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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, 2016

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 2, 2016 there were 11,393,543 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      41   
Item 3   Quantitative and Qualitative Disclosures About Market Risk      50   
Item 4   Controls and Procedures      50   
Part II. Other Information   
Item 1.   Legal Proceedings      50   
Item 1A.   Risk Factors      50   
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      51   
Item 3.   Defaults Upon Senior Securities      51   
Item 4.   Mine Safety Disclosures      51   
Item 5.   Other Information      51   
Item 6.   Exhibits      51   
Signature Page      51   


Table of Contents

Part I. Financial Information

 

Item 1. Financial Statements

ESSA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

 

     June 30,
2016
    September 30,
2015
 
     (dollars in thousands)  

Cash and due from banks

   $ 24,049      $ 15,905   

Interest-bearing deposits with other institutions

     1,929        2,853   
  

 

 

   

 

 

 

Total cash and cash equivalents

     25,978        18,758   

Certificates of deposit

     1,500        1,750   

Investment securities available for sale, at fair value

     393,523        379,407   

Loans receivable (net of allowance for loan losses of $9,390 and $8,919)

     1,233,479        1,102,118   

Regulatory stock, at cost

     16,811        13,831   

Premises and equipment, net

     16,977        16,553   

Bank-owned life insurance

     31,348        30,655   

Foreclosed real estate

     2,244        2,480   

Intangible assets, net

     2,662        1,759   

Goodwill

     13,801        10,259   

Deferred income taxes

     9,981        11,149   

Other assets

     18,377        17,825   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 1,766,681      $ 1,606,544   
  

 

 

   

 

 

 

LIABILITIES

    

Deposits

   $ 1,169,340      $ 1,096,754   

Short-term borrowings

     153,162        91,339   

Other borrowings

     240,601        229,101   

Advances by borrowers for taxes and insurance

     12,154        4,273   

Other liabilities

     13,974        13,797   
  

 

 

   

 

 

 

TOTAL LIABILITIES

     1,589,231        1,435,264   
  

 

 

   

 

 

 

STOCKHOLDERS’ EQUITY

    

Preferred Stock ($0.01 par value; 10,000,000 shares authorized, none issued)

    

Common stock ($0.01 par value; 40,000,000 shares authorized, 18,133,095 issued; 11,384,720 and 11,353,244 outstanding at June 30, 2016 and September 30, 2015)

     181        181   

Additional paid in capital

     182,063        182,295   

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

     (9,287     (9,627

Retained earnings

     87,048        83,658   

Treasury stock, at cost; 6,748,375 and 6,779,851 shares outstanding at June 30, 2016 and September 30, 2015, respectively

     (82,482     (82,832

Accumulated other comprehensive loss

     (73     (2,395
  

 

 

   

 

 

 

TOTAL STOCKHOLDERS’ EQUITY

     177,450        171,280   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 1,766,681      $ 1,606,544   
  

 

 

   

 

 

 

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,
 
     2016     2015      2016      2015  
    

(dollars in thousands, except per

share data)

    

(dollars in thousands, except per

share data)

 

INTEREST INCOME

          

Loans receivable, including fees

   $ 12,377      $ 11,398       $ 36,756       $ 33,947   

Investment securities:

          

Taxable

     1,863        1,741         5,584         5,429   

Exempt from federal income tax

     277        248         776         721   

Other investment income

     206        181         581         759   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total interest income

     14,723        13,568         43,697         40,856   
  

 

 

   

 

 

    

 

 

    

 

 

 

INTEREST EXPENSE

          

Deposits

     1,903        1,800         5,692         5,643   

Short-term borrowings

     175        118         384         324   

Other borrowings

     786        639         2,386         1,826   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total interest expense

     2,864        2,557         8,462         7,793   
  

 

 

   

 

 

    

 

 

    

 

 

 

NET INTEREST INCOME

     11,859        11,011         35,235         33,063   

Provision for loan losses

     600        525         1,800         1,500   
  

 

 

   

 

 

    

 

 

    

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

     11,259        10,486         33,435         31,563   
  

 

 

   

 

 

    

 

 

    

 

 

 

NONINTEREST INCOME

          

Service fees on deposit accounts

     919        842         2,657         2,426   

Services charges and fees on loans

     272        274         849         863   

Trust and investment fees

     196        218         603         660   

Gain on sale of investments

     413        194         781         398   

Earnings on Bank-owned life insurance

     229        231         693         701   

Insurance commissions

     221        183         637         582   

Other

     46        6         170         33   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total noninterest income

     2,296        1,948         6,390         5,663   
  

 

 

   

 

 

    

 

 

    

 

 

 

NONINTEREST EXPENSE

          

Compensation and employee benefits

     5,930        5,213         17,511         15,559   

Occupancy and equipment

     1,340        996         3,871         3,111   

Professional fees

     588        517         1,713         1,438   

Data processing

     998        861         2,996         2,566   

Advertising

     297        373         537         725   

Federal Deposit Insurance Corporation (FDIC) premiums

     312        269         912         850   

(Gain)/loss on foreclosed real estate

     (77     8         74         (167

Merger related costs

     —         —          245         —    

Amortization of intangible assets

     191        157         588         486   

Other

     1,072        965         3,096         2,855   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total noninterest expense

     10,651        9,359         31,543         27,423   
  

 

 

   

 

 

    

 

 

    

 

 

 

Income before income taxes

     2,904        3,075         8,282         9,803   

Income taxes

     792        618         2,084         2,318   
  

 

 

   

 

 

    

 

 

    

 

 

 

NET INCOME

   $ 2,112      $ 2,457       $ 6,198       $ 7,485   
  

 

 

   

 

 

    

 

 

    

 

 

 

Earnings per share

          

Basic

   $ 0.20      $ 0.24       $ 0.60       $ 0.72   

Diluted

   $ 0.20      $ 0.23       $ 0.59       $ 0.71   

Dividends per share

   $ 0.09      $ 0.09       $ 0.27       $ 0.25   

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,
 
     2016     2015     2016     2015  
     (dollars in thousands)  

Net income

   $ 2,112      $ 2,457      $ 6,198      $ 7,485   

Other comprehensive income (loss):

    

Investment securities available for sale:

    

Unrealized holding gain (loss)

     2,360        (3,496     3,942        1,617   

Tax effect

     (802     1,188        (1,341     (550

Reclassification of gains recognized in net income

     (413     (194     (781     (398

Tax effect

     141        66        266        135   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net of tax amount

     1,286        (2,436     2,086        804   

Pension plan adjustment:

    

Related to actuarial losses

     119        60        358        181   

Tax effect

     (41     (21     (122     (62
  

 

 

   

 

 

   

 

 

   

 

 

 

Net of tax amount

     78        39        236        119   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     1,364        (2,397     2,322        923   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 3,476      $ 60      $ 8,520      $ 8,408   
  

 

 

   

 

 

   

 

 

   

 

 

 

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
Loss
    Total
Stockholders’
Equity
 
     (dollars in thousands)  

Balance, September 30, 2015

     11,353,244      $ 181       $ 182,295      $ (9,627   $ 83,658      $ (82,832   $ (2,395   $ 171,280   

Net income

              6,198            6,198   

Other comprehensive income

                  2,322        2,322   

Cash dividends declared ($0.27 per share)

              (2,808         (2,808

Stock based compensation

          141                141   

Allocation of ESOP stock

          115        340              455   

Allocation of treasury shares to incentive plan

     54,176           (488         488          —    

Treasury shares purchased

     (22,700              (138       (138
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2016

     11,384,720      $ 181       $ 182,063      $ (9,287   $ 87,048      $ (82,482   $ (73   $ 177,450   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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,
 
     2016     2015  
     (dollars in thousands)  

OPERATING ACTIVITIES

    

Net income

   $ 6,198      $ 7,485   

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

    

Provision for loan losses

     1,800        1,500   

Provision for depreciation and amortization

     1,314        980   

Amortization and accretion of discounts and premiums, net

     2,851        322   

Gain on sale of investment securities

     (781     (398

Compensation expense on ESOP

     455        415   

Stock based compensation

     141        81   

Increase in accrued interest receivable

     (518     (54

Increase in accrued interest payable

     218        99   

Earnings on bank-owned life insurance

     (693     (701

Deferred federal income taxes

     (687     (507

Loss/(gain) on foreclosed real estate, net

     74        (167

Amortization of identifiable intangible assets

     588        486   

Other, net

     2,840        4,478   
  

 

 

   

 

 

 

Net cash provided by operating activities

     13,800        14,019   
  

 

 

   

 

 

 

INVESTING ACTIVITIES

    

Certificates of deposit maturities

     250        17   

Investment securities available for sale:

    

Proceeds from sale of investment securities

     45,739        5,904   

Proceeds from principal repayments and maturities

     61,662        46,953   

Purchases

     (82,454     (50,532

Increase in loans receivable, net

     (12,692     (37,329

Redemption of regulatory stock

     11,867        11,660   

Purchase of regulatory stock

     (13,958     (11,913

Proceeds from sale of foreclosed real estate

     1,375        2,543   

Acquisition, net of cash acquired

     (16,174     —     

Capital improvements to foreclosed real estate

     —         30   

Purchase of premises, equipment, and software

     (766     (604
  

 

 

   

 

 

 

Net cash used for investing activities

     (5,151     (33,271
  

 

 

   

 

 

 

FINANCING ACTIVITIES

    

Decrease in deposits, net

     (79,687     (58,336

Net increase in short-term borrowings

     61,823        12,836   

Proceeds from other borrowings

     92,300        66,705   

Repayment of other borrowings

     (80,800     (9,200

Increase in advances by borrowers for taxes and insurance

     7,881        7,524   

Purchase of treasury stock shares

     (138     (2,277

Dividends on common stock

     (2,808     (2,609
  

 

 

   

 

 

 

Net cash (used for) provided by financing activities

     (1,429     14,643   
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     7,220        (4,609

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

     18,758        22,301   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 25,978      $ 17,692   
  

 

 

   

 

 

 

 

6


Table of Contents
     For the Nine Months Ended
June 30,
 
     2016      2015  
     (dollars in thousands)  

SUPPLEMENTAL CASH FLOW DISCLOSURES

     

Cash Paid:

     

Interest

   $ 8,180       $ 7,693   

Income taxes

     600         250   

Noncash items:

     

Transfers from loans to foreclosed real estate

     1,213         2,242   

Acquisition of Eagle National Bank assets and liabilities

     

Noncash assets acquired

     

Investment securities, available for sale

     36,275         —    

Loans receivable

     123,380         —    

Federal Home Loan Bank stock

     889         —    

Premises and equipment

     945         —    

Accrued interest receivable

     185         —    

Intangible assets

     1,491         —    

Goodwill

     3,542         —    

Deferred tax assets

     715         —    

Other assets

     1,989         —    

Liabilities assumed:

     

Certificates of deposit

     32,408         —    

Deposits other than certificates of deposit

     119,865         —    

Accrued interest payable

     64         —    

Other liabilities

     900         —    

Net noncash assets acquired

     16,174         —    

Cash acquired

     8,481         —    

See accompanying notes to the unaudited consolidated financial statements.

 

7


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, Delaware, Chester, 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, 2016 are not necessarily indicative of the results that may be expected for the year ending September 30, 2016.

 

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, 2016 and 2015.

 

     Three Months Ended     Nine Months Ended  
     June 30,
2016
    June 30,
2015
    June 30,
2016
    June 30,
2015
 

Weighted-average common shares outstanding

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

Average treasury stock shares

     (6,753,180     (6,709,111     (6,780,144     (6,671,091

Average unearned ESOP shares

     (922,238     (967,514     (933,598     (978,875

Average unearned non-vested shares

     (31,373     (25,008     (36,174     (19,045
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     10,426,304        10,431,462        10,383,179        10,464,084   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     297        627        —         —    

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

     126,538        133,034        125,297        69,620   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     10,553,138        10,565,123        10,508,476        10,533,704   
  

 

 

   

 

 

   

 

 

   

 

 

 

At June 30, 2016 there were 43,692 shares of nonvested stock outstanding at an average weighted price of $12.93 per share that were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive. At June 30, 2015 there were 35,057 shares of nonvested stock outstanding at a price of $12.27 per share and 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 earnings per share because to do so would have been anti-dilutive.

 

8


Table of Contents
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 from those estimates.

 

4. Recent Accounting Pronouncements:

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 2014-12, 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 2014-15, 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 Update 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 U.S. 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 may also 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; and (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

 

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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.

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 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 FASB Accounting Standards Codification (“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.

In August 2015, the FASB issued ASU 2015-14, Revenue from Contract with Customers (Topic 606). The amendments in this Update defer the effective date of ASU 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. All other entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. The Company is evaluating the effect of adopting this new accounting Update.

In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805). The amendments in this Update require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the

 

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reporting period in which the adjustment amounts are determined. The amendments in this Update require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this Update require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, and 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.

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. The amendments in this Update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this Update apply to all entities that present a classified statement of financial position. For public business entities, the amendments in this Update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For all other entities, the amendments in this Update are effective for financial statements issued for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. The amendments in this Update may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. This Update is not expected to have a significant impact on the Company’s financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This Update applies to all entities that hold financial assets or owe financial liabilities and is intended to provide more useful information on the recognition, measurement, presentation, and disclosure of financial instruments. Among other things, this Update (a) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (b) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (c) eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (d) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (e) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (f) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (g) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (h) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For all other entities, including not-for-profit entities and employee benefit plans within the scope of Topics 960 through 965 on plan accounting, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. All entities that are not public business entities may adopt the amendments in this Update earlier as of the fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. A short-term lease is defined as one in which (a) the lease term is 12 months or less and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees may elect to recognize lease payments over the lease term on a straight-line basis. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020. The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

 

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In March 2016, the FASB issued ASU 2016-04, Liabilities - Extinguishments of Liabilities (Subtopic 405-20). The standard provides that liabilities related to the sale of prepaid stored-value products within the scope of this Update are financial liabilities. The amendments in the Update provide a narrow-scope exception to the guidance in Subtopic 405-20 to require that breakage for those liabilities be accounted for consistent with the breakage guidance in Topic 606. The amendments in this Update are effective for public business entities, certain not-for-profit entities, and certain employee benefit plans for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Earlier application is permitted, including adoption in an interim period. This Update is not expected to have a significant impact on the Company’s financial statements.

In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815). The amendments in this Update apply to all reporting entities for which there is a change in the counterparty to a derivative instrument that has been designated as a heading instrument under Topic 815. The standards in this Update clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2016, 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, 2017, and interim periods within fiscal years beginning after December 15, 2018. An entity has an option to apply the amendments in this Update on either a prospective basis or a modified retrospective basis. Early adoption is permitted, including adoption in an interim period. This Update is not expected to have a significant impact on the Company’s financial statements.

In March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging (Topic 815). The amendments apply to all entities that are issuers of or investors in debt instruments (or hybrid financial instruments that are determined to have a debt host) with embedded call (put) options. The amendments in this Update clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt host. An entity performing the assessment under the amendments in this Update is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. For entities other than public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. This Update is not expected to have a significant impact on the Company’s financial statements.

In March 2016, the FASB issued ASU 2016-07, Investments - Equity Method and Joint Ventures (Topic 323). The Update affects all entities that have an investment that becomes qualified for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence. The amendments in this Update eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. The amendments in this Update require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments in this Update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Earlier application is permitted. This Update is not expected to have a significant impact on the Company’s financial statements.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606). The amendments in this Update affect entities with transactions included within the scope of Topic 606, which includes entities that enter into contracts with customers to transfer goods or services (that are an output of the entity’s ordinary activities) in exchange for consideration. The amendments in this Update do not change the core principle of the guidance in Topic 606; they simply clarify the implementation guidance on principal versus agent considerations. The amendments in this Update are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. The amendments in this Update affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements of Update 2014-09. ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

 

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In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718). The amendments in this Update affect all entities that issue share-based payment awards to their employees. The standards in this Update provide simplification for several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as with equity or liabilities, and classification on the statement of cash flows. Some of the areas for simplification apply only to nonpublic entities. In addition to those simplifications, the amendments eliminate the guidance in Topic 718 that was indefinitely deferred shortly after the issuance of FASB Statement No. 123 (revised 2004), Share-Based Payment. This should not result in a change in practice because the guidance that is being superseded was never effective. For public business entities, the amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For all other entities, the amendments are effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted for any entity in any interim or annual period. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606). The amendments in this Update affect entities with transactions included within the scope of Topic 606, which includes entities that enter into contracts with customers to transfer goods or services in exchange for consideration. The amendments in this Update do not change the core principle for revenue recognition in Topic 606. Instead, the amendments provide (1) more detailed guidance in a few areas and (2) additional implementation guidance and examples based on feedback the FASB received from its stakeholders. The amendments are expected to reduce the degree of judgment necessary to comply with Topic 606, which the FASB expects will reduce the potential for diversity arising in practice and reduce the cost and complexity of applying the guidance. The amendments in this Update affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements in Topic 606 (and any other Topic amended by Update 2014-09). ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In May 2016, the FASB issued ASU 2016-11, Revenue Recognition (Topic 605) and Derivative and Hedging (Topic 815), which rescinds SEC paragraphs pursuant to two SEC Staff Announcements at the March 3, 2016, Emerging Issues Task Force meeting. This Update did not have a significant impact on the Company’s financial statements.

In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606), which among other things clarifies the objective of the collectability criterion in Topic 606, as well as certain narrow aspects of Topic 606. The amendments in this Update affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by Update 2014-09). ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year. This Update is not expected to have a significant impact on the Company’s financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which changes the impairment model for most financial assets. This ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the ASU is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

 

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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, 2016  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair Value  

Available for Sale

           

Fannie Mae

   $ 124,384       $ 2,458       $ (142    $ 126,700   

Freddie Mac

     89,428         1,669         (55      91,042   

Governmental National Mortgage Association

     13,303         96         (38      13,361   

Other mortgage-backed securities

     2,332         —          (16      2,316   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage-backed securities

     229,447         4,223         (251      233,419   

Obligations of states and political subdivisions

     66,727         2,868         (7      69,588   

U.S. government agency securities

     29,539         399         (2      29,936   

Corporate obligations

     34,825         363         (347      34,841   

Trust-preferred securities

     1,635         115         —          1,750   

Other debt securities

     23,726         395         (157      23,964   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     385,899         8,363         (764      393,498   

Equity securities - financial services

     25         —          —          25   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 385,924       $ 8,363       $ (764    $ 393,523   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Available for Sale

           

Fannie Mae

   $ 130,476       $ 2,052       $ (541    $ 131,987   

Freddie Mac

     88,514         1,063         (286      89,291   

Governmental National Mortgage Association

     13,201         103         (52      13,252   

Other mortgage-backed securities

     2,494         —          (17      2,477   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage-backed securities

     234,685         3,218         (896      237,007   

Obligations of states and political subdivisions

     50,094         1,676         (145      51,625   

U.S. government agency securities

     45,799         399         (12      46,186   

Corporate obligations

     22,440         157         (237      22,360   

Trust-preferred securities

     1,613         98         —          1,711   

Other debt securities

     20,313         216         (36      20,493   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     374,944         5,764         (1,326      379,382   

Equity securities - financial services

     25         —          —          25   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 374,969       $ 5,764       $ (1,326    $ 379,407   
  

 

 

    

 

 

    

 

 

    

 

 

 

The amortized cost and fair value of debt securities at June 30, 2016, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (in thousands):

 

     Available For Sale  
     Amortized
Cost
     Fair Value  

Due in one year or less

   $ 2,748       $ 2,757   

Due after one year through five years

     51,533         52,273   

Due after five years through ten years

     71,360         72,965   

Due after ten years

     260,258         265,503   
  

 

 

    

 

 

 

Total

   $ 385,899       $ 393,498   
  

 

 

    

 

 

 

For the three months ended June 30, 2016, the Company realized gross gains of $413,000 and no gross losses on proceeds from the sale of investment securities of $16.7 million. For the nine months ended June 30, 2016, the Company realized gross gains of $781,000 and no gross losses on proceeds from the sale of investment securities of $45.7 million. During the first quarter of 2016, the Company sold $16.2 million of investment securities which were acquired in the merger with Eagle National Bancorp, Inc (“ENB”). The Company realized no gain or loss from the sale of these securities. 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.

 

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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, 2016  
     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

     14       $ 2,390       $ (5   $ 13,030       $ (137   $ 15,420       $ (142

Freddie Mac

     7         1,410         (2     6,786         (53     8,196         (55

Governmental National Mortgage Association

     6         5,145         (28     812         (10     5,957         (38

Other mortgage-backed securities

     3         —          —         2,316         (16     2,316         (16

Obligations of states and political subdivisions

     3         3,586         (7     —          —         3,586         (7

U.S. government agency securities

     1         —          —         1,024         (2     1,024         (2

Corporate obligations

     9         6,652         (266     2,581         (81     9,233         (347

Other debt securities

     8         4,312         (102     3,268         (55     7,580         (157
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

     51       $ 23,495       $ (410   $ 29,818       $ (354   $ 53,312       $ (764
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     September 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

     22       $ 7,238       $ (28   $ 23,609       $ (513   $ 30,847       $ (541

Freddie Mac

     12         1,487         (1     15,477         (285     16,964         (286

Governmental National Mortgage Association

     2         —          —         2,209         (52     2,209         (52

Other mortgage-backed securities

     3         —          —         2,477         (17     2,477         (17

Obligations of states and political subdivisions

     14         9,184         (57     4,667         (88     13,851         (145

U.S. government agency securities

     3         3,246         (12     —          —         3,246         (12

Corporate obligations

     10         9,263         (207     970         (30     10,233         (237

Other debt securities

     6         5,232         (26     1,748         (10     6,980         (36
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

     72       $ 35,650       $ (331   $ 51,157       $ (995   $ 86,807       $ (1,326
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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, trust preferred securities and equity securities.

The Company reviews its position quarterly and has asserted that at June 30, 2016, the declines outlined in the above table represent temporary declines and the Company would not be required to sell the above securities before their anticipated recovery in market value.

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

 

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Table of Contents
7. Loans Receivable, Net and Allowance for Loan Losses

Loans receivable consist of the following (in thousands):

 

     June 30,
2016
     September 30,
2015
 

Real estate loans:

     

Residential

   $ 597,704       $ 610,582   

Construction

     3,479         878   

Commercial

     287,946         200,004   

Commercial

     45,324         34,314   

Obligations of states and political subdivisions

     57,169         59,820   

Home equity loans and lines of credit

     48,866         39,903   

Auto Loans

     199,034         162,193   

Other

     3,347         3,343   
  

 

 

    

 

 

 
     1,242,869         1,111,037   

Less allowance for loan losses

     9,390         8,919   
  

 

 

    

 

 

 

Net loans

   $ 1,233,479       $ 1,102,118   
  

 

 

    

 

 

 

Included in the June 30, 2016 balances are loans acquired from Eagle National Bank, as of the acquisition date of December 4, 2015 as follows (in thousands):

 

     2015  

Real estate loans:

  

Residential

   $ 10,743   

Commercial

     87,336   

Commercial

     16,604   

Home equity loans and lines of credit

     8,632   

Other

     65   
  

 

 

 

Total loans

   $ 123,380   
  

 

 

 

Purchased loans acquired in a business combination are recorded at fair value on their purchase date without a carryover of the related allowance for loan losses.

Upon acquisition, the Company evaluated whether each acquired loan (regardless of size) was within the scope of ASC 310-30, Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality. Purchased credit-impaired loans are loans that have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. The fair value of purchased credit-impaired loans, on the acquisition date of December 4, 2015, was determined, primarily based on the fair value of loan collateral. The carrying value of all purchased loans acquired with deteriorated credit quality was $5.9 million at June 30, 2016.

On the acquisition date, the preliminary estimate of the unpaid principal balance for all loans evidencing credit impairment acquired in the Eagle National Bancorp, Inc. (“ENB”) acquisition was $3.5 million and the estimated fair value of the loans was $2.0 million. Total contractually required payments on these loans, including interest, at the acquisition date was $4.2 million. However, the Company’s preliminary estimate of expected cash flows was $2.2 million. At such date, the Company established a credit risk related non-accretable discount (a discount representing amounts which are not expected to be collected from the customer nor liquidation of collateral) of $2.0 million relating to these impaired loans, reflected in the recorded net fair value. Such amount is reflected as a non-accretable fair value adjustment to loans. The Company further estimated the timing and amount of expected cash flows in excess of the estimated fair value and established an accretable discount of $240,000 on the acquisition date relating to these impaired loans.

 

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Table of Contents

The carrying value of the loans acquired and accounted for in accordance with ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, was determined by projecting discounted contractual cash flows. The table below presents the components of the purchase accounting adjustments related to the purchased impaired loans acquired in the ENB acquisition as of December 4, 2015 (in thousands):

 

Unpaid principal balance

   $ 3,468   

Interest

     717   
  

 

 

 

Contractual cash flows

     4,185   

Non-accretable discount

     (1,973
  

 

 

 

Expected cash flows

     2,212   

Accretable discount

     (240
  

 

 

 

Estimated fair value

   $ 1,972   
  

 

 

 

Changes in the accretable yield for purchased credit-impaired loans were as follows, since acquisition, for the periods ended June 30, 2016 and June 30, 2015 (in thousands):

 

     Three Months Ended June 30,  
   2016      2015  

Balance at beginning of period

   $ 365       $ 156   

Reclassification, new additions and other

     153         228   

Accretion

     (66      (49
  

 

 

    

 

 

 

Balance at end of period

   $ 452       $ 335   
  

 

 

    

 

 

 
     Nine Months Ended June 30,  
   2016      2015  

Balance at beginning of period

   $ 258       $ 170   

Reclassification, new additions and other

     240         228  

Accretion

     (46      (63
  

 

 

    

 

 

 

Balance at end of period

   $ 452       $ 335   
  

 

 

    

 

 

 

The following table presents additional information regarding loans acquired and accounted for in accordance with ASC 310-30 (in thousands):

 

     June 30, 2016      September 30, 2015  
     Acquired Loans with Specific
Evidence or Deterioration in
Credit Quality (ASC 310-30)
     Acquired Loans with Specific
Evidence or Deterioration in
Credit Quality (ASC 310-30)
 

Outstanding balance

   $ 7,395       $ 4,779   

Carrying amount

   $ 5,927       $ 4,162   

 

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Table of Contents

The following table shows the amount of loans in each category that was individually and collectively evaluated for impairment at the dates indicated (in thousands):

 

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

June 30, 2016

           

Real estate loans:

           

Residential

   $ 597,704       $ 8,655       $ —        $ 589,049   

Construction

     3,479         —          —          3,479   

Commercial

     287,946         12,581         4,890         270,475   

Commercial

     45,324         1,723         411         43,190   

Obligations of states and political subdivisions

     57,169         —          —          57,169   

Home equity loans and lines of credit

     48,866         562         626         47,678   

Auto loans

     199,034         811         —          198,223   

Other

     3,347         35         —          3,312   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,242,869       $ 24,367       $ 5,927       $ 1,212,575   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

19


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

September 30, 2015

           

Real estate loans:

           

Residential

   $ 610,582       $ 11,985       $ —        $ 598,597   

Construction

     878         —          —          878   

Commercial

     200,004         15,100         4,108         180,796   

Commercial

     34,314         204         54         34,056   

Obligations of states and political subdivisions

     59,820         —          —          59,820   

Home equity loans and lines of credit

     39,903         795         —          39,108   

Auto loans

     162,193         625         —          161,568   

Other

     3,343         —          —          3,343   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,111,037       $ 28,709       $ 4,162       $ 1,078,166   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 that it would not otherwise consider because of the borrower’s financial condition. 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 TDR status after one year of performance.

 

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Table of Contents

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

 

     Recorded
Investment
     Unpaid
Principal
Balance
     Associated
Allowance
 

June 30, 2016

        

With no specific allowance recorded:

        

Real estate loans

        

Residential

   $ 6,946       $ 8,925       $ —    

Construction

     —          —          —    

Commercial

     11,285         13,294         —    

Commercial

     1,723         1,741         —    

Obligations of states and political subdivisions

     —          —          —    

Home equity loans and lines of credit

     367         430         —    

Auto loans

     412         424         —    

Other

     35         62         —    
  

 

 

    

 

 

    

 

 

 

Total

     20,768         24,876         —    
  

 

 

    

 

 

    

 

 

 

With an allowance recorded:

        

Real estate loans

        

Residential

     1,709         1,951         201   

Construction

     —          —          —    

Commercial

     1,296         1,306         128   

Commercial

     —          —          —    

Obligations of states and political subdivisions

     —          —          —    

Home equity loans and lines of credit

     195         216         26   

Auto loans

     399         550         251   

Other

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total

     3,599         4,023         606   
  

 

 

    

 

 

    

 

 

 

Total:

        

Real estate loans

        

Residential

     8,655         10,876         201   

Construction

     —          —          —    

Commercial

     12,581         14,600         128   

Commercial

     1,723         1,741         —    

Obligations of states and political subdivisions

     —          —          —    

Home equity loans and lines of credit

     562         646         26   

Auto loans

     811         974         251   

Other

     35         62         —    
  

 

 

    

 

 

    

 

 

 

Total Impaired Loans

   $ 24,367       $ 28,899       $ 606   
  

 

 

    

 

 

    

 

 

 

 

21


Table of Contents
     Recorded
Investment
     Unpaid
Principal
Balance
     Associated
Allowance
 

September 30, 2015

        

With no specific allowance recorded:

        

Real Estate Loans

        

Residential

   $ 9,552       $ 11,521       $ —    

Construction

     —          —          —    

Commercial

     15,100         16,316         —    

Commercial

     204         216         —    

Obligations of states and political subdivisions

     —          —          —    

Home equity loans and lines of credit

     731         743         —    

Auto Loans

     350         464         —    

Other

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total

     25,937         29,260         —    
  

 

 

    

 

 

    

 

 

 

With an allowance recorded:

        

Real Estate Loans

        

Residential

     2,433         2,639         373   

Construction

     —          —          —    

Commercial

     —          —          —    

Commercial

     —          —          —    

Obligations of states and political subdivisions

     —          —          —    

Home equity loans and lines of credit

     64         93         64   

Auto Loans

     275         275         131   

Other

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total

     2,772         3,007         568   
  

 

 

    

 

 

    

 

 

 

Total:

        

Real Estate Loans

        

Residential

     11,985         14,160         373   

Construction

     —          —          —    

Commercial

     15,100         16,316         —    

Commercial

     204         216         —    

Obligations of states and political subdivisions

     —          —          —    

Home equity loans and lines of credit

     795         836         64   

Auto Loans

     625         739         131   

Other

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total Impaired Loans

   $ 28,709       $ 32,267       $ 568   
  

 

 

    

 

 

    

 

 

 

 

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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,
 
     2016      2015      2016      2015  
     Average
Recorded
Investment
     Average
Recorded
Investment
     Interest
Income
Recognized
     Interest
Income
Recognized
 

With no specific allowance recorded:

           

Real estate loans

           

Residential

   $ 7,365       $ 9,445       $ 17       $ 59   

Construction

     —          —          —          —    

Commercial

     11,590         15,802         117         222   

Commercial

     1,839         224         37         2   

Obligations of states and political subdivisions

     —          —          —          —    

Home equity loans and lines of credit

     502         433         —          2   

Auto loans

     241         116         —          —    

Other

     13         —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     21,550         26,020         171         285   
  

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

           

Real estate loans

           

Residential

     2,214         2,697         3         3   

Construction

     —          —          —          —    

Commercial

     1,565         145         —          —    

Commercial

     —          —          —          —    

Obligations of states and political subdivisions

     —          —          —          —    

Home equity loans and lines of credit

     98         51         —          —    

Auto loans

     291         60         5         2   

Other

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     4,168         2,953         8         5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total:

           

Real estate loans

           

Residential

     9,579         12,142         20         62   

Construction

     —          —          —          —    

Commercial

     13,155         15,947         117         222   

Commercial

     1,839         224         37         2   

Obligations of states and political subdivisions

     —          —          —          —    

Home equity loans and lines of credit

     600         484         —          2   

Auto loans

     532         176         5         2   

Other

     13         —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Impaired Loans

   $ 25,718       $ 28,973       $ 179       $ 290   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

23


Table of Contents
     Nine Months Ended  
     June 30,  
     2016      2015      2016      2015  
     Average
Recorded
Investment
     Average
Recorded
Investment
     Interest
Income
Recognized
     Interest
Income
Recognized
 

With no specific allowance recorded:

           

Real estate loans

           

Residential

   $ 7,815       $ 10,247       $ 65       $ 163   

Construction

     —          —          —          —    

Commercial

     12,469         16,407         424         384   

Commercial

     1,513         304         89         4   

Obligations of states and political subdivisions

     —          —          —          —    

Home equity loans and lines of credit

     615         310         2         2   

Auto loans

     250         74         2         1   

Other

     5         —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     22,667         27,342         582         554   
  

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

           

Real estate loans

           

Residential

     2,495         2,535         12         43   

Construction

     —          —          —          —    

Commercial

     1,171         343         —          —    

Commercial

     3         —          —          —    

Obligations of states and political subdivisions

     —          —          —          —    

Home equity loans and lines of credit

     77         34         —          —    

Auto loans

     217         84         8         3   

Other

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     3,963         2,996         20         46   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total:

           

Real estate loans

           

Residential

     10,310         12,782         77         206   

Construction

     —          —          —          —    

Commercial

     13,640         16,750         424         384   

Commercial

     1,516         304         89         4   

Obligations of states and political subdivisions

     —          —          —          —    

Home equity loans and lines of credit

     692         344         2         2   

Auto loans

     467         158         10         4   

Other

     5         —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Impaired Loans

   $ 26,630       $ 30,338       $ 602       $ 600   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 more than 90 days past due are considered Substandard. Loans in the Doubtful category have all the weaknesses inherent in loans classified as Substandard with the added characteristic that their 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 or Loss within the internal risk rating system at June 30, 2016 and September 30, 2015 (in thousands):

 

     Pass      Special
Mention
     Substandard      Doubtful
or Loss
     Total  

June 30, 2016

              

Commercial real estate loans

   $ 257,043       $ 10,320       $ 20,583       $ —        $ 287,946   

Commercial

     41,542         302         3,480         —          45,324   

Obligations of states and political subdivisions

     57,169         —          —          —          57,169   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 355,754       $ 10,622       $ 24,063       $ —        $ 390,439   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Pass      Special
Mention
     Substandard      Doubtful
or Loss
     Total  

September 30, 2015

              

Commercial real estate loans

   $ 174,516       $ 4,521       $ 20,967       $ —        $ 200,004   

Commercial

     33,801         —          513         —          34,314   

Obligations of states and political subdivisions

     59,820         —          —          —          59,820   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 268,137       $ 4,521       $ 21,480       $ —        $ 294,138   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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, 2016 and September 30, 2015 (in thousands):

 

     Performing      Non-performing      Total  

June 30, 2016

        

Real estate loans:

        

Residential

   $ 588,632       $ 9,072       $ 597,704   

Construction

     3,479         —          3,479   

Home equity loans and lines of credit

     47,653         1,213         48,866   

Auto loans

     198,541         493         199,034   

Other

     3,312         35         3,347   
  

 

 

    

 

 

    

 

 

 

Total

   $ 841,617       $ 10,813       $ 852,430   
  

 

 

    

 

 

    

 

 

 
     Performing      Non-performing      Total  

September 30, 2015

        

Real estate loans:

        

Residential

   $ 600,810       $ 9,772       $ 610,582   

Construction

     878         —          878   

Home equity loans and lines of credit

     39,213         690         39,903   

Auto loans

     161,827         366         162,193   

Other

     3,322         21         3,343   
  

 

 

    

 

 

    

 

 

 

Total

   $ 806,050       $ 10,849       $ 816,899   
  

 

 

    

 

 

    

 

 

 

 

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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, 2016 and September 30, 2015 (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, 2016

                    

Real estate loans

                    

Residential

   $ 586,795       $ 1,505       $ 332       $ —        $ 9,072       $ 10,909       $ 597,704   

Construction

     3,479         —          —          —          —          —          3,479   

Commercial

     277,842         568         18         —          9,518         10,104         287,946   

Commercial

     44,291         127         —          —          906         1,033         45,324   

Obligations of states and political subdivisions

     57,169         —          —          —          —          —          57,169   

Home equity loans and lines of credit

     47,479         16         158         —          1,213         1,387         48,866   

Auto loans

     197,399         875         267         —          493         1,635         199,034   

Other

     3,297         15         —          —          35         50         3,347   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,217,751       $ 3,106       $ 775       $ —        $ 21,237       $ 25,118       $ 1,242,869   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     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, 2015

                    

Real estate loans

                    

Residential

   $ 598,190       $ 1,575       $ 1,045       $ —        $ 9,772       $ 12,392       $ 610,582   

Construction

     878         —          —          —          —          —          878   

Commercial

     190,440         137         587         —          8,840         9,564         200,004   

Commercial

     33,545         346         7         —          416         769         34,314   

Obligations of states and political subdivisions

     59,820         —          —          —          —          —          59,820   

Home equity loans and lines of credit

     39,136         32         45         —          690         767         39,903   

Auto loans

     160,272         1,375         180         —          366         1,921         162,193   

Other

     3,295         27         —          —          21         48         3,343   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,085,576       $ 3,492       $ 1,864       $ —        $ 20,105       $ 25,461       $ 1,111,037   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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, 2016 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.

 

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Table of Contents

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.

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, 2016 and 2015 (in thousands):

 

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

ALL balance at March 31, 2016

  $ 4,655      $ 24      $ 968      $ 738      $ 196      $ 389      $ 1,925      $ 25      $ 495      $ 9,415   

Charge-offs

    (259     —         (61     (5     —         (11     (369     —         —         (705

Recoveries

    34       —         —         5        —         2        37        2        —         80   

Provision

    57        2        (2     96        5        29        494        (2     (79     600   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ALL balance at June 30, 2016

  $ 4,487      $ 26      $ 905      $ 834      $ 201      $ 409      $ 2,087      $ 25      $ 416      $ 9,390   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    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, 2015

  $ 5,140      $ 7      $ 671      $ 693      $ 189      $ 461      $ 1,570      $ 27      $ 161      $ 8,919   

Charge-offs

    (657     —         (70     (8     —         (110     (746     —         —         (1,591

Recoveries

    37        —         52        7        —         6        154        6        —         262   

Provision

    (33     19        252        142        12        52        1,109        (8     255        1,800   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ALL balance at June 30, 2016

  $ 4,487      $ 26      $ 905      $ 834      $ 201      $ 409      $ 2,087      $ 25      $ 416      $ 9,390   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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Table of Contents

The following table summarizes the primary segments of the ALL, segregated into two categories, the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of June 30, 2016 and September 30, 2015 (in thousands):

 

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

Individually evaluated for impairment

  $ 201      $ —       $ 128      $ —       $ —       $ 26      $ 251      $ —       $ —       $ 606   

Collectively evaluated for impairment

    4,286        26        777        834        201        383        1,836        25        416        8,784   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ALL Balance at June 30, 2016

  $ 4,487      $ 26      $ 905      $ 834      $ 201      $ 409      $ 2,087      $ 25      $ 416      $ 9,390   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Individually evaluated for impairment

  $ 373      $ —       $ —       $ —       $ —       $ 64      $ 131      $ —       $ —       $ 568   

Collectively evaluated for impairment

    4,767        7        671        693        189        397        1,439        27        161        8,351   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ALL balance at September 30, 2015

  $ 5,140      $ 7      $ 671      $ 693      $ 189      $ 461      $ 1,570      $ 27      $ 161      $ 8,919   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The allowance for loan losses is based on estimates, and actual losses will vary from current estimates. Management believes that the granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALL that is representative of the risk found in the components of the portfolio at any given date. The Company allocated increased provisions to residential real estate, construction loan, commercial real estate, commercial loans, obligations of states and political subdivisions and home equity loans and lines of credit for the three month period ending June 30, 2016 due to increased balances and impairment evaluations in those segments. The Company allocated decreased provisions to commercial real estate and other loans for the three month period ending June 30, 2016 due primarily to decreased loan balances. The Company allocated increased provisions in auto loans due to increased loan balances, increased classified assets 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.

The Company allocated decreased provisions to residential real estate, and other loans for the nine month period ending June 30, 2016 due to declining loan balances and impairment evaluations in those segments. The Company allocated increased provisions to commercial real estate, obligations of states and political subdivisions, home equity loans and lines of credit, commercial loans and construction loans for the nine month period ending June 30, 2016 due primarily to increased loan balances and increased classified assets. The Company allocated increased provisions in auto loans due to increased loan balances, increased classified assets 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, 2016 and 2015 (dollars in thousands):

 

     For the Three Months Ended June 30, 2016  
     Number of
Contracts
     Pre-Modification
Outstanding
Recorded
Investment
     Post-Modification
Outstanding
Recorded
Investment
 

Troubled Debt Restructurings

        

Real estate loans:

        

Residential

     3       $ 248       $ 248   

Construction

     —          —          —    

Commercial

     1         1,612         1,612   

Commercial

     —          —          —    

Obligations of states and political subdivisions

     —          —          —    

Home equity loans and lines of credit

     1         7         7   

Auto loans

     —          —          —    

Other

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total

     5       $ 1,867       $ 1,867   
  

 

 

    

 

 

    

 

 

 
     For the Three Months Ended June 30, 2015  
     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   
  

 

 

    

 

 

    

 

 

 
     For the Nine Months Ended June 30, 2016  
     Number of
Contracts
     Pre-Modification
Outstanding
Recorded
Investment
     Post-Modification
Outstanding
Recorded
Investment
 

Troubled Debt Restructurings

        

Real estate loans:

        

Residential

     7       $ 916       $ 916   

Construction

     —          —          —    

Commercial

     2         1,689         1,689   

Commercial

     —          —          —    

Obligations of states and political subdivisions

     —          —          —    

Home equity loans and lines of credit

     1         7         7   

Auto loans

     —          —          —    

Other

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total

     10       $ 2,612       $ 2,612   
  

 

 

    

 

 

    

 

 

 

 

29


Table of Contents
     For the Nine Months Ended June 30, 2015  
     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   
  

 

 

    

 

 

    

 

 

 

Of the five new troubled debt restructurings granted for the three months ended June 30, 2016, two loans totaling $118,000 were granted term and rate concessions, two loans totaling $1.7 million were granted term concessions and one loan totaling $7,000 was granted a rate concession.

All four new troubled debt restructurings granted for the three months ended June 30, 2015, totaling $720,000, were granted terms and rate concessions.

Of the ten new troubled debt restructurings granted for the nine months ended June 30, 2016, four loans totaling $690,000 were granted term and rate concessions, four loans totaling $1.8 million were granted term concessions and two loans totaling $84,000 were granted a rate concession.

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 three and nine months ended June 30, 2016, no loans defaulted on a restructuring agreement within one year of modification.

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.

Foreclosed assets acquired in settlement of loans are carried at fair value, less estimated costs to sell, and are included in other assets on the Consolidated Balance Sheet. As of June 30, 2016 and September 30, 2015, included with other assets are $2.2 million and $2.5 million, of foreclosed assets, respectively. As of June 30, 2016, included within the foreclosed assets is $1.7 million of consumer residential mortgages that were foreclosed on or received via a deed in lieu transaction prior to the period end. As of June 30, 2016, the Company has initiated formal foreclosure proceedings on $4.9 million of consumer residential mortgages which have not yet been transferred into foreclosed assets.

 

8. Deposits

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

 

     June 30,
2016
     September 30,
2015
 

Non-interest bearing demand accounts

   $ 141,341       $ 98,514   

Interest bearing demand accounts

     118,719         110,268   

Money market accounts

     196,396         162,418   

Savings and club accounts

     144,468         129,227   

Certificates of deposit

     568,416         596,327   
  

 

 

    

 

 

 

Total

   $ 1,169,340       $ 1,096,754   
  

 

 

    

 

 

 

 

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Table of Contents
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, 2015 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,
 
     2016      2015      2016      2015  

Service Cost

   $ 249       $ 219       $ 747       $ 655   

Interest Cost

     246         207         736         619   

Expected return on plan assets

     (311      (309      (933      (925

Amortization of unrecognized loss

     119         61         358         181   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit cost

   $ 303       $ 178       $ 908       $ 530   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Bank contributed $631,000 to its pension plan in June 2016.

 

10. Equity Incentive Plan

The Company maintained the ESSA Bancorp, Inc. 2007 Equity Incentive Plan (the “Plan”). The Plan provided 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 allowed 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.

The Company replaced the 2007 Equity Incentive Plan with the ESSA Bancorp, Inc. 2016 Equity Incentive Plan (the “2016 Plan”). The 2016 Plan provides for a total of 250,000 shares of common stock for issuance upon the grant or exercise of awards. The 2016 Plan allows for the granting of restricted stock, restricted stock units, incentive stock options and non-qualified stock options.

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 shares of restricted stock on July 22, 2014, 21,843 shares of restricted stock on May 20, 2015 and 23,491 shares of restricted stock on March 4, 2016. 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 the 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 2016 restricted shares vest over a 43 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.

For the nine months ended June 30, 2016 and 2015, the Company recorded $325,000 and $171,000 of share-based compensation expense, respectively, comprised of restricted stock expense. Expected future compensation expense relating to the 9,932 (2014 shares) restricted shares, at June 30, 2016 is $85,000 over the remaining vesting period of 1.25 years. Expected future compensation expense relating to the 16,379 restricted shares (2015 shares) at June 30, 2016 is $192,000 over the remaining vesting period of 2.5 years. Expected future compensation expense relating to the 23,491 restricted shares (2016 shares) at June 30, 2016 is $288,000 over the remaining vesting period of 3.25 years.

 

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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, 2016.

 

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

Outstanding, September 30, 2015

     1,314,580       $ 12.35         2.67       $ 802,000   

Granted

     —          —          —          —    

Exercised

     (213,254      12.35         1.92         —    

Forfeited

     —          —          —          —    
  

 

 

          

Outstanding, June 30, 2016

     1,101,326       $ 12.35         1.92       $ 1,156,000   
  

 

 

          

Exercisable at June 30, 2016

     1,101,326       $ 12.35         1.92       $ 1,156,000   
  

 

 

          

The following is a summary of the status of the Company’s restricted stock as of June 30, 2016, and changes therein during the nine month period then ended:

 

     Number of
Restricted Stock
     Weighted-
average
Grant Date
Fair Value
 

Nonvested at September 30, 2015

     26,311       $ 12.30   

Granted

     23,491         13.52   

Vested

     —          —    

Forfeited

     —          —    
  

 

 

    

Nonvested at June 30, 2016

     49,802       $ 12.88   
  

 

 

    

 

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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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, 2016 and September 30, 2015 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, 2016        

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, 2016
 

Securities available-for-sale measured on a recurring basis

       

Mortgage backed securities

  $ —       $ 233,419      $ —       $ 233,419   

Obligations of states and political subdivisions

    —         69,588        —         69,588   

U.S. government agencies

    —         29,936        —         29,936   

Corporate obligations

    —         26,879        7,962        34,841   

Trust-preferred securities

    —         —         1,750        1,750   

Other debt securities

    —         23,464        500        23,964   

Equity securities-financial services

    25        —         —         25   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total debt and equity securities

  $ 25      $ 383,286      $ 10,212      $ 393,523   

Assets measured at fair value on a nonrecurring basis:

       

Foreclosed real estate owned measured on a non-recurring basis

  $ —       $ —       $ 2,244      $ 2,244   

Impaired loans measured on a non-recurring basis

  $ —       $ —       $ 23,761      $ 23,761   

Mortgage servicing rights

  $ —       $ —       $ 456      $ 456   
    Fair Value Measurement at September 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
September 30, 2015
 

Securities available-for-sale measured on a recurring basis

       

Mortgage backed securities

  $ —       $ 237,007      $ —       $ 237,007   

Obligations of states and political subdivisions

    —         51,625        —         51,625   

U.S. government agencies

    —         46,186        —         46,186   

Corporate obligations

    —         20,360        2,000        22,360   

Trust-preferred securities

    —         —         1,711        1,711   

Other debt securities

    —         19,993        500        20,493   

Equity securities-financial services

    25        —         —         25   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total debt and equity securities

  $ 25      $ 375,171      $ 4,211      $ 379,407   

Assets measured at fair value on a nonrecurring basis:

       

Foreclosed real estate owned measured on a non-recurring basis

  $ —       $ —       $ 2,480      $ 2,480   

Impaired loans measured on a non-recurring basis

  $ —       $ —       $ 28,141      $ 28,141   

Mortgage Servicing rights

  $ —       $ —       $ 412      $ 412   

 

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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, 2016 and 2015 (in thousands).

 

     Fair Value Measurement Using Significant Unobservable Inputs
(Level III)
 
     Three Months Ended  
     June 30, 2016      June 30, 2015  

Beginning balance

   $ 7,136       $ 4,240   

Purchases, sales, issuances, settlements, net

     3,000        —    

Total unrealized gain (loss):

     

Included in earnings

     —          —    

Included in other comprehensive income

     76         (10

Transfers in and/or out of Level III

     —          —    
  

 

 

    

 

 

 
   $ 10,212       $ 4,230   
  

 

 

    

 

 

 
     Fair Value Measurement Using Significant Unobservable Inputs
(Level III)
 
     Nine Months Ended  
     June 30, 2016      June 30, 2015  

Beginning balance

   $ 4,211       $ 2,230   

Purchases, sales, issuances, settlements, net

     6,000         2,000   

Total unrealized gain (loss):

     

Included in earnings

     —          —    

Included in other comprehensive income

     1         —    

Transfers in and/or out of Level III

     —          —    
  

 

 

    

 

 

 
   $ 10,212       $ 4,230   
  

 

 

    

 

 

 

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 Company has the ability to access at the measurement date. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset, either directly or indirectly. Level 2 inputs include quoted prices for similar assets in active markets, and inputs other than quoted prices that are observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy, within which the fair value measurement in its entirety falls, has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset.

The measurement of fair value should be consistent with one of the following valuation techniques: market approach, income approach, and/or cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). For example, valuation techniques consistent with the market approach often use market multiples derived from a set of comparables. Multiples might lie in ranges with a different multiple for each comparable. The selection of where within the range the appropriate multiple falls requires judgment, considering factors specific to the measurement (qualitative and quantitative). Valuation techniques consistent with the market approach include matrix pricing. Matrix pricing is a mathematical technique used principally to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on a security’s relationship to other benchmark quoted securities. Most of the securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quoted market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. Securities reported at fair value utilizing Level 1 inputs are limited to actively traded equity securities whose market price is readily available from the New York Stock Exchange or the NASDAQ exchange. A few securities are valued using Level 3 inputs, most of these are classified as available for sale and are reported at fair value 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, 2016, 206 impaired loans with a carrying value of $24.4 million were reduced by specific valuation allowance totaling $607,000 resulting in a net fair value of $23.8 million based on Level 3 inputs. At September 30, 2015, 211 impaired loans with a carrying value of $28.7 million were reduced by a specific valuation totaling $568,000 resulting in a net fair value of $28.1 million based on Level 3 inputs.

 

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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, 2016:

           

Impaired loans

   $ 23,761        
 
Appraisal of
collateral (1)
 
  
    
 
Appraisal
adjustments (2)
 
  
    
 
0% to 50%
(23.9%)
 
  

Foreclosed real estate owned

     2,244        
 
Appraisal of
collateral (1)
 
  
    
 
Appraisal
adjustments (2)
 
  
    
 
20% to 49%
(22.3%)
 
  

Mortgage servicing rights

     456         Discounted cash flow         Discount rate        
 
11% to 16%
(11.6%)
 
  
           Prepayment speeds        
 
7% to 34%
(16.2%)
 
  
     Quantitative Information about Level 3 Fair Value Measurements  
(in thousands)    Fair Value
Estimate
     Valuation
Techniques
     Unobservable
Input
     Range  

September 30, 2015:

           

Impaired loans

   $ 28,141        
 
Appraisal of
collateral (1)
 
  
    
 
Appraisal
adjustments (2)
 
  
    
 
0% to 60%
(22.3%)
 
  

Foreclosed real estate owned

     2,480        
 
Appraisal of
collateral (1)
 
  
    
 
Appraisal
adjustments (2)
 
  
    
 
20% to 46%
(21.3%)
 
  

Mortgage servicing rights

     412         Discounted cash flow         Discount rate        
 
6% to 11%
(10.1%)
 
  
           Prepayment speeds        
 
5% to 79%
(17.9%)
 
  

 

(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.

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 (in thousands).

 

     June 30, 2016  
     Carrying Value      Level I      Level II      Level III      Total Fair
Value
 

Financial assets:

              

Cash and cash equivalents

   $ 25,978       $ 25,978       $ —        $ —        $ 25,978   

Certificates of deposit

     1,500         —          —          1,523         1,523   

Investment and mortgage backed securities available for sale

     393,523         25         383,286         10,212         393,523   

Loans receivable, net

     1,233,479         —          —          1,256,927         1,256,927   

Accrued interest receivable

     5,771         5,771         —          —          5,771   

Regulatory stock

     16,811         16,811         —          —          16,811   

Mortgage servicing rights

     456         —          —          456         456   

Bank owned life insurance

     31,348         31,348         —          —          31,348   

Financial liabilities:

              

Deposits

   $ 1,169,340       $ 600,924       $ —        $ 573,427       $ 1,174,351   

Short-term borrowings

     153,162         153,162         —          —          153,162   

Other borrowings

     240,601         —          —          242,375         242,375   

Advances by borrowers for taxes and insurance

     12,154         12,154         —          —          12,154   

Accrued interest payable

     1,148         1,148         —          —          1,148   
     September 30, 2015  
     Carrying Value      Level I      Level II      Level III      Total Fair
Value
 

Financial assets:

              

Cash and cash equivalents

   $ 18,758       $ 18,758       $ —        $ —        $ 18,758   

Certificates of deposit

     1,750         —          —          1,774         1,774   

Investment and mortgage backed securities available for sale

     379,407         25         375,171         4,211         379,407   

Loans receivable, net

     1,102,118         —          —          1,123,436         1,123,436   

Accrued interest receivable

     5,068         5,068         —          —          5,068   

Regulatory stock

     13,831         13,831         —          —          13,831   

Mortgage servicing rights

     412         —          —          412         412   

Bank owned life insurance

     30,655         30,655         —          —          30,655   

Financial liabilities:

              

Deposits

   $ 1,096,754       $ 500,427       $ —        $ 600,250       $ 1,100,677   

Short-term borrowings

     91,339         91,339         —          —          91,339   

Other borrowings

     229,101         —          —          230,255         230,255   

Advances by borrowers for taxes and insurance

     4,273         4,273         —          —          4,273   

Accrued interest payable

     866         866         —          —          866   

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.

 

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Table of Contents

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 Regulatory 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 Regulatory 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 (including Certificates of Deposit)

The fair values disclosed for demand, savings, and money market deposit accounts are valued at the amount payable on demand as of quarter-end. Fair values for time deposits are estimated using a discounted cash flow calculation that applies contractual costs currently being offered in the existing portfolio to current market rates being offered for deposits of similar remaining maturities.

Other Borrowings

Fair values for other borrowings are estimated using a discounted cash flow calculation that applies contractual costs currently being offered in the existing portfolio to current market rates being offered for other borrowings of similar remaining maturities.

 

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Table of Contents

Commitments to Extend Credit

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

 

12. Accumulated Other Comprehensive Loss

The activity in accumulated other comprehensive loss for the three and nine months ended June 30, 2016 and 2015 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, 2016

   $ (5,167   $ 3,730      $ (1,437

Other comprehensive income before reclassifications

     —         1,558        1,558   

Amounts reclassified from accumulated other comprehensive loss, net of tax

     78        (272     (194
  

 

 

   

 

 

   

 

 

 

Period change

     78        1,286        1,364   
  

 

 

   

 

 

   

 

 

 

Balance at June 30, 2016

   $ (5,089   $ 5,016      $ (73
  

 

 

   

 

 

   

 

 

 

Balance at March 31, 2015

   $ (3,148   $ 3,889      $ 741   

Other comprehensive loss 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
  

 

 

   

 

 

   

 

 

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

Balance at September 30, 2015

   $ (5,325   $ 2,930      $ (2,395

Other comprehensive income before reclassifications

     —         2,601        2,601   

Amounts reclassified from accumulated other comprehensive loss, net of tax

     236        (515     (279
  

 

 

   

 

 

   

 

 

 

Period change

     236        2,086        2,322   
  

 

 

   

 

 

   

 

 

 

Balance at June 30, 2016

   $ (5,089   $ 5,016      $ (73
  

 

 

   

 

 

   

 

 

 

Balance at September 30, 2014

   $ (3,228   $ 649      $ (2,579

Other comprehensive income before reclassifications

     —         1,067        1,067   

Amounts reclassified from accumulated other comprehensive loss, net of tax

     119        (263     (144
  

 

 

   

 

 

   

 

 

 

Period change

     119        804        923   
  

 

 

   

 

 

   

 

 

 

Balance at June 30, 2015

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

 

 

   

 

 

   

 

 

 

The following table presents significant amounts reclassified out of each component of accumulated other comprehensive loss for the three and nine months ended June 30, 2016 and 2015:

 

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Table of Contents
     Amount Reclassified from
Accumulated Other Comprehensive Loss
 
     Accumulated Other
Comprehensive Loss for
the Three Months Ended
June 30,
    Affected Line Item in the Consolidated
Statement of Income
 
     2016     2015        

Securities available for sale:

      

Securities gains reclassified into earnings

   $ 413      $ 194        Gain on sale of investments   

Related income tax expense

     (141     (66     Income taxes   
  

 

 

   

 

 

   

Net effect on accumulated other comprehensive loss for the period

     272        128     
  

 

 

   

 

 

   

Defined benefit pension plan:

      

Amortization of net loss

     (119     (60     Compensation and employee benefits   

Related income tax expense

     41        21        Income taxes   
  

 

 

   

 

 

   

Net effect on accumulated other comprehensive loss for the period

   $ (78   $ (39  
  

 

 

   

 

 

   

Total reclassification for the period

   $ 194      $ 89     
  

 

 

   

 

 

   
     Amount Reclassified from
Accumulated Other Comprehensive Loss
 
     Accumulated Other
Comprehensive Loss for
the Nine Months Ended
June 30,
    Affected Line Item in the Consolidated
Statement of Income
 
     2016     2015        

Securities available for sale:

      

Securities gains reclassified into earnings

   $ 781      $ 398        Gain on sale of investments   

Related income tax expense

     (266     (135     Income taxes   
  

 

 

   

 

 

   

Net effect on accumulated other comprehensive loss for the period

     515        263     
  

 

 

   

 

 

   

Defined benefit pension plan:

      

Amortization of net loss

     (358     (181     Compensation and employee benefits   

Related income tax expense

     122        62        Income taxes   
  

 

 

   

 

 

   

Net effect on accumulated other comprehensive loss for the period

   $ (236   $ (119  
  

 

 

   

 

 

   

Total reclassification for the period

   $ 279      $ 144     
  

 

 

   

 

 

   

 

13. Acquisitions

Acquisition of Eagle National Bancorp, Inc.

On December 4, 2015, the Company closed on a merger transaction pursuant to which ESSA Bancorp, Inc. acquired ENB and its’ wholly owned subsidiary Eagle National Bank, in a cash transaction. The acquisition added five branch locations in the Philadelphia, Pennsylvania market, establishing ESSA’s presence in that market.

Under the terms of the merger agreement, the Company acquired all of the outstanding shares of ENB, for a total cash purchase price of approximately $24.7 million. Eagle National Bank has been merged into ESSA Bank & Trust, with ESSA Bank & Trust as the surviving entity.

The acquired assets and assumed liabilities were measured at estimated fair values. Management made significant estimates and exercised significant judgment in accounting for the acquisition. Management measured loan fair values based on loan file reviews (including borrower financial statements or tax returns), appraised collateral values, expected cash flows and historical loss factors of ENB. The Company also recorded an identifiable intangible asset representing the core deposit base of ENB based on management’s evaluation of the cost of such deposits relative to alternative funding sources. Management used market quotations to measure the fair value of investment securities. The business combination resulted in the acquisition of

 

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loans with and without evidence of credit quality deterioration. ENB’s loans were deemed impaired at the acquisition date if the Company did not expect to receive all contractually required cash flows due to concerns about credit quality. Such loans were fair valued and the difference between contractually required payments at the acquisition date and cash flows expected to be collected was recorded as a nonaccretable difference. At the acquisition date, the Company recorded $3.5 million of purchased credit-impaired loans subject to a nonaccretable difference of $2.0 million. The method of measuring carrying value of purchased loans differs from loans originated by the Company (originated loans), and as such, the Company identifies purchased loans and purchased loans with a credit quality discount and originated loans as amortized cost.

ENB’s loans without evidence of credit deterioration were measured to fair valued by discounting both expected principal and interest cash flows using an observable discount rate for similar instruments that a market participant would consider in determining fair value. Additionally, consideration was given to management’s best estimates of default rates and payment speeds. At acquisition, ENB’s loan portfolio without evidence of deterioration totaled $120.7 million and was recorded at a fair value of $121.4 million.

The following condensed statement reflects the values assigned to ENB net assets as of the acquisitions date (in thousands):

 

Total purchase price

   $ 24,655   

Net assets acquired:

  

Cash

   $ 8,481   

Investments available for sale

     36,275   

Loans receivable

     123,380   

Regulatory stock

     889   

Premises and equipment, net

     945   

Intangible assets

     1,491   

Deferred tax assets

     715   

Other assets

     2,174   

Certificates of deposits

     (32,408

Deposits other than certificates of deposits

     (119,865

Other liabilities

     (964
  

 

 

 
   $ 21,113   
  

 

 

 

Goodwill resulting from the ENB merger

   $ 3,542   
  

 

 

 

Results of operations for ENB prior to the acquisition date are not included in the Consolidated Statement of Income for the three and nine month periods ended June 30, 2016. The following table presents financial information regarding the former Eagle National Bank operations included in the Consolidated Statement of Income from the date of acquisition through June 30, 2016 under column “Actual from acquisition date through June 30, 2016.” In addition, the following table presents unaudited pro forma information as if the acquisition of ENB had occurred on October 1, 2014 under the “Pro Forma” columns. The table below has been prepared for comparative purposes only and is not necessarily indicative of the actual results that would have been attained had the acquisition occurred as of the beginning of the periods presented, nor is it indicative of future results. Furthermore, the unaudited pro forma information does not reflect management’s estimate of any revenue-enhancing opportunities nor anticipated cost savings as a result of the integration and consolidation of the acquisition. Merger and acquisition integration costs and amortization of fair value adjustments net of the related income tax effects are included in the amounts below.

 

    

Actual From Acquisition Date

Through June 30, 2016

(in thousands)

 

Net interest income

   $ 3,773   

Non interest income

     301   

Net income

   $ 1,136   

 

     Pro Formas  
     Three Months Ended June 30,      Nine Months Ended June 30,  
     2016      2015      2016      2015  
     (in thousands, except per share data)  

Net interest income

   $ 11,859       $ 12,658       $ 36,619       $ 38,034   

Non interest income

     2,296         2,163         6,473         6,162   

Net income

     2,112         2,589         4,548         7,550   

Pro forma earnings per share:

           

Basic

   $ 0.20       $ 0.25       $ 0.44       $ 0.72   

Diluted

   $ 0.20       $ 0.25       $ 0.43       $ 0.72   

 

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

Forward Looking Statements

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

 

    statements of our goals, intentions and expectations;

 

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

 

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

 

    estimates of our risks and future costs and benefits.

By identifying these forward-looking statements for you in this manner, we are alerting you to the possibility that our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. Important factors that could cause our actual results and financial condition to differ from those indicated in the forward-looking statements include, among others, those discussed under “Risk Factors” in Part I, Item 1A of the Company’s Annual Report on Form 10-K and Part II, Item 1A of this Quarterly 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, 2016 and September 30, 2015

Total Assets. Total assets increased by $160.1 million, or 10.0%, to $1.77 billion at June 30, 2016 from $1.61 billion at September 30, 2015. The acquisition of ENB was the primary reason for the increase. At the acquisition date of December 4, 2015, ENB had total assets of $173.7 million, including total loans of $124.2 million and total deposits of $152.2 million. After subtracting the acquisition purchase price of $24.7 million and purchase accounting adjustments, net assets contributed at the acquisition date were $153.2 million.

Total Cash and Cash Equivalents. Total cash and cash equivalents increased $7.2 million, or 38.5%, to $26.0 million at June 30, 2016 from $18.8 million at September 30, 2015. An increase in cash and due from banks of $8.1 million partially offset by a decrease in interest bearing deposits with other institutions of $924,000 was the primary reason for the net increase of $7.2 million.

Net Loans. Net loans increased $131.4 million, or 11.9%, to $1.23 billion at June 30, 2016 from $1.10 billion at September 30, 2015. Net loans acquired from ENB in the merger were $123.4 million. During this period, construction loans increased $2.6 million

 

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to $3.5 million, commercial real estate loans increased $87.9 million to $287.9 million, commercial loans increased $11.0 million to $45.3 million, home equity loans and lines of credit increased $8.9 million to $48.9 million, auto loans increased $36.8 million to $199.0 million, and other loans increased $4,000 to $3.3 million. These increases were partially offset by decreases in residential loans of $12.9 million to $597.7 million, and obligations of states and political subdivisions of $2.7 million to $57.2 million.

Investment Securities Available for Sale. Investment securities available for sale increased $14.1 million, or 3.7%, to $393.5 million at June 30, 2016 from $379.4 million at September 30, 2015. Investment securities acquired from ENB in the merger amounted to $36.3 million of which $16.0 million were sold immediately subsequent to merger closing. The increase was due primarily to increases in obligations of states and political subdivision or $18.0 million, trust preferred securities of $39,000, other debt securities of $3.5 million and corporate obligations of $12.5 million, offset in part by decreases in US government agency securities of $16.3 million, and mortgage backed securities of $3.6 million. The Company sold $45.7 million of investment securities for the nine months ended June 30, 2016.

Deposits. Deposits increased $72.6 million, or 6.6%, to $1.17 billion at June 30, 2016 from $1.10 billion at September 30, 2015 primarily as a result of the ENB acquisition. Net deposits acquired from ENB in the merger were $152.3 million. With the exception of certificates of deposit, which declined $27.9 million, all deposit categories increased, the largest being a $42.8 million increase in non-interest bearing demand accounts. At June 30, 2016, compared to September 30, 2015, certificates of deposit, which decreased $27.9 million to $568.4 million, included a decrease in brokered certificates of $31.2 million to $249.6 million.

Borrowed Funds. Borrowed funds increased by $73.3 million, or 22.9%, to $393.8 million at June 30, 2016, from $320.4 million at September 30, 2015. No borrowings were assumed from ENB in the merger. The increase in borrowed funds was due to increases in short term borrowings of $61.8 million as well as an increase in other borrowings of $11.5 million. All borrowings at June 30, 2016 represent advances from the Pittsburgh FHLB.

Stockholders’ Equity. Stockholders’ equity increased by $6.2 million, or 3.6% to $177.5 million at June 30, 2016 from $171.3 million at September 30, 2015. The increase in stockholders’ equity was primarily due to the changes to accumulated other comprehensive loss and net income offset by dividends paid on common stock.

 

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Average Balance Sheets for the Three and Nine months Ended June 30, 2016 and 2015

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,  
     2016     2015  
     Average Balance     Interest Income/
Expense
    Yield/Cost     Average Balance     Interest Income/
Expense
    Yield/Cost  
     (dollars in thousands)  

Interest-earning assets:

            

Loans(1)

   $ 1,241,756      $ 12,377        4.00   $ 1,091,356      $ 11,398        4.19

Investment Securities