UNITED
      STATESSECURITIES
      AND EXCHANGE COMMISSIONWashington,
      DC 20549FORM
      10-Q




(Mark
      One)x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the quarterly period ended March 31, 2009ORo
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period from
                
      toCommission
      file number: 000-51214





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





Pennsylvania
              68-0593604(State
      or Other Jurisdiction of Incorporation or Organization)
              (I.R.S.
      Employer Identification No.)1834
      Oregon Avenue
              19145Philadelphia,
      Pennsylvania(Address
      of Principal Executive Offices)
              (Zip
      Code)(215)
      755-1500(Registrant’s
      Telephone Number, Including Area
Code)




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




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).


o Yes      
oNo




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” and “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large
      accelerated filer o
                Accelerated
      filer oNon-accelerated
      filer o
      (Do not check is smaller reporting company)
                Smaller
      reporting company xIndicate
      by check mark whether the registrant is a shell company (as defined in
      Rule 12b-2 of the Exchange Act).o Yes     x
  No




Indicate
the number of shares outstanding of each of the issuer’s classes of common stock
as of the latest practical date: as of May 9, 2009, 11,069,866 shares were
issued and outstanding









PRUDENTIAL
BANCORP, INC. OF PENNSYLVANIA




TABLE
OF CONTENTS


PAGEPART
      I
                            FINANCIAL
      INFORMATION:Item
      1.
                            Condensed
      Consolidated Financial StatementsUnaudited
      Condensed Consolidated Statements of Financial Condition March 31, 2009
      and September 30, 2008 (as restated)
                            
                            2Unaudited
      Condensed Consolidated Statements of Operations for the Three And Six
      Months Ended March 31, 2009 and 2008 (as restated)
                            
                            3Unaudited
      Condensed Consolidated Statements of Changes in Stockholders’ Equity and
      Comprehensive Income for the Six Months Ended March 31, 2009 and 2008 (as
      restated)
                            
                            4Unaudited
      Condensed Consolidated Statements of Cash Flows for the Six Months Ended
      March 31, 2009 and 2008 (as restated)
                            
                            5Notes
      to Unaudited Condensed Consolidated Financial Statements
                            
                            6Item
      2.
                            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                            
                            27Item
      3.
                            Quantitative
      and Qualitative Disclosures About Market Risk
                            
                            39Item
      4T.
                            Controls
      and Procedures
                            
                            42PART
      II
                            OTHER
      INFORMATIONItem
      1.
                            Legal
      Proceedings
                            
                            43Item
      1A.
                            Risk
      Factors
                            
                            43Item
      2.
                            Unregistered
      Sales of Equity Securities and Use of Proceeds
                            
                            43Item
      3.
                            Defaults
      Upon Senior Securities
                            
                            43Item
      4.
                            Submission
      of Matters to a Vote of Security Holders
                            
                            43Item
      5.
                            Other
      Information
                            
                            44Item
      6.
                            Exhibits
                            
                            45SIGNATURES
                            
                            46


1




PRUDENTIAL
      BANCORP, INC. OF PENNSYLVANIA AND SUBSIDIARIESUNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL
  CONDITION





March
      31,
                      2009
                    
                    
                    September
      30,
                      2008(as
      restated
                      See
      Note 10)(Dollars
      in Thousands)ASSETSCash
      and amounts due from depository institutions
                    
                    $
                    10,845
                    
                    
                    $
                    4,318Interest-bearing
      deposits
                    
                    
                    15,792
                    
                    
                    
                    5,136Total
      cash and cash equivalents
                    
                    
                    26,637
                    
                    
                    
                    9,454Investment
      and mortgage-backed securities held to maturity (estimated fair value—
      March 31, 2009, $156,705; September 30, 2008, $160,522)
                    
                    
                    154,826
                    
                    
                    
                    163,303Investment
      and mortgage-backed securities available for sale (amortized cost— March
      31, 2009, $60,165; September 30, 2008, $56,152)
                    
                    
                    58,040
                    
                    
                    
                    55,106Loans
      receivable—net of allowance for loan losses (March 31, 2009, $1,737;
      September 30, 2008, $1,591)
                    
                    
                    253,348
                    
                    
                    
                    243,969Accrued
      interest receivable:Loans
      receivable
                    
                    
                    1,344
                    
                    
                    
                    1,291Mortgage-backed
      securities
                    
                    
                    400
                    
                    
                    
                    393Investment
      securities
                    
                    
                    1,188
                    
                    
                    
                    1,493Real
      estate owned
                    
                    
                    4,084
                    
                    
                    
                    1,488Federal
      Home Loan Bank stock—at cost
                    
                    
                    3,545
                    
                    
                    
                    2,620Office
      properties and equipment—net
                    
                    
                    2,024
                    
                    
                    
                    2,182Prepaid
      expenses and other assets
                    
                    
                    7,180
                    
                    
                    
                    7,147Deferred
      tax asset-net
                    
                    
                    2,034
                    
                    
                    
                    1,091TOTAL
      ASSETS
                    
                    $
                    514,650
                    
                    
                    $
                    489,537LIABILITIES
      AND STOCKHOLDERS’ EQUITYLIABILITIES:Deposits:Noninterest-bearing
                    
                    $
                    3,469
                    
                    
                    $
                    4,327Interest-bearing
                    
                    
                    415,794
                    
                    
                    
                    372,503Total
      deposits
                    
                    
                    419,263
                    
                    
                    
                    376,830Advances
      from Federal Home Loan Bank
                    
                    
                    19,680
                    
                    
                    
                    31,701Accrued
      interest payable
                    
                    
                    2,509
                    
                    
                    
                    3,471Advances
      from borrowers for taxes and insurance
                    
                    
                    1,402
                    
                    
                    
                    1,348Accounts
      payable and accrued expenses
                    
                    
                    6,916
                    
                    
                    
                    7,169Accrued
      dividend payable
                    
                    
                    528
                    
                    
                    
                    531Total
      liabilities
                    
                    
                    450,298
                    
                    
                    
                    421,050COMMITMENTS
      AND CONTINGENCIES (Note 8)STOCKHOLDERS’
      EQUITY:Preferred
      stock, $.01 par value, 10,000,000 shares authorized, none
      issued
                    
                    
                    —
                    
                    
                    
                    —Common
      stock, $.01 par value, 40,000,000 shares authorized, issued 12,563,750;
      outstanding - 11,069,866 at March 31, 2009 and September 30,
      2008
                    
                    
                    126
                    
                    
                    
                    126Additional
      paid-in capital
                    
                    
                    52,608
                    
                    
                    
                    54,925Unearned
      ESOP shares
                    
                    
                    (3,569
                    )
                    
                    
                    (3,680
                    )Treasury
      stock, at cost: 1,493,884 shares at March 31, 2009 and September 30,
      2008
                    
                    
                    (19,481
                    )
                    
                    
                    (19,481
                    )Retained
      earnings
                    
                    
                    36,071
                    
                    
                    
                    37,288Accumulated
      other comprehensive loss
                    
                    
                    (1,403
                    )
                    
                    
                    (691
                    )Total
      stockholders’ equity
                    
                    
                    64,352
                    
                    
                    
                    68,487TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                    
                    $
                    514,650
                    
                    
                    $
                    489,537




See notes
to unaudited condensed consolidated financial statements.


2





PRUDENTIAL
      BANCORP, INC. OF PENNSYLVANIA AND SUBSIDIARIESUNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS





Three
      Months Ended
                March
      31,
              
              
              Six
      Months Ended
                March
      31,2009
              
              
              2008
              
              
              2009
              
              
              2008(as
      restated
                see
      Note 10)
              
              
              
              
              
              (as
      restated
                see
      Note 10)(Dollars
      in Thousands Except Per
                Share
      Amounts)
              
              
              (Dollars
      in Thousands Except Per
                Share
      Amounts)INTEREST
      INCOME:Interest
      on loans
              
              $
              3,863
              
              
              $
              3,589
              
              
              $
              7,590
              
              
              $
              7,224Interest
      on mortgage-backed securities
              
              
              1,562
              
              
              
              757
              
              
              
              3,318
              
              
              
              1,480Interest
      and dividends on investments
              
              
              1,480
              
              
              
              2,219
              
              
              
              3,224
              
              
              
              4,522Total
      interest income
              
              
              6,905
              
              
              
              6,565
              
              
              
              14,132
              
              
              
              13,226INTEREST
      EXPENSE:Interest
      on deposits
              
              
              3,202
              
              
              
              3,478
              
              
              
              6,361
              
              
              
              6,973Interest
      on borrowings
              
              
              224
              
              
              
              289
              
              
              
              527
              
              
              
              689Total
      interest expense
              
              
              3,426
              
              
              
              3,767
              
              
              
              6,888
              
              
              
              7,662NET
      INTEREST INCOME
              
              
              3,479
              
              
              
              2,798
              
              
              
              7,244
              
              
              
              5,564PROVISION
      FOR LOAN LOSSES
              
              
              50
              
              
              
              75
              
              
              
              363
              
              
              
              150NET
      INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
              
              
              3,429
              
              
              
              2,723
              
              
              
              6,881
              
              
              
              5,414NON-INTEREST
      INCOME:Fees
      and other service charges
              
              
              131
              
              
              
              133
              
              
              
              256
              
              
              
              275Other
              
              
              82
              
              
              
              80
              
              
              
              164
              
              
              
              160Total
      other-than-temporary impairment losses
              
              
              (3,156
              )
              
              
              (1,492
              )
              
              
              (5,310
              )
              
              
              (1,492
              )Portion
      of loss recognized in other comprehensive income, before
    taxes
              
              
              2,509
              
              
              
              —
              
              
              
              2,509
              
              
              
              —Net
      impairment losses recognized in earnings
              
              
              (647
              )
              
              
              (1,492
              )
              
              
              (2,801
              )
              
              
              (1,492
              )Total
      non-interest loss
              
              
              (434
              )
              
              
              (1,279
              )
              
              
              (2,381
              )
              
              
              (1,057
              )NON-INTEREST
      EXPENSE:Salaries
      and employee benefits
              
              
              1,262
              
              
              
              1,153
              
              
              
              2,330
              
              
              
              2,300Data
      processing
              
              
              136
              
              
              
              129
              
              
              
              301
              
              
              
              253Professional
      services
              
              
              204
              
              
              
              472
              
              
              
              420
              
              
              
              557Office
      occupancy
              
              
              109
              
              
              
              99
              
              
              
              204
              
              
              
              185Depreciation
              
              
              81
              
              
              
              83
              
              
              
              166
              
              
              
              166Payroll
      taxes
              
              
              78
              
              
              
              79
              
              
              
              141
              
              
              
              146Director
      compensation
              
              
              64
              
              
              
              65
              
              
              
              121
              
              
              
              129Other
              
              
              744
              
              
              
              424
              
              
              
              1,449
              
              
              
              778Total
      non-interest expense
              
              
              2,678
              
              
              
              2,504
              
              
              
              5,132
              
              
              
              4,514INCOME
      (LOSS) BEFORE TAXES
              
              
              317
              
              
              
              (1,060
              )
              
              
              (632
              )
              
              
              (157
              )INCOME
      TAXES:Current
      expense (benefit)
              
              
              350
              
              
              
              (71
              )
              
              
              853
              
              
              
              259Deferred
      expense (benefit)
              
              
              15
              
              
              
              (310
              )
              
              
              (444
              )
              
              
              (351
              )Total
      income tax expense (benefit)
              
              
              365
              
              
              
              (381
              )
              
              
              409
              
              
              
              (92
              )NET
      LOSS
              
              $
              (48
              )
              
              $
              (679
              )
              
              $
              (1,041
              )
              
              $
              (65
              )BASIC
      LOSS PER SHARE
              
              $
              (0.004
              )
              
              $
              (0.06
              )
              
              $
              (0.10
              )
              
              $
              (0.01
              )DILUTED
      LOSS PER SHARE
              
              $
              (0.004
              )
              
              $
              (0.06
              )
              
              $
              (0.10
              )
              
              $
              (0.01
              )





See
      notes to unaudited condensed consolidated financial
      statements.


3


PRUDENTIAL
BANCORP, INC. OF PENNSYLVANIA AND SUBSIDIARIES
 UNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF CHANGES INSTOCKHOLDERS’
      EQUITY AND COMPREHENSIVE INCOME (AS RESTATED, SEE NOTE
  10)
  Common
                          Stock
                        
                        
                        Additional
                          Paid-In
                          Capital
                        
                        
                        Unearned
                          ESOP
                          Shares
                        
                        
                        Treasury
                          Stock
                        
                        
                        Retained
                          Earnings
                        
                        
                        Accumulated
                          Other
                          Comprehensive
                          Loss
                        
                        
                        Total
                          Stockholders’
                          Equity
                        
                        
                        Comprehensive
                          Loss(Dollars
      in Thousands)BALANCE,
      OCTOBER 1, 2008
                        
                        $
                        126
                        
                        
                        $
                        54,925
                        
                        
                        $
                        (3,680
                        )
                        
                        $
                        (19,481
                        )
                        
                        $
                        37,288
                        
                        
                        $
                        (691
                        )
                        
                        $
                        68,487(As
      restated - see Note 10)Cummulative
      adjustment related to the adoption of EITF 06-10, net of
    tax
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (256
                        )
                        
                        
                        
                        
                        
                        
                        (256
                        )Comprehensive
      income:Cummulative
      adjustment related to the adoption of FSP SFAS 115-2 and SFAS 124-2, net
      of income tax benefit of $390 (see Note 1)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        1,148
                        
                        
                        
                        (758
                        )
                        
                        
                        390
                        
                        
                        
                        390Net
      loss
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (1,041
                        )
                        
                        
                        
                        
                        
                        
                        (1,041
                        )
                        
                        
                        (1,041
                        )Net
      unrealized holding loss on available for sale securities arising during
      the period, net of income tax benefit of $928 (See Note 1)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (1,802
                        )
                        
                        
                        (1,802
                        )
                        
                        
                        (1,802
                        )Reclassification
      adjustment for other than temporary impairment recognized in earnings net
      of tax of $953 (See Note 1)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        1,848
                        
                        
                        
                        1,848
                        
                        
                        
                        1,848Comprehensive
      loss
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        (605
                        )Cash
      dividend declared ($.10 per share)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (1,068
                        )
                        
                        
                        
                        
                        
                        
                        (1,068
                        )Excess
      tax benefit from stock compensation
                        
                        
                        
                        
                        
                        
                        35
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        35Stock
      option expense
                        
                        
                        
                        
                        
                        
                        52
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        52Recognition
      and Retention Plan expense
                        
                        
                        
                        
                        
                        
                        57
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        57Nonvested
      share grant APIC adjustment
                        
                        
                        
                        
                        
                        
                        (2,465
                        )
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (2,465
                        )ESOP
      shares committed to be released
                        
                        
                        —
                        
                        
                        
                        4
                        
                        
                        
                        111
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        115BALANCE,
      March 31, 2009
                        
                        $
                        126
                        
                        
                        $
                        52,608
                        
                        
                        $
                        (3,569
                        )
                        
                        $
                        (19,481
                        )
                        
                        $
                        36,071
                        
                        
                        $
                        (1,403
                        )
                        
                        $
                        64,352
  Common
                                                                                                                                                  Stock
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                Additional
                                                                                                                                                  Paid-In
                                                                                                                                                  Capital
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                Unearned
                                                                                                                                                  ESOP
                                                                                                                                                  Shares
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                Treasury
                                                                                                                                                  Stock
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                Retained
                                                                                                                                                  Earnings
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                Accumulated
                                                                                                                                                  Other
                                                                                                                                                  Comprehensive
                                                                                                                                                  Income
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                Total
                                                                                                                                                  Stockholders’
                                                                                                                                                  Equity
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                Comprehensive
                                                                                                                                                  Income(Dollars
      in Thousands)BALANCE,
      OCTOBER 1, 2007
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                126
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                54,880
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                (3,903
                                                                                                                                                )
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                (14,372
                                                                                                                                                )
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                43,971
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                259
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                80,961(as originally
      stated)Restatement
      - See
      note10
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                (403
                                                                                                                                                )
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                (403
                                                                                                                                                )BALANCE,
      OCTOBER 1, 2007(as
      restated)
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                126
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                54,880
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                (3,903
                                                                                                                                                )
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                (14,372
                                                                                                                                                )
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                43,568
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                259
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                80,558Comprehensive
      income:Net
      loss
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                (65
                                                                                                                                                )
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                (65
                                                                                                                                                )
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                (65
                                                                                                                                                )Net
      unrealized holding loss on available for sale securities arising during
      the period, net of income tax benefit of $317 (see Note1)
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                (615
                                                                                                                                                )
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                (615
                                                                                                                                                )
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                (615
                                                                                                                                                )Reclassification
      adjustment for other than temporary impairment net of tax of $507 (see
      Note 1)
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                985
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                985
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                985Comprehensive
      income
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                305Treasury
      stock purchased
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                (4,893
                                                                                                                                                )
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                (4,893
                                                                                                                                                )Cash
      dividend declared ($.10 per share)
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                (1,082
                                                                                                                                                )
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                (1,082
                                                                                                                                                )ESOP
      shares committed to be released
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                —
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                31
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                111
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                —
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                —
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                —
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                142BALANCE,
      March 31, 2008
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                126
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                54,911
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                (3,792
                                                                                                                                                )
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                (19,265
                                                                                                                                                )
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                42,421
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                629
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                75,030
  See notes
to unaudited condensed consolidated financial statements
 4
  PRUDENTIAL
      BANCORP, INC. OF PENNSYLVANIA AND SUBSIDIARIESUNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
 
 Six
      Months Ended March 31,2009
                      
                      
                      2008(As
      restated
                        see
      note 10)(Dollars
      in Thousands)OPERATING
      ACTIVITIES:Net
      loss
                      
                      $
                      (1,041
                      )
                      
                      $
                      (65
                      )Adjustments
      to reconcile net income to net cash used in operating
      activities:Provision
      for loan losses
                      
                      
                      363
                      
                      
                      
                      150Depreciation
                      
                      
                      166
                      
                      
                      
                      166Net
      accretion of premiums/discounts
                      
                      
                      (922
                      )
                      
                      
                      (40
                      )Net
      accretion of deferred loan fees and costs
                      
                      
                      (76
                      )
                      
                      
                      (134
                      )Impairment
      charge on investment securities
                      
                      
                      2,801
                      
                      
                      
                      1,492Share
      based compensation expense
                      
                      
                      144
                      
                      
                      
                      —Real
      estate owned writedown
                      
                      
                      186
                      
                      
                      
                      —Amortization
      of ESOP
                      
                      
                      115
                      
                      
                      
                      142Income
      from bank owned life insurance
                      
                      
                      (104
                      )
                      
                      
                      (98
                      )Deferred
      income tax benefit
                      
                      
                      (444
                      )
                      
                      
                      (351
                      )Excess
      tax benefit related to stock compensation
                      
                      
                      (35
                      )
                      
                      
                      —Changes
      in assets and liabilities which used cash:Accounts
      payable and accrued expenses
                      
                      
                      (640
                      )
                      
                      
                      1,217Accrued
      interest payable
                      
                      
                      (962
                      )
                      
                      
                      (1,077
                      )Prepaid
      expenses and other assets
                      
                      
                      71
                      
                      
                      
                      (1,680
                      )Accrued
      interest receivable
                      
                      
                      245
                      
                      
                      
                      419Net
      cash (used in) provided by operating activities
                      
                      
                      (133
                      )
                      
                      
                      141INVESTING
      ACTIVITIES:Purchase
      of investment and mortgage-backed securities held to
    maturity
                      
                      
                      (49,994
                      )
                      
                      
                      (57,943
                      )Purchase
      of investment and mortgage-backed securities available for
      sale
                      
                      
                      (8,770
                      )
                      
                      
                      (9,842
                      )Loans
      originated or acquired
                      
                      
                      (35,654
                      )
                      
                      
                      (29,964
                      )Principal
      collected on loans
                      
                      
                      23,206
                      
                      
                      
                      23,714Principal
      payments received on investment and mortgage-backed
      securities:held-to-maturity
                      
                      
                      58,589
                      
                      
                      
                      74,524available-for-sale
                      
                      
                      3,899
                      
                      
                      
                      2,744(Acquisition)
      redemption of FHLB stock, net
                      
                      
                      (925
                      )
                      
                      
                      334Purchases
      of equipment
                      
                      
                      (8
                      )
                      
                      
                      (48
                      )Net
      cash (used in) provided by investing activities
                      
                      
                      (9,657
                      )
                      
                      
                      3,519FINANCING
      ACTIVITIES:Net
      increase in demand deposits, NOW accounts, and savings
      accounts
                      
                      
                      505
                      
                      
                      
                      2,412Net
      increase in certificates of deposit
                      
                      
                      41,928
                      
                      
                      
                      17,949Net
      repayment of advances from Federal Home Loan Bank
                      
                      
                      (12,021
                      )
                      
                      
                      (11,021
                      )Increase
      in advances from borrowers for taxes and insurance
                      
                      
                      54
                      
                      
                      
                      132Excess
      tax benefit related to stock compensation
                      
                      
                      35
                      
                      
                      
                      —Acquisition
      of stock for Recognition and Retention Plan
                      
                      
                      (2,465
                      )
                      
                      
                      —Cash
      dividend paid
                      
                      
                      (1,063
                      )
                      
                      
                      (1,125
                      )Purchase
      of treasury stock
                      
                      
                      —
                      
                      
                      
                      (4,893
                      )Net
      cash provided by financing activities
                      
                      
                      26,973
                      
                      
                      
                      3,454NET
      INCREASE IN CASH AND CASH EQUIVALENTS
                      
                      
                      17,183
                      
                      
                      
                      7,114CASH
      AND CASH EQUIVALENTS—Beginning of period
                      
                      
                      9,454
                      
                      
                      
                      12,269CASH
      AND CASH EQUIVALENTS—End of period
                      
                      $
                      26,637
                      
                      
                      $
                      19,383SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Interest
      paid on deposits and advances from Federal Home Loan Bank
                      
                      $
                      7,850
                      
                      
                      $
                      8,738Income
      taxes paid
                      
                      $
                      1,329
                      
                      
                      $
                      667SUPPLEMENTAL
      DISCLOSURES OF NONCASH ITEMS:Real
      estate acquired in settlement of loans
                      
                      $
                      2,782
                      
                      
                      $
                      1,598Impact
      of adoption of EITF 06-10 on other liabilities
                      
                      $
                      388
                      
                      
                      $
                      —
  See notes
to unaudited condensed consolidated financial statements.
 5
  PRUDENTIAL
      BANCORP, INC. OF PENNSYLVANIA AND SUBSIDIARIESNOTES
      TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL
  STATEMENTS
  1.
                SIGNIFICANT
      ACCOUNTING POLICIESBasis of
      presentation–The accompanying
      unaudited condensed consolidated financial statements were prepared
      pursuant to the rules and regulations of the United States 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, 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.
      Certain financial information from the prior periods has been condensed to
      conform to the current presentation. The results for the three and six
      months ended March 31, 2009 are not necessarily indicative of the results
      that may be expected for the fiscal year ending September 30, 2009, or any
      other period. These financial statements should be read in conjunction
      with the audited consolidated financial statements of Prudential Bancorp,
      Inc. of Pennsylvania (the “Company”) and the accompanying notes thereto
      for the year ended September 30, 2008 included in the Company’s Annual
      Report on Form 10-K for the fiscal year ended September 30,
      2008.Use of
      Estimates in the Preparation of Financial Statements—The preparation of
      financial statements in conformity with GAAP in the United States of
      America requires management to make estimates and assumptions that affect
      the reported amounts of assets and liabilities and the disclosure of
      contingent assets and liabilities at the date of the financial statements
      and the reported amounts of income and expenses during the reporting
      period. The most significant estimates and assumptions in the Company’s
      consolidated financial statements are recorded in the allowance for loan
      losses, deferred income taxes, and the fair value measurement for
      investment securities available for sale. Actual results could differ from
      those estimates.Dividend
      Payable– On March 18,
      2009, the Company’s Board of Directors declared a quarterly cash dividend
      of $.05 on the common stock of the Company payable on April 27, 2009 to
      the shareholders of record at the close of business on April 13, 2009
      which resulted in a payable of $528,000 at March 31, 2009. A portion of
      the cash dividend was payable to Prudential Mutual Holding Company (the
      “MHC”) due to its ownership of shares of the Company’s common stock and
      totaled $358,000.Employee
      Stock Ownership Plan–The Company maintains
      an employee stock ownership plan (“ESOP”) for substantially all of its
      full-time employees. The ESOP purchased 452,295 shares of the Company’s
      common stock for an aggregate cost of approximately $4.5 million in fiscal
      2005. Shares of the Company’s common stock purchased by the ESOP are held
      in a suspense account until released for allocation to participants.
      Shares are allocated to each eligible participant based on the ratio of
      each such participant’s compensation, as defined in the ESOP, to the total
      compensation of all eligible plan participants. As the unearned shares are
      released from the suspense account, the Company recognizes compensation
      expense equal to the fair value of the ESOP shares during the periods in
      which they become committed to be released. To the extent that the fair
      value of the ESOP shares released differs from the cost of such shares,
      the difference is charged or credited to equity as additional paid-in
      capital. As of March 31, 2009, the Company had allocated a total of 84,825
      shares from the suspense account to participants and committed to release
      an additional 5,655 shares. In addition, at such date of the total number
      of shares of Company common stock held by the ESOP was 450,200. For the
      six months ended March 31, 2009, the Company recognized $107,000 in
      compensation expense.Share-Based
      Compensation–
      The Company accounts for stock-based compensation issued to employees, and
      where appropriate non-employees, in accordance with the fair value
      recognition provisions of SFAS No. 123(R), Share-Based Payment. Under the
      fair value provisions of Statement of Financial Accounting Standards
      (“SFAS”) No. 123(R), 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.
  6
  However,
      consistent with SFAS No. 123(R), the amount of stock-based compensation
      recognized at any date must at least equal the portion of the grant date
      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. Although the
      provisions of SFAS No. 123(R) should generally be applied to
      non-employees, Emerging Issues Task Force (“EITF”) No. 96-18, “Accounting
      for Equity Instruments That Are Issued to Other Than Employees,” is used
      in determining the measurement date of the compensation expense for
      non-employees.  Determining the fair value of stock-based awards at
      the date of grant requires judgment, including estimating the expected
      term of the stock options and the expected volatility of the Company’s
      stock. In addition, judgment is required in estimating the amount of
      stock-based awards that are expected to be forfeited. If actual results
      differ significantly from these estimates or different key assumptions
      were used, it could have a material effect on the Company’s Consolidated
      Financial Statements. See Note 7 of the Notes to Condensed Consolidated
      Financial Statements for additional information regarding stock-based
      compensation.Dividends
      with respect to non-vested share awards are held by the Company’s
      Recognition and Retention Plan (“Plan”) Trust (the “Trust”) for the
      benefit of the recipients and will be paid out proportionately by the
      Trust to the recipients of non-vested stock awards as granted pursuant to
      the Plan as soon as practicable after the non-vested stock awards are
      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. On January 21, 2009, the Company announced its
      seventh stock repurchase program to repurchase up to 198,000 shares or
      approximately 5% of the Company’s outstanding common stock held by
      shareholders other than the MHC. The average cost per share of the shares
      which have been repurchased by the Company was $13.04 for purchases
      through March 31, 2009. In addition, the MHC announced that its Board of
      Directors approved its second stock purchase plan to purchase up to
      198,000 shares or approximately 5% of the Company’s common stock held by
      shareholders other than the MHC. As of March 31, 2009, the MHC had
      purchased 243,152 shares at an average cost of $10.67 per share. The
      repurchased shares are available for general corporate
      purposes.
 
 Comprehensive
      Income (Loss)—The Company presents in the unaudited
      condensed consolidated statement of changes in stockholders’ equity and
      comprehensive income those amounts arising from transactions and other
      events which currently are excluded from the statements of operations and
      are recorded directly to stockholders’ equity. For the six months ended
      March 31, 2009 and 2008, the only components of comprehensive income were
      net income, unrealized holding gains and losses, net of income tax expense
      and benefit, on available for sale securities and reclassifications
      related to realized loss due to other than temporary impairment, net of
      tax. Reclassifications are made to avoid double counting in comprehensive
      income (loss) items which are displayed as part of net income for the
      period. These reclassifications are as
follows:
  7
  Disclosure
      of Reclassification Amounts, Net of
Tax
  For
      the six months ended March 31,2009
                                                                                                                          
                                                                                                                          
                                                                                                                          2008Pre-tax
                                                                                                                          
                                                                                                                          
                                                                                                                          Tax
                                                                                                                          
                                                                                                                          
                                                                                                                          After-tax
                                                                                                                          
                                                                                                                          
                                                                                                                          Pre-tax
                                                                                                                          
                                                                                                                          
                                                                                                                          Tax
                                                                                                                          
                                                                                                                          
                                                                                                                          After-taxBeginning
      accumulated other comprehensive loss (income)
                                                                                                                          
                                                                                                                          $
                                                                                                                          (1,047
                                                                                                                          )
                                                                                                                          
                                                                                                                          $
                                                                                                                          356
                                                                                                                          
                                                                                                                          
                                                                                                                          $
                                                                                                                          (691
                                                                                                                          )
                                                                                                                          
                                                                                                                          $
                                                                                                                          392
                                                                                                                          
                                                                                                                          
                                                                                                                          $
                                                                                                                          (133
                                                                                                                          )
                                                                                                                          
                                                                                                                          $
                                                                                                                          259Net
      unrealized holding loss on available for sale securities arising during
      the period
                                                                                                                          
                                                                                                                          
                                                                                                                          (2,730
                                                                                                                          )
                                                                                                                          
                                                                                                                          
                                                                                                                          928
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          (1,802
                                                                                                                          )
                                                                                                                          
                                                                                                                          
                                                                                                                          (932
                                                                                                                          )
                                                                                                                          
                                                                                                                          
                                                                                                                          317
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          (615
                                                                                                                          )Reclassification
      adjustment for other-than-temporary impairment recognized in
      earnings
                                                                                                                          
                                                                                                                          
                                                                                                                          2,801
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          (953
                                                                                                                          )
                                                                                                                          
                                                                                                                          
                                                                                                                          1,848
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          1,492
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          (507
                                                                                                                          )
                                                                                                                          
                                                                                                                          
                                                                                                                          985Reclassification
      adjustment for portion of impairment loss recognized in other
      comprehensive loss
                                                                                                                          
                                                                                                                          
                                                                                                                          (1,148
                                                                                                                          )
                                                                                                                          
                                                                                                                          
                                                                                                                          390
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          (758
                                                                                                                          )
                                                                                                                          
                                                                                                                          
                                                                                                                          -
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          -
                                                                                                                          
                                                                                                                          
                                                                                                                          
                                                                                                                          -Ending
      accumulated other comprehensive loss (income)
                                                                                                                          
                                                                                                                          $
                                                                                                                          (2,124
                                                                                                                          )
                                                                                                                          
                                                                                                                          $
                                                                                                                          721
                                                                                                                          
                                                                                                                          
                                                                                                                          $
                                                                                                                          (1,403
                                                                                                                          )
                                                                                                                          
                                                                                                                          $
                                                                                                                          952
                                                                                                                          
                                                                                                                          
                                                                                                                          $
                                                                                                                          (323
                                                                                                                          )
                                                                                                                          
                                                                                                                          $
                                                                                                                          629
 FHLB Stock–Federal
      Home Loan Bank(“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. The Company has
      been informed that the FHLB of Pittsburgh has ceased paying dividends on
      shares of stock and repurchasing shares thereof. While certain conditions
      are noted that required management to evaluate the stock for impairment it
      is currently not probable that the Company will not realize its cost
      basis. Management concluded that no impairment existed as of March 31,
      2009.Recent
      Accounting Pronouncements–In March 2007, the
      Financial Accounting Standards Board (“FASB”) ratified EITF Issue No.
      06-10 “Accounting for Collateral Assignment Split-Dollar Life Insurance
      Agreements” (EITF 06-10). EITF 06-10 provides guidance for determining a
      liability for the postretirement benefit obligation as well as recognition
      and measurement of the associated asset on the basis of the terms of the
      collateral assignment agreement. EITF 06-10 is effective for fiscal years
      beginning after December 15, 2007. Upon adoption of the accounting
      guidance under EITF 06-10 as of October 1, 2008, the Company recognized a
      liability of $388,000 in accordance with Accounting Principles Board
      Opinion (“APB”) No. 12, Omnibus Opinion—1967 and recorded a corresponding
      reduction to retained earnings, net of tax, representing the cumulative
      effect of the change in accounting principle.In
      February 2008, the FASB issued FASB Staff Position (“FSP”) No. 157-2,
      “Effective Date of FASB Statement No. 157”. The FSP delays the effective
      date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities,
      except for items that are recognized or disclosed at fair value in an
      entity’s financial statements on a recurring basis (at least annually), to
      fiscal years beginning after November 15, 2008. The Company is currently
      evaluating the impact of the FSP on its financial
    statements.In
      April 2009, the FASB issued FSP SFAS No. 107-1 and Accounting Principles
      Board (“APB”) 28-1, “Interim Disclosures about Fair Value of Financial
      Instruments”. FSP SFAS No. 107-1 and APB 28-1 require a public entity to
      provide disclosures about fair value of financial instruments in interim
      financial information. FSP SFAS No. 107-1 and APB 28-1 is effective for
      interim and annual financial periods ending after June 15, 2009, with
      early adoption permitted for periods ending after March 15, 2009. An
      entity adopting this FSP early must also adopt FSP SFAS No. 157-4 and FSP
      SFAS No. 115-2 and SFAS No. 124-2. The Company intends to adopt FSP SFAS
      No. 107-1 on June 30, 2009. As FSP SFAS No. 107-1 amends only the
      disclosure requirements of financial instruments, the adoption of FSP SFAS
      No. 107-1 will not impact the Company’s financial condition or results of
      operations.
 8
 
 In
      April 2009, the FASB issued FSP SFAS No. 115-2 and SFAS No. 124-2,
      “Recognition and Presentation of Other-Than-Temporary Impairments”. FSP
      SFAS No. 115-2 and SFAS No. 124-2 amends existing guidance for determining
      whether an impairment is other than temporary to debt securities and
      replaces the existing requirement that the entity’s management assert it
      has both the intent and ability to hold an impaired security until
      recovery with a requirement that management assert: (a) it does not have
      the intent to sell the security; and (b) it is more likely than not it
      will not have to sell the security before recovery of its cost basis.
      Under FSP SFAS No. 115-2 and SFAS No. 124-2, declines in the fair value of
      held-to-maturity and available-for-sale securities below their cost that
      are deemed to be other than temporary are reflected in earnings as
      realized losses to the extent the impairment is related to credit losses.
      The amount of impairment related to other factors is recognized in other
      comprehensive income. FSP SFAS No. 115-2 and SFAS No. 124-2 is effective
      for interim and annual periods ending after June 15, 2009, with early
      adoption permitted for periods ending after March 15, 2009. An entity
      adopting FSP SFAS No. 115-2 and SFAS No. 124-2 early must also adopt FSP
      SFAS 157-4. The Company has chosen to early adopt FSP SFAS No. 115-2 and
      SFAS No. 124-2. As a result, provisions of the guidance are applicable to
      the Company as of January 1, 2009. See note 3 for discussion of the impact
      of adoption on the Company’s financial condition and results of
      operations.In
      April 2009, the FASB issued FSP SFAS No. 157-4, “Determining Fair Value
      When the Volume and Level of Activity for the Asset or Liability Have
      Significantly Decreased and Identifying Transactions That Are Not
      Orderly”. FSP SFAS No. 157-4 includes additional factors for determining
      whether there has been a significant decrease in market activity, affirms
      the objective of fair value when a market is not active, eliminates the
      presumption that all transactions are not orderly unless proven otherwise,
      and requires an entity to disclose inputs and valuation techniques, and
      changes therein, used to measure fair value. FSP SFAS No. 157-4 will be
      effective for interim and annual periods ending after June 15, 2009, with
      early adoption permitted for periods ending after March 15, 2009. An
      entity adopting FSP SFAS No. 157-4 early must also adopt FSP SFAS No.
      115-2 and SFAS No. 124-2. The Company adopted the requirements of FSP No.
      157-4 as of January 1, 2009 and it did not have a material impact on the
      Company’s financial condition or results of operations.In
      January 2009, the FASB issued final FSP No. EITF 99-20-1, “Amendments to
      the Impairment Guidance of EITF Issue No. 99-20”. The FSP amends the
      impairment guidance in EITF Issue No. 99-20, “Recognition of Interest
      Income and Impairment on Purchased Beneficial Interests and Beneficial
      Interests That Continue to Be Held by a Transferor in Securitized
      Financial Assets,” to achieve more consistent determination of whether an
      other-than-temporary impairment (OTTI) has occurred. The FSP retains and
      emphasizes the OTTI guidance and required disclosures in Statement 115,
      FSP FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary
      Impairment and Its Application to Certain Investments, SEC Staff
      Accounting Bulletin (SAB) Topic 5M, Other Than Temporary Impairment of
      Certain Investments in Debt and Equity Securities, and other related
      literature. The FSP is effective for interim and annual reporting periods
      ending after December 15, 2008, and is to be applied prospectively.
      Retrospective application to a prior interim or annual reporting period is
      not permitted. Consistent with paragraph 15 of FSP FAS 115-1 and FAS
      124-1, any other-than temporary impairment resulting from the application
      of Statement 115 or Issue 99-20 shall be recognized in earnings, following
      applicable provisions for recognition of the OTTI under FSP SFAS 115-2 and
      124-2 at the balance sheet date of the reporting period for which the
      assessment is made. The adoption of the requirements of FSP No. EITF
      99-20-1 by the Company did not have a material impact on its financial
      condition or results of operations.In
      June 2008, the FASB issued FSP No. EITF 03-6-1 Determining Whether
      Instruments Granted in Share-Based Payment Transactions Are Participating
      Securities. This FASB Staff Position (FSP) addresses whether instruments
      granted in share-based payment transactions are participating securities
      prior to vesting and, therefore, need to be included in the earnings
      allocation in computing earnings per share (EPS) under the two-class
      method described in paragraphs 60 and 61 of SFAS No. 128, Earnings per
      Share. The FSP is effective for fiscal years beginning after December 15,
      2008 and is to be applied retrospectively. The Company is currently
      evaluating the requirements of FSP No. EITF 03-6-1 and has not yet
      determined the impact, if any, on the Company’s financial condition or
      results of operations.
 9


2.
                  EARNINGS
      PER SHAREBasic
      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 (“CSEs”), based upon
      the treasury stock method using an average market price for the
      period.The
      calculated basic and diluted earnings per share are as
      follows:




Quarter
      Ended March 31,2009
                                                                                        
                                                                                        
                                                                                        2008Basic
                                                                                        
                                                                                        
                                                                                        Diluted
                                                                                        
                                                                                        
                                                                                        Basic
                                                                                        
                                                                                        
                                                                                        Diluted(Dollars
      in Thousands Except Per Share Data)Net
      loss
                                                                                        
                                                                                        $
                                                                                        (48
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        (48
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        (679
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        (679
                                                                                        )Weighted
      average shares outstanding
                                                                                        
                                                                                        
                                                                                        10,772,473
                                                                                        
                                                                                        
                                                                                        
                                                                                        10,772,473
                                                                                        
                                                                                        
                                                                                        
                                                                                        10,866,071
                                                                                        
                                                                                        
                                                                                        
                                                                                        10,866,071Effect
      of common stock equivalents
                                                                                        
                                                                                        
                                                                                        —
                                                                                        
                                                                                        
                                                                                        
                                                                                        49,987
                                                                                        
                                                                                        
                                                                                        
                                                                                        —
                                                                                        
                                                                                        
                                                                                        
                                                                                        —Adjusted
      weighted average shares used in earnings per share
    computation
                                                                                        
                                                                                        $
                                                                                        10,772,473
                                                                                        
                                                                                        
                                                                                        $
                                                                                        10,822,460
                                                                                        
                                                                                        
                                                                                        $
                                                                                        10,866,071
                                                                                        
                                                                                        
                                                                                        $
                                                                                        10,866,071Loss
      per share - basic and diluted
                                                                                        
                                                                                        $
                                                                                        (0.004
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        (0.004
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        (0.06
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        (0.06
                                                                                        )Six
      Months Ended March 31,2009
                                                                                        
                                                                                        
                                                                                        2008Basic
                                                                                        
                                                                                        
                                                                                        Diluted
                                                                                        
                                                                                        
                                                                                        Basic
                                                                                        
                                                                                        
                                                                                        Diluted(Dollars
      in Thousands Except Per Share Data)Net
      loss
                                                                                        
                                                                                        $
                                                                                        (1,041
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        (1,041
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        (65
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        (65
                                                                                        )Weighted
      average shares outstanding
                                                                                        
                                                                                        
                                                                                        10,676,401
                                                                                        
                                                                                        
                                                                                        
                                                                                        10,676,401
                                                                                        
                                                                                        
                                                                                        
                                                                                        10,972,074
                                                                                        
                                                                                        
                                                                                        
                                                                                        10,972,074Effect
      of common stock equivalents
                                                                                        
                                                                                        
                                                                                        —
                                                                                        
                                                                                        
                                                                                        
                                                                                        24,568
                                                                                        
                                                                                        
                                                                                        
                                                                                        —
                                                                                        
                                                                                        
                                                                                        
                                                                                        —Adjusted
      weighted average shares used in earnings per share
    computation
                                                                                        
                                                                                        $
                                                                                        10,676,401
                                                                                        
                                                                                        
                                                                                        $
                                                                                        10,700,969
                                                                                        
                                                                                        
                                                                                        $
                                                                                        10,972,074
                                                                                        
                                                                                        
                                                                                        $
                                                                                        10,972,074Loss
      per share - basic and diluted
                                                                                        
                                                                                        $
                                                                                        (0.10
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        (0.10
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        (0.01
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        (0.01
                                                                                        )


10





3.
              INVESTMENT AND MORTGAGE-BACKED
      SECURITIESThe
      amortized cost and fair value of investment and mortgage-backed
      securities, with gross unrealized gains and losses, are as
      follows:




March
      31, 2009Amortized
                                          Cost
                                        
                                        
                                        Gross
                                          Unrealized
                                          Gains
                                        
                                        
                                        Gross
                                          Unrealized
                                          Losses
                                        
                                        
                                        Estimated
                                          Fair
                                          Value(Dollars
      in Thousands)Securities
      held to maturity:Debt
      securities - U.S. Treasury securities and securities of U.S. Government
      agencies
                                        
                                        $
                                        114,441
                                        
                                        
                                        $
                                        793
                                        
                                        
                                        $
                                        (545
                                        )
                                        
                                        $
                                        114,689Debt
      securities - Municipal bonds
                                        
                                        
                                        2,345
                                        
                                        
                                        
                                        5
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        2,350Mortgage-backed
      securities - U.S. Government agencies
                                        
                                        
                                        38,040
                                        
                                        
                                        
                                        1,626
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        39,666Total
      securities held to maturity
                                        
                                        $
                                        154,826
                                        
                                        
                                        $
                                        2,424
                                        
                                        
                                        $
                                        (545
                                        )
                                        
                                        $
                                        156,705Securities
      available for sale:Debt
      securities - U.S. Treasury securities and securities of U.S. Government
      agencies
                                        
                                        $
                                        2,000
                                        
                                        
                                        $
                                        —
                                        
                                        
                                        $
                                        (36
                                        )
                                        
                                        $
                                        1,964FHLMC
      preferred stock
                                        
                                        
                                        20
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        20Mortgage-backed
      securities - U.S. Government agencies
                                        
                                        
                                        45,999
                                        
                                        
                                        
                                        1,937
                                        
                                        
                                        
                                        (32
                                        )
                                        
                                        
                                        47,904Mortgage-backed
      securities - Non-agency (1)
                                        
                                        
                                        12,146
                                        
                                        
                                        
                                        2
                                        
                                        
                                        
                                        (3,996
                                        )
                                        
                                        
                                        8,152Total
      securities available for sale
                                        
                                        $
                                        60,165
                                        
                                        
                                        $
                                        1,939
                                        
                                        
                                        $
                                        (4,064
                                        )
                                        
                                        $
                                        58,040




(1)
              As
      a result of the adoption of FSP FAS 115-2 and FAS 124-2, $2.5 of the
      unrealized loss is applicable to the non-credit component of securities in
      which an OTTI charge has been
incurred.




September
      30, 2008Amortized
                      Cost
                    
                    
                    Gross
                      Unrealized
                      Gains
                    
                    
                    Gross
                      Unrealized
                      Losses
                    
                    
                    Estimated
                      Fair
                      Value(Dollars
      in Thousands)Securities
      held to maturity:Debt
      securities - U.S. Treasury securities and securities of U.S. Government
      agencies
                    
                    $
                    120,572
                    
                    
                    $
                    112
                    
                    
                    $
                    (2,377
                    )
                    
                    $
                    118,307Debt
      securities - Municipal bonds
                    
                    
                    2,450
                    
                    
                    
                    —
                    
                    
                    
                    (16
                    )
                    
                    
                    2,434Mortgage-backed
      securities - U.S. Government agencies
                    
                    
                    40,281
                    
                    
                    
                    95
                    
                    
                    
                    (565
                    )
                    
                    
                    39,811Total
      securities held to maturity
                    
                    $
                    163,303
                    
                    
                    $
                    207
                    
                    
                    $
                    (2,958
                    )
                    
                    $
                    160,552Securities
      available for sale:Debt
      securities - U.S. Treasury securities and securities of U.S. Government
      agencies
                    
                    $
                    3,000
                    
                    
                    $
                    —
                    
                    
                    $
                    (124
                    )
                    
                    $
                    2,876FNMA
      stock
                    
                    
                    —
                    
                    
                    
                    1
                    
                    
                    
                    —
                    
                    
                    
                    1FHLMC
      preferred stock
                    
                    
                    26
                    
                    
                    
                    19
                    
                    
                    
                    —
                    
                    
                    
                    45Mortgage-backed
      securities - U.S. Government agencies
                    
                    
                    38,078
                    
                    
                    
                    501
                    
                    
                    
                    (160
                    )
                    
                    
                    38,419Mortgage-backed
      securities - Non-agency
                    
                    
                    15,048
                    
                    
                    
                    32
                    
                    
                    
                    (1,315
                    )
                    
                    
                    13,765Total
      securities available for sale
                    
                    $
                    56,152
                    
                    
                    $
                    553
                    
                    
                    $
                    (1,599
                    )
                    
                    $
                    55,106


11




The
      following table shows the gross unrealized losses and related estimated
      fair values of the Company’s investment securities, aggregated by
      investment category and length of time that individual securities had been
      in a continuous loss position at March 31, 2009:Less
      than 12 months
                                              
                                              
                                              More
      than 12 monthsGross
                                                Unrealized
                                                Losses
                                              
                                              
                                              Estimated
                                                Fair
                                                Value
                                              
                                              
                                              Gross
                                                Unrealized
                                                Losses
                                              
                                              
                                              Estimated
                                                Fair
                                                Value(Dollars
      in thousands)Securities
      held to maturity:U.S.
      Treasury and Government agencies
                                              
                                              $
                                              522
                                              
                                              
                                              $
                                              40,461
                                              
                                              
                                              $
                                              23
                                              
                                              
                                              $
                                              1,972Total
      securities held to maturity
                                              
                                              
                                              522
                                              
                                              
                                              
                                              40,461
                                              
                                              
                                              
                                              23
                                              
                                              
                                              
                                              1,972Securities
      available for sale:U.S.
      Treasury and Government agencies
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              36
                                              
                                              
                                              
                                              1,964Mortgage-backed
      securities - U.S. Government agencies
                                              
                                              
                                              32
                                              
                                              
                                              
                                              3,164
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —Mortgage-backed
      securities - Non-agency
                                              
                                              
                                              3,996
                                              
                                              
                                              
                                              7,650
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —Total
      securities available for sale
                                              
                                              
                                              4,028
                                              
                                              
                                              
                                              10,814
                                              
                                              
                                              
                                              36
                                              
                                              
                                              
                                              1,964Total
                                              
                                              $
                                              4,550
                                              
                                              
                                              $
                                              51,275
                                              
                                              
                                              $
                                              59
                                              
                                              
                                              $
                                              3,936




All
      municipal bonds and mortgage-backed securities held to maturity were in an
      unrealized gain position as of March 31, 2009.The
      following table shows the gross unrealized losses and related estimated
      fair values of the Company’s investment securities, aggregated by
      investment category and length of time that individual securities had been
      in a continuous loss position at September 30,
  2008:




Less
      than 12 months
                      
                      
                      More
      than 12 monthsGross
                        Unrealized
                        Losses
                      
                      
                      Estimated
                        Fair
                        Value
                      
                      
                      Gross
                        Unrealized
                        Losses
                      
                      
                      Estimated
                        Fair
                        Value(Dollars
      in thousands)Securities
      held to maturity:U.S.
      Treasury and Government agencies
                      
                      $
                      2,377
                      
                      
                      $
                      99,203
                      
                      
                      $
                      —
                      
                      
                      $
                      —Municipal
      bonds
                      
                      
                      9
                      
                      
                      
                      1,280
                      
                      
                      
                      7
                      
                      
                      
                      343Mortgage-backed
      securities - U.S. government agencies
                      
                      
                      308
                      
                      
                      
                      23,803
                      
                      
                      
                      257
                      
                      
                      
                      5,778Total
      securities held to maturity
                      
                      
                      2,694
                      
                      
                      
                      124,286
                      
                      
                      
                      264
                      
                      
                      
                      6,121Securities
      available for sale:U.S.
      Treasury and Government agencies
                      
                      
                      124
                      
                      
                      
                      2,876
                      
                      
                      
                      —
                      
                      
                      
                      —Mortgage-backed
      securities - U.S. government agencies
                      
                      
                      160
                      
                      
                      
                      14,701Mortgage-backed
      securities - Non-agency
                      
                      
                      1,315
                      
                      
                      
                      8,276
                      
                      
                      
                      —
                      
                      
                      
                      —Total
      securities available for sale
                      
                      
                      1,599
                      
                      
                      
                      25,853
                      
                      
                      
                      —
                      
                      
                      
                      —Total
                      
                      $
                      4,293
                      
                      
                      $
                      150,139
                      
                      
                      $
                      264
                      
                      
                      $
                      6,121


12





Management
      has reviewed its investment securities at March 31, 2009 and determined
      that unrealized losses of $5.3 million on a certain securities in
      non-agency mortgage backed portfolio classified as available for sale were
      deemed other than temporary.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 EITF 99-20, “Recognition of
      Interest Income and Impairment on Purchased Retained Beneficial Interests
      in Securitized Financial Asset” as amended by FSP EITF 99-20-1,
      “Amendments to the Impairment Guidance of EITF Issue No. 99-20”,when
      applicable, and FSP SFAS No. 115-1 and SFAS No. 124-1,”The Meaning of
      Other-Than-Temporary Impairment and Its Application to Certain
      Investments” and FSP SFAS No. 115-2 and SFAS No. 124-2, “Recognition and
      Presentation of Other-Than-Temporary Impairments”. 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 other-than-temporary impairment (“OTTI”)
      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.FSP
      SFAS No. 115-2 and SFAS No. 124-2 requires the Company to assess whether
      the credit loss existed by considering whether (1) the Company has the
      intent to sell the security, (2) it is more likely than not that it will
      be required to sell the security before recovery, or (3) it does not
      expect to recover the entire amortized cost basis of the security. The
      guidance allows the Company to bifurcate the impact onsecurities where
      impairment in value was deemed to be other than
      temporarybetween 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 change to earnings. Credit
      component is determined by comparing the present value of the cash flows
      expected to be collected, discounted at the rate in effect before
      recognizing any OTTI with the amortized cost basis of the debt
      security.  The Company uses the cash flow expected to be realized
      from the security, which includes assumptions about interest rates, timing
      and severity of defaults, estimates of potential recoveries, the cash flow
      distribution from the bond indenture and other factors, then applies a
      discount rate equal to the effective yield of the security.  The
      difference between the present value of the expected cash flows and the
      amortized book value is considered a credit loss.  The fair market
      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 security.  The difference
      between the fair market value and the credit loss is recognized in other
      comprehensive income.Upon
      adoption of FSP SFAS 115-2, the Company recorded an adjustment to
      reclassify the non-credit portion of any other-than-temporary impairments
      previously recorded through earnings to accumulated other comprehensive
      income. This adjustment is made if the entity does not intend to sell and
      more-likely-than-not will not be required to sell the security before
      recovery of its amortized cost basis (i.e., the impairment does not meet
      the new definition of other-than-temporary). The cumulative effect
      adjustment is determined based on the difference between the present value
      of the cash flows expected to be collected and the amortized cost basis of
      the debt security as of the beginning of the interim period in which the
      FSP is adopted. The cumulative effect adjustment includes the related tax
      effects.FSP
      SFAS 115-2 and SFAS 124-2 were adopted by the Company for the quarter
      ended March 31, 2009. Upon adoption, a cumulative effect adjustment was
      recorded in the amount of $1.1 million to increase retained earnings with
      an increase to unrealized losses in accumulated other comprehensive income
      (loss). This amount represented the non-credit related impairment charge
      related to the non-agency mortgage-backed securities discussed
      below.
  For
      the quarter ended March 31, 2009, the Company updated its assessment of
      the unrealized losses with respect to the securities and whether the
      losses were temporary in nature. Upon completion of this review,
      additional credit losses of $407,000 were incurred related to securities
      that the Company had previously recorded an OTTI charge in prior periods
      and a $240,000 OTTI charge was recognized related to securities that were
      not other-than-temporarily impaired prior to the current quarter.
      Application of the guidance did not have a significant impact on other
      securities which were in unrealized loss positions at March 31,
      2009.


13




The
      following is a roll-forward for the three months ended March 31, 2009 of
      the amounts recognized in earnings on credit losses oninvestments
      held for which a portion of an OTTI was recognized in other comprehensive
      income:




(Dollars
      in thousands)Credit
      component of OTTI as of January 1, 2009
                            
                            $
                            1,732Additions
      for credit related OTTI charges on previously unimpaired
      securities
                            
                            
                            240Reductions
      for securities sold during the period
                            
                            
                            -Reductions
      for increases in cash flows expected to be collected and recognized over
      the remaining life of the security
                            
                            
                            -Additions
      for credit related OTTI charges on securities with previous
      impairment
                            
                            
                            407Credit
      component of OTTI as of March 31, 2009
                            
                            $
                            2,379




Six
      non-agency mortgage-backed securities have been determined to be
      other-than-temporarily impaired due solely to credit related
      factors.  These securities have S&P credit ratings ranging from
      below investment grade to AAA at March 31, 2009.  Each of these
      securities holds various levels of credit subordination.  The
      underlying mortgage loans that comprise these investment securities were
      originated in years 2004 through 2007. The
      collateral underlying the vintages  included,  in part,
       interest only loans in87%of
      securitiesandlimited
      documentation loans in53%
      limited documentation loans.  A summary of key assumptions utilized
      to forecast future expected cash flows on the securities determined to
      have OTTI were as follows as of March 31,
2009:
  March
      31, 2009Loss
      severity
                                                  
                                                  
                                                  50
                                                  %Expected
      cumulative loss percentage
                                                  
                                                  
                                                  12
                                                  %Cumulative
      loss percentage to date
                                                  
                                                  
                                                  0
                                                  %Weighted
      average FICO
                                                  
                                                  
                                                  731Weighted
      average LTV
                                                  
                                                  
                                                  72
                                                  %


14




State and Municipal Obligations
      – The municipal bonds consist of obligations of entities located in
      Pennsylvania. None of the municipal bonds were in an unrealized loss
      position as of March 31, 2009.US Agency Issued
      Mortgage-Backed Securities -At March 31, 2009, there were no
      unrealized losses in the category of 12 months or longer. The gross
      unrealized loss in the category of less than 12 months was $32,000 or .07%
      and consisted of 9 securities that 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. In
      September 2008, the U.S. Department of the Treasury announced the
      establishment of the Government-Sponsored Enterprise Credit Facility to
      ensure credit availability to Fannie Mae and Freddie Mac. The Treasury
      also entered into senior preferred stock purchase agreements, which ensure
      that each entity maintains a positive net worth and effectively support
      the holders of debt and mortgage-backed securities (“MBS”) issued or
      guaranteed by Fannie Mae and Freddie Mac. The Agreements enhance market
      stability by providing additional security to debt holders, senior and
      subordinated, thereby alleviating the concern of the credit driven
      impairment of the securities. The unrealized loss on these debt securities
      relates principally to the changes in market interest rates and a lack of
      liquidity currently in the financial markets and are not as a result of
      projected shortfall in cash flows. Because the Company does not intend to
      sell the securities, it is more likely than not that the Company does will
      not be required to sell the security. In addition, the Company expects to
      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 March 31, 2009.Non-Agency Issued
      Mortgage-Backed Securities and Collateralized Mortgage Obligations -This portfolio was acquired through the redemption-in-kind of a
      mutual fund during 2008 and includes 77 collateralized mortgage
      obligations (“CMO”) and MBS securities issued by large commercial
      financial institutions. These securities were performing in accordance
      with their contractualterms as of March 31,
      2009, and had paid all contractual cash flows since the Company’s initial
      investment. At March 31, 2009 management recognized an other than
      temporary impairment charge related to a portfolio of 60 securities in the
      amount of $5.3 million on a pre-tax basis due to the fact that, in
      management’s judgment, the credit quality of the collateral pool
      underlying such securities had deteriorated during the most recent quarter
      to the point that full recovery of the entire amortized cost of the
      investment was considered to be uncertain. This portfolio consists
      primarily of the securities with underlying collateral of Alt- A loans and
      those collateralized by home equity lines of credit and other receivables
      as well as whole loans with more significant exposure to the declining
      markets accountable for the balance of the other than temporary impairment
      charges. 85% or $6.9 million of the portfolio is collateralized by
      adjustable rate whole loans, 5.6% or $459,000 is collateralized by
      Alternative A-paper (Alt-A) mortgages, with remainder of the securities
      collateralized by the home equity line of credit and other receivables.
      For the overall portfolio of the securities, the Company’s exposure to the
      declining real estate markets such as California and Florida is
      approximately 38%. Consequently, an other-than- temporary impairment
      charge was deemed to be warranted as of March 31, 2009. Of the recorded
      charge a total of $2.8 million was concluded to be credit related and
      recognized currently in earnings and $2.5 million was concluded to be
      attributable to other factors and recognized in other comprehensive
      income.Additionally,
      as of December 31, 2008 management recognizedmanagement recognized
      other-than-temporary impairment on 30 securities of approximately $2.9
      million on a pre -tax basis in the portfolio. As a result of adoption of
      FSP SFAS 115-2 and FSP SFAS 124-2, $1.1 million of the
      other-than-temporary impairment loss was deemed to be attributable to
      other factors and reclassified from beginning retained earnings to
      accumulated other comprehensive income at January 1, 2009. The Company
      also recognized a reduction to our deferred tax valuation allowance of
      $390,000.


15





With
      respect to the remainder of the securities in the non-agency MBS
      portfolio, there were no unrealized losses in the category of 12 months or
      longer in any of the Company’s investments. The gross unrealized loss in
      the category of less than 12 months was $1.5 million and consisted of 17
      securities issued by non-agency issuers with the book value of $3.1
      million of the total portfolio of MBS available for sale of $58.0 million.
      In the portfolio of unrealized losses 8 of the securities with the
      aggregate decline of $273,000 are rated “AAA” and 7 securities with the
      aggregate decline of $944,000 are rated “AA” by at least one nationally
      recognized rating agencies. Remaining securities in the portfolio are
      rated below investment grade; however, individual unrealized losses on
      such securities are not material. As of March 31, 2009, with the exception
      of 53 securities discussed above, there are no securities for which the
      Company currently believes it is not probable that it will collect all
      amounts due according to the contractual terms of the investment.
      Management concluded that an other-than-temporary impairment did not
      exist, and the decline in value was attributed to the illiquidity in the
      financial markets, based upon its analysis and, the fact that the Company
      does not intend to sell these securities and it is more likely than not
      that the Company will not be required to sell these
      securities.The
      amortized cost and estimated fair value of debt securities, by contractual
      maturity, are shown below. Expected maturities will differ from
      contractual maturities because borrowers may have the right to call or
      prepay obligations with or without call or prepayment
      penalties.




March
      31, 2009Held
      to Maturity
                                                                    
                                                                    
                                                                    Available
      for SaleAmortized
                                                                      Cost
                                                                    
                                                                    
                                                                    Estimated
                                                                      Fair
                                                                      Value
                                                                    
                                                                    
                                                                    Amortized
                                                                      Cost
                                                                    
                                                                    
                                                                    Estimated
                                                                      Fair
                                                                      Value(Dollars
      in thousands)Due
      within one year
                                                                    
                                                                    $
                                                                    1,000
                                                                    
                                                                    
                                                                    $
                                                                    1,036
                                                                    
                                                                    
                                                                    $
                                                                    —
                                                                    
                                                                    
                                                                    $
                                                                    —Due
      after one through five years
                                                                    
                                                                    
                                                                    2,164
                                                                    
                                                                    
                                                                    
                                                                    2,206
                                                                    
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    —Due
      after five through ten years
                                                                    
                                                                    
                                                                    56,650
                                                                    
                                                                    
                                                                    
                                                                    57,110
                                                                    
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    —Due
      after ten years
                                                                    
                                                                    
                                                                    56,972
                                                                    
                                                                    
                                                                    
                                                                    56,687
                                                                    
                                                                    
                                                                    
                                                                    2,000
                                                                    
                                                                    
                                                                    
                                                                    1,964Total
                                                                    
                                                                    $
                                                                    116,786
                                                                    
                                                                    
                                                                    $
                                                                    117,039
                                                                    
                                                                    
                                                                    $
                                                                    2,000
                                                                    
                                                                    
                                                                    $
                                                                    1,964





September
      30, 2008Held
      to Maturity
                                                          
                                                          
                                                          Available
      for SaleAmortized
                                                            Cost
                                                          
                                                          
                                                          Estimated
                                                            Fair
                                                            Value
                                                          
                                                          
                                                          Amortized
                                                            Cost
                                                          
                                                          
                                                          Estimated
                                                            Fair
                                                            Value(Dollars
      in thousands)Due
      within one year
                                                          
                                                          $
                                                          —
                                                          
                                                          
                                                          $
                                                          —
                                                          
                                                          
                                                          $
                                                          —
                                                          
                                                          
                                                          $
                                                          —Due
      after one through five years
                                                          
                                                          
                                                          4,790
                                                          
                                                          
                                                          
                                                          4,820
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —Due
      after five through ten years
                                                          
                                                          
                                                          51,084
                                                          
                                                          
                                                          
                                                          50,311
                                                          
                                                          
                                                          
                                                          1,000
                                                          
                                                          
                                                          
                                                          991Due
      after ten years
                                                          
                                                          
                                                          67,148
                                                          
                                                          
                                                          
                                                          65,610
                                                          
                                                          
                                                          
                                                          2,000
                                                          
                                                          
                                                          
                                                          1,885Total
                                                          
                                                          $
                                                          123,022
                                                          
                                                          
                                                          $
                                                          120,741
                                                          
                                                          
                                                          $
                                                          3,000
                                                          
                                                          
                                                          $
                                                          2,876
  The
maturity tables above exclude mortgage-backed securities because the contractual
maturities are not indicative of actualmaturity expectation due to
significant prepayments.


16





4.
                LOANS
      RECEIVABLELoans
      receivable consist of the
following:




March
      31,
                            2009
                          
                          
                          September
      30,
                            2008(Dollars
      in Thousands)One-to-four
      family residential
                          
                          $
                          199,113
                          
                          
                          $
                          191,344Multi-family
      residential
                          
                          
                          2,617
                          
                          
                          
                          2,801Commercial
      real estate
                          
                          
                          20,479
                          
                          
                          
                          20,518Construction
      and land development
                          
                          
                          39,268
                          
                          
                          
                          42,634Commercial
      business
                          
                          
                          972
                          
                          
                          
                          465Consumer
                          
                          
                          766
                          
                          
                          
                          739Total
      loans
                          
                          
                          263,215
                          
                          
                          
                          258,501Undisbursed
      portion of loans-in-process
                          
                          
                          (8,764
                          )
                          
                          
                          (13,515
                          )Deferred
      loan costs, net
                          
                          
                          634
                          
                          
                          
                          574Allowance
      for loan losses
                          
                          
                          (1,737
                          )
                          
                          
                          (1,591
                          )Net
                          
                          $
                          253,348
                          
                          
                          $
                          243,969




The
      following schedule summarizes the changes in the allowance for loan
      losses:




Six
      Months Ended March 31,2009
                                
                                
                                2008(Dollars
      in Thousands)Balance,
      beginning of period
                                
                                $
                                1,591
                                
                                
                                $
                                1,011Provision
      for loan losses
                                
                                
                                363
                                
                                
                                
                                150Charge-offs
                                
                                
                                (217
                                )
                                
                                
                                (503
                                )Recoveries
                                
                                
                                —
                                
                                
                                
                                —Balance,
      end of period
                                
                                $
                                1,737
                                
                                
                                $
                                658




The
      Company established a provision for loan losses of $50,000 for the quarter
      ended March 31, 2009 and $363,000 for the six month period ended March 31,
      2009 as compared to $75,000 and $150,000 for the comparable periods in
      2008. The primary factor in the increase of the loan loss provision for
      the six month period ended March 31, 2009 related to a specific reserve
      established in the first fiscal quarter of 2009 on a $3.0 million
      non-performing construction loan reflecting the Company’s participation
      interest in a $14.9 million construction loan to build a 40-unit high-rise
      condominium project in located in Center City, Philadelphia which has
      experienced payment delinquencies. Although the project is substantially
      completed, based on an updated appraisal, the value of the real estate
      collateralizing the loan has declined. Another financial institution is
      the lead lender on the loan. As of March 31, 2009, this loan was
      classified as a real estate owned property as the borrower agreed to cede
      control of the property to the lead lender. At March 31, 2009, the
      Company’s non-performing assets totaled $6.8 million or 1.3% of total
      assets. Non-performing assets consisted of one construction loan totaling
      $640,000, one commercial real estate loan totaling $1.6 million, nine
      one-to four-family residential mortgage loans totaling $448,000 and two
      real estate owned properties totaling $4.1 million (one of which is the
      $3.0 million loan noted above). The allowance for loan losses totaled $1.7
      million, or 0.7% of total loans and 65.1% of non-performing
      loans.


17




Nonperforming
      loans (which consist of nonaccrual loans and loans in excess of 90 days
      delinquent and still accruing interest) at March 31, 2009 and September
      30, 2008 amounted to approximately $2.7 million and $4.0 million,
      respectively.An
      impaired loan generally is one for which it is probable, based on current
      information, that the lender will not collect all the amounts due under
      the contractual terms of the loan. Large groups of smaller balance,
      homogeneous loans are collectively evaluated for impairment. Loans
      collectively evaluated for impairment include smaller balance commercial
      real estate loans, residential real estate loans and consumer loans. These
      loans are evaluated as a group because they have similar characteristics
      and performance experience. Larger commercial real estate, construction
      and commercial business loans are individually evaluated for
      impairment.As
      of March 31, 2009 and September 30, 2008, the recorded investment in loans
      that are considered to be impaired was as
  follows:




March
      31,
                                                  
                                                  
                                                  September
      30,2009
                                                  
                                                  
                                                  2008(Dollars
      in thousands)Impaired
      colateral-dependent loans with related allowance
                                                  
                                                  $
                                                  640
                                                  
                                                  
                                                  $
                                                  3,640Impaired
      colateral-dependent loans with no related allowance
                                                  
                                                  $
                                                  1,581
                                                  
                                                  
                                                  $
                                                  —




Other
      data for impaired loans as of March 31, 2009 and 2008 is as
      follow:




For
      the Six Months Ended March 31,2009
                                
                                
                                2008(Dollars
      in thousands)Average
      impaired loans
                                
                                $
                                4,698
                                
                                
                                $
                                2,022Interest
      income recognized on impaired loans
                                
                                $
                                54
                                
                                
                                $
                                —




5.
                DEPOSITSDeposits
      consist of the following major
classifications:




March
      31,
                                          2009
                                        
                                        
                                        September
      30,
                                          2008Amount
                                        
                                        
                                        Percent
                                        
                                        
                                        Amount
                                        
                                        
                                        Percent(Dollars
      in Thousands)Money
      market deposit accounts
                                        
                                        $
                                        68,001
                                        
                                        
                                        
                                        16.2
                                        %
                                        
                                        $
                                        66,484
                                        
                                        
                                        
                                        17.6
                                        %NOW
      accounts
                                        
                                        
                                        27,865
                                        
                                        
                                        
                                        6.6
                                        
                                        
                                        
                                        27,335
                                        
                                        
                                        
                                        7.3Passbook,
      club and statement savings
                                        
                                        
                                        66,379
                                        
                                        
                                        
                                        15.8
                                        
                                        
                                        
                                        67,921
                                        
                                        
                                        
                                        18.0Certificates
      maturing in six months or less
                                        
                                        
                                        125,345
                                        
                                        
                                        
                                        29.9
                                        
                                        
                                        
                                        93,141
                                        
                                        
                                        
                                        24.7Certificates
      maturing in more than six months
                                        
                                        
                                        131,673
                                        
                                        
                                        
                                        31.5
                                        
                                        
                                        
                                        121,949
                                        
                                        
                                        
                                        32.4Total
                                        
                                        $
                                        419,263
                                        
                                        
                                        
                                        100.0
                                        %
                                        
                                        $
                                        376,830
                                        
                                        
                                        
                                        100.0
                                        %




At
      March 31, 2009 and September 30, 2008, the weighted average rate paid on
      deposits was 3.12% and 3.34%,
respectively.


18




Certificates
      $100,000 and over totaled $89.8 million as of March 31, 2009 and $66.7
      million as of September 30, 2008.6.
                INCOME
      TAXESItems
      that gave rise to significant portions of deferred income taxes are as
      follows:





March
      31,
                                        2009
                                      
                                      
                                      September
      30,
                                        2008(As
      restated,
                                        See
      Note 10)(Dollars
      in thousands)Deferred
      tax assets:Unrealized
      loss on available for sale securities
                                      
                                      $
                                      723
                                      
                                      
                                      $
                                      356Deposit
      premium
                                      
                                      
                                      192
                                      
                                      
                                      
                                      216Allowance
      for loan losses
                                      
                                      
                                      638
                                      
                                      
                                      
                                      594Real
      estate owned expenses
                                      
                                      
                                      173
                                      
                                      
                                      
                                      99Nonaccrual
      interest
                                      
                                      
                                      61
                                      
                                      
                                      
                                      21Accrued
      vacation
                                      
                                      
                                      41
                                      
                                      
                                      
                                      34Capital
      loss carryforward
                                      
                                      
                                      1,873
                                      
                                      
                                      
                                      1,873Impairment
      loss
                                      
                                      
                                      1,197
                                      
                                      
                                      
                                      247Split
      dollar life insurance
                                      
                                      
                                      124
                                      
                                      
                                      
                                      —Post-retirement
      benefits
                                      
                                      
                                      198
                                      
                                      
                                      
                                      200Employee
      benefit plans
                                      
                                      
                                      158
                                      
                                      
                                      
                                      110Total
      deferred tax assets
                                      
                                      
                                      5,378
                                      
                                      
                                      
                                      3,750Valuation
      allowance
                                      
                                      
                                      (2,649
                                      )
                                      
                                      
                                      (1,991
                                      )Total
      deferred tax assets, net of valuation allowance
                                      
                                      
                                      2,729
                                      
                                      
                                      
                                      1,759Deferred
      tax liabilities:Property
                                      
                                      
                                      475
                                      
                                      
                                      
                                      467Mortgage
      servicing rights
                                      
                                      
                                      5
                                      
                                      
                                      
                                      6Deferred
      loan fees
                                      
                                      
                                      215
                                      
                                      
                                      
                                      195Total
      deferred tax liabilities
                                      
                                      
                                      695
                                      
                                      
                                      
                                      668Net
      deferred tax asset
                                      
                                      $
                                      2,034
                                      
                                      
                                      $
                                      1,091





The
      Company establishes a valuation allowance for deferred tax assets when
      management believes that the deferred tax assets are not likely to be
      realized either through a carryback to taxable income in prior years,
      future reversals of existing taxable temporary differences, and, to a
      lesser extent, future taxable income. The tax deduction generated by the
      mutual fund sale and impairment charge on certain non-agency
      mortgage-backed securities are considered capital losses and can only be
      utilized to the extent of realized capital gains over a five year period
      subsequent to the year in which the capital loss occurred, resulting in
      the establishment of a valuation allowance in the amount of $2.6 million
      for the carryforward period.The
      Company accounts for income taxes in accordance with SFAS 109, Accounting
      For Income Taxes and FIN No. 48, Accounting for Uncertainty in Income
      Taxes - an interpretation of FASB Statement No. 109. FIN No. 48 clarifies
      the accounting for income taxes by prescribing a minimum probability
      threshold that a tax position must meet before a financial statement
      benefit is recognized. The minimum threshold is defined in FIN No. 48 as a
      tax position that is more likely than not to be sustained upon examination
      by the applicable taxing authority, including resolution of any related
      appeals or litigation processes, based on the technical merits of the
      position. The tax benefit to be recognized is measured as the largest
      amount of benefit that has greater than fifty percent likelihood of being
      realized upon ultimate settlement. FIN No. 48 was applied to all existing
      tax positions upon initial adoption. 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
      Unaudited Condensed Consolidated Statement of Operations. As of March 31,
      2009, the Internal Revenue Service is in the process of an audit of the
      Company’s tax returns for the year ended September 30, 2007. No findings
      have been communicated to the Company. The Company’s federal and state
      income tax returns for taxable years through September 30, 2004 have been
      closed for purposes of examination by the Internal Revenue Service and the
      Pennsylvania Department of Revenue.


19





7.
                  STOCK
      COMPENSATION PLANSThe
      Company accounts for its share-based compensation in accordance with SFAS
      123R (revised 2004), Share-Based Payment. This statement requires an
      entity to recognize the cost of employee services received in share-based
      payment transactions and measures the cost using the grant-date fair value
      of the award. The cost is recognized over the period during which an
      employee is required to provide service in exchange for the
      award.In
      December 2008, the shareholders of the Company approved the adoption of
      the 2008 Recognition and Retention Plan (“RRP”). A committee of the Board
      of Directors of the Company administers the RRP. The RRP provides for the
      grant of common stock of the Company to certain officers, employees and
      directors of the Company. In order to fund the grant of shares under the
      RRP, the RRP Trust purchased 226,148 shares of the Company’s common stock
      in the open market for approximately $2.5 million, at an average price per
      share of $10.85. The Company made sufficient contributions to the RRP
      Trust to fund these purchases. No additional purchases are expected to be
      made by the RRP Trust under this plan. During January 2009, grants
      covering 173,228 shares were awarded as part of the RRP. The remaining
      shares in the RRP Trust will be available for future awards. Shares
      subject to awards under the RRP will generally vest at the rate of 20% per
      year over five years. As of March 31, 2009, no awards were fully vested
      and no shares were forfeited.Compensation
      expense related to the shares subject to awards granted is recognized
      ratably over the five-year vesting period in an amount which totals the
      share price at the grant date. During the three and six months ended March
      31, 2009, approximately $87,000 was recognized in compensation expense for
      the RRP. A tax benefit of $30,000 was recognized during these periods.
      There was no compensation expense recognized related to the RRP during the
      comparable periods in 2008. At March 31, 2009, approximately $1.7 million
      in additional compensation expense for the shares awarded related to the
      RRP remained unrecognized.A
      summary of the Company’s non-vested stock award activity for the six
      months ended March 31, 2009 is presented in the following
      table:





Six
      Months Ended
                                  March
      31, 2009Number
      of
                                  Shares
                                
                                
                                Weighted
      Average
                                  Grant
      Date Fair
                                  ValueNonvested
      stock awards at beginning of year
                                
                                
                                —
                                
                                
                                $
                                —Issued
                                
                                
                                173,228
                                
                                
                                
                                10.76Vested
                                
                                
                                —
                                
                                
                                
                                —Nonvested
      stock awards at the end of the period
                                
                                
                                173,228
                                
                                
                                $
                                10.76


20





In
      December 2008, the shareholders of the Company approved the adoption of
      the 2008 Stock Option Plan. The Stock Option Plan authorizes the grant of
      stock options to officers, employees and directors of the Company to
      acquire shares of common stock with an exercise price equal to the market
      value of the common stock on the grant date. Options will 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 565,369 shares of common stock have been reserved for future
      issuance pursuant to the Stock Option Plan. There were 315,194 incentive
      stock options and 113,072 non-qualified stock options awarded during
      January 2009. The aggregate intrinsic value (the excess of the market
      price over the exercise price) of the options was $3.6 million as of March
      31, 2009. As of March 31, 2009, no options were vested or
      forfeited.A
      summary of the status of the Company’ stock options under the Stock Option
      Plan as of March 31, 2009 and changes during the six month period ended
      March 31, 2009 are presented
below:





Six
      Months Ended
                          March
      31, 2009Number
      of
                          Shares
                        
                        
                        Weighted
      Average
                          Exercise
      PriceOutstanding
      at beginning of year
                        
                        
                        —
                        
                        
                        $
                        —Granted
                        
                        
                        428,266
                        
                        
                        
                        11.17Exercised
                        
                        
                        —
                        
                        
                        
                        —Forfeited
                        
                        
                        —
                        
                        
                        
                        —Outstanding
      at the end of the period
                        
                        
                        428,266
                        
                        
                        $
                        11.17Exercisable
      at the end of the period
                        
                        
                        —
                        
                        
                        $
                        —





The
      weighted average remaining contractual term was approximately 9.8 years
      for options outstanding as of March 31, 2009. No options were exercisable
      as of March 31, 2009.The
      estimated fair value of options granted during fiscal 2009 was $2.81 per
      share. The fair value was estimated on the date of grant in accordance
      with SFAS No. 123R using the Black-Scholes pricing model with the
      following weighted average assumptions
used:





March
      31, 2009Dividend
      yield
                        
                        
                        1.79
                        %Expected
      volatility
                        
                        
                        27.94
                        %Risk-free
      interest rate
                        
                        
                        1.96
                        %Expected
      life of options
                        
                        6.5
      years





During
      the three and six months ended March 31, 2009, $56,000 was recognized in
      compensation expense for the Stock Option Plan. A tax benefit of $5,000
      was recognized during this period. There was no compensation expense
      recognized related to the Stock Option Plan during the comparable periods
      in 2008. At March 31, 2009, approximately $1.1 million in additional
      compensation expense for awarded options remained unrecognized. The
      weighted average period over which this expense will be recognized is
      approximately 4.8 years.8.
                COMMITMENTS
      AND CONTINGENT LIABILITIESAt
      March 31, 2009, the Company had $9.9 million in outstanding commitments to
      originate fixed and variable-rate loans with market interest rates ranging
      from 5.50% to 7.50%. At September 30, 2008, the Company had $18.6 million
      in outstanding commitments to originate fixed and variable-rate loans with
      market interest rates ranging from 5.50% to
  8.50%.


21





The
      Company also had commitments under unused lines of credit of $7.0 million
      and $5.9 million at March 31, 2009 and September 30, 2008, respectively,
      and letters of credit outstanding of $95,000 at both March 31, 2009 and
      September 30, 2008.Among
      the Company’s contingent liabilities are exposures to limited recourse
      arrangements with respect to the Company’s sales of whole loans and
      participation interests. At March 31, 2009, the exposure, which represents
      a portion of credit risk associated with the interests sold, amounted to
      $64,000. 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. There can be no assurance that any of the
      outstanding legal proceedings to which the Company is a party will not be
      decided adversely to the Company’s interests and have a material adverse
      effect on the financial condition and operations of the
      Company.9.
                    FAIR
      VALUE MEASUREMENTEffective October 1,
      2008, the Company adopted FASB issued SFAS No. 157, Fair Value
      Measurements. SFAS No. 157 defines fair value, establishes a framework for
      measuring fair value, and expands disclosures about fair value
      measurements. SFAS No. 157 does not require any new fair value
      measurements. The definition of fair value retains the exchange price
      notion in earlier definitions of fair value. SFAS No. 157 clarifies
      that the exchange price is the price in an orderly transaction between
      market participants to sell the asset or transfer the liability in the
      market in which the reporting entity would transact for the asset or
      liability. The definition focuses on the price that would be received to
      sell the asset or paid to transfer the liability (an exit price), not the
      price that would be paid to acquire the asset or received to assume the
      liability (an entry price). SFAS No. 157 emphasizes that fair value is a
      market-based measurement, not an entity-specific measurement. FSP No.
      157-2, Effective Date of FASB Statement No. 157, issued in February 2008,
      delays the effective date of SFAS No. 157 for nonfinancial assets and
      nonfinancial liabilities, except for items that are recognized or
      disclosed at fair value in an entity’s financial statements on a recurring
      basis (at least annually), to fiscal years beginning after November 15,
      2008.In
      October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value
      of a Financial Asset When the Market for That Asset Is Not Active” (“FSP
      FAS 157-3”). The purpose of FSP FAS 157-3 was to clarify the application
      of SFAS No. 157, for a market that is not active. It also allows for the
      use of management’s internal assumptions about future cash flows with
      appropriately risk-adjusted discount rates when relevant observable market
      data does not exist. FSP FAS 157-3 did not change the objective of SFAS
      No. 157 which is the determination of the price that would be received in
      an orderly transaction that is not a forced liquidation or distressed sale
      at the measurement date. FSP FAS 157-3 was effective upon issuance,
      including prior periods for which financial statements had not been
      issued. The adoption of FSP FAS 157-3 had no impact on the Company’s
      financial condition or results of operations.In
      April 2009, the FASB issued FSP SFAS No. 157-4, Determining Fair Value
      When the Volume and Level of Activity for the Asset or Liability Have
      Significantly Decreased and Identifying Transactions That Are Not Orderly.
      FSP SFAS No. 157-4 includes additional factors for determining whether
      there has been a significant decrease in market activity, affirms the
      objective of fair value when a market is not active, eliminates the
      presumption that all transactions are not orderly unless proven otherwise,
      and requires an entity to disclose inputs and valuation techniques, and
      changes therein, used to measure fair value. Provisions of the FSP SFAS
      No. 157-4 are to be adopted concurrent with the adoption of FSP SFAS No.
      115-2 and SFAS No. 124-2. The Company adopted the requirements of FSP No.
      157-4 as of January 1, 2009. The adoption did not have an impact on the
      Company’s financial condition or results of
  operations.


22





SFAS
      No. 157 establishes a fair value hierarchy which requires an entity to
      maximize the use of observable inputs and minimize the use of unobservable
      inputs when measuring fair value. The standard describes three levels of
      inputs that may be used to measure fair
value:





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




Those
assets which will continue to be measured at fair value on a recurring basis are
as follows:


Category
      Used for Fair Value MeasurementLevel
      1
                                      
                                      
                                      Level
      2
                                      
                                      
                                      Level
      3(Dollars
      in Thousands)Assets:Securities
      available for sale:U.S.
      Government agencies and mortgage-backed securities
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      49,868
                                      
                                      
                                      $
                                      —Non-agency
      mortgage-backed securities
                                      
                                      
                                      —
                                      
                                      
                                      
                                      7,270
                                      
                                      
                                      
                                      882FNMA
      and FHLMC preferred stock
                                      
                                      
                                      20
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Total
                                      
                                      $
                                      20
                                      
                                      
                                      $
                                      57,138
                                      
                                      
                                      $
                                      882





As
      a result of general market conditions and the illiquidity in the market
      for certain non-agency mortgage-backed securities, management deemed it
      necessary to classify certain securities as Level 3. These securities were
      priced by a third party specialist utilizing recent prices for similar
      securities as inputs in the standard discounted cash flow model, adjusted
      for assumptions, that may incorporate inputs unobservable in the
      market.The
      following provides details of the fair value measurement activity for
      Level 3 of the three months ended March 31,
  2009:





Fair
      Value Measurements Using Significant
                            Unobservable
      Inputs (Level 3)Non-agency
      mortgage-
                            backed
      securities
                          
                          
                          Total(Dollars
      in Thousands)Balance,
      January 1, 2009:
                          
                          $
                          924
                          
                          
                          $
                          924Total
      losses, realized/unrealizedIncluded
      in earnings
                          
                          
                          (83
                          )
                          
                          
                          (83
                          )Included
      in accumulated other comprehensive loss
                          
                          
                          80
                          
                          
                          
                          80Purchases,
      maturities, prepayments and calls, net
                          
                          
                          (51
                          )
                          
                          
                          (51
                          )Transfers
      into Level 3
                          
                          
                          12
                          
                          
                          
                          12Total
                          
                          $
                          882
                          
                          
                          $
                          882


23




The
following provides details of the fair value measurement activity for Level 3 of
the six months ended March 31, 2009:


Fair
      Value Measurements Using Significant
                                                      Unobservable
      Inputs (Level 3)Non
      agency mortgage-
                                                      backed
      securities
                                                    
                                                    
                                                    Total(Dollars
      in Thousands)Balance,
      October 1, 2008:
                                                    
                                                    $
                                                    384
                                                    
                                                    
                                                    $
                                                    384Total
      losses, realized/unrealizedIncluded
      in earnings
                                                    
                                                    
                                                    (234
                                                    )
                                                    
                                                    
                                                    (234
                                                    )Included
      in accumulated other comprehensive loss
                                                    
                                                    
                                                    (25
                                                    )
                                                    
                                                    
                                                    (25
                                                    )Purchases,
      maturities, prepayments and calls, net
                                                    
                                                    
                                                    (66
                                                    )
                                                    
                                                    
                                                    (66
                                                    )Transfers
      into Level 3
                                                    
                                                    
                                                    823
                                                    
                                                    
                                                    
                                                    823Total
                                                    
                                                    $
                                                    882
                                                    
                                                    
                                                    $
                                                    882




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, FHLB Stock and
loans or bank properties transferred into real estate owned at fair value on a
non-recurring basis.




Impaired
Loans




The
Company considers loans to be impaired when it becomes probable that the Company
will be unable to collect all amounts due in accordance with the contractual
terms of the loan agreement. Under SFAS No. 114, collateral dependent impaired
loans are based on the fair value of the collateral which is based on
appraisals. In some cases, adjustments are made to the appraised values for
various factors including 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. Specific reserves
were calculated for an impaired loan with a carrying amount of $640,000 at March
31, 2009. The collateral underlying this loan had a fair value of $145,000,
resulting in a specific reserve in the allowance for loan losses of $494,000. No
specific reserve was calculated for impaired loans with an aggregate carrying
amount of $1.6 million at March 31, 2009, as the underlying collateral value was
not below the carrying amount.




Federal Home Loan Bank
Stock




The
Company holds required equity investments in the stock of Federal Home Loan Bank
of Pittsburgh. Investment in the FHLB stock is carried at cost and is evaluated
for impairment in accordance with AICPA Statement of Position No. 01-6,
Accounting by Certain Entities (Including Entities With Trade Receivables) That
Lend to or Finance the Activities of Others. These investments may be measured
based upon a discounted cash flow model reliant on observable and unobservable
inputs, and therefore, the fair value measurement has been categorized as a
Level 2 or 3, depending on such inputs used. At March 31, 2009 these assets were
carried at cost in accordance with GAAP and do not require fair value disclosure
under the provision of SFAS No. 157




24




Transfer of Impaired Loans
into Real Estate Owned




Once an
asset is determined to be uncollectible, the underlying collateral is
repossessed and reclassified to foreclosed real estate and repossessed assets.
These assets are carried at lower of cost or fair value of the collateral, less
cost to sell. In some cases, adjustments are made to the appraised values for
various factors including 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. At March 31, 2009
these assets were valued in accordance with GAAP and do not require fair value
disclosure under the provision of SFAS No. 157.




Summary
of Non-Recurring Fair Value Measurements


At
      March 31, 2009($
      in thousands)
                                            
                                            Total
                                            
                                            
                                            Level
      1
                                            
                                            
                                            Level
      2
                                            
                                            
                                            Level
      3Impaired
      Loans
                                            
                                            $
                                            1,725
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            1,725





($
      in thousands)
                    
                    Impaired
                      LoansBalance
      at October 1, 2008
                    
                    $
                    3,111Total
      net gains
                    
                    
                    —Net
      transfers in/(out) Level 3
                    
                    
                    (1,386
                    )Balance
      at March 31, 2009
                    
                    $
                    1,725Net
      realized gains included in net income for the year to date relating to
      sales of repossessed assets.
                    
                    $
                    —





10.
                FINANCIAL
      STATEMENT RESTATEMENT




The
Company provides certain medical and life insurance benefits for a limited
number of retired officers, directors, and their spouses. Historically, the
Company has recognized expenses associated with these arrangements as applicable
premiums were paid for these benefits.




Subsequent
to the issuance of the Company’s 2008 Annual Report on Form 10-K, the Company
identified an error in the accounting for these arrangements. The Company
determined that the arrangements are “in substance” individual contracts to be
accounted for under Accounting Principles Board (“APB”) 12. Under APB 12, a
liability should be established representing the present value of the future
payments to be made under these contracts.




The
Company has restated the accompanying condensed consolidated financial
statements as of September 30, 2008 and for the three and six months ended March
31, 2008 from amounts previously reported to correct the error through the
establishment of an appropriate APB 12 liability.




The
following is a summary of the effects of the restatement on (i) Company’s
consolidated statement of financial condition at September 30, 2008, (ii) the
Company’s consolidated statements of operations for the three and six months
ended March 31, 2008 and (iii) the Company’s consolidated statement of cash
flows for the six months ended March 31, 2008.




25





September
      30, 2008As
                                          Previously
                                          Reported
                                        
                                        
                                        Adjustment
                                        
                                        
                                        As
                                          RestatedSTATEMENT
      OF FINANCIAL CONDITION
                                        (Dollars
      in thousands)Deferred
      income taxes - net
                                        
                                        $
                                        891
                                        
                                        
                                        $
                                        200
                                        
                                        
                                        $
                                        1,091Total
      assets
                                        
                                        
                                        489,337
                                        
                                        
                                        
                                        200
                                        
                                        
                                        
                                        489,537Accounts
      payable and accrued expenses
                                        
                                        
                                        6,581
                                        
                                        
                                        
                                        588
                                        
                                        
                                        
                                        7,169Total
      liabilities
                                        
                                        
                                        420,462
                                        
                                        
                                        
                                        588
                                        
                                        
                                        
                                        421,050Retained
      earnings
                                        
                                        
                                        37,676
                                        
                                        
                                        
                                        (388
                                        )
                                        
                                        
                                        37,288Total
      stockholders’ equity
                                        
                                        
                                        68,875
                                        
                                        
                                        
                                        (388
                                        )
                                        
                                        
                                        68,487Total
      liabilities and stockholders’ equity
                                        
                                        
                                        489,337
                                        
                                        
                                        
                                        200
                                        
                                        
                                        
                                        489,537





Three
      months ended
                              March
      31, 2008As
                              Previously
                              Reported
                            
                            
                            Adjustment
                            
                            
                            As
                              RestatedConsolidated
      Statement of Operations
                            
                            (Dollars
      in thousands)Salaries
      and employee benefits
                            
                            $
                            1,158
                            
                            
                            $
                            (5
                            )
                            
                            $
                            1,153Total
      non-interest expense
                            
                            
                            2,509
                            
                            
                            
                            (5
                            )
                            
                            
                            2,504Loss
      before taxes
                            
                            
                            (1,065
                            )
                            
                            
                            5
                            
                            
                            
                            (1,060
                            )Deferred
      tax benefit
                            
                            
                            (312
                            )
                            
                            
                            2
                            
                            
                            
                            (310
                            )Total
      income tax benefit
                            
                            
                            (383
                            )
                            
                            
                            2
                            
                            
                            
                            (381
                            )Net
      loss
                            
                            
                            (682
                            )
                            
                            
                            3
                            
                            
                            
                            (679
                            )





Six
      months ended
                              March
      31, 2008As
                              Previously
                              Reported
                            
                            
                            Adjustment
                            
                            
                            As
                              RestatedConsolidated
      Statement of Operations
                            
                            (Dollars
      in thousands)Salaries
      and employee benefits
                            
                            $
                            2,311
                            
                            
                            $
                            (11
                            )
                            
                            $
                            2,300Total
      non-interest expense
                            
                            
                            4,525
                            
                            
                            
                            (11
                            )
                            
                            
                            4,514Loss
      before taxes
                            
                            
                            (168
                            )
                            
                            
                            11
                            
                            
                            
                            (157
                            )Deferred
      tax benefit
                            
                            
                            (355
                            )
                            
                            
                            4
                            
                            
                            
                            (351
                            )Total
      income tax benefit
                            
                            
                            (96
                            )
                            
                            
                            4
                            
                            
                            
                            (92
                            )Net
      loss
                            
                            
                            (72
                            )
                            
                            
                            7
                            
                            
                            
                            (65
                            )





Six
      months ended
                                            March
      31, 2008As
                                            Previously
                                            Reported
                                          
                                          
                                          Adjustment
                                          
                                          
                                          As
                                            RestatedConsolidated
      Statement of Cash Flows
                                          
                                          (Dollars
      in thousands)Net
      loss
                                          
                                          
                                          (72
                                          )
                                          
                                          
                                          7
                                          
                                          
                                          
                                          (65
                                          )Deferred
      income tax benefit
                                          
                                          
                                          (355
                                          )
                                          
                                          
                                          4
                                          
                                          
                                          
                                          (351
                                          )Changes
      in accounts payable and accrued expenses
                                          
                                          
                                          1,228
                                          
                                          
                                          
                                          (11
                                          )
                                          
                                          
                                          1,217
  26




The
Company plans to restate its fiscal 2008 and 2007 consolidated financial
statements when filing its Form 10-K for the year ended September 30, 2009. The
effects of the restatement will increase the Company’s results of operations by
$15,000 and $11,000 for the fiscal years ended September 30, 2008 and 2007,
respectively. The Company plans to restate its interim financial statements for
the three and nine months ended June 30, 2008 when filing its Form 10-Q for the
third quarter.




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 condensed
consolidated financial statement included elsewhere in this Form 10-Q and with
our Annual Report on Form 10-K. The following discussion gives effect to the
restatement discussed in Note 10, Financial Statement Restatement, of the notes
to the unaudited condensed consolidated financial statements.




Overview.Prudential
Bancorp, Inc. of Pennsylvania (the “Company”) was formed by Prudential Savings
Bank (the “Bank”) in connection with the Bank’s reorganization into the mutual
holding company form of organization. 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 and non-interest
expense. Non-interest expense principally consists of salaries and employee
benefits, office occupancy, depreciation, data processing expense, payroll taxes
and other expense. Our results of operations are also significantly affected by
general economic and competitive conditions, particularly changes in interest
rates, government policies and actions of regulatory authorities. Future changes
in applicable laws, regulations or government policies may materially impact our
financial condition and results of operations. The Bank is subject to regulation
by the Federal Deposit Insurance Corporation (“FDIC”) and the Pennsylvania
Department of Banking (the “Department”). The Bank’s main office is in
Philadelphia, Pennsylvania, with six additional banking offices located in
Philadelphia and Delaware Counties in Pennsylvania. The Bank’s primary business
consists of attracting deposits from the general public and using those funds
together with borrowings to originate loans and to invest primarily in U.S.
Government and agency securities and mortgage-backed securities. In November
2005, the Bank formed PSB Delaware, Inc., a Delaware corporation, as a
subsidiary of the Bank. In March 2006, all mortgage-backed securities 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 2 of
the Notes to Consolidated Financial Statements included in the Annual Report
filed on Form 10-K for the year ended September 30, 2008. The accounting and
financial reporting policies of the Company conform to accounting principles
generally accepted in the United States of America and to general practices
within the banking industry. The preparation of the Company’s consolidated
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period.
Management evaluates these estimates and assumptions on an ongoing basis. The
following accounting policies comprise those that management believes are the
most critical to aid in fully understanding and evaluating our reported
financial results. These policies require numerous estimates or economic
assumptions that may prove inaccurate or may be subject to variations which may
significantly affect our reported results and financial condition for the period
or in future periods.




27


Allowance
for Loan Losses. The allowance for loan losses is established through a
provision for loan losses charged to expense. Loans are charged against the
allowance for loan losses when management believes that the collectibility of
the principal is unlikely. Subsequent recoveries are added to the allowance.
Allowance for loan losses represents management’s estimate of probable credit
losses known and inherent in the loan portfolio as of the balance sheetdate. The determination of the allowance for loan losses requires
management to make significant estimates with respect to the amounts and timing
of losses and market and economic conditions. Management considers such factors
as changes in the types and amount of loans in the loan portfolio, historical
loss experience, adverse situations that may affect the borrower’s ability to
repay, estimated value of any underlying collateral, estimated losses relating
to specifically identified loans, and current economic conditions. This
evaluation is inherently subjective as it requires material estimates including,
among others, exposure at default, the amount and timing of expected future cash
flows on affected loans, value of collateral, estimated losses on our
commercial, construction and residential loan portfolios and general amounts for
historical loss experience. All of these estimates may be susceptible to
significant change.
  While
management uses the best information available to make loan loss allowance
evaluations, adjustments to the allowance may be necessary based on changes in
economic and other conditions or changes in accounting guidance. Historically,
our estimates of the allowance for loan loss have not required significant
adjustments from management’s initial estimates. In addition, the Department and
the FDIC, as an integral part of their examination processes, periodically
review our allowance for loan losses. The Department and the FDIC may require
the recognition of adjustments to the allowance for loan losses based on their
judgment of information available to them at the time of their examinations. To
the extent that actual outcomes differ from management’s estimates, additional
provisions to the allowance for loan losses may be required that would adversely
impact earnings in future periods.
  Income
Taxes. We also estimate a reserve for deferred tax assets if, based on
the available evidence, it is more likely than not that some portion or all of
the recorded deferred tax assets will not be realized in future periods. The
Company accounts for income taxes in accordance with SFAS No. 109, Accounting
for Income Taxes, and Financial Accounting Standards Board (the “FASB”)
Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes – an
interpretation of FASB Statement No. 109. SFAS No. 109 requires the recording of
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. FIN No. 48 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 Unaudited
Condensed Consolidated Statement of Operations. Assessment of uncertain tax
positions under FIN No. 48 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 applying the
requirements of FIN No. 48.
  Fair Value Measurement.The
Company adopted SFAS No. 157, Fair Value Measurements, on October 1, 2008
and FASB Staff Position (“FSP”) SFAS No. 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active, on September 30,
2008. SFAS No. 157 establishes a framework for measuring fair value. SFAS
No. 157 defines fair value as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date, emphasizing that fair value is a
market-based measurement and not an entity-specific measurement. FSP SFAS No.
157-3 clarifies the application of SFAS No. 157 in a market that is not active
and provides an example to illustrate key considerations in determining the fair
value of a financial asset when the market for that financial asset is not
active. SFAS No. 157 addresses the valuation techniques used to measure
fair value. These valuation techniques include the market approach, income
approach and cost approach. The market approach uses prices or relevant
information generated by market transactions involving identical or comparable
assets or liabilities. The income approach involves converting future amounts to
a single present amount. The measurement is valued based on current market
expectations about those future amounts. The cost approach is based on the
amount that currently would be required to replace the service capacity of the
asset.
  28
  SFAS No.
157 establishes a fair value hierarchy, which prioritizes the inputs to
valuation techniques used to measure fair value into three broad levels. The
fair value hierarchy gives the highest priority to quoted prices in active
markets for identical assets or liabilities (Level 1) and the lowest priority to
unobservable inputs (Level 3). A financial instrument’s categorization within
the fair value hierarchy is based upon the lowest level of input that is
significant to the instrument’s fair value measurement. The three levels within
the fair value hierarchy are described as follows:
 ●
                Level
      1 - Quoted prices (unadjusted) in active markets for identical assets or
      liabilities.●
                Level
      2 - Inputs other than quoted prices included within Level 1 that are
      observable for the asset or liability, either directly or indirectly.
      Level 2 inputs include: quoted prices for similar assets or liabilities in
      active markets; quoted prices for identical or similar assets or
      liabilities in markets that are not active; inputs other than quoted
      prices that are observable for the asset or liability; and inputs that are
      derived principally from or corroborated by observable market data by
      correlation or other means.●
                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.
  The
Company measures financial assets and liabilities at fair value in accordance
with SFAS No. 157 and FSP SFAS No. 157-3. These measurements involve
various valuation techniques and models, which involve inputs that are
observable, when available, and include the investment and mortgage-backed
securities available for sale and derivative financial instruments.  The
Company adopted the requirements of FSP No. 157-4 as of January 1, 2009 and it
did not have an impact on the
Company’s financial condition or results of operations.  The following is a
summary of valuation techniques utilized by the Company for its significant
financial assets and liabilities which are valued on a recurring
basis.
  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. At March 31, 2009, the Company’s investment in certain
non-agency mortgage-backed securities were shifted from a Level 2 market value
measurement to a Level 3 market value measurement. This Level 3 market value
measurement included an internally developed discounted cash flow model combined
with using market data points of similar securities with comparable credit
ratings in addition to market yield curves with similar maturities in
determining the discount rate.
  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, FHLB
stock and loans or bank properties transferred into real estate owned at fair
value on a non-recurring basis.
  Valuation
techniques and models utilized for measuring financial assets and liabilities
are reviewed and validated by the Company at least quarterly.
  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 EITF 99-20, “Recognition of Interest Income and Impairment on
Purchased Retained Beneficial Interests in Securitized Financial Asset” as
amended by FSP EITF 99-20-1,”Amendments to the Impairment Guidance of EITF
Issue No. 99-20”,when applicable, and FSP SFAS No. 115-1 and SFAS No.
124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments” and FSP SFAS No. 115-2 and SFAS No. 124-2, “Recognition and
Presentation of Other-Than-Temporary Impairments”. The evaluation is based upon
factors such as the creditworthiness of the issuers/guarantors, the underlying
collateral, if applicable, and the continuing performance of the securities. In
addition the Company also considers the likelihood that the security will be
required to be sold by a regulatory agency, our internal intent not to dispose
of the security prior to maturity and whether the entire cost basis of the
security is expected to be recovered. In determining whether the cost basis will
be recovered, management evaluates other facts and circumstances that may be
indicative of an OTTI 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.
  29
  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.
  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.The continued
turbulence in the economy and the current financial crisis, which began in
mid-2007, resulting in housing-related credit decline, combined with a capital
markets liquidity crisis that has affected the liquidity and valuation of many
investment vehicles, remains a concern for the Company. The severity of the
downturn in the economic conditions deteriorated into a recession during 2008
which has continued into the beginning of 2009. One of the primary concerns
for the Company is the slump in the housing market. While the Philadelphia area
has not suffered wholesale declines in the value of residential real estate as
have other areas of the country, this downturn has rippled through many parts of
the economy, including construction lending and lending to contractors. Such
conditions increase our exposure to the risk of non-performance in our
construction and commercial loan portfolios. The Company continues to focus on
the credit quality of its customers – closely monitoring the financial status of
borrowers throughout the Company’s markets, gathering information, working on
early detection of potential problems, taking pre-emptive steps where necessary
and doing the analysis required to maintain adequate reserves. These
declines in real estate market values has also led to increases in our allowance
for loan losses and loan loss provision.
  The
decline in real estate market values and the increase in defaults on the
underlying collateral have caused illiquidity in the financial markets which has
led to the devaluation of certain non-agency securities. The Company continues
to be impacted by continued pressure in the capital markets with respect to the
value of our non-agency mortgage-backed securities and collateralized mortgage
obligations, leading to the determination that the declines in the fair value
were other-than-temporary resulting in the occurrence of other-than-temporary
impairment charges.
  Despite
the current market conditions, the Company continues to maintain a strong
capital position. The Company determined that it will not participate in the
U.S. Department of the Treasury’s Capital Purchase Program, intended to provide
capital to U.S. financial institutions through the purchase of preferred
stock.
  The
following discussion provides further details on the financial condition and
results of operations of the Company at and for the periods ended March 31,
2009.
  30
  COMPARISON
OF FINANCIAL CONDITION AT MARCH 31, 2009 AND SEPTEMBER 30, 2008
  At March
31, 2009, the Company’s total assets were $514.7 million, an increase of $25.1
million from $489.5 million at September 30, 2008. The increase was primarily
attributable to a increase in cash and cash equivalents and net loans receivable
offset in part by net repayments and impairments in the investment and
mortgage-backed security portfolios.
  Total
liabilities increased $29.2 million to $450.3 million at March 31, 2009 from
$421.1 million at September 30, 2008. The increase was primarily due to a $42.4
million increase in deposits, mainly in certificates of deposit. The increase
was partially offset by the repayment of FHLB advances which decreased by $12.0
million, from $31.7 million at September 30, 2008 to $19.7 million at March 31,
2009.
  Stockholders’
equity decreased by $4.1 million to $64.4 million at March 31, 2009 as compared
to $68.5 million at September 30, 2008 primarily as a result of the $2.5 million
cost of purchasing 226,148 shares of common stock in the open market during the
six month period ended March 31, 2009 to fund the Recognition and Retention
Plan, the declaration of quarterly cash dividends totaling $1.1 million, the net
loss of $1.0 million, the increase in the net unrealized loss on available for
sale securities due to declines in market values of $712,000 and a decrease of
$256,000 related to the adoption of the EITF No. 06-10 related to postretirement
benefits associated with endorsement split dollar life insurance arrangements
offset in part by a $1.1 million increase related to the adoption of FASB Staff
Positions 115-2 and 124-2 related to impairment charges on
securities.
  COMPARISON
OF RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2009 AND
2008
  Net income.A net loss of
$48,000 was recognized for the quarter ended March 31, 2009 as compared to net
loss of $679,000 for the same period in 2008. For the six months ended March 31,
2009, the Company recognized a net loss of $1.0 million compared to a net loss
of $65,000 for the comparable period in 2008. The net loss reported for both the
three and six months ended March 31, 2008 was due to the recognition of a $1.5
million (pre-tax) impairment charge taken with respect to the Company’s $35.0
million investment in a mutual fund. The net losses reported for the three and
six month periods ended March 31, 2009 were due to non-cash other-than-temporary
impairment (“OTTI”) charges related to certain of the non-agency mortgage-backed
securities received as a result of the redemption in kind of the Company
investment in a mutual fund during the third quarter of fiscal
2008.
  Net interest income.Net
interest income increased $681,000 or 24.3% to $3.5 million for the three months
ended March 31, 2009 as compared to $2.8 million for the same period in 2008.
The increase reflected the effects of a $341,000 or 9.1% decrease in interest
expense combined with a $340,000 or 5.2% increase in interest income. The
decrease in interest expense resulted primarily from a 70 basis point decrease
to 3.18% in the weighted average rate paid on interest-bearing liabilities,
reflecting the decrease in market rates of interest during the year, partially
offset by a $42.3 million or 10.9% increase in the average balance of
interest-bearing liabilities, primarily in certificates, for the three months
ended March 31, 2009, as compared to the same period in 2008. The increase in
interest income resulted primarily from a $26.9 million or 5.9% increase in the
average balance of interest-earning assets for the three months ended March 31,
2009, as compared to the same period in 2008, due primarily to the continued
increase in the average balance of loans receivable.
  For the
six months ended March 31, 2009, net interest income increased $1.7 million or
30.2% to $7.2 million as compared to $5.6 million for the same period in 2008.
The increase was due to the combined effects of a $906,000 or 6.9% increase in
interest income and a $774,000 or 10.1% decrease in interest expense. The
increase in interest income resulted primarily from a $25.3 million or 5.6%
increase in the average balance of interest-earning assets for the six months
ended March 31, 2009, as compared to the same period in 2008. Also contributing
to the increase in interest income was a 7 basis point increase to 5.87% in the
weighted average rate earned on interest-earning assets.
  31
  The
decrease in interest expense resulted primarily from a 74 basis point decrease
to 3.23% in the weighted average rate paid on interest-bearing liabilities,
reflecting the decrease in market rates of interest during the year, partially
offset by a $40.7 million or 10.5% increase in the average balance of
interest-bearing liabilities, primarily in certificates of deposit, for the six
months ended March 31, 2009, as compared to the same period in
2008.
  For the
quarter ended March 31, 2009, the net interest margin was 2.89%, as compared to
2.46% for the same period in 2008. For the six months ended March 31, 2009, the
net interest margin was 3.01%, as compared to 2.44% for the same period in 2008.
The increase in the interest margin was primarily due to the large decrease in
the rate paid on interest-bearing liabilities.
  32
  Average Balances, Net Interest
Income, and Yields Earned and Rates Paid. The following table shows for
the periods indicated the total dollar amount of interest from average
interest-earning assets and the resulting yields, as well as the interest
expense on average interest-bearing liabilities, expressed both in dollars and
rates, and the net interest margin. Average yields and rates have been
annualized. Tax-exempt income and yields have not been adjusted to a
tax-equivalent basis. All average balances are based on monthly balances.
Management does not believe that the monthly averages differ significantly from
what the daily averages would be.
 Three
      Months
                                                                                                                                                  Ended
      March 31,2009
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                2008(as
      restated - see Note 10)Average
                                                                                                                                                  Balance
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                Interest
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                Average
                                                                                                                                                  Yield/Rate
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                Average
                                                                                                                                                  Balance
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                Interest
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                Average
                                                                                                                                                  Yield/Rate(Dollars
      in Thousands)Interest-earning
      assets:Investment
      securities
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                117,374
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                1,466
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                5.00
                                                                                                                                                %
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                167,103
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                2,174
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                5.20
                                                                                                                                                %Mortgage-backed
      securities (3)
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                92,376
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                1,562
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                6.76
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                57,086
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                757
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                5.30Loans
      receivable(1)
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                254,793
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                3,863
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                6.06
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                223,496
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                3,589
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                6.42Other
      interest-earning assets (4)
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                17,709
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                14
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                0.32
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                7,667
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                45
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                2.35Total
      interest-earning assets
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                482,252
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                6,905
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                5.73
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                455,352
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                6,565
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                5.77Cash
      and non-interest-bearing balances
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                6,308
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                4,723Other
      non-interest-earning assets
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                13,668
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                12,458Total
      assets
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                502,228
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                472,533Interest-bearing
      liabilities:Savings
      accounts
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                64,722
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                431
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                2.66
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                66,526
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                399
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                2.40Money
      market deposit and NOW accounts
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                93,806
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                536
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                2.29
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                91,741
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                748
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                3.26Certificates
      of deposit
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                243,819
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                2,233
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                3.66
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                204,218
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                2,329
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                4.56Total
      deposits
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                402,347
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                3,200
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                3.18
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                362,485
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                3,476
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                3.84Advances
      from Federal Home Loan Bank
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                26,573
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                224
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                3.37
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                24,254
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                289
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                4.77Advances
      from borrowers for taxes and insurance
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                1,950
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                2
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                0.41
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                1,820
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                2
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                0.44Total
      interest-bearing liabilities
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                430,870
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                3,426
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                3.18
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                388,559
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                3,767
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                3.88Non-interest-bearing
      liabilities:Non-interest-bearing
      demand accounts
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                3,774
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                4,807Other
      liabilities
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                2,278
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                1,322Total
      liabilities
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                436,922
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                394,688Stockholders’
      equity
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                65,306
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                77,845Total
      liabilities and stockholders’ equity
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                502,228
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                472,533Net
      interest-earning assets
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                51,382
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                66,793Net
      interest income; interest rate spread
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                3,479
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                2.55
                                                                                                                                                %
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                2,798
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                1.89
                                                                                                                                                %Net
      interest margin(2)
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                2.89
                                                                                                                                                %
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                2.46
                                                                                                                                                %Average
      interest-earning assets to average interest-bearing
      liabilities
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                111.93
                                                                                                                                                %
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                117.19
                                                                                                                                                %
  
 (1)
                    Includes
      non-accrual loans. Calculated net of unamortized deferred fees,
      undisbursed portion of loans-in-process and allowance for loan
      losses.(2)
                    Equals
      net interest income divided by average interest-earning
      assets.
 33
 
 (3)
                  The
      increase in yield of the Company’s mortgage-backed securities portfolio is
      primarily a result of changes in portfolio composition as well as in
      estimate of prepayment speed assumptions. The Company employs the
      effective yield method of accounting, which requires retrospective
      adjustments to the yield on the Company’s assets, which in turn directly
      affects earnings. The Company estimates yield at the time of purchase of
      each asset. To the extent prepayment speeds assumptions differ from
      Company’s estimates at the time of purchase, the Company is required to
      adjust the yield on that asset as well as the amortization of premium or
      discount taken to date on the asset. This cumulative “true up” of the
      amortization is taken through earnings in the current
    period.(4)
                  Yield
      substantially decreased due to declining federal reserve overnight
      investment rates over the twelve month
period.
 
 Six Months
                                                                                                                                        Ended
      March 31,2009
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      2008(as
      restated - see Note 10)Average
                                                                                                                                        Balance
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      Interest
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      Average
                                                                                                                                        Yield/Rate
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      Average
                                                                                                                                        Balance
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      Interest
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      Average
                                                                                                                                        Yield/Rate(Dollars
      in Thousands)Interest-earning
      assets:Investment
      securities
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      124,058
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      3,194
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      5.15
                                                                                                                                      %
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      169,794
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      4,411
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      5.20
                                                                                                                                      %Mortgage-backed
      securities(3)
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      92,201
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      3,318
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      7.20
                                                                                                                                      %
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      55,830
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      1,480
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      5.30
                                                                                                                                      %Loans
      receivable(1)
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      252,179
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      7,590
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      6.02
                                                                                                                                      %
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      222,195
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      7,224
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      6.50
                                                                                                                                      %Other
      interest-earning assets(4)
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      12,726
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      30
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      0.47
                                                                                                                                      %
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      8,037
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      111
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      2.76
                                                                                                                                      %Total
      interest-earning assets
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      481,164
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      14,132
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      5.87
                                                                                                                                      %
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      455,856
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      13,226
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      5.80
                                                                                                                                      %Cash
      and non-interest-bearing balances
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      4,923
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      4,379Other
      non-interest-earning assets
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      13,838
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      12,536Total
      assets
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      499,925
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      472,771Interest-bearing
      liabilities:Savings
      accounts
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      64,865
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      873
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      2.69
                                                                                                                                      %
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      67,006
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      776
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      2.32
                                                                                                                                      %Money
      market deposit and NOW accounts
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      93,136
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      1,142
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      2.45
                                                                                                                                      %
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      91,310
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      1,548
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      3.39
                                                                                                                                      %Certificates
      of deposit
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      232,542
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      4,342
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      3.73
                                                                                                                                      %
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      199,059
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      4,645
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      4.67
                                                                                                                                      %Total
      deposits
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      390,543
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      6,357
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      3.26
                                                                                                                                      %
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      357,375
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      6,969
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      3.90
                                                                                                                                      %Advances
      from Federal Home Loan Bank
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      34,819
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      527
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      3.03
                                                                                                                                      %
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      27,456
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      689
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      5.02
                                                                                                                                      %Advances
      from borrowers for taxes and insurance
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      1,770
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      4
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      0.45
                                                                                                                                      %
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      1,641
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      4
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      0.49
                                                                                                                                      %Total
      interest-bearing liabilities
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      427,132
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      6,888
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      3.23
                                                                                                                                      %
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      386,472
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      7,662
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      3.97
                                                                                                                                      %Non-interest-bearing
      liabilities:Non-interest-bearing
      demand accounts
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      3,895
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      4,845Other
      liabilities
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      2,591
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      2,218Total
      liabilities
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      433,618
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      393,535Stockholders’
      equity
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      66,307
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      79,236Total
      liabilities and stockholders’ equity
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      499,925
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      472,771Net
      interest-earning assets
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      54,032
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      69,384Net
      interest income; interest rate spread
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      7,244
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      2.65
                                                                                                                                      %
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      $
                                                                                                                                      5,564
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      2.06
                                                                                                                                      %Net
      interest margin(2)
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      3.01
                                                                                                                                      %
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      2.44
                                                                                                                                      %Average
      interest-earning assets to average interest-bearing
      liabilities
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      112.65
                                                                                                                                      %
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      
                                                                                                                                      117.95
                                                                                                                                      %
 
 (1)
                  Includes
      non-accrual loans. Calculated net of unamortized deferred fees,
      undisbursed portion of loans-in-process and allowance for loan
      losses.
 34
  (2)
                  Equals
      net interest income divided by average interest-earning
      assets.(3)
                  The
      increase in yield of the Company’s mortgage-backed securities portfolio is
      primarily a result of changes in portfolio composition as well as in
      estimate of prepayment speed assumptions. The Company employs the
      effective yield method of accounting, which requires retrospective
      adjustments to the yield on the Company’s assets, which in turn directly
      affects earnings. The Company estimates yield at the time of purchase of
      each asset. To the extent prepayment speeds assumptions differ from
      Company’s estimates at the time of purchase, the Company is required to
      adjust the yield on that asset as well as the amortization of premium or
      discount taken to date on the asset. This cumulative “true up” of the
      amortization is taken through earnings in the current
    period.(4)
                  Yield
      substantially decreased due to declining federal reserve overnight
      investment rates over the twelve month
period.
  Provisions for loan losses.
The allowance is maintained at a level sufficient to provide for estimated
probable losses in the loan portfolio at each reporting date. At least
quarterly, management performs an analysis to identify the inherent risk of loss
in the Company’s loan portfolio. This analysis includes a qualitative evaluation
of concentrations of credit, past loss experience, current economic conditions,
amount and composition of the loan portfolio (including loans being specifically
monitored by management), estimated fair value of underlying collateral,
delinquencies, and other factors.
  Our
methodology for assessing the adequacy of the allowance establishes both
specific and general pooled allowances. To determine the adequacy of the
allowance and the need for potential changes to the allowance, we conduct a
formal analysis quarterly to assess the risk within the loan portfolio. This
assessment includes analyses of historical performance, past due trends, the
level of nonperforming loans, reviews of certain impaired loans, loan activity
since the last quarter, consideration of current economic conditions, and other
pertinent information. Loans are assigned ratings, either individually for
larger credits or in homogeneous pools, based on an internally developed grading
system. The resulting conclusions are reviewed and approved by senior
management.
  The
Company established a provision for loan losses of $50,000 for the quarter ended
March 31, 2009 and $363,000 for the six month period ended March 31, 2009 as
compared to $75,000 and $150,000 for the comparable periods in 2008. The primary
factor in the increase of the loan loss provision for the six month period ended
March 31, 2009 related to a specific reserve established in the first quarter of
fiscal 2009 on a $3.0 million non-performing construction loan reflecting the
Company’s participation interest in a $14.9 million construction loan to build a
40-unit high-rise condominium project in located in Center City, Philadelphia
which has experienced payment delinquencies. Although the project is
substantially completed, based on an updated appraisal, the value of the real
estate collateralizing the loan has declined. Another financial institution is
the lead lender on the loan. As of March 31, 2009, this loan was classified as a
real estate owned property as the borrower agreed to cede control of the
property to the lead lender. At March 31, 2009, the Company’s non-performing
assets totaled $6.8 million or 1.3% of total assets. Non-performing assets
consisted of one construction loans totaling $640,000, one commercial real
estate loan totaling $1.6 million, nine one-to four-family residential mortgage
loans totaling $448,000 and two real estate owned properties totaling $4.1
million (one of which is the $3.0 million loan noted above). The allowance for
loan losses totaled $1.7 million, or 0.7% of total loans and 65.1% of
non-performing loans.
  Non-interest income.
Non-interest income was a charge of $434,000 and $2.4 million for the three and
six month periods ended March 31, 2009, respectively, compared with a charge of
$1.3 million and $1.1 million for the comparable periods in 2008. The variance
was due solely to an OTTI charge of $1.5 million on the mutual fund for the 2008
periods while there were impairment charges of $647,000 and $2.8 million during
the three and six month periods ended March 31, 2009 related to the non-agency
mortgage-backed securities acquired as part of the June 2008 redemption in kind
of the mutual fund.
  35
  Non-interest expenses.For the
quarter and six months ended March 31, 2009, non-interest expense increased
$174,000 and $618,000, respectively, compared to the same periods in the prior
year. The increases were primarily due to a $186,000 writedown associated with
an REO property incurred during the second fiscal quarter of 2009. Increases in
deposit insurance premiums of $77,000 and $275,000, respectively, were incurred
during the three and six month periods ended March 31, 2009 compared to the
comparable periods in 2008, based on a new fee structure implemented by the
FDIC. Also contributing to the increase, were increases in advertising expenses.
These increases were partially offset by decreases in legal expenses as certain
legal fees were incurred during the 2008 periods in defense of a previously
disclosed lawsuit, in which the lawsuit has been settled. These legal fees were
not applicable in the 2009 periods.
  Income tax expense. The
Company recorded income tax expense for the quarter and six months ended March
31, 2009 of $365,000 and $409,000, respectively, compared to income tax benefit
of $381,000 and $92,000, respectively, for the quarter and six months ended
March 31, 2008. Tax expense was recorded in the 2009 periods and was not fully
impacted by the capital losses incurred in connection with the writedown of
certain of the mortgage-backed securities received in the redemption of the
mutual fund. A valuation allowance was recorded against the deferred tax asset
as capital losses are only deductible to the extent of capital
gains.
  36
  LIQUIDITY AND CAPITAL
RESOURCES
  The
Company’s liquidity, represented by cash and cash equivalents, is a product of
its operating, investing and financing activities. Our primary sources of funds
are from deposits, scheduled principal and interest payments on loans, loan
prepayments and the maturity of loans, mortgage-backed securities and other
investments, and other funds provided from operations. While scheduled payments
from the amortization of loans and mortgage-backed securities and maturing
investment securities are relatively predictable sources of funds, deposit flows
and loan and securities prepayments can be greatly influenced by market rates of
interest, economic conditions and competition. We also maintain excess funds in
short-term, interest-bearing assets that provide additional liquidity. At March
31, 2009, our cash and cash equivalents amounted to $26.6 million. In addition,
our available for sale investment and mortgage-backed securities amounted to an
aggregate of $58.0 million at such date.
  We use
our liquidity to fund existing and future loan commitments, to fund maturing
certificates of deposit and demand deposit withdrawals, to invest in other
interest-earning assets, and to meet operating expenses. At March 31, 2009, the
Company had $9.9 million in outstanding commitments to originate fixed and
variable-rate loans, not including loans in process. The Company also had
commitments under unused lines of credit of $7.0 million and letters of credit
outstanding of $95,000 at March 31, 2009. Certificates of deposit at March 31,
2009 maturing in one year or less totaled $188.0 million. Based upon historical
experience, we anticipate that a significant portion of the maturing
certificates of deposit will be redeposited with us.
  In
addition to cash flows from loan and securities payments and prepayments as well
as from sales of available for sale securities, we have significant borrowing
capacity available to fund liquidity needs should the need arise. Our borrowings
consist solely of advances from the Federal Home Loan Bank of Pittsburgh, of
which we are a member. Under terms of the collateral agreement with the Federal
Home Loan Bank, we pledge residential mortgage loans and mortgage-backed
securities as well as our stock in the Federal Home Loan Bank as collateral for
such advances. However, use of FHLB advances has been modest. At March 31, 2009,
we had $19.7 million in outstanding FHLB advances and we had $253.7 million in
additional FHLB advances available to us.
  We
anticipate that we will continue to have sufficient funds and alternative
funding sources to meet our current commitments.
  37
  The
following table summarizes the Company and Bank’s regulatory capital ratios as
of March 31, 2009 and September 30, 2008 and compares them to current regulatory
guidelines.
 Actual
      Ratio
                  
                  
                  Required
      for
                    Capital
      Adequacy
                    Purposes
                  
                  
                  To
      Be
                    Well
      Capitalized
                    Under
      Prompt
                    Corrective
      Action
                    ProvisionsMarch
      31, 2009:Tier
      1 capital (to average assets)The
      Company
                  
                  
                  13.09
                  %
                  
                  
                  4.0
                  %
                  
                  
                  N/AThe
      Bank
                  
                  
                  12.24
                  %
                  
                  
                  4.0
                  %
                  
                  
                  5.0
                  %Tier
      1 capital (to risk weighted assets)The
      Company
                  
                  
                  28.68
                  %
                  
                  
                  4.0
                  %
                  
                  
                  N/AThe
      Bank
                  
                  
                  26.81
                  %
                  
                  
                  4.0
                  %
                  
                  
                  6.0
                  %Total
      capital (to risk weighted assets)The
      Company
                  
                  
                  29.43
                  %
                  
                  
                  8.0
                  %
                  
                  
                  N/AThe
      Bank
                  
                  
                  27.57
                  %
                  
                  
                  8.0
                  %
                  
                  
                  10.0
                  %September
      30, 2008 (as revised see Note 10):Tier
      1 capital (to average assets)The
      Company
                  
                  
                  14.49
                  %
                  
                  
                  4.0
                  %
                  
                  
                  N/AThe
      Bank
                  
                  
                  13.14
                  %
                  
                  
                  4.0
                  %
                  
                  
                  5.0
                  %Tier
      1 capital (to risk weighted assets)The
      Company
                  
                  
                  31.20
                  %
                  
                  
                  4.0
                  %
                  
                  
                  N/AThe
      Bank
                  
                  
                  28.74
                  %
                  
                  
                  4.0
                  %
                  
                  
                  6.0
                  %Total
      capital (to risk weighted assets)The
      Company
                  
                  
                  31.92
                  %
                  
                  
                  8.0
                  %
                  
                  
                  N/AThe
      Bank
                  
                  
                  29.46
                  %
                  
                  
                  8.0
                  %
                  
                  
                  10.0
                  %
  IMPACT OF INFLATION AND CHANGING
PRICES
  The
financial statements, accompanying notes, and related financial data of the
Company presented herein have been prepared in accordance with generally
accepted accounting principles which requires the measurement of financial
position and operating results in terms of historical dollars, without
considering changes in the relative purchasing power of money over time due to
inflation.
  Unlike
most industrial companies, substantially all of the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates have a
more significant impact on a financial institution’s performance than the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or in the same magnitude as the price of goods and
services, since such prices are affected by inflation to a larger extent than
interest rates. In the current interest rate environment, liquidity and the
maturity structure of the Company’s assets and liabilities are critical to the
maintenance of acceptable performance levels.
  38
  ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  How We Manage Market Risk.
Market risk is the risk of loss from adverse changes in market prices and rates.
Our market risk arises primarily from the interest rate risk which is inherent
in our lending, investment and deposit gathering activities. To that end,
management actively monitors and manages interest rate risk exposure. In
addition to market risk, our primary risk is credit risk on our loan portfolio.
We attempt to manage credit risk through our loan underwriting and oversight
policies.
  The
principal objective of our interest rate risk management function is to evaluate
the interest rate risk embedded in certain balance sheet accounts, determine the
level of risk appropriate given our business strategy, operating environment,
capital and liquidity requirements and performance objectives, and manage the
risk consistent with approved guidelines. We seek to manage our exposure to
risks from changes in interest rates while at the same time trying to improve
our net interest spread. We monitor interest rate risk as such risk relates to
our operating strategies. We have established an Asset/Liability Committee which
is comprised of our President and Chief Executive Officer, Chief Financial
Officer, Chief Lending Officer, Treasurer and Controller. The Asset/Liability
Committee meets on a regular basis and is responsible for reviewing our
asset/liability policies and interest rate risk position. Both the extent and
direction of shifts in interest rates are uncertainties that could have a
negative impact on future earnings.
  In recent
years, we primarily have reduced our exposure in callable agency bonds and
increased our portfolio of agency issued mortgage-backed securities. However,
notwithstanding the foregoing steps, we remain subject to a significant level of
interest rate risk in a low interest rate environment due to the high proportion
of our loan portfolio that consists of fixed-rate loans as well as our decision
to invest a significant amount of our assets in long-term, fixed-rate investment
and mortgage-backed securities.
  Gap Analysis. The matching of
assets and liabilities may be analyzed by examining the extent to which such
assets and liabilities are “interest rate sensitive” and by monitoring a
Company’s interest rate sensitivity “gap.” An asset or liability is said to be
interest rate sensitive within a specific time period if it will mature or
reprice within that time period. The interest rate sensitivity gap is defined as
the difference between the amount of interest-earning assets maturing or
repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within that same time period. A gap is
considered positive when the amount of interest rate sensitive assets exceeds
the amount of interest rate sensitive liabilities. A gap is considered negative
when the amount of interest rate sensitive liabilities exceeds the amount of
interest rate sensitive assets. During a period of rising interest rates, a
negative gap would tend to affect adversely net interest income while a positive
gap would tend to result in an increase in net interest income. Conversely,
during a period of falling interest rates, a negative gap would tend to result
in an increase in net interest income while a positive gap would tend to affect
adversely net interest income.
  The
following table sets forth the amounts of our interest-earning assets and
interest-bearing liabilities outstanding at March 31, 2009, which we expect,
based upon certain assumptions, to reprice or mature in each of the future time
periods shown (the “GAP Table”). Except as stated below, the amounts of assets
and liabilities shown which reprice or mature during a particular period were
determined in accordance with the earlier of term to repricing or the
contractual maturity of the asset or liability. The table sets forth an
approximation of the projected repricing of assets and liabilities at March 31,
2009, on the basis of contractual maturities, anticipated prepayments, and
scheduled rate adjustments within a three-month period and subsequent selected
time intervals. The loan amounts in the table reflect principal balances
expected to be redeployed and/or repriced as a result of contractual
amortization and anticipated prepayments of adjustable-rate loans and fixed-rate
loans, and as a result of contractual rate adjustments on adjustable-rate loans.
Annual prepayment rates for adjustable-rate and fixed-rate single-family and
multi-family residential and commercial mortgage loans are assumed to range from
11.0% to 37.7%. The annual prepayment rate for mortgage-backed securities is
assumed to range from 0.6% to 75.5%. Money market deposit accounts, savings
accounts and interest-bearing checking accounts are assumed to have annual rates
of withdrawal, or “decay rates,” based on information from the FDIC. For savings
accounts and checking accounts, the decay rates are 60% in one to three years,
20% in three to five years and 20% in five to 10 years. For money market
accounts, the decay rates are 50% in three to 12 months and 50% in 13 to 36
months.
  39




3
      Months
                                                                                                                                          or
      Less
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        More
      than
                                                                                                                                          3
      Months
                                                                                                                                          to
      1 Year
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        More
      than
                                                                                                                                          1
      Year
                                                                                                                                          to
      3 Years
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        More
      than
                                                                                                                                          3
      Years
                                                                                                                                          to
      5 Years
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        More
      than
                                                                                                                                          5
      Years
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        Total
                                                                                                                                          Amount(Dollars
      in Thousands)Interest-earning
      assets(1):Investment
      and moortgage-backed securities(2)
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        23,193
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        24,823
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        31,156
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        15,294
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        120,526
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        214,992Loans
      receivable(3)
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        48,816
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        55,815
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        82,676
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        37,855
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        29,289
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        254,451Other
      interest-earning assets
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        19,337
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        19,337Total
      interest-earning assets
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        91,346
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        80,638
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        113,832
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        53,149
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        149,815
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        488,780Interest-bearing
      liabilities:Savings
      accounts
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        304
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        216
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        41,601
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        13,874
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        13,874
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        69,869Money
      market deposit and NOW accounts
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        —
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        34,001
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        46,544
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        4,181
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        4,181
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        88,907Certificates
      of deposits
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        63,847
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        124,160
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        44,121
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        24,890
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        —
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        257,018Advances
      from Federal Home Loan Bank
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        24
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        6,073
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        13,197
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        46
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        340
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        19,680Advances
      from borrowers for taxes and insurance
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        1,402
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        1,402Total
      interest-bearing liabilities
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        65,577
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        164,450
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        145,463
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        42,991
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        18,395
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        436,876Interest-earning
      assetsless
      interest-bearing liabilities
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        25,769
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        ($
                                                                                                                                        83,812
                                                                                                                                        )
                                                                                                                                        
                                                                                                                                        ($
                                                                                                                                        31,631
                                                                                                                                        )
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        10,158
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        131,420
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        51,904Cumulative
      interest-rate sensitivity gap (4)
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        25,769
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        ($
                                                                                                                                        58,043
                                                                                                                                        )
                                                                                                                                        
                                                                                                                                        ($
                                                                                                                                        89,674
                                                                                                                                        )
                                                                                                                                        
                                                                                                                                        ($
                                                                                                                                        79,516
                                                                                                                                        )
                                                                                                                                        
                                                                                                                                        $
                                                                                                                                        51,904Cumulative
      interest-rate gap as a percentage of total assets at March 31,
      2009
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        5.01
                                                                                                                                        %
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        -11.28
                                                                                                                                        %
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        -17.42
                                                                                                                                        %
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        -15.45
                                                                                                                                        %
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        10.09
                                                                                                                                        %Cumulative
      interest-earning assets as a percentage of cumulative interest-bearing
      liabilities at March 31, 2009
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        139.30
                                                                                                                                        %
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        74.77
                                                                                                                                        %
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        76.12
                                                                                                                                        %
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        81.00
                                                                                                                                        %
                                                                                                                                        
                                                                                                                                        
                                                                                                                                        111.88
                                                                                                                                        %




(1)
                Interest-earning
      assets are included in the period in which the balances are expected to be
      redeployed and/or repriced as a result of anticipated prepayments,
      scheduled rate adjustments and contractual maturities.(2)
                For
      purposes of the gap analysis, investment securities are stated at
      amortized cost.(3)
                For
      purposes of the gap analysis, loans receivable includes non-performing
      loans and is gross of the allowance for loan losses and unamortized
      deferred loan fees, but net of the undisbursed portion of
      loans-in-process.(4)
                Cumulative
      interest-rate sensitivity gap represents the difference between
      interest-earning assets and interest-bearing
  liabilities.


40





Certain
      shortcomings are inherent in the method of analysis presented in the
      foregoing table. For example, although certain assets and liabilities may
      have similar maturities or periods to repricing, they may react in
      different degrees to changes in market interest rates. Also, the interest
      rates on certain types of assets and liabilities may fluctuate in advance
      of changes in market interest rates, while interest rates on other types
      may lag behind changes in market rates. Additionally, certain assets, such
      as adjustable-rate loans, have features which restrict changes in interest
      rates both on a short-term basis and over the life of the asset. Further,
      in the event of a change in interest rates, prepayment and early
      withdrawal levels would likely deviate significantly from those assumed in
      calculating the table. Finally, the ability of many borrowers to service
      their adjustable-rate loans may be adversely affected in the event of an
      interest rate increase.Net Portfolio Value
      Analysis. Our interest rate sensitivity also is monitored by
      management through the use of a model which generates estimates of the
      changes in our net portfolio value (“NPV”) over a range of interest rate
      scenarios. NPV is the present value of expected cash flows from assets,
      liabilities and off-balance sheet contracts. The NPV ratio, under any
      interest rate scenario, is defined as the NPV in that scenario divided by
      the market value of assets in the same scenario. The following table sets
      forth our NPV as of March 31, 2009 and reflects the changes to NPV as a
      result of immediate and sustained changes in interest rates as
      indicated.




Change
      in
                              Interest
      Rates
                              In
      Basis Points
                              (Rate
      Shock)
                            
                            Net
      Portfolio Value
                            
                            NPV
      as % of Portfolio
                              Value
      of AssetsAmount
                            
                            $ Change
                            
                            %
      Change
                            
                            NPV
      Ratio
                            
                            Change(Dollars
      in Thousands)300
                            
                            $
                            23,498
                            
                            
                            $
                            (47,664
                            )
                            
                            
                            (66.98
                            )%
                            
                            
                            5.14
                            %
                            
                            
                            (8.49
                            )%200
                            
                            
                            38,191
                            
                            
                            
                            (32,971
                            )
                            
                            
                            (46.33
                            )%
                            
                            
                            8.01
                            %
                            
                            
                            (5.62
                            )%100
                            
                            
                            55,907
                            
                            
                            
                            (15,255
                            )
                            
                            
                            (21.44
                            )%
                            
                            
                            11.17
                            %
                            
                            
                            (2.46
                            )%Static
                            
                            
                            71,162
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            13.63
                            %
                            
                            
                            —(100)
                            
                            
                            71,885
                            
                            
                            
                            723
                            
                            
                            
                            1.02
                            %
                            
                            
                            13.59
                            %
                            
                            
                            (0.04
                            )%(200)
                            
                            
                            70,228
                            
                            
                            
                            (934
                            )
                            
                            
                            (1.31
                            )%
                            
                            
                            13.16
                            %
                            
                            
                            (0.47
                            )%(300)
                            
                            
                            71,051
                            
                            
                            
                            (111
                            )
                            
                            
                            (0.16
                            )%
                            
                            
                            13.23
                            %
                            
                            
                            (0.40
                            )%




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


41




ITEM
      4T. CONTROLS AND PROCEDURESOur
      management evaluated, with the participation of our Chief Executive
      Officer and Chief Financial Officer, the effectiveness of our disclosure
      controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under
      the Securities Exchange Act of 1934) as of the end of the period covered
      by this report. Based on such evaluation, our Chief Executive Officer and
      Chief Financial Officer have concluded that our disclosure controls and
      procedures are designed to ensure that information required to be
      disclosed by us in the reports that we file or submit under the Securities
      Exchange Act of 1934 is recorded, processed, summarized and reported
      within the time periods specified in the SEC’s rules and regulations and
      are operating in an effective manner.We
      evaluated the impact of the requirement to restate our financials
      discussed in Note 10 of the financial statements on the effectiveness of
      our disclosure controls and procedures. Management concluded that it did
      not have a material impact on our internal controls over financial
      reporting.No
      change in our internal control over financial reporting (as defined in
      Rule 13a-15(e) or 15d-15(f) under the Securities Exchange Act of 1934)
      occurred during the most recent fiscal quarter that has materially
      affected, or is reasonably likely to materially affect, our internal
      control over financial reporting.


42




PART
II




Item
1. Legal Proceedings




No
material changes in the matters previously disclosed in Item 3 of the Company’s
Annual Report on Form 10-K for the year ended September 30, 2008 have
occurred.




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




Item
1A. Risk Factors




There
were no material changes from the risk factors described in the Company’s Annual
Report on Form 10-K for the year ended September 30, 2008.




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


(a)
              Not
      applicable(b)
              Not
      applicable(c)
              There
      were no repurchases of common stock by the Company during the quarter
      ended March 31, 2009. During January 2009, Prudential Mutual Holding
      Company (the “MHC”) and the Company each announced approval of a stock
      purchase plan or stock repurchase plan, if applicable, of up to an
      additional 198,000 shares (for a total of 396,000 shares), or
      approximately 5% (10% in the aggregate) of the Company’s outstanding
      common stock held by other than the
MHC.




Item
3. Defaults Upon Senior Securities




Not
applicable




Item
4. Submission of Matters to a Vote of Security Holders




On
February 9, 2009, the Company held its annual meeting of shareholders and
submitted two proposals to shareholders on behalf of the Company’s Board of
Directors (the election of directors and ratification of the appointment of the
Company’s independent registered public accounting firm for fiscal 2009).
Shareholders of record as of December 24, 2008, received proxy materials and
were considered eligible to on these proposals at the annual meeting. At the
annual meeting, 11,069,802 shares of common stock of the Company were
outstanding on the record date and eligible to be voted at the meeting. Members
of the Company’s Board of Directors not up for election and continuing in office
after the annual meting were Jerome R. Balka, Esq., A.J. Fanelli, Francis V.
Mulcahy and Joseph W. Packer, Jr.




A total
of 10,723,157 shares of common stock were present in person or by proxy at the
annual meeting. The following is a brief summary of each proposal and the result
of the vote at the annual meeting:


1.
              The
      following director was elected by the requisite plurality of the votes
      cast to serve on the Company’s Board of
  Directors.


43




Nominees
                  
                  For
                  
                  WithheldThomas
      A. Vento
                  
                  10,391,871
                  
                  331,286





2.
                To
      ratify the appointment of Deloitte & Touche LLP as the Company’s
      independent registered public accounting firm for the fiscal year ended
      September 30, 2009.





For
                  
                  Against
                  
                  Abstain10,696,968
                  
                  22,889
                  
                  3,300




There
were no broker non-votes at the annual meeting.




Item
5. Other Information




Not
applicable




44




Item
6. Exhibits


Exhibit
      No.
            
            Description31.1
            
            Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive
    Officer31.2
            
            Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
    Officer32.0
            
            Section
      1350 Certifications




45




SIGNATURES




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




PRUDENTIAL
BANCORP, INC. OF PENNSYLVANIA


Date:
              May
      15, 2009
              By:
              /s/
      Thomas A. VentoThomas
      A. VentoPresident
      and Chief Executive OfficerDate:
              May
      15, 2009
              By:
              /s/
      Joseph R. CorratoJoseph
      R. CorratoExecutive
      Vice President and Chief Financial
Officer








46