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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2014

OR

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                      to                     

Commission File No. 001-33384

 

 

ESSA Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Pennsylvania   20-8023072

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

200 Palmer Street, Stroudsburg, Pennsylvania   18360
(Address of Principal Executive Offices)   (Zip Code)

(570) 421-0531

(Registrant’s telephone number)

N/A

(Former name or former address, if changed since last report)

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨

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

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

As of August 1, 2014 there were 11,758,278 shares of the Registrant’s common stock, par value $0.01 per share, outstanding.

 

 

 


Table of Contents

ESSA Bancorp, Inc.

FORM 10-Q

Table of Contents

 

         Page  
Part I. Financial Information   

Item 1.

 

Financial Statements (unaudited)

     1   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     34   

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

     43   

Item 4

 

Controls and Procedures

     43   
Part II. Other Information   

Item 1.

 

Legal Proceedings

     45   

Item 1A.

 

Risk Factors

     45   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     45   

Item 3.

 

Defaults Upon Senior Securities

     45   

Item 4.

 

Mine Safety Disclosures

     45   

Item 5.

 

Other Information

     45   

Item 6.

 

Exhibits

     46   

Signature Page

     47   


Table of Contents

Part I. Financial Information

Item 1. Financial Statements

ESSA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

 

     June 30,
2014
    September 30,
2013
 
     (dollars in thousands)  

Cash and due from banks

   $ 18,600      $ 22,393   

Interest-bearing deposits with other institutions

     4,880        4,255   
  

 

 

   

 

 

 

Total cash and cash equivalents

     23,480        26,648   

Certificates of deposit

     1,767        1,767   

Investment securities available for sale, at fair value

     375,024        315,622   

Loans receivable (net of allowance for loan losses of $8,836 and $8,064)

     1,050,125        928,230   

Regulatory stock, at cost

     12,757        9,415   

Premises and equipment, net

     17,121        15,747   

Bank-owned life insurance

     29,484        28,797   

Foreclosed real estate

     2,967        2,111   

Intangible assets, net

     2,599        2,466   

Goodwill

     10,259        8,817   

Deferred income taxes

     10,971        11,183   

Other assets

     22,624        21,512   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 1,559,178      $ 1,372,315   
  

 

 

   

 

 

 

LIABILITIES

    

Deposits

   $ 1,143,095      $ 1,041,059   

Short-term borrowings

     78,749        23,000   

Other borrowings

     145,550        129,260   

Advances by borrowers for taxes and insurance

     11,924        4,962   

Other liabilities

     8,563        7,588   
  

 

 

   

 

 

 

TOTAL LIABILITIES

     1,387,881        1,205,869   
  

 

 

   

 

 

 

STOCKHOLDERS’ EQUITY

    

Preferred Stock ($.01 par value; 10,000,000 shares authorized, none issued)

     —         —    

Common stock ($.01 par value; 40,000,000 shares authorized, 18,133,095 issued; 11,823,878 and 11,945,564 outstanding at June 30, 2014 and September 30, 2013)

     181        181   

Additional paid in capital

     182,642        182,440   

Unallocated common stock held by the Employee Stock Ownership Plan (ESOP)

     (10,193 )     (10,532 )

Retained earnings

     75,781        71,709   

Treasury stock, at cost; 6,309,217 and 6,187,531 shares outstanding at June 30, 2014 and September 30, 2013, respectively

     (77,445 )     (76,117 )

Accumulated other comprehensive income (loss)

     331        (1,235 )
  

 

 

   

 

 

 

TOTAL STOCKHOLDERS’ EQUITY

     171,297        166,446   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 1,559,178      $ 1,372,315   
  

 

 

   

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

1


Table of Contents

ESSA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF INCOME

(UNAUDITED)

 

     For the Three Months Ended
June 30,
    For the Nine Months Ended
June 30,
 
     2014     2013     2014     2013  
     (dollars in thousands, except per share data)  

INTEREST INCOME

        

Loans receivable, including fees

   $ 11,807      $ 11,032      $ 32,173      $ 34,310   

Investment securities:

        

Taxable

     1,632        1,370        4,682        4,558   

Exempt from federal income tax

     173        73        318        200   

Other investment income

     173        16        317        63   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     13,785        12,491        37,490        39,131   
  

 

 

   

 

 

   

 

 

   

 

 

 

INTEREST EXPENSE

        

Deposits

     2,015        1,757        5,909        5,576   

Short-term borrowings

     54        27        104        109   

Other borrowings

     619        858        1,951        2,994   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     2,688        2,642        7,964        8,679   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INTEREST INCOME

     11,097        9,849        29,526        30,452   

Provision for loan losses

     500        1,100        2,000        2,950   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

     10,597        8,749        27,526        27,502   
  

 

 

   

 

 

   

 

 

   

 

 

 

NONINTEREST INCOME

        

Service fees on deposit accounts

     828        797        2,342        2,315   

Services charges and fees on loans

     283        277        572        774   

Trust and investment fees

     260        230        701        641   

Gain (loss) on sale of investments, net

     (10     11        226        749   

Gain on sale of loans, net

     —         11        —         426   

Earnings on Bank-owned life insurance

     234        235        687        709   

Insurance commissions

     205        231        625        638   

Gain on acquisition

     241        —          241        —     

Other

     59        8        85        32   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     2,100        1,800        5,479        6,284   
  

 

 

   

 

 

   

 

 

   

 

 

 

NONINTEREST EXPENSE

        

Compensation and employee benefits

     4,912        4,690        13,577        14,314   

Occupancy and equipment

     1,051        956        3,034        2,935   

Professional fees

     441        549        1,348        1,453   

Data processing

     977        687        2,426        2,155   

Advertising

     243        170        463        425   

Federal Deposit Insurance Corporation (FDIC) premiums

     266        261        730        739   

Gain on foreclosed real estate

     (65     (100 )     (116 )     (498

Merger related costs

     176        —         522        —    

Amortization of intangible assets

     282        250        756        749   

Other

     812        691        1,987        2,177   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     9,095        8,154        24,727        24,449   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     3,602        2,395        8,278        9,337   

Income taxes

     976        519        2,146        2,542   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME

   $ 2,626        1,876      $ 6,132      $ 6,795   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share

        

Basic

   $ 0.24        0.16      $ 0.56      $ 0.58   

Diluted

   $ 0.24        0.16      $ 0.56      $ 0.58   

Dividends per share

   $ 0.07        0.05      $ 0.19      $ 0.15   

See accompanying notes to the unaudited consolidated financial statements.

 

2


Table of Contents

ESSA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

 

     Three Months Ended
June 30,
    Nine Months Ended
June 30,
 
     2014     2013     2014     2013  
     (dollars in thousands)  

Net income

   $ 2,626      $ 1,876      $ 6,132      $ 6,795   

Other comprehensive income (loss):

    

Investment securities available for sale:

    

Unrealized holding gain (loss)

     3,281        (6,354 )     2,578        (8,229 )

Tax effect

     (1,116 )     2,160        (877 )     2,798   

Reclassification of (gains) loss recognized in net income

     10        (11     (226 )     (749 )

Tax effect

     (3 )     4        77        255   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net of tax amount

     2,172        (4,201 )     1,552        (5,925 )

Pension plan adjustment:

    

Related to actuarial losses and prior service cost

     7        98        21        294   

Tax effect

     (2 )     (33 )     (7 )     (100 )

Net of tax amount

     5        65        14        194   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     2,177        (4,136 )     1,566        (5,731 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 4,803      $ (2,260 )   $ 7,698      $ 1,064   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

3


Table of Contents

ESSA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

     Common Stock               
     Number of
Shares
    Amount      Additional
Paid In
Capital
     Unallocated
Common
Stock Held by
the ESOP
    Retained
Earnings
    Treasury
Stock
    Accumulated
Other
Comprehensive
Income(Loss)
    Total
Stockholders’
Equity
 
     (dollars in thousands)  

Balance, September 30, 2013

     11,945,564      $ 181       $ 182,440       $ (10,532 )   $ 71,709      $ (76,117 )   $ (1,235 )   $ 166,446   

Net income

               6,132            6,132   

Other comprehensive income

                   1,566        1,566   

Cash dividends declared ($0.19 per share)

               (2,060         (2,060 )

Stock based compensation

          170                 170   

Allocation of ESOP stock

          32         339              371   

Treasury shares purchased

     (121,686 )               (1,328       (1,328 )
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2014

     11,823,878      $ 181       $ 182,642       $ (10,193   $ 75,781      $ (77,445   $ 331      $ 171,297   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

4


Table of Contents

ESSA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

 

     For the Nine Months Ended
June 30,
 
     2014     2013  
     (dollars in thousands)  

OPERATING ACTIVITIES

    

Net income

   $ 6,132      $ 6,795   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Provision for loan losses

     2,000        2,950   

Provision for depreciation and amortization

     948        860   

Amortization and accretion of discounts and premiums, net

     829        1,205   

Net gain on sale of investment securities

     (226     (749

Gain on sale of loans, net

     —          (426

Origination of mortgage loans sold

     —          (19,184

Proceeds from sale of mortgage loans originated for sale

     —          19,956   

Compensation expense on ESOP

     371        361   

Stock based compensation

     170        1,461   

(Increase) decrease in accrued interest receivable

     (629     307   

Increase (decrease) in accrued interest payable

     202        (156

Earnings on bank-owned life insurance

     (687     (709

Deferred federal income taxes

     (738     1,646   

Decrease in prepaid FDIC premiums

     —          1,934   

(Decrease) increase in accrued pension liability

     (412     312   

Gain on foreclosed real estate, net

     (116     (498

Amortization of identifiable intangible assets

     756        750   

Other, net

     2,113        2,568   
  

 

 

   

 

 

 

Net cash provided by operating activities

   $ 10,713      $ 19,383   
  

 

 

   

 

 

 

INVESTING ACTIVITIES

    

Purchase of certificates of deposit

   $ —        $ (500

Investment securities available for sale:

    

Proceeds from sale of investment securities

     8,065        39,212   

Proceeds from principal repayments and maturities

     27,863        80,111   

Purchases

     (37,720     (109,764

Decrease in loans receivable, net

     27,025        3,285   

Redemption of regulatory stock

     2,431        9,556   

Purchase of regulatory stock

     (4,204     —     

Investment in limited partnership

     —          (451

Investment in insurance subsidiary

     —          (276

Proceeds from sale of foreclosed real estate

     2,038        2,841   

Acquisition, including cash acquired

     (15,415     —     

Capital improvements to foreclosed real estate

     —          (86

Purchase of premises, equipment, and software

     (498     (723
  

 

 

   

 

 

 

Net cash provided by investing activities

   $ 9,585      $ 23,205   
  

 

 

   

 

 

 

FINANCING ACTIVITIES

    

(Decrease) increase in deposits, net

   $ (68,902   $ 22,863   

Net increase (decrease) in short-term borrowings

     55,749        (11,069

Proceeds from other borrowings

     42,500        19,800   

Repayment of other borrowings

     (56,387     (66,100

Increase in advances by borrowers for taxes and insurance

     6,962        9,875   

Purchase of treasury stock shares

     (1,328     (11,430

Dividends on common stock

   $ (2,060   $ (1,751
  

 

 

   

 

 

 

Net cash used for financing activities

     (23,466     (37,812
  

 

 

   

 

 

 

Increase in cash and cash equivalents

     (3,168     4,776   

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

     26,648        15,550   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 23,480      $ 20,326   
  

 

 

   

 

 

 

SUPPLEMENTAL CASH FLOW DISCLOSURES

    

Cash Paid:

    

Interest

   $ 7,762      $ 8,835   

Income taxes

     2        662   

Noncash items:

    

Transfers from loans to foreclosed real estate

     2,342        952   

Treasury stock payable

     —          66   

Non cash asset received and liabilities assumed:

    

Goodwill

     —          276   

Acquisition of FNCB:

    

Cash received

     4,640        —     

Noncash assets acquired

    

Loans receivable and accrued interest receivable

     1,033        —     

Premises and equipment

     1,626        —     

Goodwill

     1,442        —     
  

 

 

   

 

 

 
     4,101        —     

Liabilities assumed:

    

Certificates of deposit

     3,069        —     

Deposits other than certificates of deposit

     5,683        —     
  

 

 

   

 

 

 
     8,752        —     
    
  

 

 

   

 

 

 

Net noncash assets acquired

     (4,651     —     

Cash acquired

   $ 11      $ —     
  

 

 

   

 

 

 

Acquisition of Franklin Security Bank assets and liabilities:

    

Noncash assets acquired

    

Investment securities, available for sale

   $ 55,901      $ —     

Loans receivable

     152,188        —     

Federal Home Loan Bank stock

     1,569        —     

Premises and equipment

     176        —     

Foreclosed real estate

     436        —     

Intangible assets, net

     889        —     

Deferred income taxes

     1,031        —     

Other assets

     2,504        —     
  

 

 

   

 

 

 
   $ 214,694      $ —     

Liabilities assumed:

    

Certificates of deposits

     90,869        —     

Deposits other than certificates of deposits

     71,317        —     

Other borrowings

     30,177        —     

Other liabilities

     2,265        —     
  

 

 

   

 

 

 
     194,628        —     

Net noncash assets acquired

     20,066        —     

Cash acquired

   $ (19,825   $ —     
  

 

 

   

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

5


Table of Contents

ESSA BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(unaudited)

 

1. Nature of Operations and Basis of Presentation

The 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 Investments Company; ESSA Advisory Services, LLC; Integrated Financial Corporation; and Integrated Abstract Incorporated, a wholly owned subsidiary of Integrated Financial Corporation. The primary purpose of the Company is to act as a holding company for the Bank. The Company is subject to regulation and supervision as a savings and loan holding company by the Federal Reserve Board. The Bank is a Pennsylvania-chartered savings bank 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, Lehigh, Lackawanna and Luzerne counties, Pennsylvania. The Bank is subject to regulation and supervision by the Pennsylvania Banking Department and the Federal Deposit Insurance Corporation. 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 has been used to purchase properties at tax sales that represent collateral for delinquent loans of the Bank. 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 percent 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. Integrated Financial Corporation is a Pennsylvania Corporation that provided investment advisory services to the general public as a former subsidiary of First Star Bank. The Company acquired First Star Bank in a transaction that closed on July 31, 2012. Integrated Financial Corporation is currently inactive. Integrated Abstract Incorporated is a Pennsylvania Corporation that provides title insurance services. All significant intercompany accounts and 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 nine month period ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending September 30, 2014.

 

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, 2014 and 2013.

 

     Three months ended     Nine months ended  
     June 30,
2014
    June 30,
2013
    June 30,
2014
    June 30,
2013
 

Weighted-average common shares outstanding

     18,133,095        18,162,764        18,133,095        18,142,984   

Average treasury stock shares

     (6,272,961 )     (5,645,336 )     (6,233,349     (5,269,686

Average unearned ESOP shares

     (1,012,790 )     (1,058,066     (1,024,151     (1,069,427

Average unearned non-vested shares

     (9,752 )     (49,571 )     (11,233     (38,970
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     10,837,592        11,409,791        10,864,362        11,764,901   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     10,837,592        11,409,791        10,864,362        11,764,901   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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At June 30, 2014 and 2013 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, 2014 and 2013 there were 4,440 and 24,999 shares, respectively, of nonvested stock outstanding at prices of $10.94 and $12.35 per share, respectively that were not included in the computation of diluted EPS because to do so would have been anti-dilutive.

 

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 (“GAAP”) 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.

 

4. Recent Accounting Pronouncements:

In June 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-08, Financial Services – Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements. The amendments in this Update affect the scope, measurement, and disclosure requirements for investment companies under U.S. GAAP. The amendments do all of the following: (1) change the approach to the investment company assessment in Topic 946, clarify the characteristics of an investment company, and provide comprehensive guidance for assessing whether an entity is an investment company; (2) require an investment company to measure noncontrolling ownership interests in other investment companies at fair value rather than using the equity method of accounting; and (3) require the following additional disclosures: (a) the fact that the entity is an investment company and is applying the guidance in Topic 946, (b) information about changes, if any, in an entity’s status as an investment company, and (c) information about financial support provided or contractually required to be provided by an investment company to any of its investees. The amendments in this Update are effective for an entity’s interim and annual reporting periods in fiscal years that begin after December 15, 2013. Earlier application is prohibited. This Update is not expected to have a significant impact on the Company’s financial statements.

In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This Update applies to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. This Update is not expected to have a significant impact on the Company’s financial statements.

In January 2014, the FASB issued ASU 2014-01, Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects. The amendments in this Update permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The amendments in this Update should be applied retrospectively to all periods presented. A reporting entity that uses the effective yield method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those preexisting investments. The amendments in this Update are effective for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. Early adoption is permitted. This Update is not expected to have a significant impact on the Company’s financial statements.

In January 2014, the FASB issued ASU 2014-04, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The amendments in this Update clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan

 

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through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in this Update are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. An entity can elect to adopt the amendments in this Update using either a modified retrospective transition method or a prospective transition method. This Update is not expected to have a significant impact on the Company’s financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (a new revenue recognition standard). The Update’s core principle is that a company will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this update specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. This Update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. This update is not expected to have a significant impact on the Company’s financial statements.

In June 2014, the FASB issued ASU 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The amendments in this Update change the accounting for repurchase-to-maturity transactions to secured borrowing accounting. For repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. The amendments also require enhanced disclosures. The accounting changes in this Update are effective for the first interim or annual period beginning after December 15, 2014. An entity is required to present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Earlier application is prohibited. The disclosure for certain transactions accounted for as a sale is required to be presented for interim and annual periods beginning after December 15, 2014, and the disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. The disclosures are not required to be presented for comparative periods before the effective date. This Update is not expected to have a significant impact on the Company’s financial statements.

In June 2014, the FASB issued ASU 2014-12, Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments when the Terms of an Award Provide that a Performance Target Could Be Achieved After the Requisite Service Period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The amendments in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. Entities may apply the amendments in this Update either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this Update as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date. Additionally, if retrospective transition is adopted, an entity may use hindsight in measuring and recognizing the compensation cost. This Update is not expected to have a significant impact on the Company’s financial statements.

 

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Table of Contents
5. Investment Securities

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

 

     June 30, 2014  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  

Available for Sale

          

Fannie Mae

   $ 141,678       $ 1,991       $ (1,230 )   $ 142,439   

Freddie Mac

     80,805         813         (1,017 )     80,601   

Governmental National Mortgage Association

     31,709         170         (170     31,709   

Other mortgage-backed securities

     2,839         —           (7 )     2,832   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total mortgage-backed securities

     257,031         2,974         (2,424     257,581   

Obligations of states and political subdivisions

     42,067         1,390         (294 )     43,163   

U.S. government agency securities

     48,037         240         (372     47,905   

Corporate obligations

     13,169         262         (26 )     13,405   

Trust-preferred securities

     5,003         688         —          5,691   

Other debt securities

     5,233         40         (19 )     5,254   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total debt securities

     370,540         5,594         (3,135 )     372,999   

Equity securities - financial services

     2,025         —           —          2,025   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 372,565       $ 5,594       $ (3,135 )   $ 375,024   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

     September 30, 2013  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  

Available for Sale

          

Fannie Mae

   $ 114,927       $ 1,691       $ (1,595 )   $ 115,023   

Freddie Mac

     60,111         838         (1,252 )     59,697   

Governmental National Mortgage Association

     39,692         289         (230 )     39,751   

Other mortgage-backed securities

     3,385         —          (19 )     3,366   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total mortgage-backed securities

     218,115         2,818         (3,096 )     217,837   

Obligations of states and political subdivisions

     23,754         654         (499 )     23,909   

U.S. government agency securities

     52,775         225         (480 )     52,520   

Corporate obligations

     12,756         186         (169 )     12,773   

Trust-preferred securities

     4,943         471         —         5,414   

Other debt securities

     1,147         7         —         1,154   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total debt securities

     313,490         4,361         (4,244 )     313,607   

Equity securities - financial services

     2,025         —           (10 )     2,015   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 315,515       $ 4,361       $ (4,254 )   $ 315,622   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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The amortized cost and fair value of debt securities at June 30, 2014, 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  
     Amortized
Cost
     Fair Value  

Due in one year or less

   $ 2,130       $ 2,144   

Due after one year through five years

     47,511         47,901   

Due after five years through ten years

     63,011         63,750   

Due after ten years

     257,888         259,204   
  

 

 

    

 

 

 

Total

   $ 370,540       $ 372,999   
  

 

 

    

 

 

 

For the three months ended June 30, 2014, the Company realized gross losses of $10,000 on proceeds from the sale of investment securities of $100. For the nine months ended June 30, 2014, the Company realized gross gains of $247,000 and gross losses of $21,000 on proceeds from the sale of investment securities of $8.1 million. For the three months ended June 30, 2013, the Company realized gross gains of $11,000 on proceeds from the sale of investment securities of $23,000. For the nine months ended June 30, 2013, the Company realized gross gains of $767,000 and gross losses of $18,000 on proceeds from the sale of investment securities of $39.2 million.

 

6. 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, 2014  
     Number of
Securities
     Less than Twelve
Months
    Twelve Months or
Greater
    Total  
            Fair
Value
     Gross
Unrealized
Losses
    Fair
Value
     Gross
Unrealized
Losses
    Fair
Value
     Gross
Unrealized
Losses
 

Fannie Mae

     24       $ 6,381       $ (28   $ 33,971       $ (1,202 )   $ 40,352       $ (1,230

Freddie Mac

     23         9,551         (49     30,409         (968 )     39,960         (1,017

Governmental National Mortgage Association

     6         3,453         (11 )     6,245         (159 )     9,698         (170 )

Other mortgage-backed securities

     3         547         (1     2,286         (6     2,833         (7

Obligations of states and political subdivisions

     5         —           —          7,186         (294 )     7,186         (294

U.S. government agency securities

     10         4,004         (6 )     23,470         (366 )     27,474         (372 )

Corporate obligations

     5         1,990         (10 )     2,319         (16     4,309         (26 )

Other debt securities

     2         2,102         (19     —           —          2,102         (19
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

     78       $ 28,028       $ (124 )   $ 105,886       $ (3,011 )   $ 133,914       $ (3,135 )
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
    

 

September 30, 2013

 
     Number of
Securities
     Less than Twelve
Months
    Twelve Months or
Greater
    Total  
            Fair
Value
     Gross
Unrealized
Losses
    Fair
Value
     Gross
Unrealized
Losses
    Fair
Value
     Gross
Unrealized
Losses
 

Fannie Mae

     30       $ 47,814       $ (1,589 )   $ 1,057      $ (6 )   $ 48,871       $ (1,595 )

Freddie Mac

     20         32,781         (1,252 )        —         32,781         (1,252 )

Governmental National Mortgage Association

     6         10,301         (230 )     —          —         10,301         (230 )

Other mortgage-backed securities

     3         3,366         (19     —          —         3,366         (19

Obligations of states and political subdivisions

     7         8,064         (499     —          —         8,064         (499

U.S. government agency securities

     10         30,084         (479 )     999        (1     31,083         (480 )

Corporate obligations

     5         5,042         (169 )     —          —         5,042         (169 )

Equity securities-financial services

     1         1,990         (10 )     —          —         1,990         (10 )
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

     82       $ 139,442       $ (4,247 )   $ 2,056       $ (7 )   $ 141,498       $ (4,254 )
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents

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, 2014, 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.

 

7. Loans Receivable, Net and Allowance for Loan Losses

Loans receivable consist of the following (in thousands):

 

     June 30,
2014
     September 30,
2013
 

Held for investment:

     

Real Estate Loans:

     

Residential

   $ 667,316       $ 686,651   

Construction

     1,800         2,288   

Commercial

     188,343         159,469   

Commercial

     23,331         10,125   

Obligations of states and political subdivisions

     50,096         33,445   

Home equity loans and lines of credit

     40,866         41,923   

Auto Loans

     83,619         61   

Other

     3,590         2,332   
  

 

 

    

 

 

 
     1,058,961         936,294   

Less allowance for loan losses

     8,836         8,064   
  

 

 

    

 

 

 

Net loans

   $ 1,050,125       $ 928,230   
  

 

 

    

 

 

 

Included in the June 30, 2014 balances are loans acquired from FNCB, as of the acquisition date of January 24,2014 as follows:

 

Real Estate Loans:

  

Residential

   $ 933   

Home equity loans and lines of credit

     77   

Other

     20   
  

 

 

 

Total loans

   $ 1,030   
  

 

 

 

Included in the June 30, 2014 balances are loans acquired from Franklin Security Bank, as of the acquisition date of April 4, 2014 as follows:

 

Real Estate Loans:

  

Residential

   $ 17,151   

Commercial

     38,247   

Commercial

     9,308   

Obligations of states and political subdivisions

     7,309   

Home equity loans and lines of credit

     16   

Auto loans

     78,794   

Other

     1,363   
  

 

 

 

Total loans

   $ 152,188   
  

 

 

 

 

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Table of Contents
     Total Loans      Individually Evaluated for
Impairment
     Loans Acquired with
Deteriorated Credit Quality
     Collectively Evaluated
for Impairment
 

June 30, 2014

           

Real Estate Loans:

           

Residential

   $ 667,316       $ 13,093       $ 109       $ 654,114   

Construction

     1,800         —          —          1,800   

Commercial

     188,343         17,912         5,151         165,280   

Commercial

     23,331         536         293         22,502   

Obligations of states and political subdivisions

     50,096         —          —          50,096   

Home Equity loans and lines of credit

     40,866         220         —          40,646   

Auto Loans

     83,619         —          —          83,619   

Other

     3,590         —          —          3,590   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,058,961       $ 31,761       $ 5,553       $ 1,021,647   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Total Loans      Individually Evaluated for
Impairment
     Loans Acquired with
Deteriorated Credit Quality
     Collectively Evaluated
for Impairment
 

September 30, 2013

           

Real Estate Loans:

           

Residential

   $ 686,651       $ 14,018       $ 271       $ 672,362   

Construction

     2,288         —          —          2,288   

Commercial

     159,469         15,478         6,355         137,636   

Commercial

     10,125         220         502         9,403   

Obligations of states and political subdivisions

     33,445         —          —          33,445   

Home Equity loans and lines of credit

     41,923         379         3         41,541   

Auto Loans

     61         —          —          61   

Other

     2,332         —          —          2,332   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $    936,294       $ 30,095       $ 7,131       $    899,068   
  

 

 

    

 

 

    

 

 

    

 

 

 

We maintain a loan review system that 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.

 

12


Table of Contents

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.

 

13


Table of Contents

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, 2014

              

With no specific allowance recorded:

              

Real Estate Loans

              

Residential

   $ 8,512       $ 10,603       $ —         $ 9,566       $ 242   

Construction

     —           —           —           —           —     

Commercial

     22,252         23,205         —           20,241         553   

Commercial

     829         834         —           1,764         49   

Obligations of states and political subdivisions

     —           —           —           —           —     

Home equity loans and lines of credit

     183         458         —           285         4   

Auto Loans

     —           —           —           —           —     

Other

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     31,776         35,100         —           31,856         848   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

              

Real Estate Loans

              

Residential

     4,690         5,258         531         3,425         79   

Construction

     —           —           —           —           —     

Commercial

     811         847         96         1,896         —     

Commercial

     —           —           —           —           —     

Obligations of states and political subdivisions

     —           —           —           —           —     

Home equity loans and lines of credit

     37         45         37         17         —     

Auto Loans

     —           —           —           —           —     

Other

     —           —           —           —           —     
  

 

 

    

 

 

       

 

 

    

 

 

 

Total

     5,538         6,150         664         5,338         79   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

              

Real Estate Loans

              

Residential

     13,202         15,861         531         12,991         321   

Construction

     —           —           —           —           —     

Commercial

     23,063         24,052         96         22,137         553   

Commercial

     829         834         —           1,764         49   

Obligations of states and political subdivisions

     —           —           —           —           —     

Home equity loans and lines of credit

     220         503         37         302         4   

Auto Loans

     —           —              —           —     

Other

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Impaired Loans

   $ 37,314       $ 41,250       $ 664       $ 37,194       $ 927   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

14


Table of Contents
     Recorded
Investment
     Unpaid
Principal
Balance
     Associated
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

September 30, 2013

              

With no specific allowance recorded:

              

Real Estate Loans

              

Residential

   $ 11,251       $ 13,013       $ —        $ 9,716       $ 159   

Construction

     —          —          —          —          —    

Commercial

     18,711         20,258         —          20,751         615   

Commercial

     722         731         —          1,034         9   

Obligations of states and political subdivisions

     —          —          —          —          —    

Home equity loans and lines of credit

     382         683         —          373         3   

Other

     —          —          —          18         —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     31,066         34,685         —          31,892         786   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

              

Real Estate Loans

              

Residential

     3,038         3,221         518         2,655         74   

Construction

     —          —          —          —          —    

Commercial

     3,122         3,178         301         2,839      

Commercial

     —          —          —          —          —    

Obligations of states and political subdivisions

     —          —          —          —          —    

Home equity loans and lines of credit

     —          —          —          —       

Other

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     6,160         6,399         819         5,494         74   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

              

Real Estate Loans

              

Residential

     14,289         16,234         518         12,371         233   

Construction

     —          —          —          —          —    

Commercial

     21,833         23,436         301         23,590         615   

Commercial

     722         731         —          1,034         9   

Obligations of states and political subdivisions

     —          —          —          —          —    

Home equity loans and lines of credit

     382         683         —          373         3   

Other

     —          —          —          18         —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Impaired Loans

   $ 37,226       $ 41,084       $ 819       $ 37,386       $ 860   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

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Table of Contents

The following tables present 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, 2014 and September 30, 2013 (in thousands):

 

       Pass        Special
  Mention  
       Substandard          Doubtful          Total    

June 30, 2014

              

Commercial real estate loans

   $ 157,359       $ 8,576       $ 22,106       $ 302       $ 188,343   

Commercial

     22,295         375         661         —          23,331   

Obligations of states and political subdivisions

     50,096         —          —          —          50,096   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 229,750       $ 8,951       $ 22,767       $ 302       $ 261,770   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

       Pass        Special
  Mention  
       Substandard          Doubtful          Total    

September 30, 2013

              

Commercial real estate loans

   $ 129,799       $ 9,440       $ 20,230       $ —        $ 159,469   

Commercial

     9,466         436         223         —          10,125   

Obligations of states and political subdivisions

     33,445         —          —          —          33,445   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 172,710       $ 9,876       $ 20,453       $ —        $ 203,039   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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. The following tables present the risk ratings in the consumer categories of performing and non-performing loans at June 30, 2014 and September 30, 2013 (in thousands):

 

     Performing      Non-performing      Total  

June 30, 2014

        

Real estate loans:

        

Residential

   $ 656,893       $ 10,423       $ 667,316   

Construction

     1,800         —          1,800   

Home Equity loans and lines of credit

     40,613         253         40,866   

Auto Loans

     83,594         25         83,619   

Other

     3,577         13         3,590   
  

 

 

    

 

 

    

 

 

 

Total

   $ 786,477       $ 10,714       $ 797,191   
  

 

 

    

 

 

    

 

 

 

 

     Performing      Non-performing      Total  

September 30, 2013

        

Real estate loans:

        

Residential

   $ 675,706       $ 10,945       $ 686,651   

Construction

     2,288         —          2,288   

Home Equity loans and lines of credit

     41,584         339         41,923   

Auto loans

     61         —          61   

Other

     2,332         —          2,332   
  

 

 

    

 

 

    

 

 

 

Total

   $ 721,971       $ 11,284       $ 733,255   
  

 

 

    

 

 

    

 

 

 

 

16


Table of Contents

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 tables present the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of June 30, 2014 and September 30, 2013 (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, 2014

                    

Real estate loans

                    

Residential

   $ 652,247       $ 3,857       $ 789       $ —         $ 10,423       $ 15,069       $ 667,316   

Construction

     1,800         —           —           —           —           —           1,800   

Commercial

     177,162         283         —           —           10,898         11,181         188,343   

Commercial

     21,682         204         127         —           1,318         1,649         23,331   

Obligations of states and political subdivisions

     50,077         19         —           —           —           19         50,096   

Home equity loans and lines of credit

     40,514         69         30         —           253         352         40,866   

Auto Loans

     83,312         282         —           —           25         307         83,619   

Other

     3,517         51         9         —           13         73         3,590   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,030,311       $ 4,765       $ 955       $ —         $ 22,930       $ 28,650       $ 1,058,961   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     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
 

September 30, 2013

                    

Real estate loans

                    

Residential

   $ 671,850       $ 2,866       $ 990       $ —        $ 10,945       $ 14,801       $ 686,651   

Construction

     2,288         —          —          —          —          —          2,288   

Commercial

     146,062         2,589            —          10,818         13,407         159,469   

Commercial

     8,948         —          —          —          1,177         1,177         10,125   

Obligations of states and political subdivisions

     33,445         —          —          —          —          —          33,445   

Home equity loans and lines of credit

     41,380         127         77         —          339         543         41,923   

Auto loans

     61         —          —          —          —          —          61   

Other

     2,275         57         —          —          —          57         2,332   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $    906,309       $ 5,639       $ 1,067       $ —        $ 23,279       $ 29,985       $    936,294   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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, 2014 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 FDIC and the Pennsylvania Department of Banking, as an integral part of their 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.

 

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Table of Contents

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.

 

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Table of Contents

The following tables summarize changes in the primary segments of the ALL for the three and nine month periods ending June 30, 2014 and 2013:

 

     Real Estate Loans                                              
     Residential     Construction     Commercial     Commercial
Loans
    Obligations of
States and
Political
Subdivisions
    Home
Equity
Loans and
Lines of
Credit
    Auto
Loans
     Other Loans     Unallocated      Total  

ALL balance at March 31, 2014

     5,920        26        1,003        369        106        500        —           26        712         8,662   

Charge-offs

     (332     —          (23     —          —          (10     —           —          —           (365

Recoveries

     34        —          —          2        —          —          —           3        —           39   

Provision

     312        (2     (399     222        10        (17     56         (3     321         500   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

ALL balance at June 30, 2014

     5,934        24        581        593        116        473        56         26        1,033         8,836   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

March 31, 2013

     5,791        28        837        350        106        496        —           19        44         7,671   

Charge-offs

     (509     —          (74     (16     —          —          —           —          —           (599

Recoveries

     9        —          —          —          —          3        —           —          —           12   

Provision

     676        16        262        27        7        97        —           1        14         1,100   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

ALL balance at June 30, 2013

     5,967        44        1,025        361        113        596        —           20        58         8,184   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

ALL balance at September 30, 2013

     5,787        20        946        337        130        430        —           21        393         8,064   

Charge-offs

     (1,255     —          (73     (48     —          (73     —           —          —           (1,449

Recoveries

     112        —          83        14        —          —          —           12        —           221   

Provision

     1,290        4        (375     290        (14     116        56         (7     640         2,000   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

ALL balance at June 30, 2014

     5,934        24        581        593        116        473        56         26        1,033         8,836   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

September 30, 2012

     5,401        29        699        474        127        499        —           22        51         7,302   

Charge-offs

     (1,752     —          (288     (16     —          (67     —           (6     —           (2,129

Recoveries

     50        —          2        —          —          9        —           —          —           61   

Provision

     2,268        15        612        (97     (14     155        —           4        7         2,950   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

ALL balance at June 30, 2013

     5,967        44        1,025        361        113        596        —           20        58         8,184   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Acquired loans are recorded at fair value on their purchase date without a carryover of the related allowance for loan losses.

 

19


Table of Contents

The following table summarizes the primary segments of the ALL, segregated into amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of June 30, 2014 (in thousands):

 

     Real Estate Loans                                                   
     Residential      Construction      Commercial      Commercial
Loans
     Obligations of
States and
Political
Subdivisions
     Home
Equity
Loans and
Lines of
Credit
     Auto
Loans
     Other Loans      Unallocated      Total  

Individually evaluated for impairment

     531         —           96         —           —           37         —           —           —           664   

Collectively evaluated for impairment

     5,403         24         485         593         116         436         56         26         1,033         8,172   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

ALL Balance at June 30, 2014

     5,934         24         581         593         116         473         56         26         1,033         8,836   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Individually evaluated for impairment

     518         —           301         —           —           —           —           —           —           819   

Collectively evaluated for impairment

     5,269         20         645         337         130         430         —           21         393         7,245   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

ALL balance at September 30, 2013

     5,787         20         946         337         130         430         —           21         393         8,064   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 loans, home equity loans and lines of credit segments for the nine month period ending June 30, 2014 due to increased charge off activity and impairment evaluations 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.

 

20


Table of Contents

The following is a summary of troubled debt restructuring granted during the three and nine months ended June 30, 2014 and 2013.

 

     For the Three Months Ended June 30, 2014  
     Number of
Contracts
     Pre-Modification
Outstanding
Recorded
Investment
     Post-Modification
Outstanding
Recorded
Investment
 

Troubled Debt Restructurings

        

Real estate loans:

        

Residential

     2       $ 236       $ 236   

Construction

     —           —           —     

Commercial

     —           —           —     

Commercial

     —           —           —     

Obligations of states and political subdivisions

     —           —           —     

Home equity loans and lines of credit

     —           —           —     

Auto Loans

     —           —           —     

Other

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

     2       $ 236       $ 236   
  

 

 

    

 

 

    

 

 

 

Of the two new troubled debt restructurings granted for the three months ended June 30, 2014, one loan totaling $208,000 was granted terms and rate concessions and one loan totaling $28,000 was granted terms concessions.

 

     For the Three Months Ended June 30, 2013  
     Number of
Contracts
     Pre-Modification
Outstanding
Recorded
Investment
     Post-Modification
Outstanding

Recorded
Investment
 

Troubled Debt Restructurings

        

Real estate loans:

        

Residential

     8       $ 989       $ 989   

Construction

     —          —          —    

Commercial

     —          —          —    

Commercial

     —          —          —    

Obligations of states and political subdivisions

     —          —          —    

Home equity loans and lines of credit

     1         98         98   

Auto Loans

     —          —          —    

Other

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total

     9       $ 1,087       $ 1,087   
  

 

 

    

 

 

    

 

 

 

Of the nine new troubled debt restructurings granted for the three months ended June 30, 2013, six loans totaling $751,000 were granted terms and rate concessions and three loans totaling $336,000 were granted terms concessions.

 

     For the Nine Months Ended June 30, 2014  
     Number of
Contracts
     Pre-Modification
Outstanding
Recorded
Investment
     Post-Modification
Outstanding
Recorded
Investment
 

Troubled Debt Restructurings

        

Real estate loans:

        

Residential

     9       $ 1,293       $ 1,293   

Construction

     —          —          —     

Commercial

     1         197         197   

Commercial

     —          —          —     

Obligations of states and political subdivisions

     —          —          —     

Home equity loans and lines of credit

     —          —          —     

Auto Loans

     —          —          —     

Other

     —          —          —     
  

 

 

    

 

 

    

 

 

 

Total

     10       $ 1,490       $ 1,490   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Of the ten new troubled debt restructurings granted for the nine months ended June 30, 2014, six loans totaling $883,000 were granted terms and rate concessions and four loans totaling $607,000 were granted terms concessions.

 

     For the Nine Months Ended June 30, 2013  
     Number of
Contracts
     Pre-Modification
Outstanding
Recorded
Investment
     Post-Modification
Outstanding
Recorded
Investment
 

Troubled Debt Restructurings

        

Real estate loans:

        

Residential

     12       $ 1,589       $ 1,589   

Construction

     —          —          —    

Commercial

     —          —          —    

Commercial

     —          —          —    

Obligations of states and political subdivisions

     —          —          —    

Home equity loans and lines of credit

     1         98         98   

Auto Loans

        

Other

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total

     13       $ 1,687       $ 1,687   
  

 

 

    

 

 

    

 

 

 

Of the 13 new troubled debt restructurings granted for the nine months ended June 30, 2013, eight loans totaling $1.3 million were granted terms and rate concessions and five loans totaling $410,000 were granted terms concessions. There were no troubled debt restructurings that have subsequently defaulted within one year of modification for the three and nine months ended June 30, 2014 and 2013.

 

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8. Deposits

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

 

     June 30,
2014
     September 30,
2013
 

Non-interest bearing demand accounts

   $ 70,980       $ 58,795   

NOW accounts

     120,939         99,857   

Money market accounts

     178,263         138,049   

Savings and club accounts

     124,812         110,189   

Certificates of deposit

     648,101         634,169   
  

 

 

    

 

 

 

Total

   $ 1,143,095       $ 1,041,059   
  

 

 

    

 

 

 

 

9. Net Periodic Benefit Cost-Defined Benefit Plan

For a detailed disclosure on the Bank’s pension and employee benefits plans, please refer to Note 13 of the Company’s Consolidated Financial Statements for the year ended September 30, 2013 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,
 
     2014     2013     2014     2013  

Service Cost

   $ 144      $ 175      $ 433      $ 526   

Interest Cost

     191        179        572        537   

Expected return on plan assets

     (290 )     (259 )     (871 )     (776 )

Amortization of unrecognized loss

     7        98        21        294   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 52      $ 193      $ 155      $ 581   
  

 

 

   

 

 

   

 

 

   

 

 

 

The Bank contributed $550,000 to its pension plan in May 2014.

 

10. 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 on May 23, 2008. Certain officers were granted in aggregate 30,000 shares of restricted stock on April 1, 2013. In accordance with generally accepted accounting principles, 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.

The 2008 restricted shares vest over a five-year service period. The 2013 restricted stock shares vest over an 18-month 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.

 

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For the nine months ended June 30, 2014 and 2013, the Company recorded $170,000 and $1.5 million of share-based compensation expense, respectively, comprised of restricted stock expense of $170,000 for the June 30, 2014 period and stock option expense of $458,000 and restricted stock expense of $1.0 million for the June 30, 2013 period. Expected future compensation expense relating to the 13,334 restricted shares at June 30, 2014, is $49,000 over the remaining vesting period of 0.25 years.

The following is a summary of the Company’s stock option activity and related information for its option grants for the six month period ended June 30, 2014.

 

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

Outstanding, September 30, 2013

     1,458,379       $ 12.35         4.67       $ —    

Granted

     —          —          —          —    

Exercised

     —          —          —          —    

Forfeited

     —          —          —          —    
  

 

 

          

Outstanding, June 30, 2014

     1,458,379       $ 12.35         3.9       $ —    
  

 

 

          

Exercisable at June 30, 2014

     1,458,379       $ 12.35         3.9       $ —    
  

 

 

          

The following is a summary of the status of the Company’s restricted stock as of June 30, 2014, and changes therein during the six month period then ended:

 

     Number of
Restricted Stock
     Weighted-
average
Grant Date
Fair Value
 

Nonvested at September 30, 2013

     14,995       $ 10.94   

Granted

     —          —    

Vested

     1,661         10.94   

Forfeited

     —          —    
  

 

 

    

Nonvested at June 30, 2014

     13,334       $ 10.94   
  

 

 

    

 

11. 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.

 

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Table of Contents

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, 2014 and September 30, 2013 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, 2014  

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
September 30, 2013
 

Securities available-for-sale measured on a recurring basis

           

Mortgage backed securities

   $ —        $ 257,581       $ —        $ 257,581   

Obligations of states and political subdivisions

     —          43,163         —          43,163   

U.S. government agencies

     —          47,905         —          47,905   

Corporate obligations

     —          13,405         —          13,405   

Trust-preferred securities

     —          3,861         1,830         5,691   

Other debt securities

     —          5,254         —          5,254   

Equity securities-financial services

     2,025         —          —          2,025   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt and equity securities

   $ 2,025       $ 371,169       $ 1,830       $ 375,024   

Foreclosed real estate owned measured on a non-recurring basis

   $ —        $ —        $ 2,967       $ 2,967   

Impaired loans measured on a non-recurring basis

   $ —        $ —        $ 36,650       $ 36,650   

 

     Fair Value Measurement at September 30, 2013  

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
September 30, 2013
 

Securities available-for-sale measured on a recurring basis

           

Mortgage backed securities

   $ —        $ 217,837       $ —        $ 217,837   

Obligations of states and political subdivisions

     —          23,909         —          23,909   

U.S. government agencies

     —          52,520         —          52,520   

Corporate obligations

     —          12,773         —          12,773   

Trust-preferred securities

     —          3,614         1,800         5,414   

Other debt securities

     —          1,154         —          1,154   

Equity securities-financial services

     2,015         —          —          2,015   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt and equity securities

   $ 2,015       $ 311,807       $ 1,800       $ 315,622   

Foreclosed real estate owned measured on a non-recurring basis

   $ —        $ —        $ 2,111       $ 2,111   

Impaired loans measured on a non-recurring basis

   $ —        $ —        $ 36,407       $ 36,407   

 

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Table of Contents

The following table presents a summary of changes in the fair value of the Company’s Level III investments for the periods ended June 30, 2014 and June 30, 2013.

 

     Fair Value Measurement Using Significant Unobservable Inputs
(Level III)
 
     Three months ended  
     June 30, 2014      June 30, 2013  

Beginning balance

   $ 1,830       $ 1,760  

Purchases, sales, issuances, settlements, net

     —          —    

Total unrealized gain:

     

Included in earnings

     —       

Included in other comprehensive income

     —          20   

Transfers in and/or out of Level III

     —          —    
  

 

 

    

 

 

 
   $ 1,830       $ 1,780   
  

 

 

    

 

 

 

 

     Fair Value Measurement Using Significant Unobservable Inputs
(Level III)
 
     Nine months ended  
     June 30, 2014      June 30, 2013  

Beginning balance

   $ 1,800       $ 1,740  

Purchases, sales, issuances, settlements, net

     —          —    

Total unrealized gain:

     

Included in earnings

     —          —    

Included in other comprehensive income

     30         40   

Transfers in and/or out of Level III

     —          —    
  

 

 

    

 

 

 
   $ 1,830       $ 1,780   
  

 

 

    

 

 

 

Each financial asset and liability is identified as having been valued according to a 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

 

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Table of Contents

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, 2014, 249 impaired loans with a carrying value of $37.3 million were reduced by specific valuation allowance totaling $664,000 resulting in a net fair value of $36.7 million based on Level 3 inputs. At September 30, 2013, 233 impaired loans with a carrying value of $37.2 million were reduced by a specific valuation totaling $819,000 resulting in a net fair value of $36.4 million based on Level 3 inputs.

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value:

 

     Quantitative Information about Level 3 Fair Value Measurements
(unaudited, in thousands)    Fair Value
Estimate
     Valuation
Techniques
  Unobservable
Input
  Range

June 30, 2014:

         

Impaired loans

     36,650       Appraisal of
collateral (1)
  Appraisal
adjustments (2)
  0% to 30%
(23.0%)

Foreclosed real estate owned

     2,967       Appraisal of
collateral (1), (3)
  Appraisal
adjustments (2)
  20% to 40%
(21.4%)

 

     Quantitative Information about Level 3 Fair Value Measurements
(unaudited, in thousands)    Fair Value
Estimate
     Valuation
Techniques
  Unobservable
Input
  Range

September 30, 2013:

         

Impaired loans

     36,407       Appraisal of
collateral (1)
  Appraisal
adjustments (2)
  0% to 30%
(23.5%)

Foreclosed real estate owned

     2,111       Appraisal of
collateral (1), (3)
  Appraisal
adjustments (2)
  0% to 30%
(20.4%)

 

(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level 3 inputs which are not identifiable.
(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.
(3) Includes qualitative adjustments by management and estimated liquidation expenses.

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

 

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Table of Contents

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, 2014  
     Carrying Value      Level I      Level II      Level III      Total Fair
Value
 

Financial assets:

              

Cash and cash equivalents

   $ 23,480       $ 23,480      $ —        $ —        $ 23,480   

Certificates of deposit

     1,767         —          1,767         —          1,767   

Investment and mortgage backed securities available for sale

     375,024         2,025         371,169         1,830         375,024   

Loans receivable, net

     1,050,125         —          —          1,078,683         1,078,683   

Accrued interest receivable

     5,042         5,042         —          —          5,042   

FHLB stock

     12,757         12,757         —          —          12,757   

Mortgage servicing rights

     799         —          —          799         799   

Bank owned life insurance

     29,484         29,484         —          —          29,484   

Financial liabilities:

              

Deposits

   $ 1,143,095       $ 494,994       $ —        $ 651,908         1,146,902   

Short-term borrowings

     78,749         78,749         —          —          78,749   

Other borrowings

     145,260         —          —          146,398         146,398   

Advances by borrowers for taxes and insurance

     11,924         11,924         —          —          11,924   

Accrued interest payable

     1,035         1,035         —          —          1,035   

 

     September 30, 2013  
     Carrying Value      Level I      Level II      Level III      Total Fair
Value
 

Financial assets:

              

Cash and cash equivalents

   $ 26,648       $ 26,648      $ —        $ —        $ 26,648   

Certificates of deposit

     1,767         —          1,767         —          1,767   

Investment and mortgage backed securities available for sale

     315,622         2,015         311,807         1,800         315,622   

Loans receivable, net

     928,230         —          —             951,120         951,120   

Accrued interest receivable

     4,413         4,413         —          —          4,413   

FHLB stock

     9,415         9,415         —          —          9,415   

Mortgage servicing rights

     382         —          —          382         382   

Bank owned life insurance

     28,797         28,797         —          —          28,797   

Financial liabilities:

              

Deposits

   $ 1,041,059       $ 406,890       $ —        $ 638,510         1,045,400   

Short-term borrowings

     23,000         23,000         —          —          23,000   

Other borrowings

     129,260         —          —          124,504         124,504   

Advances by borrowers for taxes and insurance

     4,962         4,962         —          —          4,962   

Accrued interest payable

     833         833         —          —          833   

 

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Table of Contents

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 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

The fair values of loans are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.

Mortgage Servicing Rights

The Company utilizes a third party provider to estimate the fair value of certain loan servicing rights. Fair value for the purpose of this measurement is defined as the amount at which the asset could be exchanged in a current transaction between willing parties, other than in a forced liquidation.

Deposit Liabilities

The fair values disclosed for demand, savings, and money market deposit accounts are valued at the amount payable on demand as of quarter-end. Fair values for time deposits 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 of similar remaining maturities.

Other Borrowings

Fair values for 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 other borrowings of similar remaining maturities.

 

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Table of Contents

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.

 

12. Accumulated Other Comprehensive Income

The activity in accumulated other comprehensive income for the three and nine months ended June 30, 2014 and 2013 is as follows:

 

     Accumulated Other
Comprehensive Income/(Loss)
 
     Defined Benefit
Pension Plan
    Unrealized Gains
(Losses) on Securities
Available for Sale
    Total  

Balance at March 31, 2014

   $ (1,297   $ (549   $ (1,846

Other comprehensive income before reclassifications

     —         2,165        2,165   

Amounts reclassified from accumulated other comprehensive income

     5        7        12   
  

 

 

   

 

 

   

 

 

 

Period change

     5        2,172        2,177   
  

 

 

   

 

 

   

 

 

 

Balance at June 30, 2014

   $ (1,292   $ 1,623      $ 331   
  

 

 

   

 

 

   

 

 

 

Balance at March 31, 2013

   $ (4,318   $ 4,481      $ 163   

Other comprehensive loss before reclassifications

     —         (4,194     (4,194 )

Amounts reclassified from accumulated other comprehensive income

     65        (7     58   
  

 

 

   

 

 

   

 

 

 

Period change

     65        (4,201     (4,136
  

 

 

   

 

 

   

 

 

 

Balance at June 30, 2013

   $ (4,253   $ 280      $ (3,973
  

 

 

   

 

 

   

 

 

 

 

     Accumulated Other
Comprehensive Income/(Loss)
 
     Defined Benefit
Pension Plan
    Unrealized Gains
(Losses) on Securities
Available for Sale
    Total  

Balance at September 30, 2013

   $ (1,306   $ 71      $ (1,235

Other comprehensive income before reclassifications

     —         1,701        1,701   

Amounts reclassified from accumulated other comprehensive income

     14        (149     (135
  

 

 

   

 

 

   

 

 

 

Period change

     14        1,552        1,566   
  

 

 

   

 

 

   

 

 

 

Balance at June 30, 2014

   $ (1,292   $ 1,623      $ 331   
  

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

   $ (4,450   $ 6,208      $ 1,758   

Other comprehensive loss before reclassifications

     —         (5,431     (5,431

Amounts reclassified from accumulated other comprehensive income

     194        (494     (300
  

 

 

   

 

 

   

 

 

 

Period change

     194        (5,925     (5,731
  

 

 

   

 

 

   

 

 

 

Balance at June 30, 2013

   $ (4,256   $ 283      $ (3,973
  

 

 

   

 

 

   

 

 

 

 

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     Amount Reclassified from
Accumulated Other Comprehensive Income
     Accumulated Other
Comprehensive Income for
the Three Months Ended
June 30,
   

Affected Line Item in the Consolidated
Statement of Income

     2014     2013      

Securities available for sale:

      

Net securities gains reclassified into earnings

   $ 10      $ (11  

Gain on sale of investments, net

Related income tax expense

     (3     4     

Provision for income taxes

Net effect on accumulated other comprehensive income for the period

     7        (7  

Net of tax

  

 

 

   

 

 

   

Defined benefit pension plan:

      

Amortization of net loss and prior service costs

     7        98     

Compensation and employee benefits

Related income tax expense

   $ (2   $ (33  

Provision for income taxes

  

 

 

   

 

 

   

Net effect on accumulated other

     5        65     

Net of tax

  

 

 

   

 

 

   

Total reclassification for the period

   $ 12      $ 58     

Net of tax

  

 

 

   

 

 

   
     Amount Reclassified from
Accumulated Other Comprehensive Income
     Accumulated Other
Comprehensive Income for
the Nine months Ended
June 30,
   

Affected Line Item in the Consolidated
Statement of Income

     2014     2013      

Securities available for sale:

      

Net securities gains reclassified into earnings

   $ (226   $ (749  

Gain on sale of investments, net

Related income tax expense

     77        255     

Provision for income taxes

  

 

 

   

 

 

   

Net effect on accumulated other comprehensive income for the period

     (149     (494  

Net of tax

  

 

 

   

 

 

   

Defined benefit pension plan:

      

Amortization of net loss and prior service costs

     21        294     

Compensation and employee benefits

Related income tax expense

   $ (7   $ (100  

Provision for income taxes

  

 

 

   

 

 

   

Net effect on accumulated other

     14        194     

Net of tax

  

 

 

   

 

 

   

Total reclassification for the period

   $ (135   $ (300  

Net of tax

 

13. Acquisitions

Acquisition of FNCB Branch

On January 24, 2014, the Company closed on a purchase transaction pursuant to which ESSA Bancorp, Inc. acquired a branch facility, customer deposits, and loans of First National Community Bank (FNCB), the subsidiary of First National Community Bancorp, Inc., in a cash transaction. The acquired branch is located in the Monroe County, Pennsylvania market. Under the terms of the agreement, the Company acquired all of the branch facilities, customer deposits and loans of FNCB and received net cash of $4.6 million.

The acquired assets and assumed liabilities were measured at fair values. Management made significant estimates and exercised significant judgment in accounting for the acquisition. Management measured loan fair values based on loan file reviews (including borrower financial statements or tax returns), appraised collateral values, expected cash flows and historical loss factors of FNCB. Real estate acquired through foreclosure was primarily value based on appraised collateral values.

 

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The business combination resulted in the acquisition of loans without evidence of credit quality deterioration. FNCB’s loans were fair valued by discounting both expected principal and interest cash flows using an observable discount rate for similar instruments that a market participant would consider in determining fair value. Additionally, consideration was given to management’s best estimates of default rates and payment speeds. At acquisition, FNCB’s loan portfolio without evidence of deterioration totaled $1.0 million and was recorded at a fair value of $1.0 million.

The following condensed statement reflects the values assigned to FNCB’s net assets as of the acquisitions date:

 

Total purchase price

   $ 4,460   

Net assets acquired:

  

Cash

   $ 11   

Loans receivable and accrued interest receivable

     1,033   

Premises and equipment, net

     1,626   

Certificates of deposits

     (3,069

Deposits other than certificates of deposits

     (5,683
  

 

 

 
     6,082   
  

 

 

 

Goodwill resulting from FNCB purchase

   $ 1,442   
  

 

 

 

Supplemental pro forma financial information related to the FNCB acquisition has not been provided as it would be impracticable to do so. Historical financial information regarding the acquired branch is not accessible and thus the amounts would require estimates so significant as to render the disclosure irrelevant.

Acquisition of Franklin Security Bancorp, Inc.

On April 4, 2014, the Company closed on a merger transaction pursuant to which ESSA Bancorp, Inc. acquired Franklin Security Bancorp, Inc., the parent company of Franklin Security Bank, in a cash transaction. The acquisition added two branch locations in the Scranton-Wilkes Barre, Pennsylvania market, establishing ESSA’s presence in that market.

Under the terms of the merger agreement, the Company acquired all of the outstanding shares of Franklin Security Bancorp, Inc. for a total cash purchase price of approximately $15.7 million. Franklin Security Bank has been merged into ESSA Bank & Trust, with ESSA Bank & Trust as the surviving entity.

The acquired assets and assumed liabilities were measured at estimated fair values. Management made significant estimates and exercised significant judgment in accounting for the acquisition. Management measured loan fair values based on loan file reviews (including borrower financial statements or tax returns), appraised collateral values, expected cash flows and historical loss factors of Franklin Security Bank. Real estate acquired through foreclosure was primarily valued based on appraised collateral values. The Company also recorded an identifiable intangible asset representing the core deposit base of Franklin Security Bank based on management’s evaluation of the cost of such deposits relative to alternative funding sources. Management used market quotations to measure the fair value of investment securities and FHLB advances. The business combination resulted in the acquisition of loans without evidence of credit quality deterioration. At the acquisition date, the Company determined that there were no purchased impaired loans. The method of measuring carrying value of purchased loans differs from loans originated by the Company (originated loans), and as such, the Company identifies purchased loans and purchased loans with a credit quality discount and originated loans at amortized cost.

Franklin Security Bank’s loans without evidence of credit deterioration were measured to fair valued by discounting both expected principal and interest cash flows using an observable discount rate for similar instruments that a market participant would consider in determining fair value. Additionally, consideration was given to management’s best estimates of default rates and payment speeds. At acquisition, Franklin Security Bank’s loan portfolio without evidence of deterioration totaled $155.3 million and was recorded at a fair value of $152.2 million.

 

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The following condensed statement reflects the values assigned to Franklin Security Bancorp, Inc.’s net assets as of the acquisitions date:

 

Total purchase price

   $ 15,698   

Net assets acquired:

  

Cash

   $ (19,825

Investments available for sale

     55,901   

Loans receivable

     152,188   

Regulatory stock

     1,569   

Premises and equipment, net

     176   

Foreclosed real estate

     436   

Intangible assets

     889   

Deferred tax assets

     1,031   

Other assets

     2,504   

Certificates of deposits

     (90,869

Deposits other than certificates of deposits

     (71,317

Borrowings

     (30,177

Other liabilities

     (2,265
  

 

 

 
  
  

 

 

 

Gain resulting from Franklin Security Bancorp, Inc. acquisition

   $ 241   
  

 

 

 

Results of operations for Franklin prior to the acquisition date are not included in the Consolidated Statement of Income for the three and nine-month periods ended June 30, 2014. The following table presents financial information regarding the former Franklin operations included in the Consolidated Statement of Income from the date of acquisition through June 30, 2014 under column “Actual from acquisition date through June 30, 2014.” In addition, the following table presents unaudited pro forma information as if the acquisition of Franklin had occurred on October 1, 2012 under the “Pro Forma” columns. The table below has been prepared for comparative purposes only and is not necessarily indicative of the actual results that would have been attained had the acquisition occurred as of the beginning of the periods presented, nor is it indicative of future results. Furthermore, the unaudited pro forma information does not reflect management’s estimate of any revenue-enhancing opportunities nor anticipated cost savings as a result of the integration and consolidation of the acquisition. Merger and acquisition integration costs and amortization of fair value adjustments net of the related income tax effects are included in the amounts below, but any purchase gain has been excluded.

 

    

Actual From Acquisition Date

Through June 30, 2014

 
     (in thousands)  

Net interest income

   $ 1,902   

Non interest income

     107   
  

 

 

 

Net income

   $ 641   
  

 

 

 

 

     Pro Formas  
     Three months ended
June 30,
     Nine months ended
June 30,
 
     2014      2013      2014      2013  
     (in thousands, except per share data)  

Net interest income

   $ 11,097       $ 11,267       $ 32,534       $ 34,791   

Non interest income

     2,100         1,915         5,605         6,850   

Net income

     2,385         2,036         4,471         7,184   

Pro forma earnings per share:

           

Basic

   $ 0.22       $ 0.18       $ 0.41       $ 0.61   

Diluted

   $ 0.22       $ 0.18       $ 0.41       $ 0.61   

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

This quarterly report contains forward-looking statements, which can be identified by the use of such words as estimate, project, believe, intend, anticipate, plan, seek, expect and similar expressions. These forward-looking statements include:

 

    statements of our goals, intentions and expectations;

 

    statements regarding our business plans and prospects and growth and operating strategies;

 

    statements regarding the asset quality of our loan and investment portfolios; and

 

    estimates of our risks and future costs and benefits.

By identifying these forward-looking statements for you in this manner, we are alerting you to the possibility that our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. Important factors that could cause our actual results and financial condition to differ from those indicated in the forward-looking statements include, among others, those discussed under “Risk Factors” in Part I, Item 1A of the Company’s Annual Report on Form 10-K and Part II, Item 1A of this Report on Form 10-Q, as well as the following factors:

 

    significantly increased competition among depository and other financial institutions;

 

    inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;

 

    general economic conditions, either nationally or in our market areas, that are worse than expected;

 

    adverse changes in the securities markets;

 

    legislative or regulatory changes that adversely affect our business;

 

    our ability to enter new markets successfully and take advantage of growth opportunities, and the possible short-term dilutive effect of potential acquisitions or de novo branches, if any;

 

    changes in consumer spending, borrowing and savings habits;

 

    changes in accounting policies and practices, as may be adopted by the bank regulatory agencies and the Financial Accounting Standards Board; and

 

    changes in our organization, compensation and benefit plans.

 

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Table of Contents

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

Comparison of Financial Condition at June 30, 2014 and September 30, 2013

Total Assets. Total assets increased by $186.9 million, or 13.62%, to $1,559.2 million at June 30, 2014 from $1,372.3 million at September 30, 2013. The acquisition of Franklin Security Bancorp, Inc. accounted for the majority of the increase. The Company completed its acquisition of Franklin Security Bancorp on April 4, 2014, adding approximately $219.5 million in total assets, $152.2 million in loans and $162.2 million in deposits.

Total Cash and Cash Equivalents. Total cash and cash equivalents decreased $3.1 million, or 11.65%, to $23.5 million at June 30, 2014 from $26.6 million at September 30, 2013. This decrease was primarily the result of the cash used for the acquisition of Franklin Security Bancorp, Inc. offset by cash generated from the repayment of loans receivable from September 30, 2013 through June 30, 2014.

Net Loans. Net loans increased $121.9 million, or 13.13%, to $1,050.1 million at June 30, 2014 from $928.2 million at September 30, 2013. During this period, commercial real estate loans increased $28.9 million to $183.3 million, commercial loans increased $13.2 million to $23.3 million, obligations of states and political subdivisions increased $16.7 million to $50.1 million, auto loans increased $83.6 million to $83.6 million and other loans increased $1.3 million to $3.6 million. These increases were partially offset by decreases in residential loans of $19.3 million to $667.3 million, construction loans outstanding of $488,000 to $1.8 million, home equity loans and lines of credit of $1.0 million to $40.9 million.

Investment Securities Available for Sale. Investment securities available for sale increased $59.4 million, or 18.82%, to $375.0 million at June 30, 2014 from $315.6 million at September 30, 2013. The increase was due primarily to increases in mortgage backed securities of $39.8 million and obligations of states and political subdivisions of $19.3 million, offset in part by a decrease in U.S. government securities of $4.6 million.

Deposits. Deposits increased $102.0 million, or 9.8%, to $1,143.1 million at June 30, 2014 from $1,041.1 million at September 30, 2013, primarily as a result of the acquisition of Franklin Security Bancorp, Inc. At June 30, 2014 compared to September 30, 2013, certificate of deposit accounts increased $13.9 million to $648.1 million, NOW accounts increased $21.1 million to $120.9 million, non-interest bearing demand accounts increased $12.2 million to $71.0 million, money market accounts increased $40.2 million to $178.3 million and savings and club accounts increased $14.6 million to $124.8 million. Included in the certificates of deposit at June 30, 2014 was an increase in brokered certificates of $12.2 million to $245.5 million.

Borrowed Funds. Borrowed funds increased by $72.0 million, or 47.31%, to $224.3 million at June 30, 2014, from $152.3 million at September 30, 2013. The increase in borrowed funds was primarily due to increases in short term borrowings of $55.8 million and other borrowings of $16.3 million.

Stockholders’ Equity. Stockholders’ equity increased by $4.9 million, or 2.91%, to $171.3 million at June 30, 2014 from $166.5 million at September 30, 2013.

 

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Table of Contents

Average Balance Sheets for the Three and Nine Months Ended June 30, 2014 and 2013

The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances, the yields set forth below include the effect of deferred fees and discounts and premiums that are amortized or accreted to interest income.

 

     For the Three Months Ended June 30,  
     2014     2013  
     Average Balance     Interest Income/
Expenses
    Yield/Cost     Average Balance     Interest Income/
Expenses
     Yield/Cost  
     (dollars in thousands)  

Interest-earning assets:

             

Loans(1)

   $ 1,054,409      $ 11,807        4.49   $ 947,107      $ 11,032         4.67

Investment Securities

             

Taxable(2)

     81,064        411        2.03     87,100        376         1.73

Exempt from federal income tax(2)(3)

     32,298        173        3.26     14,192        73         3.13
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total investment securities

     113,362        584        2.38     101,292        449         1.93

Mortgage-backed securities

     244,722        1,221        2.00     217,162        994         1.84

Regulatory stock

     12,153        167        5.51     13,553        13         0.38

Other

     17,589        6        0.14     11,904        3         0.10
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-earning assets

     1,442,235        13,785        3.86     1,291,018        12,491         3.89

Allowance for loan losses

     (8,697         (7,841     

Noninterest-earning assets

     113,084            101,755        
  

 

 

       

 

 

      

Total assets

   $ 1,546,622          $ 1,384,932        
  

 

 

       

 

 

      

Interest-bearing liabilities:

             

NOW accounts

   $ 121,934      $ 20        0.07   $ 88,045      $ 13         0.06

Money market accounts

     178,056        92        0.21     137,908        67         0.19

Savings and club accounts

     122,691        17        0.06     105,857        12         0.05

Certificates of deposit

     652,488        1,886        1.16     606,584        1,665         1.10

Borrowed funds

     215,097        673        1.26     191,981        885         1.85
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     1,290,266        2,688        0.84     1,130,375        2,642         0.94

Non-interest-bearing NOW accounts

     67,056            60,570        

Non-interest-bearing liabilities

     19,035            21,886        
  

 

 

       

 

 

      

Total liabilities

     1,376,357            1,212,831        

Equity

     170,265            172,101        
  

 

 

       

 

 

      

Total liabilities and equity

   $ 1,546,622          $ 1,384,932        
  

 

 

       

 

 

      

Net interest income

     $ 11,097          $ 9,849      
    

 

 

       

 

 

    

Interest rate spread

             

Net interest-earning assets

   $ 151,969          3.02   $ 160,643           2.95
  

 

 

       

 

 

      

Net interest margin

         3.09          3.06   

Average interest-earning assets to average interest-bearing liabilities

       111.78       114.21     

 

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(1) Non-accruing loans are included in the outstanding loan balances.
(2) Available for sale securities are reported at fair value.
(3) Yields on tax exempt securities have been calculated on a fully tax equivalent basis assuming a tax rate of 34%.
(4) Represents the difference between interest earned and interest paid, divided by average total interest earning assets.

 

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Table of Contents
     For the Nine Months Ended June 30,  
     2014     2013  
     Average Balance     Interest Income/
Expenses
    Yield/Cost     Average Balance     Interest Income/
Expenses
    Yield/Cost  
     (dollars in thousands)  

Interest-earning assets:

            

Loans(1)

   $ 968,243      $ 32,173        4.44   $ 948,040      $ 34,310        4.84

Investment Securities

            

Taxable(2)

     83,408        1,250        2.00     90,205        1,211        1.79

Exempt from federal income tax(2)(3)

     19,896        318        3.24     12,825        200        3.16
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investment securities

     103,304        1,568        2.24     103,030        1,411        1.96

Mortgage-backed securities

     227,106        3,432        2.02     220,895        3,347        2.03

Regulatory stock

     10,687        303        3.79     17,098        53        0.41

Other

     11,802        14        0.16     9,403        10        0.14
  

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-earning assets

     1,321,142        37,490        3.81     1,298,466        39,131        4.04

Allowance for loan losses

     (8,342         (7,607    

Noninterest-earning assets

     108,291            101,364       
  

 

 

       

 

 

     

Total assets

   $ 1,421,091          $ 1,392,223       
  

 

 

       

 

 

     

Interest-bearing liabilities:

            

NOW accounts

   $ 100,849        42        0.06   $ 90,000        38        0.06

Money market accounts

     151,834        225        0.20     144,618        258        0.24

Savings and club accounts

     113,959        45        0.05     102,940        37        0.05

Certificates of deposit

     619,283        5,597        1.21     592,035        5,243        1.18

Borrowed funds

     187,720        2,055        1.46     213,548        3,103        1.94
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     1,173,645        7,964        0.90     1,143,141        8,679        1.01

Non-interest-bearing NOW accounts

     62,026            55,162       

Non-interest-bearing liabilities

     16,443            18,875       
  

 

 

       

 

 

     

Total liabilities

     1,252,114            1,217,178       

Equity

     168,977            175,045       
  

 

 

       

 

 

     

Total liabilities and equity

   $ 1,421,091          $ 1,392,223       
  

 

 

       

 

 

     

Net interest income

     $ 29,526          $ 30,452     
    

 

 

       

 

 

   

Interest rate spread

         2.91         3.03

Net interest-earning assets

   $ 147,497