Overview

At September 30, 2012, we had total assets of $490.5 million, including $260.7 million in net loans and $129.1 million of investment and mortgage-backed securities, total deposits of $425.6 million and total stockholders' equity of $59.8 million.

The market dislocations experienced in the financial market beginning in 2007 have continued through 2012. One of the primary sources of the difficulties in the market is the significant declines in value experienced in the housing market throughout the country. While the Philadelphia area has not suffered the wholesale declines in the value of residential real estate as have other areas of the country, the downturn has rippled through many parts of the local economy, especially condominium sales, construction lending and lending to contractors. The significant deterioration in the 2011 period necessitated large charge-offs and loan loss provision expense by the Bank.

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

Despite the current market and economic conditions, the Company continues to maintain capital in excess of regulatory requirements.

This Management's Discussion and Analysis section is intended to assist in understanding the financial condition and results of operations of Prudential Bancorp. The results of operations of Prudential Bancorp are primarily dependent on the results of the Bank. The information contained in this section should be read in conjunction with our consolidated financial statements and the accompanying notes to the consolidated financial statements contained in Item 8 of this Annual Report on Form 10-K.

Critical Accounting Policies

In reviewing and understanding financial information for Prudential Bancorp, 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 our consolidated financial statements included in Item 8 hereof. The accounting and financial reporting policies of Prudential Bancorp conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. Accordingly, the financial statements require certain estimates, judgments and assumptions, which are believed to be reasonable, based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities as well as contingent assets and contingent liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented. The following accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results. These policies require numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations which may significantly affect our reported results and financial condition for the period or in future periods.

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

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

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

? Nature and volume of loans;

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

? Experience, ability and depth of management and staff;

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

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

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

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

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

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

While management uses the best information available to make loan loss allowance evaluations, adjustments to the allowance may be necessary based on changes in economic and other conditions or changes in accounting guidance. In addition, the Pennsylvania Department of Banking and the FDIC, as an integral part of their examination processes, periodically review our allowance for loan losses. The Pennsylvania Department of Banking 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 affect earnings in future periods.

Investment and mortgage-backed securities available for sale. Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated using quoted prices of securities with similar characteristics or discounted cash flows and are classified within Level 2 of the fair value hierarchy. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy, although there were no securities with that classification as of September 30, 2012 or 2011.

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

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

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

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

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

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

Recent Accounting Pronouncements

The information required by this item is included in Note 2 to the Consolidated Financial Statements set forth in Item 8 hereto.

Derivative Financial Instruments, Contractual Obligations and Other Off Balance Sheet Arrangements. Derivative financial instruments include futures, forwards, interest rate swaps, option contracts, and other financial instruments with similar characteristics. We have not used derivative financial instruments in the past and do not currently have any intent to do so in the future.

While we have not used derivative financial instruments, we are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and the unused portions of lines of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition. Commitments to extend credit generally have fixed expiration dates and may require additional collateral from the borrower if deemed necessary. Commitments to extend credit are not recorded as an asset or liability by us until the instrument is exercised.

Commitments

The following tables summarize our outstanding commitments to originate loans
and to advance additional amounts pursuant to outstanding letters of credit,
lines of credit and undisbursed construction loans at September 30, 2012.

                                     Total                   Amount of Commitment Expiration - Per Period
                                    Amounts         Less than             1-3               3-5             After 5
                                   Committed          1 Year             Years             Years             Years
                                                                    (In Thousands)
Letters of credit                 $       167     $          167       $        -       $          -       $        -
Lines of credit (1)                     6,471                  -                -                  -            6,471
Undisbursed portions of loans
in process                              1,629              1,435              194                  -                -
Commitments to originate loans         14,054             14,054                -                  -                -
Total commitments                 $    22,321     $       15,656       $      194       $          -       $    6,471

Contractual Cash Obligations

The following table summarizes our contractual cash obligations at September 30,
2012.

                                                                Payments Due By Period
                                                Less than         1-3           3-5          After 5
                                    Total         1 Year         Years         Years          Years
                                                             (In Thousands)
Certificates of deposit           $ 256,237     $  121,984     $ 105,863     $  28,390     $          -
FHLB advances(1)                        483            143           340             -                -
Total long-term debt                256,720        122,127       106,203        28,390                -
Advances from borrowers for
taxes and insurance                   1,273          1,273             -             -                -
Operating lease obligations             211             79           132             -                -
Total contractual obligations     $ 258,204     $  123,479     $ 106,335     $  28,390     $          -

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.

                                                                                                          Year Ended September 30,
                                                                           2012                                     2011                                     2010
                                        Yield/Rate at                                  Average                                  Average                                  Average
                                        September 30,       Average                     Yield/       Average                     Yield/       Average                     Yield/
                                            2012            Balance      Interest        Rate        Balance      Interest        Rate        Balance      Interest        Rate
                                                                                                           (Dollars in Thousands)
Interest-earning assets:
Investment securities                             2.75 %   $  77,224     $   2,102         2.72 %   $ 107,065     $   3,569         3.33 %   $ 117,655     $   5,431         4.62 %
Mortgage-backed securities                        3.99 %      89,089         3,726         4.18 %      89,666         4,300         4.80 %      92,294         4,721         5.12 %
Loans receivable (1)                              4.82 %     242,780        13,008         5.36 %     246,188        13,724         5.57 %     254,781        14,914         5.85 %
Other interest-earning assets                     0.25 %      70,024           143         0.20 %      47,918            92         0.19 %      29,543            43         0.15 %
  Total interest-earning assets                   3.67 %     479,117        18,979         3.96 %     490,837        21,685         4.42 %     494,273        25,109         5.08 %
Non-interest-earning assets                                   20,818                                   21,210                                   26,092
  Total assets                                             $ 499,935                                $ 512,047                                $ 520,365
Interest-bearing liabilities:
Savings accounts                                  0.20 %   $  70,186     $     396         0.56 %   $  69,741     $     695         1.00 %   $  69,363     $   1,224         1.76 %
Checking and money market accounts                0.37 %     103,988           490         0.47 %     105,046           779         0.74 %     105,724         1,119         1.06 %
Certificate accounts                              1.77 %     258,154         4,884         1.89 %     271,758         5,612         2.07 %     264,082         6,321         2.39 %
  Total deposits                                  1.17 %     432,328         5,770         1.33 %     446,545         7,086         1.59 %     439,169         8,664         1.97 %
FHLB advances                                     0.56 %         537             4         0.74 %         591             6         1.02 %      16,676           746         4.47 %
Real estate tax escrow accounts                   0.25 %       1,561             5         0.32 %       1,477             5         0.34 %       1,638             6         0.37 %
  Total interest-bearing liabilities              1.16 %     434,426         5,779         1.33 %     448,613         7,097         1.58 %     457,483         9,416         2.06 %
Non-interest-bearing liabilities                               6,979                                    7,624                                    6,794
  Total liabilities                                          441,405                                  456,237                                  464,277
Stockholders' Equity                                          58,530                                   55,810                                   56,088

Total liabilities and Stockholders'
Equity                                                     $ 499,935                                $ 512,047                                $ 520,365
Net interest-earning assets                                $  44,691                                $  42,224                                $  36,790

Net interest income; interest rate
spread                                            2.51 %                 $  13,200         2.63 %                 $  14,588         2.84 %                 $  15,693         3.02 %
Net interest margin (2)                                                                    2.76 %                                   2.97 %                                   3.17 %

Average interest-earning assets to
average interest-bearing liabilities                                                     110.29 %                                 109.41 %                                 108.04 %

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

Rate/Volume Analysis. The following table shows the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities affected our interest income and expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to
(1) changes in rate, which is the change in rate multiplied by prior year volume, and (2) changes in volume, which is the change in volume multiplied by prior year rate. The combined effect of changes in both rate and volume has been allocated proportionately to the change due to rate and the change due to volume.

                                                      2012 vs. 2011                                                  2011 vs. 2010
                                       Increase (Decrease) Due to                                     Increase (Decrease) Due to
                                                                                 Total                                                         Total
                                                                 Rate/          Increase                                       Rate/          Increase
                                   Rate           Volume         Volume        (Decrease)         Rate          Volume         Volume        (Decrease)
                                                                                     (In Thousands)
Interest income:
Investment securities           $      (655 )    $    (995 )   $      183     $     (1,467 )   $   (1,509 )    $    (489 )   $      135     $     (1,863 )
Mortgage-backed securities             (550 )          (28 )            4             (574 )         (295 )         (134 )            8             (421 )
Loans receivable, net                  (533 )         (190 )            7             (716 )         (711 )         (503 )           24           (1,190 )
Other interest-earning assets             6             42              3               51             14             27              9               50
Total interest income                (1,732 )       (1,171 )          197           (2,706 )       (2,501 )       (1,099 )          176           (3,424 )
Interest expense:
Savings accounts                       (302 )            4             (1 )           (299 )         (533 )            7             (4 )           (530 )
Checking and money
  market accounts
  (interest-bearing and
  non-interest bearing)                (284 )           (8 )            3             (289 )         (335 )           (7 )            2             (340 )
Certificate accounts                   (471 )         (281 )           24             (728 )         (868 )          184            (25 )           (709 )
Total deposits                       (1,057 )         (285 )           26           (1,316 )       (1,736 )          184            (27 )         (1,579 )
FHLB advances                            (1 )           (1 )            -               (2 )         (577 )         (720 )          557             (740 )
Total interest expense               (1,058 )         (286 )           26           (1,318 )       (2,313 )         (536 )          530           (2,319 )
Increase (decrease) in net
interest income                 $      (674 )    $    (885 )   $      171     $     (1,388 )   $     (188 )    $    (563 )   $     (354 )   $     (1,105 )

Comparison of Financial Condition at September 30, 2012 and September 30, 2011

At September 30, 2012, the Company had total assets of $490.5 million, a decrease of $9.0 million from $499.5 million at September 30, 2011. The decrease was primarily attributable to a $55.2 million decrease in the investment and mortgage-backed securities portfolio. This decrease was substantially offset by increases of $27.4 million in cash and cash equivalents and $20.2 million in net loans. During fiscal 2012, in particular the third and fourth quarter, the Company received the proceeds from securities sold or called which it is in the process of deploying primarily into the purchase of U.S. government agency securities and the origination of residential mortgage loans. As a result of the continued low interest rate environment, many issuers determined to call their securities since they bore yields that were well above the current market.

Total liabilities decreased $11.4 million to $430.7 million at September 30, 2012 from $442.1 million at September 30, 2011. The decrease was primarily the result of a $10.4 million decrease in deposits as a result of management's decision to lower rates paid on certificate accounts to facilitate a modest run-off in higher cost certificates of deposit.

Stockholders' equity increased by $2.4 million to $59.8 million at September 30, 2012 from $57.5 million at September 30, 2011. The increase primarily reflected net income of $2.6 million for the year ended September 30, 2012.

Comparison of Operating Results for the Year Ended September 30, 2012 and September 30, 2011

General. For the fiscal year ended September 30, 2012, the Company recognized net income of $2.6 million as compared to net income of $112,000 for the year ended September 30, 2011. The increase in net income experienced for the fiscal . . .