholders'
	Stock		Capital			Shares		Stock			Earnings			Income (Loss)			Equity
	(Dollars in Thousands, Except Per Share Data)
BALANCE, October 1, 2017	$	108	$	118,751		$	-	$	(26,707	)	$	44,787		$	(760	)	$	136,179

Net income												4,627						4,627
Other comprehensive loss															(5,537	)		(5,537	)
Dividends paid ($0.30 per share)												(2,694	)					(2,694	)
Purchase of treasury stock (161,101 shares)									(2,922	)								(2,922	)
Treasury stock used for employee benefit plans (161,812 shares)				(1,407	)				2,474									1,067
Stock option expense				389														389
Restricted shares award expense				408														408
Reclassification due to change in federal income tax rate												303			(303	)		-

BALANCE, June 30, 2018	$	108	$	118,141		$	-	$	(27,155	)	$	47,023		$	(6,600	)	$	131,517

															Accumulated
			Additional			Unearned									Other			Total
	Common		Paid-In			ESOP			Treasury			Retained			Comprehensive			Stockholders'
	Stock		Capital			Shares			Stock			Earnings			Income (Loss)			Equity
	(Dollars in Thousands, Except Per Share Data)
BALANCE, October 1, 2016	$	95	$	95,713		$	(4,550	)	$	(21,098	)	$	43,044		$	798		$	114,002

Net income													707						707
Other comprehensive loss																(1,485	)		(1,485	)
Dividends paid ($0.09 per share)													(764	)					(764	)
Issuance of common stock (1,274,197 shares)		13		21,801															21,814
Purchase of treasury stock (43,698 shares)										(1,058	)								(1,058	)
Terminate ESOP (303,115 shares)				733			4,456			(5,189	)								-
Treasury stock used for employee benefit plan (34,814 shares)				(653	)					653									-
Tax benefit from stock compensation plans				195															195
Stock option expense				349															349
Restricted shares award expense				284															284
ESOP shares committed to be released (8,879 shares)				58			94												152

BALANCE, June 30, 2017	$	108	$	118,480		$	-		$	(26,692	)	$	42,987		$	(687	)	$	134,196

See accompanying notes to the unaudited consolidated financial statements

PRUDENTIAL BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Nine Months Ended June 30,
	2018			2017
	(Dollars in Thousands)
OPERATING ACTIVITIES:
Net income	$	4,627		$	707
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation		469			399
Net amortization of premiums/discounts		517			575
Provision for loan losses		685			2,580
Net (accretion) amortization of deferred loan fees and costs		(43	)		81
Share-based compensation expense for stock options and awards		797			828
Income from bank owned life insurance		(480	)		(506	)
Gain from sale of loans held for sale		-			(52	)
Gain on retirement of cash flow hedges		(808	)		-
Loss (gain) from sale of investment securities		376			(70	)
Gain on sale of other real estate owned		-			(60	)
Originations of loans held for sale		-			(2,634	)
Proceeds from sale of loans held for sale		-			2,686
Compensation expense of ESOP		-			139
Deferred income tax expense (benefit)		1,193			(539	)
Changes in assets and liabilities which used cash:
Accrued interest receivable		(845	)		(1,161	)
Accrued interest payable		246			(64	)
Other		590			1,706
Net cash provided by operating activities		7,324			4,615
INVESTING ACTIVITIES:
Purchase of investment and mortgage-backed securities available for sale		(113,535	)		(68,684	)
Purchase of investments held to maturity		(2,458	)		(18,847	)
Loans originated		(93,038	)		(160,085	)
Principal collected on loans		61,569			118,107
Principal payments received on investment and mortgage-backed securities:
Held-to-maturity		975			861
Available-for-sale		10,663			8,131
Proceeds from the sale of investments and mortgage-backed securities		11,052			10,593
Proceeds from the sale of Polonia Bancorp Inc.'s investment portfolio acquired		-			42,164
Proceeds from retirement of cash flow hedges		856
Redemption of FHLB Stock		3,228			163
Purchase of FHLB stock		(5,135	)		(67	)
Proceeds from sale of real estate owned		278			449
Acquisition, net of cash		-			28,956
Purchase of BOLI		-			(10,000	)
Purchases of equipment		(214	)		(229	)
Net cash used in investing activities		(125,759	)		(48,488	)
FINANCING ACTIVITIES:
Net decrease increase in demand deposits, NOW accounts, and savings accounts		(18,819	)		(12,686	)
Net increase in certificates of deposit		98,131			66,088
Proceeds from FHLB advances long-term		70,000			9,729
Repayment of FHLB advances long-term		(34,776	)		(9,521	)
Net proceeds from FHLB advances short-term		15,000			-
Increase in advances from borrowers for taxes and insurance		1,601			2,234
Cash dividends paid		(2,695	)		(764	)
Release unallocated shares from ESOP Plan		-			4,550
Repayment of remaining principal balance of ESOP Loan		-			(734	)
Treasury stock used for employee benefit plans		1,067			-
Purchase of treasury stock		(2,922	)		(4,536	)
Net cash provided by financing activities		126,587			54,360

PRUDENTIAL BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS –continued

	Nine Months Ended June 30,
	2018		2017
	(Dollars in Thousands)
NET INCREASE IN CASH AND CASH EQUIVALENTS		8,152		10,487

CASH AND CASH EQUIVALENTS—Beginning of period		27,903		12,440

CASH AND CASH EQUIVALENTS—End of period	$	36,055	$	22,927
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest paid on deposits and advances from FHLB	$	6,981	$	2,842
Income taxes paid		1,900		980
Loans transferred to real estate owned		111		-
SUPPLEMENTAL DISCLOSURES OF NONCASH FLOW
Acquisition of noncash assets and liabilities
Assets acquired:
Investment securities			$	42,164
Loans				160,157
Premises				6,902
Core deposit intangible				822
Goodwill				7,163
Bank owned life insurance				4,318
Other assets				2,558
Total assets			$	224,084
Liabilities assumed:
Deposits			$	172,243
Advances				57,232
Other liabilities				8,914
Total liabilities assumed			$	238,389
Net non-cash assets (liabilities) acquired				(14,305	)
Cash acquired			$	47,901

See notes to the unaudited consolidated financial statements

PRUDENTIAL BANCORP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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.

Basis of presentation – The accompanying unaudited consolidated financial statements were prepared pursuant to the rules and regulations of the U. S. Securities and Exchange Commission (“SEC”) for interim information and therefore do not include all the information or footnotes necessary for a complete presentation of financial condition, results of operations, comprehensive income, changes in equity and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”). However, all normal recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the financial statements have been included. The results for the three and nine months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2018, or any other period. These financial statements should be read in conjunction with the audited consolidated financial statements of the Company and the accompanying notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2017. The significant accounting policies followed in the presentation of interim financial results are the same as those followed on an annual basis. These policies are presented on pages 84 through 88 of the Form 10-K for the fiscal year ended September 30, 2017.

Use of Estimates in the Preparation of Financial Statements—The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. The most significant estimates and assumptions in the Company’s consolidated financial statements are recorded in the allowance for loan losses, goodwill and intangible assets, deferred income taxes, other-than-temporary impairment, and the fair value measurement for financial instruments. Actual results could differ from those estimates.

Recent Accounting Pronouncements

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. This Update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. In August 2015, the FASB issued ASU 2015-14,Revenue from Contracts with Customers (Topic 606). The amendments in this Update defer 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. All other entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. 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. For all other entities, including not-for-profit entities and employee benefit plans within the scope of Topics 960 through 965 on plan accounting, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. All entities that are not public business entities may adopt the amendments in this Update earlier as of the fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

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. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and 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. 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. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments in this 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 Company is currently evaluating the impact the adoption of the standard will have on the Company’s statement of cash flows.

In January 2017, the FASB issued ASU 2017-01,Business Combinations (Topic 805), Clarifying the Definition of a Business, which provides a more robust framework to use in determining when a set of assets and activities (collectively referred to as a “set”) is a business. The screening process requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This 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. All other entities should apply the amendments to annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The amendments in this 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 units fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. A public business entity that is an SEC filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. A public business entity that is not an SEC filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2020. All other entities, including not-for-profit entities, that are adopting the amendments in this Update should do so for their annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2021.This Update is not expected to have a significant impact on the Company’s financial statements.

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

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

In August 2017, the FASB issued ASU 2017-12,Derivatives and Hedging (Topic 850), the objective of which is to improve the financial reporting of hedging relationships to better portray 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 earnings as of the beginning of the fiscal year that an entity adopts the amendments in this Update. The amended presentation 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 January 2018, the FASB issued ASU 2018-01,Leases (Topic 842), which provides an optional transition practical expedient to not evaluate under Topic 842 existing or expired land easements that were not previously accounted for as leases under the current lease guidance in Topic 840. An entity that elects this practical expedient should evaluate new or modified land easements under Topic 842 beginning at the date the entity adopts Topic 842; otherwise, an entity should evaluate all existing or expired land easements in connection with the adoption of the new lease requirements in Topic 842 to assess whether they meet the definition of a lease. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in ASU 2016-02 Topic 842.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 February 2018, the FASB issued ASU 2018-02,Income Statement – Reporting Comprehensive Income (Topic 220), to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from 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 amendments 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 and retained earnings on the consolidated balance sheet.

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. Public business entities with fiscal years beginning between December 15, 2017, and June 15, 2018, are not required to adopt these amendments until the interim period beginning after June 15, 2018, and public business entities with fiscal years beginning between June 15, 2018, and December 15, 2018, are not required to adopt these amendments before adopting the amendments in Update 2016-01. For all other entities, the effective date is the same as the effective date in Update 2016-01. 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 Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

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.

EARNINGS PER SHARE

Basic earnings per common share is computed by dividing net income by the weighted average number of shares of common stock outstanding, net of any treasury shares, during the period. Diluted earnings per share is calculated by dividing net income by the weighted average number of shares of common stock outstanding, net of any treasury shares, after consideration of the potential dilutive effect of common stock equivalents, consisting of restricted stock and stock options based upon the treasury stock method using an average market price for the period.

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

	Three Months Ended June 30,
	2018				2017
	Basic		Diluted		Basic		Diluted
	(Dollars in Thousands Except Per Share Data)

Net income	$	2,436	$	2,436	$	2,117	$	2,117

Weighted average shares outstanding		8,848,393		8,848,393		8,652,699		8,652,699
Effect of common stock equivalents		-		378,912		-		656,370
Adjusted weighted average shares used in earnings per share computation		8,848,393		9,227,305		8,652,699		9,309,069
Earnings per share	$	0.28	$	0.26	$	0.25	$	0.25

	Nine Months Ended June 30,
	2018				2017
	Basic		Diluted		Basic		Diluted
	(Dollars in Thousands Except Per Share Data)

Net income	$	4,627	$	4,627	$	707	$	707

Weighted average shares outstanding		8,851,784		8,851,784		8,202,950		8,202,950
Effect of common stock equivalents		-		342,432		-		570,792
Adjusted weighted average shares used in earnings per share computation		8,851,784		9,194,216		8,202,950		8,773,742
Earnings per share	$	0.52	$	0.50	$	0.08	$	0.08

All exercisable stock options outstanding as of June 30, 2018 and 2017 had exercise prices below the then current per share market price for the Company’s common stock and were considered dilutive for the earnings per share calculation.

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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

	Three Months Ended June 30,									Three Months Ended June 30,
	2018			2018			2018			2017			2017			2017
							(Dollars in Thousands)
	Unrealized gain (loss) on AFS securities (a)			Unrealized gain (loss) on interest rate swaps (a)			Total accumulated other comprehensive income			Unrealized gain (loss) on AFS securities (a)			Unrealized gain (loss) on interest rate swaps (a)			Total accumulated other comprehensive income
Beginning balance, April 1	$	(4,965	)	$	510		$	(4,455	)	$	(1,710	)	$	390		$	(1,320	)
Other comprehensive (loss) income before reclassification		(1,721	)		(31	)		(1,752	)		739			(60	)		679
Amount reclassified from accumulated other comprehensive income		245			(638	)		(393	)		(46	)		-			(46	)
Total		(6,441	)		(159	)		(6,600	)		(1,017	)		330			(687	)
Reclassification due to change in federal income tax rate		-			-			-			-			-			-
Ending Balance, June 30	$	(6,441	)	$	(159	)	$	(6,600	)	$	(1,017	)	$	330		$	(687	)

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

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

	Nine Months Ended June 30,									Nine Months Ended June 30,
	2018			2018			2018			2017			2017			2017
							(Dollars in Thousands)
	Unrealized gain (loss) on AFS securities (a)			Unrealized gain (loss) on interest rate swaps (a)			Total accumulated other comprehensive income			Unrealized gain (loss) on AFS securities (a)			Unrealized gain (loss) on interest rate swaps (a)			Total accumulated other comprehensive income
Beginning balance, October 1	$	(1,091	)	$	331		$	(760	)	$	931		$	(133	)	$	798
Other comprehensive (loss) income before reclassification		(5,292	)		148			(5,144	)		(1,902	)		463			(1,439	)
Amount reclassified from accumulated other comprehensive income		245			(638	)		(393	)		(46	)		-			(46	)
Total		(6,138	)		(159	)		(6,297	)		(1,017	)		330			(687	)
Reclassification due to change in federal income tax rate		(303	)		-			(303	)		-			-			-
Ending Balance, June 30	$	(6,441	)	$	(159	)	$	(6,600	)	$	(1,017	)	$	330		$	(687	)

(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 other comprehensive income (loss) for the three and nine months ended June 30, 2018 and 2017. Amounts in parentheses indicate debits to net income:

	Three Months Ended June 30,									Three Months Ended June 30,
	2018			2018			2018			2017			2017		2017
							(Dollars in Thousands)
	Securities			Swaps			Total			Securities			Swaps		Total
Unrealized (losses) gain	$	(310	)(1)	$	808	(2)	$	498		$	70	(1)	$	-	$	70
		65	(3)		(170	)(3)		(105	)		(24	)(3)		-		(24	)
	$	(245	)	$	638		$	393		$	46		$	-	$	46

	Nine Months Ended June 30,									Nine Months Ended June 30,
	2018			2018			2018			2017			2017		2017
							(Dollars in Thousands)
	Securities			Swaps			Total			Securities			Swaps		Total
Unrealized (losses) gain	$	(310	)(1)	$	808	(2)	$	498		$	70	(1)	$	-	$	70
		65	(3)		(170	)(3)		(105	)		(24	)(3)		-		(24	)
	$	(245	)	$	638		$	393		$	46		$	-	$	46

(1) Recorded as a loss on the sale of investment securities

(2) Recorded as Swap income

(3) Recorded as income tax benefit (expense)

INVESTMENT AND MORTGAGE-BACKED SECURITIES

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

	June 30, 2018
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(Dollars in Thousands)
Securities Available for Sale:
U.S. government and agency obligations	$	25,592	$	-	$	(1,088	)	$	24,504
Mortgage-backed securities - U.S. government agencies		164,064		90		(4,830	)		159,324
State and political subdivisions		22,091		-		(32	)		22,059
Corporate debt securities		66,675		27		(2,356	)		64,346
Total debt securities available for sale		278,422		117		(8,306	)		270,233

FHLMC preferred stock		6		36		-			42

Total securities available for sale	$	278,428	$	153	$	(8,306	)	$	270,275

Securities Held to Maturity:
U.S. government and agency obligations	$	33,500	$	114	$	(2,863	)	$	30,751
Mortgage-backed securities - U.S. government agencies		6,052		171		(132	)		6,091
State and political subdivisions		18,575		5		(538	)		18,042

Total securities held to maturity	$	58,127	$	290	$	(3,533	)	$	54,884

	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 available for sale		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

The following table shows the gross unrealized losses and related fair values of the Company’s investments and mortgage-backed securities, aggregated by investment category and length of time that individual securities had been in a continuous loss position at June 30, 2018:

	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	$	(1,088	)	$	24,504	$	-		$	-	$	(1,088	)	$	24,504
Mortgage-backed securities - U.S. government agencies		(3,038	)		104,320		(1,792	)		37,699		(4,830	)		142,019
State and political subdivisions		(32	)		3,142		-			-		(32	)		3,142
Corporate debt securities		(2,356	)		60,568		-			-		(2,356	)		60,568

Total securities available for sale	$	(6,514	)	$	192,534	$	(1,792	)	$	37,699	$	(8,306	)	$	230,233

Securities Held to Maturity:
U.S. government and agency obligations	$	(2,863	)	$	27,636	$	-		$	-	$	(2,863	)	$	27,636
Mortgage-backed securities - U.S. government agencies		(91	)		2,777		(41	)		985		(132	)		3,762
State and political subdivisions		(538	)		16,003		-			-		(538	)		16,003

Total securities held to maturity	$	(3,492	)	$	46,416	$	(41	)	$	985	$	(3,533	)	$	47,401

Total	$	(10,006	)	$	238,950	$	(1,833	)	$	38,684	$	(11,839	)	$	277,634

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

	Less than 12 months					More than 12 months					Total
	Gross					Gross					Gross
	Unrealized			Fair		Unrealized			Fair		Unrealized			Fair
	Losses			Value		Losses			Value		Losses			Value
	(Dollars in Thousands)
Securities Available for Sale:
U.S. government and agency obligations	$	(335	)	$	20,655	$	-		$	-	$	(335	)	$	20,655
Mortgage-backed securities - U.S. government agencies		(1,135	)		77,176		(340	)		11,684		(1,475	)		88,860
Corporate debt securities		(285	)		22,511		-			-		(285	)		22,511

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

Securities Held to Maturity:
U.S. government and agency obligations	$	(1,688	)	$	28,813	$	-		$	-	$	(1,688	)	$	28,813
Mortgage-backed securities - U.S. government agencies		(11	)		1,176		-			-		(11	)		1,176
State and political subdivisions		(104	)		7,854		-			-		(104	)		7,854

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

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

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

The Company assesses whether a credit loss exists with respect to a security by considering whether (1) the Company has the intent to sell the security, (2) it is more likely than not that it will be required to sell the security before recovery has occurred, or (3) it does not expect to recover the entire amortized cost basis of the security. The Company bifurcates the OTTI impact on impaired securities where impairment in value was deemed to be other than temporary between the component representing credit loss and the component representing loss related to other factors. The portion of the fair value decline attributable to credit loss must be recognized through a charge to earnings. The credit component is determined by comparing the present value of the cash flows expected to be collected, discounted at the rate in effect before recognizing any OTTI, with the amortized cost basis of the debt security. The Company uses the cash flows expected to be realized from the security, which includes assumptions about interest rates, timing and severity of defaults, estimates of potential recoveries, the cash flow distribution from the security and other factors, then applies a discount rate equal to the effective yield of the security. The difference between the present value of the expected cash flows and the amortized book value is considered a credit loss. The fair value of the security is determined using the same expected cash flows; the discount rate is a rate the Company determines from open market and other sources as appropriate for the particular security. The difference between the fair value and the security’s remaining amortized cost is recognized in other comprehensive income (loss).

For both the three and nine months ended June 30, 2018 and 2017, the Company did not record any credit losses on investment securities through earnings.

U.S. Government and Agency Obligations -At June 30, 2018, there were 14 securities in a gross unrealized loss position for less than 12 months. These securities represent asset-backed issues that are issued or guaranteed by a U.S. Government sponsored agency or carry the full faith and credit of the United States through a government agency and are currently rated AAA by at least one bond credit rating agency. As a result, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2018.

Mortgage-Backed Securities –At June 30, 2018, there were 41 mortgage-backed securities in a gross unrealized loss position for less than 12 months, while there were 32 securities in a gross unrealized loss position for more than 12 months at such date. These securities represent asset-backed issues that are issued or guaranteed by a U.S. Government sponsored agency or carry the full faith and credit of the United States through a government agency and are currently rated AAA by at least one bond credit rating agency. As a result, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2018.

Corporate Debt Securities – At June 30, 2018, there were 34 securities in a gross unrealized loss position for less than 12 months. These securities were issued by publicly traded companies with an investment grade rating by at least one bond credit rating agency. As a result, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2018.

State and political subdivisions– At June 30, 2018, there were 10 securities in a gross unrealized loss position for less than 12 months. These securities were issued by government entities with an investment grade rating by at least one bond credit rating agency. As a result, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2018.

The amortized cost and fair value of debt securities, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

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

	June 30, 2018
	Held to Maturity				Available for Sale
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
	(Dollars in Thousands)
Due after one through five years	$	2,000	$	2,022	$	5,073	$	4,969
Due after five through ten years		25,504		24,542		61,602		59,376
Due after ten years		24,571		22,229		47,683		46,564

Total	$	52,075	$	48,793	$	114,358	$	110,909

During both the three and nine month periods ended June 30, 2018, the Company sold one mortgage-back security with an aggregate amortized cost of $5.1 million at an recognized aggregate loss of $268,000 (pre-tax), a corporate bond with an amortized cost of $2.0 million for a loss of $42,000 (pre-tax) and three municipal securities with an aggregate amortized cost of $4.6 million at an aggregate loss of $66,000 (pre-tax). The sales were of securities which bore yields below market rates in order to better position the securities portfolio in a rising rate environment.

During the both three and nine month periods ended June 30, 2018 and 2017, the Company did not use investment securities as collateral for any of its FHLB advances.

LOANS RECEIVABLE

Loans receivable consist of the following:

	June 30,			September 30,
	2018			2017
	(Dollars in Thousands)
One-to-four family residential	$	340,480		$	351,298
Multi-family residential		38,448			21,508
Commercial real estate		112,332			127,644
Construction and land development		137,820			145,486
Loans to financial institutions		6,000			-
Commercial business		14,148			488
Leases		2,169			4,240
Consumer		981			1,943

Total loans		652,378			652,607

Undisbursed portion of loans-in-process		(42,082	)		(73,858	)
Deferred loan fees, net		(2,800	)		(2,940	)
Allowance for loan losses		(5,041	)		(4,466	)

Net loans	$	602,455		$	571,343

The following table summarizes by loan segment the balance in the allowance for loan losses and the loans individually and collectively evaluated for impairment by loan segment at June 30, 2018:

	One- to-four family residential		Multi-family residential		Commercial real estate		Construction and land development		Loans to financial institutions		Commercial Business		Leases		Consumer		Unallocated		Total
	(Dollars in Thousands)
Allowance for loan losses:
Individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Collectively evaluated for impairment		1,294		383		1,056		1,600		63		146		23		15		461		5,041
Total ending allowance balance	$	1,294	$	383	$	1,056	$	1,600	$	63	$	146	$	23	$	15	$	461	$	5,041

Loans:
Individually evaluated for impairment	$	6,058	$	303	$	1,773	$	8,746	$	-	$	-	$	-	$	-			$	16,880
Collectively evaluated for impairment		334,422		38,145		110,559		129,074		6,000		14,148		2,169		981				635,498
Total loans	$	340,480	$	38,448	$	112,332	$	137,820	$	6,000	$	14,148	$	2,169	$	981			$	652,378

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

	One- to-four family residential		Multi-family residential		Commercial real estate		Construction and land development		Commercial business		Leases		Consumer		Unallocated		Total
	(Dollars in Thousands)
Allowance for loan losses:
Individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Collectively evaluated for impairment		1,241		205		1,201		1,358		4		23		24		410		4,466
Total ending allowance balance	$	1,241	$	205	$	1,201	$	1,358	$	4	$	23	$	24	$	410	$	4,466

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

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

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

					Impaired
					Loans with
	Impaired Loans with				No Specific
	Specific Allowance				Allowance		Total Impaired Loans
	(Dollars in Thousands)
									Unpaid
	Recorded		Related		Recorded		Recorded		Principal
	Investment		Allowance		Investment		Investment		Balance
One-to-four family residential	$	-	$	-	$	6,058	$	6,058	$	6,406
Multi-family residential		-		-		303		303		303
Commercial real estate		-		-		1,773		1,773		1,860
Construction and land development		-		-		8,746		8,746		11,127
Total impaired loans	$	-	$	-	$	16,880	$	16,880	$	19,696

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

					Impaired
					Loans with
	Impaired Loans with				No Specific
	Specific Allowance				Allowance		Total Impaired Loans
	(Dollars in Thousands)
									Unpaid
	Recorded		Related		Recorded		Recorded		Principal
	Investment		Allowance		Investment		Investment		Balance
One-to-four family residential	$	-	$	-	$	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 loans		-		-		10		10		10
Total impaired loans	$	-	$	-	$	19,665	$	19,665	$	23,126

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

	Three Months Ended June 30, 2018
	Average Recorded Investment		Income Recognized on Accrual Basis		Income Recognized on Cash Basis
	(Dollars in Thousands)
One-to-four family residential	$	6,159	$	-	$	17
Multi-family residential		305		-		-
Commercial real estate		2,624		-		2
Construction and land development		8,745		-		-
Total impaired loans	$	17,833	$	-	$	19

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

	Nine Months Ended June 30, 2018
	Average Recorded Investment		Income Recognized on Accrual Basis		Income Recognized on Cash Basis
	(Dollars in Thousands)
One-to-four family residential	$	6,636	$	77	$	21
Multi-family residential		307		11		-
Commercial real estate		3,004		58		2
Construction and land development		8,741		-		-
Total impaired loans	$	18,688	$	146	$	23

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

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

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

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

	June 30, 2018
			Special				Total
	Pass		Mention		Substandard		Loans
	(Dollars in Thousands)
One-to-four family residential	$	-	$	3,608	$	6,058	$	9,666
Multi-family residential		38,145		-		303		38,448
Commercial real estate		108,622		1,937		1,773		112,332
Construction and land development		129,074		-		8,746		137,820
Loans to financial institutions		6,000		-		-		6,000
Commercial business		14,148		-		-		14,148
Total loans	$	295,989	$	5,545	$	16,880	$	318,414

	September 30, 2017
			Special				Total
	Pass		Mention		Substandard		Loans
	(Dollars in Thousands)
One-to-four family residential	$	-	$	1,635	$	3,878	$	5,513
Multi-family residential		21,191		-		317		21,508
Commercial real estate		125,307		1,449		888		127,644
Construction and land development		136,763		-		8,723		145,486
Commercial business		488		-		-		488
Total loans	$	283,749	$	3,084	$	13,806	$	300,639

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

	June 30, 2018
			Non-		Total
	Performing		Performing		Loans
	(Dollars in Thousands)
One-to-four family residential	$	336,571	$	3,909	$	340,480
Leases		2,169		-		2,169
Consumer		981		-		981
Total loans	$	339,721	$	3,909	$	343,630

	September 30, 2017
			Non-		Total
	Performing		Performing		Loans
	(Dollars in Thousands)
One-to-four family residential	$	343,021	$	2,764	$	345,785
Leases		4,240		-		4,240
Consumer		1,943		-		1,943
Total residential and consumer loans	$	349,204	$	2,764	$	351,968

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is due or overdue, as the case may be. The following table presents the loan categories of the loan portfolio summarized by the aging categories of performing and delinquent loans and nonaccrual loans:

	June 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

One-to-four family residential	$	334,362	$	2,385	$	3,733	$	6,118	$	340,480	$	3,909	$	-
Multi-family residential		38,448		-		-		-		38,448		-		-
Commercial real estate		112,332		727		1,473		2,200		114,532		1,543		-
Construction and land development		129,074		-		8,746		8,746		137,820		8,746		-
Financial institutions		6,000		-		-		-		6,000		-		-
Commercial business		11,948		-		-		-		11,948		-		-
Leases		2,169		-		-		-		2,169		-		-
Consumer		923		58		-		58		981		-		-
Total loans	$	635,256	$	3,170	$	13,952	$	17,122	$	652,378	$	14,198	$	-

	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	$	-

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

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

The following tables summarize the primary segments of the allowance for loan losses. Activity in the allowance is presented for the both three and nine month periods ended June 30, 2018 and 2017:

	Three Months Ended June 30, 2018
	One- to four-family residential			Multi- family residential		Commercial real estate			Construction and land development		Financial institutions		Commercial Business		Leases			Consumer			Unallocated			Total
	(Dollars in Thousands)
ALLL balance at March 31, 2018	$	1,308		$	205	$	1,083		$	1,465	$	62	$	106	$	29		$	97		$	486		$	4,841
Charge-offs		(114	)		-		-			-		-		-		(11	)		-			-			(125	)
Recoveries		-			-		-			-		-		-		-			-			-			-
Provision		100			178		(27	)		135		-		40		5			(81	)		(25	)		325
ALLL balance at June 30, 2018	$	1,294		$	383	$	1,056		$	1,600	$	62	$	146	$	23		$	16		$	461		$	5,041

	Nine Months Ended June 30, 2018
	One- to four-family residential			Multi- family residential		Commercial real estate			Construction and land development			Financial institutions		Commercial business		Leases		Consumer			Unallocated		Total
	(Dollars in Thousands)
ALLL balance at September 30, 2017	$	1,241		$	205	$	1,201		$	1,358		$	-	$	4	$	23	$	24		$	410	$	4,466
Charge-offs		(125	)		-		-			(12	)		-		-		-		-			-		(137	)
Recoveries		27			-		-			-			-		-		-		-			-		27
Provision		151			178		(145	)		254			62		142		-		(8	)		51		685
ALLL balance at June 30, 2018	$	1,294		$	383	$	1,056		$	1,600		$	62	$	146	$	23	$	16		$	461	$	5,041

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

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

The Company recorded a provision for loan losses in the amount of $325,000 and $685,000 for the three and nine months period ended June 30, 2018, respectively, compared to $30,000 and $2.6 million for the comparable three and nine months periods in fiscal 2017. During the quarter ended June 30, 2018, the Company recorded charge offs of $125,000 and recoveries of $0. The remainder of the increase in the provision was due to increased balances of construction and land development and multi-family residential loans.

At June 30, 2018, the Company had 10 loans aggregating $6.2 million that were classified as troubled debt restructurings (“TDRs”). Six of such loans aggregating $1.1 million were performing in accordance with the restructured terms as of June 30, 2018 and accruing interest. Three of the TDRs totaling $4.9 million are on non-accrual and are a part of a troubled lending relationship totaling $10.7 million. The remaining TDR is also on non-accrual and consists of a $156,000 loan secured by various commercial and residential properties.

The Company did not restructure any debt during the three month period ended June 30, 2018; there was one loan restructured during the nine month period ending June 30, 2018. The restructuring of the loan entailed extending the maturity date of the loan from December 2017 to April 2018. The loan was paid off in April 2018. The Company did not restructure any debt during the three and nine month periods ended June 30, 2017.

	As of and for the Nine months Ended June 30, 2018
(Dollars in Thousands)	Number of Loans		Pre- Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment

One-to-four family residential		1	$	77	$	77
Total		1	$	77	$	77

No TDRs defaulted during the period ending June 30, 2018.

DEPOSITS

Deposits consist of the following major classifications:

	June 30,					September 30,
	2018					2017
	Amount		Percent			Amount		Percent
	(Dollars in Thousands)
Money market deposit accounts	$	64,349		9.0	%	$	76,272		12.0	%
Interest-bearing checking accounts		46,469		6.5			54,267		8.5
Non interest-bearing checking accounts		14,315		2.0			9,375		1.5
Passbook, club and statement savings		97,730		13.7			101,743		16.0
Certificates maturing in six months or less		187,930		26.3			154,750		24.3
Certificates maturing in more than six months		304,260		42.5			239,575		37.7

Total	$	715,053		100.0	%	$	635,982		100.0	%

Certificates of $250,000 and over totaled $40.3 million as of June 30, 2018 and $28.9 million as of September 30, 2017.

ADVANCES FROM FEDERAL HOME LOAN BANK-SHORT TERM

As of June 30, 2018 and September 30, 2017 outstanding balances and related information of short-term borrowings from the FHLB are summarized follows:

						June 30,		September 30,
						2018		2017
Type	Maturity Date	Coupon			Call Date	Amount		Amount
						(Dollars in Thousands)
Fixed Rate - Advances	6-Oct-17		1.30	%	Not Applicable		-	$	10,000
Fixed Rate - Advances	13-Oct-17		1.31	%	Not Applicable		-		10,000
Weighted average rate			1.31	%

Fixed Rate - Advances	2-Jul-18		2.10	%	Not Applicable	$	5,000		-
Fixed Rate - Advances	11-Jul-18		2.15	%	Not Applicable		10,000		-
Fixed Rate - Advances	14-Sep-18		2.22	%	Not Applicable		20,000		-
Weighted average rate			2.18	%		$	35,000	$	20,000

As of June 30, 2018, short-term advances consisted of $35.0 million maturing in three month or less. One advance for $10.0 million at June 30, 2018 was applied to an interest rate swap contract with an effective cost of 280 basis points, while the remaining $25.0 million of advances were used to fund short-term liquidity needs. There were two $10.0 million advances associated with two interest rate swap contracts with a weighted average effective cost of 125 basis points and 117 basis points respectively at June 30, 2017.

ADVANCES FROM FEDERAL HOME LOAN BANK – LONG TERM

Pursuant to collateral agreements with the FHLB of Pittsburgh, advances are secured by a blanket collateral of loans held by the Company and qualifying fixed-income securities and FHLB stock. The long-term advances outstanding as of June 30, 2018 and September 30, 2017 are as follows:

						June 30,		September 30,
						2018		2017
Type	Maturity Date	Coupon			Call Date	Amount		Amount
						(Dollars in Thousands)
Fixed Rate - Amortizing	1-Dec-17		1.16	%	Not Applicable	$	-	$	505
Fixed Rate - Amortizing	18-Nov-19		1.53	%	Not Applicable		1,987		3,044
Fixed Rate - Amortizing	26-Oct-20		1.94	%	Not Applicable		3,131		-
Fixed Rate - Amortizing	16-Mar-21		2.64	%	Not Applicable		2,298		-
Fixed Rate - Amortizing	19-Apr-21		2.72	%	Not Applicable		2,844
Fixed Rate - Amortizing	19-Apr-21		2.75	%	Not Applicable		4,070
Fixed Rate - Amortizing	3-May-21		2.83	%	Not Applicable		8,760
Fixed Rate - Amortizing	7-May-21		2.82	%	Not Applicable		4,380
Fixed Rate - Amortizing	12-Oct-21		1.99	%	Not Applicable		2,517
Fixed Rate - Amortizing	20-Jun-22		2.94	%	Not Applicable		5,000		-
Fixed Rate - Amortizing	15-Aug-23		1.94	%	Not Applicable		1,736		1,974
			2.57	%	(a)		36,723		5,523

Fixed Rate - Advances	17-Nov-17		1.20	%	Not Applicable		-		10,000
Fixed Rate - Advances	4-Dec-17		1.15	%	Not Applicable		-		2,000
Fixed Rate - Advances	19-Mar-18		2.53	%	Not Applicable		-		5,029
Fixed Rate - Advances	19-Mar-18		2.13	%	Not Applicable		-		5,041
Fixed Rate - Advances	20-Jun-18		1.86	%	Not Applicable		-		3,011
Fixed Rate - Advances	25-Jun-18		2.09	%	Not Applicable		-		3,016
Fixed Rate - Advances	27-Aug-18		4.15	%	Not Applicable		7,030		7,174
Fixed Rate - Advances	15-Nov-18		1.89	%	Not Applicable		3,005		3,014
Fixed Rate - Advances	16-Nov-18		1.40	%	Not Applicable		7,500		7,500
Fixed Rate - Advances	26-Nov-18		1.81	%	Not Applicable		2,003		2,008
Fixed Rate - Advances	3-Dec-18		1.54	%	Not Applicable		3,000		3,000
Fixed Rate - Advances	16-Aug-19		2.66	%	Not Applicable		3,033		3,056
Fixed Rate - Advances	9-Oct-19		2.54	%	Not Applicable		2,021		2,034
Fixed Rate - Advances	26-Nov-19		2.35	%	Not Applicable		3,033		3,062
Fixed Rate - Advances	22-Jun-20		2.60	%	Not Applicable		3,045		3,000
Fixed Rate - Advances	24-Jun-20		2.85	%	Not Applicable		2,039		2,054
Fixed Rate - Advances	27-Jul-20		1.38	%	Not Applicable		249		249
Fixed Rate - Advances	17-Aug-20		3.06	%	Not Applicable		2,050		2,068
Fixed Rate - Advances	9-Oct-20		2.92	%	Not Applicable		2,046		2,061
Fixed Rate - Advances	27-Jul-21		1.52	%	Not Applicable		249		249
Fixed Rate - Advances	28-Jul-21		1.48	%	Not Applicable		249		249
Fixed Rate - Advances	29-Jul-21		1.42	%	Not Applicable		249		249
Fixed Rate - Advances	19-Aug-21		1.55	%	Not Applicable		249		249
Fixed Rate - Advances	7-Oct-21		3.19	%	Not Applicable		2,073		2,089
Fixed Rate - Advances	12-Oct-21		3.23	%	Not Applicable		2,069		2,084
Fixed Rate - Advances	20-Oct-21		2.12	%	Not Applicable		4,000		-
Fixed Rate - Advances	6-Jun-22		2.05	%	Not Applicable		10,000		10,000
Fixed Rate - Advances	6-Sep-22		1.94	%	Not Applicable		249		249
Fixed Rate - Advances	22-Sep-22		2.11	%	Not Applicable		5,000		5,000
Fixed Rate - Advances	12-Oct-22		2.22	%	Not Applicable		3,000		-
Fixed Rate - Advances	17-Oct-22		2.18	%	Not Applicable		3,000		-
Fixed Rate - Advances	26-Oct-22		2.29	%	Not Applicable		3,000		-
Fixed Rate - Advances	31-Oct-22		2.30	%	Not Applicable		2,000		-
Fixed Rate - Advances	13-Dec-22		2.44	%	Not Applicable		4,000		-
Fixed Rate - Advances	17-Jan-23		2.58	%	Not Applicable		5,000		-
Fixed Rate - Advances	27-Mar-23		2.93	%	Not Applicable		3,000		-
Fixed Rate - Advances	9-May-24		3.20	%	Not Applicable		5,000		-
			2.46	%	(a)		92,441		88,795
(a) Weighted average coupon rate					Total	$	129,164	$	94,318

DERIVATIVES

The Company has contracted with a third party to participate in interest rate swap contracts. One of the swaps is a cash flow hedge associated with a $10.0 million FHLB advance at June 30, 2018. There were two cash flow hedges associated with $20.0 million of FHLB advances at September 30, 2017. These interest rate swaps involve the receipt of variable rate amounts from a counterparty in exchange for the Company making fixed payments. During the quarters ended June 30, 2018 and 2017, no income was recognized as ineffectiveness through earnings. During the nine month period ended June 30, 2018, $49,000 of income was recognized as ineffectiveness through earnings, while none was recognized as ineffectiveness through earnings during the comparable period in fiscal 2017. The two interest rate SWAPs from the 2017 period were unwound during June 2018 at a pre-tax gain of $808,000. There were nine interest rate swaps designated as a fair value hedge 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 applicable to two loans and seven investment securities as of September 30, 2017. There was one interest rate swap designated as a fair value hedge 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 applicable to a $1.1 million commercial loan as of September 30, 2017. During the quarter ended June 30, 2018, $1,000 of income was recognized through earnings, while none was recognized through earnings during the comparable period in 2017. During the nine month period ended June 30, 2018, $15,000 of income was recognized through earnings, while none was recognized through earnings during the comparable period in fiscal 2017.

Below is a summary of the interest rate swap agreements and the terms as of June 30, 2018.

	Notinal		Pay			Receive	Maturity	Unrealized
	Amount		Rate			Rate	Date	Gain (loss)
	(Dollar in thousands)

Interest rate swap contract	$	10,000		2.70	%	1 Mth Libor	10-Apr-25	$	35
Interest rate swap contract		1,705		3.06	%	3 Mth Libor	15-Feb-27		(19	)
Interest rate swap contract		2,825		3.06	%	3 Mth Libor	1-Apr-27		(31	)
Interest rate swap contract		5,000		3.07	%	3 Mth Libor	1-Jan-28		(57	)
Interest rate swap contract		1,235		3.07	%	3 Mth Libor	1-Mar-28		(14	)
Interest rate swap contract		4,500		3.07	%	3 Mth Libor	1-May-28		(52	)
Interest rate swap contract		3,305		3.05	%	3 Mth Libor	1-Feb-27		(32	)
Interest rate swap contract		3,000		3.06	%	3 Mth Libor	15-Oct-27		(32	)
Interest rate swap contract		8,300		5.74	%	1 Mth Libor +250 bp	13-Jun-25		-
Interest rate swap contract		1,100		4.10	%	1 Mth Libor +276 bp	1-Aug-26		-

								$	(202	)

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

	Notinal		Pay			Receive	Maturity	Unrealized
	Amount		Rate			Rate	Date	Gain
						(Dollar in thousands)

Interest rate swap contract	$	10,000		1.15	%	1 Mth Libor	6-Apr-21	$	217
Interest rate swap contract		10,000		1.18	%	1 Mth Libor	13-Jun-21		223
Interest rate swap contract		1,100		4.10	%	1 Mth Libor +276 bp	1-Aug-26		62

								$	502

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

10.

INCOME TAXES

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

	June 30,			September 30,
	2018			2017
	(Dollars in Thousands)
Deferred tax assets:
Allowance for loan losses	$	1,390		$	1,675
Nonaccrual interest		310			349
Accrued vacation		7			12
Capital loss carryforward		300			476
Split dollar life insurance		10			15
Post-retirement benefits		58			98
Unrealized losses on available for sale securities		1,712			569
Unrealized losses on interest rate swaps		43			-
Deferred compensation		847			1,439
Goodwill		83			148
Purchse accounting adjustments		198			731
Other		48			254
Employee benefit plans		99			90

Total deferred tax assets		5,105			5,856
Valuation allowance		(239	)		(378	)
Total deferred tax assets, net of valuation allowance		4,866			5,478

Deferred tax liabilities:
Property		132			332
Unrealized gains on interest rate swaps		-			171
Deferred loan fees		419			884

Total deferred tax liabilities		551			1,387

Net deferred tax assets	$	4,315		$	4,091

The Company establishes a valuation allowance for deferred tax assets when management believes that the use of the deferred tax assets is not likely to be fully realized through future reversals of existing taxable temporary differences, and/or to a lesser extent, future taxable income. The tax deduction generated by the redemption of the shares of a mutual fund held by the Bank and the subsequent impairment charge on the assets acquired through the redemption in kind are considered capital losses and can only be utilized to the extent of capital gains recognized over a five year period, resulting in the establishment of a valuation allowance for the carryforward period. The valuation allowance totaled $239,000 and $378,000 at June 30, 2018, and September 30, 2017, respectively.

For the nine-month period ended June 30, 2018, the Company recorded income tax expense of $3.6 million, which included a $1.8 million one-time non-cash charge related to a re-evaluation of the Company’s deferred tax assets as a result of the enactment of the Tax Cuts and Jobs Act in December 2017, compared to tax expense of $230,000 for the same period in 2017. The reevaluation reflected the effect of the significant decline in the federal corporate income tax rate applicable to the Company. During fiscal 2018, commencing with the quarter ended December 31, 2017, the Company’s statutory income tax rate will be 24.25% as compared to companies which are calendar year tax reporting companies whose statutory rate will decrease to 21% starting January 1, 2018. Effective October 1, 2018, the Company’s statutory tax rate will be reduced to 21%.

The income tax expense differs from that computed at the statutory federal corporate tax rate as follows:

	For The Nine Months Ended June 30,
	2018						2017
				Percentage						Percentage
				of Pretax						of Pretax
	Amount			Income			Amount			Income
	(Dollars in Thousands)
Tax expense at statutory rate	$	1,985			24.25	%	$	319			(34.00	)%
Adjustments resulting from:
Write-down of deferred tax asset		1,756			21.45			-			-
Non deductible merger expenses		-			-			31			3.31
Tax exempt income		(108	)		(1.32	)		(53	)		(5.65	)
Income from bank owned life insurance		(116	)		(1.42	)		(172	)		(18.34	)
Employee benefit plans		54			0.66			103			11.01
Other		(12	)		(0.15	)		2			0.22

Income tax expense	$	3,559			43.47	%	$	230			24.55	%

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 return 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, 2014 have been closed for purposes of examination by the Internal Revenue Service and the Pennsylvania Department of Revenue.

11.

STOCK COMPENSATION PLANS

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. Shares subject to awards under the 2008 RRP generally vest at the rate of 20% per year over five years. During February 2015, shareholders approved the 2014 Stock Incentive Plan (the “2014 SIP”). As part of the 2014 SIP, a maximum of 285,655 shares of common stock can be awarded as restricted stock awards or units, of which 233,500 shares were awarded during February 2015. 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.

Compensation expense related to the shares subject to restricted stock awards granted is recognized ratably over the five-year vesting period in an amount which totals the grant date fair value multiplied by the number of shares subject to the grant. During the three and nine months ended June 30, 2018, an aggregate of $158,000 and $408,000, respectively, was recognized in compensation expense for the grants pursuant to the 2008 RRP and the 2014 SIP. During the three and nine months ended June 30, 2017, $149,000 and $430,000, respectively, was recognized in compensation expense for the grants pursuant to the 2008 RRP and the 2014 SIP. At June 30, 2018, approximately $1.5 million in additional compensation expense for shares awarded related to the 2008 RRP and 2014 SIP remained unrecognized.

A summary of the Company’s non-vested stock award activity for the nine months ended June 30, 2018 and 2017 is presented in the following tables:

	Nine Months Ended June 30, 2018
	Number of Shares (1)			Weighted Average Grant Date Fair Value

Nonvested stock awards at October 1, 2017		142,594		$	12.79
Granted		26,500			18.46
Forfeited		4,636			11.91
Vested		(44,647	)		12.07
Nonvested stock awards at June 30, 2018		129,083		$	14.17

	Nine Months Ended June 30, 2017
	Number of Shares			Weighted Average Grant Date Fair Value

Nonvested stock awards at October 1, 2016		172,788		$	12.03
Granted		17,128			17.43
Forfeited		-			-
Vested		(43,755	)		11.59
Nonvested stock awards at June 30, 2017		146,161		$	12.78

The Company maintains the 2008 Stock Option Plan (the “2008 Option Plan”) which authorizes the grant of stock options to officers, employees and directors of the Company to acquire shares of common stock with an exercise price at least equal to the fair market value of the common stock on the grant date. Options generally become vested and exercisable at the rate of 20% per year over five years and are generally exercisable for a period of ten years after the grant date. A total of 533,808 shares of common stock were approved for future issuance pursuant to the 2008 Option Plan. As of June 30, 2018, all of the options had been awarded under the 2008 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. During August 2016, the Company granted 18,867 shares under the 2008 Option Plan and 8,633 shares under the 2014 SIP. In March 2017, the Company granted 22,828 shares under the 2014 SIP. In May 2017, the Company granted 24,717 shares under the 2014 SIP and 283 shares under the 2008 Option Plan. In March 2018, the Company granted 159,265 shares under the 2014 SIP and 18,235 shares under the 2008 Option Plan.

A summary of the status of the Company’s stock options under the 2008 Option Plan and the 2014 SIP for the nine months ended June 30, 2018 and 2017 are presented below:

	Nine Months Ended June 30, 2018
	Number of Shares			Weighted Average Exercise Price

Outstanding at October 1, 2017		922,564		$	12.04
Granted		177,500			18.46
Exercised		(110,926	)		11.73
Forfeited		(12,234	)		11.90
Outstanding at June 30, 2018		976,904		$	13.15
Exercisable at June 30, 2018		521,630		$	11.49

	Nine Months Ended June 30, 2017
	Number of Shares			Weighted Average Exercise Price

Outstanding at October 1, 2016		921,909		$	11.70
Granted		47,828			17.48
Exercised		(40,757	)		11.48
Forfeited		-			-
Outstanding at June 30, 2017		928,980		$	11.85
Exercisable at June 30, 2017		552,435		$	11.43

The weighted average remaining contractual term for options outstanding as of June 30, 2018 was approximately 3.8 years.

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 date in fiscal 2018. The fair value for grants made in fiscal 2017 was estimated on the date of grant using the Black-Scholes pricing model with the following assumptions: an exercise price range from $17.43 to $18.39, expected term of seven years, volatility of 14.37%, interest rate of 2.22% and a yield of 0.69%. The fair value for grants made in March 2018 was estimated on the date of grant using the Black-Scholes pricing model with the following assumptions: an exercise price of $18.46, expected term of seven years, volatility of 15.9%, interest rate of 2.82% and a yield of 1.08%.

During the three and nine months ended June 30, 2018, $150,000 and $389,000, respectively, was recognized in compensation expense for options granted pursuant to the 2008 Option Plan and the 2014 SIP. During the three and nine months ended June 30, 2017, $139,000 and $397,000, respectively, was recognized in compensation expense for options granted pursuant to the 2008 Option Plan and the 2014 SIP.

At June 30, 2018, there was approximately $1.5 million in additional compensation expense to be recognized for awarded options which remained outstanding and unvested at such date. The weighted average period over which this expense will be recognized is approximately 2.6 years.

12.

COMMITMENTS AND CONTINGENT LIABILITIES

At June 30, 2018, the Company had $27.4 million in outstanding commitments to originate fixed-rate loans with market interest rates ranging from 5.15% to 5.75%. At September 30, 2017, the Company had $45.9 million in outstanding commitments to originate fixed-rate loans with market interest rates ranging from 3.75% to 5.25%. The aggregate undisbursed portion of loans-in-process amounted to $42.1 million at June 30, 2018 and $73.9 million at September 30, 2017.

The Company also had commitments under unused lines of credit of $66.9 million as of June 30, 2018 and $7.4 million as of September 30, 2017 and letters of credit outstanding of $1.7 million as of June 30, 2018 and $1.4 million as of September 30, 2017. The increase in unused commitments as of June 30, 2018 was primarily the result of six construction loans with unused commitments totaling $50.5 million, as of such date.

Among the Company’s contingent liabilities are exposures to limited recourse arrangements with respect to the Company’s sales of whole loans and participation interests. At June 30, 2018, the exposure, which represents a portion of credit risk associated with the interests sold, amounted to $1.7 million related to loans sold to the FHLB. This exposure is for the life of the related loans and payables, on our proportionate share, as actual losses are incurred. These loans are seasoned loans and remain performing.

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

13.

FAIR VALUE MEASUREMENT

The fair value estimates presented herein are based on pertinent information available to management as of June 30, 2018 and September 30, 2017, respectively. Although management is not aware of any factors that would significantly affect the fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

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

The three broad levels of hierarchy are as follows:

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

Those assets as of June 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	$	-	$	24,504	$	-	$	24,504
Mortgage-backed securities - U.S. Government agencies		-		159,324		-		159,324
State and political subdivisions		-		22,059		-		22,059
Corporate bonds		-		64,346		-		64,346
FHLMC preferred stock		42		-		-		42
Total	$	42	$	270,233	$	-	$	270,275

Liabilities:
Interest rate swap contracts:	$	-	$	186	$	-	$	186
Total	$	-	$	186	$	-	$	186

Those assets as of September 30, 2017 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

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

Impaired Loans

The Company considers loans to be impaired when it becomes more likely than not that the Company will be unable to collect all amounts due (principle and interest) in accordance with the contractual terms of the loan agreements. Collateral dependent impaired loans are based on the fair value of the collateral which is based on appraisals and would be categorized as Level 2 measurement. In some cases, adjustments are made to the appraised values for various factors including the age of the appraisal, age of the comparables included in the appraisal, and known changes in the market and in the collateral. These adjustments are based upon unobservable inputs, and therefore, the fair value measurement has been categorized as a Level 3 measurement. These loans are reviewed for impairment and written down to their net realizable value by charges against the allowance for loan losses. The collateral underlying these loans had a fair value in excess of $16.8 million as of June 30, 2018.

Real Estate Owned

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

Summary of Non-Recurring Fair Value Measurements

	At June 30, 2018
	(Dollars in Thousands)
	Level 1		Level 2		Level 3		Total
Impaired loans	$	-	$	-	$	16,880	$	16,880
Real estate owned		-		-		85		85
Total	$	-	$	-	$	16,965	$	16,965

	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

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

	At June 30, 2018
	(Dollars in Thousands)
			Valuation		Range/
	Fair Value		Technique	Unobservable Input	Weighted Ave.
Impaired loans	$	16,880	Property appraisals (1) (3)	Management discount for selling costs, property type and market volatility (2)	6% to 10% discount/10%
Real estate owned	$	85	Property appraisals (1)(3)	Management discount for selling costs, property type and market volatility (2)	10% 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

(1)

Fair value is generally determined through independent appraisals of the underlying collateral, which generally includes various Level 3 inputs, which are not identifiable.

(2)

Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

(3)

Includes qualitative adjustments by management and estimated liquidation expenses.

The fair value of financial instruments has been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

					Fair Value Measurements at
					June 30, 2018
	Carrying		Fair
	Amount		Value		(Level 1)		(Level 2)		(Level 3)
	(Dollars in Thousands)
Assets:
Cash and cash equivalents	$	36,055	$	36,055	$	36,055	$	-	$	-
Certificates of deposit		1,604		1,604		1,604		-		-
Investment and mortgage-backed securities available for sale		270,275		270,275		42		270,233		-
Investment and mortgage-backed securities held to maturity		58,127		54,884		-		54,884		-
Loans receivable, net		602,455		600,280		-		-		600,280
Accrued interest receivable		3,670		3,670		3,670		-		-
Other real estate owned		85		85		85		-		-
Federal Home Loan Bank stock		7,909		7,909		7,909		-		-
Bank owned life insurance		28,533		28,533		28,533		-		-
Interest rate swap contracts		-		-		-		-		-

Liabilities:
Checking accounts		60,784		60,784		60,784		-		-
Money market deposit accounts		64,349		64,349		64,349		-		-
Passbook, club and statement savings accounts		97,730		97,730		97,730		-		-
Certificates of deposit		492,190		496,678		-		-		496,678
Accrued interest payable		2,179		2,179		2,179		-		-
Advances from FHLB -short-term		35,000		35,000		35,000		-		-
Advances from FHLB -long-term		129,164		126,054		-		-		126,054
Advances from borrowers for taxes and insurance		3,808		3,808		3,808		-		-
Interest rate swap contracts		202		202		-		202		-

					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		-		-
Federal Home Loan Bank 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		59,956		59,956		59,956		-		-
Money market deposit accounts		48,797		48,797		48,797		-		-
Passbook, club and statement savings accounts		101,743		101,743		101,743		-		-
Certificates of deposit		394,325		398,078		-		-		398,078
Advances from FHLB -short-term		20,000		20,000		20,000		-		-
Advances from FHLB -long-term		94,318		93,579		-		-		93,579
Accrued interest payable		1,933		1,933		1,933		-		-
Advances from borrowers for taxes and insurance		2,207		2,207		2,207		-		-

Cash and Cash Equivalents- For cash and cash equivalents, the carrying amount is a reasonable estimate of fair value.

Investments and Mortgage-Backed Securities -The fair value of investment securities and mortgage-backed securities is based on quoted market prices, dealer quotes, and prices obtained from independent pricing services.

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

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

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

Bank Owned Life Insurance -The fair value of bank owned life insurance is based on the cash surrender value obtained from an independent advisor that is derivable from observable market inputs.

Checking Accounts, Money Market Deposit Accounts, Passbook Accounts, Club Accounts, Statement Savings Accounts, and Certificates of Deposit -The fair value of passbook accounts, club accounts, statement savings accounts, checking accounts, and money market deposit accounts is the amount reported in the financial statements. The fair value of certificates of deposit is based on market rates currently offered for deposits of similar remaining maturity.

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

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

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

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

Commitments to Extend Credit and Letters of Credit -The majority of the Bank’s commitments to extend credit and letters of credit carry current market interest rates if converted to loans. Because commitments to extend credit and letters of credit are generally unassignable by either the Bank or the borrower, they only have value to the Bank and the borrower. The estimated fair value approximates the recorded deferred fee amounts, which are not significant.

14.

GOODWILL AND OTHER INTANGIBLE ASSETS

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

	Balance							Balance
	October 1,		Additions/					June 30,		Amortization
	2017		Adjustments		Amortization			2018		Period
			(Dollars in Thousands)

Goodwill	$	6,102	$	-	$	-		$	6,102
Core deposit intangible		710		-		(105	)		605	10 years
	$	6,812	$	-	$	(105	)	$	6,707

As of June 30, 2018, and for the future fiscal periods, the amortization expense for the core deposit intangible is:

(Dollars In Thousands)

2018	$	33
2019		123
2020		108
2021		93
2022		78
Thereafter		170
Total	$	605

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our unaudited consolidated financial statements included elsewhere in this Form 10-Q and with our Annual Report on Form 10-K for the year ended September 30, 2017 (the “Form 10-K”).

Overview. Prudential Bancorp, Inc. (the “Company”) was formed by Prudential Bancorp, Inc. of Pennsylvania to become the successor holding company for Prudential Bank (the “Bank”) as a result of the second-step conversion of the Bank completed in October 2013. The Company’s results of operations are primarily dependent on the results of the Bank, which is a wholly owned subsidiary of the Company. The Company’s results of operations depend to a large extent on net interest income, which primarily is the difference between the income earned on its loan and securities portfolios and the cost of funds, which is the interest paid on deposits and borrowings. Results of operations are also affected by our provision for loan losses, non-interest income (which includes impairment charges) and non-interest expense. Non-interest expense principally consists of salaries and employee benefits, office occupancy expense, depreciation, data processing expense, payroll taxes and other expense. Our results of operations are also significantly affected by general economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities. Future changes in applicable laws, regulations or government policies may materially impact our financial condition and results of operations. The Bank is subject to regulation by the Federal Deposit Insurance Corporation (the “FDIC”) and the Pennsylvania Department of Banking and Securities (the “Department”). The Bank’s main office is in Philadelphia, Pennsylvania (which includes a branch), with nine additional financial centers located in Philadelphia, Montgomery and Delaware Counties in Pennsylvania. The Bank’s primary business consists of attracting deposits from the general public and using those funds together with borrowings to originate loans and to invest primarily in U.S. Government and agency securities and mortgage-backed securities. In November 2005, the Bank formed PSB Delaware, Inc., a Delaware corporation, as a subsidiary of the Bank. In March 2006, all mortgage-backed securities then owned by the Company’s predecessor were transferred to PSB Delaware, Inc. PSB Delaware, Inc.’s activities are included as part of the consolidated financial statements.

Critical Accounting Policies. In reviewing and understanding financial information for the Company, you are encouraged to read and understand the significant accounting policies used in preparing our financial statements. These policies are described in Note 1 of the notes to our unaudited consolidated financial statements included in Item 1 hereof as well as in Note 2 of the notes to our audited consolidated financial statements included in the Form 10-K. The accounting and financial reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and to general practices within the banking industry. Accordingly, the financial statements require certain estimates, judgments and assumptions, which are believed to be reasonable, based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities as well as contingent assets and contingent liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented. The following accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results. These policies require numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations which may significantly affect our reported results and financial condition for the period or in future periods.

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.

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

Levels of past due, classified, criticized and non-accrual loans, troubled debt restructurings and loan modifications;

Nature and volume of loans;

Changes in lending policies and procedures, underwriting standards, collections, charge-offs and recoveries and for commercial loans, the level of loans being approved with exceptions to the Bank’s lending policy;

Experience, ability and depth of management and staff;

National and local economic and business conditions, including various market segments;

Quality of the Company’s loan review system and the degree of Board oversight;

Concentrations of credit and changes in levels of such concentrations; and

Effect of external factors on the level of estimated credit losses in the current portfolio.

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

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

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

Investment and mortgage-backed securities available for sale. Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated using quoted prices of securities with similar characteristics or discounted cash flows and are classified within Level 2 of the fair value hierarchy. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. There were no securities with a Level 3 classification as of June 30, 2018 or September 30, 2017.

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. The evaluation is based upon factors such as the creditworthiness of the issuers/guarantors, the underlying collateral, if applicable, and the continuing performance of the securities. In addition, the Company also considers the likelihood that the security will be required to be sold because of regulatory concerns, our internal intent not to dispose of the security prior to maturity and whether the entire cost basis of the security is expected to be recovered. In determining whether the cost basis will be recovered, management evaluates other facts and circumstances that may be indicative of an “other-than-temporary” impairment condition. This includes, but is not limited to, an evaluation of the type of security, length of time and extent to which the fair value has been less than cost, and near-term prospects of the issuer.

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

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

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

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

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

2018 Regulatory Reform. In May 2018 the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Act”), was enacted to modify or remove certain financial reform rules and regulations, including some of those implemented under the Dodd-Frank Act. While the 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 the Bank.

The 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” 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 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 any new standards under the Act will ultimately be applied to the Company and the Bank or what specific impact the Act and the yet-to-be-written implementing rules and regulations will have on community banks.

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

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

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

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

Market Overview.The economy has continued to improve during 2018 and 2017. The local market for commercial real estate and construction remain strong. The Board of Governors of the Federal Reserve system raised the discount rate by 25 basis points on three occasions in fiscal 2018 which has allowed the Company to realize higher rates on some loans, but has also led to an increase in our cost of funds in a competitive market.

The Company continues to focus on the credit quality of its customers, closely monitoring the financial status of borrowers throughout the Company’s markets, gathering information, working on early detection of potential problems, taking pre-emptive steps where necessary and performing the analysis required to maintain adequate reserves for loan losses.

The Company continues to maintain capital well in excess of regulatory requirements, allowing it to withstand unfavorable market or economic conditions.

The following discussion provides further details on the financial condition of the Company at June 30, 2018 and September 30, 2017, and the results of operations for the three and nine months ended June 30, 2018 and 2017.

COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2018 AND SEPTEMBER 30, 2017

At June 30, 2018, the Company had total assets of $1.0 billion, as compared to $899.5 million at September 30, 2017, an increase of 14.4%. At June 30, 2018, the investment portfolio increased by $88.7 million to $328.4 million as compared to September 30, 2017 primarily as a result of the purchase of investment grade corporate bonds and U.S. government agency mortgage-backed securities. Net loans receivable increased $31.2 million to $602.5 million at June 30, 2018 from $571.3 million at September 30, 2017. Cash and cash equivalents increased $8.2 million to $36.1 million to fund continuing loan and investment growth.

Total liabilities increased by $133.9 million to $897.3 million at June 30, 2018 from $763.4 million at September 30, 2017. Total deposits increased $79.1 million, consisting primarily of certificates of deposit, which were used to fund asset growth as well as meet short-term liquidity needs. At June 30, 2018, the Company had FHLB advances outstanding of $164.2 million, 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 fund purchases of investment securities in order to lock in the yield with minimal interest rate risk as part of the Company’s asset/liability management strategies. All of the borrowings had maturities of less than six years.

Total stockholders’ equity decreased by $4.7 million to $131.5 million at June 30, 2018 from $136.2 million at September 30, 2017. The decrease was a primarily due to a reduction in the fair market value of available for sale securities as of June 30, 2018 due to rising market rates. Also contributing to the decrease were dividend payments of $2.7 million consisting of both regular quarterly dividends totaling $0.15 per share as well as a special dividend of $0.15 per share.

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

Net income. The Company reported net income of $2.4 million, or $0.28 per basic and $0.26 per diluted share, for the quarter ended June 30, 2018 as compared to $2.1 million, or $0.25 for both per basic share and per diluted share, for the same quarter in fiscal 2017. For the nine months ended June 30, 2018, the Company recognized net income of $4.6 million, or $0.52 per basic share and $0.50 per diluted share as compared to net income of $707,000, or $0.08 for both per basic share and per diluted share, for the same period in fiscal 2017. The nine-month period in fiscal 2017 included a one-time $2.7 million pre-tax expense related to the acquisition of Polonia Bancorp, Inc. (“Polonia Bancorp”) which was completed as of January 1, 2017 as well as a $1.9 million non-cash pre-tax expense charge-off associated with a large lending relationship.

Net interest income. For the three months ended June 30, 2018, net interest income increased to $6.2 million as compared to $6.1 million for the same period in fiscal 2017. The increase reflected a $1.5 million, or 20.2%, increase in interest income, partially offset by an increase of $1.3 million, or 96.7%, in interest paid on deposits and borrowings. The increase in net interest income between the periods was primarily due to the increase in the weighted average balance of earning assets combined with the results to date of the shift in emphasis to originating commercial and construction loans, which generally produce higher yields than those obtained on residential loans. The average balance of interest-earning assets for the three months ended June 30, 2018 increased by $113.8 million, or 14.0% from the comparable quarter in 2017. The yield on interest-earning assets increased by 20 basis points, to 3.87% for the quarter ended June 30, 2018 from the comparable period in 2017. The weighted average cost of borrowings and deposits increased to 1.30% during the quarter ended June 30, 2018 from 0.76% during the comparable period in 2017 due to increases in market rates of interest. For the nine months ended June 30, 2018, net interest income increased to $18.6 million as compared to $15.0 million for the same period in fiscal 2017. The increase reflected a $6.7 million, or 36.1%, increase in interest income, partially offset by an increase of $3.1 million, or 86.7%, in interest paid on deposits and borrowings. The increase in interest income for the nine months ended June 30, 2018 was, as it was for the third quarter of fiscal 2018, primarily due to the increase in the weighted average balances of earning assets combined with the increasing balances of commercial and construction loans in the portfolio as well as a rising interest rate environment. The average balance of interest-earning assets increased by $188.2 million, or 26.5% from the comparable period in 2017. The yield on interest-earning assets increased by 26 basis points to 3.77% for the nine months ended June 30, 2018 from the comparable period in 2017. The weighted average cost of borrowings and deposits increased to 1.12% during the nine months ended June 30, 2018 from 0.78% during the comparable period in 2017 due to increases in market rates of interest.

For the three and nine months ended June 30, 2018, the net interest margin was 2.70% and 2.77%, respectively, compared to 2.99% and 2.82% for the same periods in fiscal 2017, respectively. The margin decreases in the 2018 periods reflected in large part the increased cost of deposits in a highly competitive interest rate environment.

Average balances, net interest income, and yields earned and rates paid. The following table shows for the periods indicated the total dollar amount of interest earned from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities and the resulting costs, expressed both in dollars and rates, the interest rate spread and the net interest margin. Average yields and rates have been annualized. Tax-exempt income and yields have not been adjusted to a tax-equivalent basis. All average balances are based on monthly balances. Management does not believe that the monthly averages differ significantly from what the daily averages would be.

	Three Months
	Ended June 30,
	2018								2017
	Average					Average			Average					Average
	Balance		Interest			Yield/Rate (1)			Balance		Interest			Yield/Rate (1)
	(Dollars in Thousands)
Interest-earning assets:
Investment securities	$	155,646	$	1,258			3.24	%	$	123,709	$	611			1.98	%
Mortgage-backed securities		154,717		1,060			2.75			132,867		1,106			3.34
Loans receivable(2)		596,252		6,485			4.36			531,130		5,647			4.26
Other interest-earning assets		19,038		128			2.70			24,192		66			1.09
Total interest-earning assets		925,653		8,931			3.87			811,898		7,430			3.67
Cash and non interest-bearing balances		2,433								2,392
Other non interest-earning assets		46,489								52,538
Total assets	$	974,575							$	866,828
Interest-bearing liabilities:
Savings accounts	$	106,256		137			0.52		$	106,801		11			0.04
Money market deposit and NOW accounts		115,467		60			0.21			146,843		38			0.10
Certificates of deposit		456,988		1,734			1.52			362,960		952			1.05
Total deposits		678,711		1,931			1.14			616,604		1,001			0.65
Advances from FHLB		152,234		776			2.04			102,786		375			1.46
Advances from borrowers for taxes and insurance		2,627		1			0.15			3,253		1			0.12
Total interest-bearing liabilities		833,572		2,708			1.30			722,643		1,377			0.76
Non interest-bearing liabilities:
Non interest-bearing demand accounts		14,747								9,300
Other liabilities		1,281								2,384
Total liabilities		849,600								734,327
Stockholders' equity		124,975								132,501
Total liabilities and stockholders' equity	$	974,575							$	866,828
Net interest-earning assets	$	92,081							$	89,255
Net interest income; interest rate spread			$	6,223			2.57	%			$	6,053			2.91	%
Net interest margin(3)							2.70	%							2.99	%

Average interest-earning assets to average interest-bearing liabilities				111.05	%							112.35	%

(1)

Yields and rates for the three month periods are annualized.

(2)

Includes non-accrual loans. Calculated net of unamortized deferred fees, undisbursed portion of loans-in-process and the allowance for loan losses.

(3)

Equals net interest income divided by average interest-earning assets.

	Nine Months
	Ended June 30,
	2018								2017
	Average					Average			Average					Average
	Balance		Interest			Yield/Rate (1)			Balance		Interest			Yield/Rate (1)
	(Dollars in Thousands)
Interest-earning assets:
Investment securities	$	147,451	$	3,403			3.09	%	$	107,488	$	2,263			2.81	%
Mortgage-backed securities		142,651		2,754			2.58			118,085		2,179			2.47
Loans receivable(2)		585,277		18,853			4.31			462,793		14,062			4.06
Other interest-earning assets		22,414		313			1.87			21,217		102			0.64
Total interest-earning assets		897,793		25,323			3.77			709,583		18,606			3.51
Cash and non interest-bearing balances		2,354								2,380
Other non interest-earning assets		44,829								42,797
Total assets	$	944,976							$	754,760
Interest-bearing liabilities:
Savings accounts	$	107,056		252			0.31		$	95,614		36			0.05
Money market deposit and NOW accounts		121,347		161			0.18			166,923		148			0.12
Certificates of deposit		433,296		4,497			1.39			262,450		2,502			1.27
Total deposits		661,699		4,910			0.99			524,987		2,686			0.68
Advances from FHLB		137,061		1,821			1.78			89,870		918			1.37
Advances from borrowers for taxes and insurance		2,522		4			0.21			2,607		4			0.21
Total interest-bearing liabilities		801,282		6,735			1.12			617,464		3,608			0.78
Non interest-bearing liabilities:
Non interest-bearing demand accounts		12,233								7,709
Other liabilities		1,196								3,606
Total liabilities		814,711								628,779
Stockholders' equity		130,265								125,981
Total liabilities and stockholders' equity	$	944,976							$	754,760
Net interest-earning assets	$	96,511							$	92,119
Net interest income; interest rate spread			$	18,588			2.65	%			$	14,998			2.73	%
Net interest margin(3)							2.77	%							2.83	%

Average interest-earning assets to average interest-bearing liabilities				112.04	%							114.92	%

(1)

Yields and rates for the nine months periods are annualized.

(2)

Includes non-accrual loans. Calculated net of unamortized deferred fees, undisbursed portion of loans-in-process and the allowance for loan losses.

(3)

Equals net interest income divided by average interest-earning assets.

Provision for loan losses. The Company recorded a provision for loan losses in the amount of $325,000 and $685,000 for the three and nine months ended June 30, 2018, respectively, compared to a provision for loan losses of $30,000 and $2.6 million, respectively, for the same periods in 2017. The large provision during the nine month period ended June 30, 2017 was primarily due to the $1.9 million charge-off related to the aforementioned borrower who planned to develop 169 residential lots incurred in the quarter ended March 31, 2017. During the three months ended June 30, 2018, the Company recorded charge offs of $125,000. During the nine months ended June 30, 2018, the Company recorded charge offs of $137,000 and recoveries of $27,000.

The allowance for loan losses totaled $5.0 million, or 0.8% of total loans and 35.5% of total non-performing loans (which included loans acquired from Polonia Bancorp at their fair value) at June 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. The Company believes that the allowance for loan losses at June 30, 2018 was sufficient to cover all inherent and known losses associated with the loan portfolio at such date.

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

At June 30, 2018, the Company’s non-performing assets totaled $14.3 million or 1.4% of total assets as compared to $15.6 million or 1.7% of total assets at September 30, 2017. Non-performing assets at June 30, 2018 included five construction loans aggregating $8.7 million, 30 one-to-four family residential loans aggregating $3.8 million, one single-family residential investment property loan in the amount of $156,000 and five commercial real estate loans aggregating $1.5 million. Non-performing assets also included at June 30, 2018 real estate owned consisting of one single-family residential property with an aggregate carrying value of $85,000. At June 30, 2018, the Company had 10 loans aggregating $6.2 million that were classified as troubled debt restructurings (“TDRs”). Six of such loans aggregating $1.1 million were performing in accordance with the restructured terms as of June 30, 2018 and were accruing interest. One 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 million are also classified as non-accrual and are a part of a lending relationship totaling $10.7 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 and as a result, the project currently is not proceeding. 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. As of June 30, 2018, the Company had reviewed $16.9 million of loans for possible impairment compared to $19.7 million reviewed for possible impairment as of September 30, 2017.

At June 30, 2018, the Company had $3.2 million of loans delinquent 30-89 days as to interest and/or principal. Such amount consisted of 11 one-to-four family residential loans totaling $2.4 million, one commercial real estate loan in the amount of $727,000, and one consumer loan in the amount of $57,000.

At June 30, 2018, we also had a total of thirty loans aggregating $5.8 million that had been designated “special mention”. These loans consist of twenty-one one-to-four family residential loans totaling $3.6 million, one multi-family loan of $302,000 and eight commercial real estate loans totaling $1.9 million. At September 30, 2017, we had a total of nine loans aggregating $3.1 million designated as “special mention”.

The following table shows the amounts of non-performing assets (defined as non-accruing loans, accruing loans 90 days or more past due as to principal and/or interest and real estate owned) as of June 30, 2018 and September 30, 2017. At neither date did the Company have any accruing loans 90 days or more past due that were accruing.

	June 30, 2018			September 30, 2017
	(Dollars in Thousands)
Non-accruing loans:
One-to-four family residential	$	3,909		$	5,107
Commercial real estate		1,543			1,566
Construction and land development		8,746			8,724
Total non-accruing loans		14,198			15,397
Real estate owned, net: (1)		85			192
Total non-performing assets	$	14,283		$	15,589

Total non-performing loans as a percentage of loans, net		2.36	%		2.67	%
Total non-performing loans as a percentage of total assets		1.37	%		1.71	%
Total non-performing assets as a percentage of total assets		1.39	%		1.73	%

(1)

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

Non-interest income. Non-interest income amounted to $985,000 and $2.0 million for the three and nine month periods ended June 30, 2018, respectively, compared to $625,000 and $1.5 million, respectively, for the comparable periods in fiscal 2017. The increase experienced in both of the 2018 periods was primarily attributable to the recognition of $808,000 in gains during 2018 associated with the unwinding of two cash flow hedges. The hedges were unwound to lock in the embedded gains of the hedge instruments. These increases were partially offset by losses on the sale of securities yielding below current market yields in order to better position the securities portfolio in a rising rate environment. The proceeds from the sales were used to invest in higher yielding loan and investment products.

Non-interest expense.For the three month period ended June 30, 2018, non-interest expense increased $265,000 or 7.6% to $3.8 million primarily due to increased employee and professional services expense. For the nine month period ended June 30, 2018, non-interest expense decreased $1.3 million or 10.1% to $11.7 million compared to the same period in the prior fiscal year. The primary reason for the higher level of non-interest expense experienced during the nine month period ended June 30, 2017 was the one-time merger-related charge in the 2017 period of approximately $2.7 million, pre-tax, incurred in connection with the completion of the Polonia Bancorp acquisition in January 2017.

Income tax expense. For the three month period ended June 30, 2018, the Company recorded a tax expense of $676,000, compared to an expense of $1.0 million for the same period in fiscal 2017. For the nine month period ended June 30, 2018, the Company recorded an income tax expense of $3.6 million as compared to an expense of $230,000 for the same period in fiscal 2017. The $3.6 million tax expense for the nine months ended June 30, 2018 included a one-time charge of $1.8 million related to a re-evaluation of the Company’s deferred tax assets due to the Tax Cuts and Jobs Act legislation enacted in 2017 that reduced the statutory income tax rate from 35% to 21%. During fiscal 2018, commencing with the quarter ended December 31, 2017, the Company’s statutory 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. Effective October 1, 2018, the Company’s statutory tax rate will be reduced to 21%. The Company’s tax obligation for the nine month period in fiscal 2017 was reduced significantly due to the one-time merger-related charge related to the Polonia Bancorp acquisition recorded during the three months ended March 31, 2017.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s liquidity, represented by cash and cash equivalents, is a product of its operating, investing and financing activities. Our primary sources of funds are deposits, scheduled principal and interest payments on loans, loan prepayments and the maturity of loans, mortgage-backed securities and other investments, and other funds provided from operations. While scheduled payments from the amortization of loans and mortgage-backed securities and maturing investment securities are relatively predictable sources of funds, deposit flows and loan and securities prepayments can be greatly influenced by market rates of interest, economic conditions and competition. We also maintain excess funds in short-term, interest-earning assets that provide additional liquidity. At June 30, 2018, our cash and cash equivalents amounted to $36.1 million. In addition, our available-for-sale investment securities amounted to an aggregate of $270.3 million at such date.

We use our liquidity to fund existing and future loan commitments, to fund maturing certificates of deposit and demand deposit withdrawals, to invest in other interest-earning assets, and to meet operating expenses. At June 30, 2018, the Company had $27.4 million in outstanding commitments to originate fixed loans, not including loans in process. The Company also had commitments under unused lines of credit of $66.9 million and letters of credit outstanding of $1.7 million at June 30, 2018. Certificates of deposit as of June 30, 2018 that are maturing in one year or less totaled $336.1 million. Based upon historical experience, we anticipate that a significant portion of the maturing certificates of deposit will be redeposited with us.

In addition to cash flows from loan and securities payments and prepayments as well as from sales of available for sale securities, we have significant borrowing capacity available to fund liquidity needs should the need arise. Our borrowings consist solely of advances from the Federal Home Loan Bank of Pittsburgh (“FHLB”), of which we are a member. Under terms of the collateral agreement with the FHLB, we pledge residential mortgage loans as well as our stock in the FHLB as collateral for such advances. At June 30, 2018, we had $164.2 million in outstanding FHLB advances and had the ability to obtain an additional $234.3 million in FHLB advances. Additional borrowing capacity with the FHLB could be obtained with the pledging of certain investment securities. The Bank has also obtained approval to borrow from the Federal Reserve Bank discount window.

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

The following table summarizes the Company’s and Bank’s regulatory capital ratios as of June 30, 2018 and September 30, 2017 and compares them to current regulatory guidelines. The Company is not subject to capital ratios imposed by Basel III on bank holding companies because the Company is still, as a result of the enactment of the Act, deemed to be a small bank holding company.

							To Be
							Well Capitalized
				Required for			Under Prompt
				Capital Adequacy			Corrective Action
	Actual Ratio			Purposes			Provisions

June 30, 2018:
Tier 1 capital (to average assets)
The Company		13.35	%		N/A			N/A
The Bank		12.74	%		4.0	%		5.0	%

Tier 1 common (to risk-weighted assets)
The Company		20.62	%		N/A			N/A
The Bank		19.67	%		5.1	%(a)		6.5	%

Tier 1 capital (to risk-weighted assets)
The Company		20.62	%		N/A			N/A
The Bank		19.67	%		6.6	%(a)		8.0	%

Total capital (to risk-weighted assets)
The Company		21.46	%		N/A			N/A
The Bank		20.50	%		8.6	%(a)		10.0	%

September 30, 2017:
Tier 1 capital (to average assets)
Company		14.81	%		N/A			N/A
Bank		13.59	%		4.0	%		5.0	%

Tier 1 common (to risk-weighted assets)
The Company		23.94	%		N/A			N/A
The Bank		21.97	%		4.5	%		6.5	%

Tier 1 capital (to risk-weighted assets)
Company		23.94	%		N/A			N/A
Bank		21.97	%		4.0	%		6.0	%

Total capital (to risk-weighted assets)
Company		24.83	%		N/A			N/A
Bank		22.86	%		8.0	%		10.0	%

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

IMPACT OF INFLATION AND CHANGING PRICES

The financial statements, accompanying notes, and related financial data of the Company presented herein have been prepared in accordance with generally accepted accounting principles which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation.

Unlike most industrial companies, substantially all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services, since such prices are affected by inflation to a larger extent than interest rates. In the current interest rate environment, liquidity and the maturity structure of the Company's assets and liabilities are critical to the maintenance of acceptable performance levels.

How We Manage Market Risk. Market risk is the risk of loss from adverse changes in market prices and rates. Our market risk arises primarily from interest rate risk which is inherent in our lending, investment and deposit gathering activities. To that end, management actively monitors and manages interest rate risk exposure. In addition to market risk, our primary risk is credit risk on our loan portfolio. We attempt to manage credit risk through our loan underwriting and oversight policies.

The principal objective of our interest rate risk management function is to evaluate the interest rate risk embedded in certain balance sheet accounts, determine the level of risk appropriate given our business strategy, operating environment, capital and liquidity requirements and performance objectives, and manage the risk consistent with approved guidelines. We seek to manage our exposure to risks from changes in interest rates while at the same time trying to improve our net interest spread. We monitor interest rate risk as such risk relates to our operating strategies. We have established an Asset/Liability Committee which is comprised of our Chief Operating Officer, Chief Financial Officer, Chief Lending Officer, Chief Credit Officer, Chief Risk Officer and Controller. The Asset/Liability Committee meets on a regular basis and is responsible for reviewing our asset/liability policies and interest rate risk position. Both the extent and direction of shifts in interest rates are uncertainties that could have a negative impact on future earnings.

In recent years, as a part of our asset/liability management strategy we primarily have reduced our investment in longer term fixed-rate callable agency bonds, increased our origination of short-term commercial and construction loans and increased our portfolio of agency issued collaterized mortgage-backed securities (“CMOs”) with short effective lives. In addition, we implemented interest rate swaps to moderate interest rate risk. However, notwithstanding the foregoing steps, we remain subject to a significant level of interest rate risk in a low interest rate environment due to the high proportion of our loan portfolio that consists of fixed-rate loans as well as our decision in prior periods to invest a significant amount of our assets in long-term, fixed-rate investment and mortgage-backed securities.

Gap Analysis. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive” and by monitoring the Company’s interest rate sensitivity “gap.” An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that same time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to affect adversely net interest income while a positive gap would tend to result in an increase in net interest income. Conversely, during a period of falling interest rates, a negative gap would tend to result in an increase in net interest income while a positive gap would tend to affect adversely net interest income.

The following table sets forth the amounts of our interest-earning assets and interest-bearing liabilities outstanding at June 30, 2018, which we expect, based upon certain assumptions, to reprice or mature in each of the future time periods shown (the “GAP Table”). Except as stated below, the amounts of assets and liabilities shown which reprice or mature during a particular period were determined in accordance with the earlier of term to repricing or the contractual maturity of the asset or liability. The table sets forth an approximation of the projected repricing of assets and liabilities at June 30, 2018, on the basis of contractual maturities, anticipated prepayments, and scheduled rate adjustments within a three-month period and subsequent selected time intervals. The loan amounts in the table reflect principal balances expected to be redeployed and/or repriced as a result of contractual amortization and anticipated prepayments of adjustable-rate loans and fixed-rate loans, and as a result of contractual rate adjustments on adjustable-rate loans. Annual prepayment rates for variable-rate and fixed-rate single-family and multi-family residential and commercial mortgage loans are assumed to range from 6.5% to 26.5%. The annual prepayment rate for mortgage-backed securities is assumed to range from 0.5% to 17.3%. For savings accounts, checking accounts and money markets, the decay rates vary on an annual basis over a ten year period.

				More than			More than			More than
	3 Months			3 Months			1 Year			3 Years			More than			Total
	or Less			to 1 Year			to 3 Years			to 5 Years			5 Years			Amount
	(Dollars in Thousands)
Interest-earning assets(1):
Investment and mortgage-backed securities(2)	$	16,601		$	28,880		$	53,509		$	55,498		$	182,062		$	336,550
Loans receivable(3)		134,533			83,776			149,353			96,315			132,723			596,700
Other interest-earning assets(4)		33,652			-			249			1,355			-			35,256
Total interest-earning assets	$	184,786		$	112,656		$	203,111		$	153,168		$	314,785		$	968,506

Interest-bearing liabilities:
Savings accounts	$	2,718		$	8,466		$	13,931		$	13,430		$	69,855		$	108,400
Money market deposit and NOW accounts		3,806			11,417			19,333			15,883			61,804			112,243
Certificates of deposit		107,184			228,697			102,914			41,293			-			480,088
Advances from FHLB		15,105			25,361			39,139			49,500			35,059.00			164,164
Advances from borrowers for taxes and insurance		3,808			-			-			-			-			3,808
Total interest-bearing liabilities	$	132,621		$	273,941		$	175,317		$	120,106		$	166,718		$	868,703

Interest-earning assets less interest-bearing liabilities	$	52,165		($	161,285	)	$	27,794		$	33,062		$	148,067		$	99,803

Cumulative interest-rate sensitivity gap (5)	$	52,165		($	109,120	)	($	81,326	)	($	48,264	)	$	99,803

Cumulative interest-rate gap as a percentage of total assets at June 30, 2018		5.78	%		-10.87	%		-8.00	%		-4.59	%		9.00	%

Cumulative interest-earning assets as a percentage of cumulative interest-bearing liabilities at June 30, 2018		139.33	%		41.12	%		115.85	%		127.53	%		188.81	%

(1)

Interest-earning assets are included in the period in which the balances are expected to be redeployed and/or repriced as a result of anticipated prepayments, scheduled rate adjustments and contractual maturities.

(2)

For purposes of the gap analysis, investment securities are reflected at amortized cost.

(3)

For purposes of the gap analysis, loans receivable includes non-performing loans and is gross of the allowance for loan losses and unamortized deferred loan fees, but net of the undisbursed portion of loans-in-process.

(4)

Includes FHLB stock.

(5)

Cumulative interest-rate sensitivity gap represents the difference between interest-earning assets and interest-bearing liabilities.

Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as variable-rate loans, have features which restrict changes in interest rates both on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Finally, the ability of many borrowers to service their variable-rate loans may be adversely affected in the event of an interest rate increase.

Net Portfolio Value Analysis. Our interest rate sensitivity also is monitored by management through the use of a model which generates estimates of the changes in our net portfolio value (“NPV”) over a range of interest rate scenarios. NPV is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts. The NPV ratio, under any interest rate scenario, is defined as the NPV in that scenario divided by the market value of assets in the same scenario. The “Sensitivity Measure” is the decline in the NPV ratio, in basis points, caused by a 2% increase or decrease in rates, whichever produces a larger decline. The following table sets forth our NPV as of June 30, 2018 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
In Basis Points	Net Portfolio Value								Value of Assets
(Rate Shock)	Amount		$ Change			% Change			NPV Ratio			Change
	(Dollars in Thousands)

300	$	117,225	$	(53,467	)		(31.32	)%		12.75	%		(3.86	)%
200		133,705		(36,987	)		(21.67	)%		14.03	%		(2.58	)%
100		150,340		(20,352	)		(11.92	)%		15.22	%		(1.39	)%
Static		170,692		-			-			16.61	%		-
(100)		181,634		10,942			6.41	%		17.14	%		0.53	%
(200)		179,834		9,142			5.36	%		16.66	%		0.05	%
(300)		177,314		6,622			3.88	%		16.16	%		(0.45	)%

At September 30, 2017, the Company’s NPV was $167.7 million or 18.6% of the market value of assets. Following a 200 basis point increase in interest rates, the Company’s “post shock” NPV would be $133.6 million or 16.0% of the market value of assets.

As is the case with the GAP Table, certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in NPV requires the making of certain assumptions which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the models presented assume that the composition of our interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Accordingly, although the NPV model provides an indication of interest rate risk exposure at a particular point in time, such model is not intended to and does not provide a precise forecast of the effect of changes in market interest rates on net interest income and will differ from actual results.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At June 30, 2018, there had not been any material change to the market risk disclosure contained in the Company’s Annual Report on Form 10-K for the year ended September 30, 2017, set forth in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation –Exposure to Changes in Interest Rates.”

ITEM 4. CONTROLS AND PROCEDURES

Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of the end of period covered by this report, our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and regulations and are operating in an effective manner.

No change in our internal control over financial reporting (as defined in Rule 13a-15(f) or 15d-15(f) under the Securities Exchange Act of 1934) occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

Item 1. Legal Proceedings

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

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

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

Shortly after the Court lifted the stay in the Philadelphia Litigation, four of the Gualtieri Parties and Affiliated Entities (One State Street Associates, LP (“State Street”), Island View Crossing II, L.P. (“Island View”), Calnshire Estates, LLC (“Calnshire”) and Steeple Run, L.P. (“Steeple Run” and collectively with State Street, Island View and Calnshire, the “Debtors”) filed for bankruptcy under Chapter 11 (reorganizations). The Bank has moved the underlying Philadelphia Litigation from state court to the federal bankruptcy court, in which the bankruptcy cases are being heard. As the 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 litigation and it intends to vigorously defend the case.

From the outset, the Bank believed that it had meritorious challenges to the Chapter 11 bankruptcies filed by the Debtors and early in the case, the Bank filed a motion to convert the bankruptcy cases to Chapter 7 (liquidation) or to appoint a Chapter 11 Trustee to preserve the assets securing the Bank’s loans with the Gualtieri Parties and Affiliated Entities (the “Conversion Motion”). On December 18, 2017, the bankruptcy court granted the Conversion Motion in part and converted the Chapter 11 cases of Calnshire and Steeple Run to Chapter 7 cases, appointed a Chapter 11 Trustee in the Island View case and left State Street in Chapter 11.

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

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended September 30, 2017, as such factors could materially affect the Company’s business, financial condition, or future results of operations. As of June 30, 2018, no material changes have occurred to the risk factors of the Company as reported in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2017. The risks described in the Annual Report on Form 10-K for the year ended September 30, 2017 are not the only risks that the Company faces. Additional risks and uncertainties not currently known to the Company, or that the Company currently deems to be immaterial, also may have a material adverse impact on the Company’s business, financial conditions, or results of operations.

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

(a)

and (b) Not applicable

Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)		Maximum Number of Shares that May Yet Purchased Under Plans or Programs (1)
April 1 - 30, 2018		43,371	$	18.34		7,500		143,554
May 1 - 31, 2018		15,200		17.55		15,200		128,354
June 1 - 30, 2018		3,100		17.47		3,100		125,254
		61,671	$	18.10		25,800

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

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable

Item 6. Exhibits

Exhibit No.		Description

31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.0		Section 1350 Certifications
101.INS		XBRL Instance Document.
101.SCH		XBRL Taxonomy Extension Schema Document.
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB		XBRL Taxonomy Extension Label Linkbase Document.
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF		XBRL Taxonomy Extension Definitions Linkbase Document.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	PRUDENTIAL BANCORP, INC.

Date: August 9, 2018		By: /s/ Dennis Pollack
		Dennis Pollack
		President and Chief Executive Officer

Date: August 9, 2018		By: /s/ Jack E. Rothkopf
		Jack E. Rothkopf
		Senior Vice President, Chief Financial Officer and Treasurer

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Prudential Bancorp (PBIP) 10-Q2018 Q3 Quarterly report

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