ESSA Bancorp, Inc. - Quarter Report: 2016 December (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended December 31, 2016

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

For the transition period from to

Commission File No. 001-33384

ESSA Bancorp, Inc.

(Exact name of registrant as specified in its charter)

Pennsylvania	20-8023072
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

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

(570) 421-0531

(Registrant’s telephone number)

N/A

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

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

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

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

Large accelerated filer	☐	Accelerated filer	☒

Non-accelerated filer	☐	Smaller reporting company	☐

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

As of February 3, 2017 there were 11,498,042 shares of the Registrant’s common stock, par value $0.01 per share, outstanding.

ESSA Bancorp, Inc.

FORM 10-Q

Table of Contents

		Page
	Part I. Financial Information

Item 1.	Financial Statements (unaudited)	2

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34

Item 3	Quantitative and Qualitative Disclosures About Market Risk	41

Item 4	Controls and Procedures	42

	Part II. Other Information

Item 1.	Legal Proceedings	42

Item 1A.	Risk Factors	42

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42

Item 3.	Defaults Upon Senior Securities	42

Item 4.	Mine Safety Disclosures	42

Item 5.	Other Information	42

Item 6.	Exhibits	43

Signature Page		43

Part I. Financial Information

Item 1.

Financial Statements

ESSA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

	December 31, 2016			September 30, 2016
	(dollars in thousands)
Cash and due from banks	$	32,683		$	31,815
Interest-bearing deposits with other institutions		7,168			11,843
Total cash and cash equivalents		39,851			43,658
Certificates of deposit		1,000			1,250
Investment securities available for sale, at fair value		392,113			390,410
Loans receivable (net of allowance for loan losses of $9,342 and $9,056)		1,224,021			1,219,213
Regulatory stock, at cost		16,680			15,463
Premises and equipment, net		16,674			16,844
Bank-owned life insurance		36,856			36,593
Foreclosed real estate		2,436			2,659
Intangible assets, net		2,324			2,487
Goodwill		13,801			13,801
Deferred income taxes		14,932			11,885
Other assets		17,922			18,216
TOTAL ASSETS	$	1,778,610		$	1,772,479
LIABILITIES
Deposits	$	1,192,941		$	1,214,820
Short-term borrowings		174,918			129,460
Other borrowings		215,571			230,601
Advances by borrowers for taxes and insurance		7,719			4,956
Other liabilities		16,022			16,298
TOTAL LIABILITIES		1,607,171			1,596,135
STOCKHOLDERS’ EQUITY
Preferred Stock ($0.01 par value; 10,000,000 shares authorized, none issued)
Common stock ($0.01 par value; 40,000,000 shares authorized, 18,133,095 issued; 11,463,785 and 11,393,558 outstanding at December 31, 2016 and September 30, 2016)		181			181
Additional paid in capital		181,072			181,900
Unallocated common stock held by the Employee Stock Ownership Plan (ESOP)		(9,061	)		(9,174	)
Retained earnings		88,628			87,638
Treasury stock, at cost; 6,669,310 and 6,739,537 shares outstanding at December 31, 2016 and September 30, 2016, respectively		(81,486	)		(82,369	)
Accumulated other comprehensive loss		(7,895	)		(1,832	)
TOTAL STOCKHOLDERS’ EQUITY		171,439			176,344
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,778,610		$	1,772,479

See accompanying notes to the unaudited consolidated financial statements.

ESSA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF INCOME

(UNAUDITED)

	For the Three Months Ended December 31,
	2016			2015
	(dollars in thousands, except per share data)
INTEREST INCOME
Loans receivable, including fees	$	12,251		$	11,574
Investment securities:
Taxable		1,874			1,818
Exempt from federal income tax		309			244
Other investment income		216			179
Total interest income		14,650			13,815
INTEREST EXPENSE
Deposits		2,012			1,845
Short-term borrowings		251			94
Other borrowings		755			784
Total interest expense		3,018			2,723
NET INTEREST INCOME		11,632			11,092
Provision for loan losses		750			600
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		10,882			10,492
NONINTEREST INCOME
Service fees on deposit accounts		864			863
Services charges and fees on loans		354			280
Trust and investment fees		150			213
Gain on sale of investments		—			3
Earnings on Bank-owned life insurance		263			230
Insurance commissions		193			199
Other		33			29
Total noninterest income		1,857			1,817
NONINTEREST EXPENSE
Compensation and employee benefits		6,177			5,578
Occupancy and equipment		1,091			1,109
Professional fees		745			453
Data processing		934			919
Advertising		305			87
Federal Deposit Insurance Corporation (FDIC) premiums		187			278
Gain on foreclosed real estate		(96	)		(10	)
Merger related costs		—			245
Amortization of intangible assets		163			174
Other		896			953
Total noninterest expense		10,402			9,786
Income before income taxes		2,337			2,523
Income taxes		400			566
NET INCOME	$	1,937		$	1,957
Earnings per share
Basic	$	0.18		$	0.19
Diluted	$	0.18		$	0.19
Dividends per share	$	0.09		$	0.09

See accompanying notes to the unaudited consolidated financial statements.

ESSA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS

(UNAUDITED)

	Three Months Ended December 31,
	2016			2015
	(dollars in thousands)
Net income	$	1,937		$	1,957
Other comprehensive loss:
Investment securities available for sale:
Unrealized holding loss		(10,232	)		(3,398	)
Tax effect		3,479			1,154
Reclassification of gains recognized in net income		—			(3	)
Tax effect		—			1
Net of tax amount		(6,753	)		(2,246	)
Pension plan adjustment:
Reclassification adjustment related to actuarial losses		136			120
Tax effect		(46	)		(41	)
Net of tax amount		90			79
Derivative and hedging activities adjustments:
Changes in unrealized holding gains on derivative included in net income		1,052			—
Tax effect		(459	)		—
Reclassification adjustment for gains on derivatives included in net income		11			—
Tax effect		(4	)		—
Net of tax amount		600			—
Total other comprehensive loss		(6,063	)		(2,167	)
Comprehensive loss	$	(4,126	)	$	(210	)

See accompanying notes to the unaudited consolidated financial statements.

ESSA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

								Unallocated									Accumulated
	Common Stock				Additional			Common									Other			Total
	Number of				Paid In			Stock Held by			Retained			Treasury			Comprehensive			Stockholders’
	Shares		Amount		Capital			the ESOP			Earnings			Stock			Loss			Equity
	(dollars in thousands except per share data)
Balance, September 30, 2016		11,393,558	$	181	$	181,900		$	(9,174	)	$	87,638		$	(82,369	)	$	(1,832	)	$	176,344
Net income												1,937									1,937
Other comprehensive loss																		(6,063	)		(6,063	)
Cash dividends declared ($0.09 per share)												(947	)								(947	)
Stock based compensation						66															66
Allocation of ESOP stock						53			113												166
Allocation of treasury shares to incentive plan		20,675				(253	)								253						—
Stock options exercised		49,552				(694	)								630						(64	)
Balance, December 31, 2016		11,463,785	$	181	$	181,072		$	(9,061	)	$	88,628		$	(81,486	)	$	(7,895	)	$	171,439

See accompanying notes to the unaudited consolidated financial statements.

ESSA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

	For the Three Months Ended December 31,
	2016			2015
	(dollars in thousands)
OPERATING ACTIVITIES
Net income	$	1,937		$	1,957
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		750			600
Provision for depreciation and amortization		351			392
Amortization and accretion of discounts and premiums, net		1,123			832
Gain on sale of investment securities		—			(3	)
Compensation expense on ESOP		166			151
Stock based compensation		66			39
Increase in accrued interest receivable		(181	)		(348	)
(Decrease) increase in accrued interest payable		(17	)		171
Earnings on bank-owned life insurance		(263	)		(230	)
Deferred federal income taxes		78			114
Increase in accrued pension liability		339			296
Gain on foreclosed real estate, net		(96	)		(10	)
Amortization of identifiable intangible assets		163			174
Other, net		978			(780	)
Net cash provided by operating activities		5,394			3,355
INVESTING ACTIVITIES
Certificates of deposit maturities		250			250
Investment securities available for sale:
Proceeds from sale of investment securities		—			17,365
Proceeds from principal repayments and maturities		15,506			31,094
Purchases		(27,912	)		(30,134	)
Increase in loans receivable, net		(6,758	)		(3,972	)
Redemption of regulatory stock		5,123			4,345
Purchase of regulatory stock		(6,340	)		(4,304	)
Proceeds from sale of foreclosed real estate		867			202
Acquisition, net of cash acquired		—			(16,174	)
Purchase of premises, equipment and software		(238	)		(400	)
Net cash used for investing activities		(19,502	)		(1,728	)
FINANCING ACTIVITIES
Decrease in deposits, net		(21,879	)		(8,857	)
Net increase (decrease) in short-term borrowings		45,458			(7,287	)
Proceeds from other borrowings		4,750			47,300
Repayment of other borrowings		(19,780	)		(27,300	)
Increase in advances by borrowers for taxes and insurance		2,763			2,719
Purchase of treasury stock shares		—			(301	)
Proceeds from the exercise of stock options		(64	)		—
Dividends on common stock		(947	)		(931	)
Net cash provided by financing activities	$	10,301		$	5,343
Increase (decrease) in cash and cash equivalents		(3,807	)		6,970
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		43,658			18,758
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	39,851		$	25,728
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash Paid:
Interest	$	3,035		$	2,489
Income taxes		(325	)		—

	For the Three Months Ended December 31,
	2016		2015
	(dollars in thousands)
Noncash items:
Transfers from loans to foreclosed real estate		548		416
Acquisition of Eagle National Bank assets and liabilities
Noncash assets acquired
Investment securities, available for sale		—		36,275
Loans receivable		—		123,380
Federal Home Loan Bank stock		—		889
Premises and equipment		—		945
Accrued interest receivable		—		185
Intangible assets		—		1,491
Goodwill		—		3,542
Deferred tax assets		—		715
Other assets		—		1,989
Liabilities assumed:
Certificates of deposit		—		32,408
Deposits other than certificates of deposit		—		119,865
Accrued interest payable		—		64
Other liabilities		—		900
Net noncash assets acquired		—		16,174
Cash acquired		—		8,481

See accompanying notes to the unaudited consolidated financial statements.

ESSA BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(unaudited)

1.	Nature of Operations and Basis of Presentation

The consolidated financial statements include the accounts of ESSA Bancorp, Inc. (the “Company”), its wholly owned subsidiary, ESSA Bank & Trust (the “Bank”), and the Bank’s wholly owned subsidiaries, ESSACOR Inc.; Pocono Investments Company; ESSA Advisory Services, LLC; Integrated Financial Corporation; and Integrated Abstract Incorporated, a wholly owned subsidiary of Integrated Financial Corporation. The primary purpose of the Company is to act as a holding company for the Bank. On November 6, 2014, the Company converted its status from a savings and loan holding company to a bank holding company. In addition, the Bank converted from a Pennsylvania-chartered savings association to a Pennsylvania-chartered savings bank. The Bank’s primary business consists of the taking of deposits and granting of loans to customers generally in Monroe, Northampton, Lehigh, Delaware, Chester, Montgomery, Lackawanna, and Luzerne Counties, Pennsylvania. The Bank is subject to regulation and supervision by the Pennsylvania Department of Banking and Securities and the Federal Deposit Insurance Corporation. The investment in subsidiary on the parent company’s financial statements is carried at the parent company’s equity in the underlying net assets.

ESSACOR, Inc. is a Pennsylvania corporation that has been used to purchase properties at tax sales that represent collateral for delinquent loans of the Bank and is currently inactive. Pocono Investment Company is a Delaware corporation formed as an investment company subsidiary to hold and manage certain investments, including certain intellectual property. ESSA Advisory Services, LLC is a Pennsylvania limited liability company owned 100 percent by ESSA Bank & Trust. ESSA Advisory Services, LLC is a full-service insurance benefits consulting company offering group services such as health insurance, life insurance, short-term and long-term disability, dental, vision, and 401(k) retirement planning as well as individual health products. Integrated Financial Corporation is a Pennsylvania corporation that provided investment advisory services to the general public and is currently inactive. Integrated Abstract Incorporated is a Pennsylvania corporation that provided title insurance services and is currently inactive. All significant intercompany accounts and transactions have been eliminated in consolidation.

The unaudited consolidated financial statements reflect all adjustments, which in the opinion of management, are necessary for a fair presentation of the results of the interim periods and are of a normal and recurring nature. Operating results for the three month period ended December 31, 2016 are not necessarily indicative of the results that may be expected for the year ending September 30, 2017.

2.	Earnings per Share

The following table sets forth the composition of the weighted-average common shares (denominator) used in the basic and diluted earnings per share computation for the three month period ended December 31, 2016 and 2015.

	Three Months Ended
	December 31, 2016			December 31, 2015
Weighted-average common shares outstanding		18,133,095			18,133,095
Average treasury stock shares		(6,720,901	)		(6,793,627	)
Average unearned ESOP shares		(899,601	)		(944,875	)
Average unearned non-vested shares		(37,561	)		(30,168	)
Weighted average common shares and common stock equivalents used to calculate basic earnings per share		10,475,032			10,364,425
Additional common stock equivalents (non-vested stock) used to calculate diluted earnings per share		1,018			618
Additional common stock equivalents (stock options) used to calculate diluted earnings per share		128,022			170,530
Weighted average common shares and common stock equivalents used to calculate diluted earnings per share		10,604,072			10,535,573

At December 31, 2016 there were 20,194 shares of nonvested stock outstanding at a price of $16.57 per share that were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive. At December 31, 2015 there were 18,021 shares of nonvested stock outstanding at a price of $13.05 per share that were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive.

3.	Use of Estimates in the Preparation of Financial Statements

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

4.	Recent Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (a new revenue recognition standard). The Update’s core principle is that a company will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this Update specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. This Update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is evaluating the effect of adopting this new accounting Update.

In August 2015, the FASB issued ASU 2015-14, Revenue from Contract with Customers (Topic 606). The amendments in this Update defer the effective date of ASU 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. All other entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. The Company is evaluating the effect of adopting this new accounting Update.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This Update applies to all entities that hold financial assets or owe financial liabilities and is intended to provide more useful information on the recognition, measurement, presentation, and disclosure of financial instruments. Among other things, this Update (a) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (b) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (c) eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (d) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (e) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (f) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (g) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (h) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For all other entities, including not-for-profit entities and employee benefit plans within the scope of Topics 960 through 965 on plan accounting, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. All entities that are not public business entities may adopt the amendments in this Update earlier as of the fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. A short-term lease is defined as one in which (a) the lease term is 12 months or less and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees may elect to recognize lease payments over the lease term on a straight-line basis. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020. The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach

with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815). The amendments in this Update apply to all reporting entities for which there is a change in the counterparty to a derivative instrument that has been designated as a hedging instrument under Topic 815. The standards in this Update clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. An entity has an option to apply the amendments in this Update on either a prospective basis or a modified retrospective basis. Early adoption is permitted, including adoption in an interim period. This Update is not expected to have a significant impact on the Company’s financial statements.

In March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging (Topic 815). The amendments apply to all entities that are issuers of or investors in debt instruments (or hybrid financial instruments that are determined to have a debt host) with embedded call (put) options. The amendments in this Update clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt host. An entity performing the assessment under the amendments in this Update is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. For entities other than public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. This Update is not expected to have a significant impact on the Company’s financial statements.

In March 2016, the FASB issued ASU 2016-07, Investments - Equity Method and Joint Ventures (Topic 323). The Update affects all entities that have an investment that becomes qualified for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence. The amendments in this Update eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. The amendments in this Update require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments in this Update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Earlier application is permitted. This Update is not expected to have a significant impact on the Company’s financial statements.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606). The amendments in this Update affect entities with transactions included within the scope of Topic 606, which includes entities that enter into contracts with customers to transfer goods or services (that are an output of the entity’s ordinary activities) in exchange for consideration. The amendments in this Update do not change the core principle of the guidance in Topic 606; they simply clarify the implementation guidance on principal versus agent considerations. The amendments in this Update are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. The amendments in this Update affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements of Update 2014-09. ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718). The amendments in this Update affect all entities that issue share-based payment awards to their employees. The standards in this Update provide simplification for several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as with equity or liabilities, and classification on the statement of cash flows. Some of the areas for simplification apply only to nonpublic entities. In addition to those simplifications, the amendments eliminate the guidance in Topic

718 that was indefinitely deferred shortly after the issuance of FASB Statement No. 123 (revised 2004), Share-Based Payment. This should not result in a change in practice because the guidance that is being superseded was never effective. For public business entities, the amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For all other entities, the amendments are effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted for any entity in any interim or annual period. The Company adopted this standard for the interim period ended December 31, 2016. The adoption of this standard resulted in recognition of all excess tax benefits for share-based payment awards to be recognized in income taxes for the three months ended December 31, 2016. Previously, such tax benefits were recognized in additional paid in capital.

In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606). The amendments in this Update affect entities with transactions included within the scope of Topic 606, which includes entities that enter into contracts with customers to transfer goods or services in exchange for consideration. The amendments in this Update do not change the core principle for revenue recognition in Topic 606. Instead, the amendments provide (1) more detailed guidance in a few areas and (2) additional implementation guidance and examples based on feedback the FASB received from its stakeholders. The amendments are expected to reduce the degree of judgment necessary to comply with Topic 606, which the FASB expects will reduce the potential for diversity arising in practice and reduce the cost and complexity of applying the guidance. The amendments in this Update affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements in Topic 606 (and any other Topic amended by Update 2014-09). ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606), which among other things clarifies the objective of the collectability criterion in Topic 606, as well as certain narrow aspects of Topic 606. The amendments in this Update affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by Update 2014-09). ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year. This Update is not expected to have a significant impact on the Company’s financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which changes the impairment model for most financial assets. This ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the ASU is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which addresses eight specific cash flow issues with the objective of reducing diversity in practice. Among these include recognizing cash payments for debt prepayment or debt extinguishment as cash outflows for financing activities; cash proceeds received from the settlement of insurance claims should be classified on the basis of the related insurance coverage; and cash proceeds received from the settlement of bank-owned life insurance policies should be classified as cash inflows from investing activities while the cash payments for premiums on bank-owned policies may be classified as cash outflows for investing activities, operating activities, or a combination of investing and operating activities. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments in this Update should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest

date practicable. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s statement of cash flows.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business “ASU 2017-01”, which provides a more robust framework to use in determining when a set of assets and activities (collectively referred to as a “set”) is a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. Public business entities should apply the amendments in this Update to annual periods beginning after December 15, 2017, including interim periods within those periods. All other entities should apply the amendments to annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The amendments in this Update should be applied prospectively on or after the effective date. This Update is not expected to have a significant impact on the Company’s financial statements.

5.	Investment Securities

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

	December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for Sale
Fannie Mae	$	119,196	$	206	$	(1,747	)	$	117,655
Freddie Mac		92,341		42		(1,345	)		91,038
Governmental National Mortgage Association		15,267		39		(236	)		15,070
Total mortgage-backed securities		226,804		287		(3,328	)		223,763
Obligations of states and political subdivisions		70,720		1,135		(1,334	)		70,521
U.S. government agency securities		25,689		111		—			25,800
Corporate obligations		39,492		135		(839	)		38,788
Other debt securities		33,627		165		(576	)		33,216
Total debt securities		396,332		1,833		(6,077	)		392,088
Equity securities - financial services		25		—		—			25
Total	$	396,357	$	1,833	$	(6,077	)	$	392,113

	September 30, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for Sale
Fannie Mae	$	115,535	$	1,891	$	(173	)	$	117,253
Freddie Mac		84,486		1,369		(85	)		85,770
Governmental National Mortgage Association		16,091		76		(28	)		16,139
Total mortgage-backed securities		216,112		3,336		(286	)		219,162
Obligations of states and political subdivisions		71,323		2,432		(65	)		73,690
U.S. government agency securities		25,669		272		—			25,941
Corporate obligations		38,331		599		(512	)		38,418
Other debt securities		32,962		428		(216	)		33,174
Total debt securities		384,397		7,067		(1,079	)		390,385
Equity securities - financial services		25		—		—			25
Total	$	384,422	$	7,067	$	(1,079	)	$	390,410

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

	Available For Sale
	Amortized Cost		Fair Value
Due in one year or less	$	11,401	$	11,454
Due after one year through five years		41,094		41,037
Due after five years through ten years		84,276		83,653
Due after ten years		259,561		255,944
Total	$	396,332	$	392,088

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

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

	December 31, 2016
	Number of Securities		Less than Twelve Months					Twelve Months or Greater					Total
			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Fannie Mae		63	$	81,136	$	(1,348	)	$	11,667	$	(399	)	$	92,803	$	(1,747	)
Freddie Mac		54		72,423		(1,076	)		7,015		(269	)		79,438		(1,345	)
Governmental National Mortgage Association		9		7,556		(199	)		2,598		(37	)		10,154		(236	)
Obligations of states and political subdivisions		37		42,064		(1,334	)		—		—			42,064		(1,334	)
Corporate obligations		21		17,497		(493	)		6,171		(346	)		23,668		(839	)
Other debt securities		19		13,883		(399	)		9,020		(177	)		22,903		(576	)
Total		203	$	234,559	$	(4,849	)	$	36,471	$	(1,228	)	$	271,030	$	(6,077	)

	September 30, 2016
	Number of Securities		Less than Twelve Months					Twelve Months or Greater					Total
			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Fannie Mae		17	$	6,841	$	(21	)	$	12,261	$	(152	)	$	19,102	$	(173	)
Freddie Mac		11		7,457		(11	)		6,375		(74	)		13,832		(85	)
Governmental National Mortgage Association		5		4,704		(16	)		1,267		(12	)		5,971		(28	)
Obligations of states and political subdivisions		12		14,420		(65	)		—		—			14,420		(65	)
Corporate obligations		12		8,778		(172	)		5,303		(340	)		14,081		(512	)
Other debt securities		13		6,582		(126	)		6,914		(90	)		13,496		(216	)
Total		70	$	48,782	$	(411	)	$	32,120	$	(668	)	$	80,902	$	(1,079	)

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

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

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

6.	Loans Receivable, Net and Allowance for Loan Losses

Loans receivable consist of the following (in thousands):

	December 31, 2016		September 30, 2016
Real estate loans:
Residential	$	597,888	$	596,645
Construction		3,057		1,733
Commercial		293,570		288,447
Commercial		33,867		39,978
Obligations of states and political subdivisions		61,374		56,923
Home equity loans and lines of credit		46,785		48,163
Auto Loans		193,523		193,078
Other		3,299		3,302
		1,233,363		1,228,269
Less allowance for loan losses		9,342		9,056
Net loans	$	1,224,021	$	1,219,213

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

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

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

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

Unpaid principal balance	$	3,468
Interest		717
Contractual cash flows		4,185
Non-accretable discount		(1,973	)
Expected cash flows		2,212
Accretable discount		(240	)
Estimated fair value	$	1,972

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

	Three Months Ended December 31,
	2016			2015
Balance at beginning of period	$	478		$	258
Reclassification, new additions and other		—			240
Accretion		(25	)		(50	)
Balance at end of period	$	453		$	448

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

	December 31, 2016		September 30, 2016
	Acquired Loans with Specific Evidence or Deterioration in Credit Quality (ASC 310-30)		Acquired Loans with Specific Evidence or Deterioration in Credit Quality (ASC 310-30)
Outstanding balance	$	6,728	$	6,893
Carrying amount	$	5,452	$	5,563

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

	Total Loans		Individually Evaluated for Impairment		Loans Acquired with Deteriorated Credit Quality		Collectively Evaluated for Impairment
December 31, 2016
Real estate loans:
Residential	$	597,888	$	7,962	$	—	$	589,926
Construction		3,057		—		—		3,057
Commercial		293,570		11,223		4,504		277,843
Commercial		33,867		1,824		411		31,632
Obligations of states and political subdivisions		61,374		—		—		61,374
Home equity loans and lines of credit		46,785		208		537		46,040
Auto loans		193,523		569		—		192,954
Other		3,299		24		—		3,275
Total	$	1,233,363	$	21,810	$	5,452	$	1,206,101

	Total Loans		Individually Evaluated for Impairment		Loans Acquired with Deteriorated Credit Quality		Collectively Evaluated for Impairment
September 30, 2016
Real estate loans:
Residential	$	596,645	$	8,721	$	—	$	587,924
Construction		1,733		—		—		1,733
Commercial		288,447		11,237		4,615		272,595
Commercial		39,978		1,698		411		37,869
Obligations of states and political sub divisions		56,923		—		—		56,923
Home equity loans and lines of credit		48,163		361		537		47,265
Auto loans		193,078		526		—		192,552
Other		3,302		22		—		3,280
Total	$	1,228,269	$	22,565	$	5,563	$	1,200,141

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

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

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

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

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

	Recorded Investment		Unpaid Principal Balance		Associated Allowance
December 31, 2016
With no specific allowance recorded:
Real estate loans
Residential	$	5,758	$	7,807	$	—
Construction		—		—		—
Commercial		10,770		12,828		—
Commercial		1,767		1,808		—
Obligations of states and political subdivisions		—		—		—
Home equity loans and lines of credit		202		274		—
Auto loans		52		147		—
Other		24		26		—
Total		18,573		22,890		—
With an allowance recorded:
Real estate loans
Residential		2,204		2,485		145
Construction		—		—		—
Commercial		453		666		32
Commercial		57		67		1
Obligations of states and political subdivisions		—		—		—
Home equity loans and lines of credit		6		6		6
Auto loans		517		517		282
Other		—		—		—
Total		3,237		3,741		466
Total:
Real estate loans
Residential		7,962		10,292		145
Construction		—		—		—
Commercial		11,223		13,494		32
Commercial		1,824		1,875		1
Obligations of states and political subdivisions		—		—		—
Home equity loans and lines of credit		208		280		6
Auto loans		569		664		282
Other		24		26		—
Total Impaired Loans	$	21,810	$	26,631	$	466

	Recorded Investment		Unpaid Principal Balance		Associated Allowance
September 30, 2016
With no specific allowance recorded:
Real Estate Loans
Residential	$	6,721	$	9,016	$	—
Construction		—		—		—
Commercial		10,939		12,928		—
Commercial		1,698		1,725		—
Obligations of states and political subdivisions		—		—		—
Home equity loans and lines of credit		361		432		—
Auto Loans		253		365		—
Other		22		22		—
Total		19,994		24,488		—
With an allowance recorded:
Real Estate Loans
Residential		2,000		2,151		198
Construction		—		—		—
Commercial		298		303		36
Commercial		—		—		—
Obligations of states and political subdivisions		—		—		—
Home equity loans and lines of credit		—		—		—
Auto Loans		273		273		113
Other		—		—		—
Total		2,571		2,727		347
Total:
Real Estate Loans
Residential		8,721		11,167		198
Construction		—		—		—
Commercial		11,237		13,231		36
Commercial		1,698		1,725		—
Obligations of states and political subdivisions		—		—		—
Home equity loans and lines of credit		361		432		—
Auto Loans		526		638		113
Other		22		22		—
Total Impaired Loans	$	22,565	$	27,215	$	347

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

	Three Months Ended December 31,
	2016		2015		2016		2015
	Average Recorded Investment		Average Recorded Investment		Interest Income Recognized		Interest Income Recognized
With no specific allowance recorded:
Real estate loans
Residential	$	6,526	$	8,785	$	11	$	27
Construction		—		—		—		—
Commercial		10,564		18,574		105		176
Commercial		1,693		820		33		15
Obligations of states and political subdivisions		—		—		—		—
Home equity loans and lines of credit		317		962		—		2
Auto loans		135		282		1		1
Other		8		—		—		—
Total		19,243		29,423		150		221
With an allowance recorded:
Real estate loans
Residential		2,066		2,592		—		5
Construction		—		—		—		—
Commercial		348		457		—		—
Commercial		19		3		—		—
Obligations of states and political subdivisions		—		—		—		—
Home equity loans and lines of credit		2		73		—		—
Auto loans		215		141		4		1
Other		—		—		—		—
Total		2,650		3,266		4		6
Total:
Real estate loans
Residential		8,592		11,377		11		32
Construction		—		—		—		—
Commercial		10,912		19,031		105		176
Commercial		1,712		823		33		15
Obligations of states and political subdivisions		—		—		—		—
Home equity loans and lines of credit		319		1,035		—		2
Auto loans		350		423		5		2
Other		8		—		—		—
Total Impaired Loans	$	21,893	$	32,689	$	154	$	227

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

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

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

	Pass		Special Mention		Substandard		Doubtful or Loss		Total
December 31, 2016
Commercial real estate loans	$	267,727	$	7,525	$	18,318	$	—	$	293,570
Commercial		30,273		171		3,423		—		33,867
Obligations of states and political subdivisions		61,374		—		—		—		61,374
Total	$	359,374	$	7,696	$	21,741	$	—	$	388,811

	Pass		Special Mention		Substandard		Doubtful or Loss		Total
September 30, 2016
Commercial real estate loans	$	260,088	$	8,886	$	19,473	$	—	$	288,447
Commercial		36,684		180		3,114		—		39,978
Obligations of states and political subdivisions		56,923		—		—		—		56,923
Total	$	353,695	$	9,066	$	22,587	$	—	$	385,348

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

	Performing		Non-performing		Purchased Credit Impaired		Total
December 31, 2016
Real estate loans:
Residential	$	588,731	$	9,157	$	—	$	597,888
Construction		3,057		—		—		3,057
Home equity loans and lines of credit		45,686		562		537		46,785
Auto loans		193,147		376		—		193,523
Other		3,263		36		—		3,299
Total	$	833,884	$	10,131	$	537	$	844,552

	Performing		Non-performing		Purchased Impaired Credit		Total
September 30, 2016
Real estate loans:
Residential	$	587,673	$	8,972	$	—	$	596,645
Construction		1,733		—		—		1,733
Home equity loans and lines of credit		47,213		413		537		48,163
Auto loans		192,734		344		—		193,078
Other		3,271		31		—		3,302
Total	$	832,624	$	9,760	$	537	$	842,921

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

	Current		31-60 Days Past Due		61-90 Days Past Due		Greater than 90 Days Past Due and still accruing		Non-Accrual		Total Past Due and Non- Accrual		Purchased Credit Impaired		Total Loans
December 31, 2016
Real estate loans
Residential	$	586,229	$	2,076	$	426	$	—	$	9,157	$	11,659	$	—	$	597,888
Construction		3,057		—		—		—		—		—		—		3,057
Commercial		284,669		167		135		—		4,095		4,397		4,504		293,570
Commercial		32,662		75		—		—		719		794		411		33,867
Obligations of states and political subdivisions		61,374		—		—		—		—		—		—		61,374
Home equity loans and lines of credit		45,609		47		30		—		562		639		537		46,785
Auto loans		192,264		614		269		—		376		1,259		—		193,523
Other		3,214		49		—		—		36		85		—		3,299
Total	$	1,209,078	$	3,028	$	860	$	—	$	14,945	$	18,833	$	5,452	$	1,233,363

	Current		31-60 Days Past Due		61-90 Days Past Due		Greater than 90 Days Past Due and still accruing		Non-Accrual		Total Past Due and Non- Accrual		Purchased Credit Impaired		Total Loans
September 30, 2016
Real estate loans
Residential	$	585,517	$	1,496	$	660	$	—	$	8,972	$	11,128	$	—	$	596,645
Construction		1,733		—		—		—		—		—		—		1,733
Commercial		279,019		1,093		191		—		3,529		4,813		4,615		288,447
Commercial		38,862		185		57		—		463		705		411		39,978
Obligations of states and political subdivisions		56,923		—		—		—		—		—		—		56,923
Home equity loans and lines of credit		47,026		40		147		—		413		600		537		48,163
Auto loans		191,785		717		232		—		344		1,293		—		193,078
Other		3,264		7		—		—		31		38		—		3,302
Total	$	1,204,129	$	3,538	$	1,287	$	—	$	13,752	$	18,577	$	5,563	$	1,228,269

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

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

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

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

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

															Home
												Obligations of			Equity
												States and			Loans and
	Real Estate Loans								Commercial			Political			Lines of						Other
	Residential			Construction		Commercial			Loans			Subdivisions			Credit			Auto Loans			Loans			Unallocated		Total
ALL balance at September 30, 2016	$	4,426		$	13	$	852		$	882		$	215		$	455		$	1,880		$	25		$	308	$	9,056
Charge-offs		(76	)		—		(91	)		(19	)		—			—			(517	)		(4	)		—		(707	)
Recoveries		2			—		10			0			—			1			228			2			—		243
Provision		98			10		24			102			19			(15	)		471			2			39		750
ALL balance at December 31, 2016	$	4,450		$	23	$	795		$	965		$	234		$	441		$	2,062		$	25		$	347	$	9,342
ALL balance at September 30, 2015	$	5,140		$	7	$	671		$	693		$	189		$	461		$	1,570		$	27		$	161	$	8,919
Charge-offs		(91	)		—		—			(3	)		—			(25	)		(188	)		—			—		(307	)
Recoveries		3			—		—			1			—			1			37			3			—		45
Provision		(305	)		7		187			14			(2	)		(48	)		335			(3	)		415		600
ALL balance at December 31, 2015	$	4,747		$	14	$	858		$	705		$	187		$	389		$	1,754		$	27		$	576	$	9,257

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

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

											Home
									Obligations of		Equity
									States and		Loans and
	Real Estate Loans						Commercial		Political		Lines of				Other
	Residential		Construction		Commercial		Loans		Subdivisions		Credit		Auto Loans		Loans		Unallocated		Total
Individually evaluated for impairment	$	145	$	—	$	32	$	1	$	—	$	6	$	282	$	—	$	—	$	466
Collectively evaluated for impairment		4,305		23		763		964		234		435		1,780		25		347		8,876
ALL Balance at December 31, 2016	$	4,450	$	23	$	795	$	965	$	234	$	441	$	2,062	$	25	$	347	$	9,342
Individually evaluated for impairment	$	198	$	—	$	36	$	—	$	—	$	—	$	113	$	—	$	—	$	347
Collectively evaluated for impairment		4,228		13		816		882		215		455		1,767		25		308		8,709
ALL balance at September 30, 2016	$	4,426	$	13	$	852	$	882	$	215	$	455	$	1,880	$	25	$	308	$	9,056

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

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

	For the Three Months Ended December 31, 2016
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings
Real estate loans:
Residential		2	$	259	$	259
Construction		—		—		—
Commercial		—		—		—
Commercial		—		—		—
Obligations of states and political subdivisions		—		—		—
Home equity loans and lines of credit		—		—		—
Auto loans		—		—		—
Other		—		—		—
Total		2	$	259	$	259

	For the Three Months Ended December 31, 2015
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings
Real estate loans:
Residential		1	$	81	$	81
Construction		—		—		—
Commercial		—		—		—
Commercial		—		—		—
Obligations of states and political subdivisions		—		—		—
Home equity loans and lines of credit		—		—		—
Auto loans		—		—		—
Other		—		—		—
Total		1	$	81	$	81

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

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

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

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

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

Deposits

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

	December 31, 2016		September 30, 2016
Non-interest bearing demand accounts	$	144,660	$	142,924
Interest bearing demand accounts		163,320		167,259
Money market accounts		255,763		249,947
Savings and club accounts		144,459		142,021
Certificates of deposit		484,739		512,669
Total	$	1,192,941	$	1,214,820

8.	Net Periodic Benefit Cost-Defined Benefit Plan

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

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

	Three Months Ended December 31,
	2016			2015
Service Cost	$	309		$	249
Interest Cost		235			245
Expected return on plan assets		(341	)		(311	)
Amortization of unrecognized loss		136			120
Net periodic benefit cost	$	339		$	303

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

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

9.	Equity Incentive Plan

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

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

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

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

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

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

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

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

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

	Number of Stock Options		Weighted- average Exercise Price		Weighted- average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)
Outstanding, September 30, 2016		905,987	$	12.35		1.67	$	1,341
Granted		—		—		—		—
Exercised		262,092		12.35		1.42		—
Forfeited		—		—		—		—
Outstanding, December 31, 2016		643,895	$	12.35		1.42	$	2,170
Exercisable at December 31, 2016		643,895	$	12.35		1.42	$	2,170

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

	Number of Restricted Stock		Weighted- average Grant Date Fair Value
Nonvested at September 30, 2016		31,896	$	13.01
Granted		20,675		16.57
Vested		—		—
Forfeited		—		—
Nonvested at December 31, 2016		52,571	$	14.41

10.	Fair Value Measurement

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

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

	Fair Value Measurement at December 31, 2016
Fair Value Measurements Utilized for the Company’s Financial Assets (in thousands):	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balances as of December 31, 2016
Securities available-for-sale measured on a recurring basis
Mortgage backed securities	$	—	$	223,763	$	—	$	223,763
Obligations of states and political subdivisions		—		70,521		—		70,521
U.S. government agencies		—		25,800		—		25,800
Corporate obligations		—		30,550		8,238		38,788
Other debt securities		—		33,216		—		33,216
Equity securities-financial services		25		—		—		25
Total debt and equity securities	$	25	$	383,850	$	8,238	$	392,113
Derivatives	$	—	$	1,362	$	—	$	1,362
Assets measured at fair value on a nonrecurring basis:
Foreclosed real estate	$	—	$	—	$	2,436	$	2,436
Impaired loans	$	—	$	—	$	21,344	$	21,344
Mortgage servicing rights	$	—	$	—	$	358	$	358

	Fair Value Measurement at September 30, 2016
Fair Value Measurements Utilized for the Company’s Financial Assets (in thousands):	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balances as of September 30, 2016
Securities available-for-sale measured on a recurring basis
Mortgage backed securities	$	—	$	219,162	$	—	$	219,162
Obligations of states and political subdivisions		—		73,690		—		73,690
U.S. government agencies		—		25,941		—		25,941
Corporate obligations		—		31,433		6,985		38,418
Other debt securities		—		32,674		500		33,174
Equity securities-financial services		25		—		—		25
Total debt and equity securities	$	25	$	382,900	$	7,485	$	390,410
Derivatives	$	—	$	453	$	—	$	453
Assets measured at fair value on a nonrecurring basis:
Foreclosed real estate	$	—	$	—	$	2,659	$	2,659
Impaired loans	$	—	$	—	$	22,218	$	22,218
Mortgage Servicing rights	$	—	$	—	$	398	$	398

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

	Fair Value Measurement Using Significant Unobservable Inputs (Level III)
	Three Months Ended
	December 31, 2016			December 31, 2015
Beginning balance	$	7,485		$	4,211
Purchases, sales, issuances, settlements, net		756			3,000
Total unrealized gain (loss):
Included in earnings		—			—
Included in other comprehensive income		(3	)		(75	)
Transfers in and/or out of Level III		—			—
	$	8,238		$	7,136

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

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

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

	Quantitative Information about Level 3 Fair Value Measurements
(in thousands)	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range
December 31, 2016:
Impaired loans	$	21,344	Appraisal of collateral (1)	Appraisal adjustments (2)	0% to 50% (24.0%)
Foreclosed real estate owned		2,436	Appraisal of collateral (1)	Appraisal adjustments (2)	20% to 46% (22.7%)
Mortgage servicing rights		358	Discounted cash flow	Discount rate	11% to 16% (11.6%)
				Prepayment speeds	7% to 34% (16.2%)

	Quantitative Information about Level 3 Fair Value Measurements
(in thousands)	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range
September 30, 2016:
Impaired loans	$	22,218	Appraisal of collateral (1)	Appraisal adjustments (2)	0% to 60% (23.0%)
Foreclosed real estate owned		2,659	Appraisal of collateral (1)	Appraisal adjustments (2)	20% to 46% (22.1%)
Mortgage servicing rights		398	Discounted cash flow	Discount rate	12% to 16% (12.0%)
				Prepayment speeds	2% to 33% (17.2%)

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

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

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

Disclosures about Fair Value of Financial Instruments

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

	December 31, 2016
	Carrying Value		Level I		Level II		Level III		Total Fair Value
Financial assets:
Cash and cash equivalents	$	39,851	$	39,851	$	—	$	—	$	39,851
Certificates of deposit		1,000		—		—		1,012		1,012
Investment and mortgage backed securities available for sale		392,113		25		384,350		7,738		392,113
Loans receivable, net		1,224,021		—		—		1,220,648		1,220,648
Accrued interest receivable		5,950		5,950		—		—		5,950
Regulatory stock		16,680		16,680		—		—		16,680
Mortgage servicing rights		358		—		—		358		358
Derivatives		1,362		—		1,362				1,362
Bank owned life insurance		36,856		36,856		—		—		36,856
Financial liabilities:
Deposits	$	1,192,941	$	708,202	$	—	$	485,989	$	1,194,191
Short-term borrowings		174,918		174,918		—		—		174,918
Other borrowings		215,571		—		—		215,726		215,726
Advances by borrowers for taxes and insurance		7,719		7,719		—		—		7,719
Accrued interest payable		1,029		1,029		—		—		1,029

	September 30, 2016
	Carrying Value		Level I		Level II		Level III		Total Fair Value
Financial assets:
Cash and cash equivalents	$	43,658	$	43,658	$	—	$	—	$	43,658
Certificates of deposit		1,250		—		—		1,269		1,269
Investment and mortgage backed securities available for sale		390,410		25		382,900		7,485		390,410
Loans receivable, net		1,219,213		—		—		1,237,759		1,237,759
Accrued interest receivable		5,769		5,769		—		—		5,769
Regulatory stock		15,463		15,463		—		—		15,463
Mortgage servicing rights		398		—		—		398		398
Derivatives		453		—		453		—		453
Bank owned life insurance		36,593		36,593		—		—		36,593
Financial liabilities:
Deposits	$	1,214,820	$	702,151	$	—	$	516,743	$	1,218,894
Short-term borrowings		129,460		129,460		—		—		129,460
Other borrowings		230,601		—		—		231,911		231,911
Advances by borrowers for taxes and insurance		4,956		4,956		—		—		4,956
Accrued interest payable		1,046		1,046		—		—		1,046

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

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

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

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

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

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

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

The fair value approximates the current book value.

Bank-Owned Life Insurance

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

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

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

Loans Receivable

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

Mortgage Servicing Rights

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

Derivatives

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

Deposits (including Certificates of Deposit)

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

Other Borrowings

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

Commitments to Extend Credit

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

11.	Accumulated Other Comprehensive Loss

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

	Accumulated Other Comprehensive Loss
	Defined Benefit Pension Plan			Unrealized Gains (Losses) on Securities Available for Sale			Derivatives		Total
Balance at September 30, 2016	$	(6,083	)	$	3,952		$	299	$	(1,832	)
Other comprehensive income (loss) before reclassifications		—			(6,753	)		593		(6,160	)
Amounts reclassified from accumulated other comprehensive loss, net of tax		90			—			7		97
Period change		90			(6,753	)		600		(6,063	)
Balance at December 31, 2016	$	(5,993	)	$	(2,801	)	$	899	$	(7,895	)
Balance at September 30, 2015	$	(5,325	)	$	2,930		$	—	$	(2,395	)
Other comprehensive loss before reclassifications		—			(2,244	)		—		(2,244	)
Amounts reclassified from accumulated other comprehensive loss, net of tax		79			(2	)		—		77
Period change		79			(2,246	)		—		(2,167	)
Balance at December 31, 2015	$	(5,246	)	$	684		$	—	$	(4,562	)

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

	Amount Reclassified from Accumulated Other Comprehensive Loss
	Accumulated Other Comprehensive Loss for the Three Months Ended December 31,						Affected Line Item in the Consolidated Statement of Income
	2016			2015
Securities available for sale:
Securities gains reclassified into earnings	$	—		$	3		Gain on sale of investments
Related income tax expense		—			(1	)	Income taxes
Net effect on accumulated other comprehensive loss for the period		—			2
Defined benefit pension plan:
Amortization of net loss		(136	)		(120	)	Compensation and employee benefits
Related income tax expense		46			41		Income taxes
Net effect on accumulated other comprehensive loss for the period		(90	)		(79	)
Derivatives and hedging activities:
Interest expense, effective portion		(11	)		—		Interest expense
Related income tax expense		4			—		Income taxes
Net effect on accumulated other comprehesive loss for the period		(7	)		—
Total reclassification for the period	$	(97	)	$	(77	)

12.	Derivatives and Hedging Activities

Risk Management Objective of Using Derivatives

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

Fair Values of Derivative Instruments on the Consolidated Balance Sheet

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

Fair Values of Derivative Instruments

Asset Derivatives

As of December 31, 2016

As of September 30, 2016

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Derivatives designated as hedging

instruments

Interest Rate Products

Other Assets

1,362

Other Assets

453

Cash Flow Hedges of Interest Rate Risk

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

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

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

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

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

Derivatives in Cash Flow Hedging Relationships	Gain Recognized in OCI on Derivative (Effective Portion) Three Months Ended December 31,				Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	(Loss) Reclassified from Accumulated OCI into Income (Effective Portion) Three Months Ended December 31,					Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)	Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion) Three Months Ended December 31,
	2016		2015			2016			2015			2016		2015
Interest Rate Products	$	1,052	$	—	Interest expense	$	(11	)	$	—	Other non-interest income	$	—	$	—
Ending balance of OCI
Total	$	1,052	$	—		$	(11	)	$	—		$	—	$	—

Credit-risk-related Contingent Features

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

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

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

Item 2.

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

Forward Looking Statements

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

•

statements of our goals, intentions and expectations;

•

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

•

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

•

estimates of our risks and future costs and benefits.

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

•

significantly increased competition among depository and other financial institutions;

•

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

•

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

•

adverse changes in the securities markets;

•

legislative or regulatory changes that adversely affect our business;

•

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

•

changes in consumer spending, borrowing and savings habits;

•

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

•

changes in our organization, compensation and benefit plans.

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

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

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

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

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

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

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

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

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

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

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

	For the Three Months Ended December 31,
	2016									2015
	Average Balance			Interest Income/ Expense			Yield/Cost			Average Balance			Interest Income/ Expense			Yield/Cost
	(dollars in thousands)
Interest-earning assets:
Loans⁽¹⁾	$	1,232,042		$	12,251			3.95	%	$	1,144,346		$	11,574			4.01	%
Investment Securities
Taxable⁽²⁾		87,926			629			2.84	%		86,498			497			2.28	%
Exempt from federal income tax⁽²⁾⁽³⁾		52,978			309			3.51	%		40,145			244			3.65	%
Total investment securities		140,904			938			3.09	%		126,643			741			2.72	%
Mortgage-backed securities		249,541			1,245			1.98	%		258,653			1,321			2.03	%
Regulatory stock		15,720			191			4.82	%		14,471			175			4.80	%
Other		8,440			25			1.18	%		3,628			4			0.44	%
Total interest-earning assets		1,646,647			14,650			3.57	%		1,547,741			13,815			3.57	%
Allowance for loan losses		(9,149	)								(8,981	)
Noninterest-earning assets		131,014									111,446
Total assets	$	1,768,512								$	1,650,206
Interest-bearing liabilities:
Interest bearing demand accounts	$	168,284		$	62			0.15	%	$	101,478		$	25			0.10	%
Money market accounts		251,171			324			0.51	%		176,775			102			0.23	%
Savings and club accounts		136,655			18			0.05	%		127,511			16			0.05	%
Certificates of deposit		508,528			1,608			1.25	%		609,525			1,702			1.11	%
Borrowed funds		363,924			1,006			1.10	%		332,636			878			1.05	%
Total interest-bearing liabilities		1,428,562			3,018			0.84	%		1,347,925			2,723			0.80	%
Non-interest-bearing demand accounts		141,876									110,806
Non-interest-bearing liabilities		22,147									18,833
Total liabilities		1,592,585									1,477,564
Equity		175,927									172,642
Total liabilities and equity	$	1,768,512								$	1,650,206
Net interest income				$	11,632								$	11,092
Interest rate spread								2.73	%								2.77	%
Net interest-earning assets	$	218,085								$	199,816
Net interest margin⁽⁴⁾								2.80	%								2.84	%
Average interest-earning assets to average interest-bearing liabilities					115.27	%								114.82	%

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

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

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

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

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

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

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

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

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

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

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

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

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

Non-Performing Assets

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

	December 31, 2016			September 30, 2016
Non-performing assets:
Non-accruing loans	$	20,397		$	19,315
Total non-performing loans		20,397			19,315
Foreclosed real estate		2,436			2,659
Other repossessed assets		9			9
Total non-performing assets	$	22,842		$	21,983
Ratio of non-performing loans to total loans		1.65	%		1.57	%
Ratio of non-performing loans to total assets		1.15	%		1.09	%
Ratio of non-performing assets to total assets		1.28	%		1.24	%
Ratio of allowance for loan losses to total loans		0.76	%		0.74	%

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

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

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

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

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

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

Liquidity and Capital Resources

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

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

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

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

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

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

Critical Accounting Policies

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

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

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

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

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

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

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

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

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

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

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

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

•

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

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

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

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

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

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

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

Off-Balance Sheet Arrangements

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

Contractual Obligations

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

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

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

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

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

Item 4.

Controls and Procedures

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

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

Part II – Other Information

Item 1.

Legal Proceedings

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

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

Item 1A.

Risk Factors

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

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3.

Defaults Upon Senior Securities

Not applicable.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

Not applicable.

Item 6.

Exhibits

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

3.1	Articles of Incorporation of ESSA Bancorp, Inc.*

3.2	Bylaws of ESSA Bancorp, Inc.*

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

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

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

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

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

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

SIGNATURES

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

	ESSA BANCORP, INC,

Date: February 9, 2017	/s/ Gary S. Olson
	Gary S. Olson
	President and Chief Executive Officer

Date: February 9, 2017	/s/ Allan A. Muto
	Allan A. Muto
	Executive Vice President and Chief Financial Officer