ESSA Bancorp, Inc. - Quarter Report: 2007 December (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended December 31, 2007

OR

For the transition period from              to             

Commission File No. 001-33384

ESSA Bancorp, Inc.

(Exact name of registrant as specified in its charter)

(570) 421-0531

(Registrant’s telephone number)

N/A

(Former name or former address, if changed since last report)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days.    YES  x    NO  ¨.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer” and “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨    Accelerated filer  ¨    Non-accelerated filer  x    Smaller reporting company  ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

As of February 11, 2008 there were 16,980,900 shares of the Registrant’s common stock, par value $0.01 per share, outstanding.

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ESSA Bancorp, Inc.

FORM 10-Q

Index

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Part I. Financial Information

ESSA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

See accompanying notes to the unaudited consolidated financial statements.

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ESSA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF INCOME

(UNAUDITED)

See accompanying notes to the unaudited consolidated financial statements.

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ESSA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

See accompanying notes to the unaudited consolidated financial statements.

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ESSA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

See accompanying notes to the unaudited consolidated financial statements.

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ESSA BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(unaudited)

The unaudited, consolidated financial statements include the accounts of ESSA Bancorp, Inc. (the “Company”), ESSA Bank & Trust (the “Bank”), and the Bank’s wholly owned subsidiaries, ESSACOR Inc. and Pocono Investment Company. The primary purpose of the Company is to act as a holding company for the Bank. The Company is subject to regulation and supervision by the Office of Thrift Supervision (the “OTS”) The Bank is a Pennsylvania chartered savings association located in Stroudsburg, Pennsylvania. The Bank’s primary business consists of the taking of deposits and granting of loans to customers generally in Monroe and Northampton counties, Pennsylvania. The Bank is subject to regulation and supervision by the Pennsylvania Department of Banking and the OTS. The investment in subsidiary on the parent company’s financial statements is carried at the parent company’s equity in the underlying net assets.

ESSACOR, Inc. is a Pennsylvania corporation that is currently inactive. Pocono Investment Company is a Delaware corporation formed as an investment company subsidiary to hold and manage certain investments of the Bank, including certain intellectual property. All intercompany transactions have been eliminated in consolidation.

The unaudited consolidated financial statements reflect all adjustments, which in the opinion of management are necessary for a fair presentation of the results of the interim periods and are of a normal and recurring nature. Operating results for the three month period ended December 31, 2007 are not necessarily indicative of the results that may be expected for the year ending September 30, 2008.

On July 25, 2006, the Bank’s Board of Directors adopted a Plan of Conversion (the “Plan”) pursuant to which the Bank converted to a Pennsylvania chartered stock association and formed ESSA Bancorp, Inc., a Pennsylvania chartered company (the “Company”). On December 7, 2006 the Company filed a Registration Statement on Form S-1 with the Securities and Exchange Commission (File No. 333-139157) with respect to the shares to be offered and sold pursuant to the Plan. The Company registered for offer and sale 16,980,900 shares of common stock, par value $0.01 per share, at a sales price of $10.00 per share.

The stock offering was consummated on April 3, 2007, resulting in gross proceeds of $158.7 million, through the sale of 15,870,000 shares at a price of $10.00 per share. The Company also contributed 1,110,900 shares of its common stock to the ESSA Bank & Trust Foundation (the “Foundation”) and $1.6 million in cash. Expenses related to the offering were approximately $2.9 million which resulted in net proceeds of approximately $155.8 million prior to the contribution to the Foundation.

The Company lent approximately $13.6 million to the Bank’s Employee Stock Ownership Plan (“ESOP”). The Company retained approximately $64.3 million of the net proceeds of the offering prior to the contribution to the Foundation, and the remainder of the net proceeds were contributed to the Bank.

There are no convertible securities which would affect the numerator in calculating basic and diluted earnings per share; therefore, net income of $1,697,000 for the three months ended December 31, 2007 will be used as the numerator.

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The following table sets for the composition of the weighted-average common shares (denominator) used in the basic and diluted earnings per share computation.

The accounting principles followed by the Bank and its subsidiaries and the methods of applying these principles conform to U.S. generally accepted accounting principles and to general practice within the banking industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the balance sheet date and related revenues and expenses for the period. Actual results could differ significantly from those estimates.

The components of comprehensive income consist of unrealized gains and losses on available for sale securities and the change in minimum pension liability. For the three months ended December 31, 2007, this activity is shown under the heading Comprehensive Income as presented in the Consolidated Statement of Changes in Stockholders’ Equity (Unaudited). For the three months ended December 31, 2006, comprehensive income totaled $875,000.

In September 2006, the FASB reached consensus on the guidance provided by Emerging Issues Task Force Issue 06-4 (“EITF 06-4”), Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. The guidance is applicable to endorsement split-dollar life insurance arrangements, whereby the employer owns and controls the insurance policy, that are associated with a postretirement benefit. EITF 06-4 requires that for a split-dollar life insurance arrangement within the scope of the Issue, an employer should recognize a liability for future benefits in accordance with FAS No. 106 (if, in substance, a postretirement benefit plan exists) or Accounting Principles Board Opinion No. 12 (if the arrangement is, in substance, an individual deferred compensation contract) based on the substantive agreement with the employee. EITF 06-4 is effective for fiscal years beginning after December 15, 2007. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s results of operations or financial condition.

In March 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-10 (“EITF 06-10”), Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements. EITF 06-10 provides guidance for determining a liability for the postretirement benefit obligation as well as recognition and measurement of the associated asset on the basis of the terms of the collateral assignment agreement. EITF 06-10 is effective for fiscal years beginning after December 15, 2007. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

In June 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-11 (“EITF 06-11”), Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards. EITF 06-11 applies to share-based payment arrangements with dividend protection features that entitle employees to receive (a) dividends on equity-classified nonvested shares, (b) dividend equivalents on equity-classified nonvested share units, or (c) payments equal to the dividends paid on the underlying shares while an equity-classified share option is

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outstanding, when those dividends or dividend equivalents are charged to retained earnings under FAS No. 123R, Share-Based Payment, and result in an income tax deduction for the employer. A consensus was reached that a realized income tax benefit from dividends or dividend equivalents that are charged to retained earnings and are paid to employees for equity-classified nonvested equity shares, nonvested equity share units, and outstanding equity share options should be recognized as an increase in additional paid-in capital. EITF 06-11 is effective for fiscal years beginning after December 15, 2007, and interim periods within those fiscal years. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes. FIN 48 is an interpretation of FAS No. 109, Accounting for Income Taxes, and it seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. In addition, FIN No. 48 requires expanded disclosure with respect to the uncertainty in income taxes and is effective for fiscal years beginning after December 15, 2006. The Company adopted FIN No. 48 October 1, 2007, the adoption of this standard did not have a material effect on the Company’s results of operations or financial position.

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“FAS”) No. 157, Fair Value Measurements, which provides enhanced guidance for using fair value to measure assets and liabilities. The standard applies whenever other standards require or permit assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. FAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Early adoption is permitted. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

In September 2006, the FASB issued FAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Post Retirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R). This Statement requires that employers measure plan assets and obligations as of the balance sheet date. This requirement is effective for fiscal years ending after December 15, 2008. The other provisions of the Statement were effective as of the end of the fiscal year ending after December 15, 2006, for public companies. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position.

In February 2007, the FASB issued FAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115, which provides all entities with an option to report selected financial assets and liabilities at fair value. The objective of the FAS No. 159 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in earnings caused by measuring related assets and liabilities differently without having to apply the complex provisions of hedge accounting. FAS No. 159 is effective as of the beginning of an entity’s first fiscal year beginning on November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007 provided the entity also elects to apply the provisions of FAS No. 157, Fair Value Measurements. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

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The amortized cost and estimated fair value of investment securities available for sale and held to maturity are summarized as follows (in thousands):

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The amortized cost and estimated fair value of debt securities at December 31, 2007, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (in thousands):

The Bank had no sale of investment securities for the three months ended December 31, 2007 or 2006.

Loans receivable consist of the following (in thousands):

The activity in the allowance for loan losses is summarized as follows (in thousands):

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

For a detailed disclosure on the Bank’s pension and employee benefits plans, please refer to Note 15 of the Bank’s Consolidated Financial Statements for the year ended September 30, 2007 included in the Company’s form 10-K.

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

The Bank expects to contribute $583,000 to its pension plan in 2008.

Forward Looking Statements

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

These forward-looking statements are subject to significant risks, assumptions and uncertainties, including, among other things, the following important factors that could affect the actual outcome of future events:

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Overview

The Company consummated its initial stock offering on April 3, 2007 with the sale of 15,870,000 shares of common stock. The Company also contributed 1,110,900 shares of the Company’s outstanding common stock, and contributed $1.6 million in cash, to a charitable foundation established by the Bank. Net proceeds of the offering were approximately $155.9 million prior to the contribution to ESSA Bank & Trust Foundation.

Comparison of Financial Condition at December 31, 2007 and September 30, 2007

Total Assets. Total assets increased by $20.2 million, or 2.2%, to $930.6 million at December 31, 2007 from $910.4 million at September 30, 2007. This increase was primarily due to increases in interest-bearing deposits with other institutions and loans receivable.

Interest-Bearing Deposits with Other Institutions. Interest-bearing deposits with other institutions increased $2.5 million to $8.7 million at December 31, 2007 from $6.2 million at September 30, 2007. The primary reason for the increase was an increase in the Company’s interest-bearing demand deposit account at FHLBank Pittsburgh of $2.3 million. The demand deposit account increased as a result of the Company’s receipt in December, 2007 of the first loan payment from the Bank’s ESOP of $1.2 million along with the accumulated interest income received from the Company’s investment portfolio.

Net Loans. Net loans increased $19.1 million, or 3.1%, to $638.9 million at December 31, 2007 from $619.8 million at September 30, 2007. Loan growth was primarily attributed to growth in several product categories as a result of our continued marketing efforts. During this period residential, construction and commercial real estate loans outstanding increased by $10.9 million to $510.9 million, $1.6 million to $9.4 million and $2.7 million to $61.1 million, respectively. Commercial loans outstanding increased by $3.3 million to $10.9 million. Home equity loans and lines of credit outstanding increased by $146,000 to $47.7 million and other loans outstanding increased by $387,000 to $4.3 million.

Deposits. Deposits decreased $11.8 million, or 3.1%, to $372.9 million at December 31, 2007 from $384.7 million at September 30, 2007. At December 31, 2007 compared to September 30, 2007 money market accounts increased $5.8 million to $45.6 million. This increase was offset during the same period by decreases in non-interest bearing demand accounts of $1.8 million to $24.1 million, NOW accounts of $2.9 million to $54.6 million, savings and club accounts of $3.3 million to $62.7 million and certificates of deposit of $9.6 million to $185.8 million. Included in the certificates of deposit at December 31, 2007 was a decrease of $5.6 million in brokered certificates of deposit to $14.4 million. The decline in brokered certificates was the result of the Company’s decision not to renew maturing certificates based on the cost of renewing those certificates compared to other available funding sources. The decline in retail deposits was primarily attributable to the increasingly competitive environment within the Company’s market.

Borrowed Funds. Borrowed funds increased by $28.1 million to $342.0 million at December 31, 2007, from $313.9 million at September 30, 2007. The increase in borrowed funds was used primarily to offset the decline in deposits and to fund additional loan growth.

Stockholders’ Equity. Stockholders’ equity increased by $2.4 million, to $207.1 million at December 31, 2007 from $204.7 million at September 30, 2007. This increase was primarily the result of the addition of net income for the three months ended December 31, 2007 of $1.7 million together with an increase in the unrealized gain on investment securities available for sale, net of taxes, of $504,000 at December 31, 2007 compared to September 30, 2007 and a decrease in unallocated shares held by the Bank’s ESOP of $171,000 for the same period.

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Average Balance Sheets for the Three Months Ended December 31, 2007 and 2006

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

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Comparison of Operating Results for the Three Months Ended December 31, 2007 and December 31, 2006

Net Income. Net income increased $836,000, to $1.7 million for the three months ended December 31, 2007 compared to net income of $861,000 for the comparable period in 2006. The primary reason for this increase was an increase in the Company’s net average interest earning assets of $147.3 million for the three months ended December 31, 2007 compared to the corresponding 2006 period. The increase in net average interest earning assets was the result of the Company’s lending volume which resulted in a $69.0 million increase in average loans outstanding from the previous period, together with the Bank’s mutual-to-stock conversion and the Company’s subsequent stock offering.

Net Interest Income. Net interest income increased $1.9 million, to $6.2 million for the three months ended December 31, 2007 from $4.3 million for the comparable period in 2006. The increase was primarily attributable to the increase in net average earning assets and was offset in part by a 27 basis point decrease in the Company’s interest rate spread to 1.93% for the three months ended December 31, 2007, from 2.20% for the comparable period in 2006.

Interest Income. Interest income increased $2.8 million, to $12.9 million for the three months ended December 31, 2007 from $10.1 million for the comparable 2006 period. The increase resulted from a $190.8 million increase in average interest-earning assets. The overall yield on interest earning assets was 5.82% for the three months ended December 31, 2007, and for the comparable 2006 period. Loans increased on average $69.0 million between the two periods along with increases in the average balance of investment securities of $45.0 million and mortgage-backed securities of $69.0 million. In addition, average Federal Home Loan Bank stock increased $2.8 million along with an increase in the average balance of other interest earning assets of $4.9 million. The primary reasons for the increase in investment securities and mortgage-backed securities was the partial reinvestment of borrowing proceeds into these assets along with the investment of the majority of the net proceeds from the stock offering into short-term, investment grade debt and mortgage-backed securities issued by United States government sponsored agencies or entities. Average Federal Home Loan Bank stock increased as a result of the Bank’s increase in borrowings from the FHLBank Pittsburgh. As a member of the Federal Home Loan Bank System, the Bank maintains an investment in the capital stock of the FHLBank Pittsburgh in an amount not less than 70 basis points of the outstanding unused FHLB borrowing capacity or 1/20 of its outstanding FHLB borrowings, whichever is greater, as calculated throughout the year. The increase in average other interest earning assets was the result of an increase in the Company’s interest bearing deposits with other institutions resulting primarily from a small portion of the funds received from the stock offering.

Interest Expense. Interest expense increased $856,000, to $6.7 million for the three months ended December 31, 2007 from $5.8 million for the comparable 2006 period. The increase resulted from a $43.5 million increase in average interest-bearing liabilities, combined with a 27 basis point increase in the overall cost of interest bearing liabilities to 3.89% for the three months ended December 31, 2007 from 3.62% for the comparable 2006 period. Average interest bearing deposits decreased $23.0 million which was offset by an increase in average borrowed funds of $66.4 million.

Provision for Loan Losses. In evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect a borrower’s ability to repay, the estimated value of any underlying collateral, peer group information and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are subject to interpretation and revision as more information becomes available or as future events occur. After an evaluation of these factors, and after considering the growth in the Company’s loan portfolio, management made a provision for loan losses of $150,000 for the three months ended December 31, 2007 as compared to $90,000 for the three months ended December 31, 2006. The allowance for loan losses was $4.4 million, or 0.68% of loans outstanding at December 31, 2007, compared to $3.9 million, or 0.68% of loans outstanding at December 31, 2006.

Non-interest Income. Non-interest income increased $35,000, to $1.5 million for the three months ended December 31, 2007, from $1.4 million for the comparable 2006 period. The increase was primarily due to

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increases in trust and investment fees of $35,000, service charges and fees on loans of $18,000 and earnings on Bank-owned life insurance of $8,000. These increases were offset, in part, by decreases in service fees on deposit accounts of $13,000 and other non-interest income of $2,000.

Non-interest Expense. Non-interest expense increased $601,000, to $5.0 million for the three months ended December 31, 2007 from $4.4 million for the comparable period in 2006. The primary reasons for the increase were increases in compensation and employee benefits of $422,000, occupancy and equipment of $67,000, professional fees of $152,000 and data processing fees of $52,000. These increases were offset, in part, by decreases in advertising costs of $42,000 and other expenses of $50,000. Compensation and employee benefits increased primarily as a result of normal compensation and benefit increases of $266,000 along with an expense of $171,000 related to the ESOP which was implemented in April, 2007. Occupancy and equipment costs increased primarily as a result of increases in rental costs of $21,000 along with increases in depreciation expense of $23,000. Professional fees increased primarily as a result of increased legal, accounting, and regulatory fees as a result of being a publicly reporting company. Data processing fees increased due to increased volume and ongoing technology upgrades.

Income Taxes. Income tax expense increased $477,000 to $783,000 for the three months ended December 31, 2007 from $306,000 for the comparable 2006 period. The effective tax rate was 31.6% for the three months ended December 31, 2007 compared to 26.2% for the comparable 2006 period.

NON-PERFORMING ASSETS

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