essa-10q_20161231.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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fannie Mae

 

$

115,535

 

 

$

1,891

 

 

$

(173

)

 

$

117,253

 

Freddie Mac

 

 

84,486

 

 

 

1,369

 

 

 

(85

)

 

 

85,770

 

Governmental National Mortgage Association

 

 

16,091

 

 

 

76

 

 

 

(28

)

 

 

16,139

 

Total mortgage-backed securities

 

 

216,112

 

 

 

3,336

 

 

 

(286

)

 

 

219,162

 

Obligations of states and political subdivisions

 

 

71,323

 

 

 

2,432

 

 

 

(65

)

 

 

73,690

 

U.S. government agency securities

 

 

25,669

 

 

 

272

 

 

 

 

 

 

25,941

 

Corporate obligations

 

 

38,331

 

 

 

599

 

 

 

(512

)

 

 

38,418

 

Other debt securities

 

 

32,962

 

 

 

428

 

 

 

(216

)

 

 

33,174

 

Total debt securities

 

 

384,397

 

 

 

7,067

 

 

 

(1,079

)

 

 

390,385

 

Equity securities - financial services

 

 

25

 

 

 

 

 

 

 

 

 

25

 

Total

 

$

384,422

 

 

$

7,067

 

 

$

(1,079

)

 

$

390,410

 

 

12


 

The amortized cost and fair value of debt securities at December 31, 2016, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (in thousands):

 

 

 

Available For Sale

 

 

 

Amortized

Cost

 

 

Fair Value

 

Due in one year or less

 

$

11,401

 

 

$

11,454

 

Due after one year through five years

 

 

41,094

 

 

 

41,037

 

Due after five years through ten years

 

 

84,276

 

 

 

83,653

 

Due after ten years

 

 

259,561

 

 

 

255,944

 

Total

 

$

396,332

 

 

$

392,088

 

 

For the three months ended December 31, 2016, the Company realized no gross gains or gross losses on proceeds from the sale of investment securities. For the three months ended December 31, 2015, the Company realized gross gains of $3,000 and no gross losses on proceeds from the sale of investment securities of $17.4 million. During the first quarter of fiscal 2016, the Company sold $16.2 million of investment securities which were acquired in the merger with Eagle National Bancorp, Inc (“ENB”). The Company realized no gain or loss from the sale of these securities.

The following table shows the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position (dollars in thousands):

 

 

 

December 31, 2016

 

 

 

Number of

Securities

 

 

Less than Twelve

Months

 

 

Twelve Months or

Greater

 

 

Total

 

 

 

 

 

 

 

Fair

Value

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

Gross

Unrealized

Losses

 

Fannie Mae

 

 

63

 

 

$

81,136

 

 

$

(1,348

)

 

$

11,667

 

 

$

(399

)

 

$

92,803

 

 

$

(1,747

)

Freddie Mac

 

 

54

 

 

 

72,423

 

 

 

(1,076

)

 

 

7,015

 

 

 

(269

)

 

 

79,438

 

 

 

(1,345

)

Governmental National Mortgage Association

 

 

9

 

 

 

7,556

 

 

 

(199

)

 

 

2,598

 

 

 

(37

)

 

 

10,154

 

 

 

(236

)

Obligations of states and political subdivisions

 

 

37

 

 

 

42,064

 

 

 

(1,334

)

 

 

 

 

 

 

 

 

42,064

 

 

 

(1,334

)

Corporate obligations

 

 

21

 

 

 

17,497

 

 

 

(493

)

 

 

6,171

 

 

 

(346

)

 

 

23,668

 

 

 

(839

)

Other debt securities

 

 

19

 

 

 

13,883

 

 

 

(399

)

 

 

9,020

 

 

 

(177

)

 

 

22,903

 

 

 

(576

)

Total

 

 

203

 

 

$

234,559

 

 

$

(4,849

)

 

$

36,471

 

 

$

(1,228

)

 

$

271,030

 

 

$

(6,077

)

 

 

 

September 30, 2016

 

 

 

Number of

Securities

 

 

Less than Twelve

Months

 

 

Twelve Months or

Greater

 

 

Total

 

 

 

 

 

 

 

Fair

Value

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

Gross

Unrealized

Losses

 

Fannie Mae

 

 

17

 

 

$

6,841

 

 

$

(21

)

 

$

12,261

 

 

$

(152

)

 

$

19,102

 

 

$

(173

)

Freddie Mac

 

 

11

 

 

 

7,457

 

 

 

(11

)

 

 

6,375

 

 

 

(74

)

 

 

13,832

 

 

 

(85

)

Governmental National Mortgage Association

 

 

5

 

 

 

4,704

 

 

 

(16

)

 

 

1,267

 

 

 

(12

)

 

 

5,971

 

 

 

(28

)

Obligations of states and political subdivisions

 

 

12

 

 

 

14,420

 

 

 

(65

)

 

 

 

 

 

 

 

 

14,420

 

 

 

(65

)

Corporate obligations

 

 

12

 

 

 

8,778

 

 

 

(172

)

 

 

5,303

 

 

 

(340

)

 

 

14,081

 

 

 

(512

)

Other debt securities

 

 

13

 

 

 

6,582

 

 

 

(126

)

 

 

6,914

 

 

 

(90

)

 

 

13,496

 

 

 

(216

)

Total

 

 

70

 

 

$

48,782

 

 

$

(411

)

 

$

32,120

 

 

$

(668

)

 

$

80,902

 

 

$

(1,079

)

 

The Company’s investment securities portfolio contains unrealized losses on securities, including mortgage-related instruments issued or backed by the full faith and credit of the United States government, or generally viewed as having the implied guarantee of the U.S. government, other mortgage backed securities, debt obligations of a U.S. state or political subdivision and corporate debt obligations.

The Company reviews its position quarterly and has asserted that at December 31, 2016, the declines outlined in the above table represent temporary declines and the Company would not be required to sell the above securities before their anticipated recovery in market value.

13


 

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

6.

Loans Receivable, Net and Allowance for Loan Losses

Loans receivable consist of the following (in thousands):

 

 

 

December 31,

2016

 

 

September 30,

2016

 

Real estate loans:

 

 

 

 

 

 

 

 

Residential

 

$

597,888

 

 

$

596,645

 

Construction

 

 

3,057

 

 

 

1,733

 

Commercial

 

 

293,570

 

 

 

288,447

 

Commercial

 

 

33,867

 

 

 

39,978

 

Obligations of states and political subdivisions

 

 

61,374

 

 

 

56,923

 

Home equity loans and lines of credit

 

 

46,785

 

 

 

48,163

 

Auto Loans

 

 

193,523

 

 

 

193,078

 

Other

 

 

3,299

 

 

 

3,302

 

 

 

 

1,233,363

 

 

 

1,228,269

 

Less allowance for loan losses

 

 

9,342

 

 

 

9,056

 

Net loans

 

$

1,224,021

 

 

$

1,219,213

 

 

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

Upon acquisition, the Company evaluated whether each acquired loan (regardless of size) was within the scope of ASC 310-30, Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality. Purchased credit-impaired loans are loans that have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. The fair value of purchased credit-impaired loans, on the acquisition date of December 4, 2015, was determined, primarily based on the fair value of loan collateral. The carrying value of all purchased loans acquired with deteriorated credit quality was $5.5 million at December 31, 2016.

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

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

 

Unpaid principal balance

 

$

3,468

 

Interest

 

 

717

 

Contractual cash flows

 

 

4,185

 

Non-accretable discount

 

 

(1,973

)

Expected cash flows

 

 

2,212

 

Accretable discount

 

 

(240

)

Estimated fair value

 

$

1,972

 

 

14


 

Changes in the accretable yield for purchased credit-impaired loans were as follows, since acquisition, for the periods ended December 31, 2016 and December 31, 2015 (in thousands):

 

 

 

Three Months Ended December 31,

 

 

 

2016

 

 

2015

 

Balance at beginning of period

 

$

478

 

 

$

258

 

Reclassification, new additions and other

 

 

 

 

 

240

 

Accretion

 

 

(25

)

 

 

(50

)

Balance at end of period

 

$

453

 

 

$

448

 

 

 

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

 

 

 

December 31, 2016

 

 

September 30, 2016

 

 

 

Acquired Loans with Specific

Evidence or Deterioration in

Credit Quality (ASC 310-30)

 

 

Acquired Loans with Specific

Evidence or Deterioration in

Credit Quality (ASC 310-30)

 

Outstanding balance

 

$

6,728

 

 

$

6,893

 

Carrying amount

 

$

5,452

 

 

$

5,563

 

 

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

 

 

 

Total Loans

 

 

Individually

Evaluated for

Impairment

 

 

Loans Acquired

with Deteriorated

Credit Quality

 

 

Collectively

Evaluated for

Impairment

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

$

597,888

 

 

$

7,962

 

 

$

 

 

$

589,926

 

Construction

 

 

3,057

 

 

 

 

 

 

 

 

 

3,057

 

Commercial

 

 

293,570

 

 

 

11,223

 

 

 

4,504

 

 

 

277,843

 

Commercial

 

 

33,867

 

 

 

1,824

 

 

 

411

 

 

 

31,632

 

Obligations of states and political subdivisions

 

 

61,374

 

 

 

 

 

 

 

 

 

61,374

 

Home equity loans and lines of credit

 

 

46,785

 

 

 

208

 

 

 

537

 

 

 

46,040

 

Auto loans

 

 

193,523

 

 

 

569

 

 

 

 

 

 

192,954

 

Other

 

 

3,299

 

 

 

24

 

 

 

 

 

 

3,275

 

Total

 

$

1,233,363

 

 

$

21,810

 

 

$

5,452

 

 

$

1,206,101

 

 

 

 

Total Loans

 

 

Individually

Evaluated for

Impairment

 

 

Loans Acquired

with Deteriorated

Credit Quality

 

 

Collectively

Evaluated for

Impairment

 

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

$

596,645

 

 

$

8,721

 

 

$

 

 

$

587,924

 

Construction

 

 

1,733

 

 

 

 

 

 

 

 

 

1,733

 

Commercial

 

 

288,447

 

 

 

11,237

 

 

 

4,615

 

 

 

272,595

 

Commercial

 

 

39,978

 

 

 

1,698

 

 

 

411

 

 

 

37,869

 

Obligations of states and political sub divisions

 

 

56,923

 

 

 

 

 

 

 

 

 

56,923

 

Home equity loans and lines of credit

 

 

48,163

 

 

 

361

 

 

 

537

 

 

 

47,265

 

Auto loans

 

 

193,078

 

 

 

526

 

 

 

 

 

 

192,552

 

Other

 

 

3,302

 

 

 

22

 

 

 

 

 

 

3,280

 

Total

 

$

1,228,269

 

 

$

22,565

 

 

$

5,563

 

 

$

1,200,141

 

 

The Company maintains a loan review system that allows for a periodic review of our loan portfolio and the early identification of potential impaired loans. Such system takes into consideration, among other things, delinquency status, size of loans, type and market value of collateral and financial condition of the borrowers. Specific loan loss allowances are established for identified losses based on a review of such information. A loan evaluated for impairment is considered to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan

15


 

agreement. All loans identified as impaired are evaluated independently. The Company does not aggregate such loans for evaluation purposes. Impairment is measured on a loan-by-loan basis for commercial and construction loans by the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral-dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential mortgage loans for impairment disclosures, unless such loans are part of a larger relationship that is impaired, or are classified as a troubled debt restructuring.

A loan is considered to be a troubled debt restructuring (“TDR”) loan when the Company grants a concession to the borrower that it would not otherwise consider because of the borrower’s financial condition. Such concessions include the reduction of interest rates, forgiveness of principal or interest, or other modifications of interest rates that are less than the current market rate for new obligations with similar risk. TDR loans that are in compliance with their modified terms and that yield a market rate at the time of modification may be removed from TDR status after one year of performance.

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

 

 

 

Recorded

Investment

 

 

Unpaid

Principal

Balance

 

 

Associated

Allowance

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

With no specific allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

$

5,758

 

 

$

7,807

 

 

$

 

Construction

 

 

 

 

 

 

 

 

 

Commercial

 

 

10,770

 

 

 

12,828

 

 

 

 

Commercial

 

 

1,767

 

 

 

1,808

 

 

 

 

Obligations of states and political subdivisions

 

 

 

 

 

 

 

 

 

Home equity loans and lines of credit

 

 

202

 

 

 

274

 

 

 

 

Auto loans

 

 

52

 

 

 

147

 

 

 

 

Other

 

 

24

 

 

 

26

 

 

 

 

Total

 

 

18,573

 

 

 

22,890

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

2,204

 

 

 

2,485

 

 

 

145

 

Construction

 

 

 

 

 

 

 

 

 

Commercial

 

 

453

 

 

 

666

 

 

 

32

 

Commercial

 

 

57

 

 

 

67

 

 

 

1

 

Obligations of states and political subdivisions

 

 

 

 

 

 

 

 

 

Home equity loans and lines of credit

 

 

6

 

 

 

6

 

 

 

6

 

Auto loans

 

 

517

 

 

 

517

 

 

 

282

 

Other

 

 

 

 

 

 

 

 

 

Total

 

 

3,237

 

 

 

3,741

 

 

 

466

 

Total:

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

7,962

 

 

 

10,292

 

 

 

145

 

Construction

 

 

 

 

 

 

 

 

 

Commercial

 

 

11,223

 

 

 

13,494

 

 

 

32

 

Commercial

 

 

1,824

 

 

 

1,875

 

 

 

1

 

Obligations of states and political subdivisions

 

 

 

 

 

 

 

 

 

Home equity loans and lines of credit

 

 

208

 

 

 

280

 

 

 

6

 

Auto loans

 

 

569

 

 

 

664

 

 

 

282

 

Other

 

 

24

 

 

 

26

 

 

 

 

Total Impaired Loans

 

$

21,810

 

 

$

26,631

 

 

$

466

 

 

16


 

 

 

Recorded

Investment

 

 

Unpaid

Principal

Balance

 

 

Associated

Allowance

 

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

With no specific allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate Loans

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

$

6,721

 

 

$

9,016

 

 

$

 

Construction

 

 

 

 

 

 

 

 

 

Commercial

 

 

10,939

 

 

 

12,928

 

 

 

 

Commercial

 

 

1,698

 

 

 

1,725

 

 

 

 

Obligations of states and political subdivisions

 

 

 

 

 

 

 

 

 

Home equity loans and lines of credit

 

 

361

 

 

 

432

 

 

 

 

Auto Loans

 

 

253

 

 

 

365

 

 

 

 

Other

 

 

22

 

 

 

22

 

 

 

 

Total

 

 

19,994

 

 

 

24,488

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate Loans

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

2,000

 

 

 

2,151

 

 

 

198

 

Construction

 

 

 

 

 

 

 

 

 

Commercial

 

 

298

 

 

 

303

 

 

 

36

 

Commercial

 

 

 

 

 

 

 

 

 

Obligations of states and political subdivisions

 

 

 

 

 

 

 

 

 

Home equity loans and lines of credit

 

 

 

 

 

 

 

 

 

Auto Loans

 

 

273

 

 

 

273

 

 

 

113

 

Other

 

 

 

 

 

 

 

 

 

Total

 

 

2,571

 

 

 

2,727

 

 

 

347

 

Total:

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate Loans

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

8,721

 

 

 

11,167

 

 

 

198

 

Construction

 

 

 

 

 

 

 

 

 

Commercial

 

 

11,237

 

 

 

13,231

 

 

 

36

 

Commercial

 

 

1,698

 

 

 

1,725

 

 

 

 

Obligations of states and political subdivisions

 

 

 

 

 

 

 

 

 

Home equity loans and lines of credit

 

 

361

 

 

 

432

 

 

 

 

Auto Loans

 

 

526

 

 

 

638

 

 

 

113

 

Other

 

 

22

 

 

 

22

 

 

 

 

Total Impaired Loans

 

$

22,565

 

 

$

27,215

 

 

$

347

 

 

17


 

The following table represents the average recorded investments in the impaired loans and the related amount of interest recognized during the time within the period that the impaired loans were impaired (in thousands):

 

 

 

Three Months Ended

December 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

Average

Recorded

Investment

 

 

Average

Recorded

Investment

 

 

Interest

Income

Recognized

 

 

Interest

Income

Recognized

 

With no specific allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

$

6,526

 

 

$

8,785

 

 

$

11

 

 

$

27

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

10,564

 

 

 

18,574

 

 

 

105

 

 

 

176

 

Commercial

 

 

1,693

 

 

 

820

 

 

 

33

 

 

 

15

 

Obligations of states and political subdivisions

 

 

 

 

 

 

 

 

 

 

 

 

Home equity loans and lines of credit

 

 

317

 

 

 

962

 

 

 

 

 

 

2

 

Auto loans

 

 

135

 

 

 

282

 

 

 

1

 

 

 

1

 

Other

 

 

8

 

 

 

 

 

 

 

 

 

 

Total

 

 

19,243

 

 

 

29,423

 

 

 

150

 

 

 

221

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

2,066

 

 

 

2,592

 

 

 

 

 

 

5

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

348

 

 

 

457

 

 

 

 

 

 

 

Commercial

 

 

19

 

 

 

3

 

 

 

 

 

 

 

Obligations of states and political subdivisions

 

 

 

 

 

 

 

 

 

 

 

 

Home equity loans and lines of credit

 

 

2

 

 

 

73

 

 

 

 

 

 

 

Auto loans

 

 

215

 

 

 

141

 

 

 

4

 

 

 

1

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

2,650

 

 

 

3,266

 

 

 

4

 

 

 

6

 

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

8,592

 

 

 

11,377

 

 

 

11

 

 

 

32

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

10,912

 

 

 

19,031

 

 

 

105

 

 

 

176

 

Commercial

 

 

1,712

 

 

 

823

 

 

 

33

 

 

 

15

 

Obligations of states and political subdivisions

 

 

 

 

 

 

 

 

 

 

 

 

Home equity loans and lines of credit

 

 

319

 

 

 

1,035

 

 

 

 

 

 

2

 

Auto loans

 

 

350

 

 

 

423

 

 

 

5

 

 

 

2

 

Other

 

 

8

 

 

 

 

 

 

 

 

 

 

Total Impaired Loans

 

$

21,893

 

 

$

32,689

 

 

$

154

 

 

$

227

 

 

 

The Company uses a ten-point internal risk-rating system to monitor the credit quality of the overall loan portfolio. The first six categories are considered not criticized and are aggregated as Pass-rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are fundamentally sound yet exhibit potentially unacceptable credit risk or deteriorating trends or characteristics which, if left uncorrected, may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans more than 90 days past due are considered Substandard. Loans in the Doubtful category have all the weaknesses inherent in loans classified as Substandard with the added characteristic that their weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Loans in the Loss category are considered uncollectible and of little value that their continuance as bankable assets is not warranted. Certain residential real estate loans, construction loans, home equity loans and lines of credit, auto loans and other consumer loans are underwritten and structured using standardized criteria and characteristics, primarily payment performance, and are normally risk rated and monitored collectively on a monthly basis. These are typically loans to individuals in the consumer categories and are delineated as either performing or non-performing.

18


 

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Bank has a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as bankruptcy, repossession, or death occurs to raise awareness of a possible credit event. The Bank’s Commercial Loan Officers are responsible for the timely and accurate risk rating recommendation for the loans in their portfolios at origination and on an ongoing basis. The Bank’s Commercial Loan Officers perform an annual review of all commercial relationships $750,000 or greater. Confirmation of the appropriate risk grade is included in the review on an ongoing basis. The Bank engages an external consultant to conduct loan reviews on at least a semi-annual basis. Generally, the external consultant reviews commercial relationships greater than $1,000,000 and/or all criticized relationships. Detailed reviews, including plans for resolution, are performed on loans classified as Substandard on a quarterly basis. Loans in the Special Mention and Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.

The following tables present the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard, and Doubtful or Loss within the internal risk rating system at December 31, 2016 and September 30, 2016 (in thousands):

 

 

 

Pass

 

 

Special

Mention

 

 

Substandard

 

 

Doubtful

or Loss

 

 

Total

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate loans

 

$

267,727

 

 

$

7,525

 

 

$

18,318

 

 

$

 

 

$

293,570

 

Commercial

 

 

30,273

 

 

 

171

 

 

 

3,423

 

 

 

 

 

 

33,867

 

Obligations of states and political subdivisions

 

 

61,374

 

 

 

 

 

 

 

 

 

 

 

 

61,374

 

Total

 

$

359,374

 

 

$

7,696

 

 

$

21,741

 

 

$

 

 

$

388,811

 

 

 

 

Pass

 

 

Special

Mention

 

 

Substandard

 

 

Doubtful

or Loss

 

 

Total

 

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate loans

 

$

260,088

 

 

$

8,886

 

 

$

19,473

 

 

$

 

 

$

288,447

 

Commercial

 

 

36,684

 

 

 

180

 

 

 

3,114

 

 

 

 

 

 

39,978

 

Obligations of states and political subdivisions

 

 

56,923

 

 

 

 

 

 

 

 

 

 

 

 

56,923

 

Total

 

$

353,695

 

 

$

9,066

 

 

$

22,587

 

 

$

 

 

$

385,348

 

 

All other loans are underwritten and structured using standardized criteria and characteristics, primarily payment performance, and are normally risk rated and monitored collectively on a monthly basis. These are typically loans to individuals in the consumer categories and are delineated as either performing or non-performing. The following tables present the risk ratings in the consumer categories of performing and non-performing loans at December 31, 2016 and September 30, 2015 (in thousands):

 

 

 

Performing

 

 

Non-performing

 

 

Purchased Credit Impaired

 

 

Total

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

$

588,731

 

 

$

9,157

 

 

$

 

 

$

597,888

 

Construction

 

 

3,057

 

 

 

 

 

 

 

 

 

3,057

 

Home equity loans and lines of credit

 

 

45,686

 

 

 

562

 

 

 

537

 

 

 

46,785

 

Auto loans

 

 

193,147

 

 

 

376

 

 

 

 

 

 

193,523

 

Other

 

 

3,263

 

 

 

36

 

 

 

 

 

 

3,299

 

Total

 

$

833,884

 

 

$

10,131

 

 

$

537

 

 

$

844,552

 

 

19


 

 

 

Performing

 

 

Non-performing

 

 

Purchased Impaired Credit

 

 

Total

 

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

$

587,673

 

 

$

8,972

 

 

$

 

 

$

596,645

 

Construction

 

 

1,733

 

 

 

 

 

 

 

 

 

1,733

 

Home equity loans and lines of credit

 

 

47,213

 

 

 

413

 

 

 

537

 

 

 

48,163

 

Auto loans

 

 

192,734

 

 

 

344

 

 

 

 

 

 

193,078

 

Other

 

 

3,271

 

 

 

31

 

 

 

 

 

 

3,302

 

Total

 

$

832,624

 

 

$

9,760

 

 

$

537

 

 

$

842,921

 

 

The Company further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of December 31, 2016 and September 30, 2016 (in thousands):

 

 

 

Current

 

 

31-60 Days

Past Due

 

 

61-90 Days

Past Due

 

 

Greater than

90 Days Past

Due and still

accruing

 

 

Non-Accrual

 

 

Total Past

Due and

Non-

Accrual

 

 

Purchased Credit Impaired

 

 

Total

Loans

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

$

586,229

 

 

$

2,076

 

 

$

426

 

 

$

 

 

$

9,157

 

 

$

11,659

 

 

$

 

 

$

597,888

 

Construction

 

 

3,057

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,057

 

Commercial

 

 

284,669

 

 

 

167

 

 

 

135

 

 

 

 

 

 

4,095

 

 

 

4,397

 

 

 

4,504

 

 

 

293,570

 

Commercial

 

 

32,662

 

 

 

75

 

 

 

 

 

 

 

 

 

719

 

 

 

794

 

 

 

411

 

 

 

33,867

 

Obligations of states

   and political

   subdivisions

 

 

61,374

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

61,374

 

Home equity loans

   and lines of credit

 

 

45,609

 

 

 

47

 

 

 

30

 

 

 

 

 

 

562

 

 

 

639

 

 

 

537

 

 

 

46,785

 

Auto loans

 

 

192,264

 

 

 

614

 

 

 

269

 

 

 

 

 

 

376

 

 

 

1,259

 

 

 

 

 

 

193,523

 

Other

 

 

3,214

 

 

 

49

 

 

 

 

 

 

 

 

 

36

 

 

 

85

 

 

 

 

 

 

3,299

 

Total

 

$

1,209,078

 

 

$

3,028

 

 

$

860

 

 

$

 

 

$

14,945

 

 

$

18,833

 

 

$

5,452

 

 

$

1,233,363

 

 

 

 

Current

 

 

31-60 Days

Past Due

 

 

61-90 Days

Past Due

 

 

Greater than

90 Days Past

Due and still

accruing

 

 

Non-Accrual

 

 

Total Past

Due and

Non-

Accrual

 

 

Purchased Credit Impaired

 

 

Total

Loans

 

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

$

585,517

 

 

$

1,496

 

 

$

660

 

 

$

 

 

$

8,972

 

 

$

11,128

 

 

$

 

 

$

596,645

 

Construction

 

 

1,733

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,733

 

Commercial

 

 

279,019

 

 

 

1,093

 

 

 

191

 

 

 

 

 

 

3,529

 

 

 

4,813

 

 

 

4,615

 

 

 

288,447

 

Commercial

 

 

38,862

 

 

 

185

 

 

 

57

 

 

 

 

 

 

463

 

 

 

705

 

 

 

411

 

 

 

39,978

 

Obligations of states

   and political

   subdivisions

 

 

56,923

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

56,923

 

Home equity loans

   and lines of credit

 

 

47,026

 

 

 

40

 

 

 

147

 

 

 

 

 

 

413

 

 

 

600

 

 

 

537

 

 

 

48,163

 

Auto loans

 

 

191,785

 

 

 

717

 

 

 

232

 

 

 

 

 

 

344

 

 

 

1,293

 

 

 

 

 

 

193,078

 

Other

 

 

3,264

 

 

 

7

 

 

 

 

 

 

 

 

 

31

 

 

 

38

 

 

 

 

 

 

3,302

 

Total

 

$

1,204,129

 

 

$

3,538

 

 

$

1,287

 

 

$

 

 

$

13,752

 

 

$

18,577

 

 

$

5,563

 

 

$

1,228,269

 

 

The allowance for loan losses is maintained at a level necessary to absorb loan losses that are both probable and reasonably estimable. Management, in determining the allowance for loan losses, considers the losses inherent in its loan portfolio and changes in the nature and volume of loan activities, along with the general economic and real estate market conditions. The allowance for loan

20


 

losses consists of two elements: (1) an allocated allowance, which comprises allowances established on specific loans and class allowances based on historical loss experience and current trends, and (2) an allocated allowance based on general economic conditions and other risk factors in our markets and portfolios. We maintain a loan review system, which allows for a periodic review of our loan portfolio and the early identification of potential impaired loans. Such system takes into consideration, among other things, delinquency status, size of loans, type and market value of collateral and financial condition of the borrowers. General loan loss allowances are based upon a combination of factors including, but not limited to, actual loan loss experience, composition of the loan portfolio, current economic conditions, management’s judgment and losses which are probable and reasonably estimable. The allowance is increased through provisions charged against current earnings and recoveries of previously charged-off loans. Loans that are determined to be uncollectible are charged against the allowance. While management uses available information to recognize probable and reasonably estimable loan losses, future loss provisions may be necessary, based on changing economic conditions. Payments received on impaired loans generally are either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal. The allowance for loan losses as of December 31, 2016 is maintained at a level that represents management’s best estimate of losses inherent in the loan portfolio, and such losses were both probable and reasonably estimable.

In addition, the FDIC and the Pennsylvania Department of Banking and Securities, as an integral part of their examination process, have periodically reviewed our allowance for loan losses. The banking regulators may require that we recognize additions to the allowance based on its analysis and review of information available to it at the time of its examination.

Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL.

The following tables summarize changes in the primary segments of the ALL for the three month period ending December 31, 2016 and 2015 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of

 

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

States and

 

 

Loans and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate Loans

 

 

Commercial

 

 

Political

 

 

Lines of

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

Construction

 

 

Commercial

 

 

Loans

 

 

Subdivisions

 

 

Credit

 

 

Auto Loans

 

 

Loans

 

 

Unallocated

 

 

Total

 

ALL balance at

   September 30,

   2016

 

$

4,426

 

 

$

13

 

 

$

852

 

 

$

882

 

 

$

215

 

 

$

455

 

 

$

1,880

 

 

$

25

 

 

$

308

 

 

$

9,056

 

Charge-offs

 

 

(76

)

 

 

 

 

 

(91

)

 

 

(19

)

 

 

 

 

 

 

 

 

(517

)

 

 

(4

)

 

 

 

 

 

(707

)

Recoveries

 

 

2

 

 

 

 

 

 

10

 

 

 

0

 

 

 

 

 

 

1

 

 

 

228

 

 

 

2

 

 

 

 

 

 

243

 

Provision

 

 

98

 

 

 

10

 

 

 

24

 

 

 

102

 

 

 

19

 

 

 

(15

)

 

 

471

 

 

 

2

 

 

 

39

 

 

 

750

 

ALL balance at

   December 31,

   2016

 

$

4,450

 

 

$

23

 

 

$

795

 

 

$

965

 

 

$

234

 

 

$

441

 

 

$

2,062

 

 

$

25

 

 

$

347

 

 

$

9,342

 

ALL balance at

   September 30,

   2015

 

$

5,140

 

 

$

7

 

 

$

671

 

 

$

693

 

 

$

189

 

 

$

461

 

 

$

1,570

 

 

$

27

 

 

$

161

 

 

$

8,919

 

Charge-offs

 

 

(91

)

 

 

 

 

 

 

 

 

(3

)

 

 

 

 

 

(25

)

 

 

(188

)

 

 

 

 

 

 

 

 

(307

)

Recoveries

 

 

3

 

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

1

 

 

 

37

 

 

 

3

 

 

 

 

 

 

45

 

Provision

 

 

(305

)

 

 

7

 

 

 

187

 

 

 

14

 

 

 

(2

)

 

 

(48

)

 

 

335

 

 

 

(3

)

 

 

415

 

 

 

600

 

ALL balance at

   December 31,

   2015

 

$

4,747

 

 

$

14

 

 

$

858

 

 

$

705

 

 

$

187

 

 

$

389

 

 

$

1,754

 

 

$

27

 

 

$

576

 

 

$

9,257

 

 

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

21


 

The following table summarizes the primary segments of the ALL, segregated into two categories, the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of December 31, 2016 and September 30, 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of

 

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

States and

 

 

Loans and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate Loans

 

 

Commercial

 

 

Political

 

 

Lines of

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

Construction

 

 

Commercial

 

 

Loans

 

 

Subdivisions

 

 

Credit

 

 

Auto Loans

 

 

Loans

 

 

Unallocated

 

 

Total

 

Individually

   evaluated for

   impairment

 

$

145

 

 

$

 

 

$

32

 

 

$

1

 

 

$

 

 

$

6

 

 

$

282

 

 

$

 

 

$

 

 

$

466

 

Collectively

   evaluated for

   impairment

 

 

4,305

 

 

 

23

 

 

 

763

 

 

 

964

 

 

 

234

 

 

 

435

 

 

 

1,780

 

 

 

25

 

 

 

347

 

 

 

8,876

 

ALL Balance at

   December 31,

   2016

 

$

4,450

 

 

$

23

 

 

$

795

 

 

$

965

 

 

$

234

 

 

$

441

 

 

$

2,062

 

 

$

25

 

 

$

347

 

 

$

9,342

 

Individually

   evaluated for

   impairment

 

$

198

 

 

$

 

 

$

36

 

 

$

 

 

$

 

 

$

 

 

$

113

 

 

$

 

 

$

 

 

$

347

 

Collectively

   evaluated for

   impairment

 

 

4,228

 

 

 

13

 

 

 

816

 

 

 

882

 

 

 

215

 

 

 

455

 

 

 

1,767

 

 

 

25

 

 

 

308

 

 

 

8,709

 

ALL balance at

   September 30,

   2016

 

$

4,426

 

 

$

13

 

 

$

852

 

 

$

882

 

 

$

215

 

 

$

455

 

 

$

1,880

 

 

$

25

 

 

$

308

 

 

$

9,056

 

 

The allowance for loan losses is based on estimates, and actual losses will vary from current estimates. Management believes that the granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALL that is representative of the risk found in the components of the portfolio at any given date. The Company allocated increased provisions to residential real estate, construction loan, commercial loans, and obligations of states and political subdivisions for the three month period ending December 31, 2016 due to increased balances and impairment evaluations in those segments. The Company allocated decreased provisions to commercial real estate loans for the three month period ending December 31, 2016 due to declining loss experience. The Company allocated decreased provisions to home equity loans and lines of credit for the three month period ending December 31, 2016 due primarily to decreased loan balances. The Company allocated increased provisions in auto loans due to increased loan balances, increased classified assets and increased charge off activity. Despite the above allocations, the allowance for loan losses is general in nature and is available to absorb losses from any loan segment.

The following is a summary of troubled debt restructuring granted during the three months ended December 31, 2016 and 2015 (dollars in thousands):

 

 

 

For the Three Months Ended December 31, 2016

 

 

 

Number of

Contracts

 

 

Pre-Modification

Outstanding

Recorded

Investment

 

 

Post-Modification

Outstanding

Recorded

Investment

 

Troubled Debt Restructurings

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

2

 

 

$

259

 

 

$

259

 

Construction

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

Obligations of states and political subdivisions

 

 

 

 

 

 

 

 

 

Home equity loans and lines of credit

 

 

 

 

 

 

 

 

 

Auto loans

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

Total

 

 

2

 

 

$

259

 

 

$

259

 

22


 

 

 

 

For the Three Months Ended December 31, 2015

 

 

 

Number of

Contracts

 

 

Pre-Modification

Outstanding

Recorded

Investment

 

 

Post-Modification

Outstanding

Recorded

Investment

 

Troubled Debt Restructurings

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

1

 

 

$

81

 

 

$

81

 

Construction

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

Obligations of states and political subdivisions

 

 

 

 

 

 

 

 

 

Home equity loans and lines of credit

 

 

 

 

 

 

 

 

 

Auto loans

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

Total

 

 

1

 

 

$

81

 

 

$

81

 

 

 

The two new troubled debt restructurings granted for the three months ended December 31, 2016, totaled $259,000 and were granted term and rate concessions.

The one new troubled debt restructurings granted for the three months ended December 31, 2015, totaled $81,000, and was granted terms and rate concessions.

For the three months ended December 31, 2016, one loan totaling $107,000 defaulted on a restructuring agreement within one year of modification.

For the three months ended December 31, 2015, no loans defaulted on a restructuring agreement within one year of modification.

Foreclosed assets acquired in settlement of loans are carried at fair value, less estimated costs to sell, and are included in the Consolidated Balance Sheet. As of December 31, 2016 and September 30, 2016, included with other assets are $2.4 million and $2.7 million, of foreclosed assets, respectively. As of December 31, 2016, included within the foreclosed assets is $1.9 million of consumer residential mortgages that were foreclosed on or received via a deed in lieu transaction prior to the period end. As of December 31, 2016, the Company has initiated formal foreclosure proceedings on $2.7 million of consumer residential mortgages which have not yet been transferred into foreclosed assets.

7.

Deposits

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

 

 

 

December 31,

2016

 

 

September 30,

2016

 

Non-interest bearing demand accounts

 

$

144,660

 

 

$

142,924

 

Interest bearing demand accounts

 

 

163,320

 

 

 

167,259

 

Money market accounts

 

 

255,763

 

 

 

249,947

 

Savings and club accounts

 

 

144,459

 

 

 

142,021

 

Certificates of deposit

 

 

484,739

 

 

 

512,669

 

Total

 

$

1,192,941

 

 

$

1,214,820

 

 

8.

Net Periodic Benefit Cost-Defined Benefit Plan

For a detailed disclosure on the Bank’s pension and employee benefits plans, please refer to Note 12 of the Company’s Consolidated Financial Statements for the year ended September 30, 2016 included in the Company’s Annual Report on Form 10-K.

23


 

The following table comprises the components of net periodic benefit cost for the periods ended (in thousands):

 

 

 

Three Months Ended

December 31,

 

 

 

2016

 

 

2015

 

Service Cost

 

$

309

 

 

$

249

 

Interest Cost

 

 

235

 

 

 

245

 

Expected return on plan assets

 

 

(341

)

 

 

(311

)

Amortization of unrecognized loss

 

 

136

 

 

 

120

 

Net periodic benefit cost

 

$

339

 

 

$

303

 

 

Subsequent to December 31, 2016, the Company’s board of directors adopted resolutions to freeze the status of the Defined Benefit Plan (“the plan”) effective February 28, 2017. (“the freeze date”).  Accordingly, no additional participants will enter the plan after February 28, 2017; no additional years of credited service for benefit accrual purposes will be earned after the freeze date under the plan; and compensation earned by participants after the freeze date will not be taken into account under the plan.

 

For purposes of determining the projected benefit obligation, accumulated other comprehensive income is expected to increase related to the expected reduction of the projected benefit obligation of the plan.  The company will recognize the appropriate effect of the reduced benefit obligation in accumulated other comprehensive income net of tax during the second quarter of fiscal 2017.

 

9.

Equity Incentive Plan

The Company maintained the ESSA Bancorp, Inc. 2007 Equity Incentive Plan (the “Plan”). The Plan provided for a total of 2,377,326 shares of common stock for issuance upon the grant or exercise of awards. Of the shares available under the Plan, 1,698,090 may be issued in connection with the exercise of stock options and 679,236 may be issued as restricted stock. The Plan allowed for the granting of non-qualified stock options (“NSOs”), incentive stock options (“ISOs”), and restricted stock. Options are granted at no less than the fair value of the Company’s common stock on the date of the grant.

The Company replaced the 2007 Equity Incentive Plan with the ESSA Bancorp, Inc. 2016 Equity Incentive Plan (the “2016 Plan”) which was approved by shareholders on March 3, 2016. The 2016 Plan provides for a total of 250,000 shares of common stock for issuance upon the grant or exercise of awards. The 2016 Plan allows for the granting of restricted stock, restricted stock units, incentive stock options and non-qualified stock options.

Certain officers, employees and outside directors were granted in aggregate 1,140,469 NSOs; 317,910 ISOs; and 590,320 shares of restricted stock on May 23, 2008. Certain officers were granted in aggregate 30,000 shares of restricted stock on April 1, 2013, 19,880 shares of restricted stock on July 22, 2014, 21,843 shares of restricted stock on May 20, 2015, 23,491 shares of restricted stock on March 4, 2016 and 20,675 shares of restricted stock on December 13, 2016. In accordance with generally accepted accounting principles, the Company expenses the fair value of all share-based compensation grants over the requisite service periods.

The Company classifies share-based compensation for employees and outside directors within “Compensation and employee benefits” in the Consolidated Statement of Income to correspond with the same line item as compensation paid.

Stock options vest over a five-year service period and expire ten years after the grant date. The Company recognizes compensation expense for the fair values of these awards, which vest on a straight-line basis over the requisite service period of the awards.

The 2013 restricted stock shares vested over an 18 month service period. The 2014 restricted shares vest over a 39 month service period. The 2015 restricted shares vest over a 40 month service period. The March 4, 2016 restricted shares vest over a 43 month service period. The December 13, 2016 restricted shares vest over a 46 month service period. The product of the number of shares granted and the grant date market price of the Company’s common stock determines the fair value of restricted shares under the Company’s restricted stock plan. The Company recognizes compensation expense for the fair value of restricted shares on a straight-line basis over the requisite service period for the entire award.

For the three months ended December 31, 2016 and 2015, the Company recorded $66,000 and $39,000 of share-based compensation expense, respectively, comprised of restricted stock expense. Expected future compensation expense relating to the 4,677 (2014 shares) restricted shares, at December 31, 2016 is $48,000 over the remaining vesting period of 0.75 years. Expected future compensation expense relating to the 10,437 restricted shares (2015 shares) at December 31, 2016 is $143,000 over the remaining vesting period of 1.75 years. Expected future compensation expense relating to the 16,782 restricted shares (2016 shares) at

24


 

December 31, 2016 is $234,000 over the remaining vesting period of 2.75 years. Expected future compensation expense relating to the 20,675 restricted shares (12/13/16 shares) at December 31, 2016 is $335,000 over the remaining vesting period of 3.75 years.

The following is a summary of the Company’s stock option activity and related information for its option grants for the three month period ended December 31, 2016.

 

 

 

Number of

Stock Options

 

 

Weighted-

average

Exercise

Price

 

 

Weighted-

average

Remaining

Contractual

Term (in years)

 

 

Aggregate

Intrinsic

Value

(in thousands)

 

Outstanding, September 30, 2016

 

 

905,987

 

 

$

12.35

 

 

 

1.67

 

 

$

1,341

 

Granted

 

 

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

262,092

 

 

 

12.35

 

 

 

1.42

 

 

 

 

Forfeited

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding, December 31, 2016

 

 

643,895

 

 

$

12.35

 

 

 

1.42

 

 

$

2,170

 

Exercisable at December 31, 2016

 

 

643,895

 

 

$

12.35

 

 

 

1.42

 

 

$

2,170

 

 

The following is a summary of the status of the Company’s restricted stock as of December 31, 2016, and changes therein during the three month period then ended:

 

 

 

Number of

Restricted Stock

 

 

Weighted-

average

Grant Date

Fair Value

 

Nonvested at September 30, 2016

 

 

31,896

 

 

$

13.01

 

Granted

 

 

20,675

 

 

 

16.57

 

Vested

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

Nonvested at December 31, 2016

 

 

52,571

 

 

$

14.41

 

 

10.

Fair Value Measurement

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

25


 

The following table presents information about the Company’s securities, derivatives, other real estate owned, impaired loans and mortgage servicing rights measured at fair value as of December 31, 2016 and September 30, 2016 and indicates the fair value hierarchy of the valuation techniques utilized by the Bank to determine such fair value:

 

 

 

Fair Value Measurement at December 31, 2016

 

 

 

 

 

Fair Value Measurements Utilized for the Company’s

Financial Assets (in thousands):

 

Quoted Prices

in Active

Markets for

Identical Assets

(Level 1)

 

 

Significant Other

Observable Inputs

(Level 2)

 

 

Significant

Unobservable Inputs

(Level 3)

 

 

Balances as of

December 31, 2016

 

Securities available-for-sale measured on a recurring

   basis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage backed securities

 

$

 

 

$

223,763

 

 

$

 

 

$

223,763

 

Obligations of states and political subdivisions

 

 

 

 

 

70,521

 

 

 

 

 

 

70,521

 

U.S. government agencies

 

 

 

 

 

25,800

 

 

 

 

 

 

25,800

 

Corporate obligations

 

 

 

 

 

30,550

 

 

 

8,238

 

 

 

38,788

 

Other debt securities

 

 

 

 

 

33,216

 

 

 

 

 

 

33,216

 

Equity securities-financial services

 

 

25

 

 

 

 

 

 

 

 

 

25

 

Total debt and equity securities

 

$

25

 

 

$

383,850

 

 

$

8,238

 

 

$

392,113

 

Derivatives

 

$

 

 

$

1,362

 

 

$

 

 

$

1,362

 

Assets measured at fair value on a nonrecurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreclosed real estate

 

$

 

 

$

 

 

$

2,436

 

 

$

2,436

 

Impaired loans

 

$

 

 

$

 

 

$

21,344

 

 

$

21,344

 

Mortgage servicing rights

 

$

 

 

$

 

 

$

358

 

 

$

358

 

 

 

 

Fair Value Measurement at September 30, 2016

 

 

 

 

 

Fair Value Measurements Utilized for the Company’s

Financial Assets (in thousands):

 

Quoted Prices

in Active

Markets for

Identical Assets

(Level 1)

 

 

Significant Other

Observable Inputs

(Level 2)

 

 

Significant

Unobservable Inputs

(Level 3)

 

 

Balances as of

September 30, 2016

 

Securities available-for-sale measured on a recurring

   basis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage backed securities

 

$

 

 

$

219,162

 

 

$

 

 

$

219,162

 

Obligations of states and political subdivisions

 

 

 

 

 

73,690

 

 

 

 

 

 

73,690

 

U.S. government agencies

 

 

 

 

 

25,941

 

 

 

 

 

 

25,941

 

Corporate obligations

 

 

 

 

 

31,433

 

 

 

6,985

 

 

 

38,418

 

Other debt securities

 

 

 

 

 

32,674

 

 

 

500

 

 

 

33,174

 

Equity securities-financial services

 

 

25

 

 

 

 

 

 

 

 

 

25

 

Total debt and equity securities

 

$

25

 

 

$

382,900

 

 

$

7,485

 

 

$

390,410

 

Derivatives

 

$

 

 

$

453

 

 

$

 

 

$

453

 

Assets measured at fair value on a nonrecurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreclosed real estate

 

$

 

 

$

 

 

$

2,659

 

 

$

2,659

 

Impaired loans

 

$

 

 

$

 

 

$

22,218

 

 

$

22,218

 

Mortgage Servicing rights

 

$

 

 

$

 

 

$

398

 

 

$

398

 

 

26


 

The following table presents a summary of changes in the fair value of the Company’s Level III investments for the three month periods ended December 31, 2016 and 2015 (in thousands).

 

 

 

Fair Value Measurement Using

Significant Unobservable Inputs

(Level III)

 

 

 

Three Months Ended

 

 

 

December 31, 2016

 

 

December 31, 2015

 

Beginning balance

 

$

7,485

 

 

$

4,211

 

Purchases, sales, issuances, settlements, net

 

 

756

 

 

 

3,000

 

Total unrealized gain (loss):

 

 

 

 

 

 

 

 

Included in earnings

 

 

 

 

 

 

Included in other comprehensive income

 

 

(3

)

 

 

(75

)

Transfers in and/or out of Level III

 

 

 

 

 

 

 

 

$

8,238

 

 

$

7,136

 

 

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

The measurement of fair value should be consistent with one of the following valuation techniques: market approach, income approach, and/or cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). For example, valuation techniques consistent with the market approach often use market multiples derived from a set of comparables. Multiples might lie in ranges with a different multiple for each comparable. The selection of where within the range the appropriate multiple falls requires judgment, considering factors specific to the measurement (qualitative and quantitative). Valuation techniques consistent with the market approach include matrix pricing. Matrix pricing is a mathematical technique used principally to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on a security’s relationship to other benchmark quoted securities. Most of the securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quoted market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. Securities reported at fair value utilizing Level 1 inputs are limited to actively traded equity securities whose market price is readily available from the New York Stock Exchange or the NASDAQ exchange. A few securities are valued using Level 3 inputs, all of these are classified as available for sale and are reported at fair value using Level 3 inputs. Mortgage servicing rights are also valued by an independent pricing service. Foreclosed real estate is measured at fair value, less cost to sell at the date of foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value, less cost to sell. Income and expenses from operations and changes in valuation allowance are included in the net expenses from foreclosed real estate. Impaired loans are reported at fair value utilizing level three inputs. For these loans, a review of the collateral is conducted and an appropriate allowance for loan losses is allocated to the loan. At December 31, 2016, 208 impaired loans with a carrying value of $21.8 million were reduced by specific valuation allowance totaling $466,000 resulting in a net fair value of $21.3 million based on Level 3 inputs. At September 30, 2016, 205 impaired loans with a carrying value of $22.6 million were reduced by a specific valuation totaling $347,000 resulting in a net fair value of $22.2  million based on Level 3 inputs.

27


 

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value:

 

 

 

Quantitative Information about Level 3 Fair Value Measurements

(in thousands)

 

Fair Value

Estimate

 

 

Valuation

Techniques

 

Unobservable

Input

 

Range

December 31, 2016:

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

21,344

 

 

Appraisal of

collateral (1)

 

Appraisal

adjustments (2)

 

0% to 50%

(24.0%)

Foreclosed real estate owned

 

 

2,436

 

 

Appraisal of

collateral (1)

 

Appraisal

adjustments (2)

 

20% to 46%

(22.7%)

Mortgage servicing rights

 

 

358

 

 

Discounted

cash flow

 

Discount

rate

 

11% to 16%

(11.6%)

 

 

 

 

 

 

 

 

Prepayment

speeds

 

7% to 34%

(16.2%)

 

 

 

Quantitative Information about Level 3 Fair Value Measurements

(in thousands)

 

Fair Value

Estimate

 

 

Valuation

Techniques

 

Unobservable

Input

 

Range

September 30, 2016:

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

22,218

 

 

Appraisal of

collateral (1)

 

Appraisal

adjustments (2)

 

0% to 60%

(23.0%)

Foreclosed real estate owned

 

 

2,659

 

 

Appraisal of

collateral (1)

 

Appraisal

adjustments (2)

 

20% to 46%

(22.1%)

Mortgage servicing rights

 

 

398

 

 

Discounted

cash flow

 

Discount

rate

 

12% to 16%

(12.0%)

 

 

 

 

 

 

 

 

Prepayment

speeds

 

2% to 33%

(17.2%)

 

(1)

Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level 3 inputs which are not identifiable.

(2)

Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

28


 

The fair values presented represent the Company’s best estimate of fair value using the methodologies discussed below.

Disclosures about Fair Value of Financial Instruments

The fair values presented represent the Company’s best estimate of fair value using the methodologies discussed below (in thousands).

 

 

 

December 31, 2016

 

 

 

Carrying Value

 

 

Level I

 

 

Level II

 

 

Level III

 

 

Total Fair

Value

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

39,851

 

 

$

39,851

 

 

$

 

 

$

 

 

$

39,851

 

Certificates of deposit

 

 

1,000

 

 

 

 

 

 

 

 

 

1,012

 

 

 

1,012

 

Investment and mortgage backed securities

   available for sale

 

 

392,113

 

 

 

25

 

 

 

384,350

 

 

 

7,738

 

 

 

392,113

 

Loans receivable, net

 

 

1,224,021

 

 

 

 

 

 

 

 

 

1,220,648

 

 

 

1,220,648

 

Accrued interest receivable

 

 

5,950

 

 

 

5,950

 

 

 

 

 

 

 

 

 

5,950

 

Regulatory stock

 

 

16,680

 

 

 

16,680

 

 

 

 

 

 

 

 

 

16,680

 

Mortgage servicing rights

 

 

358

 

 

 

 

 

 

 

 

 

358

 

 

 

358

 

Derivatives

 

 

1,362

 

 

 

 

 

 

1,362

 

 

 

 

 

 

 

1,362

 

Bank owned life insurance

 

 

36,856

 

 

 

36,856

 

 

 

 

 

 

 

 

 

36,856

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

1,192,941

 

 

$

708,202

 

 

$

 

 

$

485,989

 

 

$

1,194,191

 

Short-term borrowings

 

 

174,918

 

 

 

174,918

 

 

 

 

 

 

 

 

 

174,918

 

Other borrowings

 

 

215,571

 

 

 

 

 

 

 

 

 

215,726

 

 

 

215,726

 

Advances by borrowers for taxes and insurance

 

 

7,719

 

 

 

7,719

 

 

 

 

 

 

 

 

 

7,719

 

Accrued interest payable

 

 

1,029

 

 

 

1,029

 

 

 

 

 

 

 

 

 

1,029

 

 

 

 

September 30, 2016

 

 

 

Carrying Value

 

 

Level I

 

 

Level II

 

 

Level III

 

 

Total Fair

Value

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

43,658

 

 

$

43,658

 

 

$

 

 

$

 

 

$

43,658

 

Certificates of deposit

 

 

1,250

 

 

 

 

 

 

 

 

 

1,269

 

 

 

1,269

 

Investment and mortgage backed securities

   available for sale

 

 

390,410

 

 

 

25

 

 

 

382,900

 

 

 

7,485

 

 

 

390,410

 

Loans receivable, net

 

 

1,219,213

 

 

 

 

 

 

 

 

 

1,237,759

 

 

 

1,237,759

 

Accrued interest receivable

 

 

5,769

 

 

 

5,769

 

 

 

 

 

 

 

 

 

5,769

 

Regulatory stock

 

 

15,463

 

 

 

15,463

 

 

 

 

 

 

 

 

 

15,463

 

Mortgage servicing rights

 

 

398

 

 

 

 

 

 

 

 

 

398

 

 

 

398

 

Derivatives

 

 

453

 

 

 

 

 

 

453

 

 

 

 

 

 

453

 

Bank owned life insurance

 

 

36,593

 

 

 

36,593

 

 

 

 

 

 

 

 

 

36,593

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

1,214,820

 

 

$

702,151

 

 

$

 

 

$

516,743

 

 

$

1,218,894

 

Short-term borrowings

 

 

129,460

 

 

 

129,460

 

 

 

 

 

 

 

 

 

129,460

 

Other borrowings

 

 

230,601

 

 

 

 

 

 

 

 

 

231,911

 

 

 

231,911

 

Advances by borrowers for taxes and insurance

 

 

4,956

 

 

 

4,956

 

 

 

 

 

 

 

 

 

4,956

 

Accrued interest payable

 

 

1,046

 

 

 

1,046

 

 

 

 

 

 

 

 

 

1,046

 

 

Financial instruments are defined as cash, evidence of an ownership interest in an entity, or a contract which creates an obligation or right to receive or deliver cash or another financial instrument from/to a second entity on potentially favorable or unfavorable terms.

Fair value is defined as the amount at which a financial instrument could be exchanged in a current transaction between willing parties other than in a forced or liquidation sale. If a quoted market price is available for a financial instrument, the fair value would be calculated based upon the market price per trading unit of the instrument.

29


 

If no readily available market exists, the fair value for financial instruments should be based upon management’s judgment regarding current economic conditions, interest rate risk, expected cash flows, future estimated losses, and other factors as determined through various option pricing formulas or simulation modeling.

As many of these assumptions result from judgments made by management based upon estimates which are inherently uncertain, the resulting values may not be indicative of the amount realizable in the sale of a particular financial instrument. In addition, changes in the assumptions on which the values are based may have a significant impact on the resulting estimated values.

As certain assets and liabilities, such as deferred tax assets, premises and equipment, and many other operational elements of the Bank, are not considered financial instruments but have value, this fair value of financial instruments would not represent the full market value of the Company.

The Company employed simulation modeling in determining the fair value of financial instruments for which quoted market prices were not available based upon the following assumptions:

Cash and Cash Equivalents, Accrued Interest Receivable, Short-Term Borrowings, Advances by Borrowers for Taxes and Insurance, and Accrued Interest Payable

The fair value approximates the current book value.

Bank-Owned Life Insurance

The fair value is equal to the cash surrender value of the Bank-owned life insurance.

Investment and Mortgage-Backed Securities Available for Sale and Regulatory Stock

The fair value of investment and mortgage-backed securities available for sale is equal to the available quoted market price. If no quoted market price is available, fair value is estimated using the quoted market price for similar securities. Since the Regulatory stock is not actively traded on a secondary market and held exclusively by member financial institutions, the fair market value approximates the carrying amount. For certain securities which are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence (Level 3). In the absence of such evidence, management’s best estimate is used. Management’s best estimate consists of both internal and external support on certain Level 3 investments. Internal cash flow models using a present value formula that includes assumptions market participants would use along with indicative exit pricing obtained from broker/dealers (where available) are used to support fair values of certain Level 3 investments, if applicable.

Loans Receivable

The fair values of loans are estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.

Mortgage Servicing Rights

The Company utilizes a third party provider to estimate the fair value of certain loan servicing rights. Fair value for the purpose of this measurement is defined as the amount at which the asset could be exchanged in a current transaction between willing parties, other than in a forced liquidation.

 

Derivatives

Fair values of interest rate cap and interest rate swap contracts are based on dealer quotes.

Deposits (including Certificates of Deposit)

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

30


 

Other Borrowings

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

Commitments to Extend Credit

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

11.

Accumulated Other Comprehensive Loss

The activity in accumulated other comprehensive loss for the three months ended December 31, 2016 and 2015 is as follows (in thousands):

 

 

 

Accumulated Other

Comprehensive Loss

 

 

 

Defined Benefit

Pension Plan

 

 

Unrealized Gains

(Losses) on

Securities

Available for Sale

 

 

Derivatives

 

 

Total

 

Balance at September 30, 2016

 

$

(6,083

)

 

$

3,952

 

 

$

299

 

 

$

(1,832

)

Other comprehensive income (loss) before

   reclassifications

 

 

 

 

 

(6,753

)

 

 

593

 

 

 

(6,160

)

Amounts reclassified from accumulated

   other comprehensive loss, net of tax

 

 

90

 

 

 

 

 

 

7

 

 

 

97

 

Period change

 

 

90

 

 

 

(6,753

)

 

 

600

 

 

 

(6,063

)

Balance at December 31, 2016

 

$

(5,993

)

 

$

(2,801

)

 

$

899

 

 

$

(7,895

)

Balance at September 30, 2015

 

$

(5,325

)

 

$

2,930

 

 

$

 

 

$

(2,395

)

Other comprehensive loss before reclassifications

 

 

 

 

 

(2,244

)

 

 

 

 

 

(2,244

)

Amounts reclassified from accumulated

   other comprehensive loss, net of tax

 

 

79

 

 

 

(2

)

 

 

 

 

 

77

 

Period change

 

 

79

 

 

 

(2,246

)

 

 

 

 

 

(2,167

)

Balance at December 31, 2015

 

$

(5,246

)

 

$

684

 

 

$

 

 

$

(4,562

)

 

 

31


 

The following table presents significant amounts reclassified out of each component of accumulated other comprehensive loss for the three ended December 31, 2016 and 2015:

 

 

 

Amount Reclassified from

Accumulated Other Comprehensive Loss

 

 

Accumulated Other

Comprehensive Loss for

the Three Months Ended

December 31,

 

 

Affected Line Item in the

Consolidated Statement of Income

 

 

2016

 

 

2015

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

Securities gains reclassified into earnings

 

$

 

 

$

3

 

 

Gain on sale of investments

Related income tax expense

 

 

 

 

 

(1

)

 

Income taxes

Net effect on accumulated other comprehensive loss for the

   period

 

 

 

 

 

2

 

 

 

Defined benefit pension plan:

 

 

 

 

 

 

 

 

 

 

Amortization of net loss

 

 

(136

)

 

 

(120

)

 

Compensation and employee benefits

Related income tax expense

 

 

46

 

 

 

41

 

 

Income taxes

Net effect on accumulated other comprehensive loss for the

   period

 

 

(90

)

 

 

(79

)

 

 

Derivatives and hedging activities:

 

 

 

 

 

 

 

 

 

 

Interest expense, effective portion

 

 

(11

)

 

 

 

 

Interest expense

Related income tax expense

 

 

4

 

 

 

 

 

Income taxes

Net effect on accumulated other comprehesive loss for the

   period

 

 

(7

)

 

 

 

 

 

Total reclassification for the period

 

$

(97

)

 

$

(77

)

 

 

 

12.

Derivatives and Hedging Activities

Risk Management Objective of Using Derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions.  The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities and through the use of derivative financial instruments.  Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates.  The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to certain variable rate borrowings.

Fair Values of Derivative Instruments on the Consolidated Balance Sheet

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Balance Sheet as of December 31, 2016 and September 30, 2016, (in thousands).

 

 

 

Fair Values of Derivative Instruments

 

 

 

Asset Derivatives

 

 

 

As of December 31, 2016

 

 

 

 

 

As of September 30, 2016

 

 

 

 

 

 

Balance Sheet Location

 

Fair Value

 

 

Balance Sheet Location

 

Fair Value

 

Derivatives designated as hedging

   instruments

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Products

 

Other Assets

 

$

1,362

 

 

Other Assets

 

$

453

 

 

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest income and expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company has entered into interest rate swaps as part of its interest rate risk management strategy.  These interest rate swaps are designated as cash flow hedges and involve the receipt of

32


 

variable rate amounts from a counterparty in exchange for the Company making fixed payments.  As of December 31, 2016, the Company had three interest rate swaps with a notional of $50 million associated with the Company’s cash outflows associated with various FHLB advances.

For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings), net of tax, and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. The Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged transactions.  The Company did not recognize any hedge ineffectiveness in earnings during the period ended December 31, 2016.

Amounts reported in accumulated other comprehensive loss related to derivatives will be reclassified to interest income/expense as interest payments are made/received on the Company’s variable-rate assets/liabilities.  During the three months ended December 31, 2016, the Company had $11,000 of reclassifications to interest expense.  During the next twelve months, the Company estimates that $0 will be reclassified as a decrease in interest expense.

The table below presents the pre-tax net gains (losses) of the Company’s cash flow hedges for the period ended December 31, 2016 and 2015, respectively, and where they were recorded in the Consolidated Statement of Income, (in thousands).

 

Derivatives in Cash Flow

Hedging Relationships

 

Gain Recognized in

OCI on Derivative

(Effective Portion)

Three Months Ended

December 31,

 

 

Location of Gain

or (Loss)

Reclassified from

Accumulated OCI

into Income

(Effective Portion)

 

(Loss) Reclassified

from Accumulated

OCI into Income

(Effective Portion)

Three Months Ended

December 31,

 

 

Location of Gain

or (Loss)

Recognized in

Income on Derivative

(Ineffective Portion)

 

Gain or (Loss)

Recognized in

Income on Derivative

(Ineffective Portion)

Three Months Ended

December 31,

 

 

 

2016

 

 

2015

 

 

 

 

2016

 

 

2015

 

 

 

 

2016

 

 

2015

 

Interest Rate Products

 

$

1,052

 

 

$

 

 

Interest expense

 

$

(11

)

 

$

 

 

Other non-interest income

 

$

 

 

$

 

Ending balance of OCI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,052

 

 

$

 

 

 

 

$

(11

)

 

$

 

 

 

 

$

 

 

$

 

 

Credit-risk-related Contingent Features

The Company has agreements with its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.

The Company also has agreements with certain of its derivative counterparties that contain a provision where if the Company fails to maintain its status as a well / adequate capitalized institution, then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements.

As of December 31, 2016 the Company had no derivatives in a net liability position and was not required to post collateral  against its obligations under these agreements.  If the Company had breached any of these provisions at December 31, 2016, it could have been required to settle its obligations under the agreements at the termination value.

33


 

Item 2.

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

Forward Looking Statements

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

 

statements of our goals, intentions and expectations;

 

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

 

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

 

estimates of our risks and future costs and benefits.

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

 

significantly increased competition among depository and other financial institutions;

 

inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;

 

general economic conditions, either nationally or in our market areas, that are worse than expected;

 

adverse changes in the securities markets;

 

legislative or regulatory changes that adversely affect our business;

 

our ability to enter new markets successfully and take advantage of growth opportunities, and the possible short-term dilutive effect of potential acquisitions or de novo branches, if any;

 

changes in consumer spending, borrowing and savings habits;

 

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies and the Financial Accounting Standards Board; and

 

changes in our organization, compensation and benefit plans.

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

Comparison of Financial Condition at December 31, 2016 and September 30, 2016

Total Assets. Total assets increased by $6.1 million, or 0.4%, to $1.79 billion at December 31, 2016 from $1.77 billion at September 30, 2016.

Total Cash and Cash Equivalents. Total cash and cash equivalents decreased $3.8 million, or 8.7%, to $39.9 million at December 31, 2016 from $43.7 million at September 30, 2016. A decrease in interest bearing deposits with other institutions of $4.7 million, partially offset by an increase in cash and due from banks of $868,000, was the primary reason for the net decrease of $3.8 million.

Net Loans. Net loans increased $4.8 million, or 0.39%, to $1.22 billion at December 31, 2016 from September 30, 2016. During this period, residential loans increased $1.2 million to $597.9 million, construction loans increased $1.3 million to $3.1 million, commercial real estate loans increased $5.1 million to $293.6 million, commercial loans decreased $6.1 million to $33.9 million, obligations of states and political subdivisions increased $4.5 million to $61.4 million, home equity loans and lines of credit decreased $1.4 million to $46.8 million, auto loans increased $445,000 to $193.5 million, and other loans decreased $3,000 to $3.3 million.

Investment Securities Available for Sale. Investment securities available for sale increased $1.7 million, or 0.44%, to $392.1 million at December 31, 2016 from $390.4 million at September 30, 2016. The increase was due primarily to increases in mortgage backed securities of $4.6 million, offset in part by decreases in obligations of states and political subdivisions of $3.2 million. The Company did not sell investment securities for the three months ended December 31, 2016.

34


 

Deposits. Deposits decreased $21.9 million, or 1.8%, to $1.19 billion at December 31, 2016 from $1.21 billion at September 30, 2016. Certificates of deposit, which declined $27.9 million during the quarter ended December 31, 2016, was primarily responsible for the decline in deposits. The decrease in certificates of deposit, which decreased $27.9 million to $484.7 million at December 31, 2016, included a decrease in brokered certificates of $39.7 million to $159.0 million.

Borrowed Funds. Borrowed funds increased by $30.4 million, or 8.5%, to $390.5 million at December 31, 2016, from $360.1 million at September 30, 2016. The increase in borrowed funds was due to increases in short term borrowings of $45.5 million offset in part by a decrease in other borrowings of $15.0 million. All borrowings at December 31, 2016 represent advances from the Pittsburgh FHLB.

Stockholders’ Equity. Stockholders’ equity decreased by $4.9 million, or 2.8% to $171.4 million at December 31, 2016 from $176.3 million at September 30, 2016. The decrease in stockholders’ equity was primarily due to declines to accumulated other comprehensive loss, partially offset by net income.

35


 

Average Balance Sheets for the Three months Ended December 31, 2016 and 2015

The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances, the yields set forth below include the effect of deferred fees and discounts and premiums that are amortized or accreted to interest income.

 

 

 

For the Three Months Ended December 31,

 

 

 

2016

 

 

2015

 

 

 

Average Balance

 

 

Interest Income/

Expense

 

 

Yield/Cost

 

 

Average Balance

 

 

Interest Income/

Expense

 

 

Yield/Cost

 

 

 

(dollars in thousands)

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans(1)

 

$

1,232,042

 

 

$

12,251

 

 

 

3.95

%

 

$

1,144,346

 

 

$

11,574

 

 

 

4.01

%

Investment Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable(2)

 

 

87,926

 

 

 

629

 

 

 

2.84

%

 

 

86,498

 

 

 

497

 

 

 

2.28

%

Exempt from federal income

   tax(2)(3)

 

 

52,978

 

 

 

309

 

 

 

3.51

%

 

 

40,145

 

 

 

244

 

 

 

3.65

%

Total investment securities

 

 

140,904

 

 

 

938

 

 

 

3.09

%

 

 

126,643

 

 

 

741

 

 

 

2.72

%

Mortgage-backed securities

 

 

249,541

 

 

 

1,245

 

 

 

1.98

%

 

 

258,653

 

 

 

1,321

 

 

 

2.03

%

Regulatory stock

 

 

15,720

 

 

 

191

 

 

 

4.82

%

 

 

14,471

 

 

 

175

 

 

 

4.80

%

Other

 

 

8,440

 

 

 

25

 

 

 

1.18

%

 

 

3,628

 

 

 

4

 

 

 

0.44

%

Total interest-earning assets

 

 

1,646,647

 

 

 

14,650

 

 

 

3.57

%

 

 

1,547,741

 

 

 

13,815

 

 

 

3.57

%

Allowance for loan losses

 

 

(9,149

)

 

 

 

 

 

 

 

 

 

 

(8,981

)

 

 

 

 

 

 

 

 

Noninterest-earning assets

 

 

131,014

 

 

 

 

 

 

 

 

 

 

 

111,446

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,768,512

 

 

 

 

 

 

 

 

 

 

$

1,650,206

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing demand accounts

 

$

168,284

 

 

$

62

 

 

 

0.15

%

 

$

101,478

 

 

$

25

 

 

 

0.10

%

Money market accounts

 

 

251,171

 

 

 

324

 

 

 

0.51

%

 

 

176,775

 

 

 

102

 

 

 

0.23

%

Savings and club accounts

 

 

136,655

 

 

 

18

 

 

 

0.05

%

 

 

127,511

 

 

 

16

 

 

 

0.05

%

Certificates of deposit

 

 

508,528

 

 

 

1,608

 

 

 

1.25

%

 

 

609,525

 

 

 

1,702

 

 

 

1.11

%

Borrowed funds

 

 

363,924

 

 

 

1,006

 

 

 

1.10

%

 

 

332,636

 

 

 

878

 

 

 

1.05

%

Total interest-bearing liabilities

 

 

1,428,562

 

 

 

3,018

 

 

 

0.84

%

 

 

1,347,925

 

 

 

2,723

 

 

 

0.80

%

Non-interest-bearing demand

   accounts

 

 

141,876

 

 

 

 

 

 

 

 

 

 

 

110,806

 

 

 

 

 

 

 

 

 

Non-interest-bearing liabilities

 

 

22,147

 

 

 

 

 

 

 

 

 

 

 

18,833

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

1,592,585

 

 

 

 

 

 

 

 

 

 

 

1,477,564

 

 

 

 

 

 

 

 

 

Equity

 

 

175,927

 

 

 

 

 

 

 

 

 

 

 

172,642

 

 

 

 

 

 

 

 

 

Total liabilities and equity

 

$

1,768,512

 

 

 

 

 

 

 

 

 

 

$

1,650,206

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

 

$

11,632

 

 

 

 

 

 

 

 

 

 

$

11,092

 

 

 

 

 

Interest rate spread

 

 

 

 

 

 

 

 

 

 

2.73

%

 

 

 

 

 

 

 

 

 

 

2.77

%

Net interest-earning assets

 

$

218,085

 

 

 

 

 

 

 

 

 

 

$

199,816

 

 

 

 

 

 

 

 

 

Net interest margin(4)

 

 

 

 

 

 

 

 

 

 

2.80

%

 

 

 

 

 

 

 

 

 

 

2.84

%

Average interest-earning assets to

   average interest-bearing liabilities

 

 

 

 

 

 

115.27

%

 

 

 

 

 

 

 

 

 

 

114.82

%

 

 

 

 

 

(1)

Non-accruing loans are included in the outstanding loan balances.

(2)

Available for sale securities are reported at fair value.

(3)

Yields on tax exempt securities have been calculated on a fully tax equivalent basis assuming a tax rate of 34%.

(4)

Represents the difference between interest earned and interest paid, divided by average total interest earning assets.

 

Comparison of Operating Results for the Three Months Ended December 31, 2016 and December 31, 2015

Net Income. Net income decreased $20,000, or 1.0%, to $1.9 million for the three months ended December 31, 2016 compared to the comparable period in 2015. The decrease was due primarily to increases in non-interest expense partially offset by increases in net interest income and non-interest income.

36


 

Net Interest Income. Net interest income increased $540,000, or 4.9%, to $11.6 million for the three months ended December 31, 2016 from $11.1 million for the comparable period in 2015. The increase was primarily attributable to an increase in the Company’s average balance of net interest earning assets of $18.3 million, offset in part by a four basis point decrease in the Company’s interest rate spread to 2.73% for the three months ended December 31, 2016 from 2.77% for the comparable period in 2015. Net interest-earning assets increased primarily due to the Company’s acquisition of ENB on December 4, 2015.

Interest Income. Interest income increased $835,000, or 6.0%, to $14.7 million for the three months ended December 31, 2016 from $13.8 million for the comparable 2015 period. The increase resulted primarily from an increase in the average balance of interest earning assets of $98.9 million. The average yield on interest earning assets was 3.57% for the three months ended December 31, 2016, the same as the comparable 2015 period. The average balance of loans increased $87.7 million between the two periods. In addition, the average balance of investment securities increased $14.3 million, mortgage-backed securities decreased $9.1 million, regulatory stock increased $1.2 million and other interest earning assets increased $4.8 million.

Interest Expense. Interest expense increased $295,000, or 10.8%, to $3.0 million for the three months ended December 31, 2016 from $2.7 million for the comparable 2015 period. The increase resulted from an increase in the average balance of total interest bearing liabilities of $80.6 million and an increase in the cost of interest bearing liabilities of four basis points. For the three months ended December 31, 2016 and 2015 the average cost of interest bearing liabilities was 0.84% and 0.80%, respectively.

Provision for Loan Losses. In evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect a borrower’s ability to repay, the estimated value of any underlying collateral, peer group information and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are subject to interpretation and revision as more information becomes available or as future events occur. After an evaluation of these factors, management made a provision for loan losses of $750,000 for the three month period ended December 31, 2016 compared to $600,000 for the three month period ended December 31, 2015. The allowance for loan losses was $9.3 million, or 0.76% of loans outstanding, at December 31, 2016, compared to $9.1 million, or 0.74% of loans outstanding at September 30, 2016.

Non-interest Income. Non-interest income increased $40,000, or 2.2%, to $1.9 million for the three months ended December 31, 2016 from $1.8 million for the comparable period in 2015. Increases in service fees and charges on loans of $79,000, and earnings on bank owned life insurance of $33,000 were partially offset by decreases in trust and investment fees of $63,000.

Non-interest Expense. Non-interest expense increased $616,000, or 6.3%, to $10.4 million for the three months ended December 31, 2016 from $9.8 million for the comparable period in 2015. The primary reasons for the increase were increases in compensation and employee benefits of $599,000, professional fees of $292,000, data processing of $15,000, and advertising of $218,000 which were offset in part by declines in occupancy and equipment of $18,000 and foreclosed real estate of $86,000, merger related costs of $245,000, amortization of intangible assets of $11,000 and other expenses of $57,000. The increase in non-interest expense was attributed primarily to the addition of former ENB employees and former ENB locations as well as additional lending staff.

Income Taxes. Income tax expense decreased $166,000 to $400,000 for the three months ended December 31, 2016 from $566,000 for the comparable 2015 period. The decrease was primarily a result of the adoption of ASU 2016-09, which resulted in recognition of all excess tax benefits for share-based payment awards to be recognized in income taxes.  Previously such tax benefits were recognized in additional paid in capital. The effective tax rate for the three months ended December 31, 2016 was 17.1%, compared to 22.4% for the 2015 period.

37


 

Non-Performing Assets

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

 

 

 

December 31,

2016

 

 

September 30,

2016

 

Non-performing assets:

 

 

 

 

 

 

 

 

Non-accruing loans

 

$

20,397

 

 

$

19,315

 

Total non-performing loans

 

 

20,397

 

 

 

19,315

 

Foreclosed real estate

 

 

2,436

 

 

 

2,659

 

Other repossessed assets

 

 

9

 

 

 

9

 

Total non-performing assets

 

$

22,842

 

 

$

21,983

 

Ratio of non-performing loans to total loans

 

 

1.65

%

 

 

1.57

%

Ratio of non-performing loans to total assets

 

 

1.15

%

 

 

1.09

%

Ratio of non-performing assets to total assets

 

 

1.28

%

 

 

1.24

%

Ratio of allowance for loan losses to total loans

 

 

0.76

%

 

 

0.74

%

 

Loans are reviewed on a regular basis and are placed on non-accrual status when they become more than 90 days delinquent. When loans are placed on non-accrual status, unpaid accrued interest is fully reserved, and further income is recognized only to the extent received. Non-performing assets increased $859,000 to $22.8 million at December 31, 2016 from $22.0 million at September 30, 2016. Non-performing loans increased $1.1 million to $20.4 million at December 31, 2016 from $19.3 million at September 30, 2016. The number of nonperforming residential loans was 92 at December 31, 2016 compared to 92 at September 30, 2016. The $20.4 million of non-accruing loans at December 31, 2016 included 92 residential loans with an aggregate outstanding balance of $9.1 million, 67 commercial and commercial real estate loans with aggregate outstanding balances of $9.2 million and 48 consumer loans with aggregate balances of $1.1 million. Within the residential loan balance are $5.5 million of loans less than 90 days past due. In the quarter ended December 31, 2016, the Company identified 48 residential loans which, although paying as agreed, have a high probability of default. Foreclosed real estate decreased $223,000 to $2.4 million at December 31, 2016 from $2.7 million at September 30, 2016. Foreclosed real estate consists of 24 residential properties, two building lots and four commercial properties.

At December 31, 2016, the principal balance of troubled debt restructures was $7.8 million as compared to $7.8 million at September 30, 2016. Of the $7.8 million of troubled debt restructures at December 31, 2016, $902,000 are performing loans and $6.9 million are non-accrual loans.

Of the 58 loans that comprise our troubled debt restructures at December 31, 2016, no loans were granted a rate concession at a below market interest rate. Twenty-five loans with balances totaling $3.7 million were granted market rate and terms concessions, 12 loans totaling $708,000 were granted an interest rate concession and 21 loans with balances totaling $3.7 million were granted term concessions.

As of December 31, 2016, troubled debt restructures were comprised of 48 residential loans totaling $5.2 million, eight commercial and commercial real estate loans totaling $2.5 million, and two consumer (home equity loans, home equity lines and credit, indirect auto and other) loans totaling $84,000.

For the three month period ended December 31, 2016, no loans were removed from non-performing TDR status.

We have modified terms of loans that do not meet the definition of a TDR. The vast majority of such loans were rate modifications of residential first mortgage loans in lieu of refinancing. The non-TDR rate modifications were all performing loans when the rates were reset to current market rates. For the three months ended December 31, 2016, we modified seven loans totaling $457,000 in this fashion. With regard to commercial loans, including commercial real estate loans, there were two loans totaling $457,000 in the three months ended December 31, 2016.

Liquidity and Capital Resources

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

Our primary sources of liquidity are deposits, prepayment and repayment of loans and mortgage-backed securities, maturities of investment securities and other short-term investments, and earnings and funds provided from operations, as well as access to

38


 

FHLBank advances and other borrowing sources. While scheduled principal repayments on loans and mortgage-backed securities are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by market interest rates, economic conditions, and rates offered by our competition. We set the interest rates on our deposits to maintain a desired level of total deposits.

A portion of our liquidity consists of cash and cash equivalents and borrowings, which are a product of our operating, investing and financing activities. At December 31, 2016, $39.9 million of our assets were invested in cash and cash equivalents. Our primary sources of cash are principal repayments on loans, proceeds from the maturities of investment securities, principal repayments of mortgage-backed securities and increases in deposit accounts. Short-term investment securities (maturing in one year or less) totaled $11.4 million at December 31, 2016. As of December 31, 2016, we had $390.5 million in borrowings outstanding from FHLBank Pittsburgh. We have access to total FHLBank advances of up to approximately $605.1 million.

At December 31, 2016, we had $131.9 million in loan commitments outstanding, which included, in part, $40.3 million in undisbursed construction loans and land development loans, $33.9 million in unused home equity lines of credit, $53.8 million in commercial lines of credit and commitments to originate commercial loans, $3.1 million in performance standby letters of credit and $770,000 in other unused commitments which are primarily to originate residential mortgage loans and multifamily loans. Certificates of deposit due within one year of December 31, 2016 totaled $239.2 million, or 49.3% of certificates of deposit. If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before December 31, 2017. We believe, however, based on past experience that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

As reported in the Consolidated Statements of Cash Flows, our cash flows are classified for financial reporting purposes as operating, investing or financing cash flows. Net cash provided by operating activities was $5.4 million and $3.4 million for the three months ended December 31, 2016 and 2015, respectively. These amounts differ from our net income because of a variety of cash receipts and disbursements that did not affect net income for the respective periods. Net cash used for investing activities was ($19.5) million and ($1.7) million for the three months ended December 31, 2016 and 2015, respectively, principally reflecting our loan and investment security activities. Deposit and borrowing cash flows have comprised most of our financing activities, which resulted in net cash provided by of $10.3 million and $5.3 million for the three months ended December 31, 2016 and 2015, respectively.

Critical Accounting Policies

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

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

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

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

The analysis of the allowance for loan losses has two components: specific and general allocations. Specific allocations are made for loans that are determined to be impaired. Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. The

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general allocation is determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history. We also analyze historical loss experience, delinquency trends, general economic conditions and geographic and industry concentrations. This analysis establishes factors that are applied to the loan groups to determine the amount of the general allocations. Actual loan losses may be significantly more than the allowance for loan losses we have established which could have a material negative effect on our financial results.

Goodwill and Intangible Assets. Goodwill is not amortized, but it is tested at least annually for impairment in the fourth quarter, or more frequently if indicators of impairment are present. If the estimated current fair value of a reporting unit exceeds its carrying value, no additional testing is required and an impairment loss is not recorded. The Company uses market capitalization and multiples of tangible book value methods to determine the estimated current fair value of its reporting unit. Based on this analysis, no impairment was recorded in 2016 or 2015.

The other intangibles assets are assigned useful lives, which are amortized on an accelerated basis over their weighted-average lives. The Company periodically reviews the intangible assets for impairment as events or changes in circumstances indicate that the carrying amount of such asset may not be recoverable. Based on these reviews, no impairment was recorded in 2016 and 2015.

Derivative Instruments and Hedging Activities. The Company records all derivatives on the balance sheet at fair value.  The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge.  The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.

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

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

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

 

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

 

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

 

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

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

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

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

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

Off-Balance Sheet Arrangements

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

Contractual Obligations

During the first three months of fiscal 2017, the Company’s contractual obligations did not change materially from those discussed in the Company’s Financial Statements for the year ended September 30, 2016.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

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

We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. The net proceeds from the Company’s stock offering increased our capital and provided management with greater

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flexibility to manage our interest rate risk. In particular, management used the majority of the capital we received to increase our interest-earning assets. There have been no material changes in our interest rate risk since September 30, 2016.

Item 4.

Controls and Procedures

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

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

Part II – Other Information

Item 1.

Legal Proceedings

From time to time, the Company or its subsidiaries are engaged in legal proceedings in the ordinary course of business, none of which are currently considered to have a material impact on the Company’s financial position or results of operations, except as previously disclosed in Part I, Item 3 of the Company’s Annual Report on Form 10-K for the year ended September 30, 2016, and as described below.

The Bank was named as a defendant in an action commenced on December 8, 2016 by one plaintiff who will also seek to pursue this action as a class action on behalf of the entire class of people similarly situated. The plaintiff alleges that a bank previously acquired by ESSA Bancorp, Inc., in the process of making loans, received unearned fees and kickbacks in violation of the Real Estate Settlement Procedures Act. The Bank intends to vigorously defend against such allegations. To the extent that pending or threatened litigation could result in exposure to the Bank, the amount of such exposure is not currently estimable.

Item 1A.

Risk Factors

There have been no material changes in the “Risk Factors” as disclosed in the Company’s response to Item 1A in Part 1 of its Annual Report on Form 10-K for the year ended September 30, 2016, filed on December 14, 2016.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3.

Defaults Upon Senior Securities

Not applicable.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

Not applicable.

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Item 6.

Exhibits

The following exhibits are either filed as part of this report or are incorporated herein by reference:

 

3.1

Articles of Incorporation of ESSA Bancorp, Inc.*

 

 

3.2

Bylaws of ESSA Bancorp, Inc.*

 

 

4

Form of Common Stock Certificate of ESSA Bancorp, Inc.*

 

 

31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

32

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

101

Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Statements of Condition; (ii) the Consolidated Statement of Income; (iii) the Consolidated Statement of Changes in Stockholder Equity; the Consolidated Statement of Cash Flows; and (iv) the Notes to Consolidated Financial Statements.

 

*

Incorporated by reference to the Registration Statement on Form S-1 of ESSA Bancorp, Inc. (file no. 333-139157), originally filed with the Securities and Exchange Commission on December 7, 2006.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

ESSA BANCORP, INC,

 

 

Date: February 9, 2017

/s/ Gary S. Olson

 

Gary S. Olson

 

President and Chief Executive Officer

 

 

Date: February 9, 2017

/s/ Allan A. Muto

 

Allan A. Muto

 

Executive Vice President and Chief Financial Officer

 

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