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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, 2017

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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filers,” “accelerated filers,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

   ☐

Accelerated filer

 

 

 

 

Non-accelerated filer

   ☐ (Do not check if smaller reporting company)

Smaller reporting company

 

 

 

 

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐

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 7, 2018 there were 11,657,173 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

 

35

 

 

 

 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

 

43

 

 

 

 

Item 4

Controls and Procedures

 

43

 

 

 

 

 

Part II. Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

44

 

 

 

 

Item 1A.

Risk Factors

 

44

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

44

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

44

 

 

 

 

Item 4.

Mine Safety Disclosures

 

44

 

 

 

 

Item 5.

Other Information

 

44

 

 

 

 

Item 6.

Exhibits

 

45

 

 

 

 

Signature Page

 

46

 

 

 


 

Part I. Financial Information

Item 1.

Financial Statements

ESSA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

 

 

 

December, 31

 

 

September 30,

 

 

 

2017

 

 

2017

 

 

 

(dollars in thousands)

 

Cash and due from banks

 

$

33,638

 

 

$

36,008

 

Interest-bearing deposits with other institutions

 

 

5,147

 

 

 

5,675

 

Total cash and cash equivalents

 

 

38,785

 

 

 

41,683

 

Certificates of deposit

 

 

500

 

 

 

500

 

Investment securities available for sale, at fair value

 

 

391,202

 

 

 

390,452

 

Loans receivable (net of allowance for loan losses of $9,833 and $9,365)

 

 

1,276,335

 

 

 

1,236,681

 

Regulatory stock, at cost

 

 

16,845

 

 

 

13,832

 

Premises and equipment, net

 

 

15,736

 

 

 

16,234

 

Bank-owned life insurance

 

 

37,881

 

 

 

37,626

 

Foreclosed real estate

 

 

1,365

 

 

 

1,424

 

Intangible assets, net

 

 

1,700

 

 

 

1,844

 

Goodwill

 

 

13,801

 

 

 

13,801

 

Deferred income taxes

 

 

7,263

 

 

 

10,422

 

Other assets

 

 

21,003

 

 

 

20,719

 

TOTAL ASSETS

 

$

1,822,416

 

 

$

1,785,218

 

LIABILITIES

 

 

 

 

 

 

 

 

Deposits

 

$

1,251,021

 

 

$

1,274,861

 

Short-term borrowings

 

 

214,036

 

 

 

137,446

 

Other borrowings

 

 

154,768

 

 

 

174,168

 

Advances by borrowers for taxes and insurance

 

 

11,409

 

 

 

5,163

 

Other liabilities

 

 

11,703

 

 

 

10,853

 

TOTAL LIABILITIES

 

 

1,642,937

 

 

 

1,602,491

 

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;

   11,634,790 and 11,596,263 outstanding at December 31, 2017 and September 30,

   2017, respectively)

 

 

181

 

 

 

181

 

Additional paid in capital

 

 

180,532

 

 

 

180,764

 

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

 

 

(8,604

)

 

 

(8,720

)

Retained earnings

 

 

88,546

 

 

 

91,147

 

Treasury stock, at cost; 6,498,305 and 6,536,832 shares outstanding at December 31, 2017 and September 30, 2017, respectively

 

 

(79,420

)

 

 

(79,891

)

Accumulated other comprehensive loss

 

 

(1,756

)

 

 

(754

)

TOTAL STOCKHOLDERS’ EQUITY

 

 

179,479

 

 

 

182,727

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

1,822,416

 

 

$

1,785,218

 

See accompanying notes to the unaudited consolidated financial statements.

2


 

ESSA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF OPERATIONS

(UNAUDITED)

 

 

 

For the Three Months Ended

 

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

 

(dollars in thousands, except per

share data)

 

INTEREST INCOME

 

 

 

 

 

 

 

 

Loans receivable, including fees

 

$

12,783

 

 

$

12,251

 

Investment securities:

 

 

 

 

 

 

 

 

Taxable

 

 

2,058

 

 

 

1,874

 

Exempt from federal income tax

 

 

288

 

 

 

309

 

Other investment income

 

 

247

 

 

 

216

 

Total interest income

 

 

15,376

 

 

 

14,650

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

Deposits

 

 

2,377

 

 

 

2,012

 

Short-term borrowings

 

 

584

 

 

 

251

 

Other borrowings

 

 

647

 

 

 

755

 

Total interest expense

 

 

3,608

 

 

 

3,018

 

NET INTEREST INCOME

 

 

11,768

 

 

 

11,632

 

Provision for loan losses

 

 

1,000

 

 

 

750

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN

   LOSSES

 

 

10,768

 

 

 

10,882

 

NONINTEREST INCOME

 

 

 

 

 

 

 

 

Service fees on deposit accounts

 

 

883

 

 

 

864

 

Services charges and fees on loans

 

 

369

 

 

 

354

 

Trust and investment fees

 

 

240

 

 

 

150

 

Earnings on Bank-owned life insurance

 

 

255

 

 

 

263

 

Insurance commissions

 

 

171

 

 

 

193

 

Other

 

 

51

 

 

 

33

 

Total noninterest income

 

 

1,969

 

 

 

1,857

 

NONINTEREST EXPENSE

 

 

 

 

 

 

 

 

Compensation and employee benefits

 

 

6,008

 

 

 

6,177

 

Occupancy and equipment

 

 

1,185

 

 

 

1,091

 

Professional fees

 

 

566

 

 

 

745

 

Data processing

 

 

929

 

 

 

934

 

Advertising

 

 

158

 

 

 

305

 

Federal Deposit Insurance Corporation (FDIC) premiums

 

 

189

 

 

 

187

 

Gain on foreclosed real estate

 

 

(36

)

 

 

(96

)

Amortization of intangible assets

 

 

144

 

 

 

163

 

Other

 

 

1,139

 

 

 

896

 

Total noninterest expense

 

 

10,282

 

 

 

10,402

 

Income before income taxes

 

 

2,455

 

 

 

2,337

 

Income taxes

 

 

4,093

 

 

 

400

 

NET (LOSS) INCOME

 

$

(1,638

)

 

$

1,937

 

(Loss) Earnings per share

 

 

 

 

 

 

 

 

Basic

 

$

(0.15

)

 

$

0.18

 

Diluted

 

$

(0.15

)

 

$

0.18

 

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)

 

 

 

For the Three Months Ended

 

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

 

(dollars in thousands)

 

Net (loss) income

 

$

(1,638

)

 

$

1,937

 

Other comprehensive income:

 

 

 

 

 

 

 

 

Investment securities available for sale:

 

 

 

 

 

 

 

 

Unrealized holding loss

 

 

(1,951

)

 

 

(10,232

)

Tax effect

 

 

663

 

 

 

3,479

 

Net of tax amount

 

 

(1,288

)

 

 

(6,753

)

Pension plan adjustment:

 

 

 

 

 

 

 

 

Change in unrealized gains (losses)

 

 

 

 

 

136

 

Tax effect

 

 

 

 

 

(46

)

Net of tax amount

 

 

 

 

 

90

 

Derivative and hedging activities adjustments:

 

 

 

 

 

 

 

 

Changes in unrealized holding gain on derivative

   included in net income

 

 

457

 

 

 

1,052

 

Tax effect

 

 

(156

)

 

 

(459

)

Reclassification adjustment for gains on derivatives included

   in net income

 

 

(23

)

 

 

11

 

Tax effect

 

 

8

 

 

 

(4

)

Net of tax amount

 

 

286

 

 

 

600

 

Total other comprehensive loss

 

 

(1,002

)

 

 

(6,063

)

Comprehensive loss

 

$

(2,640

)

 

$

(4,126

)

 

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, 2017

 

 

11,596,263

 

 

$

181

 

 

$

180,764

 

 

$

(8,720

)

 

$

91,147

 

 

$

(79,891

)

 

$

(754

)

 

$

182,727

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,638

)

 

 

 

 

 

 

 

 

 

 

(1,638

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,002

)

 

 

(1,002

)

Cash dividends declared ($0.09 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(963

)

 

 

 

 

 

 

 

 

 

 

(963

)

Stock based compensation

 

 

 

 

 

 

 

 

 

 

80

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

80

 

Allocation of ESOP stock

 

 

 

 

 

 

 

 

 

 

67

 

 

 

116

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

183

 

Allocation of treasury shares to

   incentive plan

 

 

22,994

 

 

 

 

 

 

 

(281

)

 

 

 

 

 

 

 

 

 

 

281

 

 

 

 

 

 

 

 

Stock options exercised

 

 

15,533

 

 

 

 

 

 

 

(98

)

 

 

 

 

 

 

 

 

 

 

190

 

 

 

 

 

 

 

92

 

Balance, December 31, 2017

 

 

11,634,790

 

 

$

181

 

 

$

180,532

 

 

$

(8,604

)

 

$

88,546

 

 

$

(79,420

)

 

$

(1,756

)

 

$

179,479

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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,

 

 

 

2017

 

 

2016

 

 

 

(dollars in thousands)

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(1,638

)

 

$

1,937

 

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

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

1,000

 

 

 

750

 

Provision for depreciation and amortization

 

 

305

 

 

 

351

 

Amortization and accretion of discounts and premiums, net

 

 

1,167

 

 

 

1,123

 

Compensation expense on ESOP

 

 

183

 

 

 

166

 

Stock based compensation

 

 

80

 

 

 

66

 

Increase in accrued interest receivable

 

 

(124

)

 

 

(181

)

Increase (decrease) in accrued interest payable

 

 

184

 

 

 

(17

)

Earnings on bank-owned life insurance

 

 

(255

)

 

 

(263

)

Deferred federal income taxes

 

 

3,329

 

 

 

78

 

(Decrease) increase in accrued pension liability

 

 

(135

)

 

 

339

 

Gain on foreclosed real estate, net

 

 

(36

)

 

 

(96

)

Amortization of identifiable intangible assets

 

 

144

 

 

 

163

 

Other, net

 

 

1,660

 

 

 

914

 

Net cash provided by operating activities

 

 

5,864

 

 

 

5,330

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Certificates of deposit maturities

 

 

 

 

 

250

 

Investment securities available for sale:

 

 

 

 

 

 

 

 

Proceeds from principal repayments and maturities

 

 

19,254

 

 

 

15,506

 

Purchases

 

 

(22,455

)

 

 

(27,912

)

Increase in loans receivable, net

 

 

(41,724

)

 

 

(6,758

)

Redemption of regulatory stock

 

 

3,151

 

 

 

5,123

 

Purchase of regulatory stock

 

 

(6,164

)

 

 

(6,340

)

Proceeds from sale of foreclosed real estate

 

 

498

 

 

 

867

 

Sale (purchase) of premises, equipment and software

 

 

45

 

 

 

(238

)

Net cash used for investing activities

 

 

(47,395

)

 

 

(19,502

)

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Decrease in deposits, net

 

 

(23,840

)

 

 

(21,879

)

Net increase in short-term borrowings

 

 

76,590

 

 

 

45,458

 

Proceeds from other borrowings

 

 

14,600

 

 

 

4,750

 

Repayment of other borrowings

 

 

(34,000

)

 

 

(19,780

)

Increase in advances by borrowers for taxes and insurance

 

 

6,246

 

 

 

2,763

 

Dividends on common stock

 

 

(963

)

 

 

(947

)

Net cash provided by financing activities

 

 

38,633

 

 

 

10,365

 

Decrease in cash and cash equivalents

 

 

(2,898

)

 

 

(3,807

)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

 

41,683

 

 

 

43,658

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

38,785

 

 

$

39,851

 

SUPPLEMENTAL CASH FLOW DISCLOSURES

 

 

 

 

 

 

 

 

Cash Paid:

 

 

 

 

 

 

 

 

Interest

 

$

3,424

 

 

$

3,035

 

Income taxes

 

 

(2

)

 

 

(325

)

Noncash items:

 

 

 

 

 

 

 

 

Transfers from loans to foreclosed real estate

 

 

403

 

 

 

548

 

Unrealized holding loss

 

 

(1,951

)

 

 

(10,096

)

 

See accompanying notes to the unaudited consolidated financial statements.

6


 

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 “FDIC”). The investment in the Bank 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, 2017 are not necessarily indicative of the results that may be expected for the year ending September 30, 2018.

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 periods ended December 31, 2017 and 2016.

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Weighted-average common shares outstanding

 

 

18,133,095

 

 

 

18,133,095

 

Average treasury stock shares

 

 

(6,521,843

)

 

 

(6,720,901

)

Average unearned ESOP shares

 

 

(854,325

)

 

 

(899,601

)

Average unearned non-vested shares

 

 

(39,789

)

 

 

(37,561

)

Weighted average common shares and common stock

   equivalents used to calculate basic earnings per share

 

 

10,717,138

 

 

 

10,475,032

 

Additional common stock equivalents (non-vested stock)

   used to calculate diluted earnings per share

 

 

 

 

 

1,018

 

Additional common stock equivalents (stock options) used

   to calculate diluted earnings per share

 

 

 

 

 

128,022

 

Weighted average common shares and common stock

   equivalents used to calculate diluted earnings per share

 

 

10,717,138

 

 

 

10,604,072

 

 

At December 31, 2017 there were 41,062 shares of nonvested stock outstanding at an average weighted price of $15.98 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, 2016 there were 20,194 shares of nonvested stock outstanding at an average weighted 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.   

7


 

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 Financial Accounting Standards Board (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.  Since the guidance scopes out revenue associated with financial instruments, including loan receivables and investment securities, we do not expect the adoption of the new standard, or any of the amendments, to result in a material change from our current accounting for revenue because the majority of the Company's revenue is not within the scope of Topic 606.  However, we do expect that the standard will result in new disclosure requirements, which are currently being evaluated.  

 

In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts 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 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 (g) 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

8


 

with earlier application permitted as of the beginning of an interim or annual reporting period.  Based on the Company’s preliminary analysis of its current portfolio, the impact to the Company’s balance sheet is estimated to result in less than a 1 percent increase in assets and liabilities. The Company also anticipates additional disclosures to be provided at adoption.

 

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, which changes the impairment model for most financial assets. This Update 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 Update 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.  We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

 

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230):  Classification of Certain Cash Receipts and Cash Payments, 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 date practicable. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s statement of cash flows.  

 

9


 

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business, 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.

 

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test.  In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination.  Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.  A public business entity that is a U.S. Securities and Exchange Commission (SEC) filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. A public business entity that is not an SEC filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2020.  All other entities, including not-for-profit entities, that are adopting the amendments in this Update should do so for their annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2021. 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 2017, the FASB issued ASU 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20). The amendments in this Update clarify what constitutes a financial asset within the scope of Subtopic 610-20.  The amendments also clarify that entities should identify each distinct nonfinancial asset or in substance nonfinancial asset that is promised to a counterparty and to derecognize each asset when the counterparty obtains control.  There is also additional guidance provided for partial sales of a nonfinancial asset and when derecognition, and the related gain or loss, should be recognized.  The amendments in this Update are effective at the same time as the amendments in Update 2014-09. Therefore, for public entities, the amendments are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period.  For all other entities, the amendments in this Update are effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019.  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 2017, the FASB issued ASU 2017-07, Compensation—Retirement Benefits (Topic 715). The amendments in this Update require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period.  The other components of net benefit cost as defined in paragraphs 715-30-35-4 and 715-60-35-9 are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed.  The amendments in this Update are effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those annual periods. For other entities, the amendments in this Update are effective for 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 retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. 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 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20). The amendments in this Update shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity.  For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years

10


 

beginning after December 15, 2020. 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 should apply the amendments in this Update on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Additionally, in the period of adoption, an entity should provide disclosures about a change in accounting principle.  This Update is not expected to have a significant impact on the Company’s financial statements.

 

In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718), which affects any entity that changes the terms or conditions of a share-based payment award.  This Update amends the definition of modification by qualifying that modification accounting does not apply to changes to outstanding share-based payment awards that do not affect the total fair value, vesting requirements, or equity/liability classification of the awards.  The amendments in this Update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for (1) public business entities for reporting periods for which financial statements have not yet been issued and (2) all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this Update should be applied prospectively to an award modified on or after the adoption date. 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 July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), and Derivative and Hedging (Topic 815). The amendments in Part I of this Update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down-round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down-round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down-round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down-round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down- round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt—Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). The amendments in Part II of this Update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Accounting Standards Codification, to a scope exception. Those amendments do not have an accounting effect. For public business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments in Part I of this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted for all entities, 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. The amendments in Part I of this Update should be applied either retrospectively to outstanding financial instruments with a down-round feature by means of a cumulative-effect adjustment to the statement of financial position as of the beginning of the first fiscal year and interim period(s) in which the pending content that links to this paragraph is effective or retrospectively to outstanding financial instruments with a down-round feature for each prior reporting period presented in accordance with the guidance on accounting changes in paragraphs 250-10-45-5 through 45-10. The amendments in Part II of this Update do not require any transition guidance because those amendments do not have an accounting effect.  This Update is not expected to have a significant impact on the Company’s financial statements.

 

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 850), the objective of which is to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. In addition, the amendments in this Update make certain targeted improvements to simplify the application and disclosure of the hedge accounting guidance in current general accepted accounting principles.  For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020. Early application is permitted in any period after issuance.  For cash flow and net investment hedges existing at the date of adoption, an entity should apply a cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year that an entity adopts the amendments in this Update. The amended presentation and disclosure guidance is required only prospectively.   The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

 

11


 

In January 2018, the FASB issued ASU 2018-01, Leases (Topic 842), which provides an optional transition practical expedient to not evaluate under Topic 842 existing or expired land easements that were not previously accounted for as leases under the current lease guidance in Topic 840.  An entity that elects this practical expedient should evaluate new or modified land easements under Topic 842 beginning at the date the entity adopts Topic 842; otherwise, an entity should evaluate all existing or expired land easements in connection with the adoption of the new lease requirements in Topic 842 to assess whether they meet the definition of a lease.  The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in ASU 2016-02.  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, 2017

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fannie Mae

 

$

121,250

 

 

$

104

 

 

$

(1,671

)

 

$

119,683

 

Freddie Mac

 

 

100,876

 

 

 

44

 

 

 

(1,281

)

 

 

99,639

 

Governmental National Mortgage Association

 

 

18,976

 

 

 

40

 

 

 

(346

)

 

 

18,670

 

Total mortgage-backed securities

 

 

241,102

 

 

 

188

 

 

 

(3,298

)

 

 

237,992

 

Obligations of states and political subdivisions

 

 

64,262

 

 

 

1,259

 

 

 

(715

)

 

 

64,806

 

U.S. government agency securities

 

 

17,214

 

 

 

28

 

 

 

(46

)

 

 

17,196

 

Corporate obligations

 

 

48,947

 

 

 

408

 

 

 

(657

)

 

 

48,698

 

Other debt securities

 

 

23,008

 

 

 

30

 

 

 

(553

)

 

 

22,485

 

Total debt securities

 

 

394,533

 

 

 

1,913

 

 

 

(5,269

)

 

 

391,177

 

Equity securities - financial services

 

 

25

 

 

 

 

 

 

 

 

 

25

 

Total

 

$

394,558

 

 

$

1,913

 

 

$

(5,269

)

 

$

391,202

 

 

 

 

September 30, 2017

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fannie Mae

 

$

119,333

 

 

$

207

 

 

$

(1,203

)

 

$

118,337

 

Freddie Mac

 

 

98,668

 

 

 

177

 

 

 

(808

)

 

 

98,037

 

Governmental National Mortgage Association

 

 

17,609

 

 

 

43

 

 

 

(203

)

 

 

17,449

 

Total mortgage-backed securities

 

 

235,610

 

 

 

427

 

 

 

(2,214

)

 

 

233,823

 

Obligations of states and political subdivisions

 

 

64,382

 

 

 

1,522

 

 

 

(546

)

 

 

65,358

 

U.S. government agency securities

 

 

18,615

 

 

 

61

 

 

 

(5

)

 

 

18,671

 

Corporate obligations

 

 

49,025

 

 

 

335

 

 

 

(618

)

 

 

48,742

 

Other debt securities

 

 

24,200

 

 

 

47

 

 

 

(414

)

 

 

23,833

 

Total debt securities

 

 

391,832

 

 

 

2,392

 

 

 

(3,797

)

 

 

390,427

 

Equity securities - financial services

 

 

25

 

 

 

 

 

 

 

 

 

25

 

Total

 

$

391,857

 

 

$

2,392

 

 

$

(3,797

)

 

$

390,452

 

 

12


 

The amortized cost and fair value of debt securities at December 31, 2017, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (in thousands):

 

 

 

Available For Sale

 

 

 

Amortized

Cost

 

 

Fair Value

 

Due in one year or less

 

$

6,516