10-Q 1 t82890_10q.htm FORM 10-Q

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

 

 Washington, DC 20549

 

FORM 10-Q

   
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the quarterly period ended June 30, 2015
  OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the transition period from                     to
  Commission file number: 000-55084

 

Prudential Bancorp, Inc.
(Exact Name of Registrant as Specified in Its Charter)

   
Pennsylvania 46-2935427
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
1834 Oregon Avenue 19145
Philadelphia, Pennsylvania Zip Code
(Address of Principal Executive Offices)  

 

(215) 755-1500
(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes    No

 

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

Yes    No

 

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

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

 

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

Yes    No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practical date: as of July 31, 2015, there were 8,612,938 shares outstanding.

 

 
 

 

PRUDENTIAL BANCORP, INC. AND SUBSIDIARIES

 

TABLE OF CONTENTS

         
        PAGE
         
PART I   FINANCIAL INFORMATION:    
         
  Item 1. Consolidated Financial Statements    
         
    Unaudited Consolidated Statements of Financial Condition June 30, 2015 and September 30, 2014   2
         
    Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2015 and 2014   3
         
    Unaudited Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended June 30, 2015 and 2014   4
         
    Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended June 30, 2015 and 2014   5
         
    Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2015 and 2014   6
         
    Notes to Unaudited Consolidated Financial Statements   7
         
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   41
         
  Item 3. Quantitative and Qualitative Disclosures About Market Risk   55
         
  Item 4. Controls and Procedures   55
         
PART II   OTHER INFORMATION    
         
  Item 1. Legal Proceedings   56
         
  Item 1A. Risk Factors   56
         
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   56
         
  Item 3. Defaults Upon Senior Securities   56
         
  Item 4. Mine Safety Disclosures   56
         
  Item 5. Other Information   57
         
  Item 6. Exhibits   57
         
  SIGNATURES   58

 

1
 

 

PRUDENTIAL BANCORP, INC. AND SUBSIDIARIES
 
UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
               
    June 30,
2015
  September 30,
2014
 
    (Dollars in Thousands,  
ASSETS   Except Per Share Data)  
Cash and amounts due from depository institutions   $ 1,974   $ 2,025  
Interest-bearing deposits     18,331     43,357  
               
Total cash and cash equivalents     20,305     45,382  
               
Investment and mortgage-backed securities available for sale (amortized cost—June 30, 2015, $77,984; September 30, 2014, $59,262)     76,992     57,817  
Investment and mortgage-backed securities held to maturity (fair value—June 30, 2015, $69,450; September 30, 2014, $79,092)     70,003     80,840  
Loans receivable—net of allowance for loan losses (June 30, 2015, $2,673; September 30, 2014, $2,425)     317,487     321,063  
Accrued interest receivable     1,716     1,748  
Real estate owned     -     360  
Federal Home Loan Bank stock—at cost     369     1,221  
Office properties and equipment—net     1,402     1,331  
Bank owned life insurance     12,638     12,377  
Prepaid expenses and other assets     1,682     2,213  
Deferred tax asset—net     1,169     1,131  
TOTAL ASSETS   $ 503,763   $ 525,483  
               
LIABILITIES AND STOCKHOLDERS’ EQUITY              
LIABILITIES:              
Deposits:              
Noninterest-bearing   $ 2,177   $ 2,327  
Interest-bearing     373,926     388,698  
Total deposits     376,103     391,025  
Advances from Federal Home Loan Bank     -     340  
Accrued interest payable     939     1,486  
Advances from borrowers for taxes and insurance     2,802     1,240  
Accounts payable and accrued expenses     1,926     1,967  
               
Total liabilities     381,770     396,058  
               
STOCKHOLDERS’ EQUITY:              
Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued     -     -  
Common stock, $.01 par value, 40,000,000 shares authorized; 9,544,809 issued and 8,849,938 outstanding at June 30, 2015 and 9,544,809 issued and outstanding at September 30, 2014     95     95  
Additional paid-in capital     95,130     94,397  
Unearned Employee Stock Ownership Plan shares     (5,020 )   (5,302 )
Treasury stock, at cost: 694,871 shares at June 30, 2015     (8,853 )   -  
Retained earnings     41,296     41,188  
Accumulated other comprehensive loss     (655 )   (953 )
               
Total stockholders’ equity     121,993     129,425  
               
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY   $ 503,763   $ 525,483  

 

See notes to unaudited consolidated financial statements.

 

2
 

  

PRUDENTIAL BANCORP, INC. AND SUBSIDIARIES
 
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
                           
    Three Months Ended
June 30,
  Nine Months Ended
June 30,
 
    2015   2014   2015   2014  
    (Dollars in Thousands, Except Per Share Data)  
INTEREST INCOME:                          
Interest and fees on loans   $ 3,085   $ 3,184   $ 9,629   $ 9,489  
Interest on mortgage-backed securities     465     378     1,331     1,054  
Interest and dividends on investments     487     553     1,587     1,639  
Interest on interest-bearing assets     18     21     52     108  
                           
Total interest income     4,055     4,136     12,599     12,290  
INTEREST EXPENSE:                          
Interest on deposits     851     826     2,623     2,583  
                           
Total interest expense     851     826     2,623     2,583  
                           
NET INTEREST INCOME     3,204     3,310     9,976     9,707  
                           
PROVISION FOR LOAN LOSSES     210     -     585     -  
                           
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES     2,994     3,310     9,391     9,707  
                           
NON-INTEREST INCOME:                          
Fees and other service charges     87     103     283     289  
Gain on sale of loans, net     -     -     138     -  
Gain on sale of office properties, net     231     -     2,024     -  
Gain on sale of securities available for sale, net     -     -     -     274  
Total other-than-temporary impairment losses     -     (1 )   -     (16 )
Portion of loss recognized in other comprehensive income, before taxes     -     -     -     -  
Net impairment losses recognized in earnings     -     (1 )   -     (16 )
Income from bank owned life insurance     84     75     261     169  
Other     43     17     77     52  
Total non-interest income     445     194     2,783     768  
                           
NON-INTEREST EXPENSE:                          
Salaries and employee benefits     2,061     1,578     5,686     4,747  
Data processing     97     103     309     323  
Professional services     303     196     923     719  
Office occupancy     195     122     530     365  
Depreciation     84     81     239     244  
Payroll taxes     96     85     311     293  
Director compensation     107     70     275     241  
Deposit insurance     95     54     231     202  
Real estate owned expense (recovery)     (2 )   87     27     151  
Advertising     37     18     140     162  
Other     359     362     1,198     1,066  
Total non-interest expense     3,432     2,756     9,869     8,513  
                           
INCOME BEFORE INCOME TAXES     7     748     2,305     1,962  
                           
INCOME TAXES:                          
Current (benefit) expense     (45 )   321     279     496  
Deferred expense (benefit)     5     (94 )   (193 )   72  
                           
Total income tax (benefit) expense     (40 )   227     86     568  
                           
NET INCOME   $ 47   $ 521   $ 2,219   $ 1,394  
                           
BASIC EARNINGS PER SHARE   $ 0.01   $ 0.06   $ 0.26   $ 0.15  
                           
DILUTED EARNINGS PER SHARE   $ 0.01   $ 0.06   $ 0.26   $ 0.15  
                           
DIVIDENDS PER SHARE   $ 0.18   $ 0.03   $ 0.24   $ 0.03  

  

See notes to unaudited consolidated financial statements.

 

3
 

  

PRUDENTIAL BANCORP, INC. AND SUBSIDIARIES
 
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                           
    Three months ended June 30,   Nine months ended June 30,  
    2015   2014   2015   2014  
                           
    (Dollars in Thousands)   (Dollars in Thousands)  
Net income   $ 47   $ 521   $ 2,219   $ 1,394  
                           
Unrealized holding (losses) gains on available-for-sale securities     (1,145 )   932     452     1,232  
Tax effect     389     (317 )   (154 )   (419 )
Reclassification adjustment for net gains realized in net income     -     -     -     (274 )
Tax effect     -     -     -     93  
Reclassification adjustment for other-than-temporary impairment losses on debt securities     -     1     -     16  
Tax effect     -     -     -     (5 )
Total other comprehensive (loss) income     (756 )   616     298     643  
                           
Comprehensive (loss) Income   $ (709 ) $ 1,137   $ 2,517   $ 2,037  

 

See notes to unaudited consolidated financial statements.

 

4
 

  

PRUDENTIAL BANCORP, INC. AND SUBSIDIARIES
 
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

                                           
    Common
Stock
  Additional
Paid-In
Capital
  Unearned
ESOP
Shares
  Treasury
Stock
  Retained
Earnings
  Accumulated
Other
Comprehensive
(Loss) Income
  Total
Stockholders’
Equity
 
    (Dollars in Thousands, Except Per Share Data)  
BALANCE, OCTOBER 1, 2014   $ 95   $ 94,397   $ (5,302 ) $ -   $ 41,188   $ (953 ) $ 129,425  
                                             
Net income                             2,219           2,219  
                                             
Other comprehensive income                                   298     298  
                                             
Dividends paid ($0.24 per share)                             (2,111 )         (2,111 )
                                             
Excess tax benefit from stock                                            
compensation plans           118                             118  
                                             
Purchase of treasury stock (694,871 shares)                       (8,853 )               (8,853 )
                                             
Stock option expense           241                             241  
                                             
Restricted stock expense           173                             173  
                                             
ESOP shares committed to be released (26,638 shares)           201     282                       483  
                                             
BALANCE, JUNE 30, 2015   $ 95   $ 95,130   $ (5,020 ) $ (8,853 ) $ 41,296   $ (655 ) $ 121,993  
                                             
    Common
Stock
  Additional
Paid-In
Capital
  Unearned
ESOP
Shares
  Treasury
Stock
  Retained Earnings   Accumulated
Other
Comprehensive
(Loss) Income
  Total
Stockholders’ Equity
 
    (Dollars in Thousands, Except Per Share Data)  
BALANCE, OCTOBER 1, 2013   $ 118   $ 55,297   $ (2,565 ) $ (31,625 ) $ 39,979   $ (1,292 ) $ 59,912  
                                             
Net income                             1,394           1,394  
                                             
Other comprehensive income                                   643     643  
                                             
Dividends paid ($0.03 per share)                             (286 )         (286 )
                                             
Second-step conversion offering     (23 )   38,725           31,625                 70,327  
                                             
Excess tax benefit from stock compensation plans           69                             69  
                                             
Stock option expense           116                             116  
                                             
Restricted stock expense           107                             107  
                                             
Purchase of ESOP shares (285,664 shares)                 (3,089 )                     (3,089 )
                                             
ESOP shares committed to be released (23,155 shares)           5     258                       263  
                                             
BALANCE, JUNE 30, 2014   $ 95   $ 94,319   $ (5,396 ) $ -   $ 41,087   $ (649 ) $ 129,456  

 

See notes to unaudited consolidated financial statements.

 

5
 

  

PRUDENTIAL BANCORP, INC. AND SUBSIDIARIES
 
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
               
    Nine Months Ended June 30,  
    2015   2014  
           
OPERATING ACTIVITIES:   (Dollars in Thousands)  
Net income   $ 2,219   $ 1,394  
Adjustments to reconcile net income to net cash provided by operating activities:              
Depreciation     239     244  
Net accretion of premiums/discounts     (192 )   (264 )
Provision for loan losses     585     -  
Net amortization of deferred loan fees and costs     187     177  
Impairment charge on investment and mortgage-backed securities     -     16  
Share-based compensation expense     414     292  
Gain from sale of investment and mortgage-backed securities     -     (274 )
Income from bank owned life insurance     (261 )   (169 )
Gain from sale of loans     (138 )   -  
Originations of loans held for sale     (2,400 )   -  
Proceeds from sale of loans held for sale     2,538     -  
Gain from sale of office properties     (2,024 )   -  
Compensation expense of ESOP     483     263  
Deferred income tax (benefit) expense     (193 )   72  
Changes in assets and liabilities which used cash:              
Accrued interest receivable     32     (34 )
Prepaid expenses and other assets     532     1,114  
Accrued interest payable     (547 )   (612 )
Accounts payable and accrued expenses     (41 )   73  
Net cash provided by operating activities     1,433     2,292  
INVESTING ACTIVITIES:              
Purchase of investment and mortgage-backed securities held to maturity     -     (7,000 )
Purchase of investment and mortgage-backed securities available for sale     (22,837 )   (17,452 )
Loans originated or acquired     (53,139 )   (54,178 )
Principal collected on loans     55,943     38,756  
Principal payments received on investment and mortgage-backed securities:              
Held-to-maturity     10,875     7,142  
Available-for-sale     4,268     2,856  
Proceeds from redemption of FHLB stock     852     -  
Purchase of FHLB Stock     -     (40 )
Proceeds from sale of investments and mortgage-backed securities     -     1,321  
Purchase of bank owned life insurance     -     (5,000 )
Proceeds from sale of real estate owned     360     29  
Proceeds from sale of office properties     2,114     -  
Purchases of equipment     (400 )   (93 )
Net cash used in investing activities     (1,964 )   (33,659 )
FINANCING ACTIVITIES:              
Net decrease in demand deposits, NOW accounts,and savings accounts     (5,738 )   (2,382 )
Redemption of funds held in escrow relating to second-step conversion     -     (145,675 )
Net decrease in certificates of deposit     (9,184 )   (17,789 )
Increase in advances from borrowers for taxes and insurance     1,562     889  
Repayment of advance from the FHLB     (340 )   -  
Cash dividends paid     (2,111 )   (286 )
Issuance of common stock relating to second-step conversion     -     38,702  
Cancelation of treasury stock     -     31,625  
Purchase of stock for ESOP     -     (3,089 )
Purchase of treasury stock     (8,853 )   -  
Excess tax benefit related to stock compensation plans     118     69  
Net cash used in financing activities     (24,546 )   (97,936 )
               
NET DECREASE IN CASH AND CASH EQUIVALENTS     (25,077 )   (129,303 )
               
CASH AND CASH EQUIVALENTS—Beginning of period     45,382     158,984  
               
CASH AND CASH EQUIVALENTS—End of period   $ 20,305   $ 29,681  
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:              
Interest paid on deposits and advances from Federal              
Home Loan Bank   $ 3,170   $ 3,195  
               
Income taxes paid   $ 475   $ -  
SUPPLEMENTAL DISCLOSURES OF NONCASH ITEMS:              
Real estate acquired in settlement of loans   $ -   $ 83  

 

See notes to unaudited consolidated financial statements.

 

6
 

  

PRUDENTIAL BANCORP, INC. AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
   
1. SIGNIFICANT ACCOUNTING POLICIES
   
  Organization –On October 9, 2013, Prudential Mutual Holding Company (“MHC”) and Prudential Bancorp of Pennsylvania, Inc. (“Old Prudential”), the Pennsylvania-chartered mid-tier holding company for Prudential Savings Bank (the “Bank”), completed a reorganization and conversion (the “second-step conversion”), pursuant to which Prudential Bancorp, Inc., a new Pennsylvania corporation (“Prudential” or the “Company”), became the holding company for the Bank and the MHC and Old Prudential ceased to exist. In connection with the second-step conversion, 7,141,602 shares of common stock, par value $0.01 per share, of Prudential were sold in a subscription offering to certain depositors of the Bank for $10 per share or $71.4 million in the aggregate (the “Offering”), and 2,403,207 shares of common stock were issued in exchange for the outstanding shares of common stock of Old Prudential, which were held by the “public” shareholders of Old Prudential. Each share of common stock of Old Prudential was converted into right to receive 0.9442 shares of common stock of the Company in the second-step conversion. As a result of the second-step conversion, the former MHC and Old Prudential were merged into the Company and 2,540,255 (pre-conversion) treasury shares were cancelled.
   
  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 and six full-service branch offices. Five of the banking offices are located in Philadelphia (Philadelphia County), one is in Drexel Hill, Delaware County, Pennsylvania and the remaining branch is located in Chalfont, Bucks County, Pennsylvania. The Bank maintains ATMs at all seven 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, Prudential 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 nine months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2015, or any other period. These financial statements should be read in conjunction with the audited consolidated financial statements of Prudential Bancorp, Inc. and the accompanying notes thereto included in the Company’s Annual Report on Form 10-K/A for the fiscal year ended September 30, 2014.
   
  Use of Estimates in the Preparation of Financial StatementsThe 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 expense 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.

 

7
 

  

   
  Share-Based Compensation – The Company accounts for stock-based compensation issued to employees, and where appropriate, non-employees, at fair value. Under fair value provisions, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the appropriate vesting period using the straight-line method. The amount of stock-based compensation recognized at any date must at least equal the portion of the grant date fair value of the award that is vested at that date and as a result it may be necessary to recognize the expense using a ratable method. Determining the fair value of stock-based awards at the date of grant requires judgment, including estimating the expected term of the stock options and the expected volatility of the Company’s stock. In addition, judgment is required in estimating the amount of stock-based awards that are expected to be forfeited. If actual results differ significantly from these estimates or different key assumptions were used, it could have a material effect on the Company’s consolidated financial statements.
   
  Dividends with respect to non-vested share awards granted pursuant to the Company’s 2008 Recognition and Retention Plan (“Plan”) and held in the Trust (the “Trust”) are held for the benefit of the recipients and are paid out proportionately by the Trust to the recipients of stock awards granted pursuant to the Plan as soon as practicable after the stock awards are earned. A recipient of a share award granted under the 2014 Stock Incentive Plan will not be entitled to receive any dividends declared on the common stock subject to the award until earned.
   
  Treasury Stock – Stock held in treasury by the Company is accounted for using the cost method, which treats stock held in treasury as a reduction to total stockholders’ equity. During the nine month period ended June 30, 2015, the Company repurchased 694,871 shares at an approximate total cost of $8.9 million.
   
  FHLB Stock – FHLB stock is classified as a restricted equity security because ownership is restricted and there is not an established market for its resale. FHLB stock is carried at cost and is evaluated for impairment when certain conditions warrant further consideration. Management concluded that the FHLB stock was not impaired at June 30, 2015.
   
  Recent Accounting Pronouncements
   
  In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU” or “Update”) 2014-01, Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects. The amendments in this Update permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The amendments in this Update should be applied retrospectively to all periods presented. A reporting entity that uses the effective yield method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those preexisting investments. The amendments in this Update are effective for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. Early adoption is permitted. This ASU is not expected to have a significant impact on the Company’s financial statements.
   
  In January 2014, the FASB issued ASU 2014-04, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The amendments in this Update clarify that an in-substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to requirements of the applicable jurisdiction. The amendments in this Update are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. An entity can elect to adopt the amendments in this Update using either a modified retrospective transition method or a prospective transition method. This ASU did not have a significant impact on the Company’s financial statements.

 

8
 

  

   
  In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (a new revenue recognition standard). The Update’s core principle is that a company will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this update specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. This Update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. This ASU is not expected to have a significant impact on the Company’s financial statements.
   
  In June 2014, the FASB issued ASU 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The amendments in this Update change the accounting for repurchase-to-maturity transactions to secured borrowing accounting. For repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. The amendments also require enhanced disclosures. The accounting changes in this Update are effective for the first interim or annual period beginning after December 15, 2014. An entity is required to present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Earlier application is prohibited. The disclosure for certain transactions accounted for as a sale is required to be presented for interim and annual periods beginning after December 15, 2014, and the disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. The disclosures are not required to be presented for comparative periods before the effective date. This ASU did not have a significant impact on the Company’s financial statements.
   
  In June 2014, the FASB issued ASU 2014-12, Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments when the Terms of an Award Provide that a Performance Target Could Be Achieved After the Requisite Service Period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The amendments in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. Entities may apply the amendments in this Update either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this Update as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date. Additionally, if retrospective transition is adopted, an entity may use hindsight in measuring and recognizing the compensation cost. This ASU is not expected to have a significant impact on the Company’s financial statements.
   
  In August 2014, the FASB issued ASU 2014-14, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40). The amendments in this Update require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) the loan has a government guarantee that is not separable from the loan before foreclosure, (2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim, and (3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The amendments in this Update are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. This ASU is not expected to have a significant impact on the Company’s financial statements.

 

9
 

  

   
  In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements -Going Concern (Subtopic 205-40). The amendments in this Update provide guidance in accounting principles generally accepted in the United States of America about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The amendments in this Update are first effective for the annual period ending after December 15, 2016, and for annual periods and interim periods within such annual periods thereafter. Early application is permitted. This ASU is not expected to have a significant impact on the Company’s financial statements.
   
  In November 2014, the FASB issued ASU 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity (a consensus of the FASB Emerging Issues Task Force). This ASU clarifies how current U.S. GAAP should be interpreted in subjectively evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Public business entities are required to implement the new requirements in fiscal years and interim periods within those fiscal years beginning after December 15, 2015. This ASU is not expected to have a significant impact on the Company’s financial statements.
   
  In November 2014, the FASB issued ASU 2014-17, Business Combinations (Topic 805): Pushdown Accounting. The amendments in this Update apply to the separate financial statements of an acquired entity and its subsidiaries that are a business or nonprofit activity (either public or nonpublic) upon the occurrence of an event in which an acquirer (an individual or an entity) obtains control of the acquired entity. An acquired entity may elect the option to apply pushdown accounting in the reporting period in which the change-in-control event occurs. If pushdown accounting is not applied in the reporting period in which the change-in-control event occurs, an acquired entity will have the option to elect to apply pushdown accounting in a subsequent reporting period to the acquired entity’s most recent change-in-control event. The amendments in this Update are effective on November 18, 2014. After the effective date, an acquired entity can make an election to apply the guidance to future change-in-control events or to its most recent change-in-control event. This ASU is not expected to have a significant impact on the Company’s financial statements.
   
  In January 2015, the FASB issued ASU 2015-01, Income Statement –Extraordinary and Unusual Items, as part of its initiative to reduce complexity in accounting standards. This Update eliminates from GAAP the concept of extraordinary items. The amendments in this Update are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively. A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. This ASU is not expected to have a significant impact on the Compny’s financial statements.
   
  In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810). The amendments in this Update affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments (1) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities; (2) eliminate the presumption that a general partner should consolidate a limited partnership; (3) affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and (4) provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The amendments in this Update are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, and for interim periods within fiscal years beginning after December 15, 2017. This ASU is not expected to have a significant impact on the Company’s financial statements.

 

10
 

  

   
  In April 2015, the FASB issued ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30), as part of its initiative to reduce complexity in accounting standards. To simplify presentation of debt issuance costs, the amendments in this Update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this Update. For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. An entity should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. This ASU is not expected to have a significant impact on the Company’s financial statements.
   
  In April 2015, the FASB issued ASU 2015-04, Compensation-Retirement Benefits (Topic 715), as part of its initiative to reduce complexity in accounting standards. For an entity with a fiscal year-end that does not coincide with a month-end, the amendments in this Update provide a practical expedient that permits the entity to measure defined benefit plan assets and obligations using the month-end that is closest to the entity’s fiscal year-end and apply that practical expedient consistently from year to year. The practical expedient should be applied consistently to all plans if an entity has more than one plan. The amendments in this Update are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. Earlier application is permitted. This ASU is not expected to have a significant impact on the Company’s financial statements.
   
  In April 2015, the FASB issued ASU 2015-05, Intangible – Goodwill and Other Internal Use Software (Topic 350-40), as part of its initiative to reduce complexity in accounting standards. This guidance will help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement. The amendments in this Update provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. For public business entities, the FASB decided that the amendments will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. For all other entities, the amendments will be effective for annual periods beginning after December 15, 2015, and interim periods in annual periods beginning after December 15, 2016. Early adoption is permitted for all entities. This ASU is not expected to have a significant impact on the Company’s financial statements.
   
  In April 2015, the FASB issued ASU 2015-06, Earnings Per Share (Topic 260): Effects on Historical Earnings per Unit of Master Limited Partnership Dropdown Transactions. Topic 260, Earnings Per Share, contains guidance that addresses master limited partnerships that originated from Emerging Issues Task Force (EITF) Issue No. 07-4, Application of the Two-Class Method under FASB Statement No. 128 to Master Limited Partnerships. Under Topic 260, master limited partnerships apply the two-class method of calculating earnings per unit because the general partner, limited partners, and incentive distribution rights holders each participate differently in the distribution of available cash in accordance with the contractual rights contained in the partnership agreement. The amendments in this Update specify that for purposes of calculating historical earnings per unit under the two-class method, the earnings (losses) of a transferred business before the date of a dropdown transaction should be allocated entirely to the general partner. In that circumstance, the previously reported earnings per unit of the limited partners (which is typically the earnings per unit measure presented in the financial statements) would not change as a result of the dropdown transaction. Qualitative disclosures about how the rights to the earnings (losses) differ before and after the dropdown transaction occurs for purposes of computing earnings per unit under the two-class method also are required. The amendments in this Update are effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Earlier application is permitted. This ASU is not expected to have a significant impact on the Company’s financial statements.

 

11
 

  

   
  In May 2015, the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). The Update applies to reporting entities that elect to measure the fair value of an investment using the net asset value per share (or its equivalent) practical expedient. Under the amendments in this Update, investments for which fair value is measured at net asset value per share (or its equivalent) using the practical expedient should not be categorized in the fair value hierarchy. Removing those investments from the fair value hierarchy not only eliminates the diversity in practice resulting from the way in which investments measured at net asset value per share (or its equivalent) with future redemption dates are classified, but also ensures that all investments categorized in the fair value hierarchy are classified using a consistent approach. Investments that calculate net asset value per share (or its equivalent), but for which the practical expedient is not applied will continue to be included in the fair value hierarchy. A reporting entity should continue to disclose information on investments for which fair value is measured at net asset value (or its equivalent) as a practical expedient to help users understand the nature and risks of the investments and whether the investments, if sold, are probable of being sold at amounts different from net asset value. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. A reporting entity should apply the amendments retrospectively to all periods presented. The retrospective approach requires that an investment for which fair value is measured using the net asset value per share practical expedient be removed from the fair value hierarchy in all periods presented in an entity’s financial statements. Earlier application is permitted. This ASU is not expected to have a significant impact on the Company’s financial statements.
   
  In May 2015, the FASB issued ASU 2015-08, Business Combinations - Pushdown Accounting - Amendment to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115. This ASU was issued to amend various SEC paragraphs pursuant to the issuance of Staff Accounting Bulletin No. 115 which deleted certain topics related to push down accounting in order to make the SEC’s interpretive guidance consistent with current accounting and audit guidance. This ASU is not expected to have a significant impact on the Company’s financial statements.
   
2. EARNINGS PER SHARE
   
  Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding, net of any treasury shares, during the period. Diluted earnings per share is calculated by dividing net income available to common shareholders 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.

  

12
 

  

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

                           
    Three Months Ended June 30,  
           
    2015   2014  
    Basic   Diluted   Basic   Diluted  
    (Dollars in Thousands, Except Per Share Data)  
       
Net income   $ 47   $ 47   $ 521   $ 521  
Weighted average shares outstanding     8,195,086     8,195,086     8,971,874     8,971,874  
Effect of dilutive common stock equivalents     -     165,431     -     216,541  
Adjusted weighted average shares used in earnings per share computation     8,195,086     8,360,517     8,971,874     9,188,415  
Earnings per share - basic and diluted   $ 0.01   $ 0.01   $ 0.06   $ 0.06  
                           
    Nine Months Ended June 30,  
           
    2015   2014  
    Basic   Diluted   Basic   Diluted  
    (Dollars in Thousands, Except Per Share Data)  
       
Net income   $ 2,219   $ 2,219   $ 1,394   $ 1,394  
Weighted average shares outstanding     8,539,207     8,539,207     9,088,086     9,088,086  
Effect of dilutive common stock equivalents     -     158,303     -     211,429  
Adjusted weighted average shares used in earnings per share computation     8,539,207     8,697,510     9,088,086     9,299,515  
Earnings per share - basic and diluted   $ 0.26   $ 0.26   $ 0.15   $ 0.15  

 

As of June 30, 2015 and June 30, 2014, there were 684, 403 and 383,015 shares of common stock, respectively, subject to options with an exercise price greater than the then current market and which were not included in the computation of diluted earnings per share because to do so would have been antidilutive. The exercise price for the stock options representing the anti-dilutive shares was $12.23 and $11.83 at June 30, 2015 and 2014, respectively.

 

13
 

  

   
3. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

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

               
    Three Months Ended June 30,  
    2015   2014  
    (Dollars in Thousands)  
    Unrealized gains (losses)
on available for sale
securities (a)
  Unrealized gains (losses)
on available for sale
securities (a)
 
Beginning Balance   $ 101   $ (1,265 )
Other comprehensive (loss)income before reclassification     (756 )   615  
Amount reclassified from accumulated other comprehensive income     -     1  
Total other comprehensive (loss) income     (756 )   616  
Ending Balance   $ (655 ) $ (649 )

 

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

               
    Nine Months Ended June 30,  
    2015   2014  
    (Dollars in Thousands)  
    Unrealized gains (losses)
on available for sale
securities (a)
  Unrealized gains (losses)
on available for sale
securities (a)
 
Beginning Balance   $ (953 ) $ (1,292 )
Other comprehensive income before reclassification     298     813  
Amount reclassified from accumulated other comprehensive loss     -     (170 )
Total other comprehensive income     298     643  
Ending Balance   $ (655 ) $ (649 )

 

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

 

14
 

 

  The following table presents significant amounts reclassified out of each component of accumulated other comprehensive loss:
                       
    Three Months Ended June 30,        
    2015     2014        
Details about other comprehensive income     Amount Reclassified
from Accumulated
Other Comprehensive
Income (a)
    Amount Reclassified
from Accumulated
Other Comprehensive
Income (a)
    Affected Line Item in
the Statement Where
Net Income is
Presented
 
    (Dollars in Thousands)      
Unrealized gains on available for sale securities   $ -   $ -     Gain on sale of securities available for sale  
      -     -     Income taxes  
      -     (1 )   Net impairment losses recognized in earnings  
      -     -     Income taxes  
    $ -   $ (1 )   Net of tax  

 

  (a) Amounts in parentheses indicate debits to net income.
                       
    Nine Months Ended June 30,        
    2015   2014        
Details about other comprehensive income     Amount Reclassified
from Accumulated
Other Comprehensive
Income (a)
    Amount Reclassified
from Accumulated
Other Comprehensive
Income (a)
    Affected Line Item in
the Statement
Where Net Income is
Presented
 
    (Dollars in Thousands)        
Unrealized gains on available for sale securities   $ -   $ 274     Gain on sale of securities available for sale  
      -     (93 )   Income taxes  
      -     (16 )   Net impairment losses recognized in earnings  
      -     5     Income taxes  
    $ -   $ 170     Net of tax  
  (a) Amounts in parentheses indicate debits to net income.

 

15
 

 

4. INVESTMENT AND MORTGAGE-BACKED SECURITIES
   
  The amortized cost and fair value of investment and mortgage-backed securities, with gross unrealized gains and losses, are as follows:
                           
    June 30, 2015  
    Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Fair
Value
 
    (Dollars in Thousands)  
Securities Available for Sale:                          
U.S. government and agency obligations   $ 18,988   $ -   $ (671 ) $ 18,317  
Mortgage-backed securities - U.S. government agencies     58,990     273     (647 )   58,616  
Total debt securities available for sale     77,978     273     (1,318 )   76,933  
                           
FHLMC preferred stock     6     53     -     59  
                           
Total securities available for sale   $ 77,984   $ 326   $ (1,318 ) $ 76,992  
                           
Securities Held to Maturity:                          
U.S. government and agency obligations   $ 57,926   $ 438   $ (1,956 ) $ 56,408  
Mortgage-backed securities - U.S. government agencies     12,077     982     (17 )   13,042  
                           
Total securities held to maturity   $ 70,003   $ 1,420   $ (1,973 ) $ 69,450  

 

16
 

 

                           
    September 30, 2014  
   
Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized

Losses
  Fair
Value
 
    (Dollars in Thousands)  
Securities Available for Sale:                          
U.S. government and agency obligations   $ 18,987   $ -   $ (1,143 ) $ 17,844  
Mortgage-backed securities - U.S. government agencies     40,269     188     (554 )   39,903  
Total debt securities available for sale     59,256     188     (1,697 )   57,747  
                           
FHLMC preferred stock     6     64     -     70  
                           
Total securities available for sale   $ 59,262   $ 252   $ (1,697 ) $ 57,817  
                           
Securities Held to Maturity:                          
U.S. government and agency obligations   $ 66,919   $ 502   $ (3,270 ) $ 64,151  
Mortgage-backed securities - U.S. government agencies     13,921     1,130     (110 )   14,941  
                           
Total securities held to maturity   $ 80,840   $ 1,632   $ (3,380 ) $ 79,092  

 

17
 

 

  The following table shows the gross unrealized losses and related fair values of the Company’s investment securities which had unrealized losses as of June 30, 2015, aggregated by investment category and length of time that individual securities had been in a continuous loss position at June 30, 2015:
                                       
    Less than 12 months   More than 12 months   Total  
    Gross
Unrealized
Losses
  Fair
Value
  Gross
Unrealized
Losses
  Fair
Value
  Gross
Unrealized
Losses
  Fair
Value
 
    (Dollars in Thousands)  
Securities Available for Sale:                                      
U.S. government and agency obligations   $ (170 ) $ 4,827   $ (501 ) $ 13,490   $ (671 ) $ 18,317  
Mortgage-backed securities - U.S. government agencies     (492 )   28,684     (155 )   9,520     (647 )   38,204  
                                       
Total securities available for sale     (662 )   33,511     (656 )   23,010     (1,318 )   56,521  
                                       
Securities Held to Maturity:                                      
U.S. government and agency obligations     (70 )   8,422     (1,886 )   41,565     (1,956 )   49,987  
Mortgage-backed securities - U.S. government agencies     -     -     (17 )   2,393     (17 )   2,393  
Total securities held to maturity     (70 )   8,422     (1,903 )   43,958     (1,973 )   52,380  
                                       
Total   $ (732 ) $ 41,933   $ (2,559 ) $ 66,968   $ (3,291 ) $ 108,901  

 

18
 

 

  The following table shows the gross unrealized losses and related fair values of the Company’s investment securities which had unrealized losses as of September 30, 2014, aggregated by investment category and length of time that individual securities had been in a continuous loss position at September 30, 2014:
                                       
    Less than 12 months   More than 12 months   Total  
    Gross
Unrealized
Losses
  Fair
Value
  Gross
Unrealized
Losses
  Fair
Value
  Gross
Unrealized
Losses
  Fair
Value
 
    (Dollars in Thousands)  
Securities Available for Sale:                                      
U.S. government and agency obligations   $ -   $ -   $ (1,143 ) $ 17,844   $ (1,143 ) $ 17,844  
Mortgage-backed securities - U.S. government agency     (184 )   16,437     (370 )   13,303     (554 )   29,740  
                                       
Total securities available for sale     (184 )   16,437     (1,513 )   31,147     (1,697 )   47,584  
                                       
Securities Held to Maturity:                                      
U.S. government and agency obligations     (73 )   6,408     (3,197 )   49,243     (3,270 )   55,651  
Mortgage-backed securities - U.S. government agency     -     -     (110 )   4,542     (110 )   4,542  
Total securities held to maturity     (73 )   6,408     (3,307 )   53,785     (3,380 )   60,193  
                                       
Total   $ (257 ) $ 22,845   $ (4,820 ) $ 84,931   $ (5,077 ) $ 107,776  

 

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

 

19
 

 

   
  During the three and nine months ended June 30, 2015, the Company determined there were no OTTI that occurred within the investment and mortgage-back securities portfolios.  
   
  The following is a rollforward for the three and nine months ended June 30, 2014 of the amounts recognized in earnings related to credit losses on securities on which the Company  recorded OTTI charges through earnings and comprehensive income (loss).
         
    Three Months Ended
June 30, 2014
 
    (Dollars in Thousands)  
Credit component of OTTI as of April 1, 2014   $ 1,614  
         
Additions for credit-related OTTI charges on previously unimpaired securities     -  
         
Additional increase as a result of impairment charges recognized on investments for which an OTTI charge was previously recognized     1  
         
Credit component of OTTI as of June 30, 2014   $ 1,615  
         
      Nine Months Ended
June 30, 2014
 
      (Dollars in Thousands)
Credit component of OTTI as of October 1, 2013   $ 1,599  
         
Additions for credit-related OTTI charges on previously unimpaired securities     -  
         
Additional increase as a result of impairment charges recognized on investments for which an OTTI charge was previously recognized     16  
         
Credit component of OTTI as of June 30, 2014   $ 1,615  

 

   
  U.S. Government Agency Obligations - The Company’s investments reflected in the tables above in U.S. Government agency notes consist of debt obligations of the FHLB and Federal Farm Credit System (“FFCS”).  These securities are typically rated AAA by one of the internationally recognized credit rating services.  At June 30, 2015, U.S. Government and agency obligations in a gross unrealized loss for less than 12 months consisted of five securities. There were 21 securities in a gross unrealized loss for more than 12 months at such date. The unrealized losses on these debt securities relate principally to the changes in market interest rates and a lack of liquidity currently in the financial markets and are not a result of a projected shortfall of cash flows. The Company anticipates it will recover the entire amortized cost basis of the securities.  As a result, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2015.
   
  U.S. Agency Issued Mortgage-Backed Securities - At June 30, 2015, there were 21 securities in a gross unrealized loss for less than 12 months while there were seven securities in a gross unrealized loss 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. The Company anticipates it will recover the entire amortized cost basis of the securities. As a result, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2015.  

 

20
 

 

   
  The amortized cost and fair value of debt securities, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
   
  The maturity table below excludes mortgage-backed securities because the contractual maturities of such securities are not indicative of actual maturities due to significant prepayments.
                           
    June 30, 2015  
    Held to Maturity   Available for Sale  
    Amortized
Cost
  Fair
Value
  Amortized
Cost
  Fair
Value
 
    (Dollars in Thousands)  
Due within one year   $ -   $ -   $ -   $ -  
Due after one through five years     2,983     3,262     -     -  
Due after five through ten years     7,500     7,315     1,999     1,947  
Due after ten years     47,443     45,831     16,989     16,370  
                           
Total   $ 57,926   $ 56,408   $ 18,988   $ 18,317  
   
  During both the three and nine month periods ended June 30, 2015, no securities were sold. During the three month period ended June 30, 2014, no securities were sold and for the nine month period ended June 30, 2014, the Company sold five mortgage-backed securities with an aggregate amortized cost of $1.0 million and recognized aggregate gains of $274,000 (pre-tax). During the nine month period ended June 30, 2014, no securities were sold at a loss.
   
5. LOANS RECEIVABLE
   
  Loans receivable consist of the following:
               
    June 30,
2015
  September 30,
2014
 
    (Dollars in Thousands)  
One-to-four family residential   $ 266,583   $ 282,637  
Multi-family residential     6,304     7,174  
Commercial real estate     25,419     16,113  
Construction and land development     40,580     22,397  
Commercial business     -     1,976  
Consumer     378     399  
               
Total loans     339,264     330,696  
               
Undisbursed portion of loans-in-process     (21,295 )   (9,657 )
Deferred loan costs     2,191     2,449  
Allowance for loan losses     (2,673 )   (2,425 )
               
Net loans   $ 317,487   $ 321,063  

 

21
 
   
  The following table summarizes by loan segment the balance in the allowance for loan losses and the loans individually and collectively evaluated for impairment by loan segment at June 30, 2015:
                                                   
    One- to-four
family
residential
  Multi-family
residential
  Commercial real
estate
  Construction
and land
development
  Commercial
business
  Consumer   Unallocated   Total  
    (Dollars in Thousands)  
Allowance for Loan Losses:                                                  
Individually evaluated for impairment   $ -   $ -   $ -   $ -   $ -   $ -   $ -   $ -  
Collectively evaluated for impairment     1,639     60     215     507     -     4     248     2,673  
Total ending allowance balance   $ 1,639   $ 60   $ 215   $ 507   $ -   $ 4   $ 248   $ 2,673  
                                                   
Loans:                                                  
Individually evaluated for impairment   $ 8,924   $ 355   $ 3,912   $ 8,029   $ -   $ -         $ 21,220  
Collectively evaluated for impairment     257,659     5,949     21,507     32,551     -     378           318,044  
Total loans   $ 266,583   $ 6,304   $ 25,419   $ 40,580   $ -   $ 378         $ 339,264  
   
  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, 2014:
                                                   
    One- to-four
family
residential
  Multi-family
residential
  Commercial
real
estate
  Construction
and land
development
  Commercial
business
  Consumer   Unallocated   Total  
    (Dollars in Thousands)  
Allowance for Loan Losses:                                                  
Individually evaluated for impairment   $ -   $ -   $ -   $ -   $ -   $ -   $ -   $ -  
Collectively evaluated for impairment     1,663     67     122     323     15     4     231     2,425  
Total loans   $ 1,663   $ 67   $ 122   $ 323   $ 15   $ 4   $ 231   $ 2,425  
                                                   
Loans:                                                  
Individually evaluated for impairment   $ 10,436   $ 368   $ 3,777   $ 7,399   $ -   $ -   $ -   $ 21,980  
Collectively evaluated for impairment     272,201     6,806     12,336     14,998     1,976     399     -     308,716  
Total loans   $ 282,637   $ 7,174   $ 16,113   $ 22,397   $ 1,976   $ 399   $ -   $ 330,696  
   
  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, commercial real estate and commercial business loans and all loans 90 plus 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.

 

22
 

  

 

   
  The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not required as of June 30, 2015:
                                 
    Impaired Loans with
Specific Allowance
  Impaired
Loans with
No Specific
Allowance
  Total Impaired Loans  
    (Dollars in Thousands)  
    Recorded
Investment
  Related
Allowance
  Recorded
Investment
  Recorded
Investment
  Unpaid
Principal
Balance
 
One-to-four family residential   $ -   $ -   $ 8,924   $ 8,924   $ 9,315  
Multi-family residential     -     -     355     355     355  
Commercial real estate     -     -     3,912     3,912     3,912  
Construction and land development     -     -     8,029     8,029     8,029  
Total Loans   $ -   $ -   $ 21,220   $ 21,220   $ 21,611  
   
  The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not required as of September 30, 2014:
                                 
    Impaired Loans with
Specific Allowance
  Impaired
Loans with
No Specific
Allowance
  Total Impaired Loans  
    (Dollars in Thousands)  
    Recorded
Investment
  Related
Allowance
  Recorded
Investment
  Recorded
Investment
  Unpaid
Principal
Balance
 
One-to-four family residential   $ -   $ -   $ 10,436   $ 10,436   $ 11,135  
Multi-family residential     -     -     368     368     368  
Commercial real estate     -     -     3,777     3,777     3,777  
Construction and land development     -     -     7,399     7,399     7,399  
Total Loans   $ -   $ -   $ 21,980   $ 21,980   $ 22,679  

 

23
 

 

   
  The following table presents the average recorded investment in impaired loans and related interest income recognized for the periods indicated:
                     
    Three Months Ended June 30, 2015  
    Average
Recorded
Investment
  Income
Recognized on
Accrual Basis
  Income
Recognized on
Cash Basis
 
    (Dollars in Thousands)  
One-to-four family residential   $ 9,222   $ 115   $ 42  
Multi-family residential     357     6     -  
Commercial real estate     3,832     54     24  
Construction and land development     7,977     109     65  
Total Loans   $ 21,388   $ 284   $ 131  
                     
    Nine Months Ended June 30, 2015  
    Average
Recorded
Investment
  Income
Recognized on
Accrual Basis
  Income
Recognized on
Cash Basis
 
    (Dollars in Thousands)  
One-to-four family residential   $ 9,865   $ 378   $ 119  
Multi-family residential     361     19     -  
Commercial real estate     3,801     157     58  
Construction and land development     7,728     318     129  
Total Loans   $ 21,755   $ 872   $ 306  
                     
    Three Months Ended June 30, 2014  
    Average
Recorded
Investment
  Income
Recognized on
Accrual Basis
  Income
Recognized on
Cash Basis
 
    (Dollars in Thousands)  
One-to-four family residential   $ 10,030   $ 78   $ 85  
Multi-family residential     188     7     -  
Commercial real estate     1,468     8     7  
Construction and land development     4,052     34     -  
Total Loans   $ 15,738   $ 127   $ 92  

 

24
 

 

                     
    Nine Months Ended June 30, 2014  
    Average
Recorded
Investment
  Income
Recognized on
Accrual Basis
  Income
Recognized on
Cash Basis
 
    (Dollars in Thousands)  
One-to-four family residential   $ 10,342   $ 242   $ 136  
Multi-family residential     285     20     7  
Commercial real estate     1,926     18     14  
Construction and land development     2,628     70     -  
Total Loans   $ 15,181   $ 350   $ 157  

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 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.

                           
    June 30, 2015  
    Pass   Special
Mention
  Substandard   Total
Loans
 
    (Dollars in Thousands)  
One-to-four family residential   $ 3,442   $ 1,432   $ 4,050   $ 8,924  
Multi-family residential     5,949     -     355     6,304  
Commercial real estate     22,572     -     2,847     25,419  
Construction and land development     32,551     -     8,029     40,580  
Total Loans   $ 64,514   $ 1,432   $ 15,281   $ 81,227  

 

25
 

 

                           
    September 30, 2014  
    Pass   Special
Mention
  Substandard   Total
Loans
 
    (Dollars in Thousands)  
One-to-four family residential   $ -   $ 1,509   $ 10,436   $ 11,945  
Multi-family residential     6,806     -     368     7,174  
Commercial real estate     11,347     989     3,777     16,113  
Construction and land development     14,998     -     7,399     22,397  
Commercial business     1,976     -     -     1,976  
Consumer     -     119     -     119  
Total Loans   $ 35,127   $ 2,617   $ 21,980   $ 59,724  

 

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

 

The following table represents 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, that do not have a designated risk rating.

                     
    June 30, 2015  
    Performing   Non-
Performing
    Total
Loans
 
    (Dollars in Thousands)  
One-to-four family residential   $ 257,659   $ -   $ 257,659  
Consumer     378     -     378  
Total Loans   $ 258,037   $ -   $ 258,037  
                     
    September 30, 2014  
   
Performing
  Non-
Performing
  Total
Loans
 
    (Dollars in Thousands)  
One-to-four family residential   $ 270,692   $ -   $ 270,692  
Consumer     280     -     280  
Total Loans   $ 270,972   $ -   $ 270,972  

 

26
 

 

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

                                             
    June 30, 2015  
    Current   30-89 Days
Past Due
  90 Days +
Past Due
  90 Days+
Past Due
and Accruing
  Total
Past Due
and Accruing
  Total Loans   Non-
Accrual
 
    (Dollars in Thousands)  
One-to-four family residential   $ 262,629   $ 529   $ 3,425   $ -   $ 529   $ 266,583   $ 4,949  
Multi-family residential     6,304     -     -     -     -     6,304     -  
Commercial real estate     25,237     -     182     -     -     25,419     2,462  
Construction and land development     40,580     -     -     -     -     40,580     8,029  
Consumer     378     -     -     -     -     378     -  
Total Loans   $ 335,128   $ 529   $ 3,607   $ -   $ 529   $ 339,264   $ 15,440  
                                             
    September 30, 2014  
    Current   30-89 Days
Past Due
  90 Days +
Past Due
  90 Days+
Past Due
and Accruing
  Total
Past Due
and Accruing
  Total Loans   Non-
Accrual
 
    (Dollars in Thousands)  
One-to-four family residential   $ 278,716   $ 475   $ 3,446   $ -   $ 475   $ 282,637   $ 5,002  
Multi-family residential     7,174     -     -     -     -     7,174     -  
Commercial real estate     16,113     -     -     -     -     16,113     877  
Construction and land development     22,397     -     -     -     -     22,397     -  
Commercial business     1,976     -     -     -     -     1,976     -  
Consumer     399     -     -     -     -     399     -  
Total Loans   $ 326,775   $ 475   $ 3,446   $ -   $ 475   $ 330,696   $ 5,879  

 

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.

 

27
 

 

Commercial real estate loans entail significant additional credit risks compared to one-to-four family residential mortgage loans, as they generally involve large loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment experience on loans secured by income-producing properties typically depends on the successful operation of the related real estate project and/or business operation of the borrower who is also the primary 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 both the borrowers as well as 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, potentially the Company will be compelled to advance additional funds. If the Company is forced to foreclose on a project prior to completion, there is no assurance that the Company would be able to recover the entire unpaid portion of the loan.

 

The following tables summarize the primary segments of the allowance for loan losses. Activity in the allowance is presented for the three and nine month periods ended June 30, 2015 and 2014:

                                                   
    Three Months Ended June 30, 2015  
    One- to
four-family
residential
  Multi-
family
residential
  Commercial
real estate
  Construction
and land
development
  Commercial
business
  Consumer   Unallocated   Total  
    (Dollars in Thousands)  
ALLL balance at March 31, 2015   $ 1,545   $ 51   $ 207   $ 545   $ -   $ 4   $ 236   $ 2,588  
Charge-offs     (126 )   -     -     -     -     -     -     (126 )
Recoveries     1     -     -     -     -     -     -     1  
Provision     219     9     8     (38 )   -     -     12     210  
ALLL balance at June 30, 2015   $ 1,639   $ 60   $ 215   $ 507   $ -   $ 4   $ 248   $ 2,673  
                                                   
    Nine Months Ended June 30, 2015  
    One- to
four-family
residential
  Multi-
family residential
  Commercial
real estate
  Construction
and land
development
  Commercial
business
  Consumer   Unallocated   Total  
    (Dollars in Thousands)
ALLL balance at September 30, 2014   $ 1,663   $ 67   $ 122   $ 323   $ 15   $ 4   $ 231   $ 2,425  
Charge-offs     (338 )   -     -     -     -     -     -     (338 )
Recoveries     1     -     -     -     -     -     -     1  
Provision     313     (7 )   93     184     (15 )   -     17     585  
ALLL balance at June 30, 2015   $ 1,639   $ 60   $ 215   $ 507   $ -   $ 4   $ 248   $ 2,673  

 

The increase in the provision for the fiscal 2015 periods was primarily a result of replenishing the allowance related to one-to-four family loans that were charged-off during the period based upon the balance of such loans at June 30, 2015. In addition, the allowance associated with construction and land development loans was impacted by the increase in the outstanding balance of such loans triggering the need to increase the Company’s allowance.

 

28
 

 

                                                   
    Three Months Ended June 30, 2014  
    One- to
four-family
residential
  Multi-
family
residential
  Commercial
real estate
  Construction
and land
development
  Commercial
business
  Consumer   Unallocated   Total  
    (Dollars in Thousands)  
ALLL balance at March 31, 2014   $ 1,425   $ 64   $ 141   $ 523   $ 4   $ 3   $ 230   $ 2,390  
Charge-offs     (205 )   -     -     -     -     -     -     (205 )
Recoveries     -     -     -     -     -     -     -     -  
Provision     86     38     90     (234 )   -     2     18     -  
ALLL balance at June 30, 2014   $ 1,286   $ 58   $ 125   $ 512   $ 3   $ 1   $ 200   $ 2,185  
                                                   
    Nine Months Ended June 30, 2014  
    One- to
four-family
residential
  Multi-
family
residential
  Commercial
real estate
  Construction
and land
development
  Commercial
business
  Consumer   Unallocated   Total  
    (Dollars in Thousands)  
ALLL balance at September 30, 2013   $ 1,384   $ 22   $ 70   $ 653   $ 4   $ 2   $ 218   $ 2,353  
Charge-offs     (215 )   -     -     -     -     -     -     (215 )
Recoveries     47     -     -     -     -     -     -     47  
Provision     70     36     55     (141 )   (1 )   (1 )   (18 )   -  
ALLL balance at June 30, 2014   $ 1,286   $ 58   $ 125   $ 512   $ 3   $ 1   $ 200   $ 2,185  

 

The decrease in the provision for the fiscal 2014 periods primarily related to the construction and land development loan category and was due mainly to a decrease in the historical loss factor. This decrease was a direct result of prior period charge-offs that occurred prior to the three year period utilized for calculation of this component of the allowance for loan losses.

 

The following tables summarize information regarding troubled debt restructurings (“TDR”) occurring in the periods presented for both three and nine months ended June 30, 2015 and 2014.

 

The Company did not restructure any debt during the three month period ended June 30, 2015.

 

29
 

 

                     
    Nine Months Ended June 30, 2015  
(Dollars in Thousands)   Number of
Loans
  Pre-Modification
Outstanding
Recorded
Investment
  Post-
Modification
Outstanding
Recorded
Investment
 
                     
Commercial real estate     1   $ 750   $ 750  
Construction and land development     1     3,665     3,665  
      2   $ 4,415   $ 4,415  
                     
    Three Months Ended June 30, 2014  
(Dollars in Thousands)   Number of
Loans
  Pre-Modification
Outstanding
Recorded
Investment
  Post-
Modification
Outstanding
Recorded
Investment
 
                     
One-to-four family     1   $ 453   $ 800  
      1   $ 453   $ 800  
                     
    Nine Months Ended June 30, 2014  
(Dollars in Thousands)   Number of
Loans
  Pre-Modification
Outstanding
Recorded
Investment
  Post-
Modification
Outstanding
Recorded
Investment
 
                     
One-to-four family     1   $ 1,468   $ 1,468  
Commercial     1     453     800  
      2   $ 1,921   $ 2,268  

 

At June 30, 2015, the Company had ten loans classified as TDRs aggregating $8.3 million, consisting two single-family real estate loans which amounted to $1.6 million, one construction and land development loan totaling $3.6 million and seven commercial real estate loans which amounted to $3.1 million. Of these loans, one single-family real estate loan totaling $1.4 million, two commercial real estate loans totaling $1.6 million and a construction and land development loan totaling $3.7 million were determined to be non-performing, until management has made the decision to designate these credits as performing. Typically management will wait a minimum of six consecutive contractual payments prior to change the designation. All TDRs, with the exception of one commercial real estate loan totaling $884,000, were classified as “substandard” as of June 30, 2015.

 

30
 

 

No TDRs defaulted during the three and nine month periods ended June 30, 2015 or 2014 that were restructured in the twelve months preceding the periods presented.

   
6. DEPOSITS
   
  Deposits consist of the following major classifications:
                           
    June 30,
2015
  September 30,
2014
 
                   
    Amount   Percent   Amount   Percent  
    (Dollars in Thousands)  
Money market deposit accounts   $ 62,299     16.6 % $ 64,665     16.5 %
Interest-bearing checking accounts     35,958     9.6     38,119     9.8  
Non interest-bearing checking accounts     2,177     0.6     2,327     0.6  
Passbook, club and statement savings     72,214     19.2     73,275     18.8  
Certificates maturing in six months or less     56,252     15.0     48,359     12.4  
Certificates maturing in more than six months     147,203     39.0     164,280     41.9  
                           
Total   $ 376,103     100.0 % $ 391,025     100.0 %
   
  Certificates of deposit of $250,000 and over totaled $33.9 million as of June 30, 2015 and $33.1 million as of September 30, 2014.

 

31
 
   
7. INCOME TAXES
   
  Items that gave rise to significant portions of deferred income taxes are as follows:
               
    June
2015
  September 30,
2014
 
Deferred tax assets:   (Dollars in Thousands)  
Allowance for loan losses   $ 1,124   $ 1,123  
Nonaccrual interest     94     125  
Accrued vacation     118     108  
Capital loss carryforward     548     1,211  
Split dollar life insurance     20     20  
Post-retirement benefits     132     137  
Unrealized loss on available for sale securities     337     491  
Employee benefit plans     477     382  
               
Total deferred tax assets     2,850     3,597  
Valuation allowance     (548 )   (1,211 )
Total deferred tax assets, net of valuation allowance     2,302     2,386  
               
Deferred tax liabilities:              
Property     387     422  
Deferred loan fees     746     833  
               
Total deferred tax liabilities     1,133     1,255  
               
Net deferred tax asset   $ 1,169   $ 1,131  
   
  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 realized through a carry back to taxable income in prior years or 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 over a five year period, resulting in the establishment of a valuation allowance for the carryforward period. The valuation allowance totaled $548,000 at June 30, 2015.
   
  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. As of June 30, 2015, the Internal Revenue Service had conducted an audit of the Company’s federal tax return for the year ended September 30, 2010, and no adverse findings were reported. The Company’s federal and state income tax returns for taxable years through September 30, 2011 have been closed for purposes of examination by the Internal Revenue Service and the Pennsylvania Department of Revenue.

 

32
 

 

   
8. STOCK COMPENSATION PLANS
   
  The Company maintains an employee stock ownership plan (“ESOP”) for substantially all of its full-time employees. The ESOP purchased 427,057 shares (on a converted basis) of the Company’s common stock for an aggregate cost of approximately $4.5 million in fiscal 2005. The ESOP purchased an additional 255,564 shares during December 2013 and an additional 30,100 shares at the beginning January 2014, of the Company’s stock for an aggregate cost of approximately $3.1 million. The shares were purchased with the proceeds of loans from the Company. Shares of the Company’s common stock purchased by the ESOP are held in a suspense account until released for allocation to participants. Shares are allocated to each eligible participant based on the ratio of each such participant’s compensation, as defined in the ESOP, to the total compensation of all eligible plan participants. As the unearned shares are released from the suspense account, the Company recognizes compensation expense equal to the fair value of the ESOP shares during the periods in which they become committed to be released. To the extent that the fair value of the ESOP shares released differs from the cost of such shares, the difference is charged or credited to equity as additional paid-in capital. As of June 30, 2015, the ESOP held 697,301 shares and the Company had allocated a total of 222,685 shares from the suspense account to participants and committed to release an additional 17,761 shares. For the nine months ended June 30, 2015, the Company recognized $483,000 in compensation expense related to the ESOP.
   
  The Company maintains the 2008 Recognition and Retention Plan (“2008 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 RRP Trust purchased 213,528 shares (on a converted basis) of the Company’s common stock in the open market for approximately $2.5 million, at an average purchase price per share of $11.49 as part of the 2008 RRP. The Company made sufficient contributions to the RRP Trust to fund these purchases. As of June 30, 2015, all the shares had been awarded as part of the 2008 RRP. Shares subject to awards under the 2008 RRP generally vest at the rate of 20% per year over five years. As of June 30, 2015, 185,788 (on a converted basis) of the awarded shares of the 2008 Plan had become fully vested. 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 can be awarded as restricted stock awards or units, of which 235,500 shares were awarded during February 2015.
   
  Compensation expense related to the shares subject to restricted stock awards granted is recognized ratably over the five-year vesting period in an amount which totals the grant date fair value multiplied by the number of shares subject to the grant. During the three and nine months ended June 30, 2015, $154,000 and $263,000, respectively, was recognized in compensation expense for the 2008 RRP and the grants pursuant to the 2014 SIP. Income tax benefits of $52,000 and $89,000 were recognized for the three and nine months ended June 30, 2015. During the three and nine months ended June 30, 2014, $21,000 and $107,000, respectively, was recognized in compensation expense for the 2008 RRP. An income tax benefit of $7,000 was recognized for the three months ended June 30, 2014 while an income tax benefit of $55,000 was recognized for the nine months ended June 30, 2014. At June 30, 2015, approximately $2.8 million in additional compensation expense for the shares awarded related to the 2008 RRP and the 2014 SIP remained unrecognized.

 

33
 

 

   
  A summary of the Company’s non-vested stock award activity for the nine months ended June 30, 2015 and 2014 are presented in the following tables:
               
    Nine Months Ended
June 30, 2015
 
    Number of
Shares (1)
  Weighted Average
Grant Date Fair
Value
 
               
Nonvested stock awards at October 1, 2014     38,055   $ 8.07  
Issued     235,500     12.23  
Forfeited     -     -  
Vested     (10,314 )   8.22  
Nonvested stock awards at the June 30, 2015     263,241   $ 11.79  
               
    Nine Months Ended
June 30, 2014
 
    Number of
Shares
  Weighted Average
Grant Date Fair
Value
 
               
Nonvested stock awards at October 1, 2013     79,477   $ 9.56  
Issued     -     -  
Forfeited     -     -  
Vested     (41,422 )   10.93  
Nonvested stock awards at the June 30, 2014     38,055   $ 8.11  
   
  The Company maintains the 2008 Stock Option Plan (the “2008 Option Plan”) which authorizes the grant of stock options to officers, employees and directors of the Company to acquire shares of common stock with an exercise price at least equal to the fair market value of the common stock on the grant date. Options generally become vested and exercisable at the rate of 20% per year over five years and are generally exercisable for a period of ten years after the grant date. A total of 533,808 shares (on a converted basis) of common stock were approved for future issuance pursuant to the 2008 Stock Option Plan. As of June 30, 2015, all of the options had been awarded under the 2008 Option Plan. As of June 30, 2015, 419,801 options (on a converted basis) were vested under the 2008 Option Plan. The 2014 SIP reserved up to 714,145 shares for issuance pursuant to options. Options to purchase 608,737 shares were awarded during February 2015, 605,000 shares pursuant to the 2014 SIP and the remainder pursuant to the 2008 Option Plan.

 

34
 

 

   
  A summary of the status of the Company’s stock options under the 2008 Option Plan and the 2014 SIP as of June 30, 2015 and 2014 and changes during the nine month periods ended June 30, 2015 and 2014 are presented below:
               
    Nine Months Ended
June 30, 2015
 
    Number of
Shares
  Weighted Average
Exercise Price
 
               
Outstanding at October 1, 2014     530,084   $ 10.86  
Granted     608,737     12.23  
Exercised     -     -  
Forfeited     -     -  
Outstanding at June 30, 2015     1,138,821   $ 11.59  
Exercisable at June 30, 2015     445,147   $ 11.37  
               
    Nine Months Ended
June 30, 2014
 
    Number of
Shares (1)
  Weighted Average
Exercise Price
 
               
Outstanding at October 1, 2013     516,739   $ 10.86  
Granted     13,545     10.68  
Exercised     -     -  
Forfeited     -     -  
Outstanding at June 30, 2014     530,284   $ 10.86  
Exercisable at June 30, 2014     415,733   $ 11.57  
   
  The weighted average remaining contractual term was approximately 7.3 years for options outstanding as of June 30, 2015.
   
  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 and $4.58 for options granted during fiscal 2015. The fair value for grants made in fiscal 2015 was estimated on the date of grant using the Black-Scholes pricing model with the following assumptions: an exercise and fair value of $12.23, term of seven years, volatility rate of 38.16%, interest rate of 1.62% and a yield rate of 0.98%.
   
  During the three and nine months ended June 30, 2015, $158,000 and $268,000, respectively, was recognized in compensation expense for options granted pursuant to the 2008 Option Plan and the 2014 SIP. Tax benefits of $16,000 and $28,000, respectively, were recognized for the three and nine months ended June 30, 2015. During the three and nine months ended June 30, 2014, $25,000 and $116,000, respectively, was recognized in compensation expense for the 2008 Option Plan. Tax benefits of $3,000 and $14,000, respectively, were recognized for the three and nine months ended June 30, 2014. At June 30, 2015, approximately $2.8 million in additional compensation expense for awarded options remained unrecognized. The weighted average period over which this expense will be recognized is approximately 4.5 years.
   
9. COMMITMENTS AND CONTINGENT LIABILITIES
   
  At June 30, 2015, the Company had $4.2 million in outstanding commitments to originate fixed and variable-rate loans with market interest rates ranging from 3.25% to 8.00%. At September 30, 2014, the Company had $25.3 million in outstanding commitments to originate fixed and variable-rate loans with market interest rates ranging from 3.25% to 6.00%. The aggregate undisbursed portion of loans-in-process amounted to $21.3 million at June 30, 2015 and $9.7 million at September 30, 2014.

 

35
 

 

     
  The Company also had commitments under unused lines of credit of $3.6 million as of both June 30, 2015 and September 30, 2014 and letters of credit outstanding of $2.6 million and $609,000, respectively, at June 30, 2015 and September 30, 2014.
   
  Among the Company’s contingent liabilities are exposures to limited recourse arrangements with respect to the Company’s sales of whole loans and participation interests. At June 30, 2015, the exposure, which represents a portion of credit risk associated with the interests sold, amounted to $60,000. 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.
   
10. FAIR VALUE MEASUREMENT
   
  The fair value estimates presented herein are based on pertinent information available to management as of June 30, 2015 and September 30, 2014, 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.

 

36
 

 

   
  Those assets as of June 30, 2015 which are to be measured at fair value on a recurring basis are as follows:
                           
    Category Used for Fair Value Measurement  
    Level 1   Level 2   Level 3   Total  
    (Dollars in Thousands)  
       
Assets:                          
Securities available for sale:                          
U.S. Government and agency obligations   $ -   $ 18,317   $ -   $ 18,317  
Mortgage-backed securities - U.S. Government agencies     -     58,616     -     58,616  
FHLMC preferred stock     59     -     -     59  
Total   $ 59   $ 76,933   $ -   $ 76,992  
   
  Those assets as of September 30, 2014 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   $ -   $ 17,844   $ -   $ 17,844  
Mortgage-backed securities - U.S. Government agencies     -     39,903     -     39,903  
FHLMC preferred stock     70     -     -     70  
Total   $ 70   $ 57,747   $ -   $ 57,817  
   
  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 in accordance with the contractual terms of the loan agreements. Collateral dependent impaired loans are based on the fair value of the collateral which is based on appraisals and would be categorized as Level 2 measurement. In some cases, adjustments are made to the appraised values for various factors including the age of the appraisal, age of the comparables included in the appraisal, and known changes in the market and in the collateral. These adjustments are based upon unobservable inputs, and therefore, the fair value measurement has been categorized as a Level 3 measurement. These loans are reviewed for impairment and written down to their net realizable value by charges against the allowance for loan losses. The collateral underlying these loans had a fair value in excess of $21.2 million as of June 30, 2015.

 

37
 

 

   
Summary of Non-Recurring Fair Value Measurements
                           
    At June 30, 2015  
    (Dollars in Thousands)  
    Level 1   Level 2   Level 3   Total  
Impaired loans   $ -   $ -   $ 21,220   $ 21,220  
Total   $ -   $ -   $ 21,220   $ 21,220  
                           
    At September 30, 2014  
    (Dollars in Thousands)  
    Level 1   Level 2   Level 3   Total  
Impaired loans   $ -   $ -   $ 21,980   $ 21,980  
Total   $ -   $ -   $ 21,980   $ 21,980  

 

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

                   
    At June 30, 2015
    (Dollars in Thousands)
    Fair Value   Valuation
Technique
  Unobservable Input   Range/
Weighted Ave.
Impaired loans   $ 21,220   Property appraisals(1) (3)   Management discount for selling costs, property type and market volatility (2)   10% discount
                   
    At September 30, 2014
    (Dollars in Thousands)
    Fair Value   Valuation
Technique
  Unobservable Input   Range /
Weighted Ave.
Impaired loans   $ 21,980   Property appraisals(1) (3)   Management discount for selling costs, property type and market volatility (2)   10% discount
   
(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally includes various Level 3 inputs, which are not identifiable.
(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.
(3) Includes qualitative adjustments by management and estimated liquidation expenses.

 

38
 

 

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

                                 
                Fair Value Measurements at
June 30, 2015
 
    Carrying
Amount
  Fair
Value
  (Level 1)   (Level 2)   (Level 3)  
    (Dollars in Thousands)  
Assets:                                
Cash and cash equivalents   $ 20,305   $ 20,305   $ 20,305   $ -   $ -  
Investment and mortgage-backed                                
securities available for sale     76,992     76,992     59     76,933     -  
Investment and mortgage-backed                                
securities held to maturity     70,003     69,450     -     69,450     -  
Loans receivable, net     317,487     315,966     -     -     315,966  
Accrued interest receivable     1,716     1,716     1,716     -     -  
Federal Home Loan Bank stock     369     369     369     -     -  
Bank owned life insurance     12,638     12,638     12,638     -     -  
                                 
Liabilities:                                
Checking accounts     38,135     38,135     38,135     -     -  
Money market deposit accounts     62,299     62,299     62,299     -     -  
Passbook, club and statement                                
savings accounts     72,214     72,214     72,214     -     -  
Certificates of deposit     203,455     207,241     -     -     207,241  
Accrued interest payable     939     939     939     -     -  
Advances from borrowers for taxes and insurance     2,802     2,802     2,802     -     -  

 

39
 

 

                
         Fair Value Measurements at
September 30, 2014
   Carrying
Amount
  Fair
Value
  (Level 1)  (Level 2)  (Level 3)
   (Dollars in Thousands)
Assets:                         
Cash and cash equivalents  $45,382   $45,382   $45,382   $-   $- 
Investment and mortgage-backed securities available for sale   57,817    57,817    70    57,747    - 
Investment and mortgage-backed securities held to maturity   80,840    79,092    -    79,092    - 
Loans receivable, net   321,063    321,247    -    -    321,247 
Accrued interest receivable   1,748    1,748    1,748    -    - 
Federal Home Loan Bank stock   1,221    1,221    1,221    -    - 
Bank owned life insurance   12,377    12,377    12,377    -    - 
                          
Liabilities:                         
Checking accounts   40,446    40,446    40,446    -    - 
Money market deposit accounts   64,665    64,665    64,665    -    - 
Passbook, club and statement savings accounts   73,275    73,275    73,275    -    - 
Certificates of deposit   212,639    217,273    -    217,273    - 
Advances from Federal Home Loan Bank   340    340    340    -    - 
Accrued interest payable   1,486    1,486    1,486    -    - 
Advances from borrowers for taxes and insurance   1,240    1,240    1,240    -    - 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

40
 

 

Advances from Federal Home Loan BankThe fair value of advances from FHLB is the amount payable on demand at the reporting date.

 

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

 

Advances from borrowers for taxes and insurance – For advances from borrowers for taxes and insurance, the carrying amount is a reasonable estimate of fair value.

 

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

  

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/A for the year ended September 30, 2014 (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 Savings Bank (the “Bank”) as a result of the second-step conversion 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 expense. Our results of operations are also significantly affected by general economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities. Future changes in applicable laws, regulations or government policies may materially impact our financial condition and results of operations. The Bank is subject to regulation by the Federal Deposit Insurance Corporation (the “FDIC”) and the Pennsylvania Department of Banking and Securities (the “Department”). The Bank’s main office is in Philadelphia, Pennsylvania, with six additional full-service banking offices located in Philadelphia, Delaware and Bucks Counties in Pennsylvania. The Bank’s primary business consists of attracting deposits from the general public and using those funds together with borrowings to originate loans and to invest primarily in U.S. Government and agency securities and mortgage-backed securities. In November 2005, the Bank formed PSB Delaware, Inc., a Delaware corporation, as a subsidiary of the Bank. In March 2006, all mortgage-backed securities then owned by the Company 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.

 

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

  

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

 

·Levels of past due, classified, criticized and non-accrual loans, troubled debt restructurings and loan modifications;
·Nature and volume of loans;
·Changes in lending policies and procedures, underwriting standards, collections, charge-offs and recoveries and for commercial loans, the level of loans being approved with exceptions to lending policy;
·Experience, ability and depth of management and staff;
·National and local economic and business conditions, including various market segments;
·Quality of the Company’s loan review system and 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. Loans not individually reviewed are evaluated as a group using reserve factor percentages based on historical loss experience and the qualitative factors described above. In determining the appropriate level of the general pooled allowance, management makes estimates based on internal risk ratings, which take into account such factors as debt service coverage, loan-to-value ratios and external factors. Estimates are periodically measured against actual loss experience.

 

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

  

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

 

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Investment and mortgage-backed securities available for sale. Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated using quoted prices of securities with similar characteristics or discounted cash flows and are classified within Level 2 of the fair value hierarchy. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy, although there were no securities with that classification as of June 30, 2015 or September 30, 2014.

  

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. The Company determines whether the unrealized losses are temporary in accordance with U.S. GAAP. The evaluation is based upon factors such as the creditworthiness of the issuers/guarantors, the underlying collateral, if applicable, and the continuing performance of the securities. In addition, the Company also considers the likelihood that the security will be required to be sold 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 investment securities, as well as FHLB stock 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.

  

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.

 

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Forward-looking Statements. In addition to historical information, this Quarterly Report on Form 10-Q includes certain “forward-looking statements” based on management’s current expectations. The Company’s actual results could differ materially, as such term is defined in the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, from management’s expectations. Such forward-looking statements include statements regarding management’s current intentions, beliefs or expectations as well as the assumptions on which such statements are based. These forward-looking statements are subject to significant business, economic and competitive uncertainties and contingencies, many of which are not subject to the Company’s control. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. Factors that could cause future results to vary from current management expectations include, but are not limited to, general economic conditions, legislative and regulatory changes, monetary and fiscal policies of the federal government, changes in tax policies, rates and regulations of federal, state and local tax authorities, changes in interest rates, deposit flows, the cost of funds, demand for loan products, demand for financial services, competition, changes in the quality or composition of the Company’s loan and investment portfolios, changes in accounting principles, policies or guidelines and other economic, competitive, governmental and technological factors affecting the Company’s operations, markets, products, services and fees.

  

Forward looking statements speak only as of the date on which such statements are made. The Company undertakes no obligation to update or revise any forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results that occur subsequent to the date such forward-looking statements are made unless required by law or regulations.

 

Market Overview. Although the economy slowly improved during 2014 and 2015, we still view the current environment as challenging.

  

The Company continues to focus on the credit quality of its customers, closely monitoring the financial status of borrowers located throughout the Company’s market area, 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.

 

Despite the current market and economic conditions, 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 June 30, 2015 and September 30, 2014, and the results of operations for the three and nine months ended June 30, 2015 and 2014.

  

COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2015 AND SEPTEMBER 30, 2014

 

At June 30, 2015, the Company had total assets of $503.8 million, as compared to $525.5 million at September 30, 2014, a decrease of 4.3%. The decline in total assets was primarily due to the reduction of cash and cash equivalents in large part due to deposit withdrawals of higher costing certificates of deposit as part of the Company’s asset/liability management combined with funding the Company’s current stock repurchase program. Cash and cash equivalents decreased $25.1 million to $20.3 million at June 30, 2015, compared to $45.4 million at September 30, 2014. Loans receivable decreased to $317.5 million at June 30, 2015 from $321.1 million at September 30, 2014. Loans receivable declined primarily due to a $16.1 million reduction in one-to-four family residential mortgage loans partially offset by increases in commercial real estate and construction and land development loans (net of loans in process) of $9.3 million and $6.5 million, respectively, which generally have higher yields and shorter terms. These loans are secured by properties located within our immediate market area. Investment securities classified as available-for-sale increased by $19.2 million to $77.0 million as of June 30, 2015 primarily due to the purchase of GNMA-guaranteed mortgage-backed securities aggregating $22.8 million. Investment securities classified held-to-maturity declined approximately $10.9 million to $70.0 million as of June 30, 2015 primarily due to four U.S. government agency bonds aggregating $9.0 million being called during the nine months ended June 30, 2015.

 

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Total liabilities decreased by $14.3 million to $381.8 million at June 30, 2015 from $396.1 million at September 30, 2014, a 3.6% decline. Total deposits decreased $14.9 million primarily due to a $9.2 million decline in certificates of deposit combined with a $4.7 million decrease in money market and checking accounts. Advances from borrowers for taxes and insurance (commonly known as “escrow” accounts) increased $1.6 million to $2.8 million at June 30, 2015 from $1.2 million at September 30, 2015 as balances increased primarily in anticipation of the payment of real estate taxes on behalf of borrowers in August 2015.

 

Total stockholders’ equity decreased by $7.4 million to $122.0 million at June 30, 2015 from $129.4 million at September 30, 2014. The decrease was primarily due to the $8.9 million expended in connection with the Company’s announced initial stock repurchase program and to a lesser degree the declaration of approximately $2.1 million in cash dividends. The decrease was partially offset by $2.2 million in net income during the nine months ended June 30, 2015, $1.0 million related to the Company’s employee stock ownership plan and its equity incentive plans along with a $298,000 after-tax increase in the fair value of the available-for-sale securities portfolio.

 

COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2015 AND 2014

 

Net income. The Company recognized net income of $47,000, or $0.01 per basic and diluted share, for the quarter ended June 30, 2015 as compared to $521,000, or $0.06 per basic and diluted share, for the same quarter in 2014. For the nine months ended June 30, 2015, the Company recognized net income of $2.2 million or $0.26 per basic and diluted share, as compared to net income of $1.4 million, or $0.15 per basic and diluted share, for the comparable period in fiscal 2014. Profitability for the three month period ended June 30, 2015 primarily reflected the $231,000 gain recognized on the sale of the Snyder branch office. With regards to the nine month period ended June 30, 2015, the Company recorded an aggregate gain of $2.0 million from the sale of two branch offices as well as a $138,000 gain on the sale of a SBA loan, partially offset by a provision for loan losses of $585,000.

 

Net interest income. For the three months ended June 30, 2015, net interest income was $3.2 million as compared to $3.3 million for the same period in 2014, a slight decrease of $106,000. The decrease reflected an $81,000 or 2.0% decrease in interest income combined with a slight increase of $25,000 or 3.0% in interest paid on deposits and borrowings. The decrease in interest income primarily resulted from a 5 basis point decrease to 3.31% in the weighted average yield earned on interest-earning assets for the June 2015 quarter combined with a modest 2.0% decrease in the average balance of interest-earning assets. Also contributing to the decrease in net interest income was a small increase of approximately $748,000 in the average balance of deposits and borrowings for three months ended June 30, 2015, as compared to the same quarter in 2014, combined with a 3 basis point increase in the cost of funds.

 

For the nine months ended June 30, 2015, net interest income increased $269,000 or 2.8% to $10.0 million as compared to $9.7 million for the same period in 2014. Interest income increased $309,000 or 2.5%, partially offset by a $40,000 or 1.6% increase in interest expense. The increase in interest expense resulted primarily from a 2 basis point increase to 0.91% in the weighted average rate paid on interest-bearing liabilities resulting in large part from an increase in the average balance outstanding of certificates of deposit when comparing the nine month periods ended June 30, 2015 and 2014. The increase in interest income resulted from an 11 basis point increase to 3.37% in the weighted average yield earned on interest-earning assets partially offset by a $5.3 million or 1.1% decrease to $499.4 million in the average balance of interest-earning assets for the nine months ended June 30, 2015 as compared to the same period in fiscal 2014. The increase in the weighted average yield earned reflected the effect of current market rates on newly originated and adjustable-rate loans as well as on investment securities.

 

For the three months ended June 30, 2015, the net interest margin was 2.62% compared to 2.69% for the same period in fiscal 2014. The seven basis point decrease was primarily due to lower level of earning assets along with a lower yield in the 2015 quarter. For the nine months ended June 30, 2015, the net interest margin was 2.67% as compared to 2.57% for the same period in fiscal 2014 primarily due to the Company earning a higher weighted average yield on earning assets from the reinvestment of cash and cash equivalents into loans and investment securities.

 

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

                   
   Three Months
Ended June 30,
   2015  2014
   Average
Balance
  Interest  Average
Yield/Rate (1)
  Average
Balance
  Interest  Average
Yield/Rate (1)
    
   (Dollars in Thousands)
Interest-earning assets:                              
Investment securities  $77,804   $487    2.51%  $87,985   $551    2.51%
Mortgage-backed securities   65,198    465    2.86    49,624    378    3.06 
Loans receivable(2)   320,877    3,085    3.86    320,060    3,185    3.99 
Other interest-earning assets   27,134    18    0.28    35,875    22    0.25 
Total interest-earning assets   491,013    4,055    3.31    493,544    4,136    3.36 
Cash and non interest-bearing balances   2,009              2,426           
Other non interest-earning assets   21,111              17,908           
Total assets  $514,133             $513,878           
Interest-bearing liabilities:                              
Savings accounts  $75,673    52    0.28   $78,404    62    0.32 
Money market deposit and NOW accounts   97,171    83    0.34    101,031    88    0.35 
Certificates of deposit   206,422    715    1.39    199,399    675    1.36 
Total deposits   379,266    850    0.90    378,834    825    0.87 
Advances from Federal Home Loan Bank   221    -    0.00    340    -    0.00 
Advances from borrowers for taxes and insurance   2,300    1    0.17    1,865    1    0.22 
Total interest-bearing liabilities   381,787    851    0.89    381,039    826    0.87 
Non interest-bearing liabilities:                              
Non interest-bearing demand accounts   2,129              2,552           
Other liabilities   2,662              4,665           
Total liabilities   386,578              388,256           
Stockholders’ equity   127,555              125,622           
Total liabilities and stockholders’ equity  $514,133             $513,878           
Net interest-earning assets  $109,226             $112,505           
Net interest income; interest rate spread       $3,204    2.42%       $3,310    2.49%
Net interest margin(3)             2.62%             2.69%
                               
Average interest-earning assets to average interest-bearing liabilities        128.61%             129.53%     

  

 

(1)Yields and rates for the three month periods are annualized.

 

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

 

(3)Equals net interest income divided by average interest-earning assets.

 

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   Nine Months
Ended Jume 30,
   2015  2014
   Average
Balance
  Interest  Average
Yield/Rate (1)
  Average
Balance
  Interest  Average
Yield/Rate (1)
    
   (Dollars in Thousands)
Interest-earning assets:                              
Investment securities  $82,797   $1,587    2.56%  $86,972   $1,639    2.52%
Mortgage-backed securities   59,291    1,331    3.00    44,100    1,054    3.20 
Loans receivable(2)   325,782    9,629    3.95    318,410    9,489    3.98 
Other interest-earning assets   31,539    52    0.22    55,234    108    0.26 
Total interest-earning assets   499,409    12,599    3.37    504,716    12,290    3.26 
Cash and non interest-bearing balances   2,164              2,470           
Other non interest-earning assets   19,193              14,557           
Total assets  $520,766             $521,743           
Interest-bearing liabilities:                              
Savings accounts  $75,662    161    0.28   $79,420    197    0.33 
Money market deposit and NOW accounts   99,318    257    0.35    100,196    260    0.35 
Certificates of deposit   210,089    2,202    1.40    205,667    2,123    1.38 
Total deposits   385,069 &n