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Document And Entity Information
9 Months Ended
Jun. 30, 2011
Aug. 04, 2011
Document And Entity Information
Document Type 10-Q
Amendment Flag false
Document Period End Date Jun 30, 2011
Document Fiscal Period Focus Q3
Document Fiscal Year Focus 2011
Entity Registrant Name ESSA Bancorp, Inc.
Entity Central Index Key 0001382230
Current Fiscal Year End Date --09-30
Entity Filer Category Accelerated Filer
Entity Common Stock, Shares Outstanding 12,454,622
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Consolidated Balance Sheet (USD  $)
In Thousands
Jun. 30, 2011
Sep. 30, 2010
Consolidated Balance Sheet
Cash and due from banks  $ 8,604  $ 7,454
Interest-bearing deposits with other institutions 13,193 3,436
Total cash and cash equivalents 21,797 10,890
Investment securities available for sale 256,166 252,341
Investment securities held to maturity (fair value of  $9,834 and  $13,254) 9,479 12,795
Loans receivable (net of allowance for loan losses of  $8,225 and  $7,448) 741,764 730,842
Federal Home Loan Bank stock 17,770 20,727
Premises and equipment, net 11,682 12,189
Bank-owned life insurance 23,057 15,618
Foreclosed real estate 2,039 2,034
Intangible assets, net 1,906
Goodwill 40
Other assets 16,923 14,561
TOTAL ASSETS 1,102,623 1,071,997
LIABILITIES
Deposits 655,369 540,410
Short-term borrowings 14,719
Other borrowings 269,657 335,357
Advances by borrowers for taxes and insurance 6,550 1,465
Other liabilities 6,448 8,423
TOTAL LIABILITIES 938,024 900,374
Commitment and contingencies    
STOCKHOLDERS' EQUITY
Preferred Stock ( $.01 par value; 10,000,000 shares authorized, none issued)    
Common stock ( $.01 par value; 40,000,000 shares authorized, 16,980,900 issued; 12,645,522 and 13,482,612 outstanding at June 30, 2011 and September 30, 2010) 170 170
Additional paid in capital 166,208 164,494
Unallocated common stock held by the Employee Stock Ownership Plan (ESOP) (11,551) (11,891)
Retained earnings 65,973 64,272
Treasury stock, at cost; 4,335,378 and 3,498,288 shares at June 30, 2011 and September 30, 2010, respectively (55,436) (44,870)
Accumulated other comprehensive loss (765) (552)
TOTAL STOCKHOLDERS' EQUITY 164,599 171,623
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  $ 1,102,623  $ 1,071,997
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Consolidated Balance Sheet (Parenthetical) (USD  $)
In Thousands, except Share data
Jun. 30, 2011
Sep. 30, 2010
Consolidated Balance Sheet
Investment securities held to maturity, fair value  $ 9,834  $ 13,254
Allowance for loan losses  $ 8,225  $ 7,448
Preferred stock, par value  $ 0.01  $ 0.01
Preferred stock, authorized 10,000,000 10,000,000
Preferred stock, issued 0 0
Common stock, par value  $ 0.01  $ 0.01
Common stock, authorized 40,000,000 40,000,000
Common stock, issued 16,980,900 16,980,900
Common stock, outstanding 12,645,522 13,482,612
Treasury stock, shares 4,335,378 3,498,288
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Consolidated Statement Of Income (USD  $)
In Thousands, except Per Share data
3 Months Ended 9 Months Ended
Jun. 30, 2011
Jun. 30, 2010
Jun. 30, 2011
Jun. 30, 2010
INTEREST INCOME
Loans receivable  $ 9,683  $ 10,105  $ 29,322  $ 30,612
Investment securities:
Taxable 2,092 1,925 6,030 6,326
Exempt from federal income tax 66 78 219 238
Other investment income 1 3 2 5
Total interest income 11,842 12,111 35,573 37,181
INTEREST EXPENSE
Deposits 1,932 1,769 5,423 4,633
Short-term borrowings 1 1 46 85
Other borrowings 2,549 3,670 8,272 11,305
Total interest expense 4,482 5,440 13,741 16,023
NET INTEREST INCOME 7,360 6,671 21,832 21,158
Provision for loan losses 475 500 1,605 1,650
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,885 6,171 20,227 19,508
NONINTEREST INCOME
Service fees on deposit accounts 768 799 2,259 2,403
Services charges and fees on loans 142 126 497 351
Trust and investment fees 190 203 596 635
Gain on sale of investments, net 56 305 171 613
Gain on sale of loans, net 41 3 236
Earnings on bank-owned life insurance 170 135 438 410
Insurance commissions 125 125
Other 8 10 28 34
Total noninterest income 1,459 1,619 4,117 4,682
NONINTEREST EXPENSE
Compensation and employee benefits 3,899 3,731 11,712 11,068
Occupancy and equipment 758 823 2,331 2,145
Professional fees 411 373 1,260 1,136
Data processing 477 524 1,407 1,441
Advertising 165 208 534 472
Federal Deposit Insurance Corporation (FDIC) premiums 196 157 602 638
Loss on foreclosed real estate, net 81 93 1,200
Amortization of intangible assets 54 54
Other 526 519 1,667 1,511
Total noninterest expense 6,567 6,335 19,660 19,611
Income before income taxes 1,777 1,455 4,684 4,579
Income taxes 536 387 1,216 1,114
NET INCOME  $ 1,241  $ 1,068  $ 3,468  $ 3,465
Earnings per share
Basic  $ 0.11  $ 0.09  $ 0.3  $ 0.27
Diluted  $ 0.11  $ 0.09  $ 0.3  $ 0.27
Dividends per share  $ 0.05  $ 0.05  $ 0.15  $ 0.15
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Consolidated Statement Of Changes In Stockholders' Equity (USD  $)
In Thousands, except Share data
Common Stock [Member]
Additional Paid In Capital [Member]
Unallocated Common Stock Held By The ESOP [Member]
Retained Earnings [Member]
Treasury Stock [Member]
Accumulated Other Comprehensive Loss [Member]
Total
Balance at Sep. 30, 2010  $ 170  $ 164,494  $ (11,891)  $ 64,272  $ (44,870)  $ (552)  $ 171,623
Balance, shares at Sep. 30, 2010 13,482,612 13,482,612
Net income 3,468 3,468
Other comprehensive loss:
Unrealized loss on securities available for sale, net of income tax benefit of  $214 (417) (417)
Change in unrecognized pension cost, net of income taxes of  $105 204 204
Cash dividends declared ( $.15 per share) (1,767) (1,767)
Stock based compensation 1,628 1,628
Allocation of ESOP stock 86 340 426
Treasury shares purchased, shares (837,090)
Treasury shares purchased (10,566) (10,566)
Balance at Jun. 30, 2011  $ 170  $ 166,208  $ (11,551)  $ 65,973  $ (55,436)  $ (765)  $ 164,599
Balance, shares at Jun. 30, 2011 12,645,522 12,645,522
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Consolidated Statement Of Changes In Stockholders' Equity (Parenthetical) (USD  $)
In Thousands, except Per Share data
9 Months Ended
Jun. 30, 2011
Consolidated Statement Of Changes In Stockholders' Equity
Unrealized loss on securities available for sale, tax  $ 214
Change in unrecognized pension cost, tax  $ 105
Cash dividends declared, per share  $ 0.15
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Consolidated Statement Of Cash Flows (USD  $)
In Thousands
9 Months Ended
Jun. 30, 2011
Jun. 30, 2010
OPERATING ACTIVITIES
Net income  $ 3,468  $ 3,465
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 1,605 1,650
Provision for depreciation and amortization. 830 895
Amortization of discounts and premiums, net 906 474
Gain on sale of investment securities, net (171) (613)
Gain on sale of loans, net (3) (236)
Origination of mortgage loans sold (97) (9,750)
Proceeds from sale of mortgage loans originated for sale 100 9,986
Compensation expense on ESOP 426 420
Stock based compensation 1,628 1,604
Decrease in accrued interest receivable 166 208
Increase in accrued interest payable 103 191
Earnings on bank-owned life insurance (438) (410)
Deferred federal income taxes (597) (50)
(Increase) decrease in prepaid FDIC premiums 553 (1,455)
Decrease in accrued pension liability (845) (1,196)
Loss on foreclosed real estate, net 335 1,200
Amortization of intangible assets 54
Other, net (1,062) (1,811)
Net cash provided by operating activities 6,961 4,572
INVESTING ACTIVITIES
Proceeds from repayments of certificates of deposit 3,385
Investment securities available for sale:
Proceeds from sale of investment securities 7,660 28,105
Proceeds from principal repayments and maturities 67,885 47,113
Purchases (80,748) (88,275)
Investment securities held to maturity:
Proceeds from sale of investment securities 643
Proceeds from principal repayments and maturities 2,673 3,024
Purchases (10,163)
(Increase) decrease in loans receivable, net (14,687) 1,127
Redemption of FHLB stock 2,957
Purchase of bank owned life insurance (7,001)
Proceeds from sale of other real estate 1,889
Investment in limited partnership (2,170)
Capital improvements to foreclosed real estate (46) (63)
Purchase of insurance subsidiary (2,025)
Purchase of premises, equipment, and software (297) (2,859)
Net cash used for investing activities (23,267) (18,606)
FINANCING ACTIVITIES
Increase in deposits, net 114,959 107,018
Net decrease in short-term borrowings (14,719) (48,091)
Proceeds from other borrowings 8,300 17,250
Repayment of other borrowings (74,000) (45,500)
Increase in advances by borrowers for taxes and insurance 5,085 4,847
Purchase of treasury stock. (10,645) (12,421)
Dividends on common stock (1,767) (1,958)
Net cash provided by financing activities 27,213 21,145
Increase in cash and cash equivalents 10,907 7,111
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 10,890 18,593
CASH AND CASH EQUIVALENTS AT END OF PERIOD 21,797 25,704
Cash Paid:
Interest 13,638 15,832
Income taxes 2,475 1,869
Noncash items:
Transfers from loans to foreclosed real estate 2,171 699
Treasury stock payable (79) (159)
Acquisition of Insurance Subsidiary:
Cash Paid (2,025)
Noncash assets received and liabilities assumed:
Goodwill 40
Intangible assets 1,960
Premises and equipment  $ 25
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Nature Of Operations And Basis Of Presentation
9 Months Ended
Jun. 30, 2011
Nature Of Operations And Basis Of Presentation
Nature Of Operations And Basis Of Presentation
1. Nature of Operations and Basis of Presentation

The unaudited, consolidated financial statements include the accounts of ESSA Bancorp, Inc. (the "Company"), and its wholly owned subsidiary, ESSA Bank & Trust (the "Bank"), and the Bank's wholly owned subsidiaries, ESSACOR Inc, Pocono Investment Company and ESSA Advisory Services, LLC. The primary purpose of the Company is to act as a holding company for the Bank. The Company has been subject to regulation and supervision as a savings and loan holding company by the Office of Thrift Supervision (the "OTS"). As of July 21, 2011, the Federal Reserve Board assumed regulation and supervision of savings and loan holding companies as required by the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010. The Bank is a Pennsylvania chartered savings association located in Stroudsburg, Pennsylvania. The Bank's primary business consists of the taking of deposits and granting of loans to customers generally in Monroe, Northampton and Lehigh counties, Pennsylvania. The Bank has been subject to regulation and supervision by the Pennsylvania Banking Department and the OTS. Pursuant to the Dodd Frank Act referred to above, the role of the OTS was assumed by the Federal Deposit Insurance Corporation as of July 21, 2011. The investment in subsidiary on the parent company's financial statements is carried at the parent company's equity in the underlying net assets.

ESSACOR, Inc. is a Pennsylvania corporation that is currently inactive. Pocono Investment Company is a Delaware corporation formed as an investment company subsidiary to hold and manage certain investments, including certain intellectual property. ESSA Advisory Services, LLC is a Pennsylvania limited liability company owned 100% by ESSA Bank & Trust. ESSA Advisory Services, LLC is a full-service insurance benefits consulting company offering group services such as health insurance, life insurance, short term and long term disability, dental, vision and 401(k) retirement planning as well as individual health products. All significant intercompany transactions have been eliminated in consolidation.

The unaudited consolidated financial statements reflect all adjustments, which in the opinion of management are necessary for a fair presentation of the results of the interim periods and are of a normal and recurring nature. Operating results for the three and nine month periods ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ending September 30, 2011.

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Earnings Per Share
9 Months Ended
Jun. 30, 2011
Earnings Per Share
Earnings Per Share
2. Earnings per Share

The following table sets forth the composition of the weighted-average common shares (denominator) used in the basic and diluted earnings per share computation for the three and nine month periods ended June 30, 2011 and 2010.

 

     Three months ended     Nine months ended  
     June 30, 2011     June 30, 2010     June 30, 2011     June 30, 2010  

Weighted-average common shares outstanding

     16,980,900        16,980,900        16,980,900        16,980,900   

Average treasury stock shares

     (4,226,817     (2,892,908     (3,918,021     (2,555,593

Average unearned ESOP shares

     (1,148,618     (1,193,894     (1,159,979     (1,205,255

Average unearned non-vested shares

     (254,845     (373,905     (264,070     (383,006
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares and common stock equivalents used to calculate basic earnings per share

     11,350,620        12,520,193        11,638,830        12,837,046   
  

 

 

   

 

 

   

 

 

   

 

 

 

Additional common stock equivalents (non-vested stock) used to calculate diluted earnings per share

     —          —          —          —     

Additional common stock equivalents (stock options) used to calculate diluted earnings per share

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares and common stock equivalents used to calculate diluted earnings per share

     11,350,620        12,520,193        11,638,830        12,837,046   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

At June 30, 2011 and 2010 there were options to purchase 1,458,379 shares of common stock outstanding at a price of  $12.35 per share that were not included in the computation of diluted EPS because to do so would have been anti-dilutive. At June 30, 2011 and 2010 there were 224,566 and 342,656 shares, respectively, of nonvested stock outstanding at a price of  $12.35 per share that were not included in the computation of diluted EPS because to do so would have been anti-dilutive.

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Use Of Estimates In The Preparation Of Financial Statements
9 Months Ended
Jun. 30, 2011
Use Of Estimates In The Preparation Of Financial Statements
Use of Estimates In The Preparation Of Financial Statements
3. Use of Estimates in the Preparation of Financial Statements

The accounting principles followed by the Company and its subsidiaries and the methods of applying these principles conform to U.S. generally accepted accounting principles and to general practice within the banking industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the consolidated balance sheet date and related revenues and expenses for the period. Actual results could differ significantly from those estimates.

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Comprehensive Income
9 Months Ended
Jun. 30, 2011
Comprehensive Income
Comprehensive Income
4. Comprehensive Income

The components of other comprehensive income are as follows (in thousands):

 

     Three Months Ended
June  30
    Nine Months Ended
June  30
 
     2011     2010     2011     2010  

Net income

    $ 1,241       $ 1,068       $ 3,468       $ 3,465   
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gain/(loss) on securities available for sale

     4,178        1,683        (460     478   

Realized gains included in net income

     (56     (202     (171     (405

Change in unrecognized pension cost

     103        78        309        234   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income/(loss) before tax

     4,225        1,559        (322     307   

Income tax (benefit) related to comprehensive loss

     1,437        531        (109     105   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income/(loss)

     2,788        1,028        (213     202   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

    $ 4,029       $ 2,096       $ 3,255       $ 3,667   
  

 

 

   

 

 

   

 

 

   

 

 

 
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Recent Accounting Pronouncements
9 Months Ended
Jun. 30, 2011
Recent Accounting Pronouncements
Recent Accounting Pronouncements
5. Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (FASB) issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. ASU 2010-06 amends Subtopic 820-10 to clarify existing disclosures, require new disclosures, and includes conforming amendments to guidance on employers' disclosures about postretirement benefit plan assets. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of this guidance is not expected to have a significant impact on the Company's financial statements.

In July 2010, FASB issued ASU No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU 2010-20 is intended to provide additional information to assist financial statement users in assessing an entity's credit risk exposures and evaluating the adequacy of its allowance for credit losses. The disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The amendments in ASU 2010-20 encourage, but do not require, comparative disclosures for earlier reporting periods that ended before initial adoption. However, an entity should provide comparative disclosures for those reporting periods ending after initial adoption. The Company has presented the necessary disclosures in Note 8, herein.

In September, 2010, the FASB issued ASU 2010-25, Plan Accounting – Defined Contribution Pension Plans. The amendments in this ASU require that participant loans be classified as notes receivable from participants, which are segregated from plan investments and measured at their unpaid principal balance plus any accrued but unpaid interest. The amendments in this update are effective for fiscal years ending after December 15, 2010 and are not expected to have a significant impact on the Company's financial statements.

 

In October 2010, the FASB issued ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. This ASU addresses the diversity in practice regarding the interpretation of which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral, The amendments are effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2011 and are not expected to have a significant impact on the Company's financial statements.

In December 2010, the FASB issued ASU 2010-28, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. This ASU modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating an impairment may exist. The qualitative factors are consistent with the existing guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the amendments in this Update are effective for fiscal year, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. For nonpublic entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Nonpublic entities may early adopt the amendments using the effective date for public entities. This ASU is not expected to have a significant impact on the Company's financial statements.

In December 2010, the FASB issued ASU 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations. The amendments in this update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in this Update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. This ASU is not expected to have a significant impact on the Company's financial statements.

In January 2011, the FASB issued ASU 2011-01, Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. The amendments in this Update temporarily delay the effective date of the disclosures about troubled debt restructurings in Update 2010-20, enabling public-entity creditors to provide those disclosures after the FASB clarifies the guidance for determining what constitutes a troubled debt restructuring. The deferral in this Update will result in more consistent disclosures about troubled debt restructurings. This amendment does not defer the effective date of the other disclosure requirements in Update 2010-20. In the proposed Update for determining what constitutes a troubled debt restructuring, the FASB proposed that the clarifications would be effective for interim and annual periods ending after June 15, 2011. For the new disclosures about troubled debt restructurings in Update 2010-20, those clarifications would be applied retrospectively to the beginning of the fiscal year in which the proposal is adopted. The adoption of this guidance in not expected to have a significant impact on the Company's financial statements.

In April 2011, the FASB issued ASU 2011-02, Receivables (Topic 310): A Creditor's Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The amendments in this Update provide additional guidance or clarification to help creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. The amendments in this Update are effective for the first interim or annual reporting period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning annual period of adoption. As a result of applying these amendments, an entity may identify receivables that are newly considered impaired. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. The Company is currently evaluating the impact the adoption of the standard will have on the Company's financial position or results of operations.

In April 2011, the FASB issued ASU 2011-03, Reconsideration of Effective Control for Repurchase Agreements. The main objective in developing this Update is to improve the accounting for repurchase agreements (repos) and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The amendments in this Update remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. The amendments in this Update apply to all entities, both public and nonpublic. The amendments affect all entities that enter into agreements to transfer financial assets that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity. The guidance in this Update is effective for the first interim or annual period beginning on or after December 15, 2011 and should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. This ASU is not expected to have a significant impact on the Company's financial statements.

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in this Update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The amendments in this Update are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. For nonpublic entities, the amendments are effective for annual periods beginning after December 15, 2011. Early application by public entities is not permitted. This ASU is not expected to have a significant impact on the Company's financial statements.

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income. The amendments in this Update improve the comparability, clarity, consistency, and transparency of financial reporting and increase the prominence of items reported in other comprehensive income. To increase the prominence of items reported in other comprehensive income and to facilitate convergence of U.S. GAAP and IFRS, the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity was eliminated. The amendments require that all non-owner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. All entities that report items of comprehensive income, in any period presented, will be affected by the changes in this Update. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. For nonpublic entities, the amendments are effective for fiscal years ending after December 15, 2012, and interim and annual periods thereafter. The amendments in this Update should be applied retrospectively, and early adoption is permitted. This ASU is not expected to have a significant impact on the Company's financial statements.

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Investment Securities
9 Months Ended
Jun. 30, 2011
Investment Securities
Investment Securities
6. Investment Securities

The amortized cost and fair value of investment securities available for sale and held to maturity are summarized as follows (in thousands):

 

     June 30, 2011  
     Amortized Cost      Gross Unrealized
Gains
     Gross Unrealized
Losses
    Fair Value  

Available for Sale

          

Fannie Mae

    $ 129,327        $ 2,705        $ (401    $ 131,631   

Freddie Mac

     47,634         1,630         (75     49,189   

Governmental National Mortgage Association

     28,967         795         (61     29,701   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total mortgage-backed securities

     205,928         5,130         (537     210,521   

Obligations of states and political subdivisions

     14,659         406         (105     14,960   

U.S. government agency securities

     27,774         209         —          27,983   

Corporate obligations

     2,610         38         (7     2,641   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total debt securities

     250,971         5,783         (649     256,105   

Equity securities—financial services

     11         50         —          61   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

    $ 250,982        $ 5,833        $ (649    $ 256,166   
  

 

 

    

 

 

    

 

 

   

 

 

 

Held to Maturity

          

Fannie Mae

    $ 1,293        $ 87        $ —         $ 1,380   

Freddie Mac

     8,186         268         —          8,454   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

    $ 9,479        $ 355        $ —         $ 9,834   
  

 

 

    

 

 

    

 

 

   

 

 

 
     September 30, 2010  
     Amortized Cost      Gross Unrealized
Gains
     Gross Unrealized
Losses
    Fair Value  

Available for Sale

          

Fannie Mae

    $ 99,142        $ 2,412        $ (9    $ 101,545   

Freddie Mac

     47,693         1,895         —          49,588   

Governmental National Mortgage Association

     35,211         1,040         (96     36,155   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total mortgage-backed securities

     182,046         5,347         (105     187,288   

Obligations of states and political subdivisions

     10,637         279         (12     10,904   

U.S. government agency securities

     52,177         279         (22     52,434   

Corporate obligations

     1,654         23         —          1,677   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total debt securities

     246,514         5,928         (139     252,303   

Equity securities—financial services

     12         26         —          38   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

    $ 246,526        $ 5,954        $ (139    $ 252,341   
  

 

 

    

 

 

    

 

 

   

 

 

 

Held to Maturity

          

Fannie Mae

    $ 2,600        $ 140        $ —         $ 2,740   

Freddie Mac

     10,195         319         —          10,514   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

    $ 12,795        $ 459        $ —         $ 13,254   
  

 

 

    

 

 

    

 

 

   

 

 

 

The amortized cost and fair value of debt securities at June 30, 2011, 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 (in thousands):

 

     Available For Sale      Held To Maturity  
     Amortized
Cost
     Fair Value      Amortized
Cost
     Fair Value  

Due in one year or less

    $ 16,570        $ 16,639        $ —          $ —     

Due after one year through five years

     12,074         12,304         706         750   

Due after five years through ten years

     46,396         47,704         957         1,029   

Due after ten years

     175,931         179,458         7,816         8,055   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

    $ 250,971        $ 256,105        $ 9,479        $ 9,834   
  

 

 

    

 

 

    

 

 

    

 

 

 

For the nine months ended June 30, 2011, the Company realized gross gains of  $204,000 and gross losses of  $33,000 and proceeds from the sale of investment securities of  $8.3 million. For the nine months ended June 30, 2010, the Company realized gross gains of  $613,000 and proceeds from the sale of investment securities of  $28.1 million. Included in the gross gains realized for the nine months ended June 30, 2011 was  $18,000 from the sale of investment securities classified as held to maturity. Proceeds from the sale of these securities were  $643,000. The investment remaining in these securities at the time of sale was less than 20% of the original investment.

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Unrealized Losses On Securities
9 Months Ended
Jun. 30, 2011
Unrealized Losses On Securities
Unrealized Losses On Securities
7. Unrealized Losses on Securities

The following table shows the Company's gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position (in thousands):

 

    June 30, 2011  
          Less than Twelve Months     Twelve Months or Greater     Total  
    Number of
Securities
    Fair Value     Gross
Unrealized
Losses
    Fair Value     Gross
Unrealized
Losses
    Fair Value     Gross
Unrealized
Losses
 

Fannie Mae

    14       $ 35,933       $ (401    $ —         $ —         $ 35,933       $ (401

Freddie Mac

    4        9,695        (75     —          —          9,695        (75

Governmental National Mortgage Association

    5        11,169        (61     —          —          11,169        (61

Obligations of states and political subdivisions

    1        833        (105     —          —          833        (105

Corporate obligations

    1        493        (7     —          —          493        (7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    25       $ 58,123       $ (649    $ —         $ —         $ 58,123       $ (649
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    September 30, 2010  
          Less than Twelve Months     Twelve Months or Greater     Total  
    Number of
Securities
    Fair Value     Gross
Unrealized
Losses
    Fair Value     Gross
Unrealized
Losses
    Fair Value     Gross
Unrealized
Losses
 

Fannie Mae

    1       $ 2,060       $ (9    $ —         $ —         $ 2,060       $ (9

Governmental National Mortgage Association

    2        5,605        (96     —          —          5,605        (96

Obligations of states and political subdivisions

    1        610        (12     —          —          610        (12

U.S. government agency securities

    4        6,484        (22     —          —          6,484        (22
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    8       $ 14,759       $ (139    $ —         $ —         $ 14,759       $ (139
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The Company's investment securities portfolio contains unrealized losses on securities, including mortgage-related instruments issued or backed by the full faith and credit of the United States government, or generally viewed as having the implied guarantee of the U.S. government, debt obligations of a U.S. State or political subdivision and corporate debt obligations.

The Company reviews its position quarterly and has asserted that at June 30, 2011, the declines outlined in the above table represent temporary declines and the Company would not be required to sell the security before its anticipated recovery in market value.

The Company has concluded that any impairment of its investment securities portfolio is not other than temporary but is the result of interest rate changes that are not expected to result in the non-collection of principal and interest during the period.

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Loans Receivable, Net And Allowance For Loan Losses
9 Months Ended
Jun. 30, 2011
Loans Receivable, Net And Allowance For Loan Losses
Loans Receivable, Net And Allowance For Loan Losses
8. Loans Receivable, Net and Allowance for Loan Losses

Loans receivable consist of the following (in thousands):

 

     June 30,
2011
     September 30,
2010
 

Real Estate Loans:

     

Residential

    $ 589,204        $ 596,455   

Construction

     1,094         1,302   

Commercial

     101,166         77,943   

Commercial

     15,322         16,545   

Home equity loans and lines of credit

     41,037         43,559   

Other

     2,166         2,486   
  

 

 

    

 

 

 
     749,989         738,290   

Less allowance for loan losses

     8,225         7,448   
  

 

 

    

 

 

 

Net loans

    $ 741,764        $ 730,842   
  

 

 

    

 

 

 

 

     Real Estate Loans      Commercial
Loans
     Home
Equity and
Lines of
Credit
     Other
Loans
     Total  
     Residential      Construction      Commercial              
            (dollars in thousands)  

June 30, 2011

                    

Total Loans

    $ 589,204        $ 1,094        $ 101,166        $ 15,322        $ 41,037        $ 2,166        $ 749,989   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Individually evaluated for impairment

     6,233         —           4,918         300         279         192         11,922   

Collectively evaluated for impairment

     582,971         1,094         96,248         15,022         40,758         1,974         738,067   

We maintain a loan review system, which allows for a periodic review of our loan portfolio and the early identification of potential impaired loans. Such system takes into consideration, among other things, delinquency status, size of loans, type and market value of collateral and financial condition of the borrowers. Specific loan loss allowances are established for identified losses based on a review of such information. A loan evaluated for impairment is considered to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. All loans identified as impaired are evaluated independently. We do not aggregate such loans for evaluation purposes. Impairment is measured on a loan-by-loan basis for commercial and construction loans by the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral-dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential mortgage loans for impairment disclosures, unless such loans are part of a larger relationship that is impaired, or are classified as a troubled debt restructuring.

A loan is considered to be a troubled debt restructuring ("TDR") loan when the Company grants a concession to the borrower because of the borrower's financial condition that it would not otherwise consider. Such concessions include the reduction of interest rates, forgiveness of principal or interest, or other modifications of interest rates that are less than the current market rate for new obligations with similar risk. TDR loans that are in compliance with their modified terms and that yield a market rate may be removed from the TDR status after a period of performance.

The following table includes the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount, if applicable. Also presented are the average recorded investments in the impaired loans and the related amount of interest recognized during the time within the period that the impaired loans were impaired.

 

     Recorded
Investment
     Unpaid
Principal  Balance
     Associated
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

June 30, 2011

              

With no specific allowance recorded:

              

Real Estate Loans

              

Residential

    $ 2,830        $ 2,823        $ —          $ 2,720        $ —     

Construction

     —           —           —           —           —     

Commercial

     3,657         3,662         —           3,321         —     

Commercial

     267         267         —           70         —     

Home equity loans and lines of credit

     91         91         —           52         —     

Other

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     6,845         6,843         —           6,163         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

              

Real Estate Loans

              

Residential

     3,403         3,397         446         2,842         —     

Construction

     —           —           —           —           —     

Commercial

     1,261         1,261         187         608         —     

Commercial

     33         33         33         14         —     

Home equity loans and lines of credit

     188         188         118         71         —     

Other

     192         192         110         71         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     5,077         5,071         894         3,606         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

              

Real Estate Loans

              

Residential

     6,233         6,220         446         5,562         —     

Construction

     —           —           —           —           —     

Commercial

     4,918         4,923         187         3,929         —     

Commercial

     300         300         33         84         —     

Home equity loans and lines of credit

     279         279         118         123         —     

Other

     192         192         110         71         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Impaired Loans

    $ 11,922        $ 11,914        $ 894        $ 9,769        $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Management uses a ten point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first six categories are considered not criticized, and are aggregated as "Pass" rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due are considered Substandard. The portion of any loan that represents a specific allocation of the allowance for loan losses is placed in the Doubtful category. Any portion of a loan that has been charged off is placed in the Loss category.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Bank has a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as bankruptcy, repossession, or death occurs to raise awareness of a possible credit event. The Bank's Commercial Loan Officers are responsible for the timely and accurate risk rating of the loans in their portfolios at origination and on an ongoing basis. The Bank's Commercial Loan Officers perform an annual review of all commercial relationships  $250,000 or greater. Confirmation of the appropriate risk grade is included in the review on an ongoing basis. The Bank engages an external consultant to conduct loan reviews on at least a semi-annual basis. Generally, the external consultant reviews commercial relationships greater than  $500,000 and/or all criticized relationships. Detailed reviews, including plans for resolution, are performed on loans classified as Substandard on a quarterly basis. Loans in the Special Mention and Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.

 

The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk rating system as of June 30, 2011 (in thousands):

 

     Pass      Special
Mention
     Substandard      Doubtful      Total  

Commercial real estate loans

     85,649         1,316         14,014         187         101,166   

Commercial

     14,778         278         233         33         15,322   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

    $ 100,427        $ 1,594        $ 14,247        $ 220        $ 116,488   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

All other loans are underwritten and structured using standardized criteria and characteristics, primarily payment performance, and are normally risk rated and monitored collectively on a monthly basis. These are typically loans to individuals in the consumer categories and are delineated as either performing or non-performing.

 

     Performing      Non-performing      Total  

June 30, 2011

        

Real estate loans:

        

Residential

    $ 580,598        $ 8,606        $ 589,204   

Construction

     1,094         —           1,094   

Home Equity loans and lines of credit

     40,887         150         41,037   

Other

     1,973         193         2,166   
  

 

 

    

 

 

    

 

 

 

Total

    $ 624,552        $ 8,949        $ 633,501   
  

 

 

    

 

 

    

 

 

 

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of June 30, 2011 (in thousands):

 

     Current      31-60 Days
Past Due
     61-90 Days
Past Due
     Greater than
90 Days Past
Due and still
accruing
     Non-Accrual      Total Past
Due and
Non-Accrual
     Total
Loans
 

June 30, 2011

                    

Real estate loans

                    

Residential

    $ 577,784        $ 2,944        $ 166        $ —          $ 8,310        $ 11,420        $ 589,204   

Construction

     1,094         —           —           —           —           —           1,094   

Commercial

     98,731         —           —           —           2,435         2,435         101,166   

Commercial

     15,056         —           34         —           232         266         15,322   

Home equity loans and lines of credit

     40,280         440         166         —           151         757         41,037   

Other

     1,954         13         7         —           192         212         2,166   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

    $ 734,899        $ 3,397        $ 373        $ —          $ 11,320        $ 15,090        $ 749,989   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-performing assets, which are composed of non-performing loans of  $11.3 million, troubled debt restructures of  $531,000, and foreclosed real estate of  $2.0 million, were  $13.9 million at June 30, 2011. Non-performing assets were  $12.9 million at September 30, 2010. The increase was due to increases of  $1.1 million in non-performing commercial loans,  $5,000 in foreclosed real estate, and  $171,000 in troubled debt restructures, offset, in part, by a decrease of  $203,000 in non-performing consumer loans and  $51,000 in non-performing residential loans. Commercial non-performing loans increased primarily as a result of the addition of two commercial real estate relationships. The number of non-performing residential loans at June 30, 2011 decreased to 47 compared to 50 at September 30, 2010. Within the non-performing loans of  $11.3 million at June 30, 2011,  $4.8 million were impaired loans. As of June 30, 2011, the Company had total impaired loans of  $11.9 million. The Company has determined that  $5.1 million of the impaired total required a reserve of  $894,000. Foreclosed real estate was  $2.0 million at June 30, 2011 and September 30, 2010, respectively.

Our allowance for loan losses is maintained at a level necessary to absorb loan losses that are both probable and reasonably estimable. Management, in determining the allowance for loan losses, considers the losses inherent in its loan portfolio and changes in the nature and volume of loan activities, along with the general economic and real estate market conditions. Our allowance for loan losses consists of two elements: (1) an allocated allowance, which comprises allowances established on specific loans and class allowances based on historical loss experience and current trends, and (2) an allocated allowance based on general economic conditions and other risk factors in our markets and portfolios. We maintain a loan review system, which allows for a periodic review of our loan portfolio and the early identification of potential impaired loans. Such system takes into consideration, among other things, delinquency status, size of loans, type and market value of collateral and financial condition of the borrowers. General loan loss allowances are based upon a combination of factors including, but not limited to, actual loan loss experience, composition of the loan portfolio, current economic conditions, management's judgment and losses which are probable and reasonably estimable. The allowance is increased through provisions charged against current earnings and recoveries of previously charged-off loans. Loans that are determined to be uncollectible are charged against the allowance. While management uses available information to recognize probable and reasonably estimable loan losses, future loss provisions may be necessary, based on changing economic conditions. Payments received on impaired loans generally are either applied against principal or reported as interest income, according to management's judgment as to the collectability of principal. The allowance for loan losses as of June 30, 2011 is maintained at a level that represents management's best estimate of losses inherent in the loan portfolio, and such losses were both probable and reasonably estimable.

In addition, the OTS and the Pennsylvania Department of Banking, as an integral part of its examination process, have periodically reviewed our allowance for loan losses. The banking regulators may require that we recognize additions to the allowance based on its analysis and review of information available to it at the time of its examination.

Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL.

The following table summarizes the primary segments of the ALL, segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of June 30, 2011 (in thousands):

 

    Real Estate Loans        
    Residential     Construction     Commercial     Commercial
Loans
    Home Equity
Loans and
Lines of
Credit
    Other
Loans
    Unallocated     Total  

ALL balance at September 30, 2010

    4,462        15        1,556        204        569        22        620        7,448   

Charge-offs

    (717     —          —          (132     (145     —          —          (994

Recoveries

    146        —          —          2        18        —          —          166   

Provision

    1,237        (7     (69     274        217        113        (160     1,605   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ALL balance at June 30, 2011

    5,128        8        1,487        348        659        135        460        8,225   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Individually evaluated for impairment

    446        —          187        33        118        110        —          894   

Collectively evaluated for impairment

    4,682        8        1,300        315        541        25        460        7,331   

The allowance for loan losses is based on estimates, and actual losses will vary from current estimates. Management believes that the granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALL that is representative of the risk found in the components of the portfolio at any given date. The Company allocated increased provisions to the residential real estate, commercial and home equity loans and lines of credit segments for the nine month period ending June 30, 2011 due to increased charge off activity in those segments. Despite the above allocations, the allowance for loan losses is general in nature and is available to absorb losses from any loan segment.

 

The activity in the allowance for loan losses is summarized as follows (in thousands):

 

     Nine Months Ended
June  30,
 
     2011     2010  

Balance, beginning of period

    $ 7,448       $ 5,815   

Add

    

Provision charged to operations

     1,605        1,650   

Loan recoveries

     166        29   
  

 

 

   

 

 

 
     9,219        7,494   

Less loans charged off

     (994     (472
  

 

 

   

 

 

 

Balance, end of period

    $ 8,225       $ 7,022   
  

 

 

   

 

 

 
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Deposits
9 Months Ended
Jun. 30, 2011
Deposits
Deposits
9. Deposits

Deposits consist of the following major classifications (in thousands):

 

     June 30,
2011
     September 30,
2010
 

Non-interest bearing demand accounts

    $ 32,433        $ 30,448   

NOW accounts

     60,375         61,878   

Money market accounts

     117,883         119,238   

Savings and club accounts

     74,486         67,763   

Certificates of deposit

     370,192         261,083   
  

 

 

    

 

 

 

Total

    $ 655,369        $ 540,410   
  

 

 

    

 

 

 
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Net Periodic Benefit Cost-Defined Benefit Plan
9 Months Ended
Jun. 30, 2011
Net Periodic Benefit Cost-Defined Benefit Plan
Net Periodic Benefit Cost-Defined Benefit Plan
10. Net Periodic Benefit Cost-Defined Benefit Plan

For a detailed disclosure on the Bank's pension and employee benefits plans, please refer to Note 14 of the Company's Consolidated Financial Statements for the year ended September 30, 2010 included in the Company's Form 10-K.

The following table comprises the components of net periodic benefit cost for the periods ended (in thousands):

 

     Three Months Ended
June 30,
    Nine Months Ended
June  30,
 
     2011     2010     2011     2010  

Service Cost

    $ 134       $ 106       $ 401       $ 317   

Interest Cost

     175        142        524        427   

Expected return on plan assets

     (193     (145     (578     (435

Amortization of prior service cost

     2        3        6        9   

Amortization of unrecognized loss

     101        74        303        225   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

    $ 219       $ 180       $ 656       $ 543   
  

 

 

   

 

 

   

 

 

   

 

 

 

The Bank contributed  $1.5 million to its pension plan in May 2011.

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Equity Incentive Plan
9 Months Ended
Jun. 30, 2011
Equity Incentive Plan
Equity Incentive Plan
11. Equity Incentive Plan

The Company maintains the ESSA Bancorp, Inc. 2007 Equity Incentive Plan (the "Plan"). The Plan provides for a total of 2,377,326 shares of common stock for issuance upon the grant or exercise of awards. Of the shares available under the Plan, 1,698,090 may be issued in connection with the exercise of stock options and 679,236 may be issued as restricted stock. The Plan allows for the granting of non-qualified stock options ("NSOs"), incentive stock options ("ISOs"), and restricted stock. Options are granted at no less than the fair value of the Company's common stock on the date of the grant.

Certain officers, employees and outside directors were granted in aggregate 1,140,469 NSOs; 317,910 ISOs; and 590,320 shares of restricted stock. In accordance with generally accepted accounting principles for Share-Based Payments, the Company expenses the fair value of all share-based compensation grants over the requisite service periods.

 

The Company classifies share-based compensation for employees and outside directors within "Compensation and employee benefits" in the consolidated statement of income to correspond with the same line item as compensation paid. Additionally, generally accepted accounting principles require the Company to report: (1) the expense associated with the grants as an adjustment to operating cash flows and (2) any benefits of realized tax deductions in excess of previously recognized tax benefits on compensation expense as a financing cash flow.

Stock options vest over a five-year service period and expire ten years after grant date. The Company recognizes compensation expense for the fair values of these awards, which vest on a straight-line basis over the requisite service period of the awards.

Restricted shares vest over a five-year service period. The product of the number of shares granted and the grant date market price of the Company's common stock determines the fair value of restricted shares under the Company's restricted stock plan. The Company recognizes compensation expense for the fair value of restricted shares on a straight-line basis over the requisite service period for the entire award.

For the nine months ended June 30, 2011 and 2010, the Company recorded  $1.6 million of share-based compensation expense, comprised of stock option expense of  $533,000 and restricted stock expense of  $1.1 million for the June 30, 2011 period and stock option expense of  $521,000 and restricted stock expense of  $1.1 million for the June 30, 2010 period. Expected future expense relating to the 574,351 non-vested options outstanding as of June 30, 2011, is  $1.3 million over the remaining vesting period of 1.92 years. Expected future compensation expense relating to the 234,425 restricted shares at June 30, 2011, is  $2.8 million over the remaining vesting period of 1.92 years.

The following is a summary of the Company's stock option activity and related information for its option grants for the three month period ended June 30, 2011.

 

     Number of Stock
Options
     Weighted-
average

Exercise
Price
     Weighted-
average
Remaining
Contractual
Term (in years)
     Aggregate
Intrinsic
Value
(in thousands)
 

Outstanding, September 30, 2010

     1,458,379        $ 12.35         7.67        $ —     

Granted

     —           —           —           —     

Exercised

     —           —           —           —     

Forfeited

     —           —           —           —     

Outstanding, June 30, 2011

     1,458,379        $ 12.35         6.20        $ 102   
  

 

 

          

Exercisable at June 30, 2011

     884,028        $ 12.35         6.20        $ —     
  

 

 

          

The weighted-average grant date fair value of the Company's non-vested options as of June 30, 2011 and 2010, was  $2.38.

The following is a summary of the status of the Company's restricted stock as of June 30, 2011, and changes therein during the nine month period then ended:

 

     Number of
Restricted Stock
     Weighted-
average
Grant Date
Fair Value
 

Nonvested at September 30, 2010

     352,448        $ 12.35   

Granted

     —           —     

Vested

     118,023         12.35   

Forfeited

     —           —     
  

 

 

    

Nonvested at June 30, 2011

     234,425        $ 12.35   
  

 

 

    
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Fair Value Measurement
9 Months Ended
Jun. 30, 2011
Fair Value Measurement
Fair Value Measurement
12. Fair Value Measurement

The following disclosures show the hierarchal disclosure framework associated within the level of pricing observations utilized in measuring assets and liabilities at fair value. The definition of fair value maintains the exchange price notion in earlier definitions of fair value but focuses on the exit price of the asset or liability. The exit price is the price that would be received to sell the asset or paid to transfer the liability adjusted for certain inherent risks and restrictions. Expanded disclosures are also required about the use of fair value to measure assets and liabilities.

The following table presents information about the Company's securities, other real estate owned and impaired loans measured at fair value as of June 30, 2011 and September 30, 2010 and indicates the fair value hierarchy of the valuation techniques utilized by the Bank to determine such fair value:

 

Fair Value Measurement at June 30, 2011

 

Fair Value Measurements Utilized for the Company's
Financial Assets (in thousands):

  Quoted Prices in Active
Markets for Identical Assets

(Level 1)
    Significant Other
Observable Inputs

(Level 2)
    Significant
Unobservable Inputs

(Level 3)
    Balances as of June 30,
2011
 

Securities available-for-sale measured on a recurring basis

       

Mortgage backed securities

   $ —         $ 210,521       $ —         $ 210,521   

Obligations of states and political subdivisions

    —          14,960        —          14,960   

U.S. government agencies

    —          27,983        —          27,983   

Corporate obligations

    —          2,641        —          2,641   

Equity securities—financial services

    24        37        —          61   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total debt and equity securities

   $ 24       $ 256,142       $ —         $ 256,166   

Foreclosed real estate owned measured on a non-recurring basis

   $ —         $ —         $ 2,039       $ 2,039   

Impaired loans measured on a non-recurring basis

   $ —         $ —         $ 11,028       $ 11,028   

Mortgage servicing rights measured on a non-recurring basis

   $ —         $ —         $ 263       $ 263   

Fair Value Measurement at September 30, 2010

 

Fair Value Measurements Utilized for the Company's
Financial Assets (in thousands):

  Quoted Prices in Active
Markets for Identical Assets

(Level 1)
    Significant Other
Observable Inputs

(Level 2)
    Significant
Unobservable Inputs

(Level 3)
    Balances as of June 30,
2011
 

Securities available-for-sale measured on a recurring basis

       

Mortgage backed securities

   $ —         $ 187,288       $ —         $ 187,288   

Obligations of states and political subdivisions

    —          10,904        —          10,904   

U.S. government agencies

    —          52,434        —          52,434   

Corporate obligations

    —          1,677        —          1,677   

Equity securities—financial services

    38        —          —          38   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total debt and equity securities

   $ 38       $ 252,303       $ —         $ 252,341   

Foreclosed real estate owned measured on a non-recurring basis

   $ —         $ 2,034       $ —         $ 2,034   

Impaired loans measured on a non-recurring basis

   $ —         $ 7,646       $ —         $ 7,646   

Mortgage servicing rights measured on a non-recurring basis

   $ —         $ —         $ 318       $ 318   

As required by generally accepted accounting principles, each financial asset and liability must be identified as having been valued according to specified level of input, 1, 2 or 3. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Bank has the ability to access at the measurement date. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset, either directly or indirectly. Level 2 inputs include quoted prices for similar assets in active markets, and inputs other than quoted prices that are observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy, within which the fair value measurement in its entirety falls, has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset.

The measurement of fair value should be consistent with one of the following valuation techniques: market approach, income approach, and/or cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). For example, valuation techniques consistent with the market approach often use market multiples derived from a set of comparables. Multiples might lie in ranges with a different multiple for each comparable. The selection of where within the range the appropriate multiple falls requires judgment, considering factors specific to the measurement (qualitative and quantitative). Valuation techniques consistent with the market approach include matrix pricing. Matrix pricing is a mathematical technique used principally to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on a security's relationship to other benchmark quoted securities. Most of the securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quoted market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond's terms and conditions, among other things. Securities reported at fair value utilizing Level 1 inputs are limited to actively traded equity securities whose market price is readily available from the New York Stock Exchange or the NASDAQ exchange. Foreclosed real estate is measured at fair value, less cost to sell at the date of foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value, less cost to sell. Income and expenses from operations and changes in valuation allowance are included in the net expenses from foreclosed real estate. Impaired loans are reported at fair value utilizing level three inputs. For these loans, a review of the collateral is conducted and an appropriate allowance for loan losses is allocated to the loan. At June 30, 2011, 72 impaired loans with a carrying value of  $11.9 million were reduced by specific valuation allowance totaling  $894,000 resulting in a net fair value of  $11.0 million based on Level 3 inputs.

Disclosures about Fair Value of Financial Instruments

The fair values presented represent the Company's best estimate of fair value using the methodologies discussed below.

 

     June 30, 2011      September 30, 2010  
     Carrying Value      Fair Value      Carrying Value      Fair Value  

Financial assets:

           

Cash and cash equivalents

    $ 21,797        $ 21,797        $ 10,890        $ 10,890   

Investment and mortgage-backed securities:

           

Available for sale

     256,166         256,166         252,341         252,341   

Held to maturity

     9,479         9,834         12,795         13,254   

Loans receivable, net

     741,764         771,313         730,842         755,871   

Accrued interest receivable

     4,226         4,226         4,392         4,392   

FHLB stock

     17,770         17,770         20,727         20,727   

Mortgage servicing rights

     263         263         318         318   

Bank owned life insurance

     23,057         23,057         15,618         15,618   

Financial liabilities:

           

Deposits

    $ 655,369        $ 663,801        $ 540,410        $ 548,352   

Short-term borrowings

     —           —           14,719         14,719   

Other borrowings

     269,657         282,130         335,357         353,358   

Advances by borrowers for taxes and insurance

     6,550         6,550         1,465         1,465   

Accrued interest payable

     1,749         1,749         1,646         1,646   

Financial instruments are defined as cash, evidence of an ownership interest in an entity, or a contract which creates an obligation or right to receive or deliver cash or another financial instrument from/to a second entity on potentially favorable or unfavorable terms.

Fair value is defined as the amount at which a financial instrument could be exchanged in a current transaction between willing parties other than in a forced or liquidation sale. If a quoted market price is available for a financial instrument, the fair value would be calculated based upon the market price per trading unit of the instrument.

If no readily available market exists, the fair value for financial instruments should be based upon management's judgment regarding current economic conditions, interest rate risk, expected cash flows, future estimated losses, and other factors as determined through various option pricing formulas or simulation modeling.

 

As many of these assumptions result from judgments made by management based upon estimates which are inherently uncertain, the resulting values may not be indicative of the amount realizable in the sale of a particular financial instrument. In addition, changes in the assumptions on which the values are based may have a significant impact on the resulting estimated values.

As certain assets and liabilities, such as deferred tax assets, premises and equipment, and many other operational elements of the Bank, are not considered financial instruments but have value, this fair value of financial instruments would not represent the full market value of the Company.

The Company employed simulation modeling in determining the fair value of financial instruments for which quoted market prices were not available based upon the following assumptions:

Cash and Cash Equivalents, Accrued Interest Receivable, Short-Term Borrowings, Advances by Borrowers for Taxes and Insurance, and Accrued Interest Payable

The fair value approximates the current book value.

Bank-Owned Life Insurance

The fair value is equal to the cash surrender value of the Bank-owned life insurance.

Investment and Mortgage-Backed Securities Available for Sale and Held to Maturity and FHLB Stock

The fair value of investment and mortgage-backed securities available for sale is equal to the available quoted market price. If no quoted market price is available, fair value is estimated using the quoted market price for similar securities. Since the FHLB stock is not actively traded on a secondary market and held exclusively by member financial institutions, the fair market value approximates the carrying amount.

Loans Receivable, Deposits, Other Borrowings, and Mortgage Servicing Rights

The fair values for loans and mortgage servicing rights are estimated by discounting contractual cash flows and adjusting for prepayment estimates. Discount rates are based upon market rates generally charged for such loans with similar characteristics. Demand, savings, and money market deposit accounts are valued at the amount payable on demand as of year-end. Fair values for time deposits and other borrowings are estimated using a discounted cash flow calculation that applies contractual costs currently being offered in the existing portfolio to current market rates being offered for deposits and borrowings of similar remaining maturities.

Commitments to Extend Credit

These financial instruments are generally not subject to sale, and fair values are not readily available. The carrying value, represented by the net deferred fee arising from the unrecognized commitment, and the fair value, determined by discounting the remaining contractual fee over the term of the commitment using fees currently charged to enter into similar agreements with similar credit risk, are not considered material for disclosure.

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