PRUDENTIAL BANCORP, INC. - FORM 10-Q

Attached files

file	filename
EX-32.0 - EXHIBIT 32.0 - PRUDENTIAL BANCORP, INC.	tm2015313d1_ex32-0.htm
EX-31.2 - EXHIBIT 31.2 - PRUDENTIAL BANCORP, INC.	tm2015313d1_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - PRUDENTIAL BANCORP, INC.	tm2015313d1_ex31-1.htm
EX-3.2 - EXHIBIT 3.2 - PRUDENTIAL BANCORP, INC.	tm2015313d1_ex3-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2020

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
(Address of Principal Executive Offices)	(Zip Code)

(215) 755-1500

(Registrant’s Telephone Number, Including Area Code)

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

Title of each Class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	PBIP	Nasdaq Stock Market

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes x No ¨

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

Large accelerated filer ¨	Accelerated filer x
Non-accelerated filer ¨	Smaller reporting company x
	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 ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practical date: as of April 30, 2020, 10,819,006 shares were issued and 8,202,479 were outstanding.

PRUDENTIAL BANCORP, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

		Page
PART I	FINANCIAL INFORMATION:

Item 1.	Consolidated Financial Statements	1

	Unaudited Consolidated Statements of Financial Condition 2 March 31, 2020 and September 30, 2019	2

	Unaudited Consolidated Statements of Operations for the Three and Six Months Ended March 31, 2020 and 2019	3

	Unaudited Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended March 31, 2020 and 2019	4

	Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended March 31, 2020 and 2019	5

	Unaudited Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2020 and 2019	7

	Notes to Unaudited Consolidated Financial Statements	9

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	44

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	57

Item 4.	Controls and Procedures	57

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	58

Item 1A.	Risk Factors	59

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	60

Item 3.	Defaults Upon Senior Securities	60

Item 4.	Mine Safety Disclosures	60

Item 5.	Other Information	60

Item 6.	Exhibits	61

SIGNATURES		62

PRUDENTIAL BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

	March 31,			September 30,
	2020			2019
	(Dollars in Thousands, Except Per Share Data)
ASSETS

Cash and amounts due from depository institutions	$	3,791		$	2,395
Interest-bearing deposits		72,897			45,573

Total cash and cash equivalents		76,688			47,968

Certificates of deposit		2,351			2,351
Investment and mortgage-backed securities available for sale at fair value		511,333			512,822
Investment and mortgage-backed securities held to maturity (fair value—March 31, 2020, $30,045; September 30, 2019, $69,507)		28,937			68,635
Equity securities		37			95
Loans receivable—net of allowance for loan losses (March 31, 2020, $5,961;
September 30, 2019, $5,393)		572,122			585,456
Accrued interest receivable		4,412			4,549
Real estate owned		406			348
Restricted stock—at cost		15,552			16,406
Office properties and equipment—net		7,171			7,206
Bank owned life insurance		32,175			31,841
Deferred tax assets-net		4,117			2,358
Goodwill		6,102			6,102
Core deposit intangible		392			448
Prepaid expenses and other assets		5,439			2,849
TOTAL ASSETS	$	1,267,234		$	1,289,434

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES:
Deposits:
Noninterest-bearing	$	19,524		$	16,949
Interest-bearing		711,960			728,495
Total deposits		731,484			745,444
Advances from Federal Home Loan Bank (short-term)		80,000			90,000
Advances from Federal Home Loan Bank (long-term)		274,624			286,904
Accrued interest payable		2,847			4,328
Advances from borrowers for taxes and insurance		2,667			2,332
Accounts payable and accrued expenses		43,366			20,815

Total liabilities		1,134,988			1,149,823

STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued		-			-
Common stock, $.01 par value, 40,000,000 shares authorized; 10,819,006 issued and 8,782,025 outstanding at March 31, 2020; 10,819,006 issued and 8,889,447 outstanding at September 30, 2019		108			108
Additional paid-in capital		118,123			118,384
Treasury stock, at cost: 2,036,981 shares at March 31, 2020 and 1,929,559 at September 30, 2019		(30,994	)		(29,698	)
Retained earnings		49,862			49,625
Accumulated other comprehensive (loss) income		(4,853	)		1,192

Total stockholders' equity		132,246			139,611

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	1,267,234		$	1,289,434

See notes to unaudited consolidated financial statements.

PRUDENTIAL bancorp, inc. and subsidiarIES

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended March 31,						Six Months Ended March 31,
	2020			2019			2020			2019
	(Dollars in Thousands, Except Per Share Data)
INTEREST INCOME:
Interest on loans	$	6,333		$	6,722		$	13,163		$	13,184
Interest on mortgage-backed securities		2,563			2,553			5,356			4,308
Interest and dividends on investments		1,764			1,716			3,566			3,248
Interest on interest-bearing assets		350			144			752			396

Total interest income		11,010			11,135			22,837			21,136

INTEREST EXPENSE:
Interest on deposits		2,866			3,540			5,991			6,580
Interest on advances from Federal Home Loan Bank(short-term)		425			122			965			189
Interest on advances from Federal Home Loan Bank(long-term)		1,931			1,149			3,750			2,028

Total interest expense		5,222			4,811			10,706			8,797

NET INTEREST INCOME		5,788			6,324			12,131			12,339

PROVISION FOR LOAN LOSSES		500			-			625			-

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		5,288			6,324			11,506			12,339

NON-INTEREST INCOME:
Fees and other service charges		150			156			315			334
Gain on sale of loans, net		239			-			265			-
Gain on the sale of investments and mortgage-backed securities		2,364			117			2,682			117
Income from bank owned life insurance		164			149			334			303
Gain (loss) on equity securities, net		(39	)		34			(58	)		34
SWAP expense		(333	)		(41	)		(300	)		(107	)
Other		123			127			262			241

Total non-interest income		2,668			542			3,500			922

NON-INTEREST EXPENSE:
Salaries and employee benefits		2,624			2,209			4,922			4,383
Data processing		234			201			426			384
Professional services		308			374			712			775
Office occupancy		218			275			422			513
Depreciation		113			155			268			310
Director compensation		74			65			133			130
Deposit insurance premium		195			126			376			303
Advertising		53			72			92			153
Real estate owned expense		93			4			140			1
Core deposit amortization		26			29			56			63
Other		522			636			934			1,123
Total non-interest expense		4,460			4,146			8,481			8,138

INCOME BEFORE INCOME TAXES		3,496			2,720			6,525			5,123

INCOME TAXES:
Current expense		419			676			985			1,235
Deferred expense (benefit)		153			(296	)		153			(426	)

Total income tax expense		572			380			1,138			809

NET INCOME	$	2,924		$	2,340		$	5,387		$	4,314

BASIC EARNINGS PER SHARE	$	0.33		$	0.27		$	0.61		$	0.49

DILUTED EARNINGS PER SHARE	$	0.32		$	0.26		$	0.60		$	0.48

DIVIDENDS PER SHARE	$	0.50		$	0.05		$	0.57		$	0.10

See notes to unaudited consolidated financial statements.

PRUDENTIAL bancorp, inc. and subsidiarIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

	Three months ended March 31,						Six months ended March 31,
	2020			2019			2020			2019
	(Dollars in Thousands)
Net income	$	2,924		$	2,340		$	5,387		$	4,314

Unrealized holding gains on available-for-sale securities		4,825			4,522			3,652			7,945
Tax effect		(1,013	)		(949	)		(767	)		(1,668	)
Unrealized holding losses on interest rate swaps		(10,914	)		(2,466	)		(8,622	)		(3,204	)
Tax effect		2,292			518			1,811			673
Reclassification adjustment for net gains recorded in net income		(2,364	)		(117	)		(2,682	)		(117	)
Tax effect		496			25			563			25

Total other comprehensive income (loss)		(6,678	)		1,533			(6,045	)		3,654

Comprehensive income (loss)	$	(3,754	)	$	3,873		$	(658	)	$	7,968

See notes to unaudited consolidated financial statements.

PRUDENTIAL bancorp, inc. and subsidiarIES UNAUDITED

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

												Accumulated
			Additional									Other			Total
	Common		Paid-In			Treasury			Retained			Comprehensive			Stockholders'
	Stock		Capital			Stock			Earnings			Income (Loss)			Equity
	(Dollars in Thousands, Except Per Share Data)
BALANCE, January 1, 2020	$	108	$	118,673		$	(29,698	)	$	51,391		$	1,825		$	142,299

Net income										2,924						2,924

Other comprehensive loss													(6,678	)		(6,678	)

Dividends paid ($0.50 per share)										(4,453	)					(4,453	)

Purchase of treasury stock (152,009 shares)							(1,999	)								(1,999	)

Treasury stock used for employee benefit plans (44,587 shares)				(787	)		703									(84	)

Stock option expense				117												117

Restricted share award expense				120												120

BALANCE, March 31, 2020	$	108	$	118,123		$	(30,994	)	$	49,862		$	(4,853	)	$	132,246

												Accumulated
			Additional									Other			Total
	Common		Paid-In			Treasury			Retained			Comprehensive			Stockholders'
	Stock		Capital			Stock			Earnings			Income (Loss)			Equity
	(Dollars in Thousands, Except Per Share Data)
BALANCE, January 1, 2019	$	108	$	118,621		$	(29,399	)	$	47,381		$	(6,033	)	$	130,678

Net income										2,340						2,340

Other comprehensive income													1,533			1,533

Dividends paid ($0.05 per share)										(446	)					(446	)

Purchase of treasury stock (10,200 shares)							(179	)								(179	)

Treasury stock used for employee benefit plans (48,636 shares)				(921	)		610									(311	)

Stock option expense				126												126

Restricted share award expense				150												150

Reclassification for adoption of ASU 2016-01										25			(25	)		-

BALANCE, March 31, 2019	$	108	$	117,976		$	(28,968	)	$	49,300		$	(4,525	)	$	133,891

See notes to unaudited consolidated financial statements

												Accumulated
			Additional									Other			Total
	Common		Paid-In			Treasury			Retained			Comprehensive			Stockholders'
	Stock		Capital			Stock			Earnings			Income (Loss)			Equity
	(Dollars in Thousands, Except Per Share Data)
BALANCE, October 1, 2019	$	108	$	118,384		$	(29,698	)	$	49,625		$	1,192		$	139,611

Net income										5,387						5,387

Other comprehensive loss													(6,045	)		(6,045	)

Dividends paid ($0.57 per share)										(5,075	)					(5,075	)

Purchase of treasury stock (152,009 shares)							(1,999	)								(1,999	)

Treasury stock used for employee benefit plans (44,587 shares)				(787	)		703									(84	)

Stock option expense				270												270

Restricted share award expense				256												256

Reclassification for adoption of ASC Topic 842										(75	)					(75	)

BALANCE, March 31, 2020	$	108	$	118,123		$	(30,994	)	$	49,862		$	(4,853	)	$	132,246

												Accumulated
			Additional									Other			Total
	Common		Paid-In			Treasury			Retained			Comprehensive			Stockholders'
	Stock		Capital			Stock			Earnings			Loss			Equity
BALANCE, October 1, 2018	$	108	$	118,345		$	(27,744	)	$	45,854		$	(8,154	)	$	128,409

Net income										4,314						4,314

Other comprehensive income													3,654			3,654

Dividends paid ($0.10 per share)										(893	)					(893	)

Purchase of treasury stock (106,365 shares)							(2,248	)								(2,248	)

Treasury stock used for employee benefit plans (50,409 shares)				(953	)		1,024									71

Stock option expense				277												277

Restricted share award expense				307												307

Reclassification for adoption of ASU 2016-01										25			(25	)		-

BALANCE, March 31, 2019	$	108	$	117,976		$	(28,968	)	$	49,300		$	(4,525	)	$	133,891

See notes to unaudited consolidated financial statements

PRUDENTIAL BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Six Months Ended March 31,
	2020			2019
	(Dollars in Thousands)
OPERATING ACTIVITIES:
Net income	$	5,387		$	4,314
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		268			310
Net accretion of premiums/discounts		(877	)		(766	)
Provision for loan losses		625			-
Net amortization of deferred loan fees and costs		(35	)		(58	)
Share-based compensation expense for stock options and share awards		526			584
Income from bank owned life insurance		(334	)		(303	)
Loss (gain) on sale of other real estate owned		-			46
Gain on sale of investments available for sale		(2,682	)		(117	)
Proceeds from the sale of loans		20,713			-
Gain on sale of loans		(265	)		-
Originations of loans held for sale		(6,186	)		-
Holding losses (gains) on equity securities		58			(34	)
Deferred income tax (benefit) expense		(153	)		(426	)
Changes in assets and liabilities which used cash:
Accrued interest receivable		137			(489	)
Accrued interest payable		(1,481	)		(418	)
Other, net		106			601
Net cash provided by operating activities		15,807			3,244
INVESTING ACTIVITIES:
Purchase of investment and mortgage-backed securities available for sale		(130,257	)		(153,282	)
Purchase of investment and mortgage-backed securities held to maturity		(2,500	)		-
Sale of investments available for sale		81,953			12,770
Loans originated		(55,211	)		(45,722	)
Principal collected on loans		53,750			67,157
Principal payments received on investment and mortgage-backed securities:
Held-to-maturity		42,179			2,455
Available-for-sale		65,441			9,461
Redemption of FHLB Stock		5,489			5,589
Purchase of FHLB stock		(4,635	)		(8,387	)
Proceeds from sale of other real estate owned		-			603
Purchases of equipment		(233	)		(225	)
Net cash provided by (used in) investing activities		55,976			(109,581	)
FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts, and savings accounts		45,814			10,792
Net (decrease) increase in certificates of deposit		(59,774	)		30,449
Net (decrease) increase in FHLB advances - short term		(10,000	)		15,500
Proceeds from FHLB advances - long term		-			74,223
Repayment of FHLB advances - long term		(12,280	)		(19,312	)
Increase in advances from borrowers for taxes and insurance		335			177
Cash dividends paid		(5,075	)		(893	)
Treasury stock used for employee benefit plans		(84	)		71
Purchase of treasury stock		(1,999	)		(2,248	)
Net cash (used in) provided by financing activities		(43,063	)		108,759

PRUDENTIAL BANCORP, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS -continued

	Six Months Ended March 31.
	2020		2019
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		28,720		2,422

CASH AND CASH EQUIVALENTS—Beginning of period		47,968		48,171

CASH AND CASH EQUIVALENTS—End of period	$	76,688	$	50,593
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest on deposits and advances from Federal
Home Loan Bank	$	12,187	$	9,215
Income taxes paid	$	1,195	$	25

SUPPLEMENTAL DISCLOSURES OF NONCASH ITEMS
Loans transferred to other real estate owned		183		-
Lease adoption:
Right of use lease asset	$	1,415		-
Lease Liability	$	1,536		-

See the accompany 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”). 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 additional 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.

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 six months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2020, 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, 2019. 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 81 through 85 of the Annual Report on Form 10-K for the year ended September 30, 2019.

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, deferred income taxes, other-than-temporary impairment, and the fair value measurement for financial instruments. Actual results could differ from those estimates.

Recently Adopted Accounting Pronouncements

Effective October 1, 2019, the Company adopted ASU 2016-02 – Leases. This Update and all subsequent ASU’s that modified Topic 842 set forth a new lease accounting model for lessors and lessees. For lessees, virtually all leases will have to be recognized on the balance sheet by recording a right-of-use asset and lease liability. Subsequent accounting for leases varies depending on whether the lease is an operating lease or a finance lease. The accounting provided by a lessor is largely unchanged from that applied under the existing guidance. The ASU requires additional qualitative and quantitative disclosures with objective of enabling users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. The Update and its related amendments resulted in the recognition of operating right-of-use assets totaling $1.5 million and operating lease liabilities totaling $1.6 million. A $75,000 prior period adjustment to retained earnings was recognized as of October 1, 2019. The Company has presented the necessary disclosures in Note 15.

Recent Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be affected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. This Update defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. 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 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes the Disclosure Requirements for Fair Value Measurements. The Update removes the requirement to disclose the amount of and reasons for transfers between Level I and Level II of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level III fair value measurements. The Update requires disclosure of changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level III fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level III fair value measurements. This Update is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In May 2019, the FASB issued ASU 2019-05, Financial Instruments – Credit Losses, Topic 326, which allows entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost upon adoption of the new credit losses standard. To be eligible for the transition election, the existing financial asset must otherwise be both within the scope of the new credit losses standard and eligible for the applying the fair value option in ASC 825-10-3. The election must be applied on an instrument-by-instrument basis and is not available for either available-for-sale or held-to-maturity debt securities. For entities that elect the fair value option, the difference between the carrying amount and the fair value of the financial asset would be recognized through a cumulative-effect adjustment to opening retained earnings as of the date an entity adopted ASU 2016-13. Changes in fair value of that financial asset would subsequently be reported in current earnings. For entities that have not yet adopted ASU 2016-13, the effective dates and transition requirements are the same as those in ASU 2016-13. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

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

In November 2019, the FASB issued ASU 2019-10, Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). The Update defers the effective dates of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. This Update also amends the mandatory effective date for the elimination of Step 2 from the goodwill impairment test under ASU No. 2017-04, Intangibles ‒ Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (Goodwill), to align with those used for credit losses. Furthermore, the ASU provides a one-year deferral of the effective dates of the ASUs on derivatives and hedging and leases for companies that are not public business entities. The Company qualifies as a smaller reporting company and does not expect to early adopt these ASUs.

In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, to clarify its new credit impairment guidance in ASC 326, based on implementation issues raised by stakeholders. This Update clarified, among other things, that expected recoveries are to be included in the allowance for credit losses for these financial assets; an accounting policy election can be made to adjust the effective interest rate for existing troubled debt restructurings based on the prepayment assumptions instead of the prepayment assumptions applicable immediately prior to the restructuring event; and extends the practical expedient to exclude accrued interest receivable from all additional relevant disclosures involving amortized cost basis. The effective dates in this Update are the same as those applicable for ASU 2019-10. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), to simplify the accounting for income taxes, change the accounting for certain tax transactions, and make minor improvements to the codification. This Update provides a policy election to not allocate consolidated income taxes when a member of a consolidated tax return is not subject to income tax and provides guidance to evaluate whether a step-up in tax basis of goodwill relates to a business combination in which book goodwill was recognized or a separate transaction. The Update also changes current guidance for making an intra period allocation if there is a loss in continuing operations and gains outside of continuing operations; determining when a deferred tax liability is recognized after an investor in a foreign entity transitions to or from the equity method of accounting; accounting for tax law changes and year-to-date losses in interim periods; and determining how to apply the income tax guidance to franchise taxes that are partially based on income. For public business entities, the amendments in this Update are effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2020. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

EARNINGS PER SHARE

Basic earnings per common share is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock issued, net of any treasury shares and unearned restricted share awards, during the period. Diluted earnings per share is calculated by dividing net income available to common stockholders 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, 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 March 31,
	2020				2019
	Basic		Diluted		Basic		Diluted
		(Dollars in Thousands, Except Share and Per Share Data)
Net income	$	2,924	$	2,924	$	2,340	$	2,340

Weighted average shares outstanding		8,884,760		8,884,760		8,777,252		8,777,252
Effect of common stock equivalents		-		117,342		-		144,309
Adjusted weighted average shares used in earnings per share computation		8,884,760		9,002,102		8,777,252		8,921,561
Earnings per share - basic and diluted	$	0.33	$	0.32	$	0.27	$	0.26

	Six Months Ended March 31,
	2020				2019
	Basic		Diluted		Basic		Diluted
		(Dollars in Thousands, Except Share and Per Share Data)
Net income	$	5,387	$	5,387	$	4,314	$	4,314

Weighted average shares outstanding		8,885,972		8,885,972		8,790,822		8,790,822
Effect of common stock equivalents		-		133,815		-		131,262
Adjusted weighted average shares used in earnings per share computation		8,885,972		9,019,787		8,790,822		8,922,084
Earnings per share - basic and diluted	$	0.61	$	0.60	$	0.49	$	0.48

As of March 31, 2020 and 2019, there were 528,004 and 584,832 shares of common stock, respectively, subject to options with exercise prices less than the then current market and which were included in the computation of diluted earnings per share. At March 31, 2020 and 2019, there were 265,030 and 202,500 shares, respectively, that had exercise prices greater than the then current market value and were considered anti-dilutive at such dates.

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following tables present the changes in accumulated other comprehensive (loss) income by component, net of tax, for the periods presented:

	Three Months Ended March 31,									Three Months Ended March 31,
	2020			2020			2020			2019			2019			2019
	(Dollars in Thousands)
	Unrealized gain (loss) on AFS securities (a)			Unrealized gain (loss) on interest rate swaps (a)			Total accumulated other comprehensive (loss) income			Unrealized gain (loss) on AFS securities (a)			Unrealized gain (loss) on interest rate swaps (a)			Total accumulated other comprehensive (loss) income
Beginning balance, January 1	$	6,920		$	(5,096	)	$	1,824		$	(5,615	)	$	(418	)	$	(6,033	)
Other comprehensive (loss) income before reclassifications		3,812			(8,621	)		(4,809	)		3,572			(1,947	)		1,625
Total		10,732			(13,717	)		(2,985	)		(2,043	)		(2,365	)		(4,408	)
Reclassification from adoption of ASU 2016-01		-			-			-			(25	)		-			(25	)
Reclassification for net gains recorded in net income		(1,868	)		-			(1,868	)		(92	)		-			(92	)
Ending balance, March 31	$	8,864		$	(13,717	)	$	(4,853	)	$	(2,160	)	$	(2,365	)	$	(4,525	)

(a)

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

	Six Months Ended March 31,									Six Months Ended March 31,
	2020			2020			2020			2019			2019			2019
	(Dollars in Thousands)
		Unrealized gain (loss) on AFS securities (a)			Unrealized gain (loss) on interest rate swaps (a)			Total accumulated other comprehensive (loss) income			Unrealized gain (loss) on AFS securities (a)			Unrealized gain (loss) on interest rate swaps (a)			Total accumulated other comprehensive (loss) income
Beginning balance, October 1	$	8,098		$	(6,906	)	$	1,192		$	(8,320	)	$	166		$	(8,154	)
Other comprehensive (loss) income before reclassification		2,885			(6,811	)		(3,926	)		6,277			(2,531	)		3,746
Total		10,983			(13,717	)		(2,734	)		(2,043	)		(2,365	)		(4,408	)
Reclassification from adoption of ASU 2016-01		-			-			-			(25	)					(25	)
Reclassification for net gains recorded in net income		(2,119	)		-			(2,119	)		(92	)		-			(92	)
Ending balance, March 31	$	8,864		$	(13,717	)	$	(4,853	)	$	(2,160	)	$	(2,365	)	$	(4,525	)

(a)

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

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:

	March 31, 2020
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(Dollars in Thousands)
Securities Available for Sale:
U.S. government and agency obligations	$	37,433	$	119	$	(95	)	$	37,457
State and political subdivisions		71,957		1,991		(2,453	)		71,495
Mortgage-backed securities - U.S. government agencies		312,448		10,776		(63	)		323,161
Corporate debt securities		78,273		1,650		(703	)		79,220

Total securities available for sale	$	500,111	$	14,536	$	(3,314	)	$	511,333

Securities Held to Maturity:
U.S. government and agency obligations	$	6,500	$	253	$	-		$	6,753
State and political subdivisions		18,130		588		(22	)		18,696
Mortgage-backed securities - U.S. government agencies		4,307		289		-			4,596

Total securities held to maturity	$	28,937	$	1,130	$	(22	)	$	30,045

The Company recognized net realized losses on equity securities of $58,000 and $39,000 for the six and three months ended March 31, 2020, respectively. Net gains on equity securities were $34,000 and $0 during the three and six months ended March 31, 2019.

	September 30, 2019
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(Dollars in Thousands)
Securities Available for Sale:
U.S. government and agency obligations	$	24,960	$	3	$	(98	)	$	24,865
State and political subdivisions		47,909		484		(747	)		47,646
Mortgage-backed securities - U.S. government agencies		362,342		8,836		(406	)		370,772
Corporate debt securities		67,360		2,217		(38	)		69,539

Total debt securities available for sale	$	502,571	$	11,540	$	(1,289	)	$	512,822

Securities Held to Maturity:
U.S. government and agency obligations	$	43,349	$	181	$	(188	)	$	43,342
State and political subdivisions		20,474		645		-			21,119
Mortgage-backed securities - U.S. government agencies		4,812		238		(4	)		5,046

Total securities held to maturity	$	68,635	$	1,064	$	(192	)	$	69,507

The amortized cost and fair value of equity securities:

As of March 31, 2020, the Bank maintained $270.4 million of securities in a safekeeping account at the FHLB of Pittsburgh available to be used for collateral and convenience. As of March 31, 2020, The Bank was only required to hold $144.1 million as specific collateral for its borrowings; therefore the $126.3 million excess securities are not restricted and could be sold or transferred if needed.

The following table shows the gross unrealized losses and related fair values of the Company’s investment and mortgage-backed securities, aggregated by investment category and length of time that individual securities had been in a continuous loss position as of March 31, 2020:

	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	$	(24	)	$	4,976	$	(71	)	$	3,364	$	(95	)	$	8,340
State and political subdivisions		-			-		(2,453	)		23,285		(2,453	)		23,285
Mortgage-backed securities - U.S. government agencies		(18	)		7,181		(45	)		3,510		(63	)		10,691
Corporate bonds		(703	)		16,749		-			-		(703	)		16,749

Total securities available for sale	$	(745	)	$	28,906	$	(2,569	)	$	30,159	$	(3,314	)	$	59,065

Securities Held to Maturity:
State and political subdivisions	$	(22	)	$	2,002	$	-		$	-	$	(22	)	$	2,002
Total securities held to maturity	$	(22	)	$	2,002	$	-		$	-	$	(22	)	$	2,002

Total	$	(767	)	$	30,908	$	(2,569	)	$	30,159	$	(3,336	)	$	61,067

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 as of September 30, 2019:

	Less than 12 months					More than 12 months					Total
	Gross					Gross					Gross
	Unrealized			Fair		Unrealized			Fair		Unrealized			Fair
	Losses			Value		Losses			Value		Losses			Value
		(Dollars in Thousands)
Securities Available for Sale:
U.S. government and agency obligations	$	(3	)	$	6,997	$	(95	)	$	3,866	$	(98	)	$	10,863
State and political subdivisions		(4	)		890		(743	)		23,784		(747	)		24,674
Mortgage-backed securities - US government agencies		(86	)		50,057		(320	)		37,056		(406	)		87,113
Corporate bonds		(13	)		1,989		(25	)		3,014		(38	)		5,003

Total securities available for sale	$	(106	)	$	59,933	$	(1,183	)	$	67,720	$	(1,289	)	$	127,653

Securities Held to Maturity:
U.S. government and agency obligations	$	(188	)	$	14,811	$	-		$	-	$	(188	)	$	14,811
Mortgage-backed securities - US government agencies		(4	)		794		-			-		(4	)		794

Total securities held to maturity	$	(192	)	$	15,605	$	-		$	-	$	(192	)	$	15,605

Total	$	(298	)	$	75,538	$	(1,183	)	$	67,720	$	(1,481	)	$	143,258

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 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 is 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 six months ended March 31, 2020 and 2019, the Company did not record any credit losses on investment securities through earnings.

U.S. Government and Agency Obligations - At March 31, 2020, there was one security in a gross unrealized loss position for less than 12 months and there was one security 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 March 31, 2020.

Mortgage-Backed Securities – At March 31, 2020, there were five mortgage-backed securities in a gross unrealized loss position for less than 12 months, while there were seven 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 all of them 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 March 31, 2020.

Corporate Debt Securities – At March 31, 2020, there were six securities in a gross unrealized loss for less than 12 months, while there were no securities in a gross unrealized loss position for more than 12 months at such date. These securities were issued by publicly reporting 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 March 31, 2020.

State and political subdivisions – At March 31, 2020, there was one security in a gross unrealized loss for less than 12 months, while there were seven securities in a gross unrealized loss position for more than 12 months at such date. The unrealized losses on these debt securities relate principally to the changes in market interest rates in the financial markets and are not as a result of projected short fall of cash flows. These securities were issued by local municipalities/school districts 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 March 31, 2020.

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.

	March 31, 2020
	Held to Maturity				Available for Sale
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
		(Dollars in Thousands)
Due after one through five years	$	-	$	-	$	20,546	$	20,300
Due after five through ten years		17,098		17,693		58,912		60,185
Due after ten years		7,532		7,756		108,205		107,687

Total	$	24,630	$	25,449	$	187,663	$	188,172

During the three month period ended March 31, 2020, the Company sold securities with an aggregate amortized cost of $44.6 million for a recognized aggregate gain of $2.4 million. For the six month period ended March 31, 2020, the Company sold securities with an aggregate amortized value of $62.1 million and a recognized gain of $2.7 million.During both the three and six month periods ended March 31, 2019, the Company sold three mortgage-back securities with an aggregate amortized cost of $12.8 million for a recognized aggregate gain of $117,000 (pre-tax).

LOANS RECEIVABLE

Loans receivable consist of the following:

	March 31,			September 30,
	2020			2019
	(Dollars in Thousands)
One-to-four family residential	$	243,326		$	268,780
Multi-family residential		25,864			30,582
Commercial real estate		125,193			128,521
Construction and land development		245,745			253,368
Commercial business		21,999			19,630
Loans to financial institutions		6,000			6,000
Leases		298			518
Consumer		768			834

Total loans		669,193			708,233

Undisbursed portion of loans-in-process		(88,645	)		(114,528	)
Deferred loan fees		(2,465	)		(2,856	)
Allowance for loan losses		(5,961	)		(5,393	)

Net loans	$	572,122		$	585,456

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 March 31, 2020:

	One- to-four family residential		Multi-family residential		Commercial real estate		Construction and land development		Commercial Business		Loans to financial institutions		Leases		Consumer		Unallocated		Total
	(Dollars in Thousands)
Allowance for loan losses:
Individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Collectively evaluated for impairment		1,301		295		1,365		2,090		257		70		4		3		576		5,961
Total ending allowance balance	$	1,301	$	295	$	1,365	$	2,090	$	257	$	70	$	4	$	3	$	576	$	5,961

Loans:
Individually evaluated for impairment	$	3,797	$	-	$	1,417	$	8,700	$	-	$	-	$	-	$	-			$	13,914
Collectively evaluated for impairment		239,529		25,864		123,776		237,045		21,999		6,000		298		768				655,279
Total loans	$	243,326	$	25,864	$	125,193	$	245,745	$	21,999	$	6,000	$	298	$	768			$	669,193

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, 2019:

	One- to four - family residential		Multi-family residential		Commercial real estate		Construction and land development		Commercial business		Loanss to financial institutions		Leases		Consumer		Unallocated		Total
	(Dollars in Thousands)
Allowance for Loan Losses:
Individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Collectively evaluated for impairment		1,002		315		1,257		2,034		206		63		5		13		498		5,393
Total ending allowance balance	$	1,002	$	315	$	1,257	$	2,034	$	206	$	63	$	5	$	13	$	498	$	5,393

Loans:
Individually evaluated for impairment	$	4,827	$	-	$	1,965	$	8,750	$	-	$	-	$	-	$	-			$	15,542
Collectively evaluated for impairment		263,953		30,582		126,556		244,618		19,630		6,000		518		834				692,691
Total loans	$	268,780	$	30,582	$	128,521	$	253,368	$	19,630	$	6,000	$	518	$	834			$	708,233

The loan portfolio is segmented at a level that allows management to monitor both risk and performance. Management evaluates for potential impairment all construction loans, multi-family loans, commercial real estate loans, 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 March 31, 2020, 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	$	-	$	-	$	3,797	$	3,797	$	4,147
Commercial real estate		-		-		1,417		1,417		1,536
Construction and land development		-		-		8,700		8,700		11,081
Total impaired loans	$	-	$	-	$	13,914	$	13,914	$	16,764

The following table presents impaired loans by class as of September 30, 2019, 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	$	-	$	-	$	4,827	$	4,827	$	5,179
Commercial real estate		-		-		1,965		1,965		2,125
Construction and land development		-		-		8,750		8,750		11,131
Total impaired loans	$	-	$	-	$	15,542	$	15,542	$	18,435

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

	Three Months Ended March 31, 2020
	Average Recorded Investment		Income Recognized on Accrual Basis		Income Recognized on Cash Basis
	(Dollars in Thousands)
One-to-four family residential	$	4,195	$	-	$	8
Multi-family residential		74		-		-
Commercial real estate		1,593		-		-
Construction and land development		8,726		-		-
Consumer		16		-		-
Total impaired loans	$	14,603	$	-	$	8

	Three Months Ended March 31, 2019
	Average Recorded Investment		Income Recognized on Accrual Basis		Income Recognized on Cash Basis
	(Dollars in Thousands)
One-to-four family residential	$	4,952	$	21	$	5
Multi-family residential		290		5		-
Commercial real estate		2,202		10		1
Construction and land development		8,752		-		-
Consumer		10		-		-
Total impaired loans	$	16,206	$	36	$	6

	Six Months Ended March 31, 2020
	Average Recorded Investment		Income Recognized on Accrual Basis		Income Recognized on Cash Basis
	(Dollars in Thousands)
One-to-four family residential	$	4,195	$	3	$	17
Multi-family residential		74		-		-
Commercial real estate		1,593		-		1
Construction and land development		8,725		-		-
Commercial business		4		-		1
Consumer		16		-		-
Total impaired loans	$	14,607	$	3	$	19

	Six Months Ended March 31, 2019
	Average Recorded Investment		Income Recognized on Accrual Basis		Income Recognized on Cash Basis
	(Dollars in Thousands)
One-to-four family residential	$	5,055	$	44	$	10
Multi-family residential		293		10		-
Commercial real estate		2,133		20		2
Construction and land development		8,752		-		-
Consumer		8		-		-
Total impaired loans	$	16,241	$	74	$	12

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

	March 31, 2020
			Special				Total
	Pass		Mention		Substandard		Loans
	(Dollars in Thousands)
One-to-four family residential	$	238,046	$	1,483	$	3,797	$	243,326
Multi-family residential		25,864		-		-		25,864
Commercial real estate		122,671		1,105		1,417		125,193
Construction and land development		237,045		-		8,700		245,745
Loans to financial institutions		6,000		-		-		6,000
Commercial business		21,999		-		-		21,999
Total loans	$	651,625	$	2,588	$	13,914	$	668,127

	September 30, 2019
			Special				Total
	Pass		Mention		Substandard		Loans
	(Dollars in Thousands)
One-to-four family residential	$	262,164	$	1,789	$	4,827	$	268,780
Multi-family residential		30,582		-		-		30,582
Commercial real estate		122,838		3,718		1,965		128,521
Construction and land development		244,618		-		8,750		253,368
Loans to financial institutions		6,000		-		-		6,000
Commercial business		19,630		-		-		19,630
Total loans	$	685,832	$	5,507	$	15,542	$	706,881

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 loan, the loan is downgraded following the above definitions of special mention, substandard, doubtful and loss.

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 table are those loans greater than 90 days past due as to principal and/or interest that do not have a designated risk rating.

	March 31, 2020
			Non-		Total
	Performing		Performing		Loans
	(Dollars in Thousands)
One-to-four family residential	$	239,999	$	3,327	$	243,326
Leases		298		-		298
Consumer		768		-		768
Total loans	$	241,065	$	3,327	$	244,392

	September 30, 2019
			Non-		Total
	Performing		Performing		Loans
	(Dollars in Thousands)
One-to-four family residential	$	265,068	$	3,712	$	268,780
Leases		518		-		518
Consumer		834		-		834
Total loans	$	266,420	$	3,712	$	270,132

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 tables present the loan categories of the loan portfolio summarized by the aging categories of performing loans, delinquent loans and nonaccrual loans:

	March 31, 2020
													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	$	239,740	$	1,017	$	2,569	$	3,586	$	243,326	$	3,327	$	-
Multi-family residential		25,864		-		-		-		25,864		-		-
Commercial real estate		122,091		1,685		1,417		3,102		125,193		1,417		-
Construction and land development		237,045		-		8,700		8,700		245,745		8,700		-
Commercial business		21,999		-		-		-		21,999		-		-
Financial institutions		6,000		-		-		-		6,000		-		-
Leases		298		-		-		-		298		-		-
Consumer		700		68		-		68		768		-		-
Total loans	$	653,737	$	2,770	$	12,686	$	15,456	$	669,193	$	13,444	$	-

	September 30, 2019
													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	$	264,784	$	750	$	3,246	$	3,996	$	268,780	$	3,712	$	-
Multi-family residential		30,582		-		-		-		30,582		-		-
Commercial real estate		127,104		-		1,417		1,417		128,521		1,473		-
Construction and land development		244,618		-		8,750		8,750		253,368		8,750		-
Commercial business		19,630		-		-		-		19,630		-		-
Loans to financial institutions		6,000		-		-		-		6,000		-		-
Leases		518		-		-		-		518		-		-
Consumer		739		95		-		95		834		-		-
Total loans	$	693,975	$	845	$	13,413	$	14,258	$	708,233	$	13,935	$	-

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. For the three months ended March 31, 2020 the analysis took into account the pandemic and its effects on the Company’s business, especially with respect to commercial real estate, commercial business and construction and land development loans.

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 a single borrower 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 borrowers’ ability to make required payments as well as reducing the value of the collateral property. 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 construction 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 six month periods ended March 31, 2020 and 2019:

	Three Months Ended March 31, 2020
	One- to four-family residential			Multi-family residential		Commercial real estate		Construction and land development			Commercial business			Financial institutions		Leases		Consumer			Unallocated		Total
	(Dollars in Thousands)
ALLL. balance at December 31, 2019	$	999		$	255	$	1,281	$	2,205		$	201		$	63	$	4	$	12		$	508	$	5,528
Charge-offs		(3	)		-		-		-			(15	)		-		-		(56	)		-		(74	)
Recoveries		1			-		-		-			-			-		-		6			-		7
Provision		304			40		84		(115	)		71			7		-		41			68		500
ALLL balance at March 31, 2020	$	1,301		$	295	$	1,365	$	2,090		$	257		$	70	$	4	$	3		$	576	$	5,961

	Six Months Ended March 31, 2020
	One- to four-family residential			Multi-family residential			Commercial real estate		Construction and land development		Commercial business			Financial institutions		Leases			Consumer			Unallocated		Total
	(Dollars in Thousands)
ALLL balance at September 30, 2019	$	1,002		$	315		$	1,257	$	2,034	$	206		$	63	$	5		$	13		$	498	$	5,393
Charge-offs		(3	)		-			-		-		(15	)		-		-			(56	)		-		(74	)
Recoveries		1			-			-		-		-			-		10			6			-		17
Provision		301			(20	)		108		56		66			7		(11	)		40			78		625
ALLL balance at March 31, 2020	$	1,301		$	295		$	1,365	$	2,090	$	257		$	70	$	4		$	3		$	576	$	5,961

	Three Months Ended March 31, 2019
	One- to four-family residential			Multi-family residential		Commercial real estate		Construction and land development			Commercial business		Financial institutions		Leases			Consumer		Unallocated			Total
	(Dollars in Thousands)
ALLL balance at December 31, 2018	$	1,427		$	372	$	1,147	$	1,445		$	193	$	67	$	16		$	13	$	487		$	5,167
Charge-offs		-			-		-		-			-		-		-			-		-			-
Recoveries		60			-		-		-			-		-		-			-		-			60
Provision		(173	)		13		195		(75	)		42		1		(3	)		7		(7	)		-
ALLL balance at March 31, 2019	$	1,314		$	385	$	1,342	$	1,370		$	235	$	68	$	13		$	20	$	480		$	5,227

	Six Months Ended March 31, 2019
	One- to four-family residential			Multi-family residential		Commercial real estate		Construction and land development			Commercial business		Financial institutions		Leases			Consumer		Unallocated			Total
	(Dollars in Thousands)
ALLL balance at September 30, 2018	$	1,343		$	347	$	1,154	$	1,554		$	187	$	64	$	18		$	18	$	482		$	5,167
Charge-offs		-			-		-		-			-		-		-			-		-			-
Recoveries		60			-		-		-			-		-		-			-		-			60
Provision		(89	)		38		188		(184	)		48		4		(5	)		2		(2	)		-
ALLL balance at March 31, 2019	$	1,314		$	385	$	1,342	$	1,370		$	235	$	68	$	13		$	20	$	480		$	5,227

The Company recorded a provision for loan losses of $500,000 and $625,000 for the three and six months period ended March 31, 2020, respectively, compared to no provision for loan losses for the comparable three and six months periods in fiscal 2019. The provision expense incurred during the 2020 periods was primarily as a precaution due to the uncertainty associated with the economic effects of COVID-19 and the potential credit deterioration caused thereby. Although no delinquencies have occurred as of March 31, 2020 due to the effects of the COVID-19 pandemic, a number of borrowers contacted the Bank regarding deferments of upcoming loan payments. These deferments are not anticipated to be troubled debt restructurings (“TDRs”) as all the borrowers requesting deferments were current as of December 31, 2019 and the request for the deferments were related to the current economic conditions caused by COVID-19, not underlying weaknesses within the respective loans. Notwithstanding the foregoing, the Company believes there is a material risk that credit losses and non-performing assets may increase due to current economic conditions. During the quarter ended March 31, 2020, the Company recorded $74,000 in charge offs and recoveries of $7,000. During the six months ended March 31, 2020, the Company recorded charge offs of $74,000 and recoveries of $17,000. During both the quarter and six months ended March 31, 2019, the Company recorded no charge offs and recoveries of $60,000.

At March 31, 2020, the Company had four loans aggregating $5.3 million that were classified as TDRs. Three of the TDRs, totaling $4.9 million, which are classified as non-accrual are a part of a troubled lending relationship totaling $10.6. The remaining TDR is also on non-accrual and consists of a $424,000 loan secured by a single-family property; the loan is performing in accordance with the restructured terms.

The Company did not restructure any loans during the three and six months ended March 31, 2020, or during the three and six months ending March 31, 2019.

No TDRs defaulted during the six-month period ending March 31, 2020 or 2019.

DEPOSITS

Deposits consist of the following major classifications:

	March 31,					September 30,
	2020					2019
	Amount		Percent			Amount		Percent
	(Dollars in Thousands)
Money market deposit accounts	$	114,215		15.6	%	$	75,766		10.2	%
Interest-bearing checking accounts		66,827		9.1	%		58,647		7.9	%
Non interest-bearing checking accounts		19,524		2.7	%		16,949		2.3	%
Passbook, club and statement savings		77,497		10.6	%		80,899		10.8	%
Certificates maturing in six months or less		233,006		31.9	%		294,343		39.4	%
Certificates maturing in more than six months		220,415		30.1	%		218,840		29.4	%

Total	$	731,484		100.0	%	$	745,444		100.0	%

Certificates in the amount of $250,000 and over totaled $159.1 million as of March 31, 2020 and $182.8 million as of September 30, 2019.

ADVANCES FROM FEDERAL HOME LOAN BANK – SHORT TERM

As of March 31, 2020 and September 30, 2019 outstanding balances and related information of short-term borrowings from the FHLB are summarized as follows:

	March 31,			September 30,
(Dollar Amounts in Thousands)	2020			2019
Balance at period end	$	80,000		$	90,000
Weighted-average rate at period end		1.16	%		2.32	%

As of March 31, 2020, the $80.0 million of borrowings consisted of four 30-day and one 90-day FHLB advances associated with interest rate swap contracts.

As of September 30, 2019, the $90.0 million of borrowings consisted of seven 30-day FHLB advances associated with interest rate swap contracts.

The Bank maintains borrowing facilities with the FHLB of Pittsburgh, Atlantic Community Bankers Bank (“ACBB”) and the Federal Reserve Bank of Philadelphia, the terms and interest rates of which are subject to change on the date of execution of borrowings. Available borrowings are based on collateral with the facility. The Bank maintains unsecured borrowing facilities with ACBB and PNC for $12.5 million and $10.0 million, respectively.

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 March 31, 2020 and September 30, 2019 are as follows:

			Weighted
Long-term FHLB advances:	Maturity range		average interest			Stated interest rate range						March 31,		September 30,
Description	from	to	rate			from			to			2020		2019
												(Dollars in Thousands)
Fixed Rate - Amortizing	1-Oct-19	30-Sep-20										$	-	$	236
Fixed Rate - Amortizing	1-Oct-20	30-Sep-21		2.71	%		1.94	%		2.83	%		9,797		14,354
Fixed Rate - Amortizing	1-Oct-21	30-Sep-22		2.82	%		1.99	%		3.05	%		7,137		8,729
Fixed Rate - Amortizing	1-Oct-22	30-Sep-23		2.88	%		1.94	%		3.11	%		6,104		6,931
Total				2.79	%								23,038		30,250

Fixed Rate - Advances	1-Oct-19	30-Sep-20		2.76	%		1.38	%		3.06	%		7,268		12,304
Fixed Rate - Advances	1-Oct-20	30-Sep-21		2.37	%		1.42	%		2.92	%		18,006		18,017
Fixed Rate - Advances	1-Oct-21	30-Sep-22		2.31	%		1.94	%		3.23	%		63,315		63,336
Fixed Rate - Advances	1-Oct-22	30-Sep-23		2.52	%		2.00	%		3.22	%		94,999		94,999
Fixed Rate - Advances	1-Oct-23	30-Sep-24		2.88	%		2.38	%		3.20	%		67,998		67,998
Total				2.56	%								251,586		256,654

				2.58	%		Total					$	274,624	$	286,904

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 FHLB advances at both March 31, 2020 and September 30, 2019, while there are eleven additional cash flow hedges tied to wholesale funding at March 31, 2020. These interest rate swaps involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments. During the quarter ended March 31, 2020, $5,000 of expense was recognized as ineffectiveness through earnings, while $3,000 of expense was recognized as ineffectiveness through earnings during the comparable period in fiscal 2019. During the six months ended March 31, 2019, $3,000 of expense was recognized as ineffectiveness through earnings, while $5,000 of expense was recognized as ineffectiveness through earnings during the comparable period in 2019. There were nine interest rate swaps designated as fair value hedges involving the receipt of variable-rate payments from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements that were applicable to three loans and seven investment securities as of both March 31, 2020 and September 30, 2019. The fair value is recorded in the other liabilities section of the statement of financial condition.

Below is a summary of the interest rate swap agreements and their terms as of March 31, 2020.

Hedged	Notional		Pay Rate						Receive	Maturity Date		Unrealized
Item	Amount		from			to			Rate	from	to	Loss
									(Dollars in Thousands)
FHLB advances	$	10,000		2.70	%		2.70	%	1 Mth Libor	10-Apr-25	10-Apr-25	$	(1,151	)
State and political subdivisions		21,570		3.06	%		3.07	%	3 Mth Libor	1-Feb-27	1-May-28		(3,878	)
Commercial loans		17,339		4.10	%		5.74	%	1 Mth Libor +225 to 276 bp	13-Jun-25	1-Aug-26		-
30 day wholesale funding		65,000		1.94	%		2.51	%	1 Mth Libor	15-Feb-24	12-Jun-26		(4,836	)
90 day wholesale funding		135,000		2.51	%		2.78	%	3 Mth Libor	11-Jan-24	27-Mar-24		(11,378	)

												$	(21,243	)

Below is a summary of the interest rate swap agreements and their terms as of September 30, 2019.

Hedged	Notional		Pay Rate						Receive	Maturity Date		Unrealized
Item	Amount		from			to			Rate	from	to	Loss
									(Dollars in Thousands)
FHLB advances	$	10,000		2.70	%		2.70	%	1 Mth Libor	10-Apr-25	10-Apr-25	$	(719	)
State and political subdivisions		21,570		3.06	%		3.07	%	3 Mth Libor	1-Feb-27	1-May-28		(2,502	)
Commercial loans		17,339		4.10	%		5.74	%	1 Mth Libor +225 to 276 bp	13-Jun-25	1-Aug-26		-
30 day wholesale funding		65,000		1.94	%		2.51	%	1 Mth Libor	15-Feb-24	12-Jun-26		(1,415	)
90 day wholesale funding		135,000		2.51	%		2.78	%	3 Mth Libor	11-Jan-24	27-Mar-24		(6,605	)

												$	(11,241	)

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:

For the six months period ended:	March 31,			September 30,
	2020			2019
Deferred tax assets:		(Dollars in Thousands)
Allowance for loan losses	$	1,571		$	1,488
Nonaccrual interest		531			487
Accrued vacation		7			7
Capital loss carryforward		121			121
Split dollar life insurance		9			9
Post-retirement benefits		73			76
Unrealized losses on interest rate swaps		3,647			1,836
Deferred compensation		784			809
Goodwill		63			69
Other		88			64
Employee benefit plans		293			216
Total deferred tax assets		7,187			5,182
Valuation allowance		(121	)		(121	)
Total deferred tax assets, net of valuation allowance		7,066			5,061

Deferred tax liabilities:
Property		134			141
Unrealized gain on equity securities		16			19
Unrealized gains on available for sale securities		2,356			2,153
Purchase accounting adjustments		273			215
Deferred loan fees		170			175

Total deferred tax liabilities		2,949			2,703

Net deferred tax assets	$	4,117		$	2,358

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 $121,000 at March 31, 2020 and September 30, 2019, respectively.

For the six-month period ended March 31, 2020, the Company recorded income tax expense of $1.1 million compared to income tax expense of $809,000, for the period ended March 31, 2019.

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, 2015 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. 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 awards covering shares under the 2008 RRP and 3,027 shares under the 2014 SIP. In March 2017, the Company granted awards covering 17,128 shares under the 2014 SIP. In March 2018, the Company granted awards covering 924 shares under the 2008 RRP and 25,576 shares under the 2014 SIP. Shares subject to awards under either plan generally vest at the rate of 20% per year over five years. No further grants may be made pursuant to the RRP in accordance with its terms.

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 six months ended March 31, 2020, an aggregate of $120,000 and $256,000, respectively, was recognized in compensation expense for the grants pursuant to the 2008 RRP and the grants pursuant to the 2014 SIP. During the three and six months ended March 31, 2019, $150,000 and $307,000, respectively, was recognized in compensation expense for the grants pursuant to the 2008 RRP and the grants pursuant to the 2014 SIP. At March 31, 2020, approximately $443,000 in additional compensation expense for unvested 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 six months ended March 31, 2020 is presented in the following tables:

	Six Months Ended March 31, 2020
	Number of Shares (1)			Weighted Average Grant Date Fair Value
Non-vested stock awards at October 1, 2019		68,980		$	15.05
Granted		-			-
Forfeited		-			-
Vested		(42,024	)		13.44
Non-vested stock awards at the March 31, 2020		26,956		$	17.56

The Company maintains the 2008 Stock Option Plan (the “Option Plan”) which authorizes the grant of stock options to officers, employees and directors of the Company to acquire shares of common stock with an exercise price at least equal to the fair market value of the common stock on the grant date. Options generally become vested and exercisable at the rate of 20% per year over five years and are generally exercisable for a period of ten years after the grant date. A total of 533,808 shares (on a converted basis) of common stock were approved for future issuance pursuant to the Option Plan. As of September 30, 2018, all of the options had been awarded under the Option Plan. The 2014 SIP reserved up to 714,145 shares for issuance pursuant to options. Options to purchase 605,000 shares were awarded during February 2015 pursuant to the 2014 SIP. During August 2016, the Company granted options covering 18,866 shares under the Option Plan and 8,634 shares under the 2014 SIP. In March 2017, the Company granted options covering 22,828 shares under the 2014 SIP. In May 2017, the Company granted options covering 25,000 shares under the 2014 SIP and 283 shares under the Option Plan. In March 2018, the Company granted options covering 159,265 shares under the 2014 SIP and 18,235 shares under the Option Plan. In July 2019, the Company granted options covering 39,702 shares under the 2014 SIP. No further grants can be made under the Option Plan in accordance with its terms and no further shares are available for grant under the 2014 SIP unless options are forfeited.

A summary of the status of the Company’s stock options under the 2008 Option Plan and the 2014 SIP as of March 31, 2020 is presented below:

	Six Months Ended March 31, 2020
	Number of Shares			Weighted Average Exercise Price
Outstanding at October 1, 2019		793,034		$	13.86
Granted		-			-
Exercised		(13,345	)		-
Forfeited		-			-
Outstanding at March 31, 2020		779,689		$	13.93
Exercisable at March 31, 2020		598,356		$	12.67

The weighted average remaining contractual term was approximately 6.0 years for options outstanding as of March 31, 2020.

The estimated fair value of options granted during fiscal 2009 was $2.98 per share, $2.92 for options granted during fiscal 2010, $3.34 for options granted during fiscal 2013, $4.67 for the options granted during fiscal 2014, $4.58 for options granted during fiscal 2015, $2.13 for options granted during fiscal 2016, $3.18 for options granted during fiscal 2017, $3.63 for options granted during fiscal 2018 and $3.38 for options granted in 2019. 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 and fair value of $17.43, term of seven years, volatility rate of 14.37%, interest rate of 2.22% and a yield rate of 0.69%. The fair value for grants made in fiscal 2018 was estimated on the date of grant using the Black-Scholes pricing model with the following assumptions: an exercise and fair value of $18.46, term of seven years, volatility rate of 15.90%, interest rate of 2.82% and a yield rate of 1.08%. The fair value for grants made in fiscal 2019 was estimated on the date of grant using the Black-Scholes pricing model with the following assumptions: an exercise and fair value of $18.16, term of seven years, volatility rate of 17.76%, interest rate of 1.87% and a yield rate of 1.10%.

During the three and six months ended March 31, 2020, $117,000 and $270,000, respectively, was recognized in compensation expense for options granted pursuant to the Option Plan and the 2014 SIP.

At March 31, 2020, there was approximately $566,000 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 3.1 years.

12.

COMMITMENTS AND CONTINGENT LIABILITIES

At March 31, 2020, the Company had $29.7 million in outstanding commitments to originate loans with market interest rates ranging from 2.38% to 5.00%. At September 30, 2019, the Company had $32.4 million in outstanding commitments to originate fixed-rate loans with market interest rates ranging from 1.99% to 6.50%. The aggregate undisbursed portion of loans-in-process amounted to $88.7 million at March 31, 2020 and $114.5 million at September 30, 2019.

The Company also had commitments under unused lines of credit of $35.3 million as of March 31, 2020 and $37.5 million as of September 30, 2019 and letters of credit outstanding of $1.1 million as of March 31, 2020 and $1.5 million as of September 30, 2019.

Among the Company’s contingent liabilities are exposures to limited recourse arrangements with respect to the Company’s sales of whole loans and participation interests. At March 31, 2020, the exposure, which represents a portion of credit risk associated with the interests sold, amounted to $1.3 million. This exposure is for the life of the related loans and payables, on our proportionate share, as actual losses are incurred.

The Company is involved in various legal proceedings occurring in the ordinary course of business. Management of the Company, based on discussions with litigation counsel, believes that such proceedings will not have a material adverse effect on the financial condition, 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 March 31, 2020 and September 30, 2019, respectively. Although management is not aware of any factors that would significantly affect the fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

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 and liabilities as of March 31, 2020 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	$	-	$	37,457	$	-	$	37,457
State and political subdivisions		-		71,495		-		71,495
Mortgage-backed securities - U.S. Government agencies		-		323,161		-		323,161
Corporate bonds		-		79,220		-		79,220
Equity securities		37		-		-		37
Total	$	37	$	511,333	$	-	$	511,370

Liabilities
Interest rate swap contracts	$	-	$	21,243	$	-	$	21,243
Total	$	-	$	21,243	$	-	$	21,243

Those assets as of September 30, 2019 which are measured at fair value on a recurring basis are as follows:

	Category Used for Fair Value Measurement
	Level 1		Level 2		Level 3		Total
	(Dollars in Thousands)
Assets:
Securities available for sale:
U.S. Government and agency obligations	$	-	$	24,865	$	-	$	24,865
State and political subdivisions		-		47,646		-		47,646
Mortgage-backed securities - U.S. Government agencies		-		370,772		-		370,772
Corporate bonds		-		69,539		-		69,539
Equity security - FHLMC preferred stock		95		-		-		95
Total	$	95	$	512,822	$	-	$	512,917

Liabilities:
Interest rate swap contracts	$	-	$	11,241	$	-	$	11,241
Total	$	-	$	11,241	$	-	$	11,241

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

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 of approximately $13.9 million as of March 31, 2020.

Other 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 March 31, 2020
	(Dollars in Thousands)
	Level 1		Level 2		Level 3		Total
Impaired loans	$	-	$	-	$	13,914	$	13,914
Other real estate owned		-		-		406		406
Total	$	-	$	-	$	14,320	$	14,320

	At September 30, 2019
	(Dollars in Thousands)
	Level 1		Level 2		Level 3		Total
Impaired loans	$	-	$	-	$	15,542	$	15,542
Other real estate owned		-		-		348		348
Total	$	-	$	-	$	15,890	$	15,890

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

	At March 31, 2020
	(Dollars in Thousands)
			Valuation		Range/
	Fair Value		Technique	Unobservable Input	Weighted Ave.
Impaired loans	$	13,914	Property appraisals (1) (3)	Management discount for selling costs, property type and market volatility (2)	6% to 9% discount/ 7%
Other real estate owned	$	406	Property appraisals (1)(3)	Management discount for selling costs, property type and market volatility (2)	22% discount

	At September 30, 2019
	(Dollars in Thousands)
			Valuation		Range/
	Fair Value		Technique	Unobservable Input	Weighted Ave.
Impaired loans	$	15,542	Property appraisals (1) (3)	Management discount for selling costs, property type and market volatility (2)	6% to 9% discount/ 7%
Other real estate owned	$	348	Property appraisals (1)(3)	Management discount for selling costs, property type and market volatility (2)	22% discount

(1)

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

(2)

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

(3)

Includes qualitative adjustments by management and estimated liquidation expenses.

The fair value 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
					March 31, 2020
	Carrying		Fair
	Amount		Value		(Level 1)		(Level 2)		(Level 3)
		(Dollars in Thousands)
Assets:
Cash and cash equivalents	$	76,688	$	76,688	$	76,688	$	-	$	-
Certificates of deposit		2,351		2,351		2,351		-		-
Investment and mortgage-backed
securities available for sale		511,333		511,333		-		511,333		-
Equity securities		37		37		37
Investment and mortgage-backed
securities held to maturity		28,937		30,045		-		30,045		-
Loans receivable, net		572,122		572,192		-		-		572,192
Accrued interest receivable		4,412		4,412		4,412		-		-
Restricted bank stock		15,552		15,552		15,552		-		-
Bank owned life insurance		32,175		32,175		32,175		-		-

Liabilities:
Checking accounts		86,351		86,351		86,351		-		-
Money market deposit accounts		114,215		114,215		114,215		-		-
Passbook, club and statement
savings accounts		77,497		77,497		77,497		-		-
Certificates of deposit		453,421		468,543		-		-		468,543
Advances from FHLB short-term		80,000		80,000		80,000				-
Advances from FHLB long-term		274,624		289,943		-		-		289,943
Accrued interest payable		2,847		2,847		2,847		-		-
Advances from borrowers for taxes and
insurance		2,667		2,667		2,667		-		-
Interest rate swap contracts		21,243		21,243		-		21,243		-

					Fair Value Measurements at
					September 30, 2019
	Carrying		Fair
	Amount		Value		(Level 1)		(Level 2)		(Level 3)
		(Dollars in Thousands)
Assets:
Cash and cash equivalents	$	47,968	$	47,968	$	47,968	$	-	$	-
Certificates of deposit		2,351		2,351		2,351		-		-
Investment and mortgage-backed
securities held to maturity		68,635		69,507		-		69,507		-
Loans receivable, net		585,456		585,476		-		-		585,476
Accrued interest receivable		4,549		4,549		4,549		-		-
Restricted bank stock		16,406		16,406		16,406		-		-
Bank owned life insurance		31,841		31,841		31,841		-		-

Liabilities:
Checking accounts		75,596		75,596		75,596		-		-
Money market deposit accounts		75,766		75,766		75,766		-		-
Passbook, club and statement
savings accounts		80,899		80,899		80,899		-		-
Certificates of deposit		513,183		529,099		-		-		529,099
Accrued interest payable		4,328		4,328		4,328		-		-
Advances from FHLB -short-term		90,000		90,000		90,000		-		-
Advances from FHLB -long-term		286,904		293,839		-		-		293,839
Advances from borrowers for taxes and
insurance		2,332		2,332		2,332		-		-
Interest rate swap contracts		11,241		11,241		11,241		-		-

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/					March 31,		Amortization
	2019		Adjustments		Amortization			2020		Period
Goodwill	$	6,102	$	-	$	-		$	6,102
Core deposit intangible		448		-		(56	)		392		10 years
	$	6,550	$	-	$	(56	)	$	6,494

As of March 31, 2020, the current fiscal year and the future fiscal periods amortization expense for the core deposit intangible is:

(In Thousands)

2020	$	52
2021		93
2022		78
2023		64
2024		49
Thereafter		56
Total	$	392

15.

LEASES

Operating leases in which the Company is the lessee are recorded as operating lease Right of Use (“ROU”) assets and operating lease liabilities, included in other assets and other liabilities, respectively, on the consolidated statement of financial condition. The Company does not currently have any finance leases. Operating lease ROU assets represent the right to use an underlying asset during the lease term and operating lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized as of the date of adoption based on the present value of the remaining lease payments using a discount rate that represents the Company’s incremental borrowing rate at the date of initial application.

Operating lease expense, which is comprised of amortization of the ROU assets and the implicit interest accreted on the operating lease liability, is recognized on a straight line basis over the lease term of the operating basis, and is recorded in office occupancy expense in the consolidated statements of operations. The leases relate to Bank branches with remaining lease terms of generally 5 to 9 years.

As of March 31, 2020, operating lease ROU assets were $1.4 million and operating lease liabilities were $1.5 million. Operating lease costs of $60,000 and $117,000 were recognized for the three and six month periods ended March 31, 2020.

The following table summarizes other information related to our operating leases:

March 31, 2020
Weighted-average remaining lease term - operating leases in years	6.75
Weighted-average discount rate - operating leases	2.0	%

The following table presents aggregate lease maturities and obligations as of March 31, 2020:

(Dollars in Thousands)

2020	$	104
2021		210
2022		213
2023		216
2024		220
2025 and thereafter		647
Total lease payments		1,610
Less: interest		116
Present value of lease liabilities	$	1,494

16.

SUBSEQUENT EVENTS

Paycheck Protection Program

The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, 2020, and provides over $2 trillion in economic relief to individuals and businesses impacted by the COVID-19 pandemic. The CARES Act authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program (“PPP”). As a qualified SBA lender, we were automatically authorized to originate PPP loans. An eligible business can apply for a PPP loan up to the greater of: (1) 2.5 times its average monthly “payroll costs;” or (2) $10 million. PPP loans will have: (a) an interest rate of 1.0%, (b) a two-year loan term to maturity; and (c) principal and interest payments deferred for six months from the date of disbursement. The SBA will guarantee 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP so long as employee and compensation levels of the business are maintained and 75% of the loan proceeds are used for payroll expenses, with the remaining 25% of the loan proceeds used for other qualifying expenses.

As of May 1, 2020, we had received approximately 55 applications for up to $5.0 million of loans under the PPP.

Loan Modification/Troubled Debt Restructurings

As of May 1, 2020 we have modified 90 loans aggregating $146.6 million in loan principal, primarily consisting of deferral of principal and interest payments and extension of maturity date corresponding to the period of deferral. All of the loans provided modifications were performing in accordance with their terms.

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, 2019 (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”) (formerly known as Prudential Savings Bank) as a result of the second-step conversion of Prudential Mutual Holding Company 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 provisions 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 expenses. Our results of operations are also significantly affected by general economic and competitive conditions, especially changes resulting from the COVID-19 pandemic and the governmental actions taken to address it including shelter-in-place orders and required closing of non-essential businesses, as well as 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 located in Philadelphia, Pennsylvania, with nine additional full-service banking offices located in Philadelphia, Delaware and Montgomery 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 2005, the Bank formed PSB Delaware, Inc., a Delaware corporation, as a subsidiary of the Bank. In 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 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. For the quarter ended March 31, 2020, the analysis took into account the exposure to credit deterioration due to the COVID-19 pandemic. 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, especially in light of the COVID-19 pandemic on both the national and local economies;

•

Quality of the Bank’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 a loan-by-loan analysis of certain large dollar commercial real estate loans, construction and land development loans and multi-family loans. Loans not individually reviewed are evaluated as a group using reserve factor percentages based on historical loss experience and the qualitative factors described above. In determining the appropriate level of the general pooled allowance, management makes estimates based on internal risk ratings, which take into account such factors as debt service coverage, loan-to-value ratios and external factors. Estimates are periodically measured against actual loss experience.

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

While management uses the best information available to make loan loss allowance evaluations, adjustments to the allowance may be necessary based on changes in economic and other conditions or changes in accounting guidance. In addition, the Department and the FDIC, as an integral part of their examination processes, periodically review our allowance for loan losses. The Department and the FDIC may require the recognition of adjustments to the allowance for loan losses based on their judgment of information available to them at the time of their 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 March 31, 2020 or September 30, 2019.

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. In light of the COVID-19 pandemic, management is taking into account the effects the pandemic may have on securities and their impairment. The Company determines whether the unrealized losses are temporary or are considered other than temporary. The 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 other real estate owned at fair value on a non-recurring basis.

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

Derivatives. The Company uses interest rate swaps and caps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the payment of either fixed or variable-rate amounts in exchange for the receipt of variable or fixed-rate amounts from a counterparty, respectively. The Company uses interest rate swaps to manage its exposure to changes in fair value. Interest rate swaps designated as fair value hedges involve the receipt of variable-rate payments from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without the exchange of the underlying notional amount.

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.

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. 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 press release, 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; the scope and duration of the COVID-19 pandemic; the effects of the COVID-19 pandemic, including on the Company’s credit quality and operations as well as its impact on general economic conditions; legislative and regulatory changes including actions taken by governmental authorities in response to the COVID-19 pandemic; monetary and fiscal policies of the federal government; changes in tax policies, rates and regulations of federal, state and local tax authorities including the effects of the Tax Reform Act; changes in interest rates, deposit flows, the cost of funds, demand for loan products and the demand for financial services, in each case as may be affected by the COVID-19 pandemic, competition, changes in the quality or composition of the Company’s loan, investment and mortgage-backed securities portfolios; geographic concentration of the Company’s business; fluctuations in real estate values; the adequacy of loan loss reserves; the risk that goodwill and intangibles recorded in the Company’s financial statements will become impaired; changes in accounting principles, policies or guidelines and other economic, competitive, governmental and technological factors affecting the Company’s operations, markets, products, services and fees.

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 most recent Form 10-K, as supplemented by this Form 10-Q and as further supplemented by its quarterly or other reports subsequently filed with the SEC.

Market Overview. The worldwide COVID-19 pandemic has caused significant volatility and disruption in the financial markets both in the United States and globally. We are working with both residential and commercial borrowers to help them meet the unexpected financial challenges stemming from the COVID-19 pandemic and will continue to do so. As of May 1, 2020 we have modified 90 loans aggregating $146.6 million in loan principal, primarily consisting of deferral of principal and interest payments and extension of maturity date corresponding to the period of deferral. All of the loans provided modifications were performing in accordance with their terms

The Company continues to focus on the credit quality of its customers, especially in light of the COVID-19 pandemic, 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.

The following discussion provides further details on the financial condition of the Company at March 31, 2020 and September 30, 2019, and the results of operations for the three and six months ended March 31, 2020 and 2019.

COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2020 AND SEPTEMBER 30, 2019

At March 31, 2020, The Company had total assets of $1.3 billion at both March 31, 2020 and September 30, 2019. At March 31, 2020, the investment portfolio decreased by $51.2 million to $530.3 million as compared to $581.5 million at September 30, 2019 primarily as a result of investment securities sales and calls. Net loans receivable decreased slightly by $13.4 million to $572.1 million at March 31, 2020 from $585.5 million at September 30, 2019 both due to the continued intense competition for quality loans as well as to the sale of a $14.0 million package of long-term, fixed-rate mortgage loans undertaken to address the Company’s interest-rate margin compression.

Total liabilities were $1.1 billion at both March 31, 2020 and September 30, 2019, although deposits and FHLB borrowings decreased modestly as the Company has been allowing higher costing certificates of deposit and FHLB borrowings to run-off as they mature in order to reduce its cost of funds.

Total stockholders’ equity decreased by $7.4 million to $132.2 million at March 31, 2020 from $139.6 million at September 30, 2019. The decrease was primarily due to a $6.0 million decrease in the appreciation in the fair market value of interest rate swaps and available for sale securities. The decrease in the value of the swaps was due to the large decrease in market rates of interest in light of recent periods of declines in market conditions. Also contributing to the decrease were dividend payments totaling $5.1 million and treasury stock repurchases, net of stock plan activity, of $1.3 million. For the six months ended March 31, 2020, the Company repurchased 148,351 shares at an average cost of $13.45 per share. These decreases were partially offset by net income of $5.4 million.

COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2020 AND 2019

Net income. The Company reported net income of $2.9 million, or $0.33 per basic share and $0.32 per diluted share, for the quarter ended March 31, 2020 as compared to $2.3 million, or $0.27 per basic share and $0.26 per diluted share, for the same quarter in fiscal 2019. For the six months ended March 31, 2020, the Company reported net income of $5.4 million, or $0.61 per basic share and $0.60 per diluted share as compared to $4.3 million, or $0.49 per basic and $0.48 per diluted share, for the same period in fiscal 2019.

Net interest income. For the three months ended March 31, 2020, net interest income decreased to $5.8 million as compared to $6.3 million for the same period in fiscal 2019. The decrease reflected the effects of an increase of $411,000, or 8.5%, in interest paid on deposits and borrowings combined with a $124,000 or 1.1%, decrease in interest income. The increase in the interest paid on deposits and borrowings was due to an $82.6 million increase in the average balance of such liabilities. Net-interest income continued to reflect, as well, the effects of margin compression. The yield on interest-earning assets decreased by 38 basis points, to 3.60% for the quarter ended March 31, 2020 from the comparable period in 2019 due to a reduction in market yields of interest in all interest-earning asset categories.

As part of the Company’s strategic lending initiatives, the Company increased its involvement in commercial and construction lending. The yields on such loans are typically tied to the Wall Street Journal Prime Rate (“WSJ Prime”) and adjust rapidly with changes in the WSJ Prime. With the recent unexpected significant decline in the WSJ Prime during the quarter ended March 31, 2020, a significant portion of the Company’s commercial and construction loan portfolio experienced downward adjustments in the interest rates on such loans.

For the six months ended March 31, 2020, net interest income was $12.1 million as compared to $12.3 million for the same period in fiscal 2019. The decrease was due to an increase of $1.9 million, or 21.7%, in interest paid on deposits and borrowings. Partially offsetting the increase in interest expense was an increase in interest income of $1.7 million, or 8.1%. The weighted average cost of borrowings and deposits increased to 1.96% during the six months ended March 31, 2020 from 1.83% during the comparable period in 2019 primarily due to increases in market rates of interest, reflecting in part the competitive market for deposits in the areas in which the Company operates. The increase in interest income was primarily due to the increase in the weighted average balance of interest-earning assets partially offset by the 20 basis point decline in the weighted average yield earned on our interest-earning assets.

For the three and six months ended March 31, 2020, the net interest margin was 1.89% and 1.96%, respectively, compared to 2.26% and 2.27% for the same periods in fiscal 2019, respectively. The margin compression experienced in the 2020 periods in large part reflected the more rapid decline in asset yields as compared to liability costs in response to the declining interest rate environment. The Company’s interest-earning assets are more rate sensitive than its interest-bearing liabilities and as a consequence, the Company’s yield on its interest-earning assets more rapidly experience the impact of declines in market rates.

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 March 31,
	2020								2019
	Average					Average			Average					Average
	Balance		Interest			(1)			Balance		Interest			(1)
	(Dollars in Thousands)
Interest-earning assets:
Investment securities	$	233,774	$	2,010			3.45	%	$	196,030	$	1,681			3.48	%
Mortgage-backed securities		360,822		2,562			2.85			309,638		2,553			3.34
Loans receivable(2)		574,912		6,334			4.42			587,857		6,722			4.64
Other interest-earning assets		58,881		104			0.71			41,244		178			1.75
Total interest-earning assets		1,228,389		11,010			3.60			1,134,769		11,134			3.98
Cash and non interest-bearing balances		2,509								2,339
Other non interest-earning assets		50,648								22,547
Total assets	$	1,281,546							$	1,159,655
Interest-bearing liabilities:
Savings accounts	$	78,491		7			0.04		$	86,826		8			0.04
Money market deposit and NOW accounts		172,790		409			0.95			119,831		209			0.71
Certificates of deposit		464,866		2,449			2.11			601,503		3,323			2.24
Total deposits		716,147		2,865			1.60			808,160		3,540			1.78
Advances from Federal Home Loan Bank		368,336		2,356			2.57			195,007		1,270			2.64
Advances from borrowers for taxes and
insurance		3,205		1			0.13			1,958		1			0.21
Total interest-bearing liabilities		1,087,688		5,222			1.93			1,005,125		4,811			1.94
Non interest-bearing liabilities:
Non interest-bearing demand accounts		18,873								14,962
Other liabilities		33,731								7,333
Total liabilities		1,140,292								1,027,420
Stockholders' equity		141,254								132,235
Total liabilities and stockholders' equity	$	1,281,546							$	1,159,655
Net interest-earning assets	$	140,701							$	129,644
Net interest income; interest rate spread			$	5,788			1.67	%			$	6,323			2.04	%
Net interest margin(3)							1.89	%							2.26	%

Average interest-earning assets to average
interest-bearing liabilities				112.94	%							112.90	%

	Six Months
	Ended March 31,
	2020								2019
	Average					Average			Average					Average
	Balance		Interest			(1)			Balance		Interest			(1)
	(Dollars in Thousands)
Interest-earning assets:
Investment securities	$	232,582	$	4,095			3.51	%	$	189,535	$	3,240			3.43	%
Mortgage-backed securities		366,061		5,355			2.92			267,232		4,308			3.23
Loans receivable(2)		582,709		13,163			4.51			586,559		13,184			4.51
Other interest-earning assets		52,171		224			0.86			46,126		404			1.76
Total interest-earning assets		1,233,523		22,837			3.69			1,089,452		21,136			3.89
Cash and non interest-bearing balances		2,316								2,246
Other non interest-earning assets		53,446								39,078
Total assets	$	1,289,285							$	1,130,776
Interest-bearing liabilities:
Savings accounts	$	79,229		13			0.03		$	88,551		105			0.24
Money market deposit and NOW accounts		150,559		774			1.03			115,768		334			0.58
Certificates of deposit		477,511		5,201			2.17			583,795		6,139			2.11
Total deposits		707,299		5,988			1.69			788,114		6,578			1.67
Advances from Federal Home Loan Bank		379,041		4,716			2.48			175,100		2,217			2.54
Advances from borrowers for taxes and
insurance		2,985		2			0.13			2,272		2			0.18
Total interest-bearing liabilities		1,089,325		10,706			1.96			965,486		8,797			1.83
Non interest-bearing liabilities:
Non interest-bearing demand accounts		18,807								15,644
Other liabilities		32,734								18,917
Total liabilities		1,140,866								1,000,047
Stockholders' equity		148,419								130,729
Total liabilities and stockholders' equity	$	1,289,285							$	1,130,776
Net interest-earning assets	$	144,198							$	123,966
Net interest income; interest rate spread			$	12,131			1.73	%			$	12,339			2.06	%
Net interest margin(3)							1.96	%							2.27	%

Average interest-earning assets to average
interest-bearing liabilities				113.24	%							112.84	%

(1)

Yields and rates for the three and six 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.

Provision for loan losses. The Company recorded a provision for loan losses of $500,000 and $625,000, respectively, for the three and six months ended March 31, 2020, compared to no provisions for loan losses for the same periods in fiscal 2019, primarily as a precaution due to the uncertainty associated with the economic effects of the COVID-19 pandemic and the potential credit deterioration caused thereby. Although no delinquencies had occurred as of March 31, 2020 due to the effects of the COVID-19 pandemic, a number of borrowers have contacted the Company regarding deferments of upcoming loan payments. These deferments are not anticipated to be TDRs as all applicable borrowers were current as of December 31, 2019 and the request for the deferments were related to the current economic conditions caused by the COVID-19 pandemic, not underlying weaknesses within the respective loans. Notwithstanding the foregoing, the Company believes there is a material risk that credit losses and non-performing assets may increase due to current economic conditions and the effects of the COVID-19 pandemic. During the three and six months ending March 31, 2020, the Company recorded three charge offs aggregating $74,000. During the three and six months ended March 31, 2020, the Company recorded recoveries aggregating $7,000 and $17,000, respectively. During the three and six months ended March 31, 2019, the Company recorded no charge offs and one recovery in the amount of $58,000.

The allowance for loan losses totaled $6.0 million, or 1.0% of total loans and 44.3% of total non-performing loans at March 31, 2020 as compared to $5.4 million, or 0.9% of total loans and 38.7% of total non-performing loans at September 30, 2019. The Company believes that the allowance for loan losses at March 31, 2020 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.

At March 31, 2020, the Company’s non-performing assets totaled $13.9 million or 1.1% of total assets as compared to $14.3 million or 1.1% of total assets at September 30, 2019. Non-performing assets at March 31, 2020 included five construction loans aggregating $8.7 million, 24 one-to-four family residential loans aggregating $3.3 million, and four commercial real estate loans aggregating $1.4 million. Non-performing assets at March 31, 2020 also included real estate owned consisting of two single-family residential properties with an aggregate carrying value of $406,000. At March 31, 2020, the Company had four loans totaling $5.3 million that were classified as troubled debt restructurings (“TDRs”). One TDR is on non-accrual and consists of a $423,000 loan secured by a single-family residential property and is performing in accordance with the restructured terms. The three remaining TDRs totaling $4.9 million are also classified as non-accrual and are part of a lending relationship totaling $10.6 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 (see Item 1. Legal Proceeding in Part II of this Form 10-Q). As previously disclosed, subsequent to the commencement of the litigation, the borrower filed for bankruptcy under Chapter 11 (Reorganization) of the federal bankruptcy code in June 2017. The Bank has moved the underlying litigation noted above with the borrower and the Bank from state court to the federal bankruptcy court in which the bankruptcy proceeding is being heard. The state litigation is stayed pending the resolution of the bankruptcy proceedings. Two units have been sold in the project and a portion of the proceeds from such sales have been applied against the outstanding debt.

At March 31, 2020, the Company had $2.8 million of loans delinquent 30-89 days as to interest and/or principal. Such amount consisted of 12 one-to-four family residential loans totaling $1.0 million, one non-residential real estate loan in the amount of $1.7 million and one consumer loan in the amount of $68,000. At September 30, 2019, the Company had $845,000 of loans delinquent 30-89 days as to interest and/or principal. Such amount consisted of seven one-to-four family residential loans totaling $750,000 and two consumer loans totaling $95,000.

At March 31, 2020, the Company also had a total of 18 loans aggregating $2.6 million that had been designated “special mention”. These loans consist of 13 one-to-four family residential loans totaling $1.5 million and five commercial real estate loans totaling $1.1 million. At September 30, 2019, we had a total of 21 loans aggregating $5.5 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 March 31, 2020 and September 30, 2019. At neither date did the Company have any loans 90 days or more past due that were accruing.

	March 31, 2020			September 30, 2019
	(Dollars in Thousands)
Non-accruing loans:
One-to-four family residential	$	3,327		$	3,712
Commercial real estate		1,417			1,473
Construction and land development		8,700			8,750
Total non-accruing loans		13,444			13,935
Other real estate owned, net: (1)		406			348
Total non-performing assets	$	13,850		$	14,283

Total non-performing loans as a percentage of loans, net		2.43	%		2.38	%
Total non-performing loans as a percentage of total assets		1.06	%		1.08	%
Total non-performing assets as a percentage of total assets		1.09	%		1.11	%

(1)

Other 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 $2.7 million and $3.5 million for the three and six month periods ended March 31, 2020, respectively, compared to $542,000 and $922,000, respectively, for the comparable periods in fiscal 2019. The increase experienced in both of the 2020 periods was primarily attributable to the gain on sale of various investment securities of $2.4 million and $2.7 million for the quarter and six month periods ended March 31, 2020, respectively. Also contributing to the increase during the 2020 periods were attributable to the gain on sale of loans of $239,000 and $265,000 for the quarter and six month periods ended March 31, 2020, respectively.

Non-interest expense. For the three and six month periods ended March 31, 2020, non-interest expense increased $314,000 or 7.7% and $343,000 or 4.2%, respectively, compared to the same periods in the prior fiscal year. Non-interest expense increased in both of the fiscal 2020 periods primarily due in part to the hiring of additional personnel in our lending operations to support our expanded lending activities. Partially offsetting these increases were decreases in professional fees and occupancy expense as the Company maintained its focus on the continued implementation of operating efficiencies. The continued improvement of the Company’s efficiency ratio reflects the success of management’s efforts. The efficiency ratio for the six months ended March 31, 2020 improved to 54.3% from 61.7% for the same period in fiscal 2019.

Income tax expense. For the three month period ended March 31, 2020, the Company recorded a tax expense of $572,000, compared to a tax expense of $380,000 for the same period in fiscal 2019. For the six month period ended March 31, 2019, the Company recorded an income tax expense of $1.1 million as compared to a tax expense of $809,000 for the same period in fiscal 2019. The increase in income tax expense in the three and six month periods was commensurate with the increase in pre-tax income.

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. The Company also maintains excess funds in short-term, interest-earning assets that provide additional liquidity. At March 31, 2020, the Company’s cash and cash equivalents amounted to $76.7 million. In addition, its available-for-sale investment securities amounted to an aggregate of $511.3 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 March 31, 2020, the Company had $29.7 million in outstanding commitments to originate loans, not including loans in process. The Company also had commitments under unused lines of credit of $35.3 million and letters of credit outstanding of $1.1 million at March 31, 2020. Certificates of deposit as of March 31, 2020 that are maturing in one year or less totaled $342.4 million.

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 FHLB, of which we are a member. Under terms of the collateral agreement with the FHLB, we pledge residential mortgage loans, certain investment securities as well as our stock in the FHLB as collateral for such advances. At March 31, 2020, we had $354.6 million in outstanding FHLB advances and had the ability to obtain an additional $132.8 million in FHLB advances. The Bank has a line of credit amounting to $12.5 million with ACBB, which has yet to be drawn upon. 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 March 31, 2020 and September 30, 2019 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 deemed to be a small bank holding company.

							To Be
							Well Capitalized
				Required for			Under Prompt
				Capital Adequacy			Corrective Action
	Actual Ratio			Purposes			Provisions
March 31, 2020:
Tier 1 capital (to average assets)
The Company		10.26	%		N/A			N/A
The Bank		10.13	%		4.0	%		5.0	%

Tier 1 common (to risk-weighted assets)
The Company		18.32	%		N/A			N/A
The Bank		18.04	%		4.5	%		6.5	%

Tier 1 capital (to risk-weighted assets)
The Company		18.32	%		N/A			N/A
The Bank		18.04	%		6.0	%		8.0	%

Total capital (to risk-weighted assets)
The Company		19.22	%		N/A			N/A
The Bank		18.94	%		8.0	%		10.0	%

September 30, 2019:
Tier 1 capital (to average assets)
Company		10.89	%		N/A			N/A
Bank		10.49	%		4.0	%		5.0	%

Tier 1 common (to risk-weighted assets)
The Company		18.43	%		N/A			N/A
The Bank		18.10	%		4.5	%		6.5	%

Tier 1 capital (to risk-weighted assets)
Company		18.43	%		N/A			N/A
Bank		18.10	%		6.0	%		8.0	%

Total capital (to risk-weighted assets)
Company		19.27	%		N/A			N/A
Bank		18.94	%		8.0	%		10.0	%

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 President and Chief Executive Officer, Chief Financial Officer, Chief Lending Officer, Treasurer and Controller. The Asset/Liability Committee meets on a regular basis and is responsible for reviewing our asset/liability policies and interest rate risk position. Both the extent and direction of shifts in interest rates are uncertainties that could have an adverse 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 or purchase of hybrid adjustable-rate single-family residential mortgage loans, commercial real estate and construction loans (which typically bear adjustable rates indexed to the WSJ Prime) and increased our portfolio of step-up callable agency bonds and agency issued collateralized mortgage-backed securities (“CMOs”) with short effective lives. In addition, we recently implemented interest rate swaps to reduce funding cost for a five year period. 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 a Company’s interest rate sensitivity “gap.” An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that same time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to affect adversely net interest income while a positive gap would tend to result in an increase in net interest income. Conversely, during a period of falling interest rates, a negative gap would tend to result in an increase in net interest income while a positive gap would tend to adversely affect net interest income.

The following table sets forth the amounts of our interest-earning assets and interest-bearing liabilities outstanding at March 31, 2020, which we expect, based upon certain assumptions, to reprice or mature in each of the future time periods shown (the “GAP Table”). Except as stated below, the amounts of assets and liabilities shown which reprice or mature during a particular period were determined in accordance with the earlier of term to repricing or the contractual maturity of the asset or liability. The table sets forth an approximation of the projected repricing of assets and liabilities at March 31, 2020, on the basis of contractual maturities, anticipated prepayments, and scheduled rate adjustments within a three-month period and subsequent selected time intervals. The loan amounts in the table reflect principal balances expected to be redeployed and/or repriced as a result of contractual amortization and anticipated prepayments of adjustable-rate loans and fixed-rate loans, and as a result of contractual rate adjustments on adjustable-rate loans. Annual prepayment rates for variable-rate and fixed-rate single-family and multi-family residential and commercial mortgage loans are assumed to range from 10.9% to 29.0%. The annual prepayment rate for mortgage-backed securities is assumed to range from 0.9% to 25.3%. 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)	$	26,036		$	63,749		$	142,255		$	94,383		$	198,784		$	525,207
Loans receivable(3)		158,793			77,751			161,261			86,702			92,205			576,712
Other interest-earning assets(4)		72,897			-			17,156			747			-			90,800
Total interest-earning assets	$	257,726		$	141,500		$	320,672		$	181,832		$	290,989		$	1,192,719

Interest-bearing liabilities:
Savings accounts	$	2,025		$	5,780		$	9,709		$	7,987		$	51,996		$	77,497
Money market deposit and NOW accounts		5,877			17,630			17,816			159,243			0			200,566
Certificates of deposit		103,802			128,649			70,157			150,813			-			453,421
Advances from FHLB		8,563			14,604			139,681			171,776			20,000			354,624
Advances from borrowers for taxes and insurance		2,667			-			-			-			-			2,667
Total interest-bearing liabilities	$	122,934		$	166,663		$	237,363		$	489,819		$	71,996		$	1,088,775

Interest-earning assets less interest-bearing liabilities	$	134,792		($	25,163	)	$	83,309		($	307,987	)	$	218,993		$	103,944

Cumulative interest-rate sensitivity gap (5)	$	134,792		$	109,629		$	192,938		($	115,049	)	$	103,944

Cumulative interest-rate gap as a percentage of total assets at March 31, 2020		10.80	%		8.82	%		14.02	%		-1.20	%		8.03	%

Cumulative interest-earning assets as a percentage of cumulative interest-bearing liabilities at March 31, 2020		209.65	%		137.86	%		136.61	%		88.68	%		109.55	%

(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 March 31, 2020 and reflects the changes to NPV as a result of immediate and sustained changes in interest rates as indicated.

Change in									NPV as % of Portfolio
Interest Rates	Net Portfolio								Value of
In Basis Points	Value								Assets
(Rate Shock)	Amount		$ Change			% Change			NPV Ratio			Change
	(Dollars in Thousands)
300	$	101,362	$	(37,970	)		(27.25	)%		8.84	%		(2.10	)%
200		115,562		(23,770	)		(17.06	)%		9.72	%		(1.22	)%
100		130,415		(8,917	)		(6.40	)%		10.57	%		(0.37	)%
Static		139,332		-			-			10.94	%		-
(100)		131,727		(7,605	)		(5.46	)%		10.15	%		(0.79	)%
(200)		141,833		2,501			1.79	%		10.73	%		(0.21	)%
(300)		167,098		27,766			19.93	%		12.42	%		1.48	%

At September 30, 2019, the Company’s NPV was $159.6 million or 12.5% of the market value of assets. Following a 200 basis point increase in interest rates, the Company’s “post shock” NPV would be $133.0 million or 16.7% of the market value of assets. Conversely, a 200 basis point decrease in interest rates would result in a post shock NPV of $140.6 million or 11.9% 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 March 31, 2020, 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, 2019, 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

On March 31, 2016, Island View Properties, Inc. t/a Island View Crossing II and Renato J. Gualtieri (“Plaintiffs”) filed a complaint against Prudential Bank (formerly known as Prudential Savings Bank)in the Court of Common Pleas of Philadelphia County (the “CCP Action”) asserting, among other things, that the Bank breached various loan agreements and related agreements for a development known as Island View Crossing. In its complaint, Plaintiffs seek the amount of $27 million. The Company filed objections to the complaint seeking to dismiss significant portions of Plaintiffs’ claims. On August 31, 2016, the Court dismissed the majority of the claims. After that order, the Company filed an answer denying Plaintiffs’ claims as well as a counterclaim seeking damages for failure to pay the outstanding loans and not completing the project. Discovery was ongoing and a trial was scheduled for October 2, 2017. On June 30, 2017, Plaintiff Island View Crossing II filed a Chapter 11 bankruptcy and on or about July 18, 2017, the Bank removed the CCP Action to Bankruptcy Court (the “Removed Action”).

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

Currently, the parties are proceeding through the discovery phase of litigation. Fact discovery is scheduled to close on or about July 1, 2020. A pretrial conference is currently scheduled for some time after August 19, 2020. Given the stage of the case and the continuing discovery, we are unable to determine the likelihood of an unfavorable outcome at this time. The Bank intends to vigorously defend against all claims.

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

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

On August 26, 2019, the Bank filed a motion to dismiss a number of the claims filed by the Trustee. Dates for discovery and any potential trial have not been set by the bankruptcy court. Given the relatively early stages of the case, we are unable to determine the likelihood of an unfavorable outcome at this time. The Bank intends to vigorously defend against the claims.

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

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

On August 26, 2019, the Bank filed a motion to dismiss a number of the claims filed by the Trustee. Dates for discovery and any potential trial have not been set by the Bankruptcy Court. Given the relatively early stage of the case, we are unable to determine the likelihood of an unfavorable outcome at this time. The Bank intends to vigorously defend against the claims.

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

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 fiscal year ended September 30, 2019 (“2019 Annual Report”), as such factors could materially affect the Company’s business, financial condition, or future results of operations. Except as set forth below, as of March 31, 2020, no material changes have occurred to the risk factors of the Company as reported in the 2019 Annual Report except for the risk factors described below. The risks described in the 2019 Annual Report 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. The risk factors set forth below supplement the risk factors included in the 2019 Annual Report.

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

The Company believes the worldwide COVID-19 pandemic has negatively affected our business and is likely to continue to do so. The outbreak has caused significant volatility and disruption in the financial markets both in the United States and globally. If COVID-19, or another highly infectious or contagious disease, continues to spread or the response to contain it is unsuccessful, we could continue to experience material adverse effects on our business, financial condition, liquidity, and results of operations. The extent of such effects will depend on future developments which are highly uncertain and cannot be predicted, including the geographic spread of the novel coronavirus, the overall severity of the disease, the duration of the outbreak, the measures that may be taken by various governmental authorities in response to the outbreak (such as continued quarantines and travel restrictions) and the possible further impacts on the global economy. The Company’s operations may also be disrupted if significant portions of its workforce are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic, and the Company has already temporarily limited access to certain of its branches and offices. In response to the pandemic, the Company has also offered fee waivers, payment deferrals, and other expanded assistance to small business and personal lending customers. Future governmental actions may require these and other types of customer-related responses.

Any significant decrease in economic activity or resulting decline in the housing market could have an adverse effect on the Company’s investments in mortgage real estate assets, including the need to recognize credit losses in its loan portfolio and increases in the allowance for loan losses. In addition, as interest rates continue to decline as a result of demand for U.S. Treasury securities and the activities of the Federal Reserve, prepayments on our assets are likely to increase due to refinancing activity, which could have a material adverse effect on our result of operations. Similarly, because of changing economic and market conditions affecting issuers, the Company may be required to recognize impairments on the securities it holds as well as reductions in other comprehensive income.

Further, in light of the current environment related to the COVID-19 pandemic on the overall economy, such as rising unemployment levels or changes in consumer behavior related to loans as well as government policies and pronouncements, borrowers may experience difficulties meeting their obligations or seek to forbear payment on or refinance their mortgage loans to avail themselves of lower rates, which may adversely affect our result of operations.

The Company cannot predict the effect that government policies, laws and plans adopted in response to the COVID-19 pandemic and global recessionary economic conditions will have on us.

Governments have adopted, and the Company expects will continue to adopt, policies, laws and plans intended to address the COVID-19 pandemic and adverse developments in the credit, financial and mortgage markets. The Company cannot assure you that these programs will be effective, sufficient or otherwise have a positive impact on our business.

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

(a)

and (b) Not applicable.

(c)

The Company’s repurchase of equity securities for the three months ended March 31, 2020 were as follows:

Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)		Maximum Number of Shares that May Yet Purchased Under Plans or Programs (1)
January 1 - 31, 2020		-	$	-		-		833,000
February 1 - 29, 2020		-		-		-		833,000
March 1 - 31, 2020		152,009		13.45		152,009		680,991
		152,009	$	13.45		152,009

(1)

On November 19, 2018, the Company announced that the Board of Directors had approved a third stock repurchase program authorizing the Company to repurchase up 900,000 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
3.2		Amended and Restated Bylaws of Prudential Bancorp, Inc.
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: May 11, 2020	By: /s/ Dennis Pollack
	Dennis Pollack President and Chief Executive Officer

Date: May 11, 2020	By: /s/ Jack E. Rothkopf
	Jack E. Rothkopf Senior Vice President, Chief Financial Officer and Treasurer

PRUDENTIAL BANCORP, INC. - FORM 10-Q - May 11, 2020

Attached files

PRUDENTIAL BANCORP, INC. Reports