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EX-31.1 - EX-31.1 - ESSA Bancorp, Inc.essa-ex311_8.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended December 31, 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      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      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

 

 

 

 

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  

As of February 3, 2017 there were 11,498,042 shares of the Registrant’s common stock, par value $0.01 per share, outstanding.

 


 

ESSA Bancorp, Inc.

FORM 10-Q

Table of Contents

 

 

 

Page

 

Part I. Financial Information

 

 

 

 

 

 

Item 1.

Financial Statements (unaudited)

 

2

 

 

 

 

Item 2.

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

 

34

 

 

 

 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

 

41

 

 

 

 

Item 4

Controls and Procedures

 

42

 

 

 

 

 

Part II. Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

42

 

 

 

 

Item 1A.

Risk Factors

 

42

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

42

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

42

 

 

 

 

Item 4.

Mine Safety Disclosures

 

42

 

 

 

 

Item 5.

Other Information

 

42

 

 

 

 

Item 6.

Exhibits

 

43

 

 

 

 

Signature Page

 

43

 

 

 


 

Part I. Financial Information

Item 1.

Financial Statements

ESSA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

 

 

 

December 31,

2016

 

 

September 30,

2016

 

 

 

(dollars in thousands)

 

Cash and due from banks

 

$

32,683

 

 

$

31,815

 

Interest-bearing deposits with other institutions

 

 

7,168

 

 

 

11,843

 

Total cash and cash equivalents

 

 

39,851

 

 

 

43,658

 

Certificates of deposit

 

 

1,000

 

 

 

1,250

 

Investment securities available for sale, at fair value

 

 

392,113

 

 

 

390,410

 

Loans receivable (net of allowance for loan losses of $9,342 and $9,056)

 

 

1,224,021

 

 

 

1,219,213

 

Regulatory stock, at cost

 

 

16,680

 

 

 

15,463

 

Premises and equipment, net

 

 

16,674

 

 

 

16,844

 

Bank-owned life insurance

 

 

36,856

 

 

 

36,593

 

Foreclosed real estate

 

 

2,436

 

 

 

2,659

 

Intangible assets, net

 

 

2,324

 

 

 

2,487

 

Goodwill

 

 

13,801

 

 

 

13,801

 

Deferred income taxes

 

 

14,932

 

 

 

11,885

 

Other assets

 

 

17,922

 

 

 

18,216

 

TOTAL ASSETS

 

$

1,778,610

 

 

$

1,772,479

 

LIABILITIES

 

 

 

 

 

 

 

 

Deposits

 

$

1,192,941

 

 

$

1,214,820

 

Short-term borrowings

 

 

174,918

 

 

 

129,460

 

Other borrowings

 

 

215,571

 

 

 

230,601

 

Advances by borrowers for taxes and insurance

 

 

7,719

 

 

 

4,956

 

Other liabilities

 

 

16,022

 

 

 

16,298

 

TOTAL LIABILITIES

 

 

1,607,171

 

 

 

1,596,135

 

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;

   11,463,785 and 11,393,558 outstanding at December 31, 2016 and September 30,

   2016)

 

 

181

 

 

 

181

 

Additional paid in capital

 

 

181,072

 

 

 

181,900

 

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

 

 

(9,061

)

 

 

(9,174

)

Retained earnings

 

 

88,628

 

 

 

87,638

 

Treasury stock, at cost; 6,669,310 and 6,739,537 shares outstanding at December 31,

   2016 and September 30, 2016, respectively

 

 

(81,486

)

 

 

(82,369

)

Accumulated other comprehensive loss

 

 

(7,895

)

 

 

(1,832

)

TOTAL STOCKHOLDERS’ EQUITY

 

 

171,439

 

 

 

176,344

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

1,778,610

 

 

$

1,772,479

 

 

See accompanying notes to the unaudited consolidated financial statements.

2


 

ESSA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF INCOME

(UNAUDITED)

 

 

 

For the Three Months Ended

December 31,

 

 

 

2016

 

 

2015

 

 

 

(dollars in thousands, except per

share data)

 

INTEREST INCOME

 

 

 

 

 

 

 

 

Loans receivable, including fees

 

$

12,251

 

 

$

11,574

 

Investment securities:

 

 

 

 

 

 

 

 

Taxable

 

 

1,874

 

 

 

1,818

 

Exempt from federal income tax

 

 

309

 

 

 

244

 

Other investment income

 

 

216

 

 

 

179

 

Total interest income

 

 

14,650

 

 

 

13,815

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

Deposits

 

 

2,012

 

 

 

1,845

 

Short-term borrowings

 

 

251

 

 

 

94

 

Other borrowings

 

 

755

 

 

 

784

 

Total interest expense

 

 

3,018

 

 

 

2,723

 

NET INTEREST INCOME

 

 

11,632

 

 

 

11,092

 

Provision for loan losses

 

 

750

 

 

 

600

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN

   LOSSES

 

 

10,882

 

 

 

10,492

 

NONINTEREST INCOME

 

 

 

 

 

 

 

 

Service fees on deposit accounts

 

 

864

 

 

 

863

 

Services charges and fees on loans

 

 

354

 

 

 

280

 

Trust and investment fees

 

 

150

 

 

 

213

 

Gain on sale of investments

 

 

 

 

 

3

 

Earnings on Bank-owned life insurance

 

 

263

 

 

 

230

 

Insurance commissions

 

 

193

 

 

 

199

 

Other

 

 

33

 

 

 

29

 

Total noninterest income

 

 

1,857

 

 

 

1,817

 

NONINTEREST EXPENSE

 

 

 

 

 

 

 

 

Compensation and employee benefits

 

 

6,177

 

 

 

5,578

 

Occupancy and equipment

 

 

1,091

 

 

 

1,109

 

Professional fees

 

 

745

 

 

 

453

 

Data processing

 

 

934

 

 

 

919

 

Advertising

 

 

305

 

 

 

87

 

Federal Deposit Insurance Corporation (FDIC) premiums

 

 

187

 

 

 

278

 

Gain on foreclosed real estate

 

 

(96

)

 

 

(10

)

Merger related costs

 

 

 

 

 

245

 

Amortization of intangible assets

 

 

163

 

 

 

174

 

Other

 

 

896

 

 

 

953

 

Total noninterest expense

 

 

10,402

 

 

 

9,786

 

Income before income taxes

 

 

2,337

 

 

 

2,523

 

Income taxes

 

 

400

 

 

 

566

 

NET INCOME

 

$

1,937

 

 

$

1,957

 

Earnings per share

 

 

 

 

 

 

 

 

Basic

 

$

0.18

 

 

$

0.19

 

Diluted

 

$

0.18

 

 

$

0.19

 

Dividends per share

 

$

0.09

 

 

$

0.09

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

3


 

ESSA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS

(UNAUDITED)

 

 

 

Three Months Ended

December 31,

 

 

 

 

2016

 

 

2015

 

 

 

 

(dollars in thousands)

Net income

 

$

1,937

 

 

$

1,957

 

 

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

Investment securities available for sale:

 

 

 

 

 

 

 

 

 

Unrealized holding loss

 

 

(10,232

)

 

 

(3,398

)

 

Tax effect

 

 

3,479

 

 

 

1,154

 

 

Reclassification of gains recognized in net income

 

 

 

 

 

(3

)

 

Tax effect

 

 

 

 

 

1

 

 

Net of tax amount

 

 

(6,753

)

 

 

(2,246

)

 

Pension plan adjustment:

 

 

 

 

 

 

 

 

 

Reclassification adjustment related to actuarial losses

 

 

136

 

 

 

120

 

 

Tax effect

 

 

(46

)

 

 

(41

)

 

Net of tax amount

 

 

90

 

 

 

79

 

 

Derivative and hedging activities adjustments:

 

 

 

 

 

 

 

 

 

Changes in unrealized holding gains on derivative included in net income

 

 

1,052

 

 

 

 

 

Tax effect

 

 

(459

)

 

 

 

 

Reclassification adjustment for gains on derivatives included in net income

 

 

11

 

 

 

 

 

Tax effect

 

 

(4

)

 

 

 

 

Net of tax amount

 

 

600

 

 

 

 

 

Total other comprehensive loss

 

 

(6,063

)

 

 

(2,167

)

 

Comprehensive loss

 

$

(4,126

)

 

$

(210

)

 

 

See accompanying notes to the unaudited consolidated financial statements.

4


 

ESSA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unallocated

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Common Stock

 

 

Additional

 

 

Common

 

 

 

 

 

 

 

 

 

 

Other

 

 

Total

 

 

 

Number of

 

 

 

 

 

 

Paid In

 

 

Stock Held by

 

 

Retained

 

 

Treasury

 

 

Comprehensive

 

 

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

the ESOP

 

 

Earnings

 

 

Stock

 

 

Loss

 

 

Equity

 

 

 

(dollars in thousands except per share data)

 

Balance, September 30, 2016

 

 

11,393,558

 

 

$

181

 

 

$

181,900

 

 

$

(9,174

)

 

$

87,638

 

 

$

(82,369

)

 

$

(1,832

)

 

$

176,344

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,937

 

 

 

 

 

 

 

 

 

 

 

1,937

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,063

)

 

 

(6,063

)

Cash dividends declared ($0.09

   per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(947

)

 

 

 

 

 

 

 

 

 

 

(947

)

Stock based compensation

 

 

 

 

 

 

 

 

 

 

66

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

66

 

Allocation of ESOP stock

 

 

 

 

 

 

 

 

 

 

53

 

 

 

113

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

166

 

Allocation of treasury shares to

   incentive plan

 

 

20,675

 

 

 

 

 

 

 

(253

)

 

 

 

 

 

 

 

 

 

 

253

 

 

 

 

 

 

 

 

Stock options exercised

 

 

49,552

 

 

 

 

 

 

 

(694

)

 

 

 

 

 

 

 

 

 

 

630

 

 

 

 

 

 

 

(64

)

Balance, December 31, 2016

 

 

11,463,785

 

 

$

181

 

 

$

181,072

 

 

$

(9,061

)

 

$

88,628

 

 

$

(81,486

)

 

$

(7,895

)

 

$

171,439

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

5


 

ESSA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

 

 

 

For the Three Months Ended

December 31,

 

 

 

2016

 

 

2015

 

 

 

(dollars in thousands)

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income

 

$

1,937

 

 

$

1,957

 

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

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

750

 

 

 

600

 

Provision for depreciation and amortization

 

 

351

 

 

 

392

 

Amortization and accretion of discounts and premiums, net

 

 

1,123

 

 

 

832

 

Gain on sale of investment securities

 

 

 

 

 

(3

)

Compensation expense on ESOP

 

 

166

 

 

 

151

 

Stock based compensation

 

 

66

 

 

 

39

 

Increase in accrued interest receivable

 

 

(181

)

 

 

(348

)

(Decrease) increase in accrued interest payable

 

 

(17

)

 

 

171

 

Earnings on bank-owned life insurance

 

 

(263

)

 

 

(230

)

Deferred federal income taxes

 

 

78

 

 

 

114

 

Increase in accrued pension liability

 

 

339

 

 

 

296

 

Gain on foreclosed real estate, net

 

 

(96

)

 

 

(10

)

Amortization of identifiable intangible assets

 

 

163

 

 

 

174

 

Other, net

 

 

978

 

 

 

(780

)

Net cash provided by operating activities

 

 

5,394

 

 

 

3,355

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Certificates of deposit maturities

 

 

250

 

 

 

250

 

Investment securities available for sale:

 

 

 

 

 

 

 

 

Proceeds from sale of investment securities

 

 

 

 

 

17,365

 

Proceeds from principal repayments and maturities

 

 

15,506

 

 

 

31,094

 

Purchases

 

 

(27,912

)

 

 

(30,134

)

Increase in loans receivable, net

 

 

(6,758

)

 

 

(3,972

)

Redemption of regulatory stock

 

 

5,123

 

 

 

4,345

 

Purchase of regulatory stock

 

 

(6,340

)

 

 

(4,304

)

Proceeds from sale of foreclosed real estate

 

 

867

 

 

 

202

 

Acquisition, net of cash acquired

 

 

 

 

 

(16,174

)

Purchase of premises, equipment and software

 

 

(238

)

 

 

(400

)

Net cash used for investing activities

 

 

(19,502

)

 

 

(1,728

)

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Decrease in deposits, net

 

 

(21,879

)

 

 

(8,857

)

Net increase (decrease) in short-term borrowings

 

 

45,458

 

 

 

(7,287

)

Proceeds from other borrowings

 

 

4,750

 

 

 

47,300

 

Repayment of other borrowings

 

 

(19,780

)

 

 

(27,300

)

Increase in advances by borrowers for taxes and insurance

 

 

2,763

 

 

 

2,719

 

Purchase of treasury stock shares

 

 

 

 

 

(301

)

Proceeds from the exercise of stock options

 

 

(64

)

 

 

 

Dividends on common stock

 

 

(947

)

 

 

(931

)

Net cash provided by financing activities

 

$

10,301

 

 

$

5,343

 

Increase (decrease) in cash and cash equivalents

 

 

(3,807

)

 

 

6,970

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

 

43,658

 

 

 

18,758

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

39,851

 

 

$

25,728

 

SUPPLEMENTAL CASH FLOW DISCLOSURES

 

 

 

 

 

 

 

 

Cash Paid:

 

 

 

 

 

 

 

 

Interest

 

$

3,035

 

 

$

2,489

 

Income taxes

 

 

(325

)

 

 

 

6


 

 

 

For the Three Months Ended

December 31,

 

 

 

2016

 

 

2015

 

 

 

(dollars in thousands)

 

Noncash items:

 

 

 

 

 

 

 

 

Transfers from loans to foreclosed real estate

 

 

548

 

 

 

416

 

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


 

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, Montgomery, 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 and is currently inactive. Pocono Investment Company is a Delaware corporation formed as an investment company subsidiary to hold and manage certain investments, including certain intellectual property. ESSA Advisory Services, LLC is a Pennsylvania limited liability company owned 100 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 three month period ended December 31, 2016 are not necessarily indicative of the results that may be expected for the year ending September 30, 2017.

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 month period ended December 31, 2016 and 2015.

 

 

 

Three Months Ended

 

 

 

 

December 31,

2016

 

 

December 31,

2015

 

 

Weighted-average common shares outstanding

 

 

18,133,095

 

 

 

18,133,095

 

 

Average treasury stock shares

 

 

(6,720,901

)

 

 

(6,793,627

)

 

Average unearned ESOP shares

 

 

(899,601

)

 

 

(944,875

)

 

Average unearned non-vested shares

 

 

(37,561

)

 

 

(30,168

)

 

Weighted average common shares and common stock

   equivalents used to calculate basic earnings per share

 

 

10,475,032

 

 

 

10,364,425

 

 

Additional common stock equivalents (non-vested stock)

   used to calculate diluted earnings per share

 

 

1,018

 

 

 

618

 

 

Additional common stock equivalents (stock options) used

   to calculate diluted earnings per share

 

 

128,022

 

 

 

170,530

 

 

Weighted average common shares and common stock

   equivalents used to calculate diluted earnings per share

 

 

10,604,072

 

 

 

10,535,573

 

 

 

At December 31, 2016 there were 20,194 shares of nonvested stock outstanding at a price of $16.57 per share that were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive. At December 31, 2015 there were 18,021 shares of nonvested stock outstanding at a price of $13.05 per share that were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive.

8


 

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 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 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

9


 

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.

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 hedging 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.

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

10


 

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 adopted this standard for the interim period ended December 31, 2016. The adoption of this standard resulted in recognition of all excess tax benefits for share-based payment awards to be recognized in income taxes for the three months ended December 31, 2016. Previously, such tax benefits were recognized in additional paid in capital.

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 2016-12, 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.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230):  Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which addresses eight specific cash flow issues with the objective of reducing diversity in practice.  Among these include recognizing cash payments for debt prepayment or debt extinguishment as cash outflows for financing activities; cash proceeds received from the settlement of insurance claims should be classified on the basis of the related insurance coverage; and cash proceeds received from the settlement of bank-owned life insurance policies should be classified as cash inflows from investing activities while the cash payments for premiums on bank-owned policies may be classified as cash outflows for investing activities, operating activities, or a combination of investing and operating activities.  The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments in this Update should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest

11


 

date practicable. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s statement of cash flows.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business “ASU 2017-01”, which provides a more robust framework to use in determining when a set of assets and activities (collectively referred to as a “set”) is a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated.  Public business entities should apply the amendments in this Update to annual periods beginning after December 15, 2017, including interim periods within those periods. All other entities should apply the amendments to annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019.  The amendments in this Update should be applied prospectively on or after the effective date.  This Update is not expected to have a significant impact on the Company’s financial statements.

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):

 

 

 

December 31, 2016

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fannie Mae

 

$

119,196

 

 

$

206

 

 

$

(1,747

)

 

$

117,655

 

Freddie Mac

 

 

92,341

 

 

 

42

 

 

 

(1,345

)

 

 

91,038

 

Governmental National Mortgage Association

 

 

15,267

 

 

 

39

 

 

 

(236

)

 

 

15,070

 

Total mortgage-backed securities

 

 

226,804

 

 

 

287

 

 

 

(3,328

)

 

 

223,763

 

Obligations of states and political subdivisions

 

 

70,720

 

 

 

1,135

 

 

 

(1,334

)

 

 

70,521

 

U.S. government agency securities

 

 

25,689

 

 

 

111

 

 

 

 

 

 

25,800

 

Corporate obligations

 

 

39,492

 

 

 

135

 

 

 

(839

)

 

 

38,788

 

Other debt securities

 

 

33,627

 

 

 

165

 

 

 

(576

)

 

 

33,216

 

Total debt securities

 

 

396,332

 

 

 

1,833

 

 

 

(6,077

)

 

 

392,088

 

Equity securities - financial services

 

 

25

 

 

 

 

 

 

 

 

 

25

 

Total

 

$

396,357

 

 

$

1,833

 

 

$

(6,077

)

 

$

392,113

 

 

 

 

September 30, 2016

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

Available for Sale