UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION





Washington,
DC  20549








FORM
10-Q





(Mark
One)





x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIESEXCHANGE
      ACT OF 1934For
      the quarterly period ended March 31, 2008ORo
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIESEXCHANGE
      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
              Philadelphia,
      Pennsylvania
            19145(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 is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See definition of “large accelerated filer”, “accelerated
filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.  (Check one):





Large
      accelerated filer
            o
            
            Accelerated
      filer
            oNon-accelerated
      filer
            o
            (Do
      not check is smaller reporting company)
            Smaller
      reporting company
            x





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


Yes o   No 
x




Indicate
the number of shares outstanding of each of the issuer’s classes of common stock
as of the latest practical date:  as of May 9, 2008, 11,085,076 shares
were issued and outstanding










PRUDENTIAL
BANCORP, INC. OF PENNSYLVANIA AND SUBSIDIARIES





TABLE
OF CONTENTS




PAGEPART
      I FINANCIAL INFORMATION:Item
      1.
            Condensed
      Financial StatementsUnaudited
      Consolidated Statements of Financial Condition at March 31, 2008 and
      September 30, 2007
            2Unaudited
      Consolidated Statements of Income for the Three and Six Months EndedMarch
      31, 2008 and 2007
            3Unaudited
      Consolidated Statement of Changes in Stockholders’ Equity and
      Comprehensive Income for the Six Months Ended March 31, 2008 and
      2007
            4Unaudited
      Consolidated Statements of Cash Flows for the Six Months Ended March 31,
      2008 and 2007
            5Notes
      to Consolidated Unaudited Financial Statements
            6Item
      2.
            Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
            19Item
      3.
            Quantitative
      and Qualitative Disclosures About Market Risk
            28Item
      4T.
            Controls
      and Procedures
            31PART
      II OTHER INFORMATIONItem
      1.
            Legal
      Proceedings
            31Item
      1A.
            Risk
      Factors
            31Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            31Item
      3.
            Defaults
      Upon Senior Securities
            32Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            33Item
      5.
            Other
      Information
            33Item
      6.
            Exhibits
            34SIGNATURES
            35





1





PRUDENTIAL
      BANCORP, INC. OF PENNSYLVANIA AND SUBSIDIARIESUNAUDITED
      CONSOLIDATED STATEMENTS OF FINANCIAL CONDITIONMarch
      31
              
              
              September
      30,2008
              
              
              2007(Dollars
      in thousands)ASSETSCash
      and amounts due from depository institutions
              
              $
              5,328
              
              
              $
              4,133Interest-bearing
      deposits
              
              
              14,055
              
              
              
              8,136Total
      cash and cash equivalents
              
              
              19,383
              
              
              
              12,269Investment
      securities held to maturity (estimated fair value—March 31, 2008,
      $121,763;September
      30, 2007, $133,693)
              
              
              120,827
              
              
              
              134,782Investment
      securities available for sale (amortized cost—March 31, 2008,
      $36,516;September
      30, 2007, $38,007)
              
              
              37,139
              
              
              
              38,343Mortgage-backed
      securities held to maturity (estimated fair value—March
      31, 2008, $43,393; September 30, 2007, $44,213)
              
              
              42,936
              
              
              
              45,534Mortgage-backed
      securities available for sale (amortized cost—March
      31, 2008, $15,600; September 30, 2007, $8,492)
              
              
              15,931
              
              
              
              8,549Loans
      receivable—net of allowance for loan losses (March 31, 2008,
      $658;September
      30, 2007, $1,011)
              
              
              223,785
              
              
              
              219,149Accrued
      interest receivable:Loans
      receivable
              
              
              1,241
              
              
              
              1,264Mortgage-backed
      securities
              
              
              253
              
              
              
              234Investment
      securities
              
              
              1,591
              
              
              
              2,006Real
      Estate Owned
              
              
              1,598
              
              
              
              -Federal
      Home Loan Bank stock—at cost
              
              
              2,063
              
              
              
              2,397Office
      properties and equipment—net
              
              
              2,244
              
              
              
              2,363Prepaid
      expenses and other assets
              
              
              9,053
              
              
              
              7,274Deferred
      tax asset-net
              
              
              193
              
              
              
              28TOTAL
      ASSETS
              
              $
              478,237
              
              
              $
              474,192LIABILITIES
      AND STOCKHOLDERS' EQUITYLIABILITIES:Deposits:Noninterest-bearing
              
              $
              4,735
              
              
              $
              4,480Interest-bearing
              
              
              369,664
              
              
              
              349,558Total
      deposits
              
              
              374,399
              
              
              
              354,038Advances
      from Federal Home Loan Bank
              
              
              22,722
              
              
              
              33,743Accrued
      interest payable
              
              
              1,791
              
              
              
              2,868Advances
      from borrowers for taxes and insurance
              
              
              1,249
              
              
              
              1,117Accounts
      payable and accrued expenses
              
              
              2,141
              
              
              
              913Accrued
      dividend payable
              
              
              509
              
              
              
              552Total
      liabilities
              
              
              402,811
              
              
              
              393,231COMMITMENTS
      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
      - 11,087,766 at March 31, 2008;  11,478,366 at September 30,
      2007
              
              
              126
              
              
              
              126Additional
      paid-in capital
              
              
              54,911
              
              
              
              54,880Unearned
      ESOP shares
              
              
              (3,792
              )
              
              
              (3,903
              )Treasury
      stock, at cost:  1,475,984 shares at March 31,
    2008;1,085,384
      shares at September 30, 2007
              
              
              (19,265
              )
              
              
              (14,372
              )Retained
      earnings
              
              
              42,817
              
              
              
              43,971Accumulated
      other comprehensive income
              
              
              629
              
              
              
              259Total
      stockholders' equity
              
              
              75,426
              
              
              
              80,961TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
              
              $
              478,237
              
              
              $
              474,192See
      notes to unaudited consolidated financial statements.




2




PRUDENTIAL
BANCORP, INC. OF PENNSYLVANIA AND SUBSIDIARIES




UNAUDITED
CONSOLIDATED STATEMENTS OF INCOME
 
 Three
      Months Ended
                  March
      31,
                
                
                Six
      Months Ended
                  March
      31,2008
                
                
                2007
                
                
                2008
                
                
                2007(Dollars
      in Thousands Except Per Share Amounts)
                
                
                (Dollars
      in Thousands Except Per Share Amounts)INTEREST
      INCOME:Interest
      on loans
                
                $
                3,589
                
                
                $
                3,786
                
                
                $
                7,224
                
                
                $
                7,611Interest
      on mortgage-backed securities
                
                
                757
                
                
                
                702
                
                
                
                1,480
                
                
                
                1,413Interest
      and dividends on investments
                
                
                2,219
                
                
                
                2,204
                
                
                
                4,522
                
                
                
                4,351Total
      interest income
                
                
                6,565
                
                
                
                6,692
                
                
                
                13,226
                
                
                
                13,375INTEREST
      EXPENSE:Interest
      on deposits
                
                
                3,478
                
                
                
                3,250
                
                
                
                6,973
                
                
                
                6,453Interest
      on borrowings
                
                
                289
                
                
                
                324
                
                
                
                689
                
                
                
                715Total
      interest expense
                
                
                3,767
                
                
                
                3,574
                
                
                
                7,662
                
                
                
                7,168NET
      INTEREST INCOME
                
                
                2,798
                
                
                
                3,118
                
                
                
                5,564
                
                
                
                6,207PROVISION
      FOR LOAN LOSSES
                
                
                75
                
                
                
                15
                
                
                
                150
                
                
                
                75NET
      INTEREST  INCOME AFTER PROVISIONFOR
      LOAN LOSSES
                
                
                2,723
                
                
                
                3,103
                
                
                
                5,414
                
                
                
                6,132NON-INTEREST
      INCOME:Fees
      and other service charges
                
                
                133
                
                
                
                153
                
                
                
                275
                
                
                
                298Impairment
      charge on investment securities
                
                
                (1,492
                )
                
                
                -
                
                
                
                (1,492
                )
                
                
                -Other
                
                
                80
                
                
                
                68
                
                
                
                160
                
                
                
                233Total
      non-interest income (charges)
                
                
                (1,279
                )
                
                
                221
                
                
                
                (1,057
                )
                
                
                531NON-INTEREST
      EXPENSE:Salaries
      and employee benefits
                
                
                1,158
                
                
                
                1,147
                
                
                
                2,311
                
                
                
                2,263Data
      processing
                
                
                129
                
                
                
                134
                
                
                
                253
                
                
                
                253Professional
      services
                
                
                472
                
                
                
                215
                
                
                
                557
                
                
                
                443Office
      occupancy
                
                
                99
                
                
                
                94
                
                
                
                185
                
                
                
                182Depreciation
                
                
                83
                
                
                
                56
                
                
                
                166
                
                
                
                118Payroll
      taxes
                
                
                79
                
                
                
                81
                
                
                
                146
                
                
                
                148Director
      compensation
                
                
                65
                
                
                
                67
                
                
                
                129
                
                
                
                138Other
                
                
                424
                
                
                
                328
                
                
                
                778
                
                
                
                599Total
      non-interest expense
                
                
                2,509
                
                
                
                2,122
                
                
                
                4,525
                
                
                
                4,144(LOSS)
      INCOME BEFORE INCOME TAXES
                
                
                (1,065
                )
                
                
                1,202
                
                
                
                (168
                )
                
                
                2,519INCOME
      TAXES:Current
      (benefit) expense
                
                
                (71
                )
                
                
                261
                
                
                
                259
                
                
                
                563Deferred
      (benefit) expense
                
                
                (312
                )
                
                
                (24
                )
                
                
                (355
                )
                
                
                95Total
      income tax (benefit) expense
                
                
                (383
                )
                
                
                237
                
                
                
                (96
                )
                
                
                658NET
      (LOSS) INCOME
                
                $
                (682
                )
                
                $
                965
                
                
                $
                (72
                )
                
                $
                1,861BASIC
      (LOSS) EARNINGS PER SHARE
                
                $
                (0.06
                )
                
                $
                0.08
                
                
                $
                (0.01
                )
                
                $
                0.16DILUTED
      (LOSS) EARNINGS PER SHARE
                
                $
                (0.06
                )
                
                $
                0.08
                
                
                $
                (0.01
                )
                
                $
                0.16See
      notes to unaudited consolidated financial statements.
 3




PRUDENTIAL
BANCORP, INC. OF PENNSYLVANIA AND SUBSIDIARIES




UNAUDITED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE
INCOME
 AccumulatedAdditional
                  
                  
                  Unearned
                  
                  
                  
                  
                  
                  
                  
                  
                  Other
                  
                  
                  TotalCommon
                  
                  
                  Paid-In
                  
                  
                  ESOP
                  
                  
                  Treasury
                  
                  
                  Retained
                  
                  
                  Comprehensive
                  
                  
                  Stockholders'
                  
                  
                  ComprehensiveStock
                  
                  
                  Capital
                  
                  
                  Shares
                  
                  
                  Stock
                  
                  
                  Earnings
                  
                  
                  Income
                  
                  
                  Equity
                  
                  
                  Income(Dollars
      in Thousands)BALANCE,
      OCTOBER 1, 2007
                  
                  $
                  126
                  
                  
                  $
                  54,880
                  
                  
                  $
                  (3,903
                  )
                  
                  $
                  (14,372
                  )
                  
                  $
                  43,971
                  
                  
                  $
                  259
                  
                  
                  $
                  80,961Comprehensive
      income:Net
      loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (72
                  )
                  
                  
                  
                  
                  
                  
                  (72
                  )
                  
                  
                  (72
                  )Net
      unrealized holding loss onavailable
      for sale securitiesarising
      during the period, netof
      income tax benefit of $317
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (615
                  )
                  
                  
                  (615
                  )
                  
                  
                  (615
                  )Reclassification
      adjustment forother-than-temporary
      impairmentnet
      of tax of $507
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  985
                  
                  
                  
                  985
                  
                  
                  
                  985Comprehensive
      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  298Treasury
      stock purchased
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (4,893
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (4,893
                  )Cash
      dividend declared($.10
      per share)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (1,082
                  )
                  
                  
                  
                  
                  
                  
                  (1,082
                  )ESOP
      shares committed tobe
      released
                  
                  
                  -
                  
                  
                  
                  31
                  
                  
                  
                  111
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  142BALANCE,
      March 31, 2008
                  
                  $
                  126
                  
                  
                  $
                  54,911
                  
                  
                  $
                  (3,792
                  )
                  
                  $
                  (19,265
                  )
                  
                  $
                  42,817
                  
                  
                  $
                  629
                  
                  
                  $
                  75,426AccumulatedAdditional
                  
                  
                  Unearned
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  Other
                  
                  
                  TotalCommon
                  
                  
                  Paid-In
                  
                  
                  ESOP
                  
                  
                  Treasury
                  
                  
                  Retained
                  
                  
                  Comprehensive
                  
                  
                  Stockholders'
                  
                  
                  ComprehensiveStock
                  
                  
                  Capital
                  
                  
                  Shares
                  
                  
                  Stock
                  
                  
                  Earnings
                  
                  
                  Income
                  
                  
                  Equity
                  
                  
                  Income(Dollars
      in thousands)BALANCE,
      OCTOBER 1, 2006
                  
                  $
                  126
                  
                  
                  $
                  54,798
                  
                  
                  $
                  (4,127
                  )
                  
                  $
                  (6,422
                  )
                  
                  $
                  42,539
                  
                  
                  $
                  534
                  
                  
                  $
                  87,448Comprehensive
      income:Net
      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,861
                  
                  
                  
                  
                  
                  
                  
                  1,861
                  
                  
                  
                  1,861Net
      unrealized holding loss onavailable
      for sale securitiesarising
      during the period, netof
      income tax benefit of $72
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (119
                  )
                  
                  
                  (119
                  )
                  
                  
                  (119
                  )Comprehensive
      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  1,742Treasury
      stock purchased
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (3,415
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (3,415
                  )Cash
      dividends declared($.09
      per share)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (1,029
                  )
                  
                  
                  
                  
                  
                  
                  (1,029
                  )Cumulative
      adjustment related tothe
      adoption of SAB 108
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  172
                  
                  
                  
                  
                  
                  
                  
                  172ESOP
      shares committed tobe
      released
                  
                  
                  -
                  
                  
                  
                  42
                  
                  
                  
                  112
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  154BALANCE,
      March 31, 2007
                  
                  $
                  126
                  
                  
                  $
                  54,840
                  
                  
                  $
                  (4,015
                  )
                  
                  $
                  (9,837
                  )
                  
                  $
                  43,543
                  
                  
                  $
                  415
                  
                  
                  $
                  85,072






See notes
to unaudited consolidated financial statements.




4




PRUDENTIAL
BANCORP, INC. OF PENNSYLVANIA AND SUBSIDIARIES




UNAUDITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 Six Months
      Ended March 31,2008
                
                
                2007OPERATING
      ACTIVITIES:
                
                (Dollars
      in Thousands)Net
      (loss) income
                
                $
                (72
                )
                
                $
                1,861Adjustments
      to reconcile net income to net cash used inoperating
      activities:Provision
      for loan losses
                
                
                150
                
                
                
                75Depreciation
                
                
                166
                
                
                
                118Net
      accretion of premiums/discounts
                
                
                (40
                )
                
                
                (40
                )Net
      accretion of deferred loan fees and costs
                
                
                (134
                )
                
                
                (201
                )Impairment
      charge on investment securities
                
                
                1,492
                
                
                
                -Amortization
      of ESOP
                
                
                142
                
                
                
                153Income
      from bank owned life insurance
                
                
                (98
                )
                
                
                (106
                )Deferred
      income tax (benefit) expense
                
                
                (355
                )
                
                
                95Changes
      in assets and liabilities which used cash:Accounts
      payable and accrued expenses
                
                
                1,228
                
                
                
                (603
                )Accrued
      interest payable
                
                
                (1,077
                )
                
                
                (1,345
                )Prepaid
      expenses and other assets
                
                
                (1,680
                )
                
                
                (345
                )Accrued
      interest receivable
                
                
                419
                
                
                
                (127
                )Net
      cash provided by (used in) operating activities
                
                
                141
                
                
                
                (465
                )INVESTING
      ACTIVITIES:Purchase
      of investment securities held to maturity
                
                
                (57,943
                )
                
                
                (14,994
                )Purchase
      of investment available for sale
                
                
                (2,000
                )
                
                
                -Purchase
      of mortgage-backed securities held to maturity
                
                
                -
                
                
                
                (1,992
                )Purchase
      of mortgage-backed securities available for sale
                
                
                (7,842
                )
                
                
                -Loans
      originated or acquired
                
                
                (29,964
                )
                
                
                (31,872
                )Principal
      collected on loans
                
                
                23,714
                
                
                
                30,861Principal
      payments received on mortgage-backed securities:held-to-maturity
                
                
                2,621
                
                
                
                3,769available-for-sale
                
                
                745
                
                
                
                336Proceeds
      from calls and maturities of investment securities held to
      maturity
                
                
                71,903
                
                
                
                15,787Proceeds
      from calls and maturities of investment available for sale
                
                
                1,999
                
                
                
                -Net
      proceeds from redemption of Federal Home Loan Bank stock
                
                
                334
                
                
                
                99Purchases
      of equipment
                
                
                (48
                )
                
                
                (28
                )Net
      cash provided by investing activities
                
                
                3,519
                
                
                
                1,966FINANCING
      ACTIVITIES:Net
      increase (decrease) in demand deposits, NOW accounts,and
      savings accounts
                
                
                2,412
                
                
                
                (1,286
                )Net
      increase in certificates of deposit
                
                
                17,949
                
                
                
                9,644Net
      repayment of advances from Federal Home Loan Bank
                
                
                (11,021
                )
                
                
                (9,020
                )Increase
      in advances from borrowers for taxes and insurance
                
                
                132
                
                
                
                38Cash
      dividend paid
                
                
                (1,125
                )
                
                
                (927
                )Purchase
      of treasury stock
                
                
                (4,893
                )
                
                
                (3,415
                )Net
      cash provided by (used in) financing activities
                
                
                3,454
                
                
                
                (4,966
                )NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                
                
                7,114
                
                
                
                (3,465
                )CASH
      AND CASH EQUIVALENTS—Beginning of period
                
                
                12,269
                
                
                
                13,428CASH
      AND CASH EQUIVALENTS—End of period
                
                $
                19,383
                
                
                $
                9,963SUPPLEMENTAL
      DISCLOSURES OF CASH FLOWINFORMATION:Interest
      paid on deposits and advances from FederalHome
      Loan Bank
                
                $
                8,738
                
                
                $
                8,513Income
      taxes paid
                
                $
                667
                
                
                $
                653SUPPLEMENTAL
      DISCLOSURES OF NONCASH ITEMS:Real
      estate acquired in settlement of loans
                
                $
                1,598
                
                
                $
                -See
      notes to unaudited consolidated financial statements.




5





PRUDENTIAL
BANCORP, INC. OF PENNSYLVANIA AND SUBSIDIARIES




NOTES
TO UNAUDITED CONSOLIDATED  FINANCIAL STATEMENTS


1.
            BASIS
      OF PRESENTATION AND SIGNIFICANT ACCOUNTING
  POLICIES




Prudential
Bancorp, Inc. of Pennsylvania (the “Company”) is a Pennsylvania corporation,
which was organized to be the mid-tier holding company for Prudential Savings
Bank (the “Bank”), which is a Pennsylvania-chartered, FDIC-insured savings bank
with seven full-service branches in the Philadelphia area.  The
Company was organized in conjunction with the Bank’s reorganization from a
mutual savings bank to the mutual holding company structure in March
2005.  The Bank is principally in the business of attracting deposits
from its community through its branch offices and investing those deposits,
together with funds from borrowings and operations, primarily in single-family
residential loans and construction loans.




Prudential
Mutual Holding Company, a Pennsylvania-chartered mutual entity, is the mutual
holding company parent of the Company.  Prudential Mutual Holding
Company owns 62.3% (6,910,062 shares) of the Company’s outstanding common stock
as of March 31, 2008 and must always own at least a majority of the voting stock
of the Company.  In addition to the shares of the Company, Prudential
Mutual Holding Company was capitalized with $100,000 in cash from the Bank in
connection with the completion of the reorganization.  The
consolidated financial statements of the Company include the accounts of the
Company and the Bank.  In addition, Prudential Mutual Holding Company
receives dividends on the common stock of the Company that it
holds.  All intercompany balances and transactions have been
eliminated.





Prior to
the reorganization described above, the Board of Directors approved a plan of
charter conversion in May 2004 pursuant to which the Bank would convert its
charter from a Pennsylvania-chartered mutual savings and loan association to a
Pennsylvania-chartered mutual savings bank.  The conversion to a
Pennsylvania-chartered mutual savings bank was completed on August 20,
2004.  As a result of the charter conversion, the Bank’s primary
federal banking regulator changed from the Office of Thrift Supervision to the
Federal Deposit Insurance Corporation.  The Pennsylvania Department of
Banking remains as the Bank’s state banking regulator.





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.  The
activity of PSB Delaware, Inc. is included as part of the consolidated financial
statements.





The
accompanying unaudited consolidated financial statements were prepared in
accordance with the instructions to Form 10-Q, and therefore do not include all
the information or footnotes necessary for complete financial statements in
conformity with accounting principles generally accepted in the United States of
America. However, all normal recurring adjustments that, in the opinion of
management, are necessary for a fair presentation of the financial statements
have been included.  The results for the three and six months ended
March 31, 2008 are not necessarily indicative of the results that may be
expected for the fiscal year ending September 30, 2008, or any other period.
These financial statements should be read in conjunction with the audited
consolidated financial statements of the Company and the accompanying notes
thereto for the year ended September 30, 2007 included in the Company’s Annual
Report on Form 10-K for the fiscal year ended September 30, 2007.





Use of Estimates
in the Preparation of Financial Statements—The preparation of financial
statements in conformity with accounting principles generally accepted 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 and deferred
income taxes. Actual results could differ from those estimates.




6




Dividend
Payable – On March 19, 2008, the Company’s Board of Directors declared a
quarterly cash dividend of $.05 on the common stock of the Company payable on
April 28, 2008 to the shareholders of record at the close of business on April
14, 2008 which resulted in a payable of $509,000 at March 31, 2008.  A
portion of the cash dividend was payable to Prudential Mutual Holding Company on
its shares of the Company’s common stock and totaled $346,000.





Employee Stock
Ownership Plan –In fiscal 2005, the Company established 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.  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,
2008, the Company had allocated a total of 62,205 shares from the suspense
account to participants and committed to release an additional 5,655
shares.  In addition, at such date the amount of the shares of Company
common stock held by the ESOP totaled 450,885.  For the six months
ended March 31, 2008, the Company recognized $137,000 in compensation expense
with respect to the ESOP.





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.





Comprehensive
Income—The Company presents in the unaudited consolidated statement of
changes in stockholders’ equity and comprehensive income those amounts arising
from transactions and other events which currently are excluded from the
statement of income and are recorded directly to stockholders’
equity.  For the six months March 31, 2008 and 2007, the only
components of comprehensive income were net (loss) income and unrealized holding
gains and losses, net of income tax expense and benefit, on available for sale
securities.  Comprehensive income totaled $298,000 and $1.7 million
for the six months ended March 31, 2008 and 2007, respectively.





Recent Accounting
Pronouncements –On July 13, 2006, the Financial Accounting
Standards Board (“FASB”) issued Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" ("FIN 48"), which is effective for fiscal years
beginning after December 15, 2006. FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in the financial statements in accordance
with FASB Statement No. 109, "Accounting for Income Taxes." This Interpretation
prescribes a comprehensive model for how a company should recognize, measure,
present and disclose in its financial statements uncertain tax positions that
the company  has taken or expects to take on a tax return. The Company
adopted FIN 48 on October 1, 2007, and the adoption did not have an impact on
the Company’s financial statements.  The Company recognizes interest
and/or penalties related to income tax matters in income tax
expense.  The Company did not have any amounts accrued for interest
and penalties at March 31, 2008.  As of October 1, 2007, the Company
had no unrecognized tax benefits.  The Company’s federal and state
income tax returns for taxable years through September 30, 2003 have been closed
for purposes of examination by the Internal Revenue Service (the “IRS”) or the
Pennsylvania Department of Revenue.  As of March 31, 2008, the Company
is not currently being audited by and has no pending disputes with the IRS or
the State of Pennsylvania on any tax matters.





In
September 2006, the Emerging Issues Task Force (“EITF”) of FASB issued EITF
Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit
Aspects of Endorsement Split Dollar Life Insurance Arrangements” (EITF
06-04).  EITF 06-4 requires the recognition of a liability related to the
postretirement benefits covered by an endorsement split-dollar life insurance
arrangement.  EITF 06-4 is effective for fiscal years beginning after
December 15, 2007, with earlier application permitted.  The Company is
currently assessing the impact of the adoption of EITF 06-04 on its financial
statements.




7




In
September 2006, the FASB issued Statement No. 157, “Fair Value Measurements”
(“SFAS No. 157”). SFAS No. 157 (i) defines fair value, (ii) establishes a
framework for measuring fair value in GAAP and (iii) expands disclosure
requirements about fair value measurements. SFAS No. 157 is effective for all
financial statements issued for fiscal years beginning after November 15,
2007.  SFAS No. 157 emphasizes that fair value is a market-based
measurement, not an entity-specific measurement.  FASB Staff Position
(“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.  The Company is currently
assessing the impact of SFAS No. 157 on its financial statements.


In
September 2006, the Securities and Exchange Commission (“SEC”) issued SAB No.
108 expressing the SEC staff’s views regarding the process of quantifying
financial statement misstatements and the build up of improper amounts on the
balance sheet.  SAB No. 108 requires that registrants quantify errors
using both a balance sheet and income statement approach and evaluate whether
either approach results in a misstated amount that, when all relevant
quantitative and qualitative factors are considered, is material.  The
built up misstatements, while not considered material in the individual years in
which the misstatements were built up, may be considered material in a
subsequent year if a company were to correct those misstatements through current
period earnings.  Initial application of SAB No. 108 allows
registrants to elect not to restate prior periods but to reflect the initial
application in their annual financial statements covering the first fiscal year
ending after November 15, 2006.  The cumulative effect of the initial
application should be reported in the carrying amounts of assets and liabilities
as of the beginning of that fiscal year and the offsetting adjustment, net of
tax, should be made to the opening balance of retained earnings for that
year.





The
Company implemented SAB No. 108 on October 1, 2006 which resulted in an increase
in mortgage-backed securities held to maturity of approximately $321,000, an
increase in income tax liabilities of approximately $149,000 and a cumulative
adjustment to increase retained earnings as of that date by approximately
$172,000.  The adjustment relates to two separate accounting
entries.  The first entry pertains to the method of accounting that
was utilized in past years for the recognition of investment income on
mortgage-backed securities.  Prior to fiscal 2006, the Company used
the straight line method over the contractual life of the securities rather than
using the effective yield method prescribed by SFAS No. 91, “Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and
Initial Direct Costs of Leases”.  The impact of this entry was the
correction of an understatement of mortgage-backed securities by approximately
$321,000 and a corresponding understatement of income tax payable of $109,000
during the quarter ended December 31, 2006. The second entry relates to a write
off during the quarter ended December 31, 2006 of a deferred tax asset of
approximately $40,000 that was incorrectly accounted for in prior
periods.





In prior
periods, management performed a quantitative and qualitative analysis of the
differences between these two methods of accounting and concluded that there was
not a material impact on any past individual quarter or annual reporting
periods.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities”.  The Statement provides
companies with an option to report selected financial assets and liabilities at
fair value.  This Statement is effective as of the beginning of an
entity’s first fiscal year that begins after November 15, 2007.  Early
adoption is permitted under certain circumstances.  The Company is
currently assessing the impact of SFAS No. 159 on its financial
statements.





In March
2007, the FASB ratified Emerging Issues Task Force 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.  The Company is currently assessing the impact of the
adoption of EITF 06-10 on its financial statements.





8




2.
            EARNINGS
      PER SHARE




Basic
earnings per common share is computed based on the weighted average number of
shares outstanding. Diluted earnings per share is computed based on the weighted
average number of shares outstanding and common share equivalents ("CSEs") that
would arise from the exercise of dilutive securities.  As of March 31,
2008, the Company did not issue and does not have any outstanding
CSEs.





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




For
      the Quarter Ended
                March
      31, 2008
              
              
              For
      the Quarter Ended
                March
      31, 2007Basic
              
              
              Diluted
              
              
              Basic
              
              
              Diluted(Dollars
      in thousands except per share data)Net
      (loss) income
              
              $
              (682
              )
              
              $
              (682
              )
              
              $
              965
              
              
              $
              965Weighted
      average shares outstanding used inbasic
      earnings per share computation
              
              
              10,886,071
              
              
              
              10,886,071
              
              
              
              11,542,235
              
              
              
              11,542,235Effect
      of CSEs
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Adjusted
      weighted average shares used indiluted
      earnings per share computation
              
              
              10,886,071
              
              
              
              10,886,071
              
              
              
              11,542,235
              
              
              
              11,542,235(Loss)
      earnings per share - basic and diluted
              
              $
              (0.06
              )
              
              $
              (0.06
              )
              
              $
              0.08
              
              
              $
              0.08






For
      the Six Months Ended
                March
      31, 2008
              
              
              For
      the Six Months Ended
                March
      31, 2007Basic
              
              
              Diluted
              
              
              Basic
              
              
              Diluted(Dollars
      in thousands except per share data)Net
      (loss) income
              
              $
              (72
              )
              
              $
              (72
              )
              
              $
              1,861
              
              
              $
              1,861Weighted
      average shares outstanding used inbasic
      earnings per share computation
              
              
              10,972,074
              
              
              
              10,972,074
              
              
              
              11,585,158
              
              
              
              11,585,158Effect
      of CSEs
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Adjusted
      weighted average shares used indiluted
      earnings per share computation
              
              
              10,972,074
              
              
              
              10,972,074
              
              
              
              11,585,158
              
              
              
              11,585,158(Loss)
      earnings per share - basic and diluted
              
              $
              (0.01
              )
              
              $
              (0.01
              )
              
              $
              0.16
              
              
              $
              0.16







9





3.
            INVESTMENT
      SECURITIES




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




March
      31, 2008Gross
              
              
              Gross
              
              
              EstimatedAmortized
              
              
              Unrealized
              
              
              Unrealized
              
              
              FairCost
              
              
              Gains
              
              
              Losses
              
              
              Value(Dollars
      in Thousands)Securities
      held to maturity:Debt
      securities - U.S. Treasury securitiesand
      securities of U.S. Government agencies
              
              $
              118,377
              
              
              $
              948
              
              
              $
              (17
              )
              
              $
              119,308Debt
      securities - Municipal bonds
              
              
              2,450
              
              
              
              6
              
              
              
              (1
              )
              
              
              2,455Total
      securities held to maturity
              
              $
              120,827
              
              
              $
              954
              
              
              $
              (18
              )
              
              $
              121,763Securities
      available for sale:Debt
      securities - U.S. Treasury securitiesand
      securities of U.S. Government agencies
              
              $
              3,000
              
              
              $
              1
              
              
              $
              (24
              )
              
              $
              2,977FNMA
      stock
              
              
              -
              
              
              
              3
              
              
              
              -
              
              
              
              3Mutual
      fund
              
              
              33,490
              
              
              
              -
              
              
              
              -
              
              
              
              33,490FHLMC
      preferred stock
              
              
              26
              
              
              
              643
              
              
              
              -
              
              
              
              669Total
      securities available for sale
              
              $
              36,516
              
              
              $
              647
              
              
              $
              (24
              )
              
              $
              37,139





September
      30, 2007Gross
              
              
              Gross
              
              
              EstimatedAmortized
              
              
              Unrealized
              
              
              Unrealized
              
              
              FairCost
              
              
              Gains
              
              
              Losses
              
              
              ValueSecurities
      held to maturity:
              
              (Dollars
      in Thousands)Debt
      securities - U.S. Treasury securitiesand
      securities of U.S. Government agencies
              
              $
              132,332
              
              
              $
              109
              
              
              $
              (1,159
              )
              
              $
              131,282Debt
      securities - Municipal bonds
              
              
              2,450
              
              
              
              1
              
              
              
              (40
              )
              
              
              2,411Total
      securities held to maturity
              
              $
              134,782
              
              
              $
              110
              
              
              $
              (1,199
              )
              
              $
              133,693Securities
      available for sale:Debt
      securities - U.S. Treasury securitiesand
      securities of U.S. Government agencies
              
              $
              2,999
              
              
              $
              -
              
              
              $
              (30
              )
              
              $
              2,969FNMA
      stock
              
              
              -
              
              
              
              7
              
              
              
              -
              
              
              
              7Mutual
      fund
              
              
              34,982
              
              
              
              -
              
              
              
              (1,175
              )
              
              
              33,807FHLMC
      preferred stock
              
              
              26
              
              
              
              1,534
              
              
              
              -
              
              
              
              1,560Total
      securities available for sale
              
              $
              38,007
              
              
              $
              1,541
              
              
              $
              (1,205
              )
              
              $
              38,343




10




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 have been in a continuous loss
position at March 31, 2008:




Less
      than 12 months
              
              
              More
      than 12 monthsGross
              
              
              Estimated
              
              
              Gross
              
              
              EstimatedUnrealized
              
              
              Fair
              
              
              Unrealized
              
              
              FairLosses
              
              
              Value
              
              
              Losses
              
              
              Value(Dollars
      in Thousands)Securities
      held to maturity:U.S.
      Treasury and Government agencies
              
              $
              17
              
              
              $
              6,976
              
              
              $
              -
              
              
              $
              -Municipal
      bonds
              
              
              -
              
              
              
              -
              
              
              
              1
              
              
              
              349Total
      securities held to maturity
              
              
              17
              
              
              
              6,976
              
              
              
              1
              
              
              
              349Securities
      available for sale:U.S.
      Treasury and Government agencies
              
              
              24
              
              
              
              1,977
              
              
              
              -
              
              
              
              -Mutual
      fund
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Total
      securities available for sale
              
              
              24
              
              
              
              1,977
              
              
              
              -
              
              
              
              -Total
              
              $
              41
              
              
              $
              8,953
              
              
              $
              1
              
              
              $
              349




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 have been in a continuous loss
position at September 30, 2007:




Less
      than 12 months
              
              
              More
      than 12 monthsGross
              
              
              Estimated
              
              
              Gross
              
              
              EstimatedUnrealized
              
              
              Fair
              
              
              Unrealized
              
              
              FairLosses
              
              
              Value
              
              
              Losses
              
              
              Value(Dollars
      in thousands)Securities
      held to maturity:U.S.
      Treasury and Government agencies
              
              
              92
              
              
              
              14,899
              
              
              
              1,067
              
              
              
              82,715Municipal
      bonds
              
              
              -
              
              
              
              -
              
              
              
              40
              
              
              
              1,599Total
      securities held to maturity
              
              
              92
              
              
              
              14,899
              
              
              
              1,107
              
              
              
              84,314Securities
      available for sale:U.S.
      Treasury and Government agencies
              
              
              -
              
              
              
              -
              
              
              
              30
              
              
              
              2,969Mutual
      fund
              
              
              -
              
              
              
              -
              
              
              
              1,175
              
              
              
              33,807Total
      securities available for sale
              
              
              -
              
              
              
              -
              
              
              
              1,205
              
              
              
              36,776Total
              
              $
              92
              
              
              $
              14,899
              
              
              $
              2,312
              
              
              $
              121,090




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.  For all securities that are in an unrealized loss position for
an extended period of time and for all securities whose fair value is
significantly below amortized cost, the Company performs an evaluation of the
specific events attributable to the market decline of the security. The Company
considers the length of time and extent to which the security’s market value has
been below cost as well as the general market conditions, industry
characteristics, and the fundamental operating results of the issuer to
determine if the decline is other-than-temporary. The Company also considers as
part of the evaluation its intent and ability to hold the security until its
market value has recovered to a level at least equal to the amortized cost. When
the Company determines that a security’s unrealized loss is
other-than-temporary, a realized loss is recognized in the period in which the
decline in value is determined to be other-than-temporary. The write-downs are
measured based on public market prices of the security at the time the Company
determines the decline in value was other-than temporary.




11





At March
31, 2008, securities in a gross unrealized loss position for twelve months or
longer consisted of 1 security having an aggregate depreciation of 0.4% from the
Company’s amortized cost basis.  Securities in a gross unrealized loss
position for less than twelve months consist of 6 securities having an aggregate
depreciation of 0.5% from the Company’s amortized cost basis.  The
unrealized losses disclosed above are primarily related to movement in market
interest rates. Although the fair value will fluctuate as the market interest
rates move, the majority of the Company’s investment portfolio consists of low
risk securities from U.S. government agencies or government sponsored
enterprises.  If held to maturity, the contractual principal and
interest payments of such securities are expected to be received in full. As
such, no loss in value is expected over the lives of the securities with stated
maturities.
  During
the three month period ended March 31, 2008, due to continued decline in the
market value of the mutual fund investment for a sustained period of time, the
loss was deemed “other than temporary” and $1.5 million was recorded as a
reduction of non-interest income.  The impairment charge was related
to declines in fair value due to interest rate movements and the on-going
turmoil being experienced in the mortgage markets leading to significantly
reduced investor interest in mortgage-related
securities.




On May 7,
2008, the asset manager of the mutual fund investment advised the Company that
it has determined to activate the mutual fund’s redemption-in-kind (RIK)
provision to protect holders against the possibility that the mutual fund might
be forced to liquidate securities at distressed price levels to satisfy
redemption requests.  The mutual fund has also advised the Company
that it was temporarily discontinuing acceptance of new purchase orders for the
fund, except for the reinvestment of dividends.  This action was taken
because certain mortgage-related securities held by the mutual fund have been
downgraded below the funds investment guidelines applicable to purchases of
securities designed for permissible investments by financial
institutions.




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, 2008Held
      to Maturity
              
              
              Available
      for SaleEstimated
              
              
              
              
              
              EstimatedAmortized
              
              
              Fair
              
              
              Amortized
              
              
              FairCost
              
              
              Value
              
              
              Cost
              
              
              Value(Dollars
      in thousands)Due
      within one year
              
              $
              2,000
              
              
              $
              2,003
              
              
              $
              -
              
              
              $
              -Due
      after one through five years
              
              
              4,000
              
              
              
              4,096
              
              
              
              -
              
              
              
              -Due
      after five through ten years
              
              
              30,423
              
              
              
              30,746
              
              
              
              -
              
              
              
              -Due
      after ten years
              
              
              84,404
              
              
              
              84,918
              
              
              
              3,000
              
              
              
              2,977Total
              
              $
              120,827
              
              
              $
              121,763
              
              
              $
              3,000
              
              
              $
              2,977




Mutual
funds had a cost and fair value of $33.5 million as of March 31,
2008.




12





September
      30, 2007Held
      to Maturity
              
              
              Available
      for SaleEstimated
              
              
              
              
              
              EstimatedAmortized
              
              
              Fair
              
              
              Amortized
              
              
              FairCost
              
              
              Value
              
              
              Cost
              
              
              Value(Dollars
      in thousands)Due
      within one year
              
              $
              6,000
              
              
              $
              5,981
              
              
              $
              -
              
              
              $
              -Due
      after one through five years
              
              
              25,002
              
              
              
              24,950
              
              
              
              -
              
              
              
              -Due
      after five through ten years
              
              
              39,592
              
              
              
              39,427
              
              
              
              1,000
              
              
              
              999Due
      after ten years
              
              
              64,188
              
              
              
              63,335
              
              
              
              1,999
              
              
              
              1,970Total
              
              $
              134,782
              
              
              $
              133,693
              
              
              $
              2,999
              
              
              $
              2,969


Mutual
funds had a cost of $35.0 million and a fair value of $33.8 million as of
September 30, 2007.




4.
            MORTGAGE-BACKED
      SECURITIES




Mortgage-backed
securities are summarized as follows:




March
      31, 2008Gross
              
              
              Gross
              
              
              EstimatedAmortized
              
              
              Unrealized
              
              
              Unrealized
              
              
              FairCost
              
              
              Gains
              
              
              Losses
              
              
              Value(Dollars
      in Thousands)Securities
      held to maturityGNMA
      pass-through certificates
              
              $
              39,989
              
              
              $
              592
              
              
              $
              (157
              )
              
              $
              40,424FNMA
      pass-through certificates
              
              
              1,356
              
              
              
              4
              
              
              
              -
              
              
              
              1,360FHLMC
      pass-through certificates
              
              
              1,591
              
              
              
              18
              
              
              
              -
              
              
              
              1,609Total
      securities held to maturity
              
              $
              42,936
              
              
              $
              614
              
              
              $
              (157
              )
              
              $
              43,393Securities
      available for saleGNMA
      pass-through certificates
              
              $
              6,842
              
              
              $
              91
              
              
              $
              -
              
              
              $
              6,933FNMA
      pass-through certificates
              
              
              8,758
              
              
              
              240
              
              
              
              -
              
              
              
              8,998Total
      securities available for sale
              
              $
              15,600
              
              
              $
              331
              
              
              $
              -
              
              
              $
              15,931




13




September
      30, 2007Gross
              
              
              Gross
              
              
              EstimatedAmortized
              
              
              Unrealized
              
              
              Unrealized
              
              
              FairCost
              
              
              Gains
              
              
              Losses
              
              
              Value(Dollars
      in thousands)Securities
      held to maturityGNMA
      pass-through certificates
              
              $
              42,471
              
              
              $
              22
              
              
              $
              (1,261
              )
              
              $
              41,232FNMA
      pass-through certificates
              
              
              1,370
              
              
              
              -
              
              
              
              (60
              )
              
              
              1,310FHLMC
      pass-through certificates
              
              
              1,693
              
              
              
              -
              
              
              
              (22
              )
              
              
              1,671Total
      securities held to maturity
              
              $
              45,534
              
              
              $
              22
              
              
              $
              (1,343
              )
              
              $
              44,213Securities
      available for saleFNMA
      pass-through certificates
              
              $
              8,492
              
              
              $
              66
              
              
              $
              (9
              )
              
              $
              8,549Total
      securities available for sale
              
              $
              8,492
              
              
              $
              66
              
              
              $
              (9
              )
              
              $
              8,549




The
following table shows the gross unrealized losses and related estimated fair
values of the Company’s mortgage-backed securities and length of time that
individual securities have been in a continuous loss position at March 31,
2008:




Less
      than 12 months
              
              
              More
      than 12 monthsGross
              
              
              Estimated
              
              
              Gross
              
              
              EstimatedUnrealized
              
              
              Fair
              
              
              Unrealized
              
              
              FairLosses
              
              
              Value
              
              
              Losses
              
              
              Value(Dollars
      in thousands)Securities
      held to maturity:GNMA
      pass-through certificates
              
              $
              7
              
              
              $
              527
              
              
              $
              150
              
              
              $
              6,251FNMA
      pass-through certificates
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -FHLMC
      pass-through certificates
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Total
              
              $
              7
              
              
              $
              527
              
              
              $
              150
              
              
              $
              6,251




14




At March
31, 2008, all mortgage-backed-securities available-for-sale were in an
unrealized gain position.




The
following table shows the gross unrealized losses and related estimated fair
values of the Company’s mortgage-backed securities and length of time that
individual securities have been in a continuous loss position at September 30,
2007:




Less
      than 12 months
                
                
                More
      than 12 monthsGross
                
                
                Estimated
                
                
                Gross
                
                
                EstimatedUnrealized
                
                
                Fair
                
                
                Unrealized
                
                
                FairLosses
                
                
                Value
                
                
                Losses
                
                
                Value(Dollars
      in thousands)Securities
      held to maturity:GNMA
      pass-through certificates
                
                $
                129
                
                
                $
                7,968
                
                
                $
                1,132
                
                
                $
                31,050FNMA
      pass-through certificates
                
                
                -
                
                
                
                -
                
                
                
                60
                
                
                
                1,310FHLMC
      pass-through certificates
                
                
                -
                
                
                
                -
                
                
                
                22
                
                
                
                1,671Total
      securities held to maturity
                
                $
                129
                
                
                $
                7,968
                
                
                $
                1,214
                
                
                $
                34,031
 Securities
      available for sale:FNMA
      pass-through certificates
                
                
                9
                
                
                
                844
                
                
                
                -
                
                
                
                -Total
      securities available for sale
                
                $
                9
                
                
                $
                844
                
                
                $
                -
                
                
                $
                -




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.  For all securities that are in an unrealized loss
position for an extended period of time and for all securities whose fair value
is significantly below amortized cost, the Company performs an evaluation of the
specific events attributable to the market decline of the security. The Company
considers the length of time and extent to which the security’s market value has
been below cost as well as the general market conditions, industry
characteristics, and the fundamental operating results of the issuer to
determine if the decline is other-than-temporary. The Company also considers as
part of the evaluation its intent and ability to hold the security until its
market value has recovered to a level at least equal to the amortized cost. When
the Company determines that a security’s unrealized loss is
other-than-temporary, a realized loss is recognized in the period in which the
decline in value is determined to be other-than-temporary. The write-downs are
measured based on public market prices of the security at the time the Company
determines the decline in value was other-than-temporary.




At March
31, 2008, mortgage-backed securities in a gross unrealized loss position for
twelve months or longer consist of 11 securities having an aggregate
depreciation of 2.3% from the Company’s amortized cost basis. Mortgage-backed
securities in a gross unrealized loss position for less than twelve months at
March 31, 2008 consists of 1 security with an aggregate depreciation of 1.3%
from the Company’s amortized cost basis.  The unrealized losses
disclosed above are primarily related to movement in market interest rates.
Although the fair value will fluctuate as the market interest rates move, all of
the Company’s mortgage-backed securities portfolio consists of low-risk
securities issued by U.S.  government sponsored
enterprises.  If held to maturity, the contractual principal and
interest payments of such securities are expected to be received in full. As
such, no loss in value is expected over the lives of the
securities.  The Company has the ability to hold these securities
until they mature and does not intend to sell the securities at a loss. Based on
the above, management believes that the unrealized losses are temporary. The
determination of whether a decline in market value is temporary is necessarily a
matter of subjective judgment. The timing and amount of any realized losses
reported in the Company’s financial statements could vary if conclusions other
than those made by management were to determine whether an other-than-temporary
impairment exists.





15




5.        LOANS
RECEIVABLE




Loans
receivable consist of the following:




March
      31,
              
              
              September
      30,2008
              
              
              2007(Dollars
      in Thousands)One-to-four
      family residential
              
              $
              166,227
              
              
              $
              159,945Multi-family
      residential
              
              
              2,932
              
              
              
              4,362Commercial
      real estate
              
              
              19,921
              
              
              
              18,019Construction
      and land development
              
              
              51,028
              
              
              
              52,429Commercial
      business
              
              
              357
              
              
              
              155Consumer
              
              
              808
              
              
              
              832Total
      loans
              
              
              241,273
              
              
              
              235,742Undisbursed
      portion of loans-in-process
              
              
              (17,141
              )
              
              
              (15,897
              )Deferred
      loan fees
              
              
              311
              
              
              
              315Allowance
      for loan losses
              
              
              (658
              )
              
              
              (1,011
              )Net
              
              $
              223,785
              
              
              $
              219,149




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




Six
      Months Ended March 31,2008
              
              
              2007(Dollars
      in Thousands)Balance,
      beginning of period
              
              $
              1,011
              
              
              $
              618Provision
      for loan losses
              
              
              150
              
              
              
              75Charge-offs
              
              
              (503
              )
              
              
              -Recoveries
              
              
              -
              
              
              
              -Balance,
      end of period
              
              $
              658
              
              
              $
              693




Nonperforming
loans (which consist of nonaccrual loans and loans in excess of 90 days
delinquent and still accruing interest) at March 31, 2008 and September 30, 2007
amounted to approximately $297,000 and $2.6 million, respectively.




16




6.        DEPOSITS




Deposits
consist of the following major classifications:




March
      31,
              
              
              September
      30,2008
              
              
              2007Amount
              
              
              Percent
              
              
              Amount
              
              
              Percent(Dollars
      in Thousands)Money
      market deposit accounts
              
              $
              68,487
              
              
              
              18.3
              %
              
              $
              63,675
              
              
              
              18.0
              %NOW
      accounts
              
              
              27,932
              
              
              
              7.5
              
              
              
              28,895
              
              
              
              8.2Passbook,
      club and statement savings
              
              
              69,465
              
              
              
              18.6
              
              
              
              70,903
              
              
              
              20.0Certificates
      maturing in six months or less
              
              
              100,925
              
              
              
              27.0
              
              
              
              101,615
              
              
              
              28.7Certificates
      maturing in more than six months
              
              
              107,590
              
              
              
              28.6
              
              
              
              88,950
              
              
              
              25.1Total
              
              $
              374,399
              
              
              
              100.0
              %
              
              $
              354,038
              
              
              
              100.0
              %




At March
31, 2008 and September 30, 2007, the weighted average cost of deposits was 3.6%
and 3.9%, respectively.




7.
            INCOME
      TAXES




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




March
      31,
                2008
              
              
              September
      30,
                2007Deferred
      tax assets:
              
              (Dollars
      in thousands)Securities
      impairment
              
              $
              507
              
              
              $
              -Deposit
      premium
              
              
              241
              
              
              
              265Allowance
      for loan losses
              
              
              259
              
              
              
              378Employee
      stock ownership plan
              
              
              94
              
              
              
              79Total
              
              
              1,101
              
              
              
              722Deferred
      tax liabilities:Unrealized
      gain on available for sale securities
              
              
              324
              
              
              
              134Property
              
              
              472
              
              
              
              446Mortgage
      servicing rights
              
              
              7
              
              
              
              8Deferred
      loan fees
              
              
              105
              
              
              
              106Total
              
              
              908
              
              
              
              694Net
      deferred tax asset
              
              $
              193
              
              
              $
              28




8.
            COMMITMENTS
      AND CONTINGENT LIABILITIES




At March
31, 2008, the Company had $11.7 million in outstanding commitments to originate
fixed and variable-rate loans with market interest rates ranging from 5.5% to
8.5%.  At September 30, 2007, the Company had $10.4 million in
outstanding commitments to originate fixed and variable-rate loans with market
interest rates ranging from 6.625% to 9.25%.




The
Company also had commitments under unused lines of credit of $6.7 million and
$7.2 million at March 31, 2007 and September 30, 2007, respectively, and letters
of credit outstanding of $95,000 at both March 31, 2008 and September 30,
2007.




17




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, 2008, 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 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.  For additional information, see Part II, Item I Legal
Proceedings in this Form 10-Q.




18




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




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 in March 2005.  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 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  on Form 10-K for the year ended September 30, 2007 filed with
the SEC.  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.





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. The allowance is an amount that management believes will cover
known and inherent losses in the loan portfolio, based on evaluations of the
collectibility of loans. The evaluations take into consideration 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.




19


Income
Taxes.  We make estimates and judgments to calculate some of
our tax liabilities and determine the recoverability of some of our deferred tax
assets, which arise from temporary differences between the tax and financial
statement recognition of revenues and expenses.  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. These estimates and judgments are
inherently subjective.  In the past, our estimates and judgments to
calculate our deferred tax accounts have not required significant revision to
our initial estimates.





The
Company accounts for income taxes in accordance with SFAS No. 109, Accounting
for Income Taxes, and FASB Interpretation (“FIN”) No. 48.  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.  On October 1, 2007, the Company incorporated FIN No. 48
with its existing accounting policy.  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 consolidated income statement.





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.





COMPARISON
OF FINANCIAL CONDITION AT MARCH 31, 2008 AND SEPTEMBER 30, 2007





At March
31, 2008, the Company’s total assets were $478.2 million, an increase of $4.0
million from $474.2 million at September 30, 2007.  The increase was
primarily attributable to an increase in interest-bearing deposits,
mortgage-backed securities available for sale and net loans receivable offset in
part by net repayments in the investment and mortgage-backed security
portfolios.  Management chose to use the proceeds from these
repayments to repay higher cost short-term advances from the Federal Home Loan
Bank (FHLB).





Total
liabilities increased $9.6 million to $402.8 million at March 31, 2008 from
$393.2 million at September 30, 2007.  The increase was primarily due
to a $20.4 million increase in deposits, mainly in certificates of
deposit.  The increase was offset by the repayment of FHLB advances
which decreased by $11.0 million, from $33.7 million at September 30, 2007 to
$22.7 million at March 31, 2008.




20


Stockholders’
equity decreased by $5.5 million to $75.4 million at March 31, 2008 as compared
to $81.0 million at September 30, 2007 primarily as a result of the $4.9 million
cost of repurchasing 390,600 shares of common stock during the six month period
and the declaration of quarterly cash dividends totaling $1.1
million.





COMPARISON
OF RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2008 AND
2007





Net income.  The
Company reported a net loss of $682,000 for the quarter ended March 31, 2008 as
compared to net income of $965,000 for the same period in 2007.  For
the six months ended March 31, 2008, the Company recognized a net loss of
$72,000 compared to net income of $1.9 million for the comparable period in
2007.  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 impairment charge reflected the determination that the decline in fair
value in such investment was other than temporary and reflected the continued
decline in the value of the underlying mortgage-related securities held by such
mutual fund during the first quarter of calendar 2008. The impairment charge was
related to declines in fair value due to interest rate movements and the
on-going turbulence being experienced in the mortgage markets leading to
significantly reduced investor interest in mortgage-related
securities.  The impairment charge reduced earnings and earnings per
share by $985,000, or $0.09 per share for the three and six month periods ended
March 31, 2008.  On May 7, 2008, the asset manager of the mutual fund
investment advised the Company that it has determined to activate the mutual
fund’s redemption-in-kind (RIK) provision to protect holders against the
possibility that the mutual fund might be forced to liquidate securities at
distressed price levels to satisfy redemption requests.  The mutual
fund has also advised the Company that it was temporarily discontinuing
acceptance of new purchase orders for the fund, except for the reinvestment of
dividends.  This action was taken because certain mortgage-related
securities held by the mutual fund have been downgraded below the funds
investment guidelines applicable to purchases of securities designed for
permissible investments by financial institutions.





Net interest
income.Net interest income decreased $320,000 or 10.3% to
$2.8 million for the three months ended March 31, 2008 as compared to $3.1
million for the same period in 2007. The decrease reflected the effects of a
$193,000 or 5.4% increase in interest expense combined with a $127,000 or 1.9%
decrease in interest income.    The increase in interest
expense resulted primarily from a $15.7 million or 4.2% increase in the average
balance of interest-bearing liabilities for the three months ended March 31,
2008, as compared to the same period in 2007.  Also contributing to
the increase in interest expense was a 5 basis point increase to 3.88% in the
weighted average rate paid on interest-bearing liabilities, due primarily to the
continued increase in the average balance of certificates of deposit, which
generally pay a higher rate of interest than other deposit
products.  The decrease in interest income resulted primarily from a
17 basis point decrease in the weighted average yield earned on such assets to
5.77% for the quarter ended March 31, 2008 from the comparable period in 2007,
partially offset by a $4.5 million or 1.0% increase in the average balance of
interest-earning assets for the three months ended March 31, 2008, as compared
to the same period in 2007.





For the
six months ended March 31, 2008, net interest income decreased $643,000 or 10.4%
to $5.6 million as compared to $6.2 million for the same period in 2007. The
decrease was due to the combined effects of a $494,000 or 6.9% increase in
interest expense and a $149,000 or 1.1% decrease in interest
income.  The increase in interest expense resulted primarily from a
$13.8 million or 3.7% increase in the average balance of interest-bearing
liabilities for the six months ended March 31, 2008, as compared to the same
period in 2007.  Also contributing to the increase in interest expense
was a 12 basis point increase to 3.97% in the weighted average rate paid on
interest-bearing liabilities, due primarily to the continued increase in the
average balance of certificates of deposit, which generally pay a higher rate of
interest than other deposit products.    The decrease in
interest income resulted primarily from an 11 basis point decrease in the
weighted average yield earned on such assets to 5.80% for the six months ended
March 31, 2008 from the comparable period in 2007 partially offset by a $3.4
million or 0.8% increase in the average balance of interest-earning assets for
the six months ended March 31, 2008, as compared to the same period in
2007.





For the
quarter ended March 31, 2008, the net interest margin was 2.46%, as compared to
2.77% for the comparable period in 2007.  For the six months ended
March 31, 2008, the net interest margin was 2.44%, as compared to 2.74% for the
comparable period in 2007.  The compression in the net interest margin
primarily reflected an increase in the rate paid on the interest-bearing
liabilities combined with a decrease in the yield earned on interest-earning
assets.  The decline in the yield earned on interest-earning assets
reflected in large part the effects of the decline in market rates of interest
in recent periods.




21




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.  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
      MonthsEnded
      March 31,2008
              
              
              2007Average
              
              
              
              
              
              Average
              
              
              Average
              
              
              
              
              
              AverageBalance
              
              
              Interest
              
              
              Yield/Rate
              
              
              Balance
              
              
              Interest
              
              
              Yield/Rate(Dollars
      in Thousands)Interest-earning
      assets:Investment
      securities
              
              $
              167,103
              
              
              $
              2,174
              
              
              
              5.20
              %
              
              $
              171,141
              
              
              $
              2,153
              
              
              
              5.03
              %Mortgage-backed
      securities
              
              
              57,086
              
              
              
              757
              
              
              
              5.30
              
              
              
              53,732
              
              
              
              702
              
              
              
              5.23Loans
      receivable(1)
              
              
              223,496
              
              
              
              3,589
              
              
              
              6.42
              
              
              
              220,080
              
              
              
              3,786
              
              
              
              6.88Other
      interest-earning assets
              
              
              7,667
              
              
              
              45
              
              
              
              2.35
              
              
              
              5,868
              
              
              
              51
              
              
              
              3.48Total
      interest-earning assets
              
              
              455,352
              
              
              
              6,565
              
              
              
              5.77
              
              
              
              450,821
              
              
              
              6,692
              
              
              
              5.94Cash
      and non-interest-bearing balances
              
              
              4,723
              
              
              
              
              
              
              
              
              
              
              
              4,883Other
      non-interest-earning assets
              
              
              12,254
              
              
              
              
              
              
              
              
              
              
              
              11,300Total
      assets
              
              $
              472,329
              
              
              
              
              
              
              
              
              
              
              $
              467,004Interest-bearing
      liabilities:Savings
      accounts
              
              $
              66,526
              
              
              
              399
              
              
              
              2.40
              
              
              $
              72,223
              
              
              
              526
              
              
              
              2.91Money
      market deposit and NOW accounts
              
              
              91,741
              
              
              
              748
              
              
              
              3.26
              
              
              
              95,909
              
              
              
              837
              
              
              
              3.49Certificates
      of deposit
              
              
              204,218
              
              
              
              2,329
              
              
              
              4.56
              
              
              
              179,347
              
              
              
              1,884
              
              
              
              4.20Total
      deposits
              
              
              362,485
              
              
              
              3,476
              
              
              
              3.84
              
              
              
              347,479
              
              
              
              3,247
              
              
              
              3.74Advances
      from Federal Home Loan Bank
              
              
              24,254
              
              
              
              289
              
              
              
              4.77
              
              
              
              23,611
              
              
              
              324
              
              
              
              5.49Advances
      from borrowers for taxes andinsurance
              
              
              1,820
              
              
              
              2
              
              
              
              0.44
              
              
              
              1,782
              
              
              
              3
              
              
              
              0.67Total
      interest-bearing liabilities
              
              
              388,559
              
              
              
              3,767
              
              
              
              3.88
              
              
              
              372,872
              
              
              
              3,574
              
              
              
              3.83Non-interest-bearing
      liabilities:Non-interest-bearing
      demand accounts
              
              
              4,807
              
              
              
              
              
              
              
              
              
              
              
              4,850Other
      liabilities
              
              
              723
              
              
              
              
              
              
              
              
              
              
              
              2,181Total
      liabilities
              
              
              394,089
              
              
              
              
              
              
              
              
              
              
              
              379,903Stockholders'
      equity
              
              
              78,240
              
              
              
              
              
              
              
              
              
              
              
              87,101Total
      liabilities and stockholders' equity
              
              $
              472,329
              
              
              
              
              
              
              
              
              
              
              $
              467,004Net
      interest-earning assets
              
              $
              66,793
              
              
              
              
              
              
              
              
              
              
              $
              77,949Net
      interest income; interest rate spread
              
              
              
              
              
              $
              2,798
              
              
              
              1.89
              %
              
              
              
              
              
              $
              3,118
              
              
              
              2.11
              %Net
      interest margin(2)
              
              
              
              
              
              
              
              
              
              
              2.46
              %
              
              
              
              
              
              
              
              
              
              
              2.77
              %Average
      interest-earning assets to averageinterest-bearing
      liabilities
              
              
              
              
              
              
              117.19
              %
              
              
              
              
              
              
              
              
              
              
              120.91
              %
 _____________________________________





(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.




22




Six
      MonthsEnded
      March 31,2008
              
              
              2007Average
              
              
              
              
              
              Average
              
              
              Average
              
              
              
              
              
              AverageBalance
              
              
              Interest
              
              
              Yield/Rate
              
              
              Balance
              
              
              Interest
              
              
              Yield/Rate(Dollars
      in Thousands)Interest-earning
      assets:Investment
      securities
              
              $
              169,794
              
              
              $
              4,411
              
              
              
              5.20
              %
              
              $
              172,196
              
              
              $
              4,258
              
              
              
              4.95
              %Mortgage-backed
      securities
              
              
              55,830
              
              
              
              1,480
              
              
              
              5.30
              %
              
              
              54,035
              
              
              
              1,413
              
              
              
              5.23
              %Loans
      receivable(1)
              
              
              222,195
              
              
              
              7,224
              
              
              
              6.50
              %
              
              
              220,652
              
              
              
              7,611
              
              
              
              6.90
              %Other
      interest-earning assets
              
              
              8,037
              
              
              
              111
              
              
              
              2.76
              %
              
              
              5,530
              
              
              
              93
              
              
              
              3.36
              %Total
      interest-earning assets
              
              
              455,856
              
              
              
              13,226
              
              
              
              5.80
              %
              
              
              452,413
              
              
              
              13,375
              
              
              
              5.91
              %Cash
      and non-interest-bearing balances
              
              
              4,379
              
              
              
              
              
              
              
              
              
              
              
              4,636Other
      non-interest-earning assets
              
              
              12,333
              
              
              
              
              
              
              
              
              
              
              
              11,368Total
      assets
              
              $
              472,568
              
              
              
              
              
              
              
              
              
              
              $
              468,417Interest-bearing
      liabilities:Savings
      accounts
              
              $
              67,006
              
              
              
              776
              
              
              
              2.32
              %
              
              $
              73,667
              
              
              
              1,114
              
              
              
              3.02
              %Money
      market deposit and NOW accounts
              
              
              91,310
              
              
              
              1,548
              
              
              
              3.39
              %
              
              
              95,060
              
              
              
              1,673
              
              
              
              3.52
              %Certificates
      of deposit
              
              
              199,059
              
              
              
              4,645
              
              
              
              4.67
              %
              
              
              176,495
              
              
              
              3,662
              
              
              
              4.15
              %Total
      deposits
              
              
              357,375
              
              
              
              6,969
              
              
              
              3.90
              %
              
              
              345,222
              
              
              
              6,449
              
              
              
              3.74
              %Advances
      from Federal Home Loan Bank
              
              
              27,456
              
              
              
              689
              
              
              
              5.02
              %
              
              
              25,792
              
              
              
              715
              
              
              
              5.54
              %Advances
      from borrowers for taxes andinsurance
              
              
              1,641
              
              
              
              4
              
              
              
              0.49
              %
              
              
              1,614
              
              
              
              4
              
              
              
              0.50
              %Total
      interest-bearing liabilities
              
              
              386,472
              
              
              
              7,662
              
              
              
              3.97
              %
              
              
              372,628
              
              
              
              7,168
              
              
              
              3.85
              %Non-interest-bearing
      liabilities:Non-interest-bearing
      demand accounts
              
              
              4,845
              
              
              
              
              
              
              
              
              
              
              
              5,201Other
      liabilities
              
              
              1,619
              
              
              
              
              
              
              
              
              
              
              
              3,138Total
      liabilities
              
              
              392,936
              
              
              
              
              
              
              
              
              
              
              
              380,967Stockholders'
      equity
              
              
              79,630
              
              
              
              
              
              
              
              
              
              
              
              87,450Total
      liabilities and Stockholders' equity
              
              $
              472,566
              
              
              
              
              
              
              
              
              
              
              $
              468,417Net
      interest-earning assets
              
              $
              69,384
              
              
              
              
              
              
              
              
              
              
              $
              79,785Net
      interest income; interest rate spread
              
              
              
              
              
              $
              5,564
              
              
              
              1.84
              %
              
              
              
              
              
              $
              6,207
              
              
              
              2.06
              %Net
      interest margin(2)
              
              
              
              
              
              
              
              
              
              
              2.44
              %
              
              
              
              
              
              
              
              
              
              
              2.74
              %Average
      interest-earning assets to averageinterest-bearing
      liabilities
              
              
              
              
              
              
              117.95
              %
              
              
              
              
              
              
              
              
              
              
              121.41
              %




(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.




23




Provisions for loan
losses.  Provisions for loan losses are charged to earnings to
maintain the total allowance for loan losses at a level believed by management
to cover all known and inherent losses in the loan portfolio which are both
probable and reasonably estimable. Management's analysis includes consideration
of the Company's historical experience, the volume and type of lending conducted
by the Company, the amount of the Company's classified and criticized assets,
the status of past due principal and interest payments, general economic
conditions, particularly as they relate to the Company's primary market area,
and other factors related to the collectibility of the Company’s loan portfolio.
The Company established a provision for loan losses of $75,000 for the quarter
ended March 31, 2008 and $150,000 for the six month period ended March 31, 2008
as compared to $15,000 and $75,000 for the comparable periods in
2007.  The provisions in the 2008 periods were primarily increased due
to a $2.1 million single family construction loan which became real estate owned
during the quarter ended March 31, 2008 through execution of a deed in lieu of
foreclosure.    At the time the loan was re-classified as
real estate owned, the allowance was charged $68,000 to record the asset at its
fair value.





At March
31, 2008, the Company’s non-performing assets totaled $1.9 million, or 0.4%
of total assets and consisted of the one real estate owned property noted above
recorded at $1.6 million and four single-family residential real estate loans
totaling $297,000.   The allowance for loan losses totaled
$658,000, or 0.3% of total loans and 221.55% of non-performing loans at March
31, 2008.





Management
continues to review its loan portfolio to determine the extent, if any, to which
further additional loss provisions may be deemed necessary. There can be no
assurance that the allowance for losses will be adequate to cover losses which
may in fact be realized in the future and that additional provisions for losses
will not be required.





The
secondary mortgage market has been adversely impacted in recent periods and
through the filing date of this  Form 10-Q by deteriorating investor
demand for mortgage loan products, particularly with regard to subprime
products, as investors are tightening credit standards and offering less
favorable pricing. At both March 31, 2008 and September 30, 2007, the
Company had no real estate loans that would be considered subprime loans, which
are defined as mortgage loans advanced to borrowers who do not qualify for loans
bearing market interest rates because of problems with their credit
history.  The Bank does not originate subprime loans.  The Bank's
lending standards are discussed in Item 1 of the Annual Report on Form 10-K for
the fiscal year ended September 30, 2007.





Non-interest income
(charges).  Non-interest income decreased by $1.5 million and
$1.6 million, respectively, for the three and six month periods of 2008 compared
with the same periods in 2007.  The decrease was due to the previously
mentioned $1.5 million non-cash impairment charge related to the determination
that the decline in value of the Company’s $35.0 million mutual fund portfolio
was other than temporary.  The Company attributes the decrease in the
Net Asset Value of the investment to a widening of the spreads in the bond
market for mortgage related securities due to instability in the mortgage
markets.  The impairment charge was related to declines in fair value
due to interest rate movements and the significant reduction in investor
interest in mortgage-related securities in recent periods.  As of May
12, 2008, the fair value of the fund shares held by the Company decreased by
approximately an additional $843,000 (pre-tax).   The Company
investment in the mutual fund earned an annualized return of 4.9% for the six
months ended March 31, 2008 before giving effect to the impairment
charge.





Non-interest
expenses.For the quarter and six months ended March 31, 2008,
non-interest expense increased $387,000 and $381,000, respectively, compared to
the same periods in the prior year.  The increases were primarily due
to increases in professional fees and other non-interest
expenses.  The majority of the increase in professional fees and other
non-interest expense was related to expenses associated with the defense of a
previously disclosed lawsuit commenced in October 2006 by a shareholder,
Stilwell Value Partners I, L.P., and increased costs incurred in connection with
being a public company.  As of March 31, 2008, claims for $348,000
which have not yet been evaluated by the insurance carrier have been submitted
for reimbursement which related to expenses incurred by the Company in defense
of this lawsuit.  In prior quarters, a substantial portion of the
legal expenses were reimbursed by the insurance carrier.  Any
reimbursement from the insurance carrier with respect to such claims would be
recorded as a reduction in non-interest expense in the period
received.





Income tax
expense.  The Company recognized income tax benefits for the
quarter and six months ended March 31, 2008 of $383,000 and $96,000,
respectively, compared to income tax expense of $237,000 and $658,000,
respectively, for the quarter and six months ended March 31,
2007.   The recognition of income tax benefits in the 2008
periods was primarily due to the net loss before taxes incurred as a result of
the write-down of the value of the Company’s mutual fund portfolio




24


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, 2008, our cash and cash equivalents amounted
to $19.4 million.  In addition, our available for sale investment and
mortgage-backed securities amounted to an aggregate of $53.1 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,
2008, the Company had $11.7 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 $6.7 million and
letters of credit outstanding of $95,000 at March 31,
2008.  Certificates of deposit at March 31, 2008 maturing in one
year or less totaled $153.0 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 flow 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, 2008, we had $22.7 million in
outstanding FHLB advances and we had $258.0 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.





At March
31, 2008, the Company had no collateral underlying mortgage-backed securities
that would be considered to be subprime loans.  All mortgage-backed
securities owned by the Company as of March 31, 2008 possessed the highest
possible investment credit rating excluding certain mortgage-related securities
held by the mutual fund which have been downgraded below the funds investment
guidelines applicable to purchases of securities designed for permissible
investments by financial institutions.





25





The
following table summarizes the Company and Bank’s regulatory capital ratios as
of March 31, 2008 and September 30, 2007 and compares them to current regulatory
guidelines.




To
      BeWell
      CapitalizedRequired
      for
              
              
              Under
      PromptCapital
      Adequacy
              
              
              Corrective
      ActionActual
      Ratio
              
              
              Purposes
              
              
              ProvisionsMarch
      31, 2008:Tier
      1 capital (to average assets)The
      Company
              
              15.84%
              
              
              4.0%
              
              
              N/AThe
      Bank
              
              14.65%
              
              
              4.0%
              
              
              5.0%Tier
      1 capital (to risk weighted assets)The
      Company
              
              35.90%
              
              
              4.0%
              
              
              N/AThe
      Bank
              
              32.46%
              
              
              4.0%
              
              
              6.0%Total
      capital (to risk weighted assets)The
      Company
              
              36.36%
              
              
              8.0%
              
              
              N/AThe
      Bank
              
              32.91%
              
              
              8.0%
              
              
              10.0%September
      30, 2007:Tier
      1 capital (to average assets)The
      Company
              
              17.08%
              
              
              4.0%
              
              
              N/AThe
      Bank
              
              15.52%
              
              
              4.0%
              
              
              5.0%Tier
      1 capital (to risk weighted assets)The
      Company
              
              37.88%
              
              
              4.0%
              
              
              N/AThe
      Bank
              
              34.22%
              
              
              4.0%
              
              
              6.0%Total
      capital (to risk weighted assets)The
      Company
              
              38.43%
              
              
              8.0%
              
              
              N/AThe
      Bank
              
              34.77%
              
              
              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.




26




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 utilized the following strategies in our efforts to
manage interest rate risk:




●
            we
      have increased our originations of shorter term loans and/or loans with
      adjustable rates of interest, particularly construction and land
      development loans;●
            we
      have invested in securities with “step-up” rate features providing for
      increased interest rates prior to maturity according to a pre-determined
      schedule and formula; and●
            we
      have maintained moderate levels of short-term liquid
    assets.





However,
notwithstanding the foregoing steps, we remain subject to a significant level of
interest rate risk in a rising 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 designated as held to maturity.  In
addition, our interest rate spread and margin have been adversely affected due
to the flat yield curve.  Likewise, our unwillingness to originate
long-term, fixed-rate residential mortgage loans at low rates has resulted in
borrowers in many cases refinancing loans elsewhere, requiring us to reinvest
the resulting proceeds from the loan payoffs at low current market rates of
interest.   Thus, both of these strategies have increased our
interest rate risk.





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.





27





The
following table sets forth the amounts of our interest-earning assets and
interest-bearing liabilities outstanding at March 31, 2008, 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, 2008, 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 8.8% to 20.0%.  The annual
prepayment rate for mortgage-backed securities is assumed to range from 0.9% to
62.5%.  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.





More
      than
              
              
              More
      than
              
              
              More
      than3
      Months
              
              
              3
      Months
              
              
              1
      Year
              
              
              3
      Years
              
              
              More
      than
              
              
              Totalor
      Less
              
              
              to
      1 Year
              
              
              to
      3 Years
              
              
              to
      5 Years
              
              
              5
      Years
              
              
              Amount(Dollars
      in Thousands)Interest-earning
      assets(1):Investment
      securities(2)
              
              $
              29,646
              
              
              $
              19,723
              
              
              $
              11,073
              
              
              $
              0
              
              
              $
              96,901
              
              
              $
              157,343Mortgage-backed
      securities
              
              
              2,760
              
              
              
              7,490
              
              
              
              15,028
              
              
              
              10,411
              
              
              
              22,847
              
              
              
              58,536Loans
      receivable(3)
              
              
              40,660
              
              
              
              39,982
              
              
              
              60,238
              
              
              
              35,275
              
              
              
              47,977
              
              
              
              224,132Other
      interest earning assets
              
              
              16,118
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              16,118Total
      interest-earning assets
              
              $
              89,184
              
              
              $
              67,195
              
              
              $
              86,339
              
              
              $
              45,686
              
              
              $
              167,725
              
              
              $
              456,129Interest-bearing
      liabilities:Savings
      accounts
              
              $
              333
              
              
              $
              228
              
              
              $
              40,124
              
              
              $
              13,375
              
              
              $
              13,375
              
              
              $
              67,435Money
      market deposit and NOW accounts
              
              
              -
              
              
              
              34,243
              
              
              
              49,385
              
              
              
              5,048
              
              
              
              5,048
              
              
              
              93,724Certificates
      of deposits
              
              
              52,180
              
              
              
              100,760
              
              
              
              30,058
              
              
              
              25,506
              
              
              
              -
              
              
              
              208,504Advances
      from Federal Home Loan Bank
              
              
              9,020
              
              
              
              62
              
              
              
              13,170
              
              
              
              130
              
              
              
              340
              
              
              
              22,722Advances
      from borrowers for taxes and insurance
              
              
              1,249
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,249Total
      interest-bearing liabilities
              
              $
              62,782
              
              
              $
              135,293
              
              
              $
              132,737
              
              
              $
              44,059
              
              
              $
              18,763
              
              
              $
              393,634Interest-earning
      assetsless
      interest-bearing liabilities
              
              $
              26,402
              
              
              $
              (68,098
              )
              
              $
              (46,398
              )
              
              $
              1,627
              
              
              $
              148,962
              
              
              $
              62,495Cumulative
      interest-rate sensitivity gap (4)
              
              $
              26,402
              
              
              $
              (41,696
              )
              
              $
              (88,094
              )
              
              $
              (86,467
              )
              
              $
              62,495Cumulative
      interest-rate gap as apercentage
      of total assets at March 31, 2008
              
              
              5.52
              %
              
              
              -8.72
              %
              
              
              -18.42
              %
              
              
              -18.08
              %
              
              
              13.07
              %Cumulative
      interest-earning assetsas
      a percentage of cumulative interest-bearing
      liabilities at March 31, 2008
              
              
              142.05
              %
              
              
              78.95
              %
              
              
              73.37
              %
              
              
              76.93
              %
              
              
              115.88
              %




(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 undisbursed portion of
      loans-in-process.(4)
            Interest-rate
      sensitivity gap represents the difference between net interest-earning
      assets and interest-bearing
liabilities.




28




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, 2008 and reflects the changes to NPV as
a result of immediate and sustained changes in interest rates as
indicated.




Change
      in
              
              
              
              
              
              
              
              
              
              
              
              NPV
      as % of PortfolioInterest
      Rates
              
              
              Net
      Portfolio Value
              
              
              Value
      of AssetsIn
      Basis Points(Rate
      Shock)
              
              
              Amount
              
              
              $
      Change
              
              
              %
      Change
              
              
              NPV
      Ratio
              
              
              Change(Dollars
      in Thousands)300
              
              
              $
              41,222
              
              
              $
              (38,789
              )
              
              
              (48.48
              )%
              
              
              9.68
              %
              
              
              (6.97
              )%200
              
              
              
              53,327
              
              
              
              (26,684
              )
              
              
              (33.35
              )%
              
              
              12.03
              %
              
              
              (4.62
              )%100
              
              
              
              66,874
              
              
              
              (13,137
              )
              
              
              (16.42
              )%
              
              
              14.47
              %
              
              
              (2.18
              )%Static
              
              
              
              80,011
              
              
              
              -
              
              
              
              -
              
              
              
              16.65
              %
              
              
              -(100)
              
              
              
              82,292
              
              
              
              2,281
              
              
              
              2.85
              %
              
              
              16.85
              %
              
              
              0.20
              %(200)
              
              
              
              79,071
              
              
              
              (940
              )
              
              
              (1.17
              )%
              
              
              16.10
              %
              
              
              (0.55
              )%(300)
              
              
              
              77,365
              
              
              
              (2,646
              )
              
              
              (3.31
              )%
              
              
              15.65
              %
              
              
              (1.00
              )%


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.




29


ITEM 4T. CONTROLS AND
PROCEDURES





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





No change
in our internal control over financial reporting (as defined in Rule 13a-15(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.




30




PART II





Item 1. Legal Proceedings





On
October 4, 2006, Stilwell Value Partners I, L.P. (“Stilwell”) filed suit in the
United States District Court for the Eastern District of Pennsylvania against
Prudential Mutual Holding Company (the “MHC”), Prudential Bancorp, Inc. of
Pennsylvania (the “Company”) and each of the directors of the MHC and the
Company individually seeking equitable relief including (i) enjoining the
Company and the directors from allowing the MHC to participate in any
shareholder vote to consider the adoption of proposed stock option and stock
recognition and retention plans (collectively, the “Stock Plans”) and (ii)
enjoining MHC from participating in any shareholder vote to approve the Stock
Plans.  In the event that the MHC and the Company are not enjoined,
Stilwell is seeking damages, the amount to be determined at trial.





Stilwell
alleged that the Company’s prospectus used to solicit offers to purchase shares
of the Company’s common stock in connection with the mutual holding
reorganization of Prudential Savings Bank “promised” that the Stock Plans would
be submitted for consideration only by the Company’s public shareholders and not
by the MHC which controls a majority of the Company’s issued and outstanding
shares of common stock and that Stilwell relied on such promise in determining
to invest in the common stock of the Company (a “promissory estoppel”
claim).  Stilwell also alleged that the individual directors violated
their fiduciary duties to Stilwell by delaying the consideration of the Stock
Plans until such time that MHC could vote its shares on the Stock Plans assuring
their approval by shareholders.  In addition, Stilwell asserted claims
for “unjust enrichment” and for “disenfranchisement.”  On November 20,
2006, the Company, the MHC and the director defendants filed a motion to dismiss
the complaint, asserting, among other things, that the prospectus contained no
“promise,” implied or otherwise, that the MHC would never vote on the adoption
of the Stock Plans and that the breach of fiduciary duty claim, with respect to
the timing of any such vote, is legally insufficient.  On August 15,
2007, the Court ruled that there was no express promise of the sort that would
support a promissory estoppel claim, no "unconscionability" of the sort that
would support an unjust enrichment claim, and no "fundamental unfairness" of the
sort that would support a claim for "disenfranchisement."  The Court
also ruled that Stilwell does not have standing to assert claims for breach of
fiduciary duty against the directors individually.  Accordingly, the
Court dismissed all of the claims against the Company and the individual
directors and all but one of the claims against the MHC.  The Court
dismissed the claims with prejudice which prevents Stilwell from reasserting
such claims in amended form.





The only
claim remaining is a breach of fiduciary duty claim asserted against the MHC as
majority shareholder.  Discovery has been substantially completed.
Trial on the remaining claim has been scheduled to commence in June
2008.





The
Company believes Stilwell's remaining claim is without merit and the remaining
defendant, the MHC, intends to vigorously defend the case.  However,
no prediction can be made as to the outcome of the one remaining
claim.





Other
than the above referenced litigation, 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
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, 2007.





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





(a)
            Not
      applicable




31




(b)
            Not
      applicable(c)
            Purchases
      of Equity Securities




The
Company’s repurchases of its common stock made during the quarter are set forth
in the following table:








Period
            
            Total
      Number
                of
      Shares
                Purchased
            
            
            Average
      Price
                Paid
      per
                Share
            
            
            Total
                Number
      of
                Shares
                Purchased
      as
                Part
      of
                Publicly
                Announced
                Plans
      or
                Programs
            
            
            Maximum
      Number
                of
      Shares that May
                Yet
      be Purchased Under the Plan or Programs(1)(2)January
      1 – January 31, 2008
            
            
            34,000
            
            
            $
            12.34
            
            
            
            34,000
            
            
            
            266,840February
      1 – February 29, 2008
            
            
            25,100
            
            
            
            12.54
            
            
            
            25,100
            
            
            
            241,740March
      1 - March 31, 2008
            
            
            223,840
            
            
            
            12.55
            
            
            
            223,840
            
            
            
            17,900Total
            
            
            282,940
            
            
            $
            12.52
            
            
            
            282,940
            
            
            
            17,900




______________________


Notes to
the table





(1)
            On
      August 15, 2007, the Company announced its fifth stock repurchase program
      to repurchase 230,500 shares or approximately 5% of the Company’s
      outstanding common stock held by shareholders other than Prudential Mutual
      Holding Company.  Such program commenced in August 2007 and was
      completed during March 2008.(2)
            On
      January 22, 2008, the Company announced its sixth stock repurchase program
      to repurchase up to 220,000 shares or approximately 5% of the Company’s
      outstanding common stock held by shareholders other than Prudential Mutual
      Holding Company.  The program commenced upon completion of the
      fifth stock repurchase program.  In addition, the Prudential
      Mutual Holding Company announced that its Board of Directors also approved
      the purchase of 220,000 shares or approximately 5% of the Company’s common
      stock held by shareholders other than Prudential Mutual Holding
      Company.





Item 3. Defaults Upon Senior
Securities





Not
applicable





32





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





On
February 4, 2008, 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 the ratification of the
appointment of the Company’s independent registered public accounting firm for
fiscal 2008).  Shareholders of record as of December 19, 2007,
received proxy materials and were considered eligible to on
these  proposals at the annual meeting.  At the annual
meeting, 11,393,306 shares of common stock of the Company were outstanding on
the record date and eligible to be voted at the meeting. The Stilwell Group
conducted a solicitation in opposition to the nominees for re-election as
directors nominated by the Company’s Board of Directors and in connection
therewith solicited proxies withholding votes in favor of management’s
nominees.  The Stilwell Group did not oppose the ratification of the
appointment of Deloitte & Touche LLP as the Company’s independent registered
public accounting firm. Members of the Company’s Board of Directors not up for
election and continuing in office after the annual meeting were John P. Judge,
Thomas A. Vento, Jerome R. Balka, Esq. and A.J. Fanelli.





A total
of 10,564,723 shares of common 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 directors were elected by the requisite plurality of the votes
      cast to serve on the Company’s Board of
  Directors:





Nominees
            
            For
            
            WithheldFrancis
      V. Mulcahy
            
            7,849,602
            
            2,715,121Joseph
      W. Packer, Jr.
            
            7,646,365
            
            2,918,358





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, 2008.





For
            
            Against
            
            Abstain10,537,451
            
            22,153
            
            5,119





There
were no broker non-votes at the annual meeting








Item
5. Other Information





Not
applicable




33




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





34




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 15,2008
            By:
            /s/
      Thomas
      A. VentoThomas
      A. VentoPresident
      and Chief Executive OfficerDate:
      May 15, 2008
            By:
            /s/
      Joseph
      R. CorratoJoseph
      R. CorratoExecutive
      Vice President and Chief Financial
Officer




35