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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 March 31, 2015

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 May 5, 2015 there were 11,434,378 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)

     2   

Item 2.

 

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

     34   

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

     44   

Item 4

 

Controls and Procedures

     44   
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)

 

     March 31,
2015
    September 30,
2014
 
     (dollars in thousands)  

Cash and due from banks

   $ 13,392     $ 20,884  

Interest-bearing deposits with other institutions

     3,218       1,417  
  

 

 

   

 

 

 

Total cash and cash equivalents

  16,610     22,301  

Certificates of deposit

  1,752     1,767  

Investment securities available for sale, at fair value

  383,350     383,078  

Loans receivable (net of allowance for loan losses of $8,668 and $8,634)

  1,078,495     1,058,267  

Regulatory stock, at cost

  13,644     14,284  

Premises and equipment, net

  16,838     16,957  

Bank-owned life insurance

  30,190     29,720  

Foreclosed real estate

  2,479     2,759  

Intangible assets, net

  2,067     2,396  

Goodwill

  10,259     10,259  

Deferred income taxes

  9,978     12,027  

Other assets

  18,909     21,000  
  

 

 

   

 

 

 

TOTAL ASSETS

$ 1,584,571   $ 1,574,815  
  

 

 

   

 

 

 

LIABILITIES

Deposits

$ 1,103,797   $ 1,133,889  

Short-term borrowings

  110,001     108,020  

Other borrowings

  179,960     151,300  

Advances by borrowers for taxes and insurance

  8,565     4,093  

Other liabilities

  9,743     10,204  
  

 

 

   

 

 

 

TOTAL LIABILITIES

  1,412,066     1,407,506  
  

 

 

   

 

 

 

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; 11,434,378 and 11,590,378 outstanding at March 31, 2015 and September 30, 2014)

  181     181  

Additional paid in capital

  182,580     182,486  

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

  (9,853 )   (10,079 )

Retained earnings

  80,772     77,413  

Treasury stock, at cost; 6,698,717 and 6,542,717 shares outstanding at March 31, 2015 and September 30, 2014, respectively

  (81,916 )   (80,113 )

Accumulated other comprehensive income (loss)

  741     (2,579 )
  

 

 

   

 

 

 

TOTAL STOCKHOLDERS’ EQUITY

  172,505     167,309  
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$ 1,584,571   $ 1,574,815  
  

 

 

   

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

2


Table of Contents

ESSA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF INCOME

(UNAUDITED)

 

     For the Three Months Ended
March 31,
    For the Six Months Ended
March 31,
 
     2015     2014     2015     2014  
     (dollars in thousands, except per share data)  

INTEREST INCOME

        

Loans receivable, including fees

   $ 11,100      $ 9,843     $ 22,549     $ 20,366   

Investment securities:

        

Taxable

     1,799        1,523       3,688       3,050   

Exempt from federal income tax

     239        72       473       145   

Other investment income

     442        85       578       144   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

  13,580      11,523     27,288     23,705   
  

 

 

   

 

 

   

 

 

   

 

 

 

INTEREST EXPENSE

Deposits

  1,878      1,906     3,843     3,894   

Short-term borrowings

  103      27     206     50   

Other borrowings

  597      652     1,187     1,332   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

  2,578      2,585     5,236     5,276   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INTEREST INCOME

  11,002      8,938     22,052     18,429   

Provision for loan losses

  525      750     975     1,500   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

  10,477      8,188     21,077     16,929   
  

 

 

   

 

 

   

 

 

   

 

 

 

NONINTEREST INCOME

Service fees on deposit accounts

  757      722     1,584     1,514   

Services charges and fees on loans

  274      104     589     289   

Trust and investment fees

  204      230     442     441   

Gain on sale of investments, net

  204      236     204     236   

Earnings on Bank-owned life insurance

  231      225     470     453   

Insurance commissions

  217      227     399     420   

Other

  14      8     27     26   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

  1,901      1,752     3,715     3,379   
  

 

 

   

 

 

   

 

 

   

 

 

 

NONINTEREST EXPENSE

Compensation and employee benefits

  5,232      4,357     10,346     8,665   

Occupancy and equipment

  1,134      1,065     2,115     1,983   

Professional fees

  407      498     921     907   

Data processing

  892      769     1,705     1,449   

Advertising

  224      114     352     220   

Federal Deposit Insurance Corporation (FDIC) premiums

  289      235     581     464   

Gain on foreclosed real estate

  (137   (93 )   (175 )   (51

Merger related costs

  —       88      —       346   

Amortization of intangible assets

  163      237     329     474   

Other

  894      614     1,890     1,175   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

  9,098      7,884     18,064     15,632   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

  3,280      2,056     6,728     4,676   

Income taxes

  848      554     1,700     1,170   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME

$ 2,432    $ 1,502   $ 5,028   $ 3,506   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share

Basic

$ 0.23    $ 0.14   $ 0.48   $ 0.32   

Diluted

$ 0.23    $ 0.14   $ 0.48   $ 0.32   

Dividends per share

$ 0.09    $ 0.07   $ 0.16   $ 0.12   

See accompanying notes to the unaudited consolidated financial statements.

 

3


Table of Contents

ESSA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

 

     Three Months Ended
March 31,
    Six Months Ended
March 31,
 
     2015     2014     2015     2014  
     (dollars in thousands)  

Net income

   $ 2,432     $ 1,502     $ 5,028     $ 3,506  

Other comprehensive income (loss):

        

Investment securities available for sale:

        

Unrealized holding gain (loss)

     2,374       1,333       5,112       (703 )

Tax effect

     (807 )     (453 )     (1,737 )     239  

Reclassification of gains recognized in net income

     (204 )     (236     (204 )     (236 )

Tax effect

     69       80       69       80  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net of tax amount

  1,432     724     3,240     (620 )

Pension plan adjustment:

Related to actuarial losses and prior service cost

  60     7     120     14  

Tax effect

  (20 )   (2 )   (40 )   (5 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Net of tax amount

  40     5     80     9  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

  1,472     729     3,320     (611 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

$ 3,904   $ 2,231   $ 8,348   $ 2,895  
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

4


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, 2014

     11,590,378      $ 181       $ 182,486       $ (10,079   $ 77,413      $ (80,113   $ (2,579   $ 167,309   

Net income

               5,028            5,028   

Other comprehensive income

                   3,320        3,320   

Cash dividends declared ($.16 per share)

               (1,669         (1,669

Stock based compensation

          51                 51   

Allocation of ESOP stock

          43         226              269   

Treasury shares purchased

     (156,000               (1,803       (1,803
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2015

  11,434,378    $ 181    $ 182,580    $ (9,853 $ 80,772    $ (81,916 $ 741    $ 172,505   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

5


Table of Contents

ESSA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

 

     For the Six Months Ended
March 31,
 
     2015     2014  
     (dollars in thousands)  

OPERATING ACTIVITIES

    

Net income

   $ 5,028      $ 3,506   

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

    

Provision for loan losses

     975        1,500   

Provision for depreciation and amortization

     641        583   

Amortization and accretion of discounts and premiums, net

     145        467   

Net gain on sale of investment securities

     (204     (236

Compensation expense on ESOP

     269        250   

Stock based compensation

     51        122   

Decrease in accrued interest receivable

     159        222   

Decrease in accrued interest payable

     (18     (24

Earnings on bank-owned life insurance

     (470     (453

Deferred federal income taxes

     (339     (148

Gain on foreclosed real estate, net

     (175     (51

Amortization of identifiable intangible assets

     329        474   

Other, net

     2,220        994   
  

 

 

   

 

 

 

Net cash provided by operating activities

  8,611      7,206   
  

 

 

   

 

 

 

INVESTING ACTIVITIES

Maturities of certificates of deposit

  15      —     

Investment securities available for sale:

Proceeds from sale of investment securities

  3,319      8,065   

Proceeds from principal repayments and maturities

  30,318      37,245   

Purchases

  (29,317   (45,221

(Increase) decrease in loans receivable, net

  (22,416   20,065   

Redemption of regulatory stock

  7,441      1,484   

Purchase of regulatory stock

  (6,801   (2,422

Proceeds from sale of foreclosed real estate

  2,031      1,367   

Acquisition, including cash acquired

       4,654   

Capital improvements to foreclosed real estate

  13        

Purchase of premises, equipment, and software

  (454   (267
  

 

 

   

 

 

 

Net cash (used for) provided by investing activities

  (15,851   24,970   
  

 

 

   

 

 

 

FINANCING ACTIVITIES

Decrease in deposits, net

  (30,092   (51,381

Net increase in short-term borrowings

  1,981      15,000   

Proceeds from other borrowings

  37,860      30,500   

Repayment of other borrowings

  (9,200   (14,210

Increase in advances by borrowers for taxes and insurance

  4,472      3,908   

Purchase of treasury stock shares

  (1,803   (676

Dividends on common stock

  (1,669   (1,303
  

 

 

   

 

 

 

Net cash provided by (used for) financing activities

  1,549      (18,162
  

 

 

   

 

 

 

(Decrease) increase in cash and cash equivalents

  (5,691   14,014   

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

  22,301      26,648   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

$ 16,610    $ 40,662   
  

 

 

   

 

 

 

SUPPLEMENTAL CASH FLOW DISCLOSURES

Cash Paid:

Interest

$ 5,253    $ 5,300   

Income taxes

  —        2   

Noncash items:

Transfers from loans to foreclosed real estate

  1,589      1,373   

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   
  

 

 

   

 

 

 

Total non cash assets

  —        4,101   

Liabilities assumed:

Certificates of deposit

  —        3,069   

Deposits other than certificates of deposit

  —        5,683   
  

 

 

   

 

 

 

Total liabilities

  —        8,752   

Net noncash assets acquired

  —        (4,651

Cash acquired

  —        11   

See accompanying notes to the unaudited consolidated financial statements.

 

6


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”), 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. On November 6, 2014, the Company converted its status from a savings and loan holding company to a bank holding company. In addition, the Bank converted from a Pennsylvania-chartered savings association to a Pennsylvania-chartered savings bank. 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 Department of Banking and Securities 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 and is currently inactive. Integrated Abstract Incorporated is a Pennsylvania Corporation that provided title insurance services and is currently inactive. 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 six month period ended March 31, 2015 are not necessarily indicative of the results that may be expected for the year ending September 30, 2015.

 

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 six month periods ended March 31, 2015 and 2014.

 

     Three months ended      Six months ended  
     March 31,
2015
     March 31,
2014
     March 31,
2015
     March 31,
2014
 

Weighted-average common shares outstanding

     18,133,095        18,133,095        18,133,095        18,133,095   

Average treasury stock shares

     (6,695,606 )      (6,236,798 )      (6,652,080      (6,213,543

Average unearned ESOP shares

     (978,835 )      (1,024,111      (984,555      (1,029,831

Average unearned non-vested shares

     (16,344 )      (12,667 )      (16,590      (13,864
  

 

 

    

 

 

    

 

 

    

 

 

 

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

  10,442,310     10,859,519     10,479,870     10,875,857   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

  386     —       —       —    

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

  78,451     184     42,727     8,214   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

  10,521,147     10,859,703     10,522,597     10,884,071   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

7


Table of Contents

At March 31, 2015 and 2014 there were options to purchase 317,910 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 March 31, 2015 and 2014 there were 15,290 and 8,886 shares, respectively, of nonvested stock outstanding at prices of $11.07 and $10.94 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:

Recent Accounting Pronouncements:

In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 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. The Company is evaluating the effect of adopting this new accounting Update.

In June 2014, the FASB issued ASU 2014-10, 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

 

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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.

In August 2014, the FASB issued ASU 2014-14, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40). The amendments in this Update require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) the loan has a government guarantee that is not separable from the loan before foreclosure, (2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim, and (3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. 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. This Update is not expected to have a significant impact on the Company’s financial statements.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements -Going Concern (Subtopic 205-40). The amendments in this Update provide guidance in accounting principles generally accepted in the United States of America about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. This Update is not expected to have a significant impact on the Company’s financial statements.

In November 2014, the FASB issued ASU 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity (a consensus of the FASB Emerging Issues Task Force). This ASU clarifies how current U.S. GAAP should be interpreted in subjectively evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Public business entities are required to implement the new requirements in fiscal years and interim periods within those fiscal years beginning after December 15, 2015. This Update is not expected to have a significant impact on the Company’s financial statements.

In January 2015, the FASB issued ASU 2015-01, Income Statement –Extraordinary and Unusual Items, as part of its initiative to reduce complexity in accounting standards. This Update eliminates from GAAP the concept of extraordinary items. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively. A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. This Update is not expected to have a significant impact on the Company’s financial statements.

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810). The amendments in this Update affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments (1) Modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities; (2) Eliminate the presumption that a general partner should consolidate a limited partnership; (3) Affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; (4) Provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The amendments in this Update are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, and for interim periods within fiscal years beginning after December 15, 2017. This Update is not expected to have a significant impact on the Company’s financial statements.

 

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In April 2015, the FASB issued ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30), as part of its initiative to reduce complexity in accounting standards. To simplify presentation of debt issuance costs, the amendments in this Update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this Update. For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. An entity should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. This Update is not expected to have a significant impact on the Company’s financial statements.

In April 2015, the FASB issued ASU 2015-04, Compensation-Retirement Benefits (Topic 715), as part of its initiative to reduce complexity in accounting standards. For an entity with a fiscal year-end that does not coincide with a month-end, the amendments in this Update provide a practical expedient that permits the entity to measure defined benefit plan assets and obligations using the month-end that is closest to the entity’s fiscal year-end and apply that practical expedient consistently from year to year. The practical expedient should be applied consistently to all plans if an entity has more than one plan. The amendments in this Update are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. Earlier application is permitted. This Update is not expected to have a significant impact on the Company’s financial statements.

In April 2015, the FASB issued ASU 2015-05, Intangible – Goodwill and Other Internal Use Software (Topic 350-40), as part of its initiative to reduce complexity in accounting standards. This guidance will help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement. The amendments in this Update provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. For public business entities, the Board decided that the amendments will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. For all other entities, the amendments will be effective for annual periods beginning after December 15, 2015, and interim periods in annual periods beginning after December 15, 2016. Early adoption is permitted for all entities. This Update is not expected to have a significant impact on the Company’s financial statements.

 

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5. Investment Securities

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

 

     March 31, 2015  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair Value  

Available for Sale

           

Fannie Mae

   $ 134,955      $ 2,544      $ (461 )    $ 137,038  

Freddie Mac

     92,541        1,343        (348 )      93,536  

Governmental National Mortgage Association

     17,403        97        (75 )      17,425  

Other mortgage-backed securities

     2,707        —          (17 )      2,690  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage-backed securities

  247,606     3,984     (901 )   250,689  

Obligations of states and political subdivisions

  46,281     1,784     (147 )   47,918  

U.S. government agency securities

  44,492     402     (9 )   44,885  

Corporate obligations

  17,284     206     (36 )   17,454  

Trust-preferred securities

  5,075     468     —       5,543  

Other debt securities

  14,695     164     (23 )   14,836  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

  375,433     7,008     (1,116 )   381,325  

Equity securities - financial services

  2,025     —       —       2,025  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 377,458   $ 7,008   $ (1,116 ) $ 383,350  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Available for Sale

           

Fannie Mae

   $ 144,291      $ 1,327      $ (1,550 )    $ 144,068  

Freddie Mac

     99,556        548        (1,277 )      98,827  

Governmental National Mortgage Association

     19,446        92        (161 )      19,377  

Other mortgage-backed securities

     2,795        —          (15 )      2,780  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage-backed securities

  266,088     1,967     (3,003 )   265,052  

Obligations of states and political subdivisions

  41,375     1,654     (258 )   42,771  

U.S. government agency securities

  47,821     192     (383 )   47,630  

Corporate obligations

  13,140     236     (48 )   13,328  

Trust-preferred securities

  5,027     594     —       5,621  

Other debt securities

  6,618     51     (18 )   6,651  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

  380,069     4,694     (3,710 )   381,053  

Equity securities - financial services

  2,025     —       —       2,025  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 382,094   $ 4,694   $ (3,710 ) $ 383,078  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The amortized cost and fair value of debt securities at March 31, 2015, 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

   $ 6,009      $ 6,024  

Due after one year through five years

     48,926        49,516  

Due after five years through ten years

     59,415        60,601  

Due after ten years

     261,083        265,184  
  

 

 

    

 

 

 

Total

$ 375,433   $ 381,325  
  

 

 

    

 

 

 

For the three and six months ended March 31, 2015, the Company realized gross gains of $204,000 on proceeds from the sale of investment securities of $3.3 million. For the three and six months ended March 31, 2014, the Company realized gross gains of $247,000 and gross losses of $11,000 on proceeds from the sale of investment securities of $8.1 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 (dollars in thousands):

 

     March 31, 2015  
     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

     20       $ 4,304       $ (18   $ 26,087       $ (443   $ 30,391       $ (461

Freddie Mac

     13         3,316         (8     16,864         (340     20,180         (348

Governmental National Mortgage Association

     6         2,579         (12     2,674         (63     5,253         (75

Other mortgage-backed securities

     3         —          —         2,690         (17     2,690         (17

Obligations of states and political subdivisions

     10         5,282         (31     4,652         (116     9,934         (147

U.S. government agency securities

     2         2,011         (8     999         (1     3,010         (9

Corporate obligations

     4         1,971         (8     972         (28     2,943         (36

Other debt securities

     6         4,258         (13     1,857         (10     6,115         (23
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Debt Securities

  64      23,721      (98   56,795      (1,018   80,516      (1,116

Equity securities–financial services

  —       —       —       —       —       —       —    
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

  64    $ 23,721    $ (98 $ 56,795    $ (1,018 $   80,516    $ (1,116
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     September 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

     39      $ 34,377      $ (164 )   $ 33,249      $ (1,386 )   $ 67,626      $ (1,550 )

Freddie Mac

     36        38,210        (216 )     29,269        (1,061 )     67,479        (1,277 )

Governmental National Mortgage Association

     5        4,127        (22 )     2,981        (139 )     7,108        (161 )

Other mortgage-backed securities

     3         —           —          2,780         (15     2,780         (15

Obligations of states and political subdivisions

     5         —           —          7,207         (258     7,207        (258

U.S. government agency securities

     11        8,004        (25 )     18,629        (358 )     26,633        (383 )

Corporate obligations

     5        3,142        (32 )     1,130        (16 )     4,272        (48 )

Equity securities-financial services

     2         1,980         (18     —           —          1,980         (18 )
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

  106   $ 89,840   $ (477 ) $ 95,245   $ (3,233 ) $ 185,085   $ (3,710 )
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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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, other mortgage backed securities, debt obligations of a U.S. state or political subdivision, corporate debt obligations and equity securities.

The Company reviews its position quarterly and has asserted that at March 31, 2015, 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):

 

     March 31,
2015
     September 30,
2014
 

Real estate loans:

     

Residential

   $ 629,034      $ 654,152  

Construction

     1,489        1,367  

Commercial

     197,137        190,536  

Commercial

     36,923        25,807  

Obligations of states and political subdivisions

     47,054        49,177  

Home equity loans and lines of credit

     40,857        41,387  

Auto Loans

     131,570         100,571   

Other

     3,099         3,904   
  

 

 

    

 

 

 
  1,087,163     1,066,901   

Less allowance for loan losses

  8,668     8,634  
  

 

 

    

 

 

 

Net loans

$ 1,078,495   $ 1,058,267  
  

 

 

    

 

 

 

 

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

March 31, 2015

           

Real estate loans:

           

Residential

   $ 629,034       $ 12,057       $ 110       $ 616,867  

Construction

     1,489         —           —           1,489  

Commercial

     197,137         16,281         4,504         176,352   

Commercial

     36,923         234         96         36,593   

Obligations of states and political subdivisions

     47,054         —           —           47,054   

Home equity loans and lines of credit

     40,857         430         —           40,427   

Auto loans

     131,570         190         —           131,380   

Other

     3,099         —           —           3,099   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 1,087,163    $ 29,192    $ 4,710    $ 1,053,261   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

September 30, 2014

           

Real estate loans:

           

Residential

   $ 654,152      $ 13,528      $ 110      $ 640,514  

Construction

     1,367         —          —          1,367  

Commercial

     190,536         17,517         4,727         168,292   

Commercial

     25,807         456         263         25,088   

Obligations of states and political subdivisions

     49,177         —          —          49,177   

Home equity loans and lines of credit

     41,387         266         (3      41,124   

Auto loans

     100,571         101         —          100,470   

Other

     3,904         —          —          3,904   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 1,066,901    $ 31,868    $ 5,097    $ 1,029,936   
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

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 one year of performance.

 

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The following table includes the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount, if applicable (in thousands).

 

     Recorded
Investment
     Unpaid
Principal
Balance
     Associated
Allowance
 

March 31, 2015

        

With no specific allowance recorded:

        

Real estate loans

        

Residential

   $ 9,715      $ 11,523      $ —    

Construction

     —          —          —    

Commercial

     20,637        21,864        —    

Commercial

     330        341        —    

Obligations of states and political subdivisions

     —          —          —    

Home equity loans and lines of credit

     389        391        —    

Auto loans

     166         230         —     

Other

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total

  31,237     34,349     —    
  

 

 

    

 

 

    

 

 

 

With an allowance recorded:

Real estate loans

Residential

  2,452     2,729     280  

Construction

  —       —       —    

Commercial

  148     175     4  

Commercial

  —       —       —    

Obligations of states and political subdivisions

  —       —       —    

Home equity loans and lines of credit

  41     66     40  

Auto loans

  24      24      12   

Other

  —       —       —    
  

 

 

    

 

 

    

 

 

 

Total

  2,665     2,994     336  
  

 

 

    

 

 

    

 

 

 

Total:

Real estate loans

Residential

  12,167     14,252     280  

Construction

  —       —       —    

Commercial

  20,785     22,039     4  

Commercial

  330     341     —    

Obligations of states and political subdivisions

  —       —       —    

Home equity loans and lines of credit

  430     457     40  

Auto loans

  190      254      12   

Other

  —       —       —    
  

 

 

    

 

 

    

 

 

 

Total Impaired Loans

$ 33,902   $ 37,343   $ 336  
  

 

 

    

 

 

    

 

 

 

 

15


Table of Contents
     Recorded
Investment
     Unpaid
Principal
Balance
     Associated
Allowance
 

September 30, 2014

        

With no specific allowance recorded:

        

Real Estate Loans

        

Residential

   $ 11,030      $ 13,225      $ —     

Construction

     —           —           —     

Commercial

     21,587        22,428        —     

Commercial

     719        777        —     

Obligations of states and political subdivisions

     —           —           —     

Home equity loans and lines of credit

     210        377        —     

Auto Loans

     101         101         —     

Other

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

  33,647     36,908     —     
  

 

 

    

 

 

    

 

 

 

With an allowance recorded:

Real Estate Loans

Residential

  2,608     2,997     334  

Construction

  —        —        —     

Commercial

  657     677     84  

Commercial

  —        —        —     

Obligations of states and political subdivisions

  —        —        —     

Home equity loans and lines of credit

  53     76     50  

Auto Loans

  —        —        —     

Other

  —        —        —     
  

 

 

    

 

 

    

 

 

 

Total

  3,318     3,750     468  
  

 

 

    

 

 

    

 

 

 

Total:

Real Estate Loans

Residential

  13,638     16,222     334  

Construction

  —        —        —     

Commercial

  22,244     23,105     84  

Commercial

  719     777     —     

Obligations of states and political subdivisions

  —        —        —     

Home equity loans and lines of credit

  263     453     50  

Auto Loans

  101      101      —     

Other

  —        —        —     
  

 

 

    

 

 

    

 

 

 

Total Impaired Loans

$ 36,965   $ 40,658   $ 468  
  

 

 

    

 

 

    

 

 

 

 

16


Table of Contents

The following table represents 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 (in thousands).

 

     Three months ended  
     March 31,  
     2015      2014      2015      2014  
     Average
Recorded
Investment
     Average
Recorded
Investment
     Interest
Income
Recognized
     Interest
Income
Recognized
 

With no specific allowance recorded:

           

Real estate loans

           

Residential

   $ 10,551      $ 9,630      $ 64      $ 94  

Construction

     —           —           —           —     

Commercial

     21,044        21,144        190        183  

Commercial

     454        1,211        2        3  

Obligations of states and political subdivisions

     —           —           —           —     

Home equity loans and lines of credit

     286        300        —           —     

Auto loans

     55         —           1         —     

Other

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

  32,390     32,285     257     280  
  

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

Real estate loans

Residential

  2,411     3,468     19     23  

Construction

  —        —        —        —     

Commercial

  313     1,896     —        —     

Commercial

  —        —        —        —     

Obligations of states and political subdivisions

  —        —        —        —     

Home equity loans and lines of credit

  39     13     —        —     

Auto loans

  67      —        1      —     

Other

  —        —        —        —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

  2,830     5,377     20     23  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total:

Real estate loans

Residential

  12,962     13,098     83     117  

Construction

  —        —        —        —     

Commercial

  21,357     23,040     190     183  

Commercial

  454     1,211     2     3  

Obligations of states and political subdivisions

  —        —        —        —     

Home equity loans and lines of credit

  325     313     —        —     

Auto loans

  122      —        2      —     

Other

  —        —        —        —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Impaired Loans

$ 35,220   $ 37,662   $ 277   $ 303  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

17


Table of Contents
     Six months ended  
     March 31,  
     2015      2014      2015      2014  
     Average
Recorded
Investment
     Average
Recorded
Investment
     Interest
Income
Recognized
     Interest
Income
Recognized
 

With no specific allowance recorded:

           

Real estate loans

           

Residential

   $ 10,740      $ 9,855      $ 163      $ 150  

Construction

     —           —           —           —     

Commercial

     21,017        20,041        384        374  

Commercial

     672        1,002        4        6  

Obligations of states and political subdivisions

     —           —           —           —     

Home equity loans and lines of credit

     244        319        2        2  

Auto loans

     53         —           1         —     

Other

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

  32,726     31,217     554     532  
  

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

Real estate loans

Residential

  2,453     3,235     43     58  

Construction

  —        —        —        —     

Commercial

  442     2,355     —        —     

Commercial

  —        —        —        —     

Obligations of states and political subdivisions

  —        —        —        —     

Home equity loans and lines of credit

  26     6     —        —     

Auto loans

  101      —        3      —     

Other

  —        —        —        —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

  3,022     5,596     46     58  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total:

Real estate loans

Residential

  13,193     13,090     206     208  

Construction

  —        —        —        —     

Commercial

  21,459     22,396     384     374  

Commercial

  672     1,002     4     6  

Obligations of states and political subdivisions

  —        —        —        —     

Home equity loans and lines of credit

  270     325     2     2  

Auto loans

  154      —        4      —     

Other

  —        —        —        —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Impaired Loans

$ 35,748   $ 36,813   $ 600   $ 590  
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company 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 fundamentally sound yet, exhibit potentially unacceptable credit risk or deteriorating trends or characteristics which if left uncorrected, may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. 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. Loans in the Doubtful category have all the weaknesses inherent in one classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Loans in the Loss category are considered uncollectible and of little value that their continuance as bankable assets is not warranted. Certain residential real estate loans, construction loans, home equity loans and lines of credit, auto loans and other consumer 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.

 

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Table of Contents

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 $500,000 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 $1,000,000 and/or all criticized relationships. Detailed reviews, including plans for resolution, are performed on loans classified as Substandard on a quarterly basis. Loans in the Special Mention and Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.

The following 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 March 31, 2015 and September 30, 2014 (in thousands):

 

     Pass      Special
Mention
     Substandard      Doubtful      Total  

March 31, 2015

              

Commercial real estate loans

   $ 169,768       $ 5,253       $ 21,823       $ 293       $ 197,137   

Commercial

     36,394         97         432         —           36,923   

Obligations of states and political subdivisions

     47,054         —           —           —           47,054   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 253,216    $ 5,350    $ 22,255    $ 293    $ 281,114   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Pass      Special
Mention
     Substandard      Doubtful      Total  

September 30, 2014

              

Commercial real estate loans

   $ 160,749       $ 8,020       $ 21,469       $ 298       $ 190,536   

Commercial

     24,874         345         588         —           25,807   

Obligations of states and political subdivisions

     49,177         —           —           —           49,177   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 234,800    $ 8,365    $ 22,057    $ 298    $ 265,520   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 March 31, 2015 and September 30, 2014 (in thousands):

 

     Performing      Non-performing      Total  

March 31, 2015

        

Real estate loans:

        

Residential

   $ 618,364       $ 10,670       $ 629,034   

Construction

     1,489         —           1,489   

Home equity loans and lines of credit

     40,446         411         40,857   

Auto loans

     131,396         174         131,570   

Other

     3,087         12         3,099   
  

 

 

    

 

 

    

 

 

 

Total

$ 794,782    $ 11,267    $ 806,049   
  

 

 

    

 

 

    

 

 

 

 

     Performing      Non-performing      Total  

September 30, 2014

        

Real estate loans:

        

Residential

   $ 644,374       $ 9,778       $ 654,152   

Construction

     1,367         —           1,367   

Home equity loans and lines of credit

     41,128         259         41,387   

Auto loans

     100,571         —           100,571   

Other

     3,884         20         3,904   
  

 

 

    

 

 

    

 

 

 

Total

$ 791,324    $ 10,057    $ 801,381   
  

 

 

    

 

 

    

 

 

 

 

19


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 March 31, 2015 and September 30, 2014 (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
 

March 31, 2015

             

Real estate loans

             

Residential

  $ 615,872      $ 2,052      $ 440      $ —        $ 10,670      $ 13,162      $ 629,034   

Construction

    1,489        —          —          —          —          —          1,489   

Commercial

    185,477        896        83        —          10,681        11,660        197,137   

Commercial

    34,892        1,735        54        —          242        2,031        36,923   

Obligations of states and political subdivisions

    47,054        —          —          —          —          —          47,054   

Home equity loans and lines of credit

    39,897        463        86        —          411        960        40,857   

Auto loans

    130,585        654        157        —          174        985        131,570   

Other

    3,055        16        16        —          12        44        3,099   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

$ 1,058,321    $ 5,816    $ 836    $ —      $ 22,190    $ 28,842    $ 1,087,163   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    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, 2014

             

Real estate loans

             

Residential

  $ 640,583      $ 2,398      $ 1,393      $ —        $ 9,778      $ 13,569      $ 654,152   

Construction

    1,367        —          —          —          —          —          1,367   

Commercial

    179,319        516        89        —          10,612        11,217        190,536   

Commercial

    24,424        110        30        —          1,243        1,383        25,807   

Obligations of states and political subdivisions

    49,159        18        —          —          —          18        49,177   

Home equity loans and lines of credit

    40,870        225        33        —          259        517        41,387   

Auto loans

    100,112        426        33        —          —          459        100,571   

Other

    3,884        —          —          —          20        20        3,904   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

$ 1,039,718    $ 3,693    $ 1,578    $ —      $ 21,912    $ 27,183    $ 1,066,901   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 March 31, 2015 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 and Securities, 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.

 

20


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.

The following tables summarize changes in the primary segments of the ALL for the three and six month periods ending March 31, 2015 and 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  

ALL balance at December 31, 2014

   $ 5,571      $ 13       $ 676      $ 515      $ 145      $ 545      $ 674      $ 26      $ 351      $ 8,516   

Charge-offs

     (251     —           (42     —          —          —          (125     —          —          (418

Recoveries

     4        —           20        9        —          4        8        —          —          45   

Provision

     (35     4         189        111        (58     (81     466        4        (75     525   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ALL balance at March 31, 2015

$ 5,289    $ 17    $ 843    $ 635    $ 87    $ 468    $ 1,023    $ 30    $ 276    $ 8,668   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2013

$ 5,903    $ 26    $ 1,011    $ 330    $ 106    $ 491    $ —      $ 22    $ 480    $ 8,369   

Charge-offs

  (536   —        (11   —        —        —        —        —        —        (547

Recoveries

  1      —        83      1      —        —        —        5      —        90   

Provision

  552      —        (80   38      —        9      —        (1   232      750   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ALL balance at March 31, 2014

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

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     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 September 30, 2014

   $ 5,573      $ 11       $ 663      $ 528      $ 163      $ 470      $ 459      $ 32      $ 735      $ 8,634   

Charge-offs

     (760     —           (53     (27     —          (19     (165     —          —          (1,024

Recoveries

     22        —           31        9        —          12        9        —          —          83   

Provision

     454        6         202        125        (76     5        720        (2     (459     975   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ALL balance at March 31, 2015

$ 5,289    $ 17    $ 843    $ 635    $ 87    $ 468    $ 1,023    $ 30    $ 276    $ 8,668   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

September 30, 2013

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

Charge-offs

  (923   —        (50   (48   —        (63   —        —        —        (1,084

Recoveries

  78      —        83      12      —        —        —        9      —        182   

Provision

  978      6      24      68      (24   133      —        (4   319      1,500   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ALL balance at March 31, 2014

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

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

21


Table of Contents

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

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 March 31, 2015 (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

   $ 280       $ —         $ 4       $ —         $ —         $ 40       $ 12       $ —         $ —         $ 336   

Collectively evaluated for impairment

     5,009         17         839         635         87         428         1,011         30         276         8,332   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

ALL Balance at March 31, 2015

$ 5,289    $ 17    $ 843    $ 635    $ 87    $ 468    $ 1,023    $ 30    $ 276    $ 8,668   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Individually evaluated for impairment

$ 334    $ —      $ 84    $ —      $ —      $ 50    $ —      $ —      $ —      $ 468   

Collectively evaluated for impairment

  5,239      11      579      528      163      420      459      32      735      8,166   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

ALL balance at September 30, 2014

$ 5,573    $ 11    $ 663    $ 528    $ 163    $ 470    $ 459    $ 32    $ 735    $ 8,634   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 decreased provisions to obligations of state and political subdivisions, home equity loans and lines of credit for the six month period ending March 31, 2015 due to declining loan balances and impairment evaluations in those segments. The Company allocated increased provisions to commercial real estate, commercial loans, and auto loans for the six month period ending March 31, 2015 due primarily to increased loan balances. Despite the above allocations, the allowance for loan losses is general in nature and is available to absorb losses from any loan segment.

 

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The following is a summary of troubled debt restructuring granted during the three and six months ended March 31, 2015 and 2014 (dollars in thousands).

 

     For the Three Months Ended March 31, 2015  
     Number of
Contracts
     Pre-Modification
Outstanding
Recorded
Investment
     Post-Modification
Outstanding
Recorded
Investment
 

Troubled Debt Restructurings

        

Real estate loans:

        

Residential

     2       $ 408       $ 408  

Construction

     —           —           —     

Commercial

     —           —           —     

Commercial

     —           —           —     

Obligations of states and political subdivisions

     —           —           —     

Home equity loans and lines of credit

     1         150         150  

Auto loans

     —           —           —     

Other

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

  3    $ 558    $ 558  
  

 

 

    

 

 

    

 

 

 

Of the three new troubled debt restructurings granted for the three months ended March 31, 2015, two loans totaling $408,000 were granted terms and rate concessions and one loan totaling $150,000 was granted terms concessions (dollars in thousands).

 

     For the Three Months Ended March 31, 2014  
     Number of
Contracts
     Pre-Modification
Outstanding
Recorded
Investment
     Post-Modification
Outstanding
Recorded
Investment
 

Troubled Debt Restructurings

        

Real estate loans:

        

Residential

     3      $ 473      $ 473  

Construction

     —           —           —     

Commercial

     1        197        197  

Commercial

     —           —           —     

Obligations of states and political subdivisions

     —           —           —     

Home equity loans and lines of credit

     —           —           —     

Auto loans

     —           —           —     

Other

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

  4   $ 670   $ 670  
  

 

 

    

 

 

    

 

 

 

Of the four new troubled debt restructurings granted for the three months ended March 31, 2014, three loans totaling $473,000 were granted terms and rate concessions and one loan totaling $197,000 was granted terms concessions (dollars in thousands).

 

     For the Six Months Ended March 31, 2015  
     Number of
Contracts
     Pre-Modification
Outstanding
Recorded
Investment
     Post-Modification
Outstanding
Recorded
Investment
 

Troubled Debt Restructurings

        

Real estate loans:

        

Residential

     9       $ 1,474       $ 1,474  

Construction

     —           —           —     

Commercial

     —           —           —     

Commercial

     —           —           —     

Obligations of states and political subdivisions

     —           —           —     

Home equity loans and lines of credit

     1         150         150   

Auto loans

     —           —           —     

Other

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

  10    $ 1,624    $ 1,624  
  

 

 

    

 

 

    

 

 

 

 

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Of the ten new troubled debt restructurings granted for the six months ended March 31, 2015, five loans totaling $762,000 were granted terms and rate concessions, three loans totaling $496,000 were granted terms concessions and two loans totaling $366,000 were granted rate concessions (dollars in thousands).

 

     For the Six Months Ended March 31, 2014  
     Number of
Contracts
     Pre-Modification
Outstanding
Recorded
Investment
     Post-Modification
Outstanding
Recorded
Investment
 

Troubled Debt Restructurings

        

Real estate loans:

        

Residential

     7      $ 1,066      $ 1,066  

Construction

     —           —           —     

Commercial

     1        197        197  

Commercial

     —           —           —     

Obligations of states and political subdivisions

     —           —           —     

Home equity loans and lines of credit

     —           —           —     

Other

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

  8   $ 1,263   $ 1,263  
  

 

 

    

 

 

    

 

 

 

Of the eight new troubled debt restructurings granted for the six months ended March 31, 2014, five loans totaling $603,000 were granted terms and rate concessions and three loans totaling $660,000 were granted terms concessions.

For the three months ended March 31, 2015, three residential real estate loans totaling $521,000 defaulted on a restructuring agreement within one year of modification. For the six months ended March 31, 2015, four residential real estate loans totaling $677,000 defaulted on a restructuring agreement within one year of modification. There were no troubled debt restructurings that have subsequently defaulted within one year of modification for the three and six months ended March 31, 2014.

 

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Table of Contents
8. Deposits

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

 

     March 31,
2015
     September 30,
2014
 

Non-interest bearing demand accounts

   $ 103,134      $ 70,048  

Interest bearing demand accounts

     97,040        163,936  

Money market accounts

     210,500        170,158  

Savings and club accounts

     129,464        122,734  

Certificates of deposit

     563,659        607,013  
  

 

 

    

 

 

 

Total

$ 1,103,797   $ 1,133,889  
  

 

 

    

 

 

 

 

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, 2014 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
March 31,
     Six Months Ended
March 31,
 
     2015      2014      2015      2014  

Service Cost

   $ 218      $ 145      $ 436      $ 289  

Interest Cost

     206        190        412        381  

Expected return on plan assets

     (308 )      (291 )      (616 )      (581 )

Amortization of unrecognized loss

     60        7        120        14  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit cost

$ 176   $ 51   $ 352   $ 103  
  

 

 

    

 

 

    

 

 

    

 

 

 

The Bank plans to contribute $500,000 to its pension plan in 2015.

 

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 and 19,880 of restricted stock on July 22, 2014. 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 vested over a five-year service period. The 2013 restricted stock shares vested over an 18-month service period. The 2014 restricted shares vest over a 39 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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Table of Contents

For the six months ended March 31, 2015 and 2014, the Company recorded $51,000 and $122,000 of share-based compensation expense, respectively, comprised of restricted stock expense. Expected future compensation expense relating to the 14,906 restricted shares at March 31, 2015 is $169,000 over the remaining vesting period of 2.50 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 March 31, 2015.

 

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

Outstanding, September 30, 2014

     1,443,379      $ 12.35        3.67      $ —     

Granted

     —           —           —           —     

Exercised

     —           —           —           —     

Forfeited

     (123,799 )      12.35        3.17        —     
  

 

 

          

Outstanding, March 31, 2015

  1,319,580   $ 12.35     3.17   $ 620,000  
  

 

 

          

Exercisable at March 31, 2015

  1,319,580   $ 12.35     3.17   $ 620,000  
  

 

 

          

The following is a summary of the status of the Company’s restricted stock as of March 31, 2015, and changes therein during the six month period then ended:

 

     Number of
Restricted Stock
     Weighted-
average
Grant Date
Fair Value
 

Nonvested at September 30, 2014

     14,906      $ 11.07  

Granted

     —           —     

Vested

     —           —     

Forfeited

     —           —     
  

 

 

    

Nonvested at March 31, 2015

  14,906   $ 11.07  
  

 

 

    

 

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 March 31, 2015 and September 30, 2014 and indicates the fair value hierarchy of the valuation techniques utilized by the Bank to determine such fair value:

 

     Fair Value Measurement at March 31, 2015         

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
March 31, 2015
 

Securities available-for-sale measured on a recurring basis

           

Mortgage backed securities

   $ —         $ 250,689      $ —         $ 250,689  

Obligations of states and political subdivisions

     —           47,918        —           47,918  

U.S. government agencies

     —           44,885        —           44,885  

Corporate obligations

     —           15,454        2,000        17,454  

Trust-preferred securities

     —           3,803        1,740        5,543  

Other debt securities

     —           14,336        500        14,836  

Equity securities-financial services

     2,025        —           —           2,025  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt and equity securities

$ 2,025   $ 377,085   $ 4,240   $ 383,350  

Foreclosed real estate owned measured on a non-recurring basis

$ —      $ —      $ 2,479   $ 2,479  

Impaired loans measured on a non-recurring basis

$ —      $ —      $ 33,566   $ 33,566  
     Fair Value Measurement at September 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, 2014
 

Securities available-for-sale measured on a recurring basis

           

Mortgage backed securities

   $ —         $ 265,052      $ —         $ 265,052  

Obligations of states and political subdivisions

     —           42,771        —           42,771  

U.S. government agencies

     —           47,630        —           47,630  

Corporate obligations

     —           13,328        —           13,328  

Trust-preferred securities

     —           3,891        1,730        5,621  

Other debt securities

     —           6,151        500        6,651  

Equity securities-financial services

     2,025        —           —           2,025  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt and equity securities

$ 2,025   $ 378,823   $ 2,230   $ 383,078  

Foreclosed real estate owned measured on a non-recurring basis

$ —      $ —      $ 2,759   $ 2,759  

Impaired loans measured on a non-recurring basis

$ —      $ —      $ 36,497   $ 36,497  

 

27


Table of Contents

The following table presents a summary of changes in the fair value of the Company’s Level III investments for the three and six month periods ended March 31, 2015 and March 31, 2014 (in thousands).

 

     Fair Value Measurement Using Significant Unobservable Inputs
(Level III)
 
     Three months ended  
     March 31, 2015      March 31, 2014  

Beginning balance

   $ 2,200      $ 1,840  

Purchases, sales, issuances, settlements, net

     2,000        —     

Total unrealized gain:

     

Included in earnings

     —           —     

Included in other comprehensive income

     40        (10 )

Transfers in and/or out of Level III

     —           —     
  

 

 

    

 

 

 
$ 4,240   $ 1,830  
  

 

 

    

 

 

 

 

     Fair Value Measurement Using Significant Unobservable Inputs
(Level III)
 
     Six months ended  
     March 31, 2015      March 31, 2014  

Beginning balance

   $ 2,230      $ 1,800  

Purchases, sales, issuances, settlements, net

     2,000        —     

Total unrealized gain:

     

Included in earnings

     —           —     

Included in other comprehensive income

     10        30  

Transfers in and/or out of Level III

     —           —     
  

 

 

    

 

 

 
$ 4,240   $ 1,830  
  

 

 

    

 

 

 

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

 

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Table of Contents

measurements consider observable data that may include dealer quoted market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. Securities reported at fair value utilizing Level 1 inputs are limited to actively traded equity securities whose market price is readily available from the New York Stock Exchange or the NASDAQ exchange. Foreclosed real estate is measured at fair value, less cost to sell at the date of foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value, less cost to sell. Income and expenses from operations and changes in valuation allowance are included in the net expenses from foreclosed real estate. Impaired loans are reported at fair value utilizing level three inputs. For these loans, a review of the collateral is conducted and an appropriate allowance for loan losses is allocated to the loan. At March 31, 2015, 257 impaired loans with a carrying value of $33.9 million were reduced by specific valuation allowance totaling $336,000 resulting in a net fair value of $33.6 million based on Level 3 inputs. At September 30, 2014, 264 impaired loans with a carrying value of $37.0 million were reduced by a specific valuation totaling $468,000 resulting in a net fair value of $36.5 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
(in thousands)    Fair Value
Estimate
     Valuation
Techniques
   Unobservable
Input
   Range

March 31, 2015:

           

Impaired loans

   $ 33,566      Appraisal of
collateral (1)
   Appraisal
adjustments (2)
   0% to 30%
(23.0%)

Foreclosed real estate owned

     2,479      Appraisal of
collateral (1), (3)
   Appraisal
adjustments (2)
   20% to 40%
(21.3%)

 

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

September 30, 2014:

           

Impaired loans

   $ 36,497      Appraisal of
collateral (1)
   Appraisal
adjustments (2)
   0% to 35%
(23.0%)

Foreclosed real estate owned

     2,759      Appraisal of
collateral (1), (3)
   Appraisal
adjustments (2)
   19% to 35%
(21.2%)

 

(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.

 

     March 31, 2015  
     Carrying Value      Level I      Level II      Level III      Total Fair
Value
 

Financial assets:

              

Cash and cash equivalents

   $ 16,610      $ 16,610      $ —         $ —         $ 16,610   

Investment and mortgage backed securities available for sale

     383,350        2,025        377,085        4,240        383,350   

Loans receivable, net

     1,078,495        —           —           1,099,741        1,099,741   

Accrued interest receivable

     4,902        4,902        —           —           4,902   

Regulatory stock

     13,644        13,644        —           —           13,644   

Mortgage servicing rights

     554        —           —           554        554   

Bank owned life insurance

     30,190        30,190        —           —           30,190   

Financial liabilities:

              

Deposits

   $ 1,103,797      $ 540,138      $ —         $ 568,047        1,108,185   

Short-term borrowings

     110,001        110,001        —           —           110,001   

Other borrowings

     179,960        —           —           181,331        181,331   

Advances by borrowers for taxes and insurance

     8,565        8,565        —           —           8,565   

Accrued interest payable

     813        813        —           —           813   

 

     September 30, 2014  
     Carrying Value      Level I      Level II      Level III      Total Fair
Value
 

Financial assets:

              

Cash and cash equivalents

   $ 22,301      $ 22,301      $ —         $ —         $ 22,301   

Investment and mortgage backed securities available for sale

     383,078        2,025        378,823        2,230        383,078   

Loans receivable, net

     1,058,267        —           —           1,077,585        1,077,585   

Accrued interest receivable

     5,061        5,061        —           —           5,061   

Regulatory stock

     14,284        14,284        —           —           14,284   

Mortgage servicing rights

     688        —           —           688        688   

Bank owned life insurance

     29,720        29,720        —           —           29,720   

Financial liabilities:

              

Deposits

   $ 1,133,889      $ 526,876      $ —         $ 608,936        1,135,812   

Short-term borrowings

     108,020        108,020        —           —           108,020   

Other borrowings

     151,300        —           —           151,617        151,617   

Advances by borrowers for taxes and insurance

     4,093        4,093        —           —           4,093   

Accrued interest payable

     831        831        —           —           831   

 

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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. For certain securities which are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence (Level 3). In the absence of such evidence, management’s best estimate is used. Management’s best estimate consists of both internal and external support on certain Level 3 investments. Internal cash flow models using a present value formula that includes assumptions market participants would use along with indicative exit pricing obtained from broker/dealers (where available) are used to support fair values of certain Level 3 investments, if applicable.

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.

Deposits

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.

 

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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.

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/(Loss)

The activity in accumulated other comprehensive income/(loss) for the three and six months ended March 31, 2015 and 2014 is as follows (in thousands):

 

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

Balance at December 31, 2014

   $ (3,188    $ 2,457       $ (731

Other comprehensive income before reclassifications

     —           1,567         1,567   

Amounts reclassified from accumulated other comprehensive income, net of tax

     40         (135      (95
  

 

 

    

 

 

    

 

 

 

Period change

  40      1,432      1,472   
  

 

 

    

 

 

    

 

 

 

Balance at March 31, 2015

$ (3,148 $ 3,889    $ 741   
  

 

 

    

 

 

    

 

 

 

Balance at December 31, 2013

$ (1,302 $ (1,273 $ (2,575

Other comprehensive loss before reclassifications

  —        880      880   

Amounts reclassified from accumulated other comprehensive income, net of tax

  5      (156   (151
  

 

 

    

 

 

    

 

 

 

Period change

  5      724      729   
  

 

 

    

 

 

    

 

 

 

Balance at March 31, 2014

$ (1,297 $ (549 $ (1,846
  

 

 

    

 

 

    

 

 

 

 

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

Balance at September 30, 2014

   $ (3,228    $ 649       $ (2,579

Other comprehensive income (loss) before reclassifications

     —           3,375         3,375   

Amounts reclassified from accumulated other comprehensive income

     80         (135      (55
  

 

 

    

 

 

    

 

 

 

Period change

  80      3,240      3,320   
  

 

 

    

 

 

    

 

 

 

Balance at March 31, 2015

$ (3,148 $ 3,889    $ 741   
  

 

 

    

 

 

    

 

 

 

Balance at September 30, 2013

$ (1,306 $ 71    $ (1,235

Other comprehensive income (loss) before reclassifications

  —        (464   (464

Amounts reclassified from accumulated other comprehensive income

  9      (156   (147
  

 

 

    

 

 

    

 

 

 

Period change

  9      (620   (611
  

 

 

    

 

 

    

 

 

 

Balance at March 31, 2014

$ (1,297 $ (549 $ (1,846

 

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Table of Contents
     Amount Reclassified from
Accumulated Other Comprehensive Income
     Accumulated Other
Comprehensive Income for
the Three Months Ended
March 31,
    

Affected Line Item in the Consolidated
Statement of Income

     2015      2014       

Securities available for sale:

        

Net securities gains reclassified into earnings

   $ 204       $ 236       Gain on sale of investments, net

Related income tax expense

     (69      (80    Provision for income taxes
  

 

 

    

 

 

    

Net effect on accumulated other comprehensive income for the period

  135      156    Net of tax
  

 

 

    

 

 

    

Defined benefit pension plan:

Amortization of net loss and prior service costs

  (60   (7 Compensation and employee benefits

Related income tax expense

  20      2    Provision for income taxes
  

 

 

    

 

 

    

Net effect on accumulated other comprehensive income for the period

$ (40 $ (5 Net of tax
  

 

 

    

 

 

    

Total reclassification for the period

$ 95    $ 151    Net of tax
  

 

 

    

 

 

    

 

     Amount Reclassified from
Accumulated Other Comprehensive Income
     Accumulated Other
Comprehensive Income for
the Six Months Ended
March 31,
    

Affected Line Item in the Consolidated
Statement of Income

     2015      2014       

Securities available for sale:

        

Net securities gains reclassified into earnings

   $ 204       $ 236       Gain on sale of investments, net

Related income tax expense

     (69      (80    Provision for income taxes
  

 

 

    

 

 

    

Net effect on accumulated other comprehensive income for the period

  135      156    Net of tax
  

 

 

    

 

 

    

Defined benefit pension plan:

Amortization of net loss and prior service costs

  (121   (14 Compensation and employee benefits

Related income tax expense

  41      5    Provision for income taxes
  

 

 

    

 

 

    

Net effect on accumulated other comprehensive income for the period

$ (80 $ (9 Net of tax
  

 

 

    

 

 

    

Total reclassification for the period

$ 55    $ 147    Net of tax
  

 

 

    

 

 

    

 

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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.

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 March 31, 2015 and September 30, 2014

Total Assets. Total assets increased by $9.8 million, or 0.6%, to $1.58 billion at March 31, 2015 from $1.57 billion at September 30, 2014. An increase in loans receivable of $20.2 million, which was partially offset by declines in cash and due from banks of $7.5 million, deferred income taxes of $2.0 million and other assets of $2.1 million was the primary reasons for the increase.

Total Cash and Cash Equivalents. Total cash and cash equivalents decreased $5.7 million, or 25.5%, to $16.6 million at March 31, 2015 from $22.3 million at September 30, 2014. Declines in cash and due from banks of $7.5 million were partially offset by increase in interest bearing deposits with other institutions of $1.8 million. The decrease in cash and due from banks was due to normal fluctuations in cash held at the Federal Reserve Bank.

Net Loans. Net loans increased $20.2 million, or 1.9%, to $1.08 billion at March 31, 2015 from $1.06 billion at September 30, 2014. During this period, commercial real estate loans increased $6.6 million to $197.1 million, commercial loans increased $11.1 million to $36.9 million, construction loans increased $122,000 to $1.5 million and auto loans increased $31.0 million to $131.6 million. These increases were partially offset by decreases in residential loans of $25.1 million to $629.0 million, obligations of states and political subdivisions outstanding of $2.1 million to $47.1 million, home equity loans and lines of credit of $530,000 to $40.9 million and other loans of $805,000 to $3.1 million.

Investment Securities Available for Sale. Investment securities available for sale increased $272,000, or 0.1%, to $383.4 million at March 31, 2015 from $383.1 million at September 30, 2014. The increase was due primarily to increases in obligations of states and political subdivisions of $5.1 million and other debt securities of $8.2 million offset in part by decreases in mortgage backed securities of $14.4 million.

Deposits. Deposits decreased $30.1 million, or 2.7%, to $1.10 billion at March 31, 2015 from $1.13 billion at September 30, 2014, primarily as a result of declines in interest bearing demand accounts, and certificates of deposit, offset in part by increases in non-interest bearing demand accounts, money market and savings accounts. At March 31, 2015, compared to September 30, 2014, certificate of deposit accounts decreased $43.4 million to $563.7 million, interest bearing demand accounts decreased $66.9 million to $97.0 million, non-interest bearing demand accounts increased $33.1 million to $103.1 million, money market accounts increased $40.3 million to $210.5 million and savings and club accounts increased $6.7 million to $129.5 million. Included in the certificates of deposit at March 31, 2015 was a decrease in brokered certificates of $6.3 million to $212.0 million. During the fiscal second quarter approximately $24.0 million of interest bearing demand accounts that were earning 0.00% in interest were reclassified to non-interest bearing demand accounts.

 

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Table of Contents

Borrowed Funds. Borrowed funds increased by $30.6 million, or 11.8%, to $290.0 million at March 31, 2015, from $259.3 million at September 30, 2014. The increase in borrowed funds was primarily due to increases in short term borrowings of $2.0 million and other borrowings of $28.7 million.

Stockholders’ Equity. Stockholders’ equity increased by $5.2 million, or 3.1%, to $172.5 million at March 31, 2015 from $167.3 million at September 30, 2014. Increases resulting from net income and the change to accumulated other comprehensive income were partially offset by the payment of dividends and the repurchase of common stock.

 

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Table of Contents

Average Balance Sheets for the Three and Six Months Ended March 31, 2015 and 2014

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 March 31,  
    2015     2014  
    Average Balance     Interest Income/
Expense
    Yield/Cost     Average Balance     Interest Income/
Expense
    Yield/Cost  
    (dollars in thousands)  

Interest-earning assets:

           

Loans(1)

  $ 1,074,394      $ 11,100        4.19   $ 921,678      $ 9,843        4.33

Investment Securities

           

Taxable(2)

    80,644        433        2.18     82,023        413        2.04

Exempt from federal income tax(2)(3)

    36,377        239        4.04     13,706        72        3.23
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investment securities

  117,021      672      2.76   95,729      485      2.21

Mortgage-backed securities

  264,753      1,366      2.09   218,860      1,110      2.06

Regulatory stock

  12,643      438      14.05   10,179      81      3.23

Other

  4,699      4      0.35   9,827      4      0.17
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

  1,473,510      13,580      3.77   1,256,273      11,523      3.73

Allowance for loan losses

  (8,545   (8,337

Noninterest-earning assets

  106,933      107,682   
 

 

 

       

 

 

     

Total assets

$ 1,571,898    $ 1,355,618   
 

 

 

       

 

 

     

Interest-bearing liabilities:

NOW accounts

$ 103,235    $ 22      0.09 $ 90,054      11      0.05

Money market accounts

  209,839      62      0.12   139,703      62      0.18

Savings and club accounts

  121,161      15      0.05   111,819      14      0.05

Certificates of deposit

  576,393      1,779      1.25   590,813      1,819      1.25

Borrowed funds

  286,935      700      0.99   177,706      679      1.55
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

  1,297,563      2,578      0.81   1,110,095      2,585      0.94

Non-interest-bearing NOW accounts

  84,513      60,611   

Non-interest-bearing liabilities

  17,710      16,302   
 

 

 

       

 

 

     

Total liabilities

  1,399,786      1,187,008   

Equity

  172,112      168,610   
 

 

 

       

 

 

     

Total liabilities and equity

$ 1,571,898    $ 1,355,618   
 

 

 

       

 

 

     

Net interest income

$ 11,002      2.96 $ 8,938      2.79
   

 

 

       

 

 

   

Interest rate spread

Net interest-earning assets

$ 175,947      3.03 $ 146,178      2.89
 

 

 

       

 

 

     

Net interest margin

Average interest-earning assets to average interest-bearing liabilities

  113.56   113.17

 

 

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Table of Contents
    For the Six months Ended March 31,  
    2015     2014  
    Average Balance     Interest Income/
Expense
    Yield/Cost     Average Balance     Interest Income/
Expense
    Yield/Cost  
    (dollars in thousands)  

Interest-earning assets:

           

Loans(1)

  $ 1,070,817      $ 22,549        4.22   $ 925,160      $ 20,366        4.41

Investment Securities

           

Taxable(2)

    80,779        938        2.33     84,579        839        1.99

Exempt from federal income tax(2)(3)

    35,493        473        4.05     13,696        145        3.22
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investment securities

  116,272      1,411      2.85   98,275      984      2.16

Mortgage-backed securities

  266,433      2,750      2.07   218,298      2,211      2.03

Regulatory stock

  12,657      568      9.00   9,954      136      2.74

Other

  4,033      10      0.50   8,908      8      0.18
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

  1,470,212      27,288      3.76   1,260,595      23,705      3.78

Allowance for loan losses

  (8,555   (8,165

Noninterest-earning assets

  109,488      105,896   
 

 

 

       

 

 

     

Total assets

$ 1,571,145    $ 1,358,326   
 

 

 

       

 

 

     

Interest-bearing liabilities:

NOW accounts

$ 116,958    $ 48      0.08 $ 90,306      22      0.05

Money market accounts

  203,311      262      0.26   138,724      132      0.19

Savings and club accounts

  119,789      30      0.05   109,593      28      0.05

Certificates of deposit

  584,878      3,503      1.20   602,680      3,712      1.24

Borrowed funds

  282,421      1,393      0.99   174,032      1,382      1.59
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

  1,307,357      5,236      0.80   1,115,335      5,276      0.95

Non-interest-bearing NOW accounts

  76,377      59,512   

Non-interest-bearing liabilities

  16,392      15,145   
 

 

 

       

 

 

     

Total liabilities

  1,400,126      1,189,992   

Equity

  171,019      168,334   
 

 

 

       

 

 

     

Total liabilities and equity

$ 1,571,145    $ 1,358,326   
 

 

 

       

 

 

     

Net interest income

$ 22,052      2.96 $ 18,429      2.83
   

 

 

       

 

 

   

Interest rate spread

Net interest-earning assets

$ 162,855      3.01 $ 145,260      2.93
 

 

 

       

 

 

     

Net interest margin

Average interest-earning assets to average interest-bearing liabilities

  112.46   113.02

 

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Table of Contents

 

(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

Comparison of Operating Results for the Three Months Ended March 31, 2015 and March 31, 2014

Net Income. Net income increased $930,000, or 61.9%, to $2.4 million for the three months ended March 31, 2015 compared to net income of $1.5 million for the comparable period in 2014. The increase was due primarily to increases in net interest income and noninterest income, offset in part by an increase in noninterest expenses. Year over year comparisons reflect contributions from the acquisition of Franklin Security Bancorp, which closed in the Company’s fiscal 2014 third quarter.

Net Interest Income. Net interest income increased $2.1 million, or 23.1%, to $11.0 million for the three months ended March 31, 2015 from $8.9 million for the comparable period in 2014. The increase was primarily attributable to an increase in the Company’s interest rate spread to 2.96% for the three months ended March 31, 2015, from 2.79% for the comparable period in 2014, and an increase of $29.8 million in the Company’s average net interest-earnings assets.

Interest Income. Interest income increased $2.1 million, or 17.9%, to $13.6 million for the three months ended March 31, 2015 from $11.5 million for the comparable 2014 period. Included in interest income for the three months ended March 31, 2015 was a one-time special dividend on FHLB stock totaling $311,000. The increase resulted primarily from an increase in interest earning assets of $217.2 million along with a increase in the yield on interest earning assets of 4 basis points. The average yield on interest earning assets was 3.77% for the three months ended March 31, 2015, as compared to 3.73% for the comparable 2014 period. Loans increased on average $152.7 million between the two periods. In addition, average investment securities increased $21.3 million, mortgage-backed securities increased $45.9 million, regulatory stock increased $2.5 million and other interest earning assets decreased $5.1 million.

Interest Expense. Interest expense decreased $7,000, or 0.3%, to $2.6 million for the three months ended March 31, 2015. The decrease resulted from a $187.5 million increase in average interest bearing liabilities for the three months ended March 31, 2015, offset by a 13 basis point decrease in the overall cost of interest bearing liabilities to 0.81% for the three months ended March 31, 2015 from 0.94% for the comparable 2014 period. Increases in all interest bearing accounts as a result of the Franklin Security Bancorp merger was the primary reason for the increase in average interest bearing liabilities.

Provision for Loan Losses. In evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect a borrower’s ability to repay, the estimated value of any underlying collateral, peer group information and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are subject to interpretation and revision as more information becomes available or as future events occur. After an evaluation of these factors, management made a provision for loan losses of $525,000 for the three month period ended March 31, 2015 as compared to $750,000 for the three month period ended March 31, 2014. The allowance for loan losses was $8.7 million, or 0.80% of loans outstanding, at March 31, 2015, compared to $8.6 million, or 0.81% of loans outstanding at September 30, 2014.

Non-interest Income. Non-interest income increased $149,000, or 8.5%, to $1.9 million for the three months ended March 31, 2015 from $1.8 million for the comparable period in 2014. The primary reason for the increase was an increase in service charges and fees on loans of $170,000.

Non-interest Expense. Non-interest expense increased $1.2 million, or 15.4%, to $9.1 million for the three months ended March 31, 2015 from $7.9 million for the comparable period in 2014. The primary reasons for the increase were increases in compensation and employee benefits of $875,000 and other expenses of $280,000 due to increased expenses since the acquisition of Franklin Security Bank.

Income Taxes. Income tax expense increased $294,000 to $848,000 for the three months ended March 31, 2015 from $554,000 for the comparable 2014 period. The increase was primarily a result of the increase in income before taxes of $1.2 million for the three months ended March 31, 2015. The effective tax rate was 25.9% for the three months ended March 31, 2015, compared to 26.9% for the 2014 period.

Comparison of Operating Results for the Six Months Ended March 31, 2015 and March 31, 2014

Net Income. Net income increased $1.5 million, or 43.4%, to $5.0 million for the six months ended March 31, 2015 compared to net income of $3.5 million for the comparable period in 2014. The increase was due primarily to increases in net interest income and noninterest income, offset in part by an increase in noninterest expenses.

Net Interest Income. Net interest income increased $3.6 million, or 19.7%, to $22.1 million for the six months ended March 31, 2015 from $18.4 million for the comparable period in 2014. The increase was primarily attributable to an increase in the Company’s interest rate spread to 2.96% for the six months ended March 31, 2015, from 2.83% for the comparable period in 2014, and an increase of $17.6 million in the Company’s average net interest-earnings assets.

Interest Income. Interest income increased $3.6 million, or 15.1%, to $27.3 million for the six months ended March 31, 2015 from $23.7 million for the comparable 2014 period. The increase resulted primarily from an increase in interest earning assets of $209.6 million offset in part by a decline in the yield on interest earning assets of two basis points. The average yield on interest earning assets was 3.76% for the six months ended March 31, 2015, as compared to 3.78% for the comparable 2014 period. Loans increased on average $145.7 million between the two periods. In addition, average investment securities increased $18.0 million, mortgage-backed securities increased $48.1 million, regulatory stock increased $2.7 million and other interest earning assets decreased $4.9 million.

 

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Interest Expense. Interest expense decreased $40,000, or 0.8%, to $5.2 million for the six months ended March 31, 2015 from $5.3 million for the comparable 2014 period. The decrease resulted from a $192.0 million increase in average interest bearing liabilities for the six months ended March 31, 2015, offset by a 15 basis point decrease in the overall cost of interest bearing liabilities to 0.80% for the six months ended March 31, 2015 from 0.95% for the comparable 2014 period. Increases in all interest bearing accounts as a result of the Franklin Security Bancorp merger was the primary reason for the increase in average interest bearing liabilities.

Provision for Loan Losses. In evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect a borrower’s ability to repay, the estimated value of any underlying collateral, peer group information and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are subject to interpretation and revision as more information becomes available or as future events occur. After an evaluation of these factors, management made a provision for loan losses of $975,000 for the six month period ended March 31, 2015 as compared to $1.5 million for the six month period ended March 31, 2014. The allowance for loan losses was $8.7 million, or 0.80% of loans outstanding, at March 31, 2015, compared to $8.6 million, or 0.81% of loans outstanding at September 30, 2014.

Non-interest Income. Non-interest income increased $336,000, or 9.9%, to $3.7 million for the six months ended March 31, 2015 from $3.4 million for the comparable period in 2014. The primary reason for the increase was an increase in service charges and fees on loans of $300,000.

Non-interest Expense. Non-interest expense increased $2.4 million, or 15.6%, to $18.1 million for the six months ended March 31, 2015 from $15.6 million for the comparable period in 2014. The primary reasons for the increase were increases in compensation and employee benefits of $1.7 million and other expenses of $715,000 due to increased expenses since the acquisition of Franklin Security Bank.

Income Taxes. Income tax expense increased $530,000 to $1.7 million for the six months ended March 31, 2015 from $1.2 million for the comparable 2014 period. The increase was primarily a result of the increase in income before taxes of $2.1 million for the six months ended March 31, 2015. The effective tax rate was 25.3% for the six months ended March 31, 2015, compared to 25.0% for the 2014 period.

 

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Non-Performing Assets

The following table provides information with respect to the Bank’s non-performing assets at the dates indicated. (Dollars in thousands)

 

     March 31,
2015
    September 30,
2014
 

Non-performing assets:

    

Non-accruing loans

   $ 22,190     $ 21,912  

Troubled debt restructures

           238  
  

 

 

   

 

 

 

Total non-performing loans

  22,190     22,150  

Foreclosed real estate

  2,479     2,759  

Other repossessed assets

  64      69   
  

 

 

   

 

 

 

Total non-performing assets

$ 24,733   $ 24,978  
  

 

 

   

 

 

 

Ratio of non-performing loans to total loans

  2.04 %   2.08 %

Ratio of non-performing loans to total assets

  1.40 %   1.41 %

Ratio of non-performing assets to total assets

  1.56 %   1.58 %

Ratio of allowance for loan losses to total loans

  0.80 %   0.81 %

Loans are reviewed on a regular basis and are placed on non-accrual status when they become more than 90 days delinquent. When loans are placed on non-accrual status, unpaid accrued interest is fully reserved, and further income is recognized only to the extent received. Non-performing assets decreased $245,000 to $24.7 million at March 31, 2015 from $25.0 million at September 30, 2014. Non-performing loans increased $39,000 to $22.2 million at March 31, 2015 from $22.2 million at September 30, 2014. The year to date increase was primarily due to increases of $654,000 in non-performing mortgage loans and $318,000 in non-performing commercial loans offset, in part, by a decrease of $932,000 in non-performing commercial loans. The number of nonperforming residential loans decreased to 95 at March 31, 2015, from 96 at September 30, 2014. The $22.2 million of non-accruing loans at March 31, 2015 included 95 residential loans with an aggregate outstanding balance of $10.7 million, 67 commercial and commercial real estate loans with aggregate outstanding balances of $10.9 million and 36 consumer loans with aggregate balances of $597,000. Within the residential loan balance are $3.3 million of loans less than 90 days past due. In the quarter ended March 31, 2015, the Company identified 25 residential loans which, although paying as agreed, have a high probability of default. Foreclosed real estate decreased $280,000 to $2.5 million at March 31, 2015 from $2.8 million at September 30, 2014. Foreclosed real estate consists of 24 residential properties, three building lots and three commercial properties.

At March 31, 2015, the principal balance of troubled debt restructures was $7.9 million as compared to $6.8 million at September 30, 2014. Of the $7.9 million of troubled debt restructures at March 31, 2015, $2.1 million are performing loans and $5.8 million are non-accrual loans.

Of the 61 loans that comprise our troubled debt restructures at March 31, 2015, no loans were granted a rate concession at a below market interest rate. Twenty-two loans with balances totaling $3.1 million were granted market rate and terms concessions, 11 loans totaling $1.0 million were granted an interest rate concession and 28 loans with balances totaling $3.7 million were granted term concessions.

As of March 31, 2015, troubled debt restructures were comprised of 50 residential loans totaling $6.3 million, 9 commercial and commercial real estate loans totaling $1.3 million, and two consumer (home equity loans, home equity lines and credit, and other) loans totaling $246,000.

For the three month period ended March 31, 2015, three loans totaling $297,000 were removed from non-performing TDR status due to completion of one year of consecutive on time payments, one loan for $198,000 was removed due to paying off and one loan was foreclosed for $34,000. For the six months ended March 31, 2015 one loan for $198,000 was paid off, six loans totaling $572,000 were removed for consecutive on-time payments and one loan for $34,000 was transferred to foreclosed real estate.

We have modified terms of loans that do not meet the definition of a TDR. The vast majority of such loans were rate modifications of residential first mortgage loans in lieu of refinancing. The non-TDR rate modifications were all performing loans when the rates were reset to current market rates. For the three months ended March 31, 2015, we modified 24 loans ($3.0 million) in this fashion. For the six months ended March 31, 2015, we modified 36 loans ($4.7 million) in this fashion. With regard to commercial loans, including commercial real estate loans, there were six loans in the three months ended March 31, 2015 totaling $3.0 million. There were thirteen such loans in the six months ended March 31, 2015 with an aggregate balance of approximately $10.4 million.

 

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Liquidity and Capital Resources

We maintain liquid assets at levels we consider adequate to meet both our short-term and long-term liquidity needs. We adjust our liquidity levels to fund deposit outflows, repay our borrowings and to fund loan commitments. We also adjust liquidity as appropriate to meet asset and liability management objectives.

Our primary sources of liquidity are deposits, prepayment and repayment of loans and mortgage-backed securities, maturities of investment securities and other short-term investments, and earnings and funds provided from operations, as well as access to FHLBank advances and other borrowing sources. While scheduled principal repayments on loans and mortgage-backed securities are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by market interest rates, economic conditions, and rates offered by our competition. We set the interest rates on our deposits to maintain a desired level of total deposits.

A portion of our liquidity consists of cash and cash equivalents and borrowings, which are a product of our operating, investing and financing activities. At March 31, 2015, $16.6 million of our assets were invested in cash and cash equivalents. Our primary sources of cash are principal repayments on loans, proceeds from the maturities of investment securities, principal repayments of mortgage-backed securities and increases in deposit accounts. Short-term investment securities (maturing in one year or less) totaled $6.0 million at March 31, 2015. As of March 31, 2015, we had $290.0 million in borrowings outstanding from FHLBank Pittsburgh. We have access to total FHLBank advances of up to approximately $559.4 million.

At March 31, 2015, we had $102.5 million in loan commitments outstanding, which included, in part, $18.8 million in undisbursed construction loans and land development loans, $31.8 million in unused home equity lines of credit, $44.9 million in commercial lines of credit and commitments to originate commercial loans, $3.2 million in performance standby letters of credit and $3.8 million in other unused commitments which are primarily to originate residential mortgage loans and multifamily loans. Certificates of deposit due within one year of March 31, 2015 totaled $237.2 million, or 42.1% of certificates of deposit. If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before March 31, 2016. We believe, however, based on past experience that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

As reported in the Consolidated Statements of Cash Flows, our cash flows are classified for financial reporting purposes as operating, investing or financing cash flows. Net cash provided by operating activities was $8.6 million and $7.2 million for the six months ended March 31, 2015 and 2014, respectively. These amounts differ from our net income because of a variety of cash receipts and disbursements that did not affect net income for the respective periods. Net cash (used for) provided by investing activities was ($15.9) million and $25.0 million for the six months ended March 31, 2015 and 2014, respectively, principally reflecting our loan and investment security activities. Deposit and borrowing cash flows have comprised most of our financing activities, which resulted in net cash provided by (used for) of $1.5 million and ($18.2) million for the six months ended March 31, 2015 and 2014, respectively.

Critical Accounting Policies

We consider accounting policies that require management to exercise significant judgment or discretion or make significant assumptions that have, or could have, a material impact on the carrying value of certain assets or on income, to be critical accounting policies. We consider the following to be our critical accounting policies:

Allowance for Loan Losses. The allowance for loan losses is the estimated amount considered necessary to cover credit losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses which is charged against income. In determining the allowance for loan losses, management makes significant estimates and has identified this policy as one of our most critical. The methodology for determining the allowance for loan losses is considered a critical accounting policy by management due to the high degree of judgment involved, the subjectivity of the assumptions utilized and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses.

As a substantial amount of our loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing loans and discounted cash flow valuations of properties are critical in determining the amount of the allowance required for specific loans. Assumptions for appraisals and discounted cash flow valuations are instrumental in determining the value of properties. Overly optimistic assumptions or negative changes to assumptions could significantly impact the valuation of a property securing a loan and the related allowance determined. The assumptions supporting such appraisals and discounted cash flow valuations are carefully reviewed by management to determine that the resulting values reasonably reflect amounts realizable on the related loans.

Management performs a quarterly evaluation of the adequacy of the allowance for loan losses. Consideration is given to a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal and external loan reviews and other relevant factors. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant revision based on changes in economic and real estate market conditions.

 

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The analysis of the allowance for loan losses has two components: specific and general allocations. Specific allocations are made for loans that are determined to be impaired. Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. The general allocation is determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history. We also analyze historical loss experience, delinquency trends, general economic conditions and geographic and industry concentrations. This analysis establishes factors that are applied to the loan groups to determine the amount of the general allocations. Actual loan losses may be significantly more than the allowance for loan losses we have established which could have a material negative effect on our financial results.

Goodwill and Intangible Assets. Goodwill is not amortized, but it is tested at least annually for impairment in the fourth quarter, or more frequently if indicators of impairment are present. If the estimated current fair value of a reporting unit exceeds its carrying value, no additional testing is required and an impairment loss is not recorded. The Company uses market capitalization and multiples of tangible book value methods to determine the estimated current fair value of its reporting unit. Based on this analysis, no impairment was recorded in 2015 or 2014.

The other intangibles assets are assigned useful lives, which are amortized on an accelerated basis over their weighted-average lives. The Company periodically reviews the intangible assets for impairment as events or changes in circumstances indicate that the carrying amount of such asset may not be recoverable. Based on these reviews, no impairment was recorded in 2015 and 2014.

Employee Benefit Plans. The Bank maintains a noncontributory, defined benefit pension plan for all employees who have met age and length of service requirements. The Bank also maintains a defined contribution Section 401(k) plan covering eligible employees. The Company created an ESOP for the benefit of employees who meet certain eligibility requirements. The Company makes cash contributions to the ESOP on an annual basis.

The Company maintains an equity incentive plan to provide for issuance or granting of shares of common stock for stock options or restricted stock. The Company has recorded stock-based employee compensation cost using the fair value method as allowed under generally accepted accounting principles. Management estimated the fair values of all option grants using the Black-Scholes option-pricing model. Management estimated the expected life of the options using the simplified method as allowed under generally accepted accounting principles. The risk-free rate was determined utilizing the treasury yield for the expected life of the option contract.

Fair Value Measurements. We group our assets at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value. These levels are:

 

    Level I – Valuation is based upon quoted prices for identical instruments traded in active markets.

 

    Level II – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

 

    Level III – Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset.

We base our fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy in generally accepted accounting principles.

Fair value measurements for most of our assets are obtained from independent pricing services that we have engaged for this purpose. When available, we, or our independent pricing service, use quoted market prices to measure fair value. If market prices are not available, fair value measurement is based upon models that incorporate available trade, bid, and other market information. Subsequently, all of our financial instruments use either of the foregoing methodologies to determine fair value adjustments recorded to our financial statements. In certain cases, however, when market observable inputs for model-based valuation techniques may not be readily available, we are required to make judgments about assumptions market participants would use in estimating the fair value of financial instruments. The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market parameters. For financial instruments that trade actively and have quoted market prices or observable market parameters, there is minimal subjectivity involved in measuring fair value. When observable market prices and parameters are not fully available, management judgment is necessary to estimate fair value. In addition, changes in the market conditions may reduce the availability of quoted prices or observable data. When market data is not available, we use valuation techniques requiring more management judgment to estimate the appropriate fair value measurement. Therefore, the results cannot be determined with precision and may not be realized in an actual sale or immediate settlement of the asset. Additionally, there may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, that could significantly affect the results of current or future valuations.

 

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Other-than-Temporary Investment Security Impairment. Securities are evaluated periodically to determine whether a decline in their value is other-than-temporary. Management utilizes criteria such as the magnitude and duration of the decline, in addition to the reasons underlying the decline, to determine whether the loss in value is other-than-temporary. The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospect for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.

Deferred Income Taxes. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. We consider the determination of this valuation allowance to be a critical accounting policy because of the need to exercise significant judgment in evaluating the amount and timing of recognition of deferred tax liabilities and assets, including projections of future taxable income. These judgments and estimates are reviewed on a continual basis as regulatory and business factors change. A valuation allowance for deferred tax assets may be required if the amount of taxes recoverable through loss carryback declines, or if we project lower levels of future taxable income. Such a valuation allowance would be established through a charge to income tax expense that would adversely affect our operating results.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements (as such term is defined in applicable Securities and Exchange Commission rules) that are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

Contractual Obligations

During the first six months of fiscal 2015, the Company’s contractual obligations did not change materially from those discussed in the Company’s Financial Statements for the year ended September 30, 2014.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk. Our assets, consisting primarily of mortgage loans, have longer maturities than our liabilities, consisting primarily of deposits and borrowings. As a result, a principal part of our business strategy is to manage interest rate risk and reduce the exposure of our net interest income to changes in market interest rates. Accordingly, our Board of Directors has approved guidelines for managing the interest rate risk inherent in our assets and liabilities, given our business strategy, operating environment, capital, liquidity and performance objectives. Senior management monitors the level of interest rate risk on a regular basis and the asset/liability committee meets quarterly to review our asset/liability policies and interest rate risk position.

We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. The net proceeds from the Company’s stock offering increased our capital and provided management with greater flexibility to manage our interest rate risk. In particular, management used the majority of the capital we received to increase our interest-earning assets. There have been no material changes in our interest rate risk since September 30, 2014.

 

Item 4. Controls and Procedures

Under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.

There were no changes made in the Company’s internal controls over financial reporting (as defined by rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) or in other factors that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting during the period covered by this report.

 

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Part II – Other Information

 

Item 1. Legal Proceedings

The Company and its subsidiaries are subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s financial condition or results of operations.

 

Item 1A. Risk Factors

There have been no material changes in the “Risk Factors” as disclosed in the Company’s response to Item 1A to Part 1 of Form 10-K for the year ended September 30, 2014 filed on December 15, 2014.

 

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

The following table presents a summary of the company’s share repurchases during the quarter ended March 31, 2015.

Company Purchases of Common Stock

 

Month Ending    Total number of
shares purchased
     Average price
paid per share
     Total number of
shares purchased as
part of publicly
announced plans or
programs
     Maximum number
of shares that may
yet be purchased
under the plans or
programs
 

January 31, 2015

     10,000      $ 11.79        10,000        —    

February 28, 2015

     —          —          —          —    

March 31, 2015

     —          —          —          —    
  

 

 

       

 

 

    

Total

  10,000