ESSA Bancorp, Inc. - Quarter Report: 2013 June (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2013

¨	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File No. 001-33384

ESSA Bancorp, Inc.

(Exact name of registrant as specified in its charter)

Pennsylvania

20-8023072

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)


200 Palmer Street, Stroudsburg, Pennsylvania		18360
(Address of Principal Executive Offices)		(Zip Code)

(570) 421-0531

(Registrant’s telephone number)

N/A

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO x

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.

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

As of August 2, 2013 there were 12,079,111 shares of the Registrant’s common stock, par value $0.01 per share, outstanding.

ESSA Bancorp, Inc.

FORM 10-Q

Table of Contents


		Page
Part I. Financial Information

Item 1.	Financial Statements (unaudited)		1

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		27

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		36

Item 4.	Controls and Procedures		36

Part II. Other Information

Item 1.	Legal Proceedings		37

Item 1A.	Risk Factors		37

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		37

Item 3.	Defaults Upon Senior Securities		37

Item 4.	Mine Safety Disclosures		37

Item 5.	Other Information		37

Item 6.	Exhibits		38

Signature Page			39

Part I. Financial Information

Item 1. Financial Statements

ESSA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET

(UNAUDITED)


	June 30, 2013			September 30, 2012
	(dollars in thousands)
Cash and due from banks	$	12,477		$	11,034
Interest-bearing deposits with other institutions		7,849			4,516

Total cash and cash equivalents		20,326			15,550
Certificates of deposit		1,766			1,266
Investment securities available for sale, at fair value		310,621			329,585
Loans receivable, held for sale		—			346
Loans receivable (net of allowance for loan losses of $8,184 and $7,302)		942,794			950,009
Regulatory stock, at cost		12,358			21,914
Premises and equipment, net		15,921			16,170
Bank-owned life insurance		28,557			27,848
Foreclosed real estate		1,693			2,998
Intangible assets, net		2,707			3,457
Goodwill		8,817			8,541
Deferred income taxes		12,643			11,336
Other assets		20,214			29,766

TOTAL ASSETS	$	1,378,417		$	1,418,786


LIABILITIES
Deposits	$	1,010,500		$	995,634
Short-term borrowings		32,212			43,281
Other borrowings		145,160			191,460
Advances by borrowers for taxes and insurance		13,307			3,432
Other liabilities		12,188			9,568

TOTAL LIABILITIES		1,213,367			1,243,375


STOCKHOLDERS’ EQUITY
Preferred Stock ($.01 par value; 10,000,000 shares authorized, none issued)		—			—
Common stock ($.01 par value; 40,000,000 shares authorized, 18,133,095 issued; 12,215,926 and 13,229,908 outstanding at June 30, 2013 and September 30, 2012)		181			181
Additional paid in capital		182,374			181,220
Unallocated common stock held by the Employee Stock Ownership Plan (ESOP)		(10,645	)		(10,985	)
Retained earnings		70,225			65,181
Treasury stock, at cost; 5,917,169 and 4,903,187 shares outstanding at June 30, 2013 and September 30, 2012, respectively		(73,112	)		(61,944	)
Accumulated other comprehensive (loss) income		(3,973	)		1,758

TOTAL STOCKHOLDERS’ EQUITY		165,050			175,411

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,378,417		$	1,418,786

See accompanying notes to the unaudited consolidated financial statements.

ESSA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF INCOME

(UNAUDITED)


	For the Three Months Ended June 30,						For the Nine Months Ended June 30,
	2013			2012			2013			2012
	(dollars in thousands, except per share data)
INTEREST INCOME
Loans receivable, including fees	$	11,032		$	8,880		$	34,310		$	27,366
Investment securities:
Taxable		1,370			1,636			4,558			4,902
Exempt from federal income tax		73			55			200			158
Other investment income		16			5			63			13

Total interest income		12,491			10,576			39,131			32,439


INTEREST EXPENSE
Deposits		1,757			1,780			5,576			5,527
Short-term borrowings		27			7			109			18
Other borrowings		858			2,053			2,994			6,679

Total interest expense		2,642			3,840			8,679			12,224


NET INTEREST INCOME		9,849			6,736			30,452			20,215
Provision for loan losses		1,100			600			2,950			1,750


NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		8,749			6,136			27,502			18,465


NONINTEREST INCOME
Service fees on deposit accounts		797			670			2,315			2,058
Services charges and fees on loans		277			166			774			550
Trust and investment fees		230			262			641			684
Gain on sale of investments, net		11			—			749			147
Gain on sale of loans, net		11			19			426			27
Earnings on Bank-owned life insurance		235			194			709			588
Insurance commissions		231			177			638			563
Other		8			7			32			25

Total noninterest income		1,800			1,495			6,284			4,642


NONINTEREST EXPENSE
Compensation and employee benefits		4,690			3,888			14,314			11,804
Occupancy and equipment		956			756			2,935			2,288
Professional fees		549			339			1,453			1,083
Data processing		687			523			2,155			1,512
Advertising		170			110			425			263
Federal Deposit Insurance Corporation (FDIC) premiums		261			168			739			497
Loss (Gain) on foreclosed real estate		(100	)		(17	)		(498	)		90
Merger related costs		—			168			—			544
Amortization of intangible assets		250			81			749			243
Other		691			510			2,177			1,738

Total noninterest expense		8,154			6,526			24,449			20,062

Income before income taxes		2,395			1,105			9,337			3,045
Income taxes		519			311			2,542			706


NET INCOME	$	1,876		$	794		$	6,795		$	2,339


Earnings per share
Basic	$	0.16		$	0.07		$	0.58		$	0.22
Diluted	$	0.16		$	0.07		$	0.58		$	0.22
Dividends per share	$	0.05		$	0.05		$	0.15		$	0.15

See accompanying notes to the unaudited consolidated financial statements.

ESSA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)


	Three Months Ended June 30,						Nine Months Ended June 30,
	2013			2012			2013			2012
	(dollars in thousands)
Net income	$	1,876		$	794		$	6,795		$	2,339
Other comprehensive income (loss):
Investment securities available for sale:
Unrealized holding gain (loss)		(6,354	)		1,484			(8,229	)		(724	)
Tax effect		2,160			(505	)		2,798			246
Reclassification of gains recognized in net income		(11	)		—			(749	)		(147	)
Tax effect		4			—			255			50

Net of tax amount		(4,201	)		979			(5,925	)		(575	)
Pension plan adjustment:
Related to actuarial losses and prior service cost		98			119			294			356
Tax effect		(33	)		(40	)		(100	)		(120	)

Net of tax amount		65			79			194			236

Total other comprehensive income (loss)		(4,136	)		1,058			(5,731	)		(339	)

Comprehensive income (loss)	$	(2,260	)	$	1,852		$	1,064		$	2,000

See accompanying notes to the unaudited consolidated financial statements.

ESSA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)


	Common Stock					Additional Paid In Capital			Unallocated Common Stock Held by the ESOP			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
	Number of Shares			Amount		Additional Paid In Capital			Unallocated Common Stock Held by the ESOP			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
	(Dollars in thousands)
Balance, September 30, 2012		13,229,908		$	181	$	181,220		$	(10,985	)	$	65,181		$	(61,944	)	$	1,758		$	175,411

Net income													6,795									6,795
Other comprehensive loss:
Unrealized loss on securities available for sale, net of income tax benefit of $3,052																			(5,925	)		(5,925	)
Change in unrecognized pension cost, net of income taxes of $100																			194			194
Cash dividends declared ($.15 per share)													(1,751	)								(1,751	)
Stock based compensation							1,461															1,461
Allocation of ESOP stock							21			340												361
Treasury shares purchased		(1,013,982	)													(11,496	)					(11,496	)
Allocation of treasury shares incentive plan							(328	)								328						—

Balance, June 30, 2013		12,215,926		$	181	$	182,374		$	(10,645	)	$	70,225		$	(73,112	)	$	(3,973	)	$	165,050

See accompanying notes to the unaudited consolidated financial statements.

ESSA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)


	For the Nine Months Ended June 30,
	2013			2012
	(dollars in thousands)
OPERATING ACTIVITIES
Net income	$	6,795		$	2,339
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		2,950			1,750
Provision for depreciation and amortization.		860			726
Amortization and accretion of discounts and premiums, net		1,205			1,217
Net gain on sale of investment securities		(749	)		(147	)
Gain on sale of loans, net		(426	)		(27	)
Origination of mortgage loans sold		(19,184	)		(1,871	)
Proceeds from sale of mortgage loans originated for sale		19,956			1,898
Compensation expense on ESOP		361			348
Stock based compensation		1,461			1,623
Decrease in accrued interest receivable		307			264
(Decrease) increase in accrued interest payable		(156	)		55
Earnings on bank-owned life insurance		(709	)		(588	)
Deferred federal income taxes		1,646			1,009
Decrease in prepaid FDIC premiums		1,934			451
Increase in accrued pension liability		312			413
(Gain) loss on foreclosed real estate, net		(498	)		90
Amortization of identifiable intangible assets		750			243
Other, net		2,568			(282	)

Net cash provided by operating activities		19,383			9,511


INVESTING ACTIVITIES
Purchase of certificates of deposit		(500	)		—
Investment securities available for sale:
Proceeds from sale of investment securities		39,212			8,072
Proceeds from principal repayments and maturities		80,111			54,746
Purchases		(109,764	)		(95,833	)
Increase (decrease) in loans receivable, net		3,285			(5,485	)
Redemption of FHLB stock		9,556			2,408
Investment in limited partnership		(451	)		(4,442	)
Proceeds from sale of foreclosed real estate		2,841			1,622
Capital improvements to foreclosed real estate		(86	)		—
Investment in insurance subsidiary		(276	)		(373	)
Purchase of premises, equipment, and software		(723	)		(694	)

Net cash provided by (used for) investing activities		23,205			(39,979	)


FINANCING ACTIVITIES
Increase in deposits, net		22,863			50,973
Net (decrease) increase in short-term borrowings		(11,069	)		7,000
Proceeds from other borrowings		19,800			5,150
Repayment of other borrowings		(66,100	)		(55,150	)
Increase in advances by borrowers for taxes and insurance		9,875			5,561
Purchase of treasury stock shares		(11,430	)		(332	)
Dividends on common stock		(1,751	)		(1,644	)

Net cash provided by (used for) financing activities		(37,812	)		11,558

Increase (decrease) in cash and cash equivalents		4,776			(18,910	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		15,550			41,694

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	20,326		$	22,784


SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash Paid:
Interest	$	8,835		$	12,169
Income taxes		662			300
Noncash items:
Transfers from loans to foreclosed real estate	$	952		$	1,125
Treasury stock payable		66			—
Noncash assets received and liabilities assumed:
Goodwill	$	276		$	373

See accompanying notes to the unaudited consolidated financial statements.

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”), and 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 Company is subject to regulation and supervision as a savings and loan holding company by the Federal Reserve Board. 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, Northampton and Lehigh counties, Pennsylvania. The Bank is subject to regulation and supervision by the Pennsylvania Banking Department and the Federal Deposit Insurance Corporation. The investment in subsidiary on the parent company’s financial statements is carried at the parent company’s equity in the underlying net assets.

ESSACOR, Inc. is a Pennsylvania corporation that has been used to purchase properties at tax sales that represent collateral for delinquent loans of the Bank. 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 as a former subsidiary of First Star Bank. The Company acquired First Star Bank in a transaction that closed on July 31, 2012. Integrated Financial Corporation is currently inactive. Integrated Abstract Incorporated is a Pennsylvania Corporation that provides title insurance services. 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 nine month periods ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending September 30, 2013.

2.	Earnings per Share

The following table sets forth the composition of the weighted-average common shares (denominator) used in the basic and diluted earnings per share computation for the three and nine month periods ended June 30, 2013 and 2012.


	Three Months ended						Nine Months ended
	June 30, 2013			June 30, 2012			June 30, 2013			June 30, 2012
Weighted-average common shares outstanding		18,162,764			16,980,900			18,142,984			16,980,900
Average treasury stock shares		(5,645,336	)		(4,884,603	)		(5,269,686	)		(4,875,703	)
Average unearned ESOP shares		(1,058,066	)		(1,103,342	)		(1,069,427	)		(1,114,702	)
Average unearned non-vested shares		(49,571	)		(135,472	)		(38,970	)		(145,363	)

Weighted average common shares and common stock equivalents used to calculate basic earnings per share		11,409,791			10,857,483			11,764,901			10,845,132

Additional common stock equivalents (non-vested stock) used to calculate diluted earnings per share		—			—			—			—
Additional common stock equivalents (stock options) used to calculate diluted earnings per share		—			—			—			—

Weighted average common shares and common stock equivalents used to calculate diluted earnings per share		11,409,791			10,857,483			11,764,901			10,845,132

At June 30, 2013 and 2012 there were options to purchase 1,458,379 shares of common stock outstanding at a price of $12.35 per share that were not included in the computation of diluted EPS because to do so would have

been anti-dilutive. At June 30, 2013 and 2012 there were 24,999 and 105,519 shares, respectively, of nonvested stock outstanding at a price of $10.94 per share that were not included in the computation of diluted EPS because to do so would have been anti-dilutive.

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 significantly from those estimates.

4.	Recent Accounting Pronouncements:

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. The amendments in this Update affect all entities that have financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement. The requirements amend the disclosure requirements on offsetting in Section 210-20-50. This information will enable users of an entity’s financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments in the scope of this Update. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. This ASU is not expected to have a significant impact on the Company’s financial statements.

In October, 2012, the FASB issued ASU 2012-06, Business Combinations (Topic 805) - Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution. ASU 2012-06 requires that when a reporting entity recognizes an indemnification asset (in accordance with Subtopic 805-20) as a result of a government assisted acquisition of a financial institution and subsequently a change in the cash flows expected to be collected on the indemnification asset occurs (as a result of a change in cash flows expected to be collected on the assets subject to indemnification), the reporting entity should subsequently account for the change in the measurement of the indemnification asset on the same basis as the change in the assets subject to indemnification. Any amortization of changes in value should be limited to the contractual term of the indemnification agreement (that is, the lesser of the term of the indemnification agreement and the remaining life of the indemnified assets). ASU 2012-06 is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2012. Early adoption is permitted. The amendments should be applied prospectively to any new indemnification assets acquired after the date of adoption and to indemnification assets existing as of the date of adoption arising from a government-assisted acquisition of a financial institution. This ASU is not expected to have a significant impact on the Company’s financial statements.

In January 2013, the FASB issued ASU 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. The amendments clarify that the scope of Update 2011-11 applies to derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or subject to an enforceable master netting arrangement or similar agreement. An entity is required to apply the amendments for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the required disclosures retrospectively for all comparative periods presented. The effective date is the same as the effective date of Update 2011-11. This ASU is not expected to have a significant impact on the Company’s financial statements.

In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The amendments in this Update require

an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. generally accepted accounting principles (GAAP) to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. For public entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2012. For nonpublic entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2013. Early adoption is permitted. The Company has provided the necessary disclosures in Note 12.

In February 2013, the FASB issued ASU 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date. The objective of the amendments in this Update is to provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. generally accepted accounting principles (GAAP). Examples of obligations within the scope of this Update include debt arrangements, other contractual obligations, and settled litigation and judicial rulings. U.S. GAAP does not include specific guidance on accounting for such obligations with joint and several liability, which has resulted in diversity in practice. Some entities record the entire amount under the joint and several liability arrangement on the basis of the concept of a liability and the guidance that must be met to extinguish a liability. Other entities record less than the total amount of the obligation, such as an amount allocated, an amount corresponding to the proceeds received, or the portion of the amount the entity agreed to pay among its co-obligors, on the basis of the guidance for contingent liabilities. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. This ASU is not expected to have a significant impact on the Company’s financial statements.

5.	Investment Securities

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


	June 30, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for Sale
Fannie Mae	$	106,381	$	1,352	$	(1,358	)	$	106,375
Freddie Mac		59,480		836		(1,157	)		59,159
Governmental National Mortgage Association		43,207		512		(93	)		43,626
Other mortgage-backed securities		3,437		—		(4	)		3,433

Total mortgage-backed securities		212,505		2,700		(2,612	)		212,593
Obligations of states and political subdivisions		23,772		699		(498	)		23,973
U.S. government agency securities		53,049		191		(554	)		52,686
Corporate obligations		12,328		193		(186	)		12,335
Trust-preferred securities		4,920		507		—			5,427
Other debt securities		1,477		23		—			1,500

Total debt securities		308,051		4,313		(3,850	)		308,514
Equity securities - financial services		2,142		4		(39	)		2,107

Total	$	310,193	$	4,317	$	(3,889	)	$	310,621


	September 30, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for Sale
Fannie Mae	$	111,145	$	4,652	$	(3	)	$	115,794
Freddie Mac		48,913		1,952		(11	)		50,854
Governmental National Mortgage Association		43,164		803		(16	)		43,951
Other mortgage-backed securities		5,043		162		—			5,205

Total mortgage-backed securities		208,265		7,569		(30	)		215,804
Obligations of states and political subdivisions		18,611		906		—			19,517
U.S. government agency securities		74,106		379		(1	)		74,484
Corporate obligations		8,602		146		(91	)		8,657
Trust-preferred securities		5,852		382		(1	)		6,233
Other debt securities		1,476		36		—			1,512

Total debt securities		316,912		9,418		(123	)		326,207
Equity securities - financial services		3,267		111		—			3,378

Total	$	320,179	$	9,529	$	(123	)	$	329,585

The amortized cost and fair value of debt securities at June 30, 2013, 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	$	2,948	$	2,967
Due after one year through five years		39,547		39,679
Due after five years through ten years		55,260		55,014
Due after ten years		210,296		210,854

Total	$	308,051	$	308,514

For the three months ended June 30, 2013, the Company realized gross gains of $11,000 and proceeds from the sale of investment securities of $23,000. For the nine months ended June 30, 2013, the Company realized gross gains of $767,000 and gross losses of $18,000 and proceeds from the sale of investment securities of $39.2 million. For the three months ended June 30, 2012, the Company did not sell any investment securities. For the nine months ended June 30, 2012, the Company realized gross gains of $147,000 and proceeds from the sale of investment securities of $8.1 million.

6.	Unrealized Losses on Securities

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


	June 30, 2013
	Number of Securities		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		30	$	51,045	$	(1,355	)	$	1,148	$	(3	)	$	52,193	$	(1,358	)
Freddie Mac		20		35,583		(1,157	)		—		—			35,583		(1,157	)
Governmental National Mortgage Association		4		7,903		(93	)		—		—			7,903		(93	)
Other mortgage-backed securities		2		2,467		(4	)		—		—			2,467		(4	)
Obligations of states and political subdivisions		8		8,845		(498	)		—		—			8,845		(498	)
U.S. government agency securities		13		34,972		(554	)		—		—			34,972		(554	)
Corporate obligations		4		4,554		(186	)		—		—			4,554		(186	)
Equity securities-financial services		1		1,989		(39	)		—		—			1,989		(39	)

Total		82	$	147,358	$	(3,886	)	$	1,148	$	(3	)	$	148,506	$	(3,889	)


	September 30, 2012
	Number of Securities		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		3	$	4,083	$	(3	)	$	—	$	—		$	4,083	$	(3	)
Freddie Mac		1		2,002		(11	)		—		—			2,002		(11	)
Governmental National Mortgage Association		5		6,090		(16	)		—		—			6,090		(16	)
U.S. government agency securities		1		999		(1	)		—		—			999		(1	)
Corporate obligations		5		1,059		(25	)		1,434		(66	)		2,493		(91	)
Trust-preferred securities		1		998		(1	)		—		—			998		(1	)

Total		16	$	15,231	$	(57	)	$	1,434	$	(66	)	$	16,665	$	(123	)

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, debt obligations of a U.S. state or political subdivision and corporate debt obligations.

The Company reviews its position quarterly and has asserted that at June 30, 2013, the declines outlined in the above table represent temporary declines and the Company would not be required to sell the security before its 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.

7.	Loans Receivable, Net and Allowance for Loan Losses

Loans receivable consist of the following (in thousands):


	June 30, 2013		September 30, 2012
Held for investment:
Real Estate Loans:
Residential	$	688,724	$	696,350
Construction		5,097		3,805
Commercial		164,186		160,192
Commercial		11,111		12,818
Obligations of states and political subdivisions		36,147		33,736
Home equity loans and lines of credit		43,402		47,925
Other		2,311		2,485

		950,978		957,311
Less allowance for loan losses		8,184		7,302

Net loans	$	942,794	$	950,009


Held for sale:
Real Estate Loans:
Residential		—		346


	Real Estate Loans						Commercial Loans		Obligations of States and Political Subdivisions		Home Equity and Lines of Credit		Other Loans		Total
	Residential		Construction		Commercial		Commercial Loans		Obligations of States and Political Subdivisions		Home Equity and Lines of Credit		Other Loans		Total
			(dollars in thousands)
June 30, 2013
Total Loans	$	688,724	$	5,097	$	164,186	$	11,111	$	36,147	$	43,402	$	2,311	$	950,978

Individually evaluated for impairment		12,953		—		16,612		383		—		434		—		30,382
Loans acquired with deteriorated credit quality		335		—		6,240		514		—		15		—		7,104
Collectively evaluated for impairment		675,436		5,097		141,334		10,214		36,147		42,953		2,311		913,492


	Real Estate Loans						Commercial Loans		Obligations of States and Political Subdivisions		Home Equity and Lines of Credit		Other Loans		Total
	Residential		Construction		Commercial		Commercial Loans		Obligations of States and Political Subdivisions		Home Equity and Lines of Credit		Other Loans		Total
			(dollars in thousands)
September 30, 2012
Total Loans	$	696,350	$	3,805	$	160,192	$	12,818	$	33,736	$	47,925	$	2,485	$	957,311

Individually evaluated for impairment		7,942		—		17,415		423		—		191		—		25,971
Loans acquired with deteriorated credit quality		271		—		6,159		1,007		—		44		19		7,500
Collectively evaluated for impairment		688,137		3,805		136,618		11,388		33,736		47,690		2,466		923,840

We maintain 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. We do 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 because of the borrower’s financial condition that it would not otherwise consider. 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 may be removed from the TDR status after a period of performance.

The following table includes the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount, if applicable. Also presented are 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.


	Recorded Investment		Unpaid Principal Balance		Associated Allowance		Average Recorded Investment		Interest Income Recognized
June 30, 2013
With no specific allowance recorded:
Real Estate Loans
Residential	$	8,158	$	8,159	$	—	$	9,217	$	120
Construction		—		—		—		—		—
Commercial		22,169		22,182		—		22,942		483
Commercial		858		857		—		1,045		7
Obligations of states and political subdivisions		—		—		—		—		—
Home equity loans and lines of credit		311		311		—		244		2
Other		—		—		—		20		—

Total		31,496		31,509		—		33,468		612

With an allowance recorded:
Real Estate Loans
Residential		5,130		5,123		595		2,769		51
Construction		—		—		—		—		—
Commercial		683		685		397		1,039		1
Commercial		39		39		8		41		—
Obligations of states and political subdivisions		—		—		—		—		—
Home equity loans and lines of credit		138		138		138		46		—
Other		—		—		—		—		—

Total		5,990		5,985		1,138		3,895		52

Total:
Real Estate Loans
Residential		13,288		13,282		595		11,986		171
Construction		—		—		—		—		—
Commercial		22,852		22,867		397		23,981		484
Commercial		897		896		8		1,086		7
Obligations of states and political subdivisions		—		—		—		—		—
Home equity loans and lines of credit		449		449		138		290		2
Other		—		—		—		20		—

Total Impaired Loans	$	37,486	$	37,494	$	1,138	$	37,363	$	664


	Recorded Investment		Unpaid Principal Balance		Associated Allowance		Average Recorded Investment		Interest Income Recognized
September 30, 2012
With no specific allowance recorded:
Real Estate Loans
Residential	$	5,182	$	5,177	$	—	$	4,687	$	82
Construction		—		—		—		—		—
Commercial		22,290		22,341		—		13,584		457
Commercial		1,386		1,385		—		581		28
Obligations of states and political subdivisions		—		—		—		—		—
Home equity loans and lines of credit		226		226		—		238		—
Other		19		19		—		25		—

Total		29,103		29,148		—		19,115		567

With an allowance recorded:
Real Estate Loans
Residential		3,031		3,030		661		1,892		68
Construction		—		—		—		—		—
Commercial		1,284		1,286		270		1,326		13
Commercial		44		44		12		47		—
Obligations of states and political subdivisions		—		—		—		—		—
Home equity loans and lines of credit		9		9		9		13		1
Other		—		—		—		—		—

Total		4,368		4,369		952		3,278		82

Total:
Real Estate Loans
Residential		8,213		8,207		661		6,579		150
Construction		—		—		—		—		—
Commercial		23,574		23,627		270		14,910		470
Commercial		1,430		1,429		12		628		28
Obligations of states and political subdivisions		—		—		—		—		—
Home equity loans and lines of credit		235		235		9		251		1
Other		19		19		—		25		—

Total Impaired Loans	$	33,471	$	33,517	$	952	$	22,393	$	649

Management 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 currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. 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 greater than 90 days past due are considered Substandard. The portion of any loan that represents a specific allocation of the allowance for loan losses is placed in the Doubtful category. Any portion of a loan that has been charged off is placed in the Loss category.

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 of 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 $250,000 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 $500,000 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 within the internal risk rating system as of June 30, 2013 and September 30, 2012 (in thousands):


June 30, 2013	Pass		Special Mention		Substandard		Doubtful		Total
Commercial real estate loans	$	135,098	$	7,958	$	21,130	$	—	$	164,186
Commercial		10,222		296		593		—		11,111
Obligations of states and political subdivisions		36,147		—		—		—		36,147

Total	$	181,467	$	8,254	$	21,723	$	—	$	211,444


September 30, 2012	Pass		Special Mention		Substandard		Doubtful		Total
Commercial real estate loans	$	132,841	$	5,502	$	21,849	$	—	$	160,192
Commercial		12,035		360		423		—		12,818
Obligations of states and political subdivisions		33,736		—		—		—		33,736

Total	$	178,612	$	5,862	$	22,272	$	—	$	206,746

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 June 30, 2013 and September 30, 2012 (in thousands):


	Performing		Non-performing		Total
June 30, 2013
Real estate loans:
Residential	$	676,985	$	11,739	$	688,724
Construction		5,097		—		5,097
Home Equity loans and lines of credit		42,953		449		43,402
Other		2,298		13		2,311

Total	$	727,333	$	12,201	$	739,534


	Performing		Non-performing		Total
September 30, 2012
Real estate loans:
Residential	$	685,814	$	10,536	$	696,350
Construction		3,805		—		3,805
Home Equity loans and lines of credit		47,552		373		47,925
Other		2,466		19		2,485

Total	$	739,637	$	10,928	$	750,565

Management 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 June 30, 2013 and September 30, 2012 (in thousands):


	Current		31-60 Days Past Due		61-90 Days Past Due		Greater than 90 Days Past Due and still accruing		Non-Accrual		Total Past Due and Non- Accrual		Total Loans
June 30, 2013
Real estate loans
Residential	$	673,932	$	2,161	$	892	$	—	$	11,739	$	14,792	$	688,724
Construction		5,097		—		—		—		—		—		5,097
Commercial		152,129		728		37		—		11,292		12,057		164,186
Commercial		9,838		23		—		—		1,250		1,273		11,111
Obligations of states and political subdivisions		36,147		—		—		—		—		—		36,147
Home equity loans and lines of credit		42,596		257		100		—		449		806		43,402
Other		2,263		30		5		—		13		48		2,311

Total	$	922,002	$	3,199	$	1,034	$	—	$	24,743	$	28,976	$	950,978


	Current		31-60 Days Past Due		61-90 Days Past Due		Greater than 90 Days Past Due and still accruing		Non-Accrual		Total Past Due and Non- Accrual		Total Loans
September 30, 2012
Real estate loans
Residential	$	680,876	$	3,664	$	1,274	$	—	$	10,536	$	15,474	$	696,350
Construction		3,805		—		—		—		—		—		3,805
Commercial		142,277		3,658		3,348		—		10,909		17,915		160,192
Commercial		10,948		—		—		—		1,870		1,870		12,818
Obligations of states and political subdivisions		33,736		—		—		—		—		—		33,736
Home equity loans and lines of credit		46,967		447		138		—		373		958		47,925
Other		2,452		14		—		—		19		33		2,485

Total	$	921,061	$	7,783	$	4,760	$	—	$	23,707	$	36,250	$	957,311

Our 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. Our 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 allocated allowance based on general economic conditions and other risk factors in our markets and portfolios. We maintain a loan review system, which allows for a periodic review of our loan portfolio and the early identification of potential impaired loans. Such system takes into consideration, among other things, delinquency status, size of loans, type and market value of collateral and financial condition of the borrowers. General loan loss allowances are based upon a combination of factors including, but not limited to, actual loan loss experience, composition of the loan portfolio, current economic conditions, management’s judgment and losses which are probable and reasonably estimable. The allowance is increased through provisions charged against current earnings and recoveries of previously charged-off loans. Loans that are determined to be uncollectible are charged against the allowance. While management uses available information to recognize probable and reasonably estimable loan losses, future loss provisions may be necessary, based on changing economic conditions. Payments received on impaired loans generally are either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal. The allowance for loan losses as of June 30, 2013 is maintained at a level that represents management’s best estimate of losses inherent in the loan portfolio, and such losses were both probable and reasonably estimable.

In addition, the FDIC and the Pennsylvania Department of Banking, 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. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the Allowance for Loan Losses.

The following table summarizes the primary segments of the ALL, segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of June 30, 2013 (in thousands):


	Real Estate Loans
	Residential			Construction		Commercial			Commercial Loans			Obligations of States and Political Subdivisions		Home Equity Loans and Lines of Credit		Other Loans		Unallocated		Total
ALL balance at March 31, 2013	$	5,791		$	28	$	837		$	350		$	106	$	496	$	19	$	44	$	7,671
Charge-offs		(509	)		—		(74	)		(16	)		—		—		—		—		(599	)
Recoveries		9			—		—			—			—		3		—		—		12
Provision		676			16		262			27			7		97		1		14		1,100

ALL balance at June 30, 2013	$	5,967		$	44	$	1,025		$	361		$	113	$	596	$	20	$	58	$	8,184


	Real Estate Loans
	Residential			Construction		Commercial			Commercial Loans			Obligations of States and Political Subdivisions			Home Equity Loans and Lines of Credit			Other Loans			Unallocated		Total
ALL balance at September 30, 2012	$	5,401		$	29	$	699		$	474		$	127		$	499		$	22		$	51	$	7,302
Charge-offs		(1,752	)		—		(288	)		(16	)		—			(67	)		(6	)		—		(2,126	)
Recoveries		50			—		2			—			—			9			—			—		58
Provision		2,268			15		612			(97	)		(14	)		155			4			7		2,950

ALL balance at June 30, 2013	$	5,967		$	44	$	1,025		$	361		$	113		$	596		$	20		$	58	$	8,184


	Real Estate Loans
	Residential			Construction			Commercial			Commercial Loans			Obligations of States and Political Subdivisions		Home Equity Loans and Lines of Credit			Other Loans			Unallocated		Total
ALL balance at March 31, 2012	$	5,619		$	8		$	1,432		$	343		$	81	$	469		$	135		$	11	$	8,098
Charge-offs		(1,152	)		—			(475	)		(31	)		—		(80	)		—			—		(1,738	)
Recoveries		140			—			—			—			—		—			—			—		140
Provision		596			(1	)		(206	)		82			21		(15	)		(3	)		126		600

ALL balance at June 30, 2012	$	5,203		$	7		$	751		$	394		$	102	$	374		$	132		$	137	$	7,100


	Real Estate Loans
	Residential			Construction			Commercial			Commercial Loans			Obligations of States and Political Subdivisions		Home Equity Loans and Lines of Credit			Other Loans			Unallocated			Total
ALL balance at September 30, 2011	$	5,220		$	8		$	1,255		$	500		$	74	$	622		$	80		$	411		$	8,170
Charge-offs		(1,834	)		—			(820	)		(31	)		—		(326	)		(9	)		—			(3,020	)
Recoveries		173			—			5			20			—		—			2			—			200
Provision		1,644			(1	)		311			(95	)		28		78			59			(274	)		1,750

ALL balance at June 30, 2012	$	5,203		$	7		$	751		$	394		$	102	$	374		$	132		$	137		$	7,100


	Real Estate Loans
	Residential		Construction		Commercial		Commercial Loans		Obligations of States and Political Subdivisions		Home Equity Loans and Lines of Credit		Other Loans		Unallocated		Total
Individually evaluated for impairment	$	595	$	—	$	397	$	8	$	—	$	138	$	—	$	—	$	1,138
Collectively evaluated for impairment		5,372		44		628		353		113		458		20		58		7,046

ALL balance at June 30, 2013	$	5,967	$	44	$	1,025	$	361	$	113	$	596	$	20	$	58	$	8,184


	Real Estate Loans
	Residential		Construction		Commercial		Commercial Loans		Obligations of States and Political Subdivisions		Home Equity Loans and Lines of Credit		Other Loans		Unallocated		Total
Individually evaluated for impairment	$	661	$	—	$	270	$	12	$	—	$	9	$	—	$	—	$	952
Collectively evaluated for impairment		4,740		29		429		462		127		490		22		51		6,350

ALL balance at September 30, 2012	$	5,401	$	29	$	699	$	474	$	127	$	499	$	22	$	51	$	7,302

The allowance for loan losses is based on estimates, and actual losses will vary from current estimates. Management believes that the granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALL that is representative of the risk found in the components of the portfolio at any given date. The Company allocated increased provisions to the residential real estate, commercial real estate and other loan segments for the nine month period ending June 30, 2013 due to increased charge off activity and impairment evaluations in those segments. Despite the above allocations, the allowance for loan losses is general in nature and is available to absorb losses from any loan segment.

The following is a summary of troubled debt restructuring granted during the three and nine months ended June 30, 2013 and 2012.


	For the Three Months Ended June 30, 2013
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings
Real estate loans:
Residential		8	$	989	$	989
Construction		—		—		—
Commercial		—		—		—
Commercial		—		—		—
Obligations of states and political subdivisions		—		—		—
Home equity loans and lines of credit		1		98		98
Other		—		—		—

Total		9	$	1,087	$	1,087


	For the Nine Months Ended June 30, 2013
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings
Real estate loans:
Residential		12	$	1,589	$	1,589
Construction		—		—		—
Commercial		—		—		—
Commercial		—		—		—
Obligations of states and political subdivisions		—		—		—
Home equity loans and lines of credit		1		98		98
Other		—		—		—

Total		13	$	1,687	$	1,687


	For the Three Months Ended June 30, 2012
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings
Real estate loans:
Residential		8	$	1,509	$	1,509
Construction		—		—		—
Commercial		3		666		666
Commercial		—		—		—
Obligations of states and political subdivisions		—		—		—
Home equity loans and lines of credit		1		5		5
Other		—		—		—

Total		12	$	2,180	$	2,180


	For the Nine Months Ended June 30, 2012
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings
Real estate loans:
Residential		14	$	2,563	$	2,563
Construction		—		—		—
Commercial		9		2,396		2,396
Commercial		3		207		207
Obligations of states and political subdivisions		—		—		—
Home equity loans and lines of credit		3		47		47
Other		—		—		—

Total		29	$	5,213	$	5,213

The following is a summary of troubled debt restructurings that have subsequently defaulted within one year of modification. There were no troubled debt restructurings that defaulted for the twelve months ended June 30, 2013. The period ended June 30, 2012 is shown below.


	For the Twelve Months Ended June 30, 2012
	Pre-Modification Outstanding Number of Contracts		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings
Real estate loans:
Residential	$	1	$	88
Construction		—		—
Commercial		3		159
Commercial		1		31
Obligations of states and political subdivisions		—		—
Home equity loans and lines of credit		1		36
Other		—		—

Total	$	6	$	314

8.	Deposits

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


	June 30, 2013		September 30, 2012
Non-interest bearing demand accounts	$	65,625	$	41,767
NOW accounts		89,808		109,923
Money market accounts		140,939		155,666
Savings and club accounts		110,123		102,143
Certificates of deposit		604,005		586,135

Total	$	1,010,500	$	995,634

9.	Net Periodic Benefit Cost-Defined Benefit Plan

For a detailed disclosure on the Bank’s pension and employee benefits plans, please refer to Note 13 of the Company’s Consolidated Financial Statements for the year ended September 30, 2012 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):


	Three Months Ended June 30,						Nine Months Ended June 30,
	2013			2012			2013			2012
Service Cost	$	175		$	149		$	526		$	448
Interest Cost		179			179			537			535
Expected return on plan assets		(259	)		(204	)		(776	)		(611	)
Amortization of prior service cost		—			—			—			—
Amortization of unrecognized loss		98			119			294			356

Net periodic benefit cost	$	193		$	243		$	581		$	728

The Bank contributed $600,000 to its pension plan in March 2013.

10.

Equity Incentive Plan

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

Certain officers, employees and outside directors were granted in aggregate 1,140,469 NSOs; 317,910 ISOs; and 590,320 shares of restricted stock in 2008. Certain officers and employees were granted in aggregate,

30,000 shares of restricted stock on April 1, 2013. In accordance with generally accepted accounting principles for Share-Based Payments, the Company expenses the fair value of all share-based compensation grants over the requisite service periods.

The Company classifies share-based compensation for employees and outside directors within “Compensation and employee benefits” in the consolidated statement of income to correspond with the same line item as compensation paid. Additionally, generally accepted accounting principles require the Company to report: (1) the expense associated with the grants as an adjustment to operating cash flows and (2) any benefits of realized tax deductions in excess of previously recognized tax benefits on compensation expense as a financing cash flow.

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

The 2008 restricted shares vest over a five-year service period. The 2013 restricted shares vest over an eighteen month service period. The product of the number of shares granted and the grant date market price of the Company’s common stock determines the fair value of restricted shares under the Company’s restricted stock plan. The Company recognizes compensation expense for the fair value of restricted shares on a straight-line basis over the requisite service period for the entire award.

For the nine months ended June 30, 2013 and 2012, the Company recorded $1.5 million and $1.6 million of share-based compensation expense, respectively, comprised of stock option expense of $458,000 and restricted stock expense of $949,000 for the June 30, 2013 period and stock option expense of $515,000 and restricted stock expense of $1.1 million for the June 30, 2012 period. Expected future compensation expense relating to the 30,000 restricted shares at June 30, 2013, is $273,000 over the remaining vesting period of 1.25 years.

The following is a summary of the Company’s stock option activity and related information for its option grants for the nine month period ended June 30, 2013.


	Number of Stock Options		Weighted- average Exercise Price		Weighted- average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding, September 30, 2012		1,458,379	$	12.35		5.67	$	—
Granted		—		—		—		—
Exercised		—		—		—		—
Forfeited		—		—		—		—

Outstanding, June 30, 2013		1,458,379	$	12.35		4.92	$	—

Exercisable at June 30, 2013		1,458,379	$	12.35		4.92	$	—

The weighted-average grant date fair value of the Company’s non-vested options as of June 30, 2013 and 2012 was $2.38.

The following is a summary of the status of the Company’s restricted stock as of June 30, 2013, and changes therein during the nine month period then ended:


	Number of Restricted Stock		Weighted- average Grant Date Fair Value
Nonvested at September 30, 2012		115,212	$	12.35
Granted		30,000		10.94
Vested		115,212		12.35
Forfeited		—		—

Nonvested at June 30, 2013		30,000	$	10.94

11.

Fair Value Measurement

The following disclosures show the hierarchal disclosure framework associated within the level of pricing observations utilized in measuring assets and liabilities at fair value. The definition of fair value maintains the exchange price notion in earlier definitions of fair value but focuses on the exit price of the asset or liability. The

exit price is the price that would be received to sell the asset or paid to transfer the liability adjusted for certain inherent risks and restrictions. Expanded disclosures are also required about the use of fair value to measure assets and liabilities.

The following table presents information about the Company’s securities, other real estate owned and impaired loans measured at fair value as of June 30, 2013 and September 30, 2012 and indicates the fair value hierarchy of the valuation techniques utilized by the Bank to determine such fair value:


Fair Value Measurement at June 30, 2013
Fair Value Measurements Utilized for the Company’s Financial Assets (in thousands):	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balances as of June 30, 2013
Securities available-for-sale measured on a recurring basis
Mortgage backed securities	$	—	$	212,593	$	—	$	212,593
Obligations of states and political subdivisions		—		23,973		—		23,973
U.S. government agencies		—		52,686		—		52,686
Corporate obligations		—		12,335		—		12,335
Trust-preferred securities		—		3,647		1,780		5,427
Other debt securities		—		1,500		—		1,500
Equity securities-financial services		2,107		—		—		2,107

Total debt and equity securities	$	2,107	$	306,734	$	1,780	$	310,621
Foreclosed real estate owned measured on a non-recurring basis	$	—	$	—	$	1,693	$	1,693
Impaired loans measured on a non-recurring basis	$	—	$	—	$	36,348	$	36,348


Fair Value Measurement at September 30, 2012
Fair Value Measurements Utilized for the Company’s Financial Assets (in thousands):	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balances as of September 30, 2012
Securities available-for-sale measured on a recurring basis
Mortgage backed securities	$	—	$	215,804	$	—	$	215,804
Obligations of states and political subdivisions		—		19,517		—		19,517
U.S. government agencies		—		74,484		—		74,484
Corporate obligations		—		8,657		—		8,657
Trust-preferred securities		—		4,493		1,740		6,233
Other debt securities		—		1,512		—		1,512
Equity securities-financial services		3,378		—		—		3,378

Total debt and equity securities	$	3,378	$	324,467	$	1,740	$	329,585
Foreclosed real estate owned measured on a non-recurring basis	$	—	$	—	$	2,998	$	2,998
Impaired loans measured on a non-recurring basis	$	—	$	—	$	32,520	$	32,520

The following table presents a summary of changes in the fair value of the Company’s Level III investments for the three and nine month periods ended June 30, 2013.


	Fair Value Measurement Using Significant Unobservable Inputs (Level III)
	Three Months Ended June 30, 2013		Nine Months Ended June 30, 2013
Beginning balance	$	1,760	$	1,740
Purchases, sales, issuances, settlements, net		—		—
Total unrealized gain:
Included in earnings		—		—
Included in other comprehensive income		20		40
Transfers in and/or out of Level III		—		—

	$	1,780	$	1,780

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

The measurement of fair value should be consistent with one of the following valuation techniques: market approach, income approach, and/or cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). For example, valuation techniques consistent with the market approach often use market multiples derived from a set of comparables. Multiples might lie in ranges with a different multiple for each comparable. The selection of where within the range the appropriate multiple falls requires judgment, considering factors specific to the measurement (qualitative and quantitative). Valuation techniques consistent with the market approach include matrix pricing. Matrix pricing is a mathematical technique used principally to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on a security’s relationship to other benchmark quoted securities. Most of the securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quoted market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. Securities reported at fair value utilizing Level 1 inputs are limited to actively traded equity securities whose market price is readily available from the New York Stock Exchange or the NASDAQ exchange. 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 June 30, 2013, 226 impaired loans with a carrying value of $37.5 million were reduced by specific valuation allowance totaling $1.1 million resulting in a net fair value of $36.3 million based on Level 3 inputs.

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


	Quantitative Information about Level 3 Fair Value Measurements
(unaudited, in thousands)	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range
June 30, 2013:
Impaired loans		36,348	Appraisal of collateral (1)	Appraisal adjustments (2)	0% to 30%
Foreclosed real estate owned		1,693	Appraisal of collateral (1), (3)	Appraisal adjustments (2)	0% to 30%


	Quantitative Information about Level 3 Fair Value Measurements
(unaudited, in thousands)	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range
September 30, 2012:
Impaired loans		32,520	Appraisal of collateral (1)	Appraisal adjustments (2)	0% to 30%
Foreclosed real estate owned		2,998	Appraisal of collateral (1), (3)	Appraisal adjustments (2)	0% to 30%

(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.

(3)	Includes qualitative adjustments by management and estimated liquidation expenses.

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

Disclosures about Fair Value of Financial Instruments

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


	June 30, 2013
	Level I		Level II		Level III		Total Fair Value
Financial assets:
Cash and cash equivalents	$	20,326	$	—	$	—	$	20,326
Investment and mortgage backed securities Available for sale		327		308,514		1,780		310,621
Loans receivable, held for sale, net		—		—		—		—
Loans receivable, net		—		—		968,877		968,877
Accrued interest receivable		4,622		—		—		4,622
FHLB stock		12,358		—		—		12,358
Mortgage servicing rights		—		—		403		403
Bank owned life insurance		28,557		—		—		28,557

Financial liabilities:
Deposits	$	386,623	$	—	$	609,905	$	996,528
Short-term borrowings		32,212		—		—		32,212
Other borrowings		—		—		145,454		145,454
Advances by borrowers for taxes and insurance		13,307		—		—		13,307
Accrued interest payable		972		—		—		972


	September 30, 2012
	Level I		Level II		Level III		Total Fair Value
Financial assets:
Cash and cash equivalents	$	15,550	$	—	$	—	$	15,550
Investment and mortgage backed securities Available for sale		3,378		324,467		1,740		329,585
Loans receivable, held for sale, net		346		—		—		346
Loans receivable, net		—		—		997,339		997,339
Accrued interest receivable		4,929		—		—		4,929
FHLB stock		21,914		—		—		21,914
Mortgage servicing rights		—		—		365		365
Bank owned life insurance		27,848		—		—		27,848

Financial liabilities:
Deposits	$	409,499	$	—	$	597,028	$	1,006,527
Short-term borrowings		43,281		—		—		43,281
Other borrowings		—		—		195,636		195,636
Advances by borrowers for taxes and insurance		3,432		—		—		3,432
Accrued interest payable		1,128		—		—		1,128


	June 30, 2013				September 30, 2012
	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial assets:
Cash and cash equivalents	$	20,326	$	20,326	$	15,550	$	15,550
Investment securities available for sale		310,621		310,621		329,585		329,585
Loans receivable, held for sale, net		—		—		346		346
Loans receivable, net		942,794		968,877		950,009		997,339
Accrued interest receivable		4,622		4,622		4,929		4,929
FHLB stock		12,358		12,358		21,914		21,914
Mortgage servicing rights		403		403		365		365
Bank owned life insurance		28,557		28,557		27,848		27,848

Financial liabilities:
Deposits	$	1,010,500	$	996,528	$	995,634	$	1,006,527
Short-term borrowings		32,212		32,212		43,281		43,281
Other borrowings		145,160		145,454		191,460		195,636
Advances by borrowers for taxes and insurance		13,307		13,307		3,432		3,432
Accrued interest payable		972		972		1,128		1,128

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

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

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

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

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

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

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

The fair value approximates the current book value.

Bank-Owned Life Insurance

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

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

The fair value of investment and mortgage-backed securities available for sale is equal to the available quoted market price. If no quoted market price is available, fair value is estimated using the quoted market price for similar securities. Since the FHLB stock is not actively traded on a secondary market and held exclusively by member financial institutions, the fair market value approximates the carrying amount.

Loans Receivable

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

Mortgage Servicing Rights

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

Deposit Liabilities

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

Other Borrowings

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

Commitments to Extend Credit

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

12.

Accumulated Other Comprehensive Income

The activity in accumulated other comprehensive income for the three and nine months ended June 30, 2013 and 2012 is as follows:


				Accumulated Other Comprehensive Income/(Loss)
	Defined Benefit Pension Plan			Unrealized Gains (Losses) on Securities Available for Sale			Total
Balance at March 31, 2013	$	(4,318	)	$	4,481		$	163
Other comprehensive income (loss) before reclassifications		—			(4,194	)		(4,194	)
Amounts reclassified from accumulated other comprehensive income		65			(7	)		58

Period change		65			(4,201	)		(4,136	)

Balance at June 30, 2013	$	(4,253	)	$	280		$	(3,973	)


Balance at September 30, 2012	$	(4,450	)	$	6,208		$	1,758
Other comprehensive income (loss) before reclassifications		—			(5,431	)		(5,431	)
Amounts reclassified from accumulated other comprehensive income		194			(494	)		(300	)

Period change		194			(5,925	)		(5,731	)

Balance at June 30, 2013	$	(4,256	)	$	283		$	(3,973	)


Balance at March 31, 2012	$	(4,924	)	$	4,113		$	(811	)
Other comprehensive income before reclassifications		—			979			979
Amounts reclassified from accumulated other comprehensive income		79			—			79

Period change		79			979			1,058

Balance at June 30, 2012	$	(4,845	)	$	5,092		$	247


Balance at September 30, 2011	$	(5,080	)	$	5,666		$	586
Other comprehensive income (loss) before reclassifications		—			(478	)		(478	)
Amounts reclassified from accumulated other comprehensive income		236			(97	)		139

Period change		236			(575	)		(339	)

Balance at June 30, 2012	$	(4,844	)	$	5,091		$	247


	Amount Reclassified from Accumulated Other Comprehensive Income
	Accumulated Other Comprehensive Income for the Three Months Ended June 30,						Affected Line Item in the Consolidated Statement of Income
	2013			2012
Securities available for sale:
Net securities gains reclassified into earnings	$	(11	)	$	—		Gain on sale of investments, net
Related income tax expense		4			—		Provision for income taxes

Net effect on accumulated other comprehensive income for the period		(7	)		—		Net of tax

Defined benefit pension plan:
Amortization of net loss and prior service costs		98			119		Compensation and employee benefits
Related income tax expense	$	(33	)	$	(40	)	Provision for income taxes

Net effect on accumulated other		65			79		Net of tax

Total reclassification for the period	$	58		$	79		Net of tax


	Amount Reclassified from Accumulated Other Comprehensive Income
	Accumulated Other Comprehensive Income for the Nine Months Ended June 30,						Affected Line Item in the Consolidated Statement of Income
	2013			2012
Securities available for sale
Net securities gains reclassified into earnings	$	(749	)	$	(147	)	Gain on sale of investments, net
Related income tax expense		255			50		Provision for income taxes

Net effect on accumulated other comprehensive income for the period		(494	)		(97	)	Net of tax

Defined benefit pension plan:
Amortization of net loss and prior service costs		294			356		Compensation and employee benefits
Related income tax expense	$	(100	)		(120	)	Provision for income taxes

Net effect on accumulated other		194			236		Net of tax

Total reclassification for the period	$	(300	)		139		Net of tax

Item 2.

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

Forward Looking Statements

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

•

statements of our goals, intentions and expectations;

•

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

•

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

•

estimates of our risks and future costs and benefits.

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

•

significantly increased competition among depository and other financial institutions;

•

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

•

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

•

adverse changes in the securities markets;

•

legislative or regulatory changes that adversely affect our business;

•

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

•

changes in consumer spending, borrowing and savings habits;

•

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

•

changes in our organization, compensation and benefit plans.

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

Comparison of Financial Condition at June 30, 2013 and September 30, 2012

Total Assets. Total assets decreased by $40.4 million, or 2.9%, to $1,378.4 million at June 30, 2013 from $1,418.7 million at September 30, 2012. Decreases in loans receivable, investment securities available for sale, regulatory stock and other assets were offset, in part, by increases in interest bearing deposits with other institutions and cash and due from banks.

Interest-Bearing Deposits with Other Institutions. Interest-bearing deposits with other institutions increased $3.3 million, or 73.8%, to $7.8 million at June 30, 2013 from $4.5 million at September 30, 2012. This increase was primarily the result of the cash generated from the increase in sales of loans receivable and investment securities available for sale from September 30, 2012 through June 30, 2013.

Net Loans. Net loans decreased $7.2 million, or 0.8%, to $942.8 million at June 30, 2013 from $950.0 million at September 30, 2012. During this period, residential real estate loans outstanding decreased by $7.6 million to $688.7 million. Home equity loans and lines of credit decreased $4.5 million to $43.4 million and other loans decreased $174,000 to $2.3 million. These decreases were partially offset by increases in commercial real estate loans outstanding of $4.0 million to $164.2 million, construction loans outstanding of $1.3 million to $5.1 million and obligations of states and political subdivisions of $2.4 million to $36.1 million.

Other Assets. Other assets decreased $9.6 million, or 32.1%, to $20.2 million at June 30, 2013 from $29.8 million at September 30, 2012. The primary reason for the decrease was a decrease in accounts receivable of $6.9 million at June 30, 2013 compared to September 30, 2012. At September 30, 2012, the Company had approximately $6.0 million in accounts receivable for brokered deposits that the Company contracted for prior to September 30, 2012 but for which the funds were not received until October 1, 2012.

Investment Securities Available for Sale. Investment securities available for sale decreased $19.0 million, or 5.75%, to $310.6 million at June 30, 2013 from $329.6 million at September 30, 2012. The decrease was due primarily to the sale of $15.1 million of investment securities to provide liquidity to our holding company in order to fund our stock repurchase program.

Deposits. Deposits increased $14.9 million, or 1.49%, to $1,010.5 million at June 30, 2013 from $995.6 million at September 30, 2012. At June 30, 2013, compared to September 30, 2012, certificate of deposit accounts increased $17.9 million to $604.0 million, non-interest bearing demand accounts increased $23.9 million to $65.6 million, and savings and club accounts increased $8.0 million to $110.1 million. These increases were offset in part during the same period by a decrease in NOW accounts of $20.1 million to $89.8 million and money market accounts of $14.7 million to $140.9 million. Included in the certificates of deposit at June 30, 2013 was an increase in brokered certificates of $54.8 million to $211.6 million.

Borrowed Funds. Borrowed funds decreased by $57.4 million, or 24.4%, to $177.4 million at June 30, 2013, from $234.7 million at September 30, 2012. The decrease in borrowed funds was primarily due to decreases in short term FHLBank Pittsburgh borrowings of $11.1 million and declines in other borrowings of $46.3 million.

Stockholders’ Equity. Stockholders’ equity decreased by $10.4 million, or 5.91%, to $165.1 million at June 30, 2013 from $175.4 million at September 30, 2012. This decrease was primarily the result of the stock repurchase program announced during the first fiscal quarter and a decrease in other comprehensive income. For the nine months ended June 30, 2013 the Company repurchased 1,008,665 shares at an average cost of $11.02 per share. During the same period other comprehensive income declined $5.7 million. Other comprehensive income declined primarily due to a decrease in unrealized gain on available for sale investment securities of $5.9 million for the nine months ended June 30, 2013.

Average Balance Sheets for the Three and Nine Months Ended June 30, 2013 and 2012

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


	For the Three Months Ended June 30,
	2013									2012
	Average Balance			Interest Income/ Expense			Yield/ Cost			Average Balance			Interest Income/ Expense			Yield/ Cost
	(dollars in thousands)
Interest-earning assets:
Loans (1)	$	947,107		$	11,032			4.67	%	$	749,165		$	8,880			4.75	%
Investment securities
Taxable (2)		87,100			376			1.73	%		58,654			264			1.81	%
Exempt from federal income tax (2) (3)		14,192			73			3.13	%		8,898			51			3.48	%

Total investment securities		101,292			449			1.93	%		67,552			315			2.03	%
Mortgage-backed securities		217,162			994			1.84	%		207,447			1,376			2.66	%
Federal Home Loan Bank stock		13,553			13			0.38	%		14,719			4			0.11	%
Other		11,904			3			0.10	%		10,891			1			0.04	%

Total interest-earning assets		1,291,018			12,491			3.89	%		1,049,774			10,576			4.05	%
Allowance for loan losses		(7,841	)								(7,632	)
Noninterest-earning assets		101,755									63,558

Total assets	$	1,384,932								$	1,105,700


Interest-bearing liabilities:
NOW accounts	$	88,045			13			0.06	%	$	61,982			4			0.03	%
Money market accounts		137,908			67			0.19	%		108,390			69			0.26	%
Savings and club accounts		105,857			12			0.05	%		77,847			15			0.08	%
Certificates of deposit		606,584			1,665			1.10	%		389,464			1,692			1.74	%
Borrowed funds		191,981			885			1.85	%		254,414			2,060			3.25	%

Total interest-bearing liabilities		1,130,375			2,642			0.94	%		892,097			3,840			1.73	%
Non-interest bearing NOW accounts		60,570									35,480
Noninterest-bearing liabilities		21,886									14,109

Total liabilities		1,212,831									941,686
Equity		172,101									164,014

Total liabilities and equity	$	1,384,932								$	1,105,700


Net interest income				$	9,849								$	6,736

Interest rate spread								2.95	%								2.32	%
Net interest-earning assets	$	160,643								$	157,677

Net interest margin (4)								3.06	%								2.57	%
Average interest-earning assets to average interest-bearing liabilities					114.21	%								117.67	%


	For the Nine Months Ended June 30,
	2013									2012
	Average Balance			Interest Income/ Expense			Yield/ Cost			Average Balance			Interest Income/ Expense			Yield/ Cost
	(dollars in thousands)
Interest-earning assets:
Loans (1)	$	948,040		$	34,310			4.84	%	$	748,803		$	27,366			4.87	%
Investment securities
Taxable (2)		90,205			1,211			1.79	%		46,713			728			2.08	%
Exempt from federal income tax (2) (3)		12,825			200			3.16	%		8,661			158			3.68	%

Total investment securities		103,030			1,411			1.96	%		55,374			886			2.33	%
Mortgage-backed securities		220,895			3,347			2.03	%		206,614			4,174			2.69	%
Federal Home Loan Bank stock		17,098			53			0.41	%		15,569			8			0.07	%
Other		9,403			10			0.14	%		16,893			5			0.04	%

Total interest-earning assets		1,298,466			39,131			4.04	%		1,043,253			32,439			4.15	%
Allowance for loan losses		(7,607	)								(8,135	)
Noninterest-earning assets		101,364									62,903

Total assets	$	1,392,223								$	1,098,021


Interest-bearing liabilities:
NOW accounts	$	90,000			38			0.06	%	$	59,647			13			0.03	%
Money market accounts		144,618			258			0.24	%		110,106			225			0.27	%
Savings and club accounts		102,940			37			0.05	%		74,103			58			0.10	%
Certificates of deposit		592,035			5,243			1.18	%		372,408			5,231			1.87	%
Borrowed funds		213,548			3,103			1.94	%		272,701			6,697			3.27	%

Total interest-bearing liabilities		1,143,141			8,679			1.01	%		888,965			12,224			1.83	%
Non-interest bearing NOW accounts		55,162									33,512
Noninterest-bearing liabilities		18,875									12,596

Total liabilities		1,217,178									935,073
Equity		175,045									162,948

Total liabilities and equity	$	1,392,223								$	1,098,021


Net interest income				$	30,452								$	20,215

Interest rate spread								3.03	%								2.32	%
Net interest-earning assets	$	155,325								$	154,288

Net interest margin (4)								3.14	%								2.58	%
Average interest-earning assets to average interest-bearing liabilities					113.59	%								117.36	%

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

(2)	Available for sale securities are reported at fair value.

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

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

Comparison of Operating Results for the Three Months Ended June 30, 2013 and June 30, 2012

Net Income. Net income increased $1.1 million, or 136.3%, to $1.9 million for the three months ended June 30, 2013 compared to net income of $794,000 for the comparable period in 2012. The increase was due primarily to increases in net interest income and noninterest income, offset in part, by an increase in noninterest expenses.

Net Interest Income. Net interest income increased $3.1 million, or 46.2%, to $9.8 million for the three months ended June 30, 2013 from $6.7 million for the comparable period in 2012. The increase was primarily attributable to an increase in the Company’s interest rate spread to 2.95% for the three months ended June 30, 2013, from 2.32% for the comparable period in 2012, combined with an increase of $3.0 million in the Company’s average net earnings assets.

Interest Income. Interest income increased $1.9 million, or 18.1%, to $12.5 million for the three months ended June 30, 2013 from $10.6 million for the comparable 2012 period. The increase resulted primarily from additional earning assets added as a result of the merger with First Star Bank in the fourth quarter of 2012. Average interest earning assets increased $241.2 million and was offset, in part, by a decline in the average yield on interest earning assets of 16 basis points. The average yield on interest earning assets was 3.89% for the three months ended June 30, 2013, as compared to 4.05% for the comparable 2012 period. Loans increased on average $197.9 million

between the two periods. In addition, average investment securities increased $33.7 million, mortgage-backed securities increased $9.7 million, Federal Home Loan Bank stock decreased $1.2 million and other interest earning assets increased $1.0 million. Interest income for the fiscal third quarter 2013 also includes the recapture of approximately $468,000, before tax, of net accretion of fair market value adjustments for credit and yield for loans acquired as part of the First Star acquisition. In addition, interest income for the quarter includes approximately $185,000 of the recapture of fair value adjustments to loans acquired as part of the First Star acquisition that were either fully or partially repaid during the quarter.

Interest Expense. Interest expense decreased $1.2 million, or 31.2%, to $2.6 million for the three months ended June 30, 2013 from $3.8 million for the comparable 2012 period. The decrease resulted from a 79 basis point decrease in the overall cost of interest bearing liabilities to 0.94% for the three months ended June 30, 2013 from 1.73% for the comparable 2012 period, partially offset by a $238.2 million increase in average interest-bearing liabilities. Average interest bearing liabilities increased primarily as a result of the merger with First Star Bank in the fourth quarter of 2012. The yield on borrowed funds declined primarily as a result of the prepayment of $37.0 million in higher yielding borrowings in the fourth quarter of 2012. Yields on certificates of deposits declined due primarily to the replacement of maturing brokered certificates of deposit with shorter duration lower cost certificates of deposit.

Provision for Loan Losses. In evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect a borrower’s ability to repay, the estimated value of any underlying collateral, peer group information and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are subject to interpretation and revision as more information becomes available or as future events occur. After an evaluation of these factors, management made a provision for loan losses of $1.1 million for the three month period ended June 30, 2013 as compared to $600,000 for the three month period ended June 30, 2012. The allowance for loan losses was $8.2 million, or 0.86% of loans outstanding, at June 30, 2013, compared to $7.3 million, or 0.76% of loans outstanding at September 30, 2012.

Non-interest Income. Non-interest income increased $305,000, or 20.4%, to $1.8 million for the three months ended June 30, 2013 from $1.5 million for the comparable period in 2012. The primary reasons for the increase were increases in service charges and fees on loans of $111,000 and service fees on deposit accounts of $127,000 during the 2013 period.

Non-interest Expense. Non-interest expense increased $1.6 million, or 25.0%, to $8.2 million for the three months ended June 30, 2013 from $6.5 million for the comparable period in 2012. The primary reasons for the increase were increases in compensation and employee benefits of $802,000, occupancy and equipment of $200,000 and professional fees of $210,000. These increases were partially offset by decreases in the cost to liquidate foreclosed real estate of $83,000 and merger related costs of $168,000. The increases in noninterest expense were due primarily to the larger organization in fiscal third quarter 2013 compared with fiscal third quarter 2012 as a result of the First Star merger.

Income Taxes. Income tax expense increased $208,000 to $519,000 for the three months ended June 30, 2013 from $311,000 for the comparable 2012 period. The increase was primarily a result of the increase in income before taxes of $1.3 million for the three months ended June 30, 2013. The effective tax rate was 21.7% for the nine months ended June 30, 2013, compared to 28.1% for the 2012 period.

Comparison of Operating Results for the Nine Months Ended June 30, 2013 and June 30, 2012

Net Income. Net income increased $4.5 million, or 190.5%, to $6.8 million for the nine months ended June 30, 2013 compared to net income of $2.3 million for the comparable period in 2012. The increase was due primarily to increases in net interest income and noninterest income, offset in part, by an increase in noninterest expenses.

Net Interest Income. Net interest income increased $10.2 million, or 50.6%, to $30.5 million for the nine months ended June 30, 2013 from $20.2 million for the comparable period in 2012. The increase was primarily attributable to an increase in the Company’s interest rate spread to 3.03% for the nine months ended June 30, 2013, from 2.32% for the comparable period in 2012, combined with an increase of $1.0 million in the Company’s average net earnings assets.

Interest Income. Interest income increased $6.7 million, or 20.6%, to $39.1 million for the nine months ended June 30, 2013 from $32.4 million for the comparable 2012 period. The increase resulted primarily from

additional earning assets added as a result of the merger with First Star Bank in the fourth quarter of 2012. Average interest earning assets increased $255.2 million and was offset, in part, by a decline in the average yield on interest earning assets of 11 basis points. The average yield on interest earning assets was 4.04% for the nine months ended June 30, 2013, as compared to 4.15% for the comparable 2012 period. Loans increased on average $199.2 million between the two periods. In addition, average investment securities increased $47.7 million, mortgage-backed securities increased $14.3 million, Federal Home Loan Bank stock increased $1.5 million and other interest earning assets decreased $7.5 million. The decrease in other interest earning assets was primarily due to a corresponding decrease in the average balance of cash held at FHLBank Pittsburgh. Interest income for the nine months ended June 30, 2013 included approximately $1.3 million of net accretion of fair market value adjustments for credit and yield applied to First Star loans at the acquisition closing date of July 31, 2012. In addition, interest income for the nine months included approximately $1.4 million of the recapture of fair value adjustments to loans acquired as part of the First Star acquisition that were either fully or partially repaid during the nine months ended June 30, 2013.

Interest Expense. Interest expense decreased $3.5 million, or 29.0%, to $8.7 million for the nine months ended June 30, 2013 from $12.2 million for the comparable 2012 period. The decrease resulted from an 82 basis point decrease in the overall cost of interest bearing liabilities to 1.01% for the nine months ended June 30, 2013 from 1.83% for the comparable 2012 period, partially offset by a $254.2 million increase in average interest-bearing liabilities. Average interest bearing liabilities increased primarily as a result of the merger with First Star Bank in the fourth quarter of 2012. The yield on borrowed funds declined to 1.94% at June 30, 2013 from 3.27% for the comparable 2012 period primarily as a result of the prepayment of $37.0 million in higher yielding borrowings in the fourth quarter of 2012. Yields on certificates of deposits declined to 1.18% at June 30, 2013 from 1.87% for the comparable 2012 period due primarily to the replacement of maturing brokered certificates of deposit with shorter duration lower cost certificates of deposit.

Provision for Loan Losses. In evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect a borrower’s ability to repay, the estimated value of any underlying collateral, peer group information and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are subject to interpretation and revision as more information becomes available or as future events occur. After an evaluation of these factors, management made a provision for loan losses of $3.0 million for the nine month period ended June 30, 2013 as compared to $1.8 million for the nine month period ended June 30, 2012. The allowance for loan losses was $8.2 million, or 0.86% of loans outstanding, at June 30, 2013, compared to $7.3 million, or 0.76% of loans outstanding at September 30, 2012.

Non-interest Income. Non-interest income increased $1.6 million, or 35.4%, to $6.3 million for the nine months ended June 30, 2013 from $4.6 million for the comparable period in 2012. The primary reasons for the increase were increases in gain on sale of loans, net of $399,000 and gain on sale of investments, net of $602,000 during the 2012 period. As part of its overall interest rate risk management strategy, the Company sold $19.5 million of long-term, fixed-rate mortgage loans during the nine months ended June 30, 2013. The Company sold $1.9 million in long-term fixed rate mortgage loans for the comparable period in 2012.

Non-interest Expense. Non-interest expense increased $4.4 million, or 21.9%, to $24.4 million for the nine months ended June 30, 2013 from $20.1 million for the comparable period in 2012. The primary reasons for the increase were increases in compensation and employee benefits of $2.5 million, occupancy and equipment of $647,000 and data processing expense of $643,000. These increases were partially offset by decreases in the cost to liquidate foreclosed real estate of $588,000 and merger related costs of $544,000. The increases in noninterest expense were due primarily to the larger organization in the first nine months of fiscal 2013 compared with fiscal first nine months of 2012 as a result of the First Star merger.

Income Taxes. Income tax expense increased $1.8 million to $2.5 million for the nine months ended June 30, 2013 from $706,000 for the comparable 2012 period. The increase was primarily a result of the increase in income before taxes of $6.3 million for the nine months ended June 30, 2013. The effective tax rate was 27.2% for the nine months ended June 30, 2013, compared to 23.2% for the 2012 period. The increase in the effective tax rate was primarily due to the decrease in the portion of pre-tax income derived from non-taxable loan and investment income for the nine months ended June 30, 2013 compared to the 2012 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)


	June 30, 2013			September 30, 2012

Non-performing assets:
Non-accruing loans	$	24,743		$	23,707
Troubled debt restructures		590			533

Total non-performing loans		25,333			24,240
Foreclosed real estate		1,693			2,998

Total non-performing assets	$	27,026		$	27,238

Ratio of non-performing loans to total loans		2.66	%		2.53	%
Ratio of non-performing loans to total assets		1.84	%		1.71	%
Ratio of non-performing assets to total assets		1.96	%		1.92	%
Ratio of allowance for loan losses to total loans		0.86	%		0.76	%

Loans are reviewed on a regular basis and are placed on non-accrual status when they become more than 90 days delinquent. When loans are placed on non-accrual status, unpaid accrued interest is fully reserved, and further income is recognized only to the extent received. Non-performing assets decreased $212,000 to $27.0 million at June 30, 2013 from $27.2 million at September 30, 2012. Non-performing loans increased $1.1 million to $25.3 million at June 30, 2013 from $24.2 million at September 30, 2012. The increase was primarily due to an increase of $1.2 million in nonperforming residential loans. The number of nonperforming residential loans increased to 89 at June 30, 2013, from 79 at September 30, 2012. The $24.7 million of non-accruing loans at June 30, 2013 included 82 residential loans with an aggregate outstanding balance of $10.6 million that were past due 90 or more days at June 30, 2013, 87 commercial and commercial real estate loans with aggregate outstanding balances of $12.5 million and 19 consumer loans with aggregate balances of $462,000. Within the residential loan balance are $1.1 million of loans less than 90 days past due. In the quarter ended June 30, 2013, the Company identified seven residential loans which, although paying as agreed, have a high probability of default. Foreclosed real estate decreased $1.3 million to $1.7 million at June 30, 2013 from $3.0 million at September 30, 2012. Foreclosed real estate consists of 20 residential properties, two building lots and one commercial property.

At June 30, 2013 the principal balance of troubled debt restructures was $9.7 million as compared to $13.1 million at September 30, 2012. Of the $9.7 million of troubled debt restructures at June 30, 2013, $5.2 million are performing loans and $4.4 million are non-accrual loans. An additional $590,000 of performing troubled debt restructures are classified as non-performing assets because they were non-performing assets at the time they were restructured.

Of the 69 loans that comprise our troubled debt restructures at June 30, 2013, no loans were granted a rate concession at a below market interest rate. Eighteen loans with balances totaling $2.7 million were granted market rate and terms concessions and 51 loans with balances totaling $6.9 million were granted term concessions.

As of June 30, 2013, troubled debt restructures were comprised of 48 residential loans totaling $7.2 million, 15 commercial and commercial real estate loans totaling $2.2 million, and six consumer (home equity loans, home equity lines and credit, and other) totaling $233,000.

For the nine month period ended June 30, 2013, 19 loans totaling $4.7 million were removed from TDR status. Two loans totaling $259,000 were transferred to foreclosed real estate, two loans totaling $331,000 were paid in full and 15 loans totaling $4.1 million completed 12 months of consecutive on time payments.

We have modified terms of loans that do not meet the definition of a TDR. The vast majority of such loans were rate modifications of residential first mortgage loans in lieu of refinancing. The non-TDR rate modifications were all performing loans when the rates were reset to current market rates. For the nine months ended June 30, 2013, we modified 250 loans ($35.1 million) in this fashion. With regard to commercial loans, including commercial real estate loans, various non-troubled loans were modified, either for the purpose of a rate reduction to reflect current market rates (in lieu of a refinance) or the extension of a loan’s maturity date. In total, there were 23 such loans in the nine months ended June 30, 2013 with an aggregate balance of approximately $9.0 million.

Liquidity and Capital Resources

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

Our primary sources of liquidity are deposits, prepayment and repayment of loans and mortgage-backed securities, maturities of investment securities and other short-term investments, and earnings and funds provided from operations, as well as access to FHLBank advances and other borrowing sources. While scheduled principal repayments on loans and mortgage-backed securities are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by market interest rates, economic conditions, and rates offered by our competition. We set the interest rates on our deposits to maintain a desired level of total deposits.

A portion of our liquidity consists of cash and cash equivalents and borrowings, which are a product of our operating, investing and financing activities. At June 30, 2013, $20.3 million of our assets were invested in cash and cash equivalents. Our primary sources of cash are principal repayments on loans, proceeds from the maturities of investment securities, principal repayments of mortgage-backed securities and increases in deposit accounts. Short-term investment securities (maturing in one year or less) totaled $3.0 million at June 30, 2013. As of June 30, 2013, we had $167.3 million in borrowings outstanding from FHLBank Pittsburgh and $10.0 million in borrowings through repurchase agreements with other financial institutions. We have access to additional FHLBank advances of up to approximately $583.5 million.

At June 30, 2013, we had $64.6 million in loan commitments outstanding, which included, in part, $19.3 million in undisbursed construction loans and land development loans, $32.2 million in unused home equity lines of credit, $5.7 million in commercial lines of credit and commitments to originate commercial loans, $3.1 million in performance standby letters of credit and $4.3 million in other unused commitments which are primarily to originate residential mortgage loans and multifamily loans. Certificates of deposit due within one year of June 30, 2013 totaled $335.0 million, or 55.5% of certificates of deposit. If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before June 30, 2013. We believe, however, based on past experience that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered

As reported in the Consolidated Statements of Cash Flows, our cash flows are classified for financial reporting purposes as operating, investing or financing cash flows. Net cash provided by operating activities was $19.4 million and $9.5 million for the nine months ended June 30, 2013 and 2012, respectively. These amounts differ from our net income because of a variety of cash receipts and disbursements that did not affect net income for the respective periods. Net cash provided (used) in investing activities was $23.2 million and $(40.0) million for the nine months ended June 30, 2013 and 2012, respectively, principally reflecting our loan and investment security activities. Deposit and borrowing cash flows have comprised most of our financing activities which resulted in net cash (used) provided of $(37.8) million and $11.6 million for the nine months ended June 30, 2013 and 2012, respectively.

Basel III

In July 2013, the Federal Deposit Insurance Corporation and the other federal bank regulatory agencies issued a final rule that will revise their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. Among other things, the rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increases the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The final rule also requires unrealized gains and losses on certain “available-for-sale” securities holdings to be included for purposes of calculating regulatory capital requirements unless a one-time opt-in or opt-out is exercised. The rule limits a

banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements.

The final rule becomes effective for the Bank on January 1, 2015. The capital conservation buffer requirement will be phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement will be effective. The final rule also implements consolidated capital requirements for savings and loan holding companies, such as the Company, effective January 1, 2015.

Critical Accounting Policies

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

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

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

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

The analysis of the allowance for loan losses has two components: specific and general allocations. Specific allocations are made for loans that are determined to be impaired. Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. The general allocation is determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history. We also analyze historical loss experience, delinquency trends, general economic conditions and geographic and industry concentrations. This analysis establishes factors that are applied to the loan groups to determine the amount of the general allocations. Actual loan losses may be significantly more than the allowance for loan losses we have established which could have a material negative effect on our financial results.

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

Deferred Income Taxes. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences

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

Off-Balance Sheet Arrangements

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

Contractual Obligations

During the first nine months of fiscal 2013, the Company’s contractual obligations did not change materially from those discussed in the Company’s Financial Statements for the year ended September 30, 2012.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

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

We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. The net proceeds from the Company’s stock offering increased our capital and provided management with greater flexibility to manage our interest rate risk. In particular, management used the majority of the capital we received to increase our interest-earning assets. There have been no material changes in our interest rate risk since September 30, 2012.

Item 4.

Controls and Procedures

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

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

Part II – Other Information

Item 1.

Legal Proceedings

The Company and its subsidiaries are subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s financial condition or results of operations.

Item 1A.

Risk Factors

There have been no material changes in the “Risk Factors” as disclosed in the Company’s response to Item 1A to part I of Form 10-K for the year ended September 30, 2012 filed on December 14, 2012.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The following table presents a summary of the company’s share repurchases during the quarter ended June 30, 2013.

Company Purchases of Common Stock


Month Ending	Total number of shares purchased		Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs		Maximum number of shares that may yet be purchased under the plans or programs

April 30, 2013		51,858	$	10.83		51,858		—
May 31, 2013 (1)		107,015		10.89		71,698		—
June 30, 2013		244,900		10.94		244,900		—

Total		403,773	$	10.91		368,456		314,326

(1)	In May 2013 the Bank purchased 35,317 shares at $10.73 per share outside of its previously disclosed stock repurchase program.

Item 3.

Defaults Upon Senior Securities

Not applicable.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

Not applicable.

Item 6.

Exhibits

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


3.1		Certificate of Incorporation of ESSA Bancorp, Inc.*

3.2		Bylaws of ESSA Bancorp, Inc.*

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

10.2		Amended and Restated Employment Agreement for Gary S. Olson**

10.3		Amended and Restated Employment Agreement for Robert S. Howes**

10.4		Amended and Restated Employment Agreement for Allan A. Muto**

10.5		Amended and Restated Employment Agreement for Diane K. Reimer**

10.6		Amended and Restated Employment Agreement for V. Gail Warner**

10.7		Supplemental Executive Retirement Plan**

10.8		Endorsement Split Dollar Life Insurance Agreement for Gary S. Olson**

10.9		Endorsement Split Dollar Life Insurance Agreement for Robert S. Howes**

21		Subsidiaries of Registrant***

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

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

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

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

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

**	Incorporated by reference to ESSA Bancorp, Inc.’s current report on Form 8-K filed with the Securities and Exchange Commission on October 6, 2008.

***	Incorporated by reference to ESSA Bancorp, Inc.’s Form 10-K filed with the Securities and Exchange Commission on December 14, 2012.

****	As provided in Pub. 406 of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

SIGNATURES

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


		ESSA BANCORP, INC.

Date: August 9, 2013		/s/ Gary S. Olson
		Gary S. Olson
		President and Chief Executive Officer

Date: August 9, 2013		/s/ Allan A. Muto
		Allan A. Muto
		Executive Vice President and Chief Financial Officer