UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant To Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2007
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 (I.R.S. Employer
incorporation or organization) Identification Number)
200 Palmer Street, Stroudsburg, Pennsylvania 18360
-------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(570) 421-0531
--------------
(Registrant's telephone number)
N/A
---
(Former name or former address, if changed since last report)
----------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days. YES [ X ] NO [ ].
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [ X ]
As of August 14, 2007 there were 16,980,900 shares of the Registrant's
common stock, par value $0.01 per share, outstanding.
1
ESSA Bancorp, Inc.
FORM 10-Q
Index
Page
--------
Part I. Financial Information
Item 1. Financial Statements (unaudited) 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
Item 4. Controls and Procedures 25
Part II. Other Information
Item 1. Legal Proceedings 25
Item 1A. Risk Factors 25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 25
Item 3. Defaults upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits 25
Signature Page 27
2
Part I. Financial Information
Item 1. Financial Statements
ESSA BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
June 30, September 30,
2007 2006
------------------ -------------------
(dollars in thousands)
ASSETS
Cash and due from banks..............................................................$ 15,033 $ 11,677
Interest-bearing deposits with other institutions.................................... 6,074 1,053
------------------ -------------------
-
Total cash and cash equivalents................................................ 21,107 12,730
Investment securities available for sale............................................. 203,185 89,122
Investment securities held to maturity (market value of $17,250 and $19,193)......... 17,657 19,715
Loans receivable (net of allowance for loan losses of $4,116 and $3,855)............. 599,656 556,677
Federal Home Loan Bank stock......................................................... 15,231 13,675
Premises and equipment............................................................... 11,391 11,447
Bank-owned life insurance............................................................ 13,786 13,376
Other assets......................................................................... 10,242 9,054
------------------ -------------------
TOTAL ASSETS...................................................................$ 892,255 $ 725,796
================== ==================
=
LIABILITIES
Deposits.............................................................................$ 397,480 $ 402,153
Short-term borrowings................................................................ 33,031 35,299
Other borrowings..................................................................... 248,000 224,000
Advances by borrowers for taxes and insurance........................................ 5,156 2,198
Other liabilities.................................................................... 4,216 3,809
------------------ -------------------
-
TOTAL LIABILITIES.............................................................. 687,883 667,459
------------------ -------------------
-
Commitment and contingencies......................................................... -- --
STOCKHOLDERS' EQUITY
Preferred stock ($.01 par value: 10,000,000 shares authorized, none issued).......... -- --
Common stock ($.01 par value; 40,000,000 shares authorized, 16,980,900 shares issued
and outstanding).................................................................. 170 --
Additional paid in capital........................................................... 166,769 --
Unallocated common stock held by the Employee Stock Ownership Plan................... (13,434) --
Retained earnings.................................................................... 51,682 58,526
Accumulated other comprehensive loss................................................. (815) (189)
------------------ -------------------
-
TOTAL STOCKHOLDERS' EQUITY..................................................... 204,372 58,337
------------------ -------------------
-
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.....................................$ 892,255 $ 725,796
================== ==================
See accompanying notes to the unaudited consolidated financial statements.
3
ESSA BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME (LOSS)
(UNAUDITED)
For the Three Months For the Nine Months
Ended June 30, Ended June 30,
----------------------- --------------------
2007 2006 2007 2007
--------- ------- ------ ------
(dollars in thousands, except per share data)
INTEREST INCOME
Loans receivable................................................................$ 9,041 $ 8051 $ 26,426 $ 23,399
Investment securities:..........................................................
Taxable................................................................... 2,634 954 5,127 2,490
Exempt from federal income tax............................................ 74 71 221 204
Other investment income......................................................... 424 228 1,209 641
--------- -------- ------- -------
Total interest income..................................................... 12,173 9,304 32,983 26,734
--------- -------- ------- -------
INTEREST EXPENSE
Deposits........................................................................ 2,546 2,340 7,912 6,443
Short-term borrowings........................................................... 480 23 1,319 433
Other borrowings................................................................ 2,821 2,530 8,238 6,947
---------- ------- --------- -------
Total interest expense.................................................... 5,847 4,893 17,469 13,823
---------- -------- --------- -------
NET INTEREST INCOME................................................................... 6,326 4,411 15,514 12,911
Provision for loan losses....................................................... 90 75 270 225
---------- -------- --------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES................................... 6,236 4,336 15,244 12,686
---------- -------- --------- -------
NONINTEREST INCOME
Service fees on deposit accounts................................................ 873 933 2,629 2,853
Services charges and fees on loans.............................................. 178 120 434 355
Trust and investment fees....................................................... 195 179 595 498
Gain on sale of loans, net...................................................... -- 7 12 7
Earnings on Bank-owned life insurance........................................... 143 131 410 381
Other........................................................................... 22 25 56 73
---------- -------- ------- -------
Total noninterest income.................................................. 1,411 1,395 4,136 4,167
---------- -------- ------- -------
NONINTEREST EXPENSE
Compensation and employee benefits.............................................. 2,828 2,381 7,995 6,952
Occupancy and equipment......................................................... 690 606 1,951 1,819
Professional fees............................................................... 278 206 586 602
Data processing................................................................. 475 433 1,358 1,341
Advertising..................................................................... 178 135 514 446
Contribution to charitable foundation........................................... 12,693 97 12,693 303
Other........................................................................... 426 394 1,206 1,164
---------- -------- --------- -------
Total noninterest expense................................................. 17,568 4,252 26,303 12,627
---------- -------- --------- -------
Income (loss) before income tax expense (benefit)..................................... (9,921) 1,479 (6,923) 4,226
Income tax expense (benefit).......................................................... (915) 457 (79) 1,276
---------- ------- --------- -------
NET INCOME (LOSS).....................................................................$ (9,006) $ 1,022 $ (6,844) $ 2,950
=========== ========== =========== =========
Basic loss per common share, from date of initial stock offering:.....................$ (0.27) $ - $ (0.27) $ -
============ ===========
See accompanying notes to the unaudited consolidated financial statements.
4
ESSA BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
Nine Months Ended June 30, 2007
(dollars in thousands)
Additional Unallocated Accumulated Other
Common Paid In Common Stock Retained Comprehensive Total Comprehensive
Stock Capital Held by the Earnings Loss Stockholders' Loss
---- ------ ESOP ------- ---- Equity ----
---- ------
Balance, September 30, 2006
$- $- $- $58,526 $ (189) $58,337
Net loss.................. ( 6,844) - (6,844) (6,844)
Other comprehensive loss:
Unrealized loss on
securities available for
sale, net of tax expense
benefit of $322......... (626) (626) (626)
Sale of 16,980,900 shares of
common stock in the
initial public offering.. 170 166,745 (13,585) 153,330
Allocation of ESOP stock.. 24 151 175
----------- -------------- -------------- ----------- ------------------- --------------- -----------
----------- -------------- -------------- ----------- ------------------- --------------- -----------
Comprehensive loss........ $(7,470)
========
Balance, June 30, 2007.... $170 $166,769 $ (13,434) $51,682 $(815) $204,372
---- -------- ---------- ------- ------ ========
See accompanying notes to the unaudited consolidated financial statements.
5
ESSA BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Nine Months
Ended June 30,
---------------------
2007 2006
-------- ---------
(dollars in thousands)
OPERATING ACTIVITIES
Net income (loss)...............................................................................$ (6,844) $ 2,950
Adjustments to reconcile net income (loss) to net cash provided by (used for)
operating activities:........
Provision for loan losses................................................................. 270 225
Provision for depreciation and amortization............................................... 873 827
Accretion of discounts and premiums....................................................... (217) 12
Amortization of unallocated common stock held by ESOP..................................... 175 -
Gain on sale of loans, net................................................................ (12) (7)
Origination of loans held for sale........................................................ (899) -
Proceeds from sale of loans............................................................... 911 -
Increase in accrued interest receivable................................................... (1,528) (335)
Increase (decrease) in accrued interest payable........................................... (38) 399
Earnings on Bank-owned life insurance..................................................... (410) (381)
Deferred federal income taxes (benefit)................................................... (2,276) (293)
Other, net................................................................................ 3,148 (490)
-------- ------
Net cash provided by (used for) operating activities...................................... (6,577) 2,907
-------- ------
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from principal repayments and maturities......................................... 36,771 19,907
Purchases.................................................................................(151,656) (37,790)
Investment securities held to maturity:.........................................................
Proceeds from principal repayments and maturities......................................... 2,046 2,916
Purchases................................................................................. 0 (1,988)
Increase in loans receivable, net............................................................... (43,146) (32,427)
Proceeds from the sale of loans................................................................. - 340
Redemption of FHLB stock........................................................................ 1,622 1,489
Purchase of FHLB stock.......................................................................... (3,178) (2,665)
Purchase of premises, equipment, and software................................................... (852) (1,046)
--------- --------
Net cash used for investing activities....................................................(158,393) (51,264)
--------- --------
FINANCING ACTIVITIES
Decrease (increase) in deposits, net............................................................ (4,673) 26,368
Net decrease in short-term borrowings........................................................... (2,268) (9,741)
Proceeds from long-term FHLB borrowings......................................................... 36,000 31,000
Repayment of long-term FHLB borrowings.......................................................... (12,000) (8,000)
Increase (decrease) in advances by borrowers for taxes and insurance............................ 2,958 3,178
Proceeds from the issuance of common stock...................................................... 153,330 -
--------- --------
Net cash provided by financing activities................................................. 173,347 42,805
--------- --------
Increase (decrease) in cash and cash equivalents.......................................... 8,377 (5,552)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD...................................................... 12,730 20,290
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................................................$ 21,107 $ 14,738
--------- ---------
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid:......................................................................................
Interest..................................................................................$ 17,507 $ 13,424
Income taxes.............................................................................. 1,140 1,225
See accompanying notes to the unaudited consolidated financial statements.
6
ESSA BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(unaudited)
1. Nature of Operations and Basis of Presentation
The unaudited, consolidated financial statements include the accounts of
ESSA Bancorp, Inc. (the "Company"), ESSA Bank & Trust (the "Bank"), and the
Bank's wholly owned subsidiaries, ESSACOR Inc. and Pocono Investment Company.
The Bank is a Pennsylvania chartered savings association located in Stroudsburg,
Pennsylvania. The Bank's primary business consists of the taking of deposits and
granting of loans to customers generally in Monroe and Northampton counties,
Pennsylvania. The Bank is subject to regulation and supervision by the
Pennsylvania Department of Banking and the Office of Thrift Supervision (the
"OTS").
ESSACOR, Inc. is a Pennsylvania corporation that is currently inactive.
Pocono Investment Company is a Delaware corporation formed as an investment
company subsidiary to hold and manage certain investments of ESSA Bank & Trust,
including certain intellectual property. All intercompany 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- and nine-month periods ended June 30, 2007 are
not necessarily indicative of the results that may be expected for the year
ending September 30, 2007.
2. Completion of Initial Public Offering
On July 25, 2006, the ESSA Bank & Trust's Board of Directors adopted a Plan
of Conversion (the "Plan") pursuant to which the Bank converted to a
Pennsylvania chartered stock association and formed ESSA Bancorp, Inc., a
Pennsylvania chartered company (the "Company"). On December 7, 2006 the Company
filed a Registration Statement on Form S-1 with the Securities and Exchange
Commission (File No. 333-139157) with respect to the shares to be offered and
sold pursuant to the Plan. The Company registered for offer and sale 16,980,900
shares of common stock, par value $0.01 per share, at a sales price of $10.00
per share.
The stock offering was consummated on April 3, 2007, resulting in gross
proceeds of $158.7 million, through the sale of 15,870,000 shares at a price of
$10.00 per share. The Company also contributed 1,110,900 shares of its common
stock to the ESSA Bank & Trust Foundation and $1.6 million in cash. Expenses
related to the offering were approximately $2.9 million which resulted in net
proceeds of approximately $155.9 million prior to the contribution to the ESSA
Bank & Trust Foundation.
The Company lent approximately $13.6 million to the Bank's Employee Stock
Ownership Plan. The Company retained approximately $64.3 million of the net
proceeds of the offering prior to the contribution to the ESSA Bank & Trust
Foundation, and the remainder of the net proceeds were contributed to the Bank.
3. Earnings per Share
Basic loss per common share has been calculated based on a net loss of $4.2
million from April 3, 2007 to June 30, 2007 (the period during which the common
stock was outstanding), and weighted average common shares of 15,627,802
outstanding for the period. The number of shares outstanding for this purpose
excludes unallocated ESOP shares.
4. Use of Estimates in the Preparation of Financial Statements
The accounting principles followed by the Bank and its subsidiaries and the
methods of applying these principles conform to U.S. generally accepted
accounting principles 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
7
liabilities as of the balance sheet date and related revenues and expenses for
the period. Actual results could differ significantly from those estimates.
5. Comprehensive Income (Loss)
The components of comprehensive income (loss) consist exclusively of
unrealized gains and losses on available for sale securities. For the nine
months ended June 30, 2007, this activity is shown under the heading
Comprehensive Income (Loss) as presented in the Consolidated Statement of
Changes in Stockholders' Equity (Unaudited). For the three months ended June 30,
2007, comprehensive (loss) totaled $9.9 million. For the three and nine months
ended June 30, 2006, comprehensive income totaled $678,000 and $2.4 million,
respectively.
6. Recent Accounting Pronouncements
In September 2006, the FASB issued FAS No. 157, Fair Value Measurements,
which provides enhanced guidance for using fair value to measure assets and
liabilities. The standard applies whenever other standards require or permit
assets or liabilities to be measured at fair value. The Standard does not expand
the use of fair value in any new circumstances. FAS No. 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007
and interim periods within those fiscal years. Early adoption is permitted. The
Company is currently evaluating the impact the adoption of the standard will
have on the Company's financial position and results of operations.
In September 2006, the FASB issued FAS No. 158, Employers' Accounting for
Defined Benefit Pension and Other Post Retirement Plans, an amendment of FASB
Statements No. 87, 88, 106 and 132(R). FAS No. 158 requires that a company
recognize the overfunded or underfunded status of its defined benefit post
retirement plans (other than multiemployer plans) as an asset or liability in
its statement of financial position and that it recognize changes in the funded
status in the year in which the changes occur through other comprehensive
income. FAS No. 158 also requires the measurement of defined benefit plan assets
and obligations as of the fiscal year end, in addition to footnote disclosures.
FAS No. 158 is effective for fiscal years ending after December 15, 2006. The
Company is currently evaluating the impact the adoption of the standard will
have on the Company's financial position.
In February 2007, the FASB issued FAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115, which provides all entities with an option to report selected
financial assets and liabilities at fair value. The objective of the FAS No. 159
is to improve financial reporting by providing entities with the opportunity to
mitigate volatility in earnings caused by measuring related assets and
liabilities differently without having to apply the complex provisions of hedge
accounting. FAS No. 159 is effective as of the beginning of an entity's first
fiscal year beginning after November 15, 2007. Early adoption is permitted as of
the beginning of a fiscal year that begins on or before November 15, 2007
provided the entity also elects to apply the provisions of FAS No. 157, Fair
Value Measurements. The adoption of this standard is not expected to have a
material effect on the Company's results of operations or financial position.
In June 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"),
Accounting for Uncertainty in Income Taxes. FIN 48 is an interpretation of FAS
No. 109, Accounting for Income Taxes, and it seeks to reduce the diversity in
practice associated with certain aspects of measurement and recognition in
accounting for income taxes. In addition, FIN No. 48 requires expanded
disclosure with respect to the uncertainty in income taxes and is effective for
fiscal years beginning after December 15, 2006. The Company is currently
evaluating the impact the adoption of the standard will have on the Company's
results of operations.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108 ("SAB
108"), Considering the Effects of Prior Year Misstatements When Quantifying
Misstatements in Current Year Financial Statements, providing guidance on
quantifying financial statement misstatement and implementation when first
applying this guidance. Under SAB No. 108, companies should evaluate a
8
misstatement based on its impact on the current year income statement, as well
as the cumulative effect of correcting such misstatements that existed in prior
years existing in the current year's ending balance sheet. SAB 108 is effective
for fiscal years ending after November 15, 2006. The Company is currently
evaluating the impact the adoption of the standard will have on the Company's
results of operations.
In September 2006, the FASB reached consensus on the guidance provided by
Emerging Issues Task Force Issue 06-4 ("EITF 06-4"), Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life
Insurance Arrangements. The guidance is applicable to endorsement split-dollar
life insurance arrangements, whereby the employer owns and controls the
insurance policy, that are associated with a postretirement benefit. EITF 06-4
requires that for a split-dollar life insurance arrangement within the scope of
the Issue, an employer should recognize a liability for future benefits in
accordance with FAS No. 106 (if, in substance, a postretirement benefit plan
exists) or Accounting Principles Board Opinion No. 12 (if the arrangement is, in
substance, an individual deferred compensation contract) based on the
substantive agreement with the employee. EITF 06-4 is effective for fiscal years
beginning after December 15, 2007. The Company is currently evaluating the
impact the adoption of the EITF will have on the Company's results of operations
or financial condition.
In September 2006, the FASB reached consensus on the guidance provided by
Emerging Issues Task Force Issue 06-5("EITF 06-5"), Accounting for Purchases of
Life Insurance--Determining the Amount That Could Be Realized in Accordance with
FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance.
EITF 06-5 states that a policyholder should consider any additional amounts
included in the contractual terms of the insurance policy other than the cash
surrender value in determining the amount that could be realized under the
insurance contract. EITF 06-5 also states that a policyholder should determine
the amount that could be realized under the life insurance contract assuming the
surrender of an individual-life by individual-life policy (or certificate by
certificate in a group policy). EITF 06-5 is effective for fiscal years
beginning after December 15, 2006. The Company is currently evaluating the
impact the adoption of the standard will have on the Company's results of
operations or financial condition.
In March 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-10
("EITF 06-10"), Accounting for Collateral Assignment Split-Dollar Life Insurance
Agreements. EITF 06-10 provides guidance for determining a liability for the
postretirement benefit obligation as well as recognition and measurement of the
associated asset on the basis of the terms of the collateral assignment
agreement. EITF 06-10 is effective for fiscal years beginning after December 15,
2007. The Company is currently evaluating the impact the adoption of the EITF
will have on the Company's results of operations or financial condition.
In June 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-11
("EITF 06-11"), Accounting for Income Tax Benefits of Dividends on Share-Based
Payment Awards. EITF 06-11 applies to share-based payment arrangements with
dividend protection features that entitle employees to receive (a) dividends on
equity-classified nonvested shares, (b) dividend equivalents on
equity-classified nonvested share units, or (c) payments equal to the dividends
paid on the underlying shares while an equity-classified share option is
outstanding, when those dividends or dividend equivalents are charged to
retained earnings under FAS No. 123R, Share-Based Payment, and result in an
income tax deduction for the employer. A consensus was reached that a realized
income tax benefit from dividends or dividend equivalents that are charged to
retained earnings and are paid to employees for equity-classified nonvested
equity shares, nonvested equity share units, and outstanding equity share
options should be recognized as an increase in additional paid-in capital. EITF
06-11 is effective for fiscal years beginning after December 15, 2007, and
interim periods within those fiscal years. The Company is currently evaluating
the impact the adoption of the EITF will have on the Company's financial
condition.
9
7. Investment Securities
The amortized cost and estimated market value of investment securities
available for sale and held to maturity are summarized as follows (in
thousands):
June 30, 2007
-------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ------------ ----------- ----------
Available for Sale
Fannie Mae................................................................$ 21,189 $ 29 $ (176) $ 21,042
Freddie Mac............................................................... 70,145 15 (1,052) 69,108
Governmental National Mortgage
Association securities.............................................. 15,797 70 (119) 15,748
------------- ---------- ---------- ----------
Total mortgage-backed securities 107,131 114 (1,347) 105,898
Obligations of states and political subdivisions.......................... 7,173 131 (70) 7,234
U.S. government agency securities......................................... 89,225 36 (177) 89,084
------------- --------- ---------- ---------
Total debt securities............................................... 203,529 281 (1,594) 202,216
Equity securities......................................................... 882 100 (14) 969
------------- -------- ---------- ---------
Total.........................................................$ 204,411 $ 381 $ (1,608) $ 203,185
============= ============= ============== ============
=
Held to Maturity
Fannie Mae................................................................$ 8,055 $ 2 $ (257) $ 7,800
Freddie Mac............................................................... 4,871 -- (112) 4,759
------------- ------------- ------------- ------------
Total mortgage-backed securities.................................... 12,926 2 (369) 12,559
U.S. government agency securities......................................... 4,731 -- (40) 4,691
------------- ------------- ------------- ------------
Total.........................................................$ 17,657 $ 2 $ (409) $ 17,250
============= ============= ============= =============
=
September 30, 2006
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ------------ ----------- ----------
Available for Sale
Fannie Mae..................................................................$ 6,988 $ 33 $ (31) $ 6,990
Freddie Mac................................................................. 22,836 3 (523) 22,316
Governmental National Mortgage
Association securities................................................ 10,503 98 -- 0,601
------------ ------------ ------------- -----------
Total mortgage-backed securities................................ 40,327 134 (554) 39,907
Obligations of states and political subdivisions............................ 6,240 225 -- 6,465
U.S. government agency securities........................................... 41,960 35 (180) 41,815
------------ ------------ ------------- -----------
Total debt securities................................................. 88,527 394 (734) 88,187
Equity securities........................................................... 882 64 (11) 9
------------ ----------- ------------- -----------
Total.................................................................$ 89,409 $ 458 $ (745) $ 89,122
============ =========== ============= ===========
Held to Maturity
Fannie Mae..................................................................$ 9,263 $ 4 $ (309) $ 8,958
Freddie Mac................................................................. 5,722 -- (168) 5,554
------------
Total mortgage-backed securities...................................... 14,985 4 (477) 14,512
U.S. government agency securities........................................... 4,730 -- (49) 4,681
------------
Total...........................................................$ 19,715 $ 4 $ (526) $ 19,193
============ ============ ============ ==========
10
The amortized cost and estimated market value of debt securities at June
30, 2007, 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 Held To
Sale Maturity
-------------------------- ----------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
------------- ------------- --------------- ------------
Due in one year or less....................................................$ 74,696 $ 74,517 $ 2,735 $ 2,719
Due after one year through five years...................................... 23,230 22,829 8,292 8,115
Due after five years through ten years..................................... 2,000 1,970 2,825 2,749
Due after ten years........................................................ 104,485 103,869 3,805 3,667
------------- ------------ -------------- ------------
Total................................................................$ 204,411 $ 203,185 $ 17,657 $ 17,250
============= =========== ============== ============
The Bank had no sale of investment securities for the nine months ended
June 30, 2007 and 2006.
8. Loans Receivable, Net and Allowance for Loan Losses
Loans receivable consist of the following (in thousands):
June 30 September
2007 30, 2006
-------------- ---------
Real Estate Loans:
Residential.............................................................................$ 484,310 $ 452,406
Construction........................................................................... 6,705 5,943
Commercial............................................................................ 54,778 47,479
Commercial...................................................................................... 7,281 6,159
Home equity loans and lines of credit........................................................... 47,811 46,796
Other........................................................................................... 4,600 4,247
----------------------------
605,485 563,030
Less deferred loan fees......................................................................... 1,713 2,498
---------------------------
603,772 560,532
Less allowance for loan losses.................................................................. 4,116 3,855
---------------------------
Net loans...........................................................................$ 599,656 $ 556,677
============ ============
The activity in the allowance for loan losses is summarized as follows
(in thousands):
Three Months Ended Nine Months Ended
June 30, 2007 June 30, 2007
------------- -------------
2007 2006 2007 2006
------ ------ ---- ----
Balance, beginning of period................ $ 4,028 $ 3,705 $ 3,855 $ 3,563
Add
Provision charged to operations........ 90 75 270 225
Loan recoveries........................ - - 1 1
------------ ------------- ------------- -----------
90 75 271 226
Less loans charged off...................... 2 - 10 9
------------ ------------- ------------- -----------
Balance, end of period...................... $ 4,116 $ 3,780 $ 4,116 $ 3,780
============ ============= ============= ===========
11
9. Deposits
Deposits consist of the following major classifications (in
thousands):
June 30, September
2007 30, 2006
------------- -----------
Non-interest bearing demand accounts........................................................ $ 28,418 $ 23,675
NOW accounts................................................................................ 63,303 59,480
Money market accounts....................................................................... 31,645 33,255
Savings and club accounts................................................................... 72,240 76,166
Certificates of deposit..................................................................... 201,874 209,577
=========================
Total....................................................................................... $ 397,480 $402,153
=========================
10. Net Periodic Benefit Cost-Defined Benefit Plan
For a detailed disclosure on the Bank's pension and employee benefits
plans, please refer to Note 13 of the Bank's Consolidated Financial Statements
for the year ended September 30, 2006 included in the Registration Statement on
Form S-1.
The following table comprises the components of net periodic benefit cost
for the periods ended (in thousands):
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------- --------------------
2007 2006 2007 2006
------------ ----------- --------- ---------
Service Cost.........................................................................$ 154 $ 134 $ 462 $ 402
Interest Cost........................................................................ 120 99 360 297
Expected return on plan assets....................................................... (111) (97) (333) (291)
Amortization of prior service cost................................................... 2 2 6 6
Amortization of unrecognized loss.................................................... 46 31 138 92
Amortization of transition obligation................................................ -- -- -- 1
---------- ----------- ---------- ---------
Net periodic benefit cost............................................................$ 211 $ 169 $ 633 $ 507
=========== =========== ========== =========
The Bank expects to contribute $1.3 million to its pension plan in 2007.
11. Employee Stock Ownership Plan
The Company has an ESOP for the benefit of employees who meet the eligibility
requirements. The ESOP trust purchased 1,358,472 shares of common stock in the
initial public offering with proceeds from a loan with the Company. The Bank
will make cash contributions to the ESOP on an annual basis sufficient to enable
the ESOP to make the required loan payments to the Company. The loan bears an
interest rate of 8.25% with principal and interest payable in annual
installments over thirty years. The loan is secured by the shares of the stock
purchased.
As the debt is repaid, shares are released from the collateral and allocated to
qualified employees based on the proportion of debt service paid during the
year. Accordingly, the shares pledged as collateral are reported as unallocated
common stock held by the ESOP in the Consolidated Balance Sheet. As shares are
released from collateral, the Company reports compensation expense equal to the
current market price of the shares, and the shares become outstanding for
earnings-per-share computations.
12
The following table presents the components of the ESOP shares:
June 30, 2007
---------------
Shares released for allocation................................................. 15,094
Unreleased shares.............................................................. 1,358,472
---------
Total ESOP shares.............................................................. 1,343,378
=========
Fair value of unreleased shares................................................ $15,011,116
===========
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:
o statements of our goals, intentions and expectations;
o statements regarding our business plans and prospects and growth and
operating strategies;
o statements regarding the asset quality of our loan and investment
portfolios; and
o estimates of our risks and future costs and benefits.
These forward-looking statements are subject to significant risks,
assumptions and uncertainties, including, among other things, the following
important factors that could affect the actual outcome of future events:
o significantly increased competition among depository and other
financial institutions;
o inflation and changes in the interest rate environment that reduce
our margins or reduce the fair value of financial instruments;
o general economic conditions, either nationally or in our market
areas, that are worse than expected;
o adverse changes in the securities markets;
o legislative or regulatory changes that adversely affect our
business;
o 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;
o changes in consumer spending, borrowing and savings habits;
o changes in accounting policies and practices, as may be adopted by
the bank regulatory agencies and the Financial Accounting Standards
Board; and
o changes in our organization, compensation and benefit plans.
Overview
The Company consummated its initial stock offering on April 3, 2007
with the sale of 15,870,000 shares of common stock. The Company also
contributed 1,110,900 shares of the Company's outstanding common
stock, and contributed $1.6 million in cash, to a charitable
foundation established by the Bank. Net proceeds of the offering were
approximately $155.9 million prior to the contribution to ESSA Bank &
Trust Foundation.
Comparison of Financial Condition at June 30, 2007 and September 30, 2006
Total Assets. Total assets increased by $166.5 million, or 22.9%, to $892.3
million at June 30, 2007 from $725.8 million at September 30, 2006. This
increase was primarily due to increases in cash and due from banks,
interest-bearing deposits with other institutions, investment securities
available for sale and loans receivable.
Cash and Due from Banks. Cash and due from banks increased $3.4 million, or
28.7%, to $15.0 million at June 30, 2007 from $11.7 million at September 30,
13
2006. The increase was primarily due to the fact that June 30, 2007 fell on a
weekend which contributed to an increase in the Bank's Federal Reserve Bank
balance at June 30, 2007.
Interest-Bearing Deposits with Other Institutions. Interest-bearing
deposits with other institutions increased $5.0 million to $6.1 million at June
30, 2007 from $1.1 million at September 30, 2006. As noted earlier, the
Company's initial stock offering was consummated on April 3, 2007. Approximately
$5.0 million of the net proceeds received from the stock offering were deposited
by the Company into its Federal Home Loan Bank of Pittsburgh demand deposit
account.
Investment Securities Available for Sale. Investment securities available
for sale increased $114.1 million, or 128.0% to $203.2 million at June 30, 2007,
from $89.1 million at September 30, 2006. This increase was due almost
exclusively to the investment of the majority of the net proceeds from the stock
offering into investment grade debt obligations and mortgage-backed securities
issued by United States sponsored agencies or entities.
Net Loans. Net loans increased $43.0 million, or 7.7%, to $599.7 million at
June 30, 2007 from $556.7 million at September 30, 2006. During this period
residential, construction and commercial real estate loans outstanding increased
by $31.9 million to $484.3 million, $762,000 to $6.7 million and $7.3 million to
$54.8 million, respectively. Commercial loans outstanding increased by $1.1
million to $7.3 million. Home equity loans and lines of credit outstanding
increased by $1.0 million to $47.8 million and other loans outstanding increased
by $353,000 to $4.6 million.
Deposits. Deposits decreased $4.7 million, or 1.2%, to $397.5 million at
June 30, 2007 from $402.2 million at September 30, 2006. At June 30, 2007
compared to September 30, 2006 non-interest bearing demand accounts increased
$4.7 million to $28.4 million and now accounts increased $3.8 million to $63.3
million. These increases were more than offset by decreases in money market
accounts of $1.6 million to $31.6 million, savings and club accounts of $3.9
million to $72.2 million and certificates of deposit of $7.7 million to $201.9
million. At June 30, 2007, the Bank had $21.7 million of brokered certificates
of deposit outstanding.
Borrowed Funds. Funds borrowed from the Federal Home Loan Bank of
Pittsburgh increased by $21.7 million, or 8.4%, to $281.0 million at June 30,
2007, from $259.3 million at September 30, 2006. This increase is despite the
use of approximately $29.7 million of the net proceeds from the stock offering
to pay down shorter term borrowings. The increase in borrowed funds was used
primarily to fund additional loan growth.
Stockholders' Equity. Stockholders' equity increased by $146.0 million, to
$204.4 million at June 30, 2007 from $58.3 million at September 30, 2006. The
net increase in stockholders' equity from the stock offering, after deducting
the unallocated stock held by the ESOP, was $153.5 million. This increase was
offset, in part, by the Company's net operating loss of $6.8 million for the
nine months ended June 30, 2007 and to a lesser degree by an increase in
unrealized losses on securities available for sale, net of taxes, of $600,000.
Average Balance Sheets for the Three and Nine Months Ended June 30, 2007
and 2006
The following tables set forth average balance sheets, average yields and
costs, and certain other information for the periods indicated. All average
balances are monthly 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.
14
For the Three Months Ended June 30,
-----------------------------------------------------------------------------------
2007 2006
------------------------------------- --------------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost
-----------------------------------------------------------------------------------
(Dollars in Thousands)
Interest-earning assets:
Loans (1)............... $ 92,083 $ 9,041 6.12% $ 538,487 $ 8,051 6.00%
Investment securities...
Taxable (2).......... 90,777 1,168 5.17% 46,011 489 4.26%
Exempt from federal
income tax(2) (3).... 6,45 73 6.88% 6,437 79 7.46%
---------- --------- ------ --------- --------- ------
Total investment
securities.............. 97,229 1,241 5.28% 52,448 568 4.66%
Mortgage-backed securities 117,545 1,467 5.01% 41,615 457 4.40%
Federal Home Loan Bank
stock................. 14,601 208 5.71% 12,220 161 5.28%
Other................... 16,498 216 5.23% 5,552 67 4.84%
---------- --------- ------- --------- --------- ------
Total interest-earning
assets............. 837,956 12,173 5.84% 650,322 9,304 5.76%
Allowance for loan
losses.................. (4,059) (3,731)
Noninterest-earning
assets.................. 51,115 41,634
---------- ---------
Total assets......... $ 885,012 $ 688,225
========= =========
Interest-bearing
liabilities:
NOW accounts............ $63,173 12 0.08% $ 61,507 9 0.06%
Money market accounts... 31,826 230 2.90% 30,098 176 2.35%
Savings and club
accounts................ 73,153 75 0.41% 79,816 95 0.48%
Certificates of
deposit................. 199,983 2,229 4.47% 203,456 2,060 4.06%
Borrowed funds.......... 274,615 3,301 4.82% 227,649 2,553 4.50%
--------- --------- ------ --------- --------- ------
Total interest-bearing
liabilities........ 642,750 5,847 3.65% 602,526 4,893 3.26%
Non-interest bearing
NOW accounts............. 32,773 20,761
Noninterest-bearing
liabilities........... 8,511 7,731
---------- ---------
Total liabilities.. 684,034 631,018
Equity.................. 200,978 57,207
--------- ---------
Total liabilities
and equity........... $ 885,012 $ 688,225
========= =========
Net interest income..... $ 6,326 $ 4,411
========= =========
15
For the Three Months Ended June 30,
-----------------------------------------------------------------------------------
2007 2006
------------------------------------- --------------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost
-----------------------------------------------------------------------------------
(Dollars in Thousands)
Interest rate spread.... 2.19% 2.50%
Net interest-earning
assets.................. $ 195,206 $ 47,796
========= =========
Net interest margin(4).. 3.03% 2.72%
Average interest-earning
assets to average
interest-bearing
liabilities.......... 130.37% 107.69%
----------------------------
(1) Non-accruing loans are included in the outstanding loan balances. (
2) Held to maturity securities are reported at amortized cost. 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.
16
For the Nine Months Ended June 30,
--------------------------------------------------------------------------------------------------
2007 2006
------------------------------------------------- -----------------------------------------------
Interest Interest
Average Income/ Average Income/
Balance Expense Yield/Cost Balance Expense Yield/ Cost
----------- ---------------- ----------------- --------------- -------------- ---------------
(Dollars in Thousands)
Interest-earning assets:
Loans(1)................ $ 578,646 $ 26,426 6.11% $ 527,567 $ 23,399 5.93%
Investment securities...
Taxable(2)........... 56,399 2,065 4.90% 43,151 1,298 4.02%
Exempt from federal
income tax(2)(3)..... 6,441 219 6.89% 5,733 213 7.53%
----- --- ---- ----- --- ----
Total investment
securities.............. 62,840 2,284 5.10% 48,884 1,511 4.43%
Mortgage-backed securities 84,181 3,064 4.87% 37,763 1,183 4.19%
Federal Home Loan Bank
stock................. 14,226 576 5.41% 11,875 352 3.96%
Other................... 15,992 633 5.29% 8,930 289 4.33%
------ --- ----- ----- --- ----
Total interest-earning
assets............. 755,885 32,983 5.85% 635,019 26,734 5.65%
Allowance for loan losses (3,973) (3,657)
Noninterest-earning assets 47,591 41,012
------ ------
Total assets......... $ 799,503 $ 672,374
======== =======
Interest-bearing
liabilities:
NOW accounts............ $ 61,342 32 0.07% $ 60,820 34 0.07%
Money market accounts... 34,699 763 2.94% 31,267 465 1.99%
Savings and club accounts 77,612 246 0.42% 80,376 274 0.46%
Certificates of deposit. 206,392 6,871 4.45% 192,665 5,670 3.93%
Borrowed funds.......... 266,777 9,557 4.79% 223,925 7,380 4.41%
------- ----- ---- ------- ----- -----
Total interest-bearing
liabilities........ 646,822 17,469 3.61% 589,053 13,823 3.14%
Non-interest bearing NOW
accounts.............. 38,088 20,034
Noninterest-bearing
liabilities........... 7,529 6,935
----- -----
Total liabilities.. 692,439 616,022
Equity.................. 107,064 56,352
------- ------
Total liabilities and
equity............. $ 799,503 $ 672,374
========= =========
17
For the Nine Months Ended June 30,
--------------------------------------------------------------------------------------------------
2007 2006
------------------------------------------------- -----------------------------------------------
Interest Interest
Average Income/ Average Income/
Balance Expense Yield/Cost Balance Expense Yield/ Cost
----------- ---------------- ----------------- --------------- -------------- ---------------
Net interest income..... $ 15,514 $ 12,911
========= =========
Interest rate spread.... 2.24% 2.51%
Net interest-earning
assets.................. $ 109,063 $ 45,966
========= =========
Net interest margin(4).. 2.74% 2.72%
Average interest-earning
assets to average
interest-bearing
liabilities.......... 116.86% 107.80%
----------------------------
(1) Non-accruing loans are included in the outstanding loan balances.
(2) Held to maturity securities are reported at amortized cost. 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.
18
Comparison of Operating Results for the Three Months Ended June 30, 2007 and
June 30, 2006
Net Income. Net income decreased $10.0 million to a net loss of $9.0
million for the three months ended June 30, 2007 compared to net income of $1.0
million for the comparable period in 2006. The primary reason for this decrease
was a $12.7 million pre-tax charitable contribution to the ESSA Bank & Trust
Foundation. The contribution was made in conjunction with the stock offering and
was detailed in the Company's prospectus.
Net Interest Income. Net interest income increased by $1.9 million, or
43.4%, to $6.3 million for the three months ended June 30, 2007 from $4.4
million for the comparable 2006 period. The increase was primarily attributable
to an increase in net average interest earnings assets of $147.4 million offset
by a 31 basis point decrease in the interest rate spread to 2.19% for the three
months ended June 30, 2007 from 2.50% for the comparable 2006 period.
Interest Income. Interest income increased $2.9 million, or 30.8%, to $12.2
million for the three months ended June 30, 2007 from $9.3 million for the
comparable 2006 period. The increase resulted from a $187.6 million increase in
average interest-earning assets combined with an eight basis point increase in
the overall yield on interest earning assets to 5.84% for the three months ended
June 30, 2007, from 5.76% for the comparable 2006 period. Loans increased on
average $53.6 million between the two periods along with increases in the
average balance of investment securities of $44.8 million and mortgage-backed
securities of $75.9 million. In addition, average Federal Home Loan Bank stock
increased $2.4 million along with an increase in the average balance of other
interest earning assets of $10.9 million. The primary reason for the increase in
other interest earning assets was funds received for stock orders during the
Company's initial stock offering which was consummated on April 3, 2007. Cash
received during the offering period was held until April 3, 2007 when it was
used to execute stock purchases or refunded to the orderer. While held, this
cash was maintained in a demand account at the Federal Home Loan Bank. The
primary reasons for the increase in investment securities and mortgage-backed
securities was the partial reinvestment of borrowing proceeds into these assets
along with the investment of the majority of the net proceeds from the stock
offering into short-term, investment grade debt and mortgage-backed securities
issued by United States government sponsored agencies or entities.
Interest Expense. Interest expense increased $900,000, or 19.5%, to $5.8
million for the three months ended June 30, 2007 from $4.9 million for the
comparable 2006 period. The increase resulted from a $40.2 million increase in
average interest-bearing liabilities, combined with a 39 basis point increase in
the overall cost of interest bearing liabilities to 3.65% for the three months
ended June 30, 2007 from 3.26% for the comparable 2006 period. Average interest
bearing deposits decreased $6.7 million which was offset by an increase in
average borrowed funds of $50.0 million. The decrease in interest bearing
deposits was due primarily to activity related to the Company's initial stock
offering.
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 $90,000 for the three months ended June 30, 2007 as compared
to $75,000 for the three months ended June 30, 2006. The allowance for loan
losses was $4.1 million, or 0.68% of loans outstanding at June 30, 2007,
compared to $3.8 million, or 0.69% of loans outstanding at June 30, 2006.
Non-interest Income. Non-interest income increased $16,000 or 1.1% to $1.4
million for the three months ended June 30, 2007, from $1.4 million for the
comparable 2006 period. The increase was primarily due to increases in service
charges and fees on loans of $58,000, trust and investment fees of $16,000 and
earnings on Bank-owned life insurance of $12,000 offset, in part, by a decrease
in service fees on deposit accounts of $60,000. The decrease in service fees on
deposit accounts was primarily due to a decrease in non-sufficient fund charges
of $86,000 related to volume.
19
Non-interest Expense. Non-interest expense increased $13.3 million to $17.6
million for the three months ended June 30, 2007 from $4.3 million for the
comparable 2006 period. The primary reason for the increase was the one-time
increase in contribution to charitable foundation expense of $12.6 million for
the three months ended June 30, 2007 compared to the comparable period in 2006.
This increase was the result of the Company's contribution of $12.7 million to
the ESSA Bank & Trust Foundation made in connection with the Company's initial
public stock offering. Excluding the contribution, non-interest expense
increased $620,000 or 14.6% for the three months ended June 30, 2007 compared to
the comparable period in 2006. Increases in compensation and employee benefits
of $447,000, occupancy and equipment of $84,000 and professional fees of $72,000
were the primary reasons for the increases. The increase in compensation and
employee benefits was the result of normal merit increases combined with
increases in board of director fees, incentive accruals and pension and other
benefit costs. The increase in occupancy and equipment costs was due primarily
to increases in lease expense for office buildings, utility and maintenance
costs. The increase in professional fees was due primarily to increased legal
and accounting costs resulting from the Bank's conversion to a stock company.
Income Taxes. Income tax benefit of $915,000 was recognized for the three
months ended June 30, 2007 compared to income tax expense of $457,000 for the
three months ended June 30, 2006. The benefit recognized in the 2007 period was
due to the pre-tax loss of $9.9 million for the quarter, while the expense
recognized in the 2006 period was due to the pre-tax income of $1.5 million for
the quarter. The tax deduction generated by the contribution to the ESSA Bank &
Trust Foundation exceeded the allowable federal income tax deduction limitations
resulting in the establishment of a valuation allowance on the contribution
carry forward and a decreased effective tax rate in the 2007 period.
Comparison of Operating Results for the Nine Months Ended June 30, 2007 and June
30, 2006
Net Income. Net income decreased $9.8 million to a net loss of $6.8 million
for the nine months ended June 30, 2007 compared to net income of $3.0 million
for the comparable period in 2006. The primary reason for this decrease was a
$12.7 million pre-tax charitable contribution to the ESSA Bank & Trust
Foundation.
Net Interest Income. Net interest income increased by $2.6 million, or
20.2%, to $15.5 million for the nine months ended June 30, 2007 from $12.9
million for the comparable 2006 period. The increase was primarily attributable
to an increase in net average interest earnings assets of $63.1 million offset
by a 27 basis point decrease in the interest rate spread to 2.24% for the nine
months ended June 30, 2007 from 2.51% for the comparable 2006 period.
Interest Income. Interest income increased $6.2 million, or 23.4%, to $33.0
million for the nine months ended June 30, 2007 from $26.7 million for the
comparable 2006 period. The increase resulted from a $120.9 million increase in
average interest-earning assets combined with a 20 basis point increase in the
overall yield on interest earning assets to 5.85% for the nine months ended June
30, 2007, from 5.65% for the comparable 2006 period. Loans increased on average
$51.1 million between the two periods along with increases in the average
balance of investment securities, of $14.0 million, and mortgage-backed
securities of $46.4 million. Also, average Federal Home Loan Bank stock
increased $2.4 million along with an increase in the average balance of other
interest earning assets of $7.1 million. The primary reason for the increase in
average other interest earning assets was due to the funds received for stock
orders during the Company's initial stock offering which was consummated on
April 3, 2007. Cash received during the offering period was held until April 3,
2007 when it was used to execute stock purchases or refunded to the orderer.
While held, this cash was maintained in a demand account at the Federal Home
Loan Bank. The primary reasons for the increase in investment securities and
mortgage-backed securities was the partial reinvestment of deposit and borrowing
proceeds into these assets along with the investment of the majority of the net
proceeds from the stock offering into short-term, investment grade debt and
mortgage-backed securities issued by United State government sponsored agencies
or entities.
Interest Expense. Interest expense increased $3.6 million, or 26.4%, to
$17.5 million for the nine months ended June 30, 2007 from $13.8 million for the
comparable 2006 period. The increase resulted from a $57.8 million increase in
20
average interest-bearing liabilities, combined with a 47 basis point increase in
the overall cost of interest bearing liabilities to 3.61% for the nine months
ended June 30, 2007 from 3.14% for the comparable 2006 period. Average interest
bearing deposits increased $14.9 million along with an increase in average
borrowed funds of $42.9 million.
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 $270,000 for the nine months ended June 30, 2007 as compared
to $225,000 for the nine months ended June 30, 2006. The allowance for loan
losses was $4.1 million, or 0.68% of loans outstanding at June 30, 2007,
compared to $3.8 million, or 0.69% of loans outstanding at June 30, 2006.
Non-interest Income. Non-interest income decreased $31,000 or 0.7% to $4.1
million for the nine months ended June 30, 2007, from $4.2 million for the
comparable 2006 period. The decrease was primarily due to a decrease in service
fees on deposit accounts of $224,000 which was partially offset by increases in
trust and investment fees of $97,000, service charges and fees on loans of
$79,000, and earning on bank owned life insurance of $29,000. The decrease in
service fees on deposit accounts was primarily due to a decrease in
non-sufficient fund charges of $221,000 related to volume.
Non-interest Expense. Non-interest expense increased $13.7 million to $26.3
million for the nine months ended June 30, 2007 from $12.6 million for the
comparable 2006 period. The primary reason for the increase was the one-time
increase in contribution to charitable foundation expense of $12.4 million for
the nine months ended June 30, 2007 compared to the comparable period in 2006.
This increase was the result of the Company's contribution of $12.7 million to
the ESSA Bank & Trust Foundation made in connection with the Company's initial
public stock offering. Excluding the contribution, non-interest expense
increased $983,000 or 7.8% for the nine months ended June 30, 2007 compared to
the comparable period in 2006. Increases in compensation and employee benefits
of $1.0 million, occupancy and equipment of $132,000 and advertising of $68,000
were the primary reason for the increases. The increase in compensation and
employee benefits was the result of normal merit increases combined with
increases in board of director fees, incentive accruals and pension and other
benefit costs. The increase in occupancy and equipment costs was due primarily
to increases in lease expenses for office buildings, utility and maintenance
costs. Advertising expense increased as a result of our increased efforts to
maintain and improve our presence in our market area.
Income Taxes. Income tax benefit of $79,000 was recognized for the nine
months ended June 30, 2007 compared to income tax expense of $1.3 million for
the nine months ended June 30, 2006. The benefit recognized in the 2007 period
was due to the pre-tax loss of $6.9 million for the quarter, while the expense
recognized in the 2006 period was due to the pre-tax income of $4.2 million for
the quarter. The tax deduction generated by the contribution to ESSA Bank &
Trust Foundation exceeded the allowable federal income tax deduction limitations
resulting in the establishment of a valuation allowance on the contribution
carry forward and a decreased effective tax rate in the 2007 period.
21
The following table provides information with respect to the Bank's
non-performing assets at the dates indicated. (Dollars in thousands)
June 30, 2007 September 30, 2006
--------------- ------------------
Non-performing assets:
Non-accruing loans ..................................................................$ 943 $ 476
Accruing loans past due 90 days or more.......................................... - -
--------- --------
Total non-performing loans 943 476
Real estate owned................................................................. - -
---------- --------
Total non-performing assets.................................................$ 943 $ 476
=========== =========
Ratio of non-performing loans to total loans............................................... 0.16% 0.08%
Ratio of non-performing loans to total assets.............................................. 0.11% 0.07%
Ratio of non-performing assets to total assets............................................. 0.11% 0.07%
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.
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, and prepayment 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 Federal Home Loan Bank advances. While scheduled principal
repayments on loans and mortgage-backed securities are a relatively predictable
source of funds, deposit flows and loan prepayments are greatly influenced by
market interest rates, economic conditions, and rates offered by our
competition. We set the interest rates on our deposits to maintain a desired
level of total deposits.
A portion of our liquidity consists of cash and cash equivalents and
borrowings, which are a product of our operating, investing and financing
activities. At June 30, 2007, $21.1 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 $77.3
million at June 30, 2007. As of June 30, 2007, we had $281.0 million in
borrowings outstanding from the Federal Home Loan Bank of Pittsburgh and we have
access to additional Federal Home Loan Bank advances of up to approximately
$300.1 million.
At June 30, 2007, we had $60.6 million in loan commitments outstanding,
which included, in part, $19.1 million in undisbursed construction loans, $21.9
million in unused home equity lines of credit, $5.7 million in commercial lines
of credit and $3.7 million to originate primarily multi-family and
nonresidential mortgage loans. Certificates of deposit due within one year of
June 30, 2007 totaled $146.7 million, or 72.7 % 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
22
deposit due on or before September 30, 2007. 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 (used for) operating activities was
($6.5) million and $2.9 million for the nine months ended June 30, 2007 and
2006, 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 in investing activities was $158.4 million
and $51.2 million for the nine months ended June 30, 2007 and 2006,
respectively, principally reflecting our loan and investment security activities
in the respective periods. Investment security cash flows had the most
significant effect, as net cash utilized in purchases amounted to $151.7 million
and $39.8 million for the nine months ended June 30, 2007 and 2006,
respectively. Deposit, borrowing, and stock offering subscription rights cash
flows have comprised most of our financing activities which resulted in net cash
provided of $173.3 million and $42.8 million for the nine months ended June 30,
2007 and 2006, 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
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
23
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.
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 which would adversely affect our operating results. At June 30, 2007 the
Company had a $2.6 million reserve established against its deferred tax asset.
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.
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 nine months of 2007, the Company's contractual obligations
have not changed materially from those discussed in the Company's Financial
Statements for the year ended September 30, 2006.
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 offering will increase our capital and provide management with
greater flexibility to manage our interest rate risk. In particular, management
intends to leverage the capital we receive to increase our interest-earning
assets. There have been no material changes in our interest rate risk since
September 30, 2006.
24
Item 4. Controls and Procedures
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief 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 Exchange Act)
as of the end of the period covered by this report. Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that, as of
the end of the period covered by this report, our disclosure controls and
procedures were effective to ensure that information required to be disclosed in
the reports that the Company files or submits under the Securities Exchange Act
of 1934 is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms.
There were no significant changes made in the Company's internal controls
over financial reporting or in other factors that could significantly affect the
Company's internal controls over financial reporting during the period covered
by this report that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
Part II - Other Information
Item 1. Legal Proceedings
The Company and its subsidiaries are subject to various legal actions
arising in the normal course of business. In the opinion of management, the
resolution of these legal actions is not expected to have a material adverse
effect on the Company's financial condition or results of operations.
Item 1A. Risk Factors
There have been no material changes in the "Risk Factors" disclosed in the
Company's Registration Statement on Form S-1 (Commission File No. 333-139157).
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) There were no sales of unregistered securities during the period
covered by this Report.
(b) The stock offering, which was completed on March 15, 2007, resulted in
gross proceeds of $158.7 million, through the sale of 15,870,000
shares at a price of $10.00 per share. The Company also contributed
1,110,900 shares of its common stock to the ESSA Bank & Trust
Foundation and $1.6 million in cash. Expenses related to the offering
were approximately $2.8 million, including the expenses paid to Ryan,
Beck & Co., Inc. No underwriting discounts, commissions or finders
fees were paid in connection with the offering. Net proceeds of the
offering were approximately $155.9 million prior to the contribution
to ESSA Bank & Trust Foundation.
(c) There were no issuer repurchases of securities during the period
covered by this Report.
Item 3. Defaults Upon Senior Securities Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
During the period covered by this report, the Company did not submit any
matters to the vote of security holders.
Item 5. Other Information Not applicable.
Item 6. Exhibits
The following exhibits are either filed as part of this report or are
incorporated herein by reference:
3.1 Charter of ESSA Bancorp, Inc. *
25
3.2 Bylaws of ESSA Bancorp, Inc. *
4 Form of Common Stock Certificate of ESSA Bancorp, Inc.*
10.1 Form of Employee Stock Ownership Plan*
10.2 Form of Employment Agreement for Chief Executive Officer*
10.3 Form of Employment Agreement for Executive Officers*
10.4 Form of Change in Control Agreement*
10.5 [Reserved]
10.6 Supplemental Retirement Plan for Gary S. Olson*
10.7 Supplemental Retirement Plan for Robert S. Howes, Jr.*
10.8 Supplemental Retirement Plan for Diane K. Reimer*
10.9 Supplemental Retirement Plan for Thomas J. Grayuski*
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
-----------------------------------------------
* Filed as exhibits to the Company's Registration Statement on Form S-1, and
any amendments thereto, with the Securities and Exchange Commission
(Registration No. 333-139157).
26
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: August 14, 2007 /s/ Gary S. Olson
-------------------------------------
-------------------------------------
Gary S. Olson
President and Chief Executive Officer
Date: August 14, 2007 /s/ Allan A. Muto
-------------------------------------
-------------------------------------
Allan A. Muto
Executive Vice President and
Chief Financial Officer
27
Exhibit 31.1
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Gary S. Olson, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of ESSA Bancorp, Inc., a
Pennsylvania corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors:
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 14, 2007 /s/ Gary S. Olson
---------------------------------
---------------------------------
Gary S. Olson
President and Chief Executive Officer
28
Exhibit 31.2
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Allan A. Muto, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of ESSA Bancorp, Inc., a
Pennsylvania corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors:
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 14, 2007 /s/ Allan A. Muto
-------------------------------------------
-------------------------------------------
Allan A. Muto
Executive Vice President and
Chief Financial Officer
29
Exhibit 32
Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Gary S. Olson, Chief Executive Officer and President of ESSA Bancorp, Inc.,
a Pennsylvania corporation (the "Company") and Allan A. Muto, Executive Vice
President and Chief Financial Officer of the Company, each certify in his
capacity as an officer of the Company that he has reviewed the quarterly report
on Form 10-Q for the period ended June 30, 2007 (the "Report") and that to the
best of his knowledge:
1. the Report fully complies with the requirements of Sections 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
2. the information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
Date: August 14, 2007 /s/ Gary S. Olson
------------------------------------------
------------------------------------------
Gary S. Olson
President and Chief Executive Officer
Date: August 14, 2007 /s/ Allan A. Muto
------------------------------------------
------------------------------------------
Allan A. Muto
Executive Vice President and
Chief Financial Officer
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
30