ESSA BANCORP, INC. AND SUBSIDIARY
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. 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 a Pennsylvania chartered savings bank and is subject to regulation and supervision by the Pennsylvania Department of Banking and Securities and the Federal Deposit Insurance Corporation (the “FDIC”). The investment in the Bank on the parent company’s financial statements is carried at the parent company’s equity in the underlying net assets.
ESSACOR, Inc. is a Pennsylvania corporation that has been used to purchase properties at tax sales that represent collateral for delinquent loans of the Bank and is currently inactive. Pocono Investment Company is a Delaware corporation formed as an investment company subsidiary to hold and manage certain investments, including certain intellectual property. ESSA Advisory Services, LLC is a Pennsylvania limited liability company owned 100 percent by ESSA Bank & Trust. ESSA Advisory Services, LLC is a full-service insurance benefits consulting company offering group services such as health insurance, life insurance, short-term and long-term disability, dental, vision, and 401(k) retirement planning as well as individual health products. Integrated Financial Corporation is a Pennsylvania corporation that provided investment advisory services to the general public and is currently inactive. Integrated Abstract Incorporated is a Pennsylvania corporation that provided title insurance services and is currently inactive. All significant intercompany accounts and transactions have been eliminated in consolidation.
The unaudited consolidated financial statements reflect all adjustments, which in the opinion of management, are necessary for a fair presentation of the results of the interim periods and are of a normal and recurring nature. Operating results for the three month periods ended December 31, 2020 and 2019 are not necessarily indicative of the results that may be expected for the year ending September 30, 2021.
The following table sets forth the composition of the weighted-average common shares (denominator) used in the basic and diluted earnings per share computation for the three month periods ended December 31, 2020 and 2019.
|
|
Three Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Weighted-average common shares outstanding
|
|
|
18,133,095
|
|
|
|
18,133,095
|
|
Average treasury stock shares
|
|
|
(7,279,981
|
)
|
|
|
(6,830,518
|
)
|
Average unearned ESOP shares
|
|
|
(718,523
|
)
|
|
|
(763,787
|
)
|
Average unearned non-vested shares
|
|
|
(63,504
|
)
|
|
|
(56,517
|
)
|
Weighted average common shares and common stock
equivalents used to calculate basic earnings per share
|
|
|
10,071,087
|
|
|
|
10,482,273
|
|
Additional common stock equivalents (nonvested stock)
used to calculate diluted earnings per share
|
|
|
2,820
|
|
|
|
10
|
|
Weighted average common shares and common stock
equivalents used to calculate diluted earnings per share
|
|
|
10,073,907
|
|
|
|
10,482,283
|
|
At December 31, 2020 there were 32,107 shares of nonvested stock outstanding at an average weighted price of $16.13 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, 2019 there were 53,257 shares of nonvested stock outstanding at an average weighted price of $16.16 per share that were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive.
7
3.
|
Use of Estimates in the Preparation of Financial Statements
|
The accounting principles followed by the Company and its subsidiaries and the methods of applying these principles conform to U.S. generally accepted accounting principles (“GAAP”) and to general practice within the banking industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the Consolidated Balance Sheet date and related revenues and expenses for the period. Actual results could differ from those estimates.
4.
|
Accounting Pronouncements
|
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. In November 2019, the FASB issued ASU 2019-10, Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). This Update defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. A public business entity that is a U.S. Securities and Exchange Commission (SEC) filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. A public business entity that is not an SEC filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2020. All other entities, including not-for-profit entities, that are adopting the amendments in this Update should do so for their annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2021. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.
In August 2018, the FASB issued ASU 2018-14, Compensation – Retirement Benefits (Topic 715-20). This Update amends ASC 715 to add, remove and clarify disclosure requirements related to defined benefit pension and other postretirement plans. The Update eliminates the requirement to disclose the amounts in accumulated other comprehensive income expected to be recognized as part of net periodic benefit cost over the next year. The Update also removes the disclosure requirements for the effects of a one-percentage-point change on the assumed health care costs and the effect of this change in rates on service cost, interest cost and the benefit obligation for postretirement health care benefits. This Update is effective for public business entities for fiscal years ending after December 15, 2020, and must be applied on a retrospective basis. For all other entities, this Update is effective for fiscal years ending after December 15, 2021. This Update is not expected to have a significant impact on the Company’s financial statements.
8
In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which affects a variety of topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance. Topic 326, Financial Instruments – Credit Losses amendments are effective for SEC registrants for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other public business entities, the effective date is for fiscal years beginning after December 15, 2020, and for all other entities, the effective date is for fiscal years beginning after December 15, 2021. Topic 815, Derivatives and Hedging amendments are effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020. For entities that have adopted the amendments in Update 2017-12, the effective date is as of the beginning of the first annual period beginning after the issuance of this Update. Topic 825, Financial Instruments amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within 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 May 2019, the FASB issued ASU 2019-05, Financial Instruments – Credit Losses, Topic 326, which allows entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost upon adoption of the new credit losses standard. To be eligible for the transition election, the existing financial asset must otherwise be both within the scope of the new credit losses standard and eligible for the applying the fair value option in ASC 825-10.3. The election must be applied on an instrument-by-instrument basis and is not available for either available-for-sale or held-to-maturity debt securities. For entities that elect the fair value option, the difference between the carrying amount and the fair value of the financial asset would be recognized through a cumulative-effect adjustment to opening retained earnings as of the date an entity adopted ASU 2016-13. Changes in fair value of that financial asset would subsequently be reported in current earnings. For entities that have not yet adopted ASU 2016-13, the effective dates and transition requirements are the same as those in ASU 2016-13. For entities that have adopted ASU 2016-13, ASU 2019-05 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted once ASU 2016-13 has been 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 November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, to clarify its new credit impairment guidance in ASC 326, based on implementation issues raised by stakeholders. This Update clarified, among other things, that expected recoveries are to be included in the allowance for credit losses for these financial assets; an accounting policy election can be made to adjust the effective interest rate for existing troubled debt restructurings based on the prepayment assumptions instead of the prepayment assumptions applicable immediately prior to the restructuring event; and extends the practical expedient to exclude accrued interest receivable from all additional relevant disclosures involving amortized cost basis. The effective dates in this Update are the same as those applicable for ASU 2019-10. 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 December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), to simplify the accounting for income taxes, change the accounting for certain tax transactions, and make minor improvements to the codification. This Update provides a policy election to not allocate consolidated income taxes when a member of a consolidated tax return is not subject to income tax and provides guidance to evaluate whether a step-up in tax basis of goodwill relates to a business combination in which book goodwill was recognized or a separate transaction. The Update also changes current guidance for making an intraperiod allocation, if there is a loss in continuing operations and gains outside of continuing operations; determining when a deferred tax liability is recognized after an investor in a foreign entity transitions to or from the equity method of accounting; accounting for tax law changes and year-to-date losses in interim periods; and determining how to apply the income tax guidance to franchise taxes that are partially based on income. For public business entities, the amendments in this Update are effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2020. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. This Update is not expected to have a significant impact on the Company’s financial statements.
In January 2020, the FASB issued ASU 2020-1, Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815), to clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The amendments also clarify that, for the purpose of applying paragraph 815-10-15-141(a) an entity should not consider whether, upon the settlement of the forward contract or exercise of the purchased option, individually or with existing investments, the underlying securities would be accounted for under the equity method in Topic 323 or the fair value option, in accordance with the financial instruments guidance in Topic 825. An entity also would evaluate the remaining characteristics in paragraph 815-10-15-141 to determine the accounting for those forward contracts and purchased options. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. This Update is not expected to have a significant impact on the Company’s financial statements.
9
In March 2020, the FASB issued ASU 2020-3, Codification Improvements to Financial Instruments. This ASU was issued to improve and clarify various financial instruments topics, including the current expected credit losses (CECL) standard issued in 2016. The ASU includes seven issues that describe the areas of improvement and the related amendments to GAAP; they are intended to make the standards easier to understand and apply and to eliminate inconsistencies, and they are narrow in scope and are not expected to significantly change practice for most entities. Among its provisions, the ASU clarifies that all entities, other than public business entities that elected the fair value option, are required to provide certain fair value disclosures under ASC 825, Financial Instruments, in both interim and annual financial statements. It also clarifies that the contractual term of a net investment in a lease under Topic 842 should be the contractual term used to measure expected credit losses under Topic 326. Amendments related to ASU 2019-04 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is not permitted before an entity’s adoption of ASU 2016-01. Amendments related to ASU 2016-13 for entities that have not yet adopted that guidance are effective upon adoption of the amendments in ASU 2016-13. Early adoption is not permitted before an entity’s adoption of ASU 2016-13. Amendments related to ASU 2016-13 for entities that have adopted that guidance are effective for fiscal years beginning after December 15, 2019, including interim periods within those years. Other amendments are effective upon issuance of this ASU. This Update is not expected to have a significant impact on the Company’s financial statements.
In January 2020, the FASB issued ASU 2020-4, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, March 2020, to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Also, entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met, and can make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities upon issuance through December 31, 2022. 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 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. This ASU removes from U.S. GAAP the separation models for (1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature. As a result, entities will not separately present in equity an embedded conversion feature in such debt. Instead, they will account for a convertible debt instrument wholly as debt, and for convertible preferred stock wholly as preferred stock (i.e., as a single unit of account), unless (1) a convertible instrument contains features that require bifurcation as a derivative under ASC 815 or (2) a convertible debt instrument was issued at a substantial premium. This ASU requires entities to provide expanded disclosures about the terms and features of convertible instruments, how the instruments have been reported in the entity’s financial statements, and information about events, conditions, and circumstances that can affect how to assess the amount or timing of an entity’s future cash flows related to those instruments. The amendments in this ASU are effective for public business entities that are not smaller reporting companies, for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. For all other entities, this ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The guidance may be early adopted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. This Update is not expected to have a significant impact on the Company’s financial statements.
In October 2020, the FASB issued ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable Fees and Other Costs, which clarifies that, for each reporting period, an entity should reevaluate whether a callable debt security is within the scope of ASC 310-20-35-33. For public business entities, ASU 2020-08 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early application is not permitted. For all other entities, ASU 2020-08 is effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. This Update is not expected to have a significant impact on the Company’s financial statements.
In October 2020, the FASB issued ASU 2020-09, Debt (Topic 470): Amendments to SEC Paragraphs Pursuant to SEC Release No. 33-10762, which codifies, as appropriate, the amended financial statement disclosure requirements in Regulation S-X Rules 13-01 and 13-02. The amendments are effective January 4, 2021. This Update did not have a significant impact on the Company’s financial statements.
In October 2020, the FASB issued ASU 2020-10, Codification Improvements, which makes minor technical corrections and clarifications to the ASC. The amendments in Sections B and C of the ASU are effective for annual periods beginning after December
10
15, 2020, for public business entities. For all other entities, the amendments are effective for annual periods beginning after December 15, 2021, and interim periods within annual periods beginning after December 15, 2022. This Update is not expected to have a significant impact on the Company’s financial statements.
In November 2020, the FASB issued ASU 2020-11, Financial Services – Insurance (Topic 944), which was made in consideration of the implications of the Coronavirus Disease 2019 (COVID-19) pandemic on an insurance entity’s ability to effectively implement the amendments in Accounting Standards Update No. 2018-12, Financial Services— Insurance: Targeted Improvements to the Accounting for Long-Duration Contracts (LDTI). The amendments in this Update defer the effective date of LDTI for all entities by one year, as (1) for public business entities that meet the definition of an SEC filer and are not SRCs, LDTI is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years; and (2) for all other entities, LDTI is effective for fiscal years beginning after December 15, 2024, and interim periods within fiscal years beginning after December 15, 2025. This Update is not expected to have a significant impact on the Company’s financial statements.
In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848), which provides optional temporary guidance for entities transitioning away from the London Interbank Offered Rate(LIBOR) and other interbank offered rates (IBORs) to new references rates so that derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions within Topic848. ASU 2021-01 clarifies that the derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions in Topic 848. ASU 2021-01 is effective immediately for all entities. Entities may elect to apply the amendments on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final update, up to the date that financial statements are available to be issued. The
amendments in this update do not apply to contract modifications made, as well as new hedging relationships entered into, after December 31, 2022, and to existing hedging relationships evaluated for effectiveness for periods after December 31, 2022, except for certain hedging relationships existing as of December 31, 2022, that apply certain optional expedients in which the accounting effects are recorded through the end of the hedging relationship. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.
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, 2020
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae
|
|
$
|
36,177
|
|
|
$
|
1,205
|
|
|
$
|
(79
|
)
|
|
$
|
37,303
|
|
Freddie Mac
|
|
|
27,906
|
|
|
|
893
|
|
|
|
(2
|
)
|
|
|
28,797
|
|
Governmental National Mortgage Association
|
|
|
12,992
|
|
|
|
349
|
|
|
|
(54
|
)
|
|
|
13,287
|
|
Total mortgage-backed securities
|
|
|
77,075
|
|
|
|
2,447
|
|
|
|
(135
|
)
|
|
|
79,387
|
|
Obligations of states and political subdivisions
|
|
|
21,127
|
|
|
|
746
|
|
|
|
—
|
|
|
|
21,873
|
|
U.S. government agency securities
|
|
|
1,998
|
|
|
|
31
|
|
|
|
—
|
|
|
|
2,029
|
|
Corporate obligations
|
|
|
56,596
|
|
|
|
918
|
|
|
|
(479
|
)
|
|
|
57,035
|
|
Other debt securities
|
|
|
13,494
|
|
|
|
394
|
|
|
|
(136
|
)
|
|
|
13,752
|
|
Total
|
|
$
|
170,290
|
|
|
$
|
4,536
|
|
|
$
|
(750
|
)
|
|
$
|
174,076
|
|
11
|
|
September 30, 2020
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae
|
|
$
|
41,961
|
|
|
$
|
1,385
|
|
|
$
|
(88
|
)
|
|
$
|
43,258
|
|
Freddie Mac
|
|
|
31,642
|
|
|
|
964
|
|
|
|
(2
|
)
|
|
|
32,604
|
|
Governmental National Mortgage Association
|
|
|
15,300
|
|
|
|
368
|
|
|
|
(99
|
)
|
|
|
15,569
|
|
Total mortgage-backed securities
|
|
|
88,903
|
|
|
|
2,717
|
|
|
|
(189
|
)
|
|
|
91,431
|
|
Obligations of states and political subdivisions
|
|
|
21,136
|
|
|
|
795
|
|
|
|
—
|
|
|
|
21,931
|
|
U.S. government agency securities
|
|
|
24,990
|
|
|
|
—
|
|
|
|
—
|
|
|
|
24,990
|
|
U.S. government treasury securities
|
|
|
7,991
|
|
|
|
57
|
|
|
|
—
|
|
|
|
8,048
|
|
Corporate obligations
|
|
|
51,188
|
|
|
|
807
|
|
|
|
(521
|
)
|
|
|
51,474
|
|
Other debt securities
|
|
|
14,265
|
|
|
|
495
|
|
|
|
(150
|
)
|
|
|
14,610
|
|
Total
|
|
$
|
208,473
|
|
|
$
|
4,871
|
|
|
$
|
(860
|
)
|
|
$
|
212,484
|
|
The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the three months ended December 31, 2020 and 2019.
(in thousands)
|
|
Three Months Ended December 31, 2020
|
|
|
Three Months Ended December 31, 2019
|
|
Net gains recognized during the period on equity securities
|
|
$
|
7
|
|
|
$
|
1
|
|
Less: Net gains recognized during the period on equity securities sold
during the period
|
|
|
—
|
|
|
|
—
|
|
Unrealized gains recognized during the reporting period on equity
securities still held at the reporting date
|
|
$
|
7
|
|
|
$
|
1
|
|
The amortized cost and fair value of debt securities at December 31, 2020, 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
|
|
$
|
3,382
|
|
|
$
|
3,399
|
|
Due after one year through five years
|
|
|
28,945
|
|
|
|
29,688
|
|
Due after five years through ten years
|
|
|
50,959
|
|
|
|
51,586
|
|
Due after ten years
|
|
|
87,004
|
|
|
|
89,403
|
|
Total
|
|
$
|
170,290
|
|
|
$
|
174,076
|
|
For the three months ended December 31, 2020, there were no sales of investment securities. For the three months ended December 31, 2019, the Company realized gross gains of $221,000 and no gross losses on proceeds from the sale on investment securities of $13.0 million
12
The following tables show 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 (in thousands):
|
|
December 31, 2020
|
|
|
|
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
|
|
|
10
|
|
|
$
|
1,513
|
|
|
$
|
(16
|
)
|
|
$
|
5,109
|
|
|
$
|
(63
|
)
|
|
$
|
6,622
|
|
|
$
|
(79
|
)
|
Freddie Mac
|
|
|
0
|
|
|
|
—
|
|
|
|
—
|
|
|
|
314
|
|
|
|
(2
|
)
|
|
|
314
|
|
|
|
(2
|
)
|
Governmental National Mortgage Association
|
|
|
6
|
|
|
|
1,266
|
|
|
|
(19
|
)
|
|
|
3,067
|
|
|
|
(35
|
)
|
|
|
4,333
|
|
|
|
(54
|
)
|
Corporate obligations
|
|
|
24
|
|
|
|
18,570
|
|
|
|
(175
|
)
|
|
|
4,066
|
|
|
|
(304
|
)
|
|
|
22,636
|
|
|
|
(479
|
)
|
Other debt securities
|
|
|
10
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,652
|
|
|
|
(136
|
)
|
|
|
3,652
|
|
|
|
(136
|
)
|
Total
|
|
|
50
|
|
|
$
|
21,349
|
|
|
$
|
(210
|
)
|
|
$
|
16,208
|
|
|
$
|
(540
|
)
|
|
$
|
37,557
|
|
|
$
|
(750
|
)
|
|
|
September 30, 2020
|
|
|
|
|
|
|
|
Less than Twelve
Months
|
|
|
Twelve Months or
Greater
|
|
|
Total
|
|
|
|
Number of
Securities
|
|
|
Fair
Value
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Gross
Unrealized
Losses
|
|
Fannie Mae
|
|
|
8
|
|
|
$
|
1,397
|
|
|
$
|
(19
|
)
|
|
$
|
5,827
|
|
|
$
|
(69
|
)
|
|
$
|
7,224
|
|
|
$
|
(88
|
)
|
Freddie Mac
|
|
|
1
|
|
|
|
330
|
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
330
|
|
|
|
(2
|
)
|
Governmental National Mortgage Association
|
|
|
7
|
|
|
|
4,428
|
|
|
|
(61
|
)
|
|
|
2,996
|
|
|
|
(38
|
)
|
|
|
7,424
|
|
|
|
(99
|
)
|
Corporate obligations
|
|
|
20
|
|
|
|
13,213
|
|
|
|
(93
|
)
|
|
|
6,573
|
|
|
|
(428
|
)
|
|
|
19,786
|
|
|
|
(521
|
)
|
Other debt securities
|
|
|
10
|
|
|
|
—
|
|
|
|
0
|
|
|
|
3,879
|
|
|
|
(150
|
)
|
|
|
3,879
|
|
|
|
(150
|
)
|
Total
|
|
|
46
|
|
|
$
|
19,368
|
|
|
$
|
(175
|
)
|
|
$
|
19,275
|
|
|
$
|
(685
|
)
|
|
$
|
38,643
|
|
|
$
|
(860
|
)
|
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, U.S. government agency securities, corporate obligations, other debt securities and equity securities.
The Company reviews its position quarterly and has asserted that at December 31, 2020, the declines outlined in the above table represent temporary declines and the Company would not be required to sell the above securities before their anticipated recovery in market value.
The Company has concluded that any impairment of its investment securities portfolio is not other than temporary but is the result of interest rate changes that are not expected to result in the non-collection of principal and interest during the period.
13
6.
|
Loans Receivable, Net and Allowance for Loan Losses
|
Loans receivable consist of the following (in thousands):
|
|
December 31, 2020
|
|
|
September 30, 2020
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
601,530
|
|
|
$
|
610,172
|
|
Construction
|
|
|
11,626
|
|
|
|
11,853
|
|
Commercial
|
|
|
508,043
|
|
|
|
509,628
|
|
Commercial
|
|
|
123,376
|
|
|
|
139,603
|
|
Obligations of states and political subdivisions
|
|
|
72,527
|
|
|
|
79,230
|
|
Home equity loans and lines of credit
|
|
|
40,459
|
|
|
|
40,800
|
|
Auto loans
|
|
|
32,013
|
|
|
|
39,795
|
|
Other
|
|
|
1,862
|
|
|
|
2,293
|
|
|
|
|
1,391,436
|
|
|
|
1,433,374
|
|
Less allowance for loan losses
|
|
|
16,141
|
|
|
|
15,400
|
|
Net loans
|
|
$
|
1,375,295
|
|
|
$
|
1,417,974
|
|
During 2020 the Company participated in the Paycheck Protection Program (“PPP”), administered directly by the U.S. SBA. The PPP provides loans to small businesses who were affected by economic conditions as a result of COVID-19 to provide cash-flow assistance to employers who maintain their payroll (including healthcare and certain related expenses), mortgage interest, rent, leases, utilities and interest on existing debt during the COVID-19 emergency. The PPP loans are fully guaranteed by the SBA and may be eligible for forgiveness by the SBA to the extent that the proceeds are used to cover eligible payroll costs, interest costs, rent, and utility costs over a period of up to 24 weeks after the loan is made as long as certain conditions are met regarding employee retention and compensation levels. PPP loans deemed eligible for forgiveness by the SBA will be repaid by the SBA to the Company. PPP loans are included in the Commercial loan category.
In accordance with the SBA terms and conditions on these PPP loans, the Company received approximately $2.4 million in fees associated with the processing of these loans. Upon funding of the loan, these fees were deferred and will be amortized over the life of the loan as an adjustment to yield in accordance with FASB ASC 310-20-25-2.
Included in commercial loans in the above table are 596 loans totaling $67.5 million originated by the Company under the Payroll Protection Program during the quarter ended December 31, 2020. These loans mature in two years.
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.
The following table presents additional information regarding loans acquired and accounted for in accordance with ASC 310-30 (in thousands):
|
|
December 31, 2020
|
|
|
September 30, 2020
|
|
|
|
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
|
|
$
|
992
|
|
|
$
|
1,086
|
|
Carrying amount
|
|
$
|
931
|
|
|
$
|
1,025
|
|
14
The following tables show the amount of loans in each category that were 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, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
601,530
|
|
|
$
|
3,580
|
|
|
$
|
—
|
|
|
$
|
597,950
|
|
Construction
|
|
|
11,626
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,626
|
|
Commercial
|
|
|
508,043
|
|
|
|
11,088
|
|
|
|
931
|
|
|
|
496,024
|
|
Commercial
|
|
|
123,376
|
|
|
|
1,195
|
|
|
|
—
|
|
|
|
122,181
|
|
Obligations of states and political subdivisions
|
|
|
72,527
|
|
|
|
—
|
|
|
|
—
|
|
|
|
72,527
|
|
Home equity loans and lines of credit
|
|
|
40,459
|
|
|
|
96
|
|
|
|
—
|
|
|
|
40,363
|
|
Auto loans
|
|
|
32,013
|
|
|
|
131
|
|
|
|
—
|
|
|
|
31,882
|
|
Other
|
|
|
1,862
|
|
|
|
11
|
|
|
|
—
|
|
|
|
1,851
|
|
Total
|
|
$
|
1,391,436
|
|
|
$
|
16,101
|
|
|
$
|
931
|
|
|
$
|
1,374,404
|
|
|
|
Total Loans
|
|
|
Individually
Evaluated for
Impairment
|
|
|
Loans Acquired
with Deteriorated
Credit Quality
|
|
|
Collectively
Evaluated for
Impairment
|
|
September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
610,172
|
|
|
$
|
3,949
|
|
|
$
|
—
|
|
|
$
|
606,223
|
|
Construction
|
|
|
11,853
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,853
|
|
Commercial
|
|
|
509,628
|
|
|
|
11,322
|
|
|
|
1,025
|
|
|
|
497,281
|
|
Commercial
|
|
|
139,603
|
|
|
|
1,595
|
|
|
|
—
|
|
|
|
138,008
|
|
Obligations of states and political sub divisions
|
|
|
79,230
|
|
|
|
—
|
|
|
|
—
|
|
|
|
79,230
|
|
Home equity loans and lines of credit
|
|
|
40,800
|
|
|
|
117
|
|
|
|
—
|
|
|
|
40,683
|
|
Auto loans
|
|
|
39,795
|
|
|
|
210
|
|
|
|
—
|
|
|
|
39,585
|
|
Other
|
|
|
2,293
|
|
|
|
11
|
|
|
|
—
|
|
|
|
2,282
|
|
Total
|
|
$
|
1,433,374
|
|
|
$
|
17,204
|
|
|
$
|
1,025
|
|
|
$
|
1,415,145
|
|
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 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.
15
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, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
With no specific allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
3,367
|
|
|
$
|
4,619
|
|
|
$
|
—
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial
|
|
|
4,054
|
|
|
|
6,241
|
|
|
|
—
|
|
Commercial
|
|
|
1,195
|
|
|
|
1,291
|
|
|
|
—
|
|
Obligations of states and political subdivisions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Home equity loans and lines of credit
|
|
|
96
|
|
|
|
182
|
|
|
|
—
|
|
Auto loans
|
|
|
63
|
|
|
|
95
|
|
|
|
—
|
|
Other
|
|
|
11
|
|
|
|
22
|
|
|
|
—
|
|
Total
|
|
|
8,786
|
|
|
|
12,450
|
|
|
|
—
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
213
|
|
|
|
271
|
|
|
|
21
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial
|
|
|
7,034
|
|
|
|
7,145
|
|
|
|
61
|
|
Commercial
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Obligations of states and political subdivisions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Home equity loans and lines of credit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Auto loans
|
|
|
68
|
|
|
|
74
|
|
|
|
20
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
7,315
|
|
|
|
7,490
|
|
|
|
102
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
3,580
|
|
|
|
4,890
|
|
|
|
21
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial
|
|
|
11,088
|
|
|
|
13,386
|
|
|
|
61
|
|
Commercial
|
|
|
1,195
|
|
|
|
1,291
|
|
|
|
—
|
|
Obligations of states and political subdivisions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Home equity loans and lines of credit
|
|
|
96
|
|
|
|
182
|
|
|
|
—
|
|
Auto loans
|
|
|
131
|
|
|
|
169
|
|
|
|
20
|
|
Other
|
|
|
11
|
|
|
|
22
|
|
|
|
—
|
|
Total Impaired Loans
|
|
$
|
16,101
|
|
|
$
|
19,940
|
|
|
$
|
102
|
|
16
|
|
Recorded
Investment
|
|
|
Unpaid
Principal
Balance
|
|
|
Associated
Allowance
|
|
September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
With no specific allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
3,699
|
|
|
$
|
5,070
|
|
|
$
|
—
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial
|
|
|
4,203
|
|
|
|
6,342
|
|
|
|
—
|
|
Commercial
|
|
|
1,539
|
|
|
|
1,625
|
|
|
|
—
|
|
Obligations of states and political subdivisions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Home equity loans and lines of credit
|
|
|
117
|
|
|
|
222
|
|
|
|
—
|
|
Auto Loans
|
|
|
72
|
|
|
|
131
|
|
|
|
—
|
|
Other
|
|
|
11
|
|
|
|
22
|
|
|
|
—
|
|
Total
|
|
|
9,641
|
|
|
|
13,412
|
|
|
|
—
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
250
|
|
|
|
271
|
|
|
|
26
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial
|
|
|
7,119
|
|
|
|
7,169
|
|
|
|
132
|
|
Commercial
|
|
|
56
|
|
|
|
57
|
|
|
|
20
|
|
Obligations of states and political subdivisions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Home equity loans and lines of credit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Auto Loans
|
|
|
138
|
|
|
|
143
|
|
|
|
43
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
7,563
|
|
|
|
7,640
|
|
|
|
221
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
3,949
|
|
|
|
5,341
|
|
|
|
26
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial
|
|
|
11,322
|
|
|
|
13,511
|
|
|
|
132
|
|
Commercial
|
|
|
1,595
|
|
|
|
1,682
|
|
|
|
20
|
|
Obligations of states and political subdivisions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Home equity loans and lines of credit
|
|
|
117
|
|
|
|
222
|
|
|
|
—
|
|
Auto Loans
|
|
|
210
|
|
|
|
274
|
|
|
|
43
|
|
Other
|
|
|
11
|
|
|
|
22
|
|
|
|
—
|
|
Total Impaired Loans
|
|
$
|
17,204
|
|
|
$
|
21,052
|
|
|
$
|
221
|
|
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):
|
|
For the Three Months Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
Average
Recorded
Investment
|
|
|
Average
Recorded
Investment
|
|
|
Interest
Income
Recognized
|
|
|
Interest
Income
Recognized
|
|
With no specific allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
1,436
|
|
|
$
|
3,933
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial
|
|
|
11,131
|
|
|
|
2,398
|
|
|
|
—
|
|
|
|
—
|
|
Commercial
|
|
|
1,313
|
|
|
|
392
|
|
|
|
—
|
|
|
|
—
|
|
Obligations of states and political subdivisions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Home equity loans and lines of credit
|
|
|
109
|
|
|
|
322
|
|
|
|
—
|
|
|
|
—
|
|
Auto loans
|
|
|
55
|
|
|
|
116
|
|
|
|
—
|
|
|
|
1
|
|
Other
|
|
|
11
|
|
|
|
19
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
14,055
|
|
|
|
7,180
|
|
|
|
1
|
|
|
|
2
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
221
|
|
|
|
297
|
|
|
|
—
|
|
|
|
—
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial
|
|
|
2,581
|
|
|
|
333
|
|
|
|
—
|
|
|
|
—
|
|
Commercial
|
|
|
37
|
|
|
|
65
|
|
|
|
—
|
|
|
|
—
|
|
Obligations of states and political subdivisions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Home equity loans and lines of credit
|
|
|
—
|
|
|
|
0
|
|
|
|
—
|
|
|
|
—
|
|
Auto loans
|
|
|
40
|
|
|
|
212
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
5
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
2,879
|
|
|
|
912
|
|
|
|
—
|
|
|
|
—
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
1,657
|
|
|
|
4,230
|
|
|
|
1
|
|
|
|
1
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial
|
|
|
13,712
|
|
|
|
2,731
|
|
|
|
—
|
|
|
|
—
|
|
Commercial
|
|
|
1,350
|
|
|
|
457
|
|
|
|
—
|
|
|
|
—
|
|
Obligations of states and political subdivisions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Home equity loans and lines of credit
|
|
|
109
|
|
|
|
322
|
|
|
|
—
|
|
|
|
—
|
|
Auto loans
|
|
|
95
|
|
|
|
328
|
|
|
|
—
|
|
|
|
1
|
|
Other
|
|
|
11
|
|
|
|
24
|
|
|
|
—
|
|
|
|
—
|
|
Total Impaired Loans
|
|
$
|
16,934
|
|
|
$
|
8,092
|
|
|
$
|
1
|
|
|
$
|
2
|
|
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 that are 90 or more 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, 2020 and September 30, 2020 (in thousands):
|
|
Pass
|
|
|
Special
Mention
|
|
|
Substandard
|
|
|
Doubtful
or Loss
|
|
|
Total
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate loans
|
|
$
|
469,972
|
|
|
$
|
18,608
|
|
|
$
|
19,463
|
|
|
$
|
—
|
|
|
$
|
508,043
|
|
Commercial
|
|
|
121,932
|
|
|
|
108
|
|
|
|
1,336
|
|
|
|
—
|
|
|
|
123,376
|
|
Obligations of states and political subdivisions
|
|
|
72,527
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
72,527
|
|
Total
|
|
$
|
664,431
|
|
|
$
|
18,716
|
|
|
$
|
20,799
|
|
|
$
|
—
|
|
|
$
|
703,946
|
|
|
|
Pass
|
|
|
Special
Mention
|
|
|
Substandard
|
|
|
Doubtful
or Loss
|
|
|
Total
|
|
September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate loans
|
|
$
|
479,475
|
|
|
$
|
15,022
|
|
|
$
|
15,131
|
|
|
$
|
—
|
|
|
$
|
509,628
|
|
Commercial
|
|
|
137,860
|
|
|
|
—
|
|
|
|
1,743
|
|
|
|
—
|
|
|
|
139,603
|
|
Obligations of states and political subdivisions
|
|
|
79,230
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
79,230
|
|
Total
|
|
$
|
696,565
|
|
|
$
|
15,022
|
|
|
$
|
16,874
|
|
|
$
|
—
|
|
|
$
|
728,461
|
|
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, 2020 and September 30, 2020 (in thousands):
|
|
Performing
|
|
|
Non-
performing
|
|
|
Total
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
596,489
|
|
|
$
|
5,041
|
|
|
$
|
601,530
|
|
Construction
|
|
|
11,626
|
|
|
|
—
|
|
|
|
11,626
|
|
Home equity loans and lines of credit
|
|
|
40,262
|
|
|
|
197
|
|
|
|
40,459
|
|
Auto loans
|
|
|
31,873
|
|
|
|
140
|
|
|
|
32,013
|
|
Other
|
|
|
1,844
|
|
|
|
18
|
|
|
|
1,862
|
|
Total
|
|
$
|
682,094
|
|
|
$
|
5,396
|
|
|
$
|
687,490
|
|
|
|
Performing
|
|
|
Non-
performing
|
|
|
Total
|
|
September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
605,549
|
|
|
$
|
4,623
|
|
|
$
|
610,172
|
|
Construction
|
|
|
11,853
|
|
|
|
—
|
|
|
|
11,853
|
|
Home equity loans and lines of credit
|
|
|
40,581
|
|
|
|
219
|
|
|
|
40,800
|
|
Auto loans
|
|
|
39,572
|
|
|
|
223
|
|
|
|
39,795
|
|
Other
|
|
|
2,282
|
|
|
|
11
|
|
|
|
2,293
|
|
Total
|
|
$
|
699,837
|
|
|
$
|
5,076
|
|
|
$
|
704,913
|
|
19
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, 2020 and September 30, 2020 (in thousands):
|
|
|
|
|
|
31-60 Days
|
|
|
61-89 Days
|
|
|
90 + Days
Past
Due and
|
|
|
|
|
|
|
Total
|
|
|
Purchased
Credit Impaired
|
|
|
Total
|
|
|
|
Current
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Accruing
|
|
|
Nonaccrual
|
|
|
Past Due
|
|
|
Accruing
|
|
|
Nonaccrual
|
|
|
Loans
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
594,713
|
|
|
$
|
1,192
|
|
|
$
|
584
|
|
|
$
|
—
|
|
|
$
|
5,041
|
|
|
$
|
6,817
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
601,530
|
|
Construction
|
|
|
11,626
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,626
|
|
Commercial
|
|
|
485,544
|
|
|
|
8,464
|
|
|
|
105
|
|
|
|
—
|
|
|
|
12,999
|
|
|
|
21,568
|
|
|
|
233
|
|
|
|
698
|
|
|
|
508,043
|
|
Commercial
|
|
|
121,882
|
|
|
|
15
|
|
|
|
10
|
|
|
|
—
|
|
|
|
1,469
|
|
|
|
1,494
|
|
|
|
—
|
|
|
|
—
|
|
|
|
123,376
|
|
Obligations of states and political
subdivisions
|
|
|
72,527
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
72,527
|
|
Home equity loans and lines of credit
|
|
|
40,086
|
|
|
|
176
|
|
|
|
—
|
|
|
|
—
|
|
|
|
197
|
|
|
|
373
|
|
|
|
—
|
|
|
|
—
|
|
|
|
40,459
|
|
Auto loans
|
|
|
31,103
|
|
|
|
766
|
|
|
|
4
|
|
|
|
—
|
|
|
|
140
|
|
|
|
910
|
|
|
|
—
|
|
|
|
—
|
|
|
|
32,013
|
|
Other
|
|
|
1,844
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18
|
|
|
|
18
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,862
|
|
Total
|
|
$
|
1,359,325
|
|
|
$
|
10,613
|
|
|
$
|
703
|
|
|
$
|
—
|
|
|
$
|
19,864
|
|
|
$
|
31,180
|
|
|
$
|
233
|
|
|
$
|
698
|
|
|
$
|
1,391,436
|
|
|
|
|
|
|
|
31-60 Days
|
|
|
61-89 Days
|
|
|
90 + Days
Past
Due and
|
|
|
|
|
|
|
Total
|
|
|
Purchased
Credit Impaired
|
|
|
Total
|
|
|
|
Current
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Accruing
|
|
|
Nonaccrual
|
|
|
Past Due
|
|
|
Accruing
|
|
|
Nonaccrual
|
|
|
Loans
|
|
September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
604,168
|
|
|
$
|
979
|
|
|
$
|
402
|
|
|
$
|
—
|
|
|
$
|
4,623
|
|
|
$
|
6,004
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
610,172
|
|
Construction
|
|
|
11,853
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,853
|
|
Commercial
|
|
|
494,881
|
|
|
|
1,085
|
|
|
|
—
|
|
|
|
—
|
|
|
|
12,637
|
|
|
|
13,722
|
|
|
|
236
|
|
|
|
789
|
|
|
|
509,628
|
|
Commercial
|
|
|
137,769
|
|
|
|
6
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,828
|
|
|
|
1,834
|
|
|
|
—
|
|
|
|
—
|
|
|
|
139,603
|
|
Obligations of states and political
subdivisions
|
|
|
79,230
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
79,230
|
|
Home equity loans and lines of credit
|
|
|
40,533
|
|
|
|
48
|
|
|
|
—
|
|
|
|
—
|
|
|
|
219
|
|
|
|
267
|
|
|
|
—
|
|
|
|
—
|
|
|
|
40,800
|
|
Auto loans
|
|
|
38,971
|
|
|
|
593
|
|
|
|
8
|
|
|
|
—
|
|
|
|
223
|
|
|
|
824
|
|
|
|
—
|
|
|
|
—
|
|
|
|
39,795
|
|
Other
|
|
|
2,282
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11
|
|
|
|
11
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,293
|
|
Total
|
|
$
|
1,409,687
|
|
|
$
|
2,711
|
|
|
$
|
410
|
|
|
$
|
—
|
|
|
$
|
19,541
|
|
|
$
|
22,662
|
|
|
$
|
236
|
|
|
$
|
789
|
|
|
$
|
1,433,374
|
|
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 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 unallocated 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. In addition, for the three months ended December 31, 2020, consideration was given and a credit provision was recorded for loans granted short term payment relief 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, 2020 was 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.
20
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 allowance for loan losses (“ALL”). When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL.
The following table summarizes changes in the primary segments of the ALL for the three months ended December 31, 2020 and 2019 (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, 2020
|
|
$
|
4,301
|
|
|
$
|
127
|
|
|
$
|
7,209
|
|
|
$
|
874
|
|
|
$
|
555
|
|
|
$
|
337
|
|
|
$
|
780
|
|
|
$
|
25
|
|
|
$
|
1,192
|
|
|
$
|
15,400
|
|
Charge-offs
|
|
|
—
|
|
|
|
—
|
|
|
|
(76
|
)
|
|
|
(9
|
)
|
|
|
—
|
|
|
|
(8
|
)
|
|
|
(155
|
)
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(249
|
)
|
Recoveries
|
|
|
—
|
|
|
|
—
|
|
|
|
17
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
72
|
|
|
|
—
|
|
|
|
—
|
|
|
|
90
|
|
Provision
|
|
|
206
|
|
|
|
8
|
|
|
|
712
|
|
|
|
39
|
|
|
|
(47
|
)
|
|
|
20
|
|
|
|
(77
|
)
|
|
|
(2
|
)
|
|
|
41
|
|
|
|
900
|
|
ALL balance at December 31, 2020
|
|
$
|
4,507
|
|
|
$
|
135
|
|
|
$
|
7,862
|
|
|
$
|
904
|
|
|
$
|
508
|
|
|
$
|
350
|
|
|
$
|
620
|
|
|
$
|
22
|
|
|
$
|
1,233
|
|
|
$
|
16,141
|
|
ALL balance at September 30, 2019
|
|
$
|
4,243
|
|
|
$
|
53
|
|
|
$
|
3,806
|
|
|
$
|
1,870
|
|
|
$
|
343
|
|
|
$
|
329
|
|
|
$
|
1,384
|
|
|
$
|
28
|
|
|
$
|
574
|
|
|
$
|
12,630
|
|
Charge-offs
|
|
|
(22
|
)
|
|
|
—
|
|
|
|
(40
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(29
|
)
|
|
|
(372
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
(465
|
)
|
Recoveries
|
|
|
1
|
|
|
|
—
|
|
|
|
42
|
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
|
|
161
|
|
|
|
1
|
|
|
|
|
|
|
|
207
|
|
Provision
|
|
|
(61
|
)
|
|
|
29
|
|
|
|
(204
|
)
|
|
|
370
|
|
|
|
(3
|
)
|
|
|
68
|
|
|
|
59
|
|
|
|
(3
|
)
|
|
|
120
|
|
|
|
375
|
|
ALL balance at December 31, 2019
|
|
$
|
4,161
|
|
|
$
|
82
|
|
|
$
|
3,604
|
|
|
$
|
2,241
|
|
|
$
|
340
|
|
|
$
|
369
|
|
|
$
|
1,232
|
|
|
$
|
24
|
|
|
$
|
694
|
|
|
$
|
12,747
|
|
During the three months ended December 31, 2020, the Company recorded provision expense for the residential real estate loans, construction real estate loans, commercial real estate loans, commercial loans, construction loans and home equity loans and lines of credit segments, due to either increased loan balances, changes in the loan mix within the pool, and/or charge-off activity in those segments. Provision expense was also recorded for possible loan losses due to the economic slowdown caused by COVID-19 restrictions. Credit provisions were recorded for loan loss for the obligations of states and political subdivisions, auto loan and other loan segments.
During the three months ended December 31, 2019, the Company recorded provision expense for the construction real estate
loans, commercial, home equity loans and lines of credit and auto loan segments, due to either increased loan balances, changes in the
loan mix within the pool, and/or charge-off activity in those segments. Credit provisions were recorded for loan loss for the residential real estate, commercial real estate, obligations of states and political subdivisions and other loan segments.
The Company is closely monitoring all customer credit positions, particularly loans requesting payment relief. Such loans, as of December 31, 2020, amounted to approximately 2.3% of total loans outstanding, including $28.1 million in commercial real estate loans, $108,000 in commercial loans, $3.3 million in mortgage loans and $160,000 in auto loans. As the economic slowdown continues to evolve due to COVID-19 restrictions, our customers may experience decreased cash flows, which may correlate to an inability to make timely loan payments. This, in turn, may require further increases in our allowance for loan losses and increases in the level of charge-offs in our loan portfolio.
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, 2020 and September 30, 2020 (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
|
|
$
|
21
|
|
$
|
—
|
|
$
|
61
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
20
|
|
$
|
—
|
|
$
|
—
|
|
$
|
102
|
|
Collectively
evaluated for
impairment
|
|
|
4,486
|
|
|
135
|
|
|
7,801
|
|
|
904
|
|
|
508
|
|
|
350
|
|
|
600
|
|
|
22
|
|
|
1,233
|
|
|
16,039
|
|
ALL balance at December 31, 2020
|
|
$
|
4,507
|
|
$
|
135
|
|
$
|
7,862
|
|
$
|
904
|
|
$
|
508
|
|
$
|
350
|
|
$
|
620
|
|
$
|
22
|
|
$
|
1,233
|
|
$
|
16,141
|
|
Individually
evaluated for
impairment
|
|
$
|
26
|
|
$
|
—
|
|
$
|
132
|
|
$
|
20
|
|
$
|
—
|
|
$
|
—
|
|
$
|
43
|
|
$
|
—
|
|
$
|
—
|
|
$
|
221
|
|
Collectively
evaluated for
impairment
|
|
|
4,275
|
|
|
127
|
|
|
7,077
|
|
|
854
|
|
|
555
|
|
|
337
|
|
|
737
|
|
|
25
|
|
|
1,192
|
|
|
15,179
|
|
ALL balance at September 30, 2020
|
|
$
|
4,301
|
|
$
|
127
|
|
$
|
7,209
|
|
$
|
874
|
|
$
|
555
|
|
$
|
337
|
|
$
|
780
|
|
$
|
25
|
|
$
|
1,192
|
|
$
|
15,400
|
|
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. Despite the above allocations, the allowance for loan losses is general in nature and is available to absorb losses from any loan segment.
There were no new troubled debt restructurings granted for the three months ended December 31, 2020.
The following is a summary of troubled debt restructuring granted during the three months ended December 31, 2019 (dollars in thousands):
|
|
For the Three Months Ended December 31, 2019
|
|
|
|
Number of
Contracts
|
|
|
Pre-Modification
Outstanding
Recorded
Investment
|
|
|
Post-Modification
Outstanding
Recorded
Investment
|
|
Troubled Debt Restructurings
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
1
|
|
|
$
|
534
|
|
|
$
|
534
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Obligations of states and political subdivisions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Home equity loans and lines of credit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Auto loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
1
|
|
|
$
|
534
|
|
|
$
|
534
|
|
The one new troubled debt restructuring granted for the three months ended December 31, 2019, totaled $534,000 and was granted an interest rate concession.
For the three months ended December 31, 2020 and 2019, no loans defaulted on a restructuring agreement within one year of modification.
As of December 31, 2020, approximately 15 of our commercial clients had requested loan payment deferrals or payments of interest only on loans totaling $28.2 million. We have had similar request from approximately 17 mortgage customers and approximately 22 auto loan customers. In accordance with interagency guidance issued in March 2020, these short-term deferrals are not considered troubled debt restructurings (“TDRs”) unless the borrower was previously experiencing financial difficulty.
22
In addition, the risk-rating on COVID-19 modified loans did not change, and these loans will not be considered past due until after the deferral period is over and scheduled payments resume. The credit quality of these loans will be reevaluated after the deferral period ends.
At December 31, 2020, our non-performing assets were not yet materially impacted by the economic pressures of COVID-19, although there can be no assurance that our non-performing assets will not increase in the future. In addition, we will continue to closely monitor credit risk and our exposure to increased loan losses resulting from the impact of COVID-19 on our commercial and consumer clients..
Deposits consist of the following major classifications (in thousands):
|
|
December 31, 2020
|
|
|
September 30, 2020
|
|
Non-interest bearing demand accounts
|
|
$
|
256,202
|
|
|
$
|
242,642
|
|
Interest bearing demand accounts
|
|
|
314,509
|
|
|
|
274,722
|
|
Money market accounts
|
|
|
390,173
|
|
|
|
401,863
|
|
Savings and club accounts
|
|
|
168,435
|
|
|
|
160,975
|
|
Certificates of deposit
|
|
|
501,015
|
|
|
|
463,494
|
|
Total
|
|
$
|
1,630,334
|
|
|
$
|
1,543,696
|
|
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, 2020 included in the Company’s Annual Report on Form 10-K.
The following table comprises the components of net periodic benefit cost for the three month periods ended December 31, 2020 and 2019 (in thousands):
|
|
For the Three Months Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Service Cost
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest Cost
|
|
|
113
|
|
|
|
121
|
|
Expected return on plan assets
|
|
|
(289
|
)
|
|
|
(269
|
)
|
Amortization of net loss from earlier periods
|
|
|
55
|
|
|
|
—
|
|
Net periodic benefit cost
|
|
$
|
(121
|
)
|
|
$
|
(148
|
)
|
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 service for benefit accrual purposes will be credited 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.
The Company previously 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 that were available under the Plan, 1,698,090 were available to be issued in connection with the exercise of stock options and 679,236 were available to 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 granted under the plan were granted at no less than the fair value of the Company’s common stock on the date of the grant. As of the effective date of the 2016 Equity Incentive Plan (detailed below), no further grants will be made under the Plan and forfeitures of outstanding awards under the Plan will be added to the shares available under the 2016 Equity Incentive Plan.
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
23
for issuance upon the grant or exercise of awards. The 2016 Plan allows for the granting of restricted stock, restricted stock units, ISOs and NSOs.
The Company classifies share-based compensation for employees and outside directors within “Compensation and employee benefits” in the Consolidated Statement of Operations to correspond with the same line item as compensation paid.
Restricted stock shares outstanding at December 31, 2020 vest over periods ranging from 9 to 45 months. 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 expenses the fair value of all share based compensation grants over the requisite service period.
For the three months ended December 31, 2020 and 2019, the Company recorded $232,000 and $240,000 of share-based compensation expense, respectively, comprised of restricted stock expense. Expected future compensation expense relating to the restricted shares outstanding at December 31, 2020 is $867,000 over the remaining vesting period of 3.75 years.
The following is a summary of the status of the Company’s restricted stock as of December 31, 2020, and changes therein during the three month period then ended:
|
|
Number of
Restricted Stock
|
|
|
Weighted-
average
Grant Date
Fair Value
|
|
Nonvested at September 30, 2020
|
|
|
35,245
|
|
|
$
|
16.15
|
|
Granted
|
|
|
43,939
|
|
|
|
12.56
|
|
Vested
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
Nonvested at December 31, 2020
|
|
|
79,184
|
|
|
$
|
14.16
|
|
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.
24
Assets and Liabilities Required to be Measured and Reported at Fair Value on a Recurring Basis
The following tables provide the fair value for assets and liabilities required to be measured and reported at fair value on a recurring basis on the Consolidated Balance Sheet as of December 31, 2020 and September 30, 2020 by level within the fair value hierarchy (in thousands).
Recurring Fair Value Measurements at Reporting Date
|
|
|
|
December 31, 2020
|
|
Assets
|
|
Level I
|
|
|
Level II
|
|
|
Level III
|
|
|
Total
|
|
Investment securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage backed securities
|
|
$
|
—
|
|
|
$
|
79,387
|
|
|
$
|
—
|
|
|
$
|
79,387
|
|
Obligations of states and political subdivisions
|
|
|
—
|
|
|
|
21,873
|
|
|
|
—
|
|
|
|
21,873
|
|
U.S. government agencies
|
|
|
—
|
|
|
|
2,029
|
|
|
|
—
|
|
|
|
2,029
|
|
Corporate obligations
|
|
|
—
|
|
|
|
51,647
|
|
|
|
5,388
|
|
|
|
57,035
|
|
Other debt securities
|
|
|
—
|
|
|
|
13,752
|
|
|
|
—
|
|
|
|
13,752
|
|
Total debt securities
|
|
$
|
—
|
|
|
$
|
168,688
|
|
|
$
|
5,388
|
|
|
$
|
174,076
|
|
Equity securities- financial services
|
|
|
24
|
|
|
|
—
|
|
|
|
—
|
|
|
|
24
|
|
Derivatives and hedging activities
|
|
|
—
|
|
|
|
1,694
|
|
|
|
—
|
|
|
|
1,694
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives and hedging activities
|
|
|
—
|
|
|
|
5,315
|
|
|
|
—
|
|
|
|
5,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
Assets
|
|
Level I
|
|
|
Level II
|
|
|
Level III
|
|
|
Total
|
|
Investment securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage backed securities
|
|
$
|
—
|
|
|
$
|
91,431
|
|
|
$
|
—
|
|
|
$
|
91,431
|
|
Obligations of states and political subdivisions
|
|
|
—
|
|
|
|
21,931
|
|
|
|
—
|
|
|
|
21,931
|
|
U.S. government treasury securities
|
|
|
—
|
|
|
|
24,990
|
|
|
|
—
|
|
|
|
24,990
|
|
U.S. government agencies
|
|
|
—
|
|
|
|
8,048
|
|
|
|
—
|
|
|
|
8,048
|
|
Corporate obligations
|
|
|
—
|
|
|
|
43,214
|
|
|
|
8,260
|
|
|
|
51,474
|
|
Other debt securities
|
|
|
—
|
|
|
|
14,610
|
|
|
|
—
|
|
|
|
14,610
|
|
Total debt securities
|
|
$
|
—
|
|
|
$
|
204,224
|
|
|
$
|
8,260
|
|
|
$
|
212,484
|
|
Equity securities-financial services
|
|
|
17
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17
|
|
Derivatives and hedging activities
|
|
|
—
|
|
|
|
2,192
|
|
|
|
—
|
|
|
|
2,192
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives and hedging activities
|
|
|
—
|
|
|
|
7,002
|
|
|
|
—
|
|
|
|
7,002
|
|
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, 2020 and 2019 (in thousands).
|
|
Fair Value Measurement Using
Significant Unobservable Inputs
(Level III)
|
|
|
|
Three Months Ended
|
|
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
Beginning balance
|
|
$
|
8,260
|
|
|
$
|
7,792
|
|
Purchases, sales, issuances, settlements, net
|
|
|
(3,000
|
)
|
|
|
—
|
|
Total unrealized gain (loss):
|
|
|
|
|
|
|
|
|
Included in earnings
|
|
|
—
|
|
|
|
—
|
|
Included in other comprehensive income (loss)
|
|
|
128
|
|
|
|
29
|
|
Transfers in and/or out of Level III
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
5,388
|
|
|
$
|
7,821
|
|
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
25
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 comparable. 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.
Assets and Liabilities Required to be Measured and Reported on a Non-Recurring Basis
The following tables provide the fair value for assets required to be measured and reported at fair value on a non recurring basis on the Consolidated Balance Sheet as of December 31, 2020 and September 30, 2020 by level within the fair value hierarchy:
Non-Recurring Fair Value Measurements at Reporting Date (in thousands)
|
|
|
|
December 31, 2020
|
|
|
|
Level I
|
|
|
Level II
|
|
|
Level III
|
|
|
Total
|
|
Foreclosed real estate
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
160
|
|
|
$
|
160
|
|
Impaired loans
|
|
|
—
|
|
|
|
—
|
|
|
|
7,213
|
|
|
|
7,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
|
|
Level I
|
|
|
Level II
|
|
|
Level III
|
|
|
Total
|
|
Foreclosed real estate
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
269
|
|
|
$
|
269
|
|
Impaired loans
|
|
|
—
|
|
|
|
—
|
|
|
|
16,983
|
|
|
|
16,983
|
|
The following tables present 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
|
(dollars in thousands)
|
|
Fair Value
Estimate
|
|
|
Valuation
Techniques
|
|
Unobservable
Input
|
|
Range
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
7,213
|
|
|
Appraisal of
collateral (1)
|
|
Appraisal
adjustments (2)
|
|
0% to 35%
(20.4%)
|
Foreclosed real estate owned
|
|
|
160
|
|
|
Appraisal of
collateral (1)
|
|
Appraisal
adjustments (2)
|
|
20% to 35%
(27.9%)
|
26
|
|
Quantitative Information about Level 3 Fair Value Measurements
|
(dollars in thousands)
|
|
Fair Value
Estimate
|
|
|
Valuation
Techniques
|
|
Unobservable
Input
|
|
Range
|
September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
16,983
|
|
|
Appraisal of
collateral (1)
|
|
Appraisal
adjustments (2)
|
|
0% to 35%
(20.5%)
|
Foreclosed real estate owned
|
|
|
269
|
|
|
Appraisal of
collateral (1)
|
|
Appraisal
adjustments (2)
|
|
20% to 35%
(25.7%)
|
(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.
|
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, 2020, 14 impaired loans with a carrying value of $7.3 million were reduced by specific valuation allowance totaling $102,000 resulting in a net fair value of $7.2 million based on Level 3 inputs. At September 30, 2020, 111 impaired loans with a carrying value of $17.2 million were reduced by a specific valuation totaling $221,000 resulting in a net fair value of $17.0 million based on Level 3 inputs.
Assets and Liabilities not Required to be Measured and Reported at Fair Value
The following tables provide the carrying value and fair value for certain financial instruments that are not required to be measured or reported at fair value on the consolidated Balance Sheet at December 31, 2020 and September 30, 2020 by level within the fair value hierarchy:
|
|
December 31, 2020
|
|
(in thousands)
|
|
Carrying Value
|
|
|
Level I
|
|
|
Level II
|
|
|
Level III
|
|
|
Total Fair
Value
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable, net
|
|
|
1,375,295
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,387,543
|
|
|
|
1,387,543
|
|
Mortgage servicing rights
|
|
|
511
|
|
|
|
—
|
|
|
|
—
|
|
|
|
511
|
|
|
|
511
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
1,630,334
|
|
|
$
|
1,129,319
|
|
|
$
|
—
|
|
|
$
|
505,649
|
|
|
$
|
1,634,968
|
|
Other borrowings
|
|
|
14,164
|
|
|
|
—
|
|
|
|
—
|
|
|
|
15,392
|
|
|
|
15,392
|
|
|
|
September 30, 2020
|
|
(in thousands)
|
|
Carrying Value
|
|
|
Level I
|
|
|
Level II
|
|
|
Level III
|
|
|
Total Fair
Value
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable, net
|
|
|
1,418,182
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,426,962
|
|
|
|
1,426,962
|
|
Mortgage servicing rights
|
|
|
393
|
|
|
|
—
|
|
|
|
—
|
|
|
|
393
|
|
|
|
393
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
1,543,696
|
|
|
$
|
1,080,201
|
|
|
$
|
—
|
|
|
$
|
467,630
|
|
|
$
|
1,547,831
|
|
Other borrowings
|
|
|
14,164
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17,721
|
|
|
|
17,721
|
|
For Cash and Cash Equivalents, Accrued Interest Receivable, Regulatory Stock, Bank Owned Life Insurance, Short-Term Borrowings, Advances by Borrowers for Taxes and Insurance, and Accrued Interest Payable the carrying value is a reasonable estimate of the fair value and are considered Level 1 measurements.
The fair value approximates the current book value.
27
11.
|
Accumulated Other Comprehensive Income (Loss)
|
The activity in accumulated other comprehensive income (loss) for the three month periods ended December 31, 2020 and 2019 is as follows (in thousands):
|
|
Accumulated Other
Comprehensive Income/(Loss)
|
|
|
|
Defined
Benefit
Pension Plan
|
|
|
Unrealized Gains
(Losses) on
Securities
Available for Sale
|
|
|
Derivatives
|
|
|
Total
|
|
Balance at September 30, 2020
|
|
$
|
(3,432
|
)
|
|
$
|
3,167
|
|
|
$
|
(3,791
|
)
|
|
$
|
(4,056
|
)
|
Other comprehensive income (loss) before
reclassifications
|
|
|
—
|
|
|
|
(174
|
)
|
|
|
406
|
|
|
|
232
|
|
Amounts reclassified from accumulated
other comprehensive income (loss)
|
|
|
—
|
|
|
|
—
|
|
|
|
527
|
|
|
|
527
|
|
Period change
|
|
|
—
|
|
|
|
(174
|
)
|
|
|
933
|
|
|
|
759
|
|
Balance at December 31, 2020
|
|
$
|
(3,432
|
)
|
|
$
|
2,993
|
|
|
$
|
(2,858
|
)
|
|
$
|
(3,297
|
)
|
Balance at September 30, 2019
|
|
$
|
(1,527
|
)
|
|
$
|
807
|
|
|
$
|
(560
|
)
|
|
$
|
(1,280
|
)
|
Other comprehensive income (loss) before
reclassifications
|
|
|
—
|
|
|
|
(16
|
)
|
|
|
173
|
|
|
|
157
|
|
Amounts reclassified from accumulated
other comprehensive income (loss)
|
|
|
—
|
|
|
|
(175
|
)
|
|
|
(54
|
)
|
|
|
(229
|
)
|
Period change
|
|
|
—
|
|
|
|
(191
|
)
|
|
|
119
|
|
|
|
(72
|
)
|
Balance at December 31, 2019
|
|
$
|
(1,527
|
)
|
|
$
|
616
|
|
|
$
|
(441
|
)
|
|
$
|
(1,352
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents significant amounts reclassified out of each component of accumulated other comprehensive income (loss) for the three month periods ended December 31, 2020 and 2019 (in thousands):
|
|
Amount Reclassified from
Accumulated Other Comprehensive Income (Loss)
|
Details About Accumulated Other Comprehensive Income (Loss) Components
|
|
Accumulated Other Comprehensive Income (Loss) for the Three Months Ended December 31,
|
|
|
Affected Line Item in the
Consolidated Statement of Income
|
|
|
2020
|
|
|
2019
|
|
|
|
Securities available for sale
|
|
|
|
|
|
|
|
|
|
|
Net securities gains reclassified into earnings
|
|
$
|
—
|
|
|
$
|
221
|
|
|
Gain on sale of investment securities available for sale, net
|
Related income tax expense
|
|
|
—
|
|
|
|
(46
|
)
|
|
Income taxes
|
Net effect on accumulated other comprehensive income (loss)
for the period
|
|
|
—
|
|
|
|
175
|
|
|
|
Derivatives and hedging activities:
|
|
|
|
|
|
|
|
|
|
|
Interest expense, effective portion
|
|
|
(667
|
)
|
|
|
68
|
|
|
Deposits and short-term borrowings interest expense
|
Related income tax expense
|
|
|
140
|
|
|
|
(14
|
)
|
|
Income taxes
|
Net effect on accumulated other comprehensive income (loss)
for the period
|
|
|
(527
|
)
|
|
|
54
|
|
|
|
Total reclassification for the period
|
|
$
|
(527
|
)
|
|
$
|
229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
28
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, 2020 and September 30, 2020 (in thousands).
|
|
|
|
Fair Values of Derivative Instruments
|
|
|
|
|
|
Asset Derivatives
|
|
|
|
|
|
As of December 31, 2020
|
|
|
|
|
|
|
|
|
|
As of September 30, 2020
|
|
|
|
|
Hedged Item
|
Notional
Amount
|
|
Balance
Sheet
Location
|
|
Fair
Value
|
|
|
Notional
Amount
|
|
|
Balance
Sheet
Location
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Loans
|
$
|
62,765
|
|
Other Assets
|
|
$
|
1,694
|
|
|
$
|
55,784
|
|
|
Other Assets
|
|
$
|
2,192
|
|
Total
|
$
|
62,765
|
|
|
|
$
|
1,694
|
|
|
$
|
55,784
|
|
|
|
|
$
|
2,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Values of Derivative Instruments
|
|
|
|
|
|
Liability Derivatives
|
|
|
|
|
|
As of December 31, 2020
|
|
|
|
|
|
|
|
|
|
As of September 30, 2020
|
|
|
|
|
Hedged Item
|
Notional
Amount
|
|
Balance
Sheet
Location
|
|
Fair
Value
|
|
|
Notional
Amount
|
|
|
Balance
Sheet
Location
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB Advances
|
$
|
-
|
|
Other Liabilities
|
|
$
|
-
|
|
|
$
|
25,000
|
|
|
Other Liabilities
|
|
$
|
700
|
|
Brokered Deposits
|
|
420,000
|
|
Other Liabilities
|
|
|
3,616
|
|
|
|
410,000
|
|
|
Other Liabilities
|
|
|
4,098
|
|
Commercial Loans
|
|
77,716
|
|
Other Liabilities
|
|
|
1,699
|
|
|
|
70,784
|
|
|
Other Liabilities
|
|
|
2,204
|
|
Total
|
$
|
497,716
|
|
|
|
$
|
5,315
|
|
|
$
|
505,784
|
|
|
|
|
$
|
7,002
|
|
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 variable rate amounts from a counterparty in exchange for the Company making fixed payments. As of December 31, 2020, the Company had eighteen interest rate swaps with a notional principal amount of $420 million associated with the Company’s cash outflows associated with various brokered certificates and $78 million associated with associated with various commercial loans.
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 periods ended December 31, 2020 and 2019.
Amounts reported in accumulated other comprehensive income ( loss) related to derivatives that 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, 2020 and 2019, the Company had $667,000 of losses which resulted in an increase to interest expense and $68,000 of gains reclassified which resulted in a decrease to interest expense. During the next twelve months, the Company estimates that $2.0 million will be reclassified as a increase to interest expense.
29
The table below presents the effect of the Company’s cash flow hedge accounting on Accumulated Other Comprehensive Income (Loss) for the three month periods ended December 31, 2020 and 2019 (in thousands).
The Effect of Fair Value and Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income (Loss)
|
|
Derivatives in Hedging Relationships
|
|
Loss 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) Gain Recognized in
OCI on Derivative
(Effective Portion)
Three Months Ended December 31,
|
|
Derivatives in Cash Flow Hedging Relationships
|
|
2020
|
|
|
2019
|
|
|
|
|
2020
|
|
|
2019
|
|
Interest Rate Products
|
|
$
|
1,181
|
|
|
$
|
151
|
|
|
Interest expense
|
|
$
|
(667
|
)
|
|
$
|
68
|
|
Total
|
|
$
|
1,181
|
|
|
$
|
151
|
|
|
|
|
$
|
(667
|
)
|
|
$
|
68
|
|
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 / adequately 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, 2020, the Company had derivatives in a net liability position and was required to post $5.3 million in collateral against its obligations under these agreements. As of September 30, 2019, the Company was required to post $7.5 million in collateral against its obligations under these agreements. If the Company had breached any of these provisions at December 31, 2020 and September 30, 2020, it could have been required to settle its obligations under the agreements at the termination value.
13.
|
Contingent Liabilities
|
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 results of operations.
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 received unearned fees and kickbacks in the process of making loans, in violation of the Real Estate Settlement Procedures Act. In an order dated January 29, 2018, the district court granted the Bank’s motion to dismiss the case. The plaintiff appealed the court’s ruling. In an opinion and order dated April 26, 2019, the appellate court reversed the district court’s order dismissing the plaintiff’s case against the Bank, and remanded the case back to the district court in order to continue the litigation. The litigation is now proceeding before the district court. On December 9, 2019, the court permitted an amendment to the complaint to add two new plaintiffs to the case asserting similar claims. On May 21, 2020, the court granted the plaintiffs’ motion for class certification. The case is currently stayed while the parties explore the possibility of a negotiated resolution to the case. In an order dated November 24, 2020, the Court referred the case to Magistrate Judge Timothy J. Sullivan to assist in mediation efforts. If these discussions are not successful, the Bank will continue to defend against such allegations. To the extent that this matter could result in exposure to the Bank, the amount of such exposures cannot currently be estimated.
On May 29, 2020, the Bank was named as a defendant in a second action commenced by three plaintiffs who will also seek to pursue this action as a class action on behalf of the entire class of people similarly situated. The plaintiffs allege that a bank previously acquired by ESSA Bancorp received unearned fees and kickbacks from a different title company than the one involved in the previously discussed litigation in the process of making loans. The original complaint alleged violations of the Real Estate Settlement Procedures Act, the Sherman Act, and the Racketeer Influenced and Corrupt Organizations Act (“RICO”). The plaintiffs filed an Amended complaint on September 30, 2020 that dropped the RICO claim, but they are continuing to pursue the Real Estate Settlement Procedures Act and Sherman Act claims. The Bank moved to dismiss the Sherman Act claim on October 14, 2020, and that motion is now fully briefed and awaiting a decision from the court. The Bank intends to defend against such allegations. To the extent that this matter could result in exposure to the Bank, the amount of such exposure cannot currently be estimated.
30
Management determined that the primary sources of revenue associated with financial instruments, including interest income on loans and investments, along with certain noninterest revenue sources including investment security gains, loan servicing charges, gains on the sale of loans, and earnings on bank owned life insurance are not within the scope of Topic 606. As a result, no changes were made during the period related to these sources of revenue, which cumulatively comprise 90.3% of the total revenue of the Corporation.
Noninterest income within the scope of Topic 606 are as follows:
Trust and Investment Fees
Trust and asset management income is primarily comprised of fees earned from the management and administration of trusts and other customer assets. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days after month end through a direct charge to customer’s accounts. The Company does not earn performance-based incentives. Optional services such as real estate sales and tax return preparation services are also available to existing trust and asset management customers. The Company’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e. as incurred). Payment is received shortly after services are rendered.
Service Charges on Deposit Accounts
Service charges on deposit accounts consist of account analysis fees (i.e. net fees earned on analyzed business and public checking accounts), monthly service fees, check orders, and other deposit account related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.
Fees, Exchange, and Other Service Charges
Fees, interchange, and other service charges are primarily comprised of debit card income, ATM fees, cash management income, and other services charges. Debit card income is primarily comprised of interchange fees earned whenever the Company’s debit cards are processed through card payment networks such as Mastercard. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a company ATM. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. The Company’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized when the services are rendered or upon completion., Payment is typically received immediately or in the following month.
Insurance Commissions
Insurance income primarily consists of commissions received on product sales. The Company acts as an intermediary between the Company’s customer and the insurance carrier. The Company’s performance obligation is generally satisfied upon the issuance of the policy. Shortly after the policy is issued, the carrier remits the commission payment to the Company, and the Company recognizes the revenue.
15. Leases
A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. On October 1, 2019, the Company adopted ASU No. 2016-02 “Leases” (Topic 842) and all subsequent ASUs that modified Topic 842. For the Company, Topic 842 primarily affected the accounting treatment for operating lease agreements in which the Company is the lessee.
31
Lessee Accounting
Substantially all of the leases in which the Company is the lessee are comprised of real estate property for branches, ATM locations, and office space with terms extending through 2044. All of our leases are classified as operating leases, and therefore, were previously not recognized on the Company’s Consolidated Balance sheet. With the adoption of Topic 842, operating lease agreements are required to be recognized on the Consolidated Balance sheet as a right-of-use (“ROU”) asset and a corresponding lease liability.
The following table presents the Consolidated Balance Sheet classification of the Company’s ROU assets and lease liabilities. The Company elected not to include short-term leases (i.e., leases with initial terms of twelve months or less), or equipment leases (deemed immaterial) on the Consolidated Balance sheet.
(in thousands)
|
|
December 31, 2020
|
|
Lease Right-of-Use Assets
|
Classification
|
|
|
|
Operating lease right-of-use assets
|
Other assets
|
$
|
6,885
|
|
Total Lease Right-Of-Use Assets
|
|
$
|
6,885
|
|
|
|
|
|
|
(in thousands)
|
|
December 31, 2020
|
|
Lease Liabilities
|
Classification
|
|
|
|
Operating lease Liabilities
|
Other liabilities
|
$
|
6,984
|
|
Total Lease Liabilities
|
|
$
|
6,984
|
|
|
|
|
|
|
(in thousands)
|
|
September 30, 2020
|
|
Lease Right-of-Use Assets
|
Classification
|
|
|
|
Operating lease right-of-use assets
|
Other assets
|
$
|
7,082
|
|
Total Lease Right-Of-Use Assets
|
|
$
|
7,082
|
|
|
|
|
|
|
(in thousands)
|
|
September 30, 2020
|
|
Lease Liabilities
|
Classification
|
|
|
|
Operating lease Liabilities
|
Other liabilities
|
$
|
7,161
|
|
Total Lease Liabilities
|
|
$
|
7,161
|
|
The calculated amount of the ROU assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. The Company’s lease agreements often include one or more options to renew at the Company’s discretion. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROU asset and lease liability. Regarding the discount rate, Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. For operating leases existing prior to October 1, 2019, the rate for the remaining lease term as of October 1, 2019 was used.
|
December 31, 2020
|
|
Weighted average remaining lease term
|
|
|
|
Operating leases
|
13.3 years
|
|
Weighted average discount rate
|
|
|
|
Operating leases
|
|
2.40
|
%
|
The following table represents lease costs and other lease information. As the Company elected, for all classes of underlying assets, not to separate lease and non-lease components and instead to account for them as a single lease component, the variable lease cost primarily represents variable payments such as common area maintenance and utilities.
Lease Costs (in thousands)
|
|
Three Months Ended December 31, 2020
|
|
Operating lease cost
|
|
$
|
263
|
|
Variable lease cost
|
|
|
64
|
|
Net lease cost
|
|
$
|
327
|
|
|
|
|
|
|
|
|
|
|
|
Lease Costs (in thousands)
|
|
Three Months Ended December 31,2019
|
|
Operating lease cost
|
|
$
|
254
|
|
Variable lease cost
|
|
|
59
|
|
Net lease cost
|
|
$
|
313
|
|
32
Future minimum payments for finance leases and operating leases with initial or remaining terms of one year or more as of December 31, 2020 were as follows:
(in thousands)
|
Operating leases
|
|
Twelve months Ended:
|
|
|
|
December 31, 2021
|
$
|
963
|
|
December 31, 2022
|
|
1,247
|
|
December 31, 2023
|
|
711
|
|
December 31, 2024
|
|
536
|
|
December 31, 2025
|
|
509
|
|
Thereafter
|
|
4,998
|
|
Total future minimum lease payments
|
|
8,964
|
|
Amounts representing interest
|
|
(1,980
|
)
|
Present Value of Net Future Minimum Lease Payments
|
$
|
6,984
|
|
33