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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended June 30, 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 August 3, 2015 there were 11,412,821 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)

 

     June 30,
2015
    September 30,
2014
 
     (dollars in thousands)  

Cash and due from banks

   $ 16,017     $ 20,884  

Interest-bearing deposits with other institutions

     1,675       1,417  
  

 

 

   

 

 

 

Total cash and cash equivalents

     17,692       22,301  

Certificates of deposit

     1,750       1,767  

Investment securities available for sale, at fair value

     381,375       383,078  

Loans receivable (net of allowance for loan losses of $8,767 and $8,634)

     1,092,527       1,058,267  

Regulatory stock, at cost

     14,537       14,284  

Premises and equipment, net

     16,655       16,957  

Bank-owned life insurance

     30,421       29,720  

Foreclosed real estate

     2,595       2,759  

Intangible assets, net

     1,910       2,396  

Goodwill

     10,259       10,259  

Deferred income taxes

     11,045       12,027  

Other assets

     18,058       21,000  
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 1,598,824     $ 1,574,815  
  

 

 

   

 

 

 

LIABILITIES

    

Deposits

   $ 1,075,553     $ 1,133,889  

Short-term borrowings

     120,856       108,020  

Other borrowings

     208,805       151,300  

Advances by borrowers for taxes and insurance

     11,617       4,093  

Other liabilities

     10,666       10,204  
  

 

 

   

 

 

 

TOTAL LIABILITIES

     1,427,497       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; 11,419,321 and 11,590,378 outstanding at June 30, 2015 and September 30, 2014)

     181       181  

Additional paid in capital

     182,358       182,486  

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

     (9,740     (10,079 )

Retained earnings

     82,289        77,413  

Treasury stock, at cost; 6,713,774 and 6,542,717 shares outstanding at June 30, 2015 and September 30, 2014, respectively

     (82,105     (80,113 )

Accumulated other comprehensive loss

     (1,656 )     (2,579 )
  

 

 

   

 

 

 

TOTAL STOCKHOLDERS’ EQUITY

     171,327       167,309  
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 1,598,824     $ 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
June 30,
    For the Nine Months Ended
June 30,
 
     2015      2014     2015     2014  
     (dollars in thousands, except per share data)  

INTEREST INCOME

         

Loans receivable, including fees

   $ 11,398       $ 11,807     $ 33,947     $ 32,173   

Investment securities:

         

Taxable

     1,741         1,632       5,429       4,682   

Exempt from federal income tax

     248         173       721       318   

Other investment income

     181         173       759       317   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total interest income

     13,568         13,785       40,856       37,490   
  

 

 

    

 

 

   

 

 

   

 

 

 

INTEREST EXPENSE

         

Deposits

     1,800         2,015       5,643       5,909   

Short-term borrowings

     118         54       324       104   

Other borrowings

     639         619       1,826       1,951   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total interest expense

     2,557         2,688       7,793       7,964   
  

 

 

    

 

 

   

 

 

   

 

 

 

NET INTEREST INCOME

     11,011         11,097       33,063       29,526   

Provision for loan losses

     525         500       1,500       2,000   
  

 

 

    

 

 

   

 

 

   

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

     10,486         10,597       31,563       27,526   
  

 

 

    

 

 

   

 

 

   

 

 

 

NONINTEREST INCOME

         

Service fees on deposit accounts

     842         828       2,426       2,342   

Services charges and fees on loans

     274         283       863       572   

Trust and investment fees

     218         260       660       701   

Gain/(loss) on sale of investments, net

     194         (10 )     398       226   

Earnings on Bank-owned life insurance

     231         234       701       687   

Insurance commissions

     183         205       582       625   

Gain on acquisition

     —           241        —          241   

Other

     6         59       33       85   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total noninterest income

     1,948         2,100       5,663       5,479   
  

 

 

    

 

 

   

 

 

   

 

 

 

NONINTEREST EXPENSE

         

Compensation and employee benefits

     5,213         4,912       15,559       13,577   

Occupancy and equipment

     996         1,051       3,111       3,034   

Professional fees

     517         441       1,438       1,348   

Data processing

     861         977       2,566       2,426   

Advertising

     373         243       725       463   

Federal Deposit Insurance Corporation (FDIC) premiums

     269         266       850       730   

(Gain)/loss on foreclosed real estate

     8         (65 )     (167 )     (116

Merger related costs

     —           176        —          522   

Amortization of intangible assets

     157         282       486       756   

Other

     965         812       2,855       1,987   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total noninterest expense

     9,359         9,095       27,423       24,727   
  

 

 

    

 

 

   

 

 

   

 

 

 

Income before income taxes

     3,075         3,602       9,803       8,278   

Income taxes

     618         976       2,318       2,146   
  

 

 

    

 

 

   

 

 

   

 

 

 

NET INCOME

   $ 2,457       $ 2,626     $ 7,485     $ 6,132   
  

 

 

    

 

 

   

 

 

   

 

 

 

Earnings per share

         

Basic

   $ 0.24       $ 0.24     $ 0.72     $ 0.56   

Diluted

   $ 0.23       $ 0.24     $ 0.71     $ 0.56   

Dividends per share

   $ 0.09       $ 0.07     $ 0.25     $ 0.19   

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
June 30,
    Nine Months Ended
June 30,
 
     2015     2014     2015     2014  
     (dollars in thousands)  

Net income

   $ 2,457     $ 2,626     $ 7,485     $ 6,132  

Other comprehensive income (loss):

        

Investment securities available for sale:

        

Unrealized holding gain (loss)

     (3,496 )     3,281       1,616       2,578  

Tax effect

     1,188        (1,116 )     (549     (877 )

Reclassification of (gains) losses recognized in net income

     (194 )     10        (398     (226

Tax effect

     66       (3 )     135        77  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net of tax amount

     (2,436 )     2,172       804        1,552  

Pension plan adjustment:

        

Related to actuarial losses and prior service cost

     61       7       181        21  

Tax effect

     (22     (2 )     (62     (7 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Net of tax amount

     39       5       119       14  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     (2,397 )     2,177       923       1,566  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 60     $ 4,803     $ 8,408     $ 7,698  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

            7,485           7,485  

Other comprehensive income

                923       923  

Cash dividends declared ($.25 per share)

            (2,609         (2,609

Stock based compensation

        81               81  

Allocation of ESOP stock

        76       339             415  

Allocation of treasury shares to incentive plan

        (285         285          —     

Treasury shares purchased

    (171,057             (2,277       (2,277
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2015

    11,419,321      $ 181      $ 182,358     $ (9,740   $ 82,289     $ (82,105   $ (1,656   $ 171,327   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 Nine Months Ended
June 30,
 
     2015     2014  
     (dollars in thousands)  

OPERATING ACTIVITIES

    

Net income

   $ 7,485      $ 6,132   

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

    

Provision for loan losses

     1,500        2,000   

Provision for depreciation and amortization

     980        948   

Amortization and accretion of discounts and premiums, net

     322        829   

Net gain on sale of investment securities

     (398     (226

Compensation expense on ESOP

     415        371   

Stock based compensation

     81        170   

Increase in accrued interest receivable

     (54     (629

Increase in accrued interest payable

     99        202   

Earnings on bank-owned life insurance

     (701     (687

Deferred federal income taxes

     (507     (738

Gain on foreclosed real estate, net

     (167     (116

Amortization of identifiable intangible assets

     486        756   

Other, net

     4,478        1,701   
  

 

 

   

 

 

 

Net cash provided by operating activities

     14,019        10,713   
  

 

 

   

 

 

 

INVESTING ACTIVITIES

    

Maturities of certificates of deposit

     17        —     

Investment securities available for sale:

    

Proceeds from sale of investment securities

     5,904        8,065   

Proceeds from principal repayments and maturities

     46,953        27,863   

Purchases

     (50,532     (37,720

(Increase) decrease in loans receivable, net

     (37,329     27,025   

Redemption of regulatory stock

     11,660        2,431   

Purchase of regulatory stock

     (11,913     (4,204

Proceeds from sale of foreclosed real estate

     2,543        2,038   

Acquisition, including cash acquired

     —          (15,415

Capital improvements to foreclosed real estate

     30        —     

Purchase of premises, equipment, and software

     (604     (498
  

 

 

   

 

 

 

Net cash (used for) provided by investing activities

     (33,271     9,585   
  

 

 

   

 

 

 

FINANCING ACTIVITIES

    

Decrease in deposits, net

     (58,336     (68,902

Net increase in short-term borrowings

     12,836        55,749   

Proceeds from other borrowings

     66,705        42,500   

Repayment of other borrowings

     (9,200     (56,387

Increase in advances by borrowers for taxes and insurance

     7,524        6,962   

Purchase of treasury stock shares

     (2,277     (1,328

Dividends on common stock

     (2,609     (2,060
  

 

 

   

 

 

 

Net cash provided by (used for) financing activities

     14,643        (23,466
  

 

 

   

 

 

 

Decrease in cash and cash equivalents

     (4,609     (3,168

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

     22,301        26,648   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 17,692      $ 23,480   
  

 

 

   

 

 

 

SUPPLEMENTAL CASH FLOW DISCLOSURES

    

Cash Paid:

    

Interest

   $ 7,694      $ 7,762   

Income taxes

     250        2   

Noncash items:

    

Transfers from loans to foreclosed real estate

     2,242        2,342   

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   
    

 

 

 

Acquisition of Franklin Security Bank assets and liabilities:

    

Noncash assets acquired

    

Investment securities, available for sale

       55,901   

Loans receivable

       152,188   

Federal Home Loan Bank stock

       1,569   

Premises and equipment

       176   

Foreclosed real estate

       436   

Intangible assets, net

       889   

Deferred income taxes

       1,031   

Other assets

       2,504   
    

 

 

 

Total assets acquired

     $ 214,694   

Liabilities assumed:

    

Certificates of deposit

       90,869   

Deposits other than certificates of deposit

       71,317   

Other borrowings

       30,177   

Other liabilities

       2,265   
    

 

 

 

Total liabilities

       194,628   

Net noncash assets acquired

       20,066   

Cash acquired

     $ (19,825
    

 

 

 

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 nine month period ended June 30, 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 nine month periods ended June 30, 2015 and 2014.

 

     Three months ended      Nine months ended  
     June 30,
2015
     June 30,
2014
     June 30,
2015
     June 30,
2014
 

Weighted-average common shares outstanding

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

Average treasury stock shares

     (6,709,111      (6,272,961 )      (6,671,091      (6,233,349

Average unearned ESOP shares

     (967,514      (1,012,790      (978,875      (1,024,151

Average unearned non-vested shares

     (25,008      (9,752 )      (19,045      (11,233
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     10,431,462        10,837,592        10,464,084        10,864,362   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     627        —          —          —    

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

     133,034        —          69,620        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     10,565,123        10,837,592        10,533,704        10,864,362   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

7


Table of Contents

At June 30, 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 June 30, 2015 and 2014 there were 35,057 and 4,440 shares, respectively, of nonvested stock outstanding at prices of $12.27 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 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The amendments in this Update change the accounting for repurchase-to-maturity transactions to secured borrowing accounting. For repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. The amendments also require enhanced disclosures. The accounting changes in this Update are effective for the first interim or annual period beginning after December 15, 2014. An entity is required to present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Earlier application is prohibited. The disclosure for certain transactions accounted for as a sale is required to be presented for interim and annual

 

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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 did not 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.

In May 2015, the FASB issued ASU 2015-08, Business Combinations - Pushdown Accounting - Amendment to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115. This ASU was issued to amend various SEC paragraphs pursuant to the issuance of Staff Accounting Bulletin No. 115. This Update did not have a significant impact on the Company’s financial statements.

In May 2015, the FASB issued ASU 2015-09, Financial Services-Insurance (Topic 944) - Disclosure about Short-Duration Contracts. The amendments apply to all insurance entities that issue short-duration contracts as defined in Topic 944, Financial Services-Insurance. The amendments require insurance entities to disclose for annual reporting periods certain information about the liability for unpaid claims and claim adjustment expenses. The amendments also require insurance entities to disclose information about significant changes in methodologies and assumptions used to calculate the liability for unpaid claims and claim adjustment expenses, including reasons for the change and the effects on the financial statements. Additionally, the amendments require insurance entities to disclose for annual and interim reporting periods a rollforward of the liability for unpaid claims and claim adjustment expenses, described in Topic 944. For health insurance claims, the amendments require the disclosure of the total of incurred-but-not-reported liabilities plus expected development on reported claims included in the liability for unpaid claims and claim adjustment expenses. For public business entities, the amendments in this Update are effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016. For all other entities, the amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within annual periods beginning after December 15, 2017. This Update is not expected to have a significant impact on the Company’s financial statements.

In June 2015, the FASB issued ASU 2015-10, Technical Corrections and Improvements. The amendments in this Update represent changes to clarify the Codification, correct unintended application of guidance, or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. Transition guidance varies based on the amendments in this Update. The amendments in this Update that require transition guidance are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. All other amendments will be effective upon the issuance of this Update. 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, gross unrealized gains and losses, and fair value of investment securities available for sale are summarized as follows (in thousands):

 

     June 30, 2015  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair Value  

Available for Sale

           

Fannie Mae

   $ 134,184      $ 1,470      $ (913    $ 134,741  

Freddie Mac

     92,368        738        (562      92,544  

Governmental National Mortgage Association

     16,534        106        (77      16,563  

Other mortgage-backed securities

     2,663        —           (12      2,651  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage-backed securities

     245,749        2,314        (1,564      246,499  

Obligations of states and political subdivisions

     48,887        1,293        (376      49,804  

U.S. government agency securities

     44,246        280        (14      44,512  

Corporate obligations

     21,493        142        (236      21,399  

Trust-preferred securities

     3,194        277        —           3,471  

Other debt securities

     15,579        122        (36      15,665  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     379,148        4,428        (2,226      381,350  

Equity securities - financial services

     25        —           —           25  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 379,173      $ 4,428      $ (2,226    $ 381,375  
  

 

 

    

 

 

    

 

 

    

 

 

 
     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 June 30, 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

   $ 6,506      $ 6,516  

Due after one year through five years

     49,366        49,771  

Due after five years through ten years

     64,198        64,601  

Due after ten years

     259,078        260,462  

Total

   $ 379,148      $ 381,350  

For the three months ended June 30, 2015, the Company realized gross gains of $194,000 and no gross losses on proceeds from the sale of investment securities of $2.6 million. For the nine months ended June 30, 2015, the Company realized gross gains of $398,000 and no gross losses on proceeds from the sale of investment securities of $5.9 million. For the three months ended June 30, 2014, the Company realized gross losses of $10,000 on proceeds from the sale of investment securities of $100. For the nine months ended June 30, 2014, the Company realized gross gains of $247,000 and gross losses of $21,000 on proceeds from the sale of investment securities of $8.1 million.

 

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):

 

     June 30, 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

     26       $ 15,652       $ (129   $ 24,511       $ (784   $ 40,163       $ (913

Freddie Mac

     21         15,946         (101     16,010         (461     31,956         (562

Governmental National Mortgage Association

     4         1,244         (7     2,399         (70     3,643         (77

Other mortgage-backed securities

     3         —           —          2,651         (12     2,651         (12

Obligations of states and political subdivisions

     14         9,172         (195     4,581         (181     13,753         (376

U.S. government agency securities

     4         7,986         (13     1,000         (1     8,986         (14

Corporate obligations

     10         9,906         (214     979         (22     10,885         (236

Other debt securities

     7         6,097         (27)        1,801         (9)        7,898         (36)   

Total

     89         66,003         (686     53,932         (1,540     119,935         (2,226
     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 )

Other debt securities

     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 June 30, 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):

 

     June 30,
2015
     September 30,
2014
 

Real estate loans:

     

Residential

   $ 618,198       $ 654,152   

Construction

     1,151         1,367   

Commercial

     195,503         190,536   

Commercial

     35,035         25,807   

Obligations of states and political subdivisions

     56,868         49,177   

Home equity loans and lines of credit

     40,975         41,387   

Auto Loans

     150,370         100,571   

Other

     3,194         3,904   
     1,101,294         1,066,901   

Less allowance for loan losses

     8,767         8,634   
  

 

 

    

 

 

 

Net loans

   $ 1,092,527       $ 1,058,267   
  

 

 

    

 

 

 

 

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

June 30, 2015

           

Real estate loans:

           

Residential

   $ 618,198       $ 12,671       $ —         $ 605,527  

Construction

     1,151         —           —           1,151  

Commercial

     195,503         15,627         4,365         175,511   

Commercial

     35,035         219         74         34,742   

Obligations of states and political subdivisions

     56,868         —           —           56,868   

Home equity loans and lines of credit

     40,975         607         —           40,368   

Auto loans

     150,370         340         —           150,030   

Other

     3,194         —           —           3,194   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,101,294       $ 29,464       $ 4,439       $ 1,067,391   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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
 

June 30, 2015

        

With no specific allowance recorded:

        

Real estate loans

        

Residential

   $ 9,378       $ 11,231       $ —     

Construction

     —           —           —     

Commercial

     19,847         20,789         —     

Commercial

     293         305         —     

Obligations of states and political subdivisions

     —           —           —     

Home equity loans and lines of credit

     529         533         —     

Auto loans

     159         237         —     

Other

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

     30,206         33,095         —     
  

 

 

    

 

 

    

 

 

 

With an allowance recorded:

        

Real estate loans

        

Residential

     3,293         3,761         432   

Construction

     —           —           —     

Commercial

     145         174         1   

Commercial

     —           —           —     

Obligations of states and political subdivisions

     —           —           —     

Home equity loans and lines of credit

     78         106         69   

Auto loans

     181         181         76   

Other

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

     3,697         4,222         578   
  

 

 

    

 

 

    

 

 

 

Total:

        

Real estate loans

        

Residential

     12,671         14,992         432   

Construction

     —           —           —     

Commercial

     19,992         20,963         1   

Commercial

     293         305         —     

Obligations of states and political subdivisions

     —           —           —     

Home equity loans and lines of credit

     607         639         69   

Auto loans

     340         418         76   

Other

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total Impaired Loans

   $ 33,903       $ 37,317       $ 578   
  

 

 

    

 

 

    

 

 

 

 

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  
     June 30,  
     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

   $ 9,522       $ 8,989       $ 59       $ 92   

Construction

     —           —           —           —     

Commercial

     20,152         20,640         222         179   

Commercial

     306         3,289         2         43   

Obligations of states and political subdivisions

     —           —           —           —     

Home equity loans and lines of credit

     433         215         2         2   

Auto loans

     116         —           —           —     

Other

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     30,529         33,133         285         316   
  

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

           

Real estate loans

           

Residential

     2,697         3,806         3         21   

Construction

     —           —           —           —     

Commercial

     146         978         —           —     

Commercial

     —           —           —           —     

Obligations of states and political subdivisions

     —           —           —           —     

Home equity loans and lines of credit

     51         37         —           —     

Auto loans

     60         —           2         —     

Other

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2,954         4,821         5         21   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total:

           

Real estate loans

           

Residential

     12,219         12,795         62         113   

Construction

     —           —           —           —     

Commercial

     20,298         21,618         222         179   

Commercial

     306         3,289         2         43   

Obligations of states and political subdivisions

     —           —           —           —     

Home equity loans and lines of credit

     484         252         2         2   

Auto loans

     176         —           2         —     

Other

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Impaired Loans

   $ 33,483       $ 37,954       $ 290       $ 337   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

17


Table of Contents
     Nine months ended  
     June 30,  
     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

   $ 10,334       $ 9,556       $ 222       $ 242   

Construction

     —           —           —           —     

Commercial

     20,729         20,241         606         553   

Commercial

     550         1,764         6         49   

Obligations of states and political subdivisions

     —           —           —           —     

Home equity loans and lines of credit

     307         285         4         4   

Auto loans

     74         —           1         —     

Other

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     31,994         31,846         839         848   
  

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

           

Real estate loans

           

Residential

     2,535         3,425         45         79   

Construction

     —           —           —           —     

Commercial

     343         1,896         —           —     

Commercial

     —           —           —           —     

Obligations of states and political subdivisions

     —           —           —           —     

Home equity loans and lines of credit

     34         17         —           —     

Auto loans

     83         —           5         —     

Other

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2,995         5,338         50         79   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total:

           

Real estate loans

           

Residential

     12,869         12,981         267         321   

Construction

     —           —           —           —     

Commercial

     21,072         22,137         606         553   

Commercial

     550         1,764         6         49   

Obligations of states and political subdivisions

     —           —           —           —     

Home equity loans and lines of credit

     341         302         4         4   

Auto loans

     157         —           6         —     

Other

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Impaired Loans

   $ 34,989       $ 37,184       $ 889       $ 927   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 June 30, 2015 and September 30, 2014 (in thousands):

 

June 30, 2015    Pass      Special
Mention
     Substandard      Doubtful      Total  

Commercial real estate loans

   $ 169,502       $ 3,382       $ 22,619       $ —         $ 195,503   

Commercial

     32,325         2,295         415         —           35,035   

Obligations of states and political subdivisions

     56,868         —           —           —           56,868   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 258,695       $ 5,677       $ 23,034       $ —         $ 287,406   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
September 30, 2014    Pass      Special
Mention
     Substandard      Doubtful      Total  

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 June 30, 2015 and September 30, 2014 (in thousands):

 

     Performing      Non-performing      Total  

June 30, 2015

        

Real estate loans:

        

Residential

   $ 608,002       $ 10,196       $ 618,198   

Construction

     1,151         —           1,151   

Home equity loans and lines of credit

     40,281         694         40,975   

Auto loans

     150,263         107         150,370   

Other

     3,156         38         3,194   
  

 

 

    

 

 

    

 

 

 

Total

   $ 802,853       $ 11,035       $ 813,888   
  

 

 

    

 

 

    

 

 

 

 

     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 June 30, 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
 

June 30, 2015

                    

Real estate loans

                    

Residential

   $ 604,655       $ 1,930       $ 1,417       $ —         $ 10,196       $ 13,543       $ 618,198   

Construction

     1,151         —           —           —           —           —           1,151   

Commercial

     185,696         300         —           —           9,507         9,807         195,503   

Commercial

     34,496         370         11         —           158         539         35,035   

Obligations of states and political subdivisions

     56,868         —           —           —           —           —           56,868   

Home equity loans and lines of credit

     40,148         63         70         —           694         827         40,975   

Auto loans

     148,588         1,549         126         —           107         1,782         150,370   

Other

     3,147         —           9         —           38         47         3,194   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,074,749       $ 4,212       $ 1,633       $ —         $ 20,700       $ 26,545       $ 1,101,294   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     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 June 30, 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 nine month periods ending June 30, 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 March 31, 2015

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

Charge-offs

    (390     —          —          (3     —          (3     (136     (5     —          (537

Recoveries

    —          —          54        11        —          —          40        6        —          111   

Provision

    359        (8     (189     (2     112        10        406        (3     (160     525   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ALL balance at June 30, 2015

  $ 5,258      $ 9      $ 708      $ 641      $ 199      $ 475      $ 1,333      $ 28      $ 116      $ 8,767   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

March 31, 2014

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

Charge-offs

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

Recoveries

    34        —          —          2        —          —          —          3        —          39   

Provision

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ALL balance at June 30, 2014

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    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

    (1,150     —          (53     (30     —          (22     (301     (5     —          (1,561

Recoveries

    22        —          85        20        —          12        49        6        —          194   

Provision

    813        (2     13        123        36        15        1,126        (5     (619     1,500   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ALL balance at June 30, 2015

  $ 5,258      $ 9      $ 708      $ 641      $ 199      $ 475      $ 1,333      $ 28      $ 116      $ 8,767   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

September 30, 2013

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

Charge-offs

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

Recoveries

    112        —          83        14        —          —          —          12        —          221   

Provision

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ALL balance at June 30, 2014

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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 June 30, 2015 and September 30, 2014 (in thousands):

 

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

Individually evaluated for impairment

  $ 432      $ —        $ 1      $ —        $ —        $ 69      $ 76      $ —        $ —        $ 578   

Collectively evaluated for impairment

    4,826        9        707        641        199        406        1,257        28        116        8,189   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ALL Balance at June 30, 2015

  $ 5,258      $ 9      $ 708      $ 641      $ 199      $ 475      $ 1,333      $ 28      $ 116      $ 8,767   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 residential real estate for the nine month period ending June 30, 2015 due to declining loan balances and impairment evaluations in those segments. The Company allocated increased provisions to commercial real estate, commercial loans and obligations of states and political subdivisions for the nine month period ending June 30, 2015 due primarily to increased loan balances. The Company allocated increased provisions in auto loans due to increased loan balances and increased charge off activity. 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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Table of Contents

The following is a summary of troubled debt restructuring granted during the three and nine months ended June 30, 2015 and 2014 (dollars in thousands).

 

     For the Three Months Ended June 30, 2015  
     Dollars in thousands  
     Number of
Contracts
     Pre-Modification
Outstanding
Recorded
Investment
     Post-Modification
Outstanding
Recorded
Investment
 

Troubled Debt Restructurings

        

Real estate loans:

        

Residential

     3       $ 695       $ 695   

Construction

     —           —           —     

Commercial

     —           —           —     

Commercial

     —           —           —     

Obligations of states and political subdivisions

     —           —           —     

Home equity loans and lines of credit

     1         25         25   

Auto loans

     —           —           —     

Other

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

     4       $ 720       $ 720   
  

 

 

    

 

 

    

 

 

 

All four new troubled debt restructurings, granted for the three months ended June 30, 2015, were granted terms and rate concessions.

 

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

Recorded
Investment
 

Troubled Debt Restructurings

        

Real estate loans:

        

Residential

     2       $ 236       $ 236   

Construction

     —           —           —     

Commercial

     —           —           —     

Commercial

     —           —           —     

Obligations of states and political subdivisions

     —           —           —     

Home equity loans and lines of credit

     —           —           —     

Auto loans

     —           —           —     

Other

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

     2       $ 236       $ 236   
  

 

 

    

 

 

    

 

 

 

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

 

     For the Nine Months Ended June 30, 2015  
     Dollars in thousands  
     Number of
Contracts
     Pre-Modification
Outstanding
Recorded
Investment
     Post-Modification
Outstanding
Recorded
Investment
 

Troubled Debt Restructurings

        

Real estate loans:

        

Residential

     12       $ 2,115       $ 2,115   

Construction

     —           —           —     

Commercial

     —           —           —     

Commercial

     —           —           —     

Obligations of states and political subdivisions

     —           —           —     

Home equity loans and lines of credit

     2         175         175   

Auto loans

     —           —           —     

Other

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

     14       $ 2,290       $ 2,290   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Of the fourteen new troubled debt restructurings granted for the nine months ended June 30, 2015, ten loans totaling $1.6 million were granted terms and rate concessions and four loans totaling $607,000 were granted terms concessions.

 

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

Troubled Debt Restructurings

        

Real estate loans:

        

Residential

     9       $ 1,293       $ 1,293   

Construction

     —           —           —     

Commercial

     1         197         197   

Commercial

     —           —           —     

Obligations of states and political subdivisions

     —           —           —     

Home equity loans and lines of credit

     —           —           —     

Other

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

     10       $ 1,490       $ 1,490   
  

 

 

    

 

 

    

 

 

 

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

For the three months ended June 30, 2015, one residential real estate loan totaling $68,000 defaulted on a restructuring agreement within one year of modification. For the nine months ended June 30, 2015, five residential real estate loans totaling $712,000 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 nine months ended June 30, 2014.

 

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Table of Contents
8. Deposits

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

 

     June 30,
2015
     September 30,
2014
 

Non-interest bearing demand accounts

   $ 103,419       $ 70,048   

Interest bearing demand accounts

     98,498         163,936   

Money market accounts

     155,140         170,158   

Savings and club accounts

     131,295         122,734   

Certificates of deposit

     587,201         607,013   
  

 

 

    

 

 

 

Total

   $ 1,075,553       $ 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
June 30,
     Nine Months Ended
June 30,
 
     2015      2014      2015      2014  

Service Cost

   $ 219       $ 144       $ 655       $ 433   

Interest Cost

     207         191         619         572   

Expected return on plan assets

     (309 )      (290 )      (925 )      (871 )

Amortization of unrecognized loss

     61         7         181         21   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit cost

   $ 178       $ 52       $ 530       $ 155   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Bank contributed $500,000 to its pension plan in April 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, 19,880 of restricted stock on July 22, 2014 and 21,843 shares of restricted stock on May 20, 2105. 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 2013 restricted stock shares vested over an 18-month service period. The 2014 restricted shares vest over a 39 month service period. The 2015 restricted shares vest over a 40 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 nine months ended June 30, 2015 and 2014, the Company recorded $171,000 and $170,000 of share-based compensation expense, respectively, comprised of restricted stock expense. Expected future compensation expense relating to the 14,906 (2014 shares) restricted shares, at June 30, 2015 is $152,000 over the remaining vesting period of 2.25 years. Expected future compensation expense relating to the 21,843 restricted shares (2015 shares) at June 30, 2015 is $271,000 over the remaining vesting period of 3.25 years.

The following is a summary of the Company’s stock option activity and related information for its option grants for the nine month period ended June 30, 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         2.92         —     
  

 

 

          

Outstanding, June 30, 2015

     1,319,580       $ 12.35         2.92       $ 673,000   
  

 

 

          

Exercisable at June 30, 2015

     1,319,580       $ 12.35         2.92       $ 673,000   
  

 

 

          

The following is a summary of the status of the Company’s restricted stock as of June 30, 2015, and changes therein during the nine month period then ended:

 

     Number of
Restricted Stock
     Weighted-
average
Grant Date
Fair Value
 

Nonvested at September 30, 2014

     14,906       $ 11.07   

Granted

     21,843         13.05   

Vested

     —           —     

Forfeited

     —           —     
  

 

 

    

Nonvested at June 30, 2015

     36,749       $ 12.25   
  

 

 

    

 

11. Fair Value Measurement

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

 

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Table of Contents

The following table presents information about the Company’s securities, other real estate owned and impaired loans measured at fair value as of June 30, 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 June 30, 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
June 30, 2015
 

Securities available-for-sale measured on a recurring basis

           

Mortgage backed securities

   $ —         $ 246,499       $ —         $ 246,499   

Obligations of states and political subdivisions

     —           49,804         —           49,804   

U.S. government agencies

     —           44,512         —           44,512   

Corporate obligations

     —           19,399         2,000         21,399   

Trust-preferred securities

     —           1,741         1,730         3,471   

Other debt securities

     —           15,165         500         15,665   

Equity securities-financial services

     25         —           —           25   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt and equity securities

   $ 25       $ 377,120       $ 4,230       $ 381,375   

Foreclosed real estate owned measured on a non-recurring basis

   $ —         $ —         $ 2,595       $ 2,595   

Impaired loans measured on a non-recurring basis

   $ —         $ —         $ 33,325       $ 33,325   
     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   

 

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Table of Contents

The following table presents a summary of changes in the fair value of the Company’s Level III investments for the three and nine month periods ended June 30, 2015 and June 30, 2014 (in thousands).

 

     Fair Value Measurement Using Significant Unobservable Inputs
(Level III)
 
     Three months ended  
     June 30, 2015      June 30, 2014  

Beginning balance

   $ 4,240       $ 1,830   

Purchases, sales, issuances, settlements, net

     —           —     

Total unrealized gain:

     

Included in earnings

     —           —     

Included in other comprehensive income

     (10      —     

Transfers in and/or out of Level III

     —           —     
  

 

 

    

 

 

 
   $ 4,230       $ 1,830   
  

 

 

    

 

 

 

 

     Fair Value Measurement Using Significant Unobservable Inputs
(Level III)
 
     Nine months ended  
     June 30, 2015      June 30, 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

     —           30   

Transfers in and/or out of Level III

     —           —     
  

 

 

    

 

 

 
   $ 4,230       $ 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. A few securities are valued using Level 3 inputs. Foreclosed real estate is measured at fair value, less cost to sell at the date of foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value, less cost to sell. Income and expenses from operations and changes in valuation allowance are included in the net expenses from foreclosed real estate. Impaired loans are reported at fair value utilizing level three inputs. For these loans, a review of the collateral is conducted and an appropriate allowance for loan losses is allocated to the loan. At June 30, 2015, 246 impaired loans with a carrying value of $33.9 million were reduced by specific valuation allowance totaling $578,000 resulting in a net fair value of $33.3 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

June 30, 2015 :

           

Impaired loans

   $ 33,325       Appraisal of
collateral (1)
   Appraisal
adjustments (2)
   0% to 50%
(22.7%)

Foreclosed real estate owned

     2,595       Appraisal of
collateral (1), (3)
   Appraisal
adjustments (2)
   19% to 30%
(21.1%)
     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.

 

     June 30, 2015  
     Carrying Value      Level I      Level II      Level III      Total Fair
Value
 

Financial assets:

              

Cash and cash equivalents

   $ 17,692       $ 17,692       $ —         $ —         $ 17,692   

Investment and mortgage backed securities available for sale

     381,375         25         377,120         4,230         381,375   

Loans receivable, net

     1,092,527         —           —           1,109,147         1,109,147   

Accrued interest receivable

     5,115         5,115         —           —           5,115   

Regulatory stock

     14,537         14,537         —           —           14,537   

Mortgage servicing rights

     478         —           —           478         478   

Bank owned life insurance

     30,421         30,421         —           —           30,421   

Financial liabilities:

              

Deposits

   $ 1,075,553       $ 488,352       $ —         $ 590,123       $ 1,078,475   

Short-term borrowings

     120,856         120,856         —           —           120,856   

Other borrowings

     208,805         —           —           209,841         209,841   

Advances by borrowers for taxes and insurance

     11,617         11,617         —           —           11,617   

Accrued interest payable

     930         930         —           —           930   
     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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Table of Contents

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 nine months ended June 30, 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 March 31, 2015

   $ (3,148    $ 3,889       $ 741   

Other comprehensive income before reclassifications

     —           (2,308      (2,308

Amounts reclassified from accumulated other comprehensive loss, net of tax

     39         (128      (89
  

 

 

    

 

 

    

 

 

 

Period change

     39         (2,436      (2,397
  

 

 

    

 

 

    

 

 

 

Balance at June 30, 2015

   $ (3,109    $ 1,453       $ (1,656
  

 

 

    

 

 

    

 

 

 

Balance at March 31, 2014

   $ (1,297    $ (549    $ (1,846

Other comprehensive loss before reclassifications

     —           2,165         2,165   

Amounts reclassified from accumulated other comprehensive loss, net of tax

     5         7         12   
  

 

 

    

 

 

    

 

 

 

Period change

     5         2,172         2,177   
  

 

 

    

 

 

    

 

 

 

Balance at June 30, 2014

   $ (1,292    $ 1,623       $ 331   
  

 

 

    

 

 

    

 

 

 

 

     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 loss before reclassifications

     —          1,067         1,067   

Amounts reclassified from accumulated other comprehensive loss

     119         (263      (144
  

 

 

    

 

 

    

 

 

 

Period change

     119         804         923   
  

 

 

    

 

 

    

 

 

 

Balance at June 30, 2015

   $ (3,109    $ 1,453       $ (1,656
  

 

 

    

 

 

    

 

 

 

Balance at September 30, 2013

   $ (1,306    $ 71       $ (1,235

Other comprehensive loss before reclassifications

     —          1,701         1,701   

Amounts reclassified from accumulated other comprehensive loss

     14         (149      (135
  

 

 

    

 

 

    

 

 

 

Period change

     14         1,552         1,566   
  

 

 

    

 

 

    

 

 

 

Balance at June 30, 2014

   $ (1,292    $ 1,623       $ 331   

 

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     Amount Reclassified from
Accumulated Other Comprehensive Income
     Accumulated Other
Comprehensive Income for
the Three Months Ended
June 30,
     Affected Line Item in the Consolidated
Statement of Income
     2015      2014       

Securities available for sale:

        

Net securities gains reclassified into earnings

   $ 194       $ (10    Gain on sale of investments, net

Related income tax expense

     (66      (3    Income taxes
  

 

 

    

 

 

    

Net effect on accumulated other comprehensive loss for the period

      128         (7    Net of tax
  

 

 

    

 

 

    

Defined benefit pension plan:

        

Amortization of net loss and prior service costs

     (61      (7    Compensation and employee benefits

Related income tax expense

     22             2       Income taxes
  

 

 

    

 

 

    

Net effect on accumulated other comprehensive loss for the period

   $ (39    $ (5    Net of tax
  

 

 

    

 

 

    

Total reclassification for the period

   $ 89       $ (12    Net of tax
  

 

 

    

 

 

    
     Amount Reclassified from
Accumulated Other Comprehensive Income
     Accumulated Other
Comprehensive Income for
the Nine Months Ended
June 30,
     Affected Line Item in the Consolidated
Statement of Income
     2015      2014       

Securities available for sale:

        

Net securities gains reclassified into earnings

   $ 398       $ 226       Gain on sale of investments, net

Related income tax expense

     (135      (77    Income taxes
  

 

 

    

 

 

    

Net effect on accumulated other comprehensive loss for the period

     263         149       Net of tax
  

 

 

    

 

 

    

Defined benefit pension plan:

        

Amortization of net loss and prior service costs

     (181      (21    Compensation and employee benefits

Related income tax expense

     62         7       Income taxes
  

 

 

    

 

 

    

Net effect on accumulated other comprehensive loss for the period

   $ (119    $ (14    Net of tax
  

 

 

    

 

 

    

Total reclassification for the period

   $ 144       $ 135       Net of tax
  

 

 

    

 

 

    

 

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Table of Contents
13. Subsequent Events.

On July 29, 2015, the Company announced that it and Eagle National Bancorp, Inc. (“ENB”) had executed a definitive agreement whereby the Company will acquire ENB and its wholly owned subsidiary, Eagle National Bank through an all-cash deal. Under the terms of the merger agreement, stockholders of ENB will receive $5.80 per share or an aggregate of approximately $24.7 million. Pending the satisfaction of customary closing conditions, including the receipt of all regulatory approvals and the approval of ENB stockholders, the transaction is expected to close in the fourth calendar quarter of 2015.

 

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 June 30, 2015 and September 30, 2014

Total Assets. Total assets increased by $24.0 million, or 1.5%, to $1.60 billion at June 30, 2015 from $1.57 billion at September 30, 2014. An increase in loans receivable of $34.3 million, which was partially offset by decreases in cash and due from banks of $4.9 million, deferred income taxes of $1.0 million, investment securities available for sale of $1.7 million, and other assets of $2.9 million was the primary reason for the increase.

Total Cash and Cash Equivalents. Total cash and cash equivalents decreased $4.6 million, or 20.7%, to $17.7 million at June 30, 2015 from $22.3 million at September 30, 2014. Decreases in cash and due from banks of $4.9 million were partially offset by an increase in interest bearing deposits with other institutions of $258,000. 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 $34.3 million, or 3.2%, to $1.09 billion at June 30, 2015 from $1.06 billion at September 30, 2014. During this period, commercial real estate loans increased $5.0 million to $195.5 million, commercial loans increased $9.2 million to $35.0 million, obligations of states and political subdivisions increased $7.7 million to $56.9 million and auto loans increased $49.8 million to $150.4 million. These increases were partially offset by decreases in residential loans of $36.0 million to $618.2 million, construction loans of $216,000 to $1.2 million, home equity loans and lines of credit of $412,000 to $41.0 million and other loans of $710,000 to $3.2 million.

 

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Table of Contents

Investment Securities Available for Sale. Investment securities available for sale decreased $1.7 million, or 0.4%, to $381.4 million at June 30, 2015 from $383.1 million at September 30, 2014. The decrease was due primarily to decreases in mortgage backed securities of $18.6 million, U.S. government agency securities of $3.1 million, trust preferred securities of $2.2 million and equity securities of $2.0 million, offset in part by increases in obligations of states and political subdivisions of $7.0 million, corporate obligations of $8.1 million and other debt securities of $9.0 million.

Deposits. Deposits decreased $58.3 million, or 5.1%. to $1.08 billion at June 30, 2015 from $1.13 billion at September 30, 2014. primarily as a result of decreases in interest bearing demand accounts, money market accounts and certificates of deposit, offset in part by increases in non-interest bearing demand accounts and savings accounts. At June 30, 2015, compared to September 30, 2014, certificate of deposit accounts decreased $19.8 million to $587.2 million, interest bearing demand accounts decreased $65.4 million to $98.5 million, non-interest bearing demand accounts increased $33.4 million to $103.4 million, money market accounts decreased $15.0 million to $155.1 million and savings and club accounts increased $8.6 million to $131.3 million. Included in the certificates of deposit at June 30, 2015 was an increase in brokered certificates of $30.7 million to $249.0 million to help offset the decline in retail deposits.

Borrowed Funds. Borrowed funds increased by $70.3 million, or 27.1%, to $329.7 million at June 30, 2015, from $259.3 million at September 30, 2014. The increase in borrowed funds was due to increases in short term borrowings of $12.8 million and other borrowings of $57.5 million. All borrowings at June 30, 2015 represent advances from the Pittsburgh FHLB.

Stockholders’ Equity. Stockholders’ equity increased by $4.0 million, or 2.4% to $171.3 million at June 30, 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 Nine Months Ended June 30, 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 June 30,  
     2015     2014  
     Average
Balance
    Interest Income/
Expense
    Yield/Cost     Average
Balance
    Interest Income/
Expense
    Yield/Cost  
     (dollars in thousands)  

Interest-earning assets:

            

Loans(1)

   $ 1,091,356      $ 11,398        4.19   $ 1,054,409      $ 11,807        4.49

Investment Securities

            

Taxable(2)

     82,731        433        2.10     81,064        411        2.03

Exempt from federal income tax(2)(3)

     38,382        248        3.93     32,298        173        3.26
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investment securities

     121,113        681        2.68     113,362        584        2.38

Mortgage-backed securities

     260,522        1,308        2.01     244,722        1,221        2.00

Regulatory stock

     13,670        177        5.19     12,153        167        5.51

Other

     3,170        4        0.51     17,589        6        0.14
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

     1,489,831        13,568        3.69     1,442,235        13,785        3.86

Allowance for loan losses

     (8,708         (8,697    

Noninterest-earning assets

     106,842            113,084       
  

 

 

       

 

 

     

Total assets

   $ 1,587,965          $ 1,546,622       
  

 

 

       

 

 

     

Interest-bearing liabilities:

            

Interest bearing demand accounts

   $ 100,123      $ 28        0.11   $ 121,934        20        0.07

Money market accounts

     176,533        110        0.25     178,056        92        0.21

Savings and club accounts

     126,209        16        0.05     122,691        17        0.06

Certificates of deposit

     575,014        1,646        1.15     652,488        1,886        1.16

Borrowed funds

     314,155        757        0.97     215,097        673        1.26
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     1,292,034        2,557        0.79     1,290,266        2,688        0.84

Non-interest-bearing demand accounts

     102,598            67,056       

Non-interest-bearing liabilities

     19,655            19,035       
  

 

 

       

 

 

     

Total liabilities

     1,414,287            1,376,357       

Equity

     173,678            170,265       
  

 

 

       

 

 

     

Total liabilities and equity

   $ 1,587,965          $ 1,546,622       
  

 

 

       

 

 

     

Net interest income

     $ 11,011          $ 11,097     
    

 

 

       

 

 

   

Interest rate spread

         2.90         3.02

Net interest-earning assets

   $ 197,797          $ 151,969       
  

 

 

       

 

 

     

Net interest margin(4)

         2.96         3.09

Average interest-earning assets to average interest-bearing liabilities

       115.31         111.78  

 

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Table of Contents
     For the Nine Months Ended June 30,  
     2015     2014  
     Average
Balance
    Interest Income/
Expense
    Yield/Cost     Average
Balance
    Interest Income/
Expense
    Yield/Cost  
     (dollars in thousands)  

Interest-earning assets:

            

Loans(1)

   $ 1,077,664      $ 33,947        4.21   $ 968,243      $ 32,173        4.44

Investment Securities

            

Taxable(2)

     81,429        1,370        2.25     83,408        1,250        2.00

Exempt from federal income tax(2)(3)

     36,456        721        4.01     19,896        318        3.24
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investment securities

     117,885        2,091        2.79     103,304        1,568        2.24

Mortgage-backed securities

     264,463        4,059        2.05     227,106        3,432        2.02

Regulatory stock

     12,995        745        7.66     10,687        303        3.79

Other

     3,745        14        0.50     11,802        14        0.16
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

     1,476,752        40,856        3.73     1,321,142        37,490        3.81

Allowance for loan losses

     (8,606         (8,342    

Noninterest-earning assets

     108,606            108,291       
  

 

 

       

 

 

     

Total assets

   $ 1,576,752          $ 1,421,091       
  

 

 

       

 

 

     

Interest-bearing liabilities:

            

Interest bearing demand accounts

   $ 111,346      $ 76        0.09   $ 100,849        42        0.06

Money market accounts

     194,385        372        0.26     151,834        225        0.20

Savings and club accounts

     121,929        46        0.05     113,959        45        0.05

Certificates of deposit

     581,590        5,149        1.18     619,283        5,597        1.21

Borrowed funds

     292,999        2,150        0.98     187,720        2,055        1.46
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     1,302,249        7,793        0.80     1,173,645        7,964        0.90

Non-interest-bearing demand accounts

     85,118            62,026       

Non-interest-bearing liabilities

     17,480            16,443       
  

 

 

       

 

 

     

Total liabilities

     1,404,847            1,252,114       

Equity

     171,905            168,977       
  

 

 

       

 

 

     

Total liabilities and equity

   $ 1,576,752          $ 1,421,091       
  

 

 

       

 

 

     

Net interest income

     $ 33,063          $ 29,526     
    

 

 

       

 

 

   

Interest rate spread

         2.93         2.91

Net interest-earning assets

   $ 174,503          $ 147,497       
  

 

 

       

 

 

     

Net interest margin(4)

         2.99         2.99

Average interest-earning assets to average interest-bearing liabilities

       113.40         112.57  

 

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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 June 30, 2015 and June 30, 2014

Net Income. Net income decreased $169,000, or 6.4%, to $2.5 million for the three months ended June 30, 2015 compared to net income of $2.6 million for the comparable period in 2014. The decrease was due primarily to decreases in net interest income and non-interest income combined with an increase in non-interest expenses.

Net Interest Income. Net interest income decreased $86,000, or 0.8%, to $11.0 million for the three months ended June 30, 2015 from $11.1 million for the comparable period in 2014. The decrease was primarily attributable to a decrease in the Company’s interest rate spread to 2.90% for the three months ended June 30, 2015, from 3.02% for the comparable period in 2014, offset in part by an increase of $45.8 million in the Company’s average net interest-earnings assets. Net interest-earning assets increased primarily due to the Company’s acquisition of Franklin Security Bancorp on April 4, 2014.

Interest Income. Interest income decreased $217,000, or 1.6%, to $13,6 million for the three months ended June 30, 2015 from $13.8 million for the comparable 2014 period. The decrease resulted primarily from a decrease in the yield on interest earning assets of 17 basis points, offset in part by an increase in interest earning assets of $47.6 million. The average yield on interest earning assets was 3.69% for the three months ended June 30, 2015, as compared to 3.86% for the comparable 2014 period. Loans increased on average $36.9 million between the two periods. In addition, average investment securities increased $7.8 million, mortgage-backed securities increased $15.8 million, regulatory stock increased $1.5 million and other interest earning assets decreased $14.4 million.

Interest Expense. Interest expense decreased $131,000, or 4.9%, to $2.6 million for the three months ended June 30, 2015 from $2.7 million for the comparable 2014 period. The decrease resulted from a 5 basis point decrease in the overall cost of interest bearing liabilities to 0.79% for the three months ended June 30, 2015 from 0.84% for the comparable 2014 period, offset in part by an increase in average interest bearing liabilities of $1.8 million. Increases in average balances of borrowed funds and savings and club accounts were offset by declines in interest bearing demand accounts, money market accounts and certificates of deposit.

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 June 30, 2015 compared to $500,000 for the three month period ended June 30, 2014. The allowance for loan losses was $8.8 million, or 0.80% of loans outstanding, at June 30, 2015, compared to $8.6 million, or 0.81% of loans outstanding at September 30, 2014.

Non-interest Income. Non-interest income decreased $152,000, or 7.2%, to $1.9 million for the three months ended June 30, 2015 from $2.1 million for the comparable period in 2014. An increase of $204,000 in gain on the sale of investments was more than offset by declines in the gain on acquisition of $241,000 and other income of $53,000.

Non-interest Expense. Non-interest expense increased $264,000, or 2.9%, to $9.4 million for the three months ended June 30, 2015 from $9.1 million for the comparable period in 2014. The primary reasons for the increase were increases in compensation and employee benefits of $301,000, advertising of $130,000, foreclosed real estate of $73,000 and other expenses of $154,000 which were offset in part by declines in occupancy and equipment of $55,000, data processing of $116,000, merger related costs of $176,000 and amortization of intangible assets of $126,000.

Income Taxes. Income tax expense decreased $358,000 to $618,000 for the three months ended June 30, 2015 from $976,000 for the comparable 2014 period. The decrease was primarily a result of the decrease in income before taxes of $527,000 for the three months ended June 30, 2015 and a decline in the effective tax rate. The effective tax rate was 20.1% for the three months ended June 30, 2015, compared to 27.1% for the 2014 period.

Comparison of Operating Results for the Nine Months Ended June 30, 2015 and June 30, 2014

Net Income. Net income increased $1.4 million, or 22.1%, to $7.5 million for the nine months ended June 30, 2015 compared to net income of $6.1 million for the comparable period in 2014. The increase was due primarily to increases in net interest income and non-interest income, offset in part by an increase in non-interest expenses.

Net Interest Income. Net interest income increased $3.5 million, or 12.0%, to $33.1 million for the nine months ended June 30, 2015 from $29.5 million for the comparable period in 2014. The increase was primarily attributable to an increase in the Company’s interest rate spread to 2.93% for the nine months ended June 30, 2015, from 2.91% for the comparable period in 2014, and an increase of $27.0 million in the Company’s average net interest-earnings assets.

Interest Income. Interest income increased $3.4 million, or 9.0%, to $40.9 million for the nine months ended June 30, 2015 from $37.5 million for the comparable 2014 period. The increase resulted primarily from an increase in interest earning assets of $155.6 million, offset in

 

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part by a decline in the yield on interest earning assets of eight basis points. The average yield on interest earning assets was 3.73% for the nine months ended June 30, 2015, as compared to 3.81% for the comparable 2014 period. Loans increased on average $109.4 million between the two periods. In addition, average investment securities increased $14.6 million, mortgage-backed securities increased $37.4 million, regulatory stock increased $2.3 million and other interest earning assets decreased $8.1 million. Average interest earning assets increased primarily due to the Franklin acquisition.

Interest Expense. Interest expense decreased $171,000, or 2.2%, to $7.8 million for the nine months ended June 30, 2015 from $8.0 million for the comparable 2014 period. The decrease resulted from a 10 basis point decrease in the overall cost of interest bearing liabilities to 0.80% for the nine months ended June 30, 2015 from 0.90% for the comparable 2014 period offset by a $128.6 million increase in average interest bearing liabilities for the nine months ended June 30, 2015. 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 $1.5 million for the nine month period ended June 30, 2015 as compared to $2.0 million for the nine month period ended June 30, 2014. The allowance for loan losses was $8.8 million, or 0.80% of loans outstanding, at June 30, 2015, compared to $8.6 million, or 0.81% of loans outstanding at September 30, 2014.

Non-interest Income. Non-interest income increased $184,000, or 3.4%, to $5.7 million for the nine months ended June 30, 2015 from $5.5 million for the comparable period in 2014. The primary reasons for the increase were increases in service charges and fees of deposit accounts of $84,000, offset in part by declines in gain on acquisition of $241,000, insurance commissions of $43,000 and other expense of $52,000.

Non-interest Expense.Non-interest expense increased $2.7 million, or 10.9%, to $27.4 million for the nine months ended June 30, 2015 from $24.7 million for the comparable period in 2014. The primary reasons for the increase were increases in compensation and employee benefits of $2.0 million and other expenses of $869,000 due to increased expenses since the acquisition of Franklin Security Bank. Declines in merger related costs of $522,000 and amortization of intangibles partially offset the increase in other expenses.

Income Taxes. Income tax expense increased $172,000 to $2.3 million for the nine months ended June 30, 2015 from $2.1million for the comparable 2014 period. The increase was primarily a result of the increase in income before taxes of $1.5 million for the nine months ended June 30, 2015. The effective tax rate was 23.6% for the nine months ended June 30, 2015, compared to 25.9% 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)

 

     June 30,
2015
    September 30,
2014
 

Non-performing assets:

    

Non-accruing loans

   $ 20,700      $ 21,912   

Troubled debt restructures

     —          238   
  

 

 

   

 

 

 

Total non-performing loans

     20,700        22,150   

Foreclosed real estate

     2,595        2,759   

Other repossessed assets

     63        69   
  

 

 

   

 

 

 

Total non-performing assets

   $ 23,358      $ 24,978   
  

 

 

   

 

 

 

Ratio of non-performing loans to total loans

     1.89 %     2.08 %

Ratio of non-performing loans to total assets

     1.29 %     1.41 %

Ratio of non-performing assets to total assets

     1.46 %     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 $1.6 million to $23.4 million at June 30, 2015 from $25.0 million at September 30, 2014. Non-performing loans decreased $1.5 million to $20.7 million at June 30, 2015 from $22.2 million at September 30, 2014. The year to date decrease was primarily due to decreases of $2.2 million in non-performing commercial loans offset, in part, by increases of $179,000 in non-performing mortgage loans and $560,000 in non-performing consumer loans. The number of nonperforming residential loans remained at 96 for June 30, 2015, and September 30, 2014. The $20.7 million of non-accruing loans at June 30, 2015 included 96 residential loans with an aggregate outstanding balance of $10.2 million, 60 commercial and commercial real estate loans with aggregate outstanding balances of $10.0 million and 37 consumer loans with aggregate balances of $840,000. Within the residential loan balance are $3.9 million of loans less than 90 days past due. In the quarter ended June 30, 2015, the Company identified 29 residential loans which, although paying as agreed, have a high probability of default. Foreclosed real estate decreased $164,000 to $2.6 million at June 30, 2015 from $2.8 million at September 30, 2014. Foreclosed real estate consists of 27 residential properties, seven building lots and one commercial property.

At June 30, 2015, the principal balance of troubled debt restructures was $8.0 million as compared to $6.8 million at September 30, 2014. Of the $8.0 million of troubled debt restructures at June 30, 2015, $2.5 million are performing loans and $5.5 million are non-accrual loans.

Of the 62 loans that comprise our troubled debt restructures at June 30, 2015, no loans were granted a rate concession at a below market interest rate. Twenty-three loans with balances totaling $3.4 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 June 30, 2015, troubled debt restructures were comprised of 51 residential loans totaling $6.6 million, 8 commercial and commercial real estate loans totaling $1.2 million, and three consumer (home equity loans, home equity lines and credit, and other) loans totaling $268,000.

For the three month period ended June 30, 2015, one loan totaling $120,000 was removed from non-performing TDR status due to completion of one year of consecutive on time payments and two loans were foreclosed totaling $308,000. For the nine months ended June 30, 2015 one loan for $198,000 was paid off, ten loans totaling $1.1 million were removed for consecutive on-time payments and three loans for $343,000 were 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 June 30, 2015, we modified 5 loans ($771,000) in this fashion. For the nine months ended June 30, 2015, we modified 41 loans ($5.4 million) in this fashion. With regard to commercial loans, including commercial real estate loans, there were five loans in the three months ended June 30, 2015 totaling $1.6 million. There were eighteen such loans in the nine months ended June 30, 2015 with an aggregate balance of approximately $12.0 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 June 30, 2015, $17.7 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 $6.6 million at June 30, 2015. As of June 30, 2015, we had $329.7 million in borrowings outstanding from FHLBank Pittsburgh. We have access to total FHLBank advances of up to approximately $556.5 million.

At June 30, 2015, we had $105.1 million in loan commitments outstanding, which included, in part, $31.3 million in undisbursed construction loans and land development loans, $31.8 million in unused home equity lines of credit, $32.4 million in commercial lines of credit and commitments to originate commercial loans, $3.2 million in performance standby letters of credit and $6.3 million in other unused commitments which are primarily to originate residential mortgage loans and multifamily loans. Certificates of deposit due within one year of June 30, 2015 totaled $262.8 million, or 44.8% 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 June 30, 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 $14.0 million and $10.7 million for the nine months ended June 30, 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 ($33.3) million and $9.6 million for the nine months ended June 30, 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 $14.6 million and ($23.5) million for the nine months ended June 30, 2015 and 2014, respectively.

Critical Accounting Policies

We consider accounting policies that require management to exercise significant judgment or discr