ESSA Bancorp, Inc. - Quarter Report: 2020 March (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 March 31, 2020

☐	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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common	ESSA	Nasdaq Stock Market LLC

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ☒ NO ☐

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

Large accelerated filer	☐	Accelerated filer	☒

Non-accelerated filer	☐	Smaller reporting company	☒

Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of May 6, 2020, there were 11,093,518 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	38

Item 3	Quantitative and Qualitative Disclosures About Market Risk	47

Item 4	Controls and Procedures	47

	Part II. Other Information

Item 1.	Legal Proceedings	48

Item 1A.	Risk Factors	48

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49

Item 3.	Defaults Upon Senior Securities	49

Item 4.	Mine Safety Disclosures	49

Item 5.	Other Information	49

Item 6.	Exhibits	50

Signature Page		51

Part I. Financial Information

Item 1.

Financial Statements

ESSA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

	March 31,			September 30,
	2020			2019
	(dollars in thousands)
ASSETS
Cash and due from banks	$	97,121		$	48,426
Interest-bearing deposits with other institutions		76,398			3,816
Total cash and cash equivalents		173,519			52,242
Investment securities available for sale, at fair value		306,407			313,393
Loans receivable (net of allowance for loan losses of $13,179 and $12,630)		1,358,167			1,328,653
Regulatory stock, at cost		17,284			11,579
Premises and equipment, net		14,397			14,335
Bank-owned life insurance		40,077			39,601
Foreclosed real estate		408			240
Intangible assets, net		926			1,066
Goodwill		13,801			13,801
Deferred income taxes		4,190			5,122
Other assets		26,000			19,395
TOTAL ASSETS	$	1,955,176		$	1,799,427
LIABILITIES
Deposits	$	1,327,613		$	1,342,830
Short-term borrowings		238,898			107,701
Other borrowings		161,762			140,581
Advances by borrowers for taxes and insurance		11,721			6,700
Other liabilities		21,516			12,107
TOTAL LIABILITIES		1,761,510			1,609,919
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; 11,105,887 and 11,321,417 outstanding at March 31, 2020 and September 30, 2019, respectively)		181			181
Additional paid in capital		181,218			181,161
Unallocated common stock held by the Employee Stock Ownership Plan (ESOP)		(7,576	)		(7,803	)
Retained earnings		107,265			102,465
Treasury stock, at cost; 7,027,208 and 6,811,678 shares outstanding at March 31, 2020 and September 30, 2019, respectively		(88,418	)		(85,216	)
Accumulated other comprehensive income (loss)		996			(1,280	)
TOTAL STOCKHOLDERS’ EQUITY		193,666			189,508
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,955,176		$	1,799,427

See accompanying notes to the unaudited consolidated financial statements.

ESSA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF OPERATIONS

(UNAUDITED)

	For the Three Months Ended					For the Six Months Ended
	March 31,					March 31,
	2020			2019		2020			2019
	(dollars in thousands, except per share data)					(dollars in thousands, except per share data)
INTEREST INCOME
Loans receivable, including fees	$	14,005		$	14,042	$	28,195		$	27,949
Investment securities:
Taxable		1,945			2,530		3,902			5,012
Exempt from federal income tax		48			94		96			230
Other investment income		346			462		664			806
Total interest income		16,344			17,128		32,857			33,997
INTEREST EXPENSE
Deposits		3,228			3,555		6,561			6,943
Short-term borrowings		489			1,172		994			2,249
Other borrowings		895			669		1,744			1,188
Total interest expense		4,612			5,396		9,299			10,380
NET INTEREST INCOME		11,732			11,732		23,558			23,617
Provision for loan losses		500			600		875			1,476
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		11,232			11,132		22,683			22,141
NONINTEREST INCOME
Service fees on deposit accounts		778			784		1,605			1,647
Services charges and fees on loans		700			276		1,233			606
Realized and unrealized gain (loss) on equity securities		(6	)		3		(5	)		1
Trust and investment fees		429			235		747			474
Gain on sale of investment securities available for sale, net		160			39		381			43
Gain on sale of loans, net		144			—		144			—
Earnings on Bank-owned life insurance		235			240		476			484
Insurance commissions		238			194		446			395
Other		27			297		104			544
Total noninterest income		2,705			2,068		5,131			4,194
NONINTEREST EXPENSE
Compensation and employee benefits		6,077			6,035		12,315			12,159
Occupancy and equipment		1,069			1,112		2,136			2,138
Professional fees		533			646		992			1,170
Data processing		1,085			930		2,102			1,833
Advertising		118			204		234			359
Federal Deposit Insurance Corporation (FDIC) premiums		205			182		338			369
Loss (gain) on foreclosed real estate		86			11		66			(104	)
Amortization of intangible assets		68			77		140			161
Other		583			514		1,264			1,278
Total noninterest expense		9,824			9,711		19,587			19,363
Income before income taxes		4,113			3,489		8,227			6,972
Income taxes		706			630		1,410			1,104
NET INCOME	$	3,407		$	2,859	$	6,817		$	5,868
Earnings per share
Basic	$	0.33		$	0.26	$	0.65		$	0.54
Diluted	$	0.33		$	0.26	$	0.65		$	0.54
Dividends per share	$	0.11		$	0.10	$	0.22		$	0.20

See accompanying notes to the unaudited consolidated financial statements.

ESSA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

	For the Three Months Ended						For the Six Months Ended
	March 31,						March 31,
	2020			2019			2020			2019
	(dollars in thousands)
Net income	$	3,407		$	2,859		$	6,817		$	5,868
Other comprehensive income
Investment securities available for sale:
Unrealized holding gain		5,693			4,866			5,672			9,918
Tax effect		(1,196	)		(1,022	)		(1,191	)		(2,083	)
Reclassification of gains recognized in net income		(160	)		(39	)		(381	)		(43	)
Tax effect		34			8			80			9
Net of tax amount		4,371			3,813			4,180			7,801
Derivative and hedging activities adjustments:
Changes in unrealized holding losses on derivatives included in net income		(2,555	)		(336	)		(2,352	)		(1,061	)
Tax effect		524			71			494			223
Reclassification adjustment for losses (gains) on derivatives included in net income		10			(271	)		(58	)		(488	)
Tax effect		(2	)		56			12			102
Net of tax amount		(2,023	)		(480	)		(1,904	)		(1,224	)
Total other comprehensive income		2,348			3,333			2,276			6,577
Comprehensive income	$	5,755		$	6,192		$	9,093		$	12,445

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			Income (Loss)			Equity
	(dollars in thousands except share data)
Balance, December 31, 2018		11,819,814		$	181	$	180,631	$	(8,142	)	$	96,026		$	(77,259	)	$	(6,662	)	$	184,775
Net Income												2,859									2,859
Other comprehensive income																		3,333			3,333
Cash dividends declared ($0.10 per share)												(1,064	)								(1,064	)
Stock based compensation							98														98
Allocation of ESOP stock							64		113												177
Reclassification of equity investment securities		(5,495	)				64								(64	)					—
Purchase of common stock		(405,384	)												(6,541	)					(6,541	)
Balance, March 31, 2019		11,408,935		$	181	$	180,857	$	(8,029	)	$	97,821		$	(83,864	)	$	(3,329	)	$	183,637


								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			Income (Loss)			Equity
	(dollars in thousands except share data)
Balance, December 31, 2019		11,290,451		$	181	$	181,056	$	(7,689	)	$	105,012		$	(85,845	)	$	(1,352	)	$	191,363
Net income												3,407									3,407
Other comprehensive loss																		2,348			2,348
Cash dividends declared ($0.11 per share)												(1,154	)								(1,154	)
Stock based compensation							93														93
Allocation of ESOP stock							69		113												182
Purchase of common stock		(184,564	)												(2,573	)					(2,573	)
Balance, March 31, 2020		11,105,887		$	181	$	181,218	$	(7,576	)	$	107,265		$	(88,418	)	$	996		$	193,666

									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			Income (Loss)			Equity
	(dollars in thousands except share data)
Balance, September 30, 2018		11,782,718		$	181	$	180,765		$	(8,255	)	$	94,112		$	(77,707	)	$	(9,910	)	$	179,186
Net Income													5,868									5,868
Other comprehensive income																			6,577			6,577
Cash dividends declared ($0.20 per share)													(2,155	)								(2,155	)
Stock based compensation							350															350
Allocation of ESOP stock							126			226												352
Allocation of treasury shares to incentive plan		31,601					(384	)								384						—
Reclassification of equity investment securities													(4	)				4				—
Purchase of common stock		(405,384	)													(6,541	)					(6,541	)
Balance, March 31, 2019		11,408,935		$	181	$	180,857		$	(8,029	)	$	97,821		$	(83,864	)	$	(3,329	)	$	183,637


									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			Income (Loss)			Equity
	(dollars in thousands except share data)
Balance, September 30, 2019		11,321,417		$	181	$	181,161		$	(7,803	)	$	102,465		$	(85,216	)	$	(1,280	)	$	189,508
Net income													6,817									6,817
Other comprehensive income																			2,276			2,276
Cash dividends declared ($0.22 per share)													(2,307	)								(2,307	)
Change in accounting principal for adoption of ASU 2016-02												290										290
Stock based compensation							333															333
Allocation of ESOP stock							144			227												371
Allocation of treasury shares to incentive plan		33,134					(420	)								416						(4	)
Purchase of common stock		(248,664	)													(3,618	)					(3,618	)
Balance, March 31, 2020		11,105,887		$	181	$	181,218		$	(7,576	)	$	107,265		$	(88,418	)	$	996		$	193,666

See accompanying notes to the unaudited consolidated financial statements.

ESSA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

	For the Six Months Ended
	March 31,
	2020			2019
	(dollars in thousands)
OPERATING ACTIVITIES
Net income	$	6,817		$	5,868
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	875				1,476
Provision for depreciation and amortization		536			561
Amortization and accretion of discounts and premiums, net		1,123			1,567
Net gain on sale of investment securities		(381	)		(43	)
Realized and unrealized loss (gain) on equity securities		5			(1	)
Gain on sale of loans, net		(144	)		—
Origination of residential real estate loans for sale		(4,000	)		—
Proceeds on sale of residential real estate loans		4,144			—
Compensation expense on ESOP		371			352
Amortization of right-of-use asset		443			—
Stock based compensation		333			350
Increase in accrued interest receivable		(368	)		(398	)
Increase in accrued interest payable		174			504
Earnings on bank-owned life insurance		(476	)		(484	)
Deferred federal income taxes		327			1,027
Decrease in accrued pension liability		(296	)		(239	)
Loss (gain) on foreclosed real estate, net		66			(104	)
Amortization of identifiable assets		140			161
Other, net		867			(2,712	)
Net cash provided by operating activities		10,556			7,885
INVESTING ACTIVITIES
Certificate of deposit maturities		—		250
Investment securities available for sale:
Proceeds from sale of investment securities		24,009			30,455
Proceeds from principal repayments and maturities		25,457			22,259
Purchases		(37,532	)		(20,729	)
Increase in loans receivable, net		(31,133	)		(32,462	)
Redemption of regulatory stock		7,796			9,953
Purchase of regulatory stock		(13,501	)		(11,613	)
Proceeds from sale of foreclosed real estate		111			629
Purchase of premises, equipment and software		(743	)		(336	)
Net cash used for investing activities		(25,536	)		(1,594	)
FINANCING ACTIVITIES
Decrease in deposits, net		(15,217	)		(42,972	)
Net increase in short-term borrowings		131,197			18,520
Proceeds from other borrowings		51,527			75,700
Repayment of other borrowings		(30,346	)		(54,750	)
Increase in advances by borrowers for taxes and insurance		5,021			3,527
Purchase of treasury shares		(3,618	)		(6,541	)
Dividends on common stock		(2,307	)		(2,155	)
Net cash provided by (used for) financing activities		136,257			(8,671	)
Increase and decrease in cash and cash equivalents		121,277			(2,380	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		52,242			43,539
CASH AND CASH EQUIVALENTS AT END OF YEAR	$	173,519		$	41,159
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash Paid:
Interest	$	9,125		$	9,876
Income taxes		8			—
Noncash items:
Transfers from loans to foreclosed real estate		345			49
Initial recognition of operating right-of-use asset		(7,272	)		—
Initial recognition of operating lease liability		7,272			—
Unrealized holding gains		5,291			9,882

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. The Bank’s primary business consists of the taking of deposits and granting of loans to customers generally in Monroe, Northampton, Lehigh, Delaware, Chester, Montgomery, Lackawanna, and Luzerne Counties, Pennsylvania. The Bank is a Pennsylvania chartered savings bank and is subject to regulation and supervision by the Pennsylvania Department of Banking and Securities and the Federal Deposit Insurance Corporation (the “FDIC”). The investment in the Bank on the parent company’s financial statements is carried at the parent company’s equity in the underlying net assets.

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

The unaudited consolidated financial statements reflect all adjustments, which in the opinion of management, are necessary for a fair presentation of the results of the interim periods and are of a normal and recurring nature. Operating results for the three and six month periods ended March 31, 2020 and 2019 are not necessarily indicative of the results that may be expected for the year ending September 30, 2020.

2.	Earnings per Share

The following table sets forth the composition of the weighted-average common shares (denominator) used in the basic and diluted earnings per share computation for the three and six month periods ended March 31, 2020 and 2019.

	Three Months Ended						Six Months Ended
	March 31,			March 31,			March 31,			March 31,
	2020			2019			2020			2019
Weighted-average common shares outstanding		18,133,095			18,133,095			18,133,095			18,133,095
Average treasury stock shares		(6,848,093	)		(6,458,020	)		(6,865,860	)		(6,386,412	)
Average unearned ESOP shares		(758,160	)		(797,738	)		(752,472	)		(803,457	)
Average unearned non-vested shares		(53,376	)		(51,711	)		(52,750	)		(52,039	)
Weighted average common shares and common stock equivalents used to calculate basic earnings per share		10,473,466			10,825,626			10,462,013			10,891,187
Additional common stock equivalents (stock options) used to calculate diluted earnings per share		—			—			—			—
Weighted average common shares and common stock equivalents used to calculate diluted earnings per share		10,473,466			10,825,626			10,462,013			10,891,187

At March 31, 2020 there were 48,901 shares of nonvested stock outstanding at an average weighted price of $16.16 per share that were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive. At March 31, 2019 there were 45,214 shares of nonvested stock outstanding at an average weighted price of $16.01 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.	Accounting Pronouncements

Adoption of New Standards

In February 2016, the FASB issued Accounting Standards Update (ASU) 2016-02, Leases. The new leases standard applies a right-of-use (ROU) model that requires a lessee to record, for all leases with a lease term of more than 12 months, an asset representing its right to use the underlying asset and a liability to make lease payments. For leases with a term of 12 months or less, a practical expedient is available whereby a lessee may elect, by class of underlying asset, not to recognize an ROU asset or lease liability. At inception, lessees must classify all leases as either finance or operating based on five criteria. Balance sheet recognition of finance and operating leases is similar, but the pattern of expense recognition in the income statement, as well as the effect on the statement of cash flows, differs depending on the lease classification.

The new leases standard requires a lessor to classify leases as either sales-type, direct financing or operating, similar to existing U.S. GAAP. Classification depends on the same five criteria used by lessees plus certain additional factors. The subsequent accounting treatment for all three lease types is substantially equivalent to existing U.S. GAAP for sales-type leases, direct financing leases, and operating leases. However, the new standard updates certain aspects of the lessor accounting model to align it with the new lessee accounting model, as well as with the new revenue standard under Topic 606.

Lessees and lessors are required to provide certain qualitative and quantitative disclosures to enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.

The new leases standard addresses other considerations including identification of a lease, separating lease and non-lease components of a contract, sale and leaseback transactions, modifications, combining contracts, reassessment of the lease term, and re-measurement of lease payments. It also contains comprehensive implementation guidance with practical examples

ASU 2016-02 was adopted by us on October 1, 2019 and initially required transition using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. In January 2018, the FASB issued ASU 2018-01, Leases (Topic 842), which provides an optional transition practical expedient to not evaluate under Topic 842 existing or expired land easements that were not previously accounted for as leases under the current lease guidance in Topic 840. In July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842) - Targeted Improvements,” which, among other things, provides an additional transition method that would allow entities to not apply the guidance in ASU 2016-02 in the comparative periods presented in the financial statements and instead recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. In December 2018, the FASB also issued ASU 2018-20, “Leases (Topic 842) - Narrow-Scope Improvements for Lessors,” which provides for certain policy elections and changes lessor accounting for sales and similar taxes and certain lessor costs. In March 2019, the FASB issued ASU 2019-01, Leases (Topic 842): Codification Improvements, which addresses 1) determining the fair value of the underlying asset by the lessor that are not manufacturers or dealers (generally financial institutions and captive finance companies), and 2) lessors that are depository and lending institutions should classify principal and payments received under sales-type and direct financing leases within investing activities in the cash flow statement

Upon adoption of ASU 2016-02, ASU 2018-01, ASU 2018-11, ASU 2018-20, and ASU 2019-01 on October 1, 2019, we recognized right-of-use assets and related lease liabilities totaling $7.3 million and $7.3 million, respectively.

We elected to apply certain practical expedients provided under ASU 2016-02 whereby we will not reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. We also did not apply the recognition requirements of ASU 2016-02 to any short-term leases (as defined by related accounting guidance). We utilized the modified-retrospective transition approach prescribed by ASU 2018-11.

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining

life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. In November 2019, the FASB issued ASU 2019-10, Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). This Update defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. A public business entity that is a U.S. Securities and Exchange Commission (SEC) filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. A public business entity that is not an SEC filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2020. All other entities, including not-for-profit entities, that are adopting the amendments in this Update should do so for their annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2021. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes the Disclosure Requirements for Fair Value Measurements. The Update removes the requirement to disclose the amount of and reasons for transfers between Level I and Level II of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level III fair value measurements. The Update requires disclosure of changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level III fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level III fair value measurements. This Update is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. This Update is not expected to have a significant impact on the Company’s financial statements.

In August 2018, the FASB issued ASU 2018-14, Compensation – Retirement Benefits (Topic 715-20). This Update amends ASC 715 to add, remove and clarify disclosure requirements related to defined benefit pension and other postretirement plans. The Update eliminates the requirement to disclose the amounts in accumulated other comprehensive income expected to be recognized as part of net periodic benefit cost over the next year. The Update also removes the disclosure requirements for the effects of a one-percentage-point change on the assumed health care costs and the effect of this change in rates on service cost, interest cost and the benefit obligation for postretirement health care benefits. This Update is effective for public business entities for fiscal years ending after December 15, 2020, and must be applied on a retrospective basis. For all other entities, this Update is effective for fiscal years ending after December 15, 2021. This Update is not expected to have a significant impact on the Company’s financial statements.

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which affects a variety of topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance. Topic 326, Financial Instruments – Credit Losses amendments are effective for SEC registrants for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other public business entities, the effective date is for fiscal years beginning after December 15, 2020, and for all other entities, the effective date is for fiscal years beginning after December 15, 2021. Topic 815, Derivatives and Hedging amendments are effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020. For entities that have adopted the amendments in Update 2017-12, the effective date is as of the beginning of the first annual period beginning after the issuance of this Update. Topic 825, Financial Instruments amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In May 2019, the FASB issued ASU 2019-05, Financial Instruments – Credit Losses, Topic 326, which allows entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost upon adoption of the new credit losses standard. To be eligible for the transition election, the existing financial asset must otherwise be both within the scope of the new credit losses standard and eligible for the applying the fair value option in ASC 825-10.3. The election must be applied on an instrument-by-instrument basis and is not available for either available-for-sale or held-to-maturity debt securities. For entities that elect the fair value option, the difference between the carrying amount and the fair value of the financial asset would be recognized through a cumulative-effect adjustment to opening retained earnings as of the date an entity adopted ASU 2016-13. Changes in fair value of that financial asset would subsequently be reported in current earnings. For entities that have not yet adopted ASU 2016-13, the effective dates and transition requirements are the same as those in ASU 2016-13. For entities that have adopted ASU 2016-13, ASU 2019-05 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted once ASU 2016-13 has been adopted. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In November 2019, the FASB issued ASU 2019-10, Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). The Update defers the effective dates of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. This Update also amends the mandatory effective date for the elimination of Step 2 from the goodwill impairment test under ASU No. 2017-04, Intangibles ‒ Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (Goodwill), to align with those used for credit losses. Furthermore, the ASU provides a one-year deferral of the effective dates of the ASUs on derivatives and hedging and leases for companies that are not public business entities. The Company qualifies as a smaller reporting company and does not expect to early adopt these ASUs.

In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, to clarify its new credit impairment guidance in ASC 326, based on implementation issues raised by stakeholders. This Update clarified, among other things, that expected recoveries are to be included in the allowance for credit losses for these financial assets; an accounting policy election can be made to adjust the effective interest rate for existing troubled debt restructurings based on the prepayment assumptions instead of the prepayment assumptions applicable immediately prior to the restructuring event; and extends the practical expedient to exclude accrued interest receivable from all additional relevant disclosures involving amortized cost basis. The effective dates in this Update are the same as those applicable for ASU 2019-10. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), to simplify the accounting for income taxes, change the accounting for certain tax transactions, and make minor improvements to the codification. This Update provides a policy election to not allocate consolidated income taxes when a member of a consolidated tax return is not subject to income tax and provides guidance to evaluate whether a step-up in tax basis of goodwill relates to a business combination in which book goodwill was recognized or a separate transaction. The Update also changes current guidance for making an intraperiod allocation, if there is a loss in continuing operations and gains outside of continuing operations; determining when a deferred tax liability is recognized after an investor in a foreign entity transitions to or from the equity method of accounting; accounting for tax law changes and year-to-date losses in interim periods; and determining how to apply the income tax guidance to franchise taxes that are partially based on income. For public business entities, the amendments in this Update are effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2020. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. This Update is not expected to have a significant impact on the Company’s financial statements.

In January 2020, the FASB issued ASU 2020-1, Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815), to clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative

in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The amendments also clarify that, for the purpose of applying paragraph 815-10-15-141(a) an entity should not consider whether, upon the settlement of the forward contract or exercise of the purchased option, individually or with existing investments, the underlying securities would be accounted for under the equity method in Topic 323 or the fair value option, in accordance with the financial instruments guidance in Topic 825. An entity also would evaluate the remaining characteristics in paragraph 815-10-15-141 to determine the accounting for those forward contracts and purchased options. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. This Update is not expected to have a significant impact on the Company’s financial statements.

In January 2020, the FASB issued ASU 2020-2, Financial Instruments – Credit Losses (Topic 326) and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842), February 2020, to add and amend SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Staff Accounting Bulletin No. 119, related to the new credit losses standard, and comments by the SEC staff related to the revised effective date of the new leases standard. This ASU is effective upon issuance. This did not have a significant impact on the Company’s financial statements.

In March 2020, the FASB issued ASU 2020-3, Codification Improvements to Financial Instruments. This ASU was issued to improve and clarify various financial instruments topics, including the current expected credit losses (CECL) standard issued in 2016. The ASU includes seven issues that describe the areas of improvement and the related amendments to GAAP; they are intended to make the standards easier to understand and apply and to eliminate inconsistencies, and they are narrow in scope and are not expected to significantly change practice for most entities. Among its provisions, the ASU clarifies that all entities, other than public business entities that elected the fair value option, are required to provide certain fair value disclosures under ASC 825, Financial Instruments, in both interim and annual financial statements. It also clarifies that the contractual term of a net investment in a lease under Topic 842 should be the contractual term used to measure expected credit losses under Topic 326. Amendments related to ASU 2019-04 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is not permitted before an entity’s adoption of ASU 2016-01. Amendments related to ASU 2016-13 for entities that have not yet adopted that guidance are effective upon adoption of the amendments in ASU 2016-13. Early adoption is not permitted before an entity’s adoption of ASU 2016-13. Amendments related to ASU 2016-13 for entities that have adopted that guidance are effective for fiscal years beginning after December 15, 2019, including interim periods within those years. Other amendments are effective upon issuance of this ASU. This Update is not expected to have a significant impact on the Company’s financial statements.

In January 2020, the FASB issued ASU 2020-4, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, March 2020, to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Also, entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met, and can make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities upon issuance through December 31, 2022. 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):

	March 31, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for Sale
Fannie Mae	$	111,195	$	3,598	$	(80	)	$	114,713
Freddie Mac		78,225		2,473		(5	)		80,693
Governmental National Mortgage Association		20,353		450		(115	)		20,688
Total mortgage-backed securities		209,773		6,521		(200	)		216,094
Obligations of states and political subdivisions		22,405		336		(20	)		22,721
U.S. government agency securities		9,963		127		—			10,090
Corporate obligations		42,475		535		(902	)		42,108
Other debt securities		15,479		101		(186	)		15,394
Total	$	300,095	$	7,620	$	(1,308	)	$	306,407

	September 30, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for Sale
Fannie Mae	$	126,672	$	987	$	(554	)	$	127,105
Freddie Mac		80,639		453		(331	)		80,761
Governmental National Mortgage Association		18,590		182		(198	)		18,574
Total mortgage-backed securities		225,901		1,622		(1,083	)		226,440
Obligations of states and political subdivisions		19,860		356		(4	)		20,212
U.S. government agency securities		6,454		234		—			6,688
Corporate obligations		43,121		594		(581	)		43,134
Other debt securities		17,036		84		(201	)		16,919
Total	$	312,372	$	2,890	$	(1,869	)	$	313,393

The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the three and six months ended March 31, 2020 and 2019.

(in thousands)	Three Months Ended March 31, 2020			Three Months Ended March 31, 2019
Net (losses) gains recognized during the period on equity securities	$	(6	)	$	3
Less: Net gains recognized during the period on equity securities sold during the period		—			—
Unrealized (losses) gains recognized during the reporting period on equity securities still held at the reporting date	$	(6	)	$	3
(in thousands)	Six Months Ended March 31, 2020			Six Months Ended March 31, 2019
Net (losses) gains recognized during the period on equity securities	$	(5	)	$	1
Less: Net gains recognized during the period on equity securities sold during the period		—			—
Unrealized (losses) gains recognized during the reporting period on equity securities still held at the reporting date	$	(5	)	$	1

The amortized cost and fair value of debt securities at March 31, 2020, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (in thousands):

	Available For Sale
	Amortized Cost		Fair Value
Due in one year or less	$	2,045	$	2,031
Due after one year through five years		38,381		38,529
Due after five years through ten years		67,909		68,937
Due after ten years		191,760		196,910
Total	$	300,095	$	306,407

For the three months ended March 31, 2020, the Company realized gross gains of $199,000 and gross losses of $39,000 on proceeds from the sale of investment securities of $11.0 million. For the six months ended March 31, 2020, the Company realized gross gains of $420,000 and gross losses of $39,000 on proceeds from the sale of investment securities of $24.0 million. For the three months ended March 31, 2019, the Company realized gross gains of $132,000 and gross losses of $93,000 on proceeds from the sale on investment securities of $20.5 million. For the six months ended March 31, 2019, the Company realized gross gains of $175,000 and gross losses of $132,000 on proceeds from the sale on investment securities of $30.5 million.

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

	March 31, 2020
	Number of Securities		Less than Twelve Months					Twelve Months or Greater					Total
			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Fannie Mae		8	$	1,253	$	(25	)	$	6,878	$	(55	)	$	8,131	$	(80	)
Freddie Mac		1		362		(5	)		—		—			362		(5	)
Governmental National Mortgage Association		6		4,039		(46	)		3,912		(69	)		7,951		(115	)
Obligations of states and political subdivisions		2		1,541		(20	)		—		—			1,541		(20	)
Corporate obligations		18		8,685		(217	)		8,223		(685	)		16,908		(902	)
Other debt securities		11		—		—			5,516		(186	)		5,516		(186	)
Total		46	$	15,880	$	(313	)	$	24,529	$	(995	)	$	40,409	$	(1,308	)

	September 30, 2019
			Less than Twelve Months					Twelve Months or Greater					Total
	Number of Securities		Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Fannie Mae		48	$	5,568	$	(6	)	$	45,867	$	(548	)	$	51,435	$	(554	)
Freddie Mac		32		765		—			29,661		(331	)		30,426		(331	)
Governmental National Mortgage Association		12		345		(1	)		8,242		(197	)		8,587		(198	)
Obligations of states and political subdivisions		2		2,159		(4	)		—		—			2,159		(4	)
Corporate obligations		13		2,063		(5	)		12,015		(576	)		14,078		(581	)
Other debt securities		14		3,493		(16	)		6,132		(185	)		9,625		(201	)
Total		121	$	14,393	$	(32	)	$	101,917	$	(1,837	)	$	116,310	$	(1,869	)

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

The Company reviews its position quarterly and has asserted that at March 31, 2020, the declines outlined in the above table represent temporary declines and the Company would not be required to sell the above securities before their anticipated recovery in market value.

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

6.	Loans Receivable, Net and Allowance for Loan Losses

Loans receivable consist of the following (in thousands):

	March 31, 2020		September 30, 2019
Real estate loans:
Residential	$	600,492	$	597,514
Construction		10,630		5,672
Commercial		508,690		480,647
Commercial		70,610		55,559
Obligations of states and political subdivisions		76,204		71,828
Home equity loans and lines of credit		43,801		45,156
Auto loans		58,504		81,983
Other		2,415		2,924
		1,371,346		1,341,283
Less allowance for loan losses		13,179		12,630
Net loans	$	1,358,167	$	1,328,653

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

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

	March 31, 2020		September 30, 2019
	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	$	1,229	$	1,392
Carrying amount	$	1,140	$	1,299

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

	Total Loans		Individually Evaluated for Impairment		Loans Acquired with Deteriorated Credit Quality		Collectively Evaluated for Impairment
March 31, 2020
Real estate loans:
Residential	$	600,492	$	4,058	$	—	$	596,434
Construction		10,630		—		—		10,630
Commercial		508,690		2,233		1,140		505,317
Commercial		70,610		2,512		—		68,098
Obligations of states and political subdivisions		76,204		—		—		76,204
Home equity loans and lines of credit		43,801		243		—		43,558
Auto loans		58,504		230		—		58,274
Other		2,415		27		—		2,388
Total	$	1,371,346	$	9,303	$	1,140	$	1,360,903

	Total Loans		Individually Evaluated for Impairment		Loans Acquired with Deteriorated Credit Quality		Collectively Evaluated for Impairment
September 30, 2019
Real estate loans:
Residential	$	597,514	$	4,281	$	—	$	593,233
Construction		5,672		—		—		5,672
Commercial		480,647		2,633		1,299		476,715
Commercial		55,559		448		—		55,111
Obligations of states and political sub divisions		71,828		—		—		71,828
Home equity loans and lines of credit		45,156		400		—		44,756
Auto loans		81,983		583		—		81,400
Other		2,924		31		—		2,893
Total	$	1,341,283	$	8,376	$	1,299	$	1,331,608

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
March 31, 2020
With no specific allowance recorded:
Real estate loans
Residential	$	3,672	$	4,889	$	—
Construction		—		—		—
Commercial		2,070		4,039		—
Commercial		2,343		2,415		—
Obligations of states and political subdivisions		—		—		—
Home equity loans and lines of credit		243		275		—
Auto loans		106		182		—
Other		13		23		—
Total		8,447		11,823		—
With an allowance recorded:
Real estate loans
Residential		386		443		36
Construction		—		—		—
Commercial		163		204		40
Commercial		169		169		117
Obligations of states and political subdivisions		—		—		—
Home equity loans and lines of credit		—		—		—
Auto loans		124		133		66
Other		14		16		9
Total		856		965		268
Total:
Real estate loans
Residential		4,058		5,332		36
Construction		—		—		—
Commercial		2,233		4,243		40
Commercial		2,512		2,584		117
Obligations of states and political subdivisions		—		—		—
Home equity loans and lines of credit		243		275		—
Auto loans		230		315		66
Other		27		39		9
Total Impaired Loans	$	9,303	$	12,788	$	268

	Recorded Investment		Unpaid Principal Balance		Associated Allowance
September 30, 2019
With no specific allowance recorded:
Real Estate Loans
Residential	$	3,935	$	5,309	$	—
Construction		—		—		—
Commercial		2,385		4,269		—
Commercial		354		475		—
Obligations of states and political subdivisions		—		—		—
Home equity loans and lines of credit		400		465		—
Auto Loans		161		248		—
Other		15		22		—
Total		7,250		10,788		—
With an allowance recorded:
Real Estate Loans
Residential		346		398		36
Construction		—		—		—
Commercial		248		294		56
Commercial		94		223		6
Obligations of states and political subdivisions		—		—		—
Home equity loans and lines of credit		—		—		—
Auto Loans		422		426		144
Other		16		17		6
Total		1,126		1,358		248
Total:
Real Estate Loans
Residential		4,281		5,707		36
Construction		—		—		—
Commercial		2,633		4,563		56
Commercial		448		698		6
Obligations of states and political subdivisions		—		—		—
Home equity loans and lines of credit		400		465		—
Auto Loans		583		674		144
Other		31		39		6
Total Impaired Loans	$	8,376	$	12,146	$	248

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

	For the Three Months Ended March 31,
	2020		2019		2020		2019
	Average Recorded Investment		Average Recorded Investment		Interest Income Recognized		Interest Income Recognized
With no specific allowance recorded:
Real estate loans
Residential	$	3,825	$	3,567	$	1	$	—
Construction		—		—		—		—
Commercial		2,140		1,934		—		8
Commercial		1,061		207		4		1
Obligations of states and political subdivisions		—		—		—		—
Home equity loans and lines of credit		195		229		—		—
Auto loans		201		85		1		1
Other		14		16		—		—
Total		7,436		6,038		6		10
With an allowance recorded:
Real estate loans
Residential		292		1,151		—		—
Construction		—		—		—		—
Commercial		165		88		—		—
Commercial		60		32		—		—
Obligations of states and political subdivisions		—		—		—		—
Home equity loans and lines of credit		—		33		—		—
Auto loans		88		250		—		—
Other		15		—		—		—
Total		620		1,554		—		—
Total:
Real estate loans
Residential		4,117		4,718		1		—
Construction		—		—		—		—
Commercial		2,305		2,022		—		8
Commercial		1,121		239		4		1
Obligations of states and political subdivisions		—		—		—		—
Home equity loans and lines of credit		195		262		—		—
Auto loans		289		335		1		1
Other		29		16		—		—
Total Impaired Loans	$	8,056	$	7,592	$	6	$	10

	For the Six Months Ended March 31,
	2020		2019		2020		2019
	Average Recorded Investment		Average Recorded Investment		Interest Income Recognized		Interest Income Recognized
With no specific allowance recorded:
Real estate loans
Residential	$	3,880	$	3,867	$	1	$	3
Construction		—		—		—		—
Commercial		2,269		3,209		1		54
Commercial		726		145		4		1
Obligations of states and political subdivisions		—		—		—		—
Home equity loans and lines of credit		258		190		—		—
Auto loans		158		86		1		1
Other		17		17		—		—
Total		7,308		7,514		7		59
With an allowance recorded:
Real estate loans
Residential		295		983		—		—
Construction		—		—		—		—
Commercial		249		44		—		—
Commercial		62		16		—		—
Obligations of states and political subdivisions		—		—		—		—
Home equity loans and lines of credit		—		23		—		—
Auto loans		150		227		—		—
Other		10		—		—		—
Total		766		1,293		—		—
Total:
Real estate loans
Residential		4,175		4,850		1		3
Construction		—		—		—		—
Commercial		2,518		3,253		1		54
Commercial		788		161		4		1
Obligations of states and political subdivisions		—		—		—		—
Home equity loans and lines of credit		258		213		—		—
Auto loans		308		313		1		1
Other		27		17		—		—
Total Impaired Loans	$	8,074	$	8,807	$	7	$	59

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

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 March 31, 2020 and September 30, 2019 (in thousands):

	Pass		Special Mention		Substandard		Doubtful or Loss		Total
March 31, 2020
Commercial real estate loans	$	490,132	$	11,289	$	7,269	$	—	$	508,690
Commercial		67,939		—		2,671		—		70,610
Obligations of states and political subdivisions		76,204		—		—		—		76,204
Total	$	634,275	$	11,289	$	9,940	$	—	$	655,504

	Pass		Special Mention		Substandard		Doubtful or Loss		Total
September 30, 2019
Commercial real estate loans	$	461,701	$	7,492	$	11,454	$	—	$	480,647
Commercial		52,486		—		3,073		—		55,559
Obligations of states and political subdivisions		71,828		—		—		—		71,828
Total	$	586,015	$	7,492	$	14,527	$	—	$	608,034

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 March 31, 2020 and September 30, 2019 (in thousands):

	Performing		Non- performing		Total
March 31, 2020
Real estate loans:
Residential	$	596,117	$	4,375	$	600,492
Construction		10,630		—		10,630
Home equity loans and lines of credit		43,323		478		43,801
Auto loans		58,245		259		58,504
Other		2,388		27		2,415
Total	$	710,703	$	5,139	$	715,842

	Performing		Non- performing		Total
September 30, 2019
Real estate loans:
Residential	$	592,907	$	4,607	$	597,514
Construction		5,672		—		5,672
Home equity loans and lines of credit		44,534		622		45,156
Auto loans		81,317		666		81,983
Other		2,883		41		2,924
Total	$	727,313	$	5,936	$	733,249

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 March 31, 2020 and September 30, 2019 (in thousands):

			31-60 Days		61-89 Days		90 + Days Past Due and				Total		Purchased Credit Impaired				Total
	Current		Past Due		Past Due		Accruing		Nonaccrual		Past Due		Accruing		Nonaccrual		Loans
March 31, 2020
Real estate loans:
Residential	$	592,381	$	2,701	$	1,035	$	—	$	4,375	$	8,111	$	—	$	—	$	600,492
Construction		10,630		—		—		—		—		—		—		—		10,630
Commercial		502,527		469		2,393		—		2,161	$	5,023		237		903		508,690
Commercial		67,748		134		296		—		2,432	$	2,862		—		—		70,610
Obligations of states and political subdivisions		76,204		—		—		—		—		—		—		—		76,204
Home equity loans and lines of credit		43,142		69		112		—		478		659		—		—		43,801
Auto loans		57,232		968		45		—		259		1,272		—		—		58,504
Other		2,341		37		10		—		27		74		—		—		2,415
Total	$	1,352,205	$	4,378	$	3,891	$	—	$	9,732	$	18,001	$	237	$	903	$	1,371,346

			31-60 Days		61-89 Days		90 + Days Past Due and				Total		Purchased Credit Impaired				Total
	Current		Past Due		Past Due		Accruing		Nonaccrual		Past Due		Accruing		Nonaccrual		Loans
September 30, 2019
Real estate loans:
Residential	$	590,457	$	2,187	$	263	$	—	$	4,607	$	7,057	$	—	$	—	$	597,514
Construction		5,672		—		—		—		—		—		—		—		5,672
Commercial		476,644		236		—		—		2,468		2,704		243		1,056		480,647
Commercial		54,899		20		37		—		603		660		—		—		55,559
Obligations of states and political subdivisions		71,828		—		—		—		—		—		—		—		71,828
Home equity loans and lines of credit		44,319		47		168		—		622		837		—		—		45,156
Auto loans		80,090		1,227		—		—		666		1,893		—		—		81,983
Other		2,883		—		—		—		41		41		—		—		2,924
Total	$	1,326,792	$	3,717	$	468	$	—	$	9,007	$	13,192	$	243	$	1,056	$	1,341,283

The allowance for loan losses is maintained at a level necessary to absorb loan losses that are both probable and reasonably estimable. Management, in determining the allowance for loan losses, considers the losses inherent in its loan portfolio and changes in the nature and volume of loan activities, along with the general economic and real estate market conditions. The allowance for loan losses consists of two elements: (1) an allocated allowance, which comprises allowances established on specific loans and class allowances based on historical loss experience and current trends, and (2) an unallocated allowance based on general economic conditions and other risk factors in our markets and portfolios. We maintain a loan review system, which allows for a periodic review of our loan portfolio and the early identification of potential impaired loans. Such system takes into consideration, among other things, delinquency status, size of loans, type and market value of collateral and financial condition of the borrowers. General loan loss allowances are based upon a combination of factors including, but not limited to, actual loan loss experience, composition of the loan portfolio, current economic conditions, management’s judgment and losses which are probable and reasonably estimable. 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 March 31, 2020 was maintained at a level that represents management’s best estimate of losses inherent in the loan portfolio, and such losses were both probable and reasonably estimable.

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

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

The following table summarizes changes in the primary segments of the ALL for the three and six months ended March 31, 2020 and 2019 (in thousands):

																Home
													Obligations of			Equity
													States and			Loans and
	Real Estate Loans									Commercial			Political			Lines of						Other
	Residential			Construction			Commercial			Loans			Subdivisions			Credit			Auto Loans			Loans			Unallocated			Total
ALL balance at December 31, 2019	$	4,161		$	82		$	3,604		$	2,241		$	340		$	369		$	1,232		$	24		$	694		$	12,747
Charge-offs		(8	)		—			(9	)		—			—			(11	)		(211	)		(3	)		—			(242	)
Recoveries		5			—			18			—			—			2			148			1			—			174
Provision		172			(27	)		950			(61	)		19			(9	)		(65	)		7			(486	)		500
ALL balance at March 31, 2020	$	4,330		$	55		$	4,563		$	2,180		$	359		$	351		$	1,104		$	29		$	208		$	13,179
ALL balance at December 31, 2018	$	3,745		$	43		$	3,496		$	1,704		$	295		$	298		$	1,694		$	26		$	920		$	12,221
Charge-offs		(131	)		—			(7	)		—			—			(19	)		(370	)		(11	)		—			(538	)
Recoveries		3			—			12			—			—			2			88			1			—			106
Provision		125			16			315			161			(1	)		14			196			11			(237	)		600
ALL balance at March 31, 2019	$	3,742		$	59		$	3,816		$	1,865		$	294		$	295		$	1,608		$	27		$	683		$	12,389

ALL balance at September 30, 2019	$	4,243		$	53		$	3,806		$	1,870		$	343		$	329		$	1,384		$	28		$	574		$	12,630
Charge-offs		(29	)		—			(9	)		—			—			(40	)		(582	)		(5	)		—			(665	)
Recoveries		6			—			18			1			—			3			309			2			—			339
Provision		110			2			748			309			16			59			(7	)		4			(366	)		875
ALL balance at March 31, 2020	$	4,330		$	55		$	4,563		$	2,180		$	359		$	351		$	1,104		$	29		$	208		$	13,179
ALL balance at September 30, 2018	$	3,605		$	35		$	3,458		$	1,462		$	323		$	296		$	1,859		$	23		$	627		$	11,688
Charge-offs		(273	)		—			(7	)		(22	)		—			(19	)		(738	)		(11	)		—			(1,070	)
Recoveries		9			—			12			—			—			3			269			2			—			295
Provision		401			24			353			425			(29	)		15			218			13			56			1,476
ALL balance at March 31, 2019	$	3,742		$	59		$	3,816		$	1,865		$	294		$	295		$	1,608		$	27		$	683		$	12,389

During the three months ended March 31, 2020 the Company recorded provision expense for the residential real estate loans, commercial real estate loans, obligations of states and political subdivisions and other loan segments, due to either increased loan balances, changes in the loan mix within the pool, and/or charge-off activity in those segments. Credit provisions were recorded for loan loss for the construction real estate, commercial loans, home equity loans and lines of credit and auto loan segments.

During the six months ended March 31, 2020 the Company recorded provision expense for the residential real estate loans, commercial real estate loans, obligations of states and political subdivisions, construction real estate, commercial loans, home equity loans and lines of credit and other loan segments, due to either increased loan balances, changes in the loan mix within the pool, and/or charge-off activity in those segments. Credit provisions were recorded for loan loss for the auto loan segment.

During the three and six months ended March 31, 2019 the Company recorded provision expense for the residential real estate, construction loans, commercial real estate, commercial, home equity loans and lines of credit, auto and other loan segments, due to either increased loan balances, changes in the loan mix within the pool, and/or charge-off activity in those segments. Credit provisions were recorded for loan loss for the obligations of states and political subdivisions segment.

The Company is closely monitoring all customer credit positions, particularly loans requesting payment relief. Such loans, as of May 5, 2020 amounted to approximately 14.1% of total loans outstanding, including $142.8 million in commercial real estate loans, $9.1 in commercial loans, $36.8 million in mortgage loans, $3.6 million in auto loans and $1.5 million in home equity loans. As the economic slowdown continues to evolve due to COVID-19 restrictions, our customers may experience decreased cash flows, which may correlate to an inability to make timely loan payments. This, in turn may require further increases in our allowance for loan losses and increases in the level of charge-offs in our loan portfolio.

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 March 31, 2020 and September 30, 2019 (in thousands):

											Home
									Obligations of		Equity
									States and		Loans and
	Real Estate Loans						Commercial		Political		Lines of				Other
	Residential		Construction		Commercial		Loans		Subdivisions		Credit		Auto Loans		Loans		Unallocated		Total
Individually evaluated for impairment	$	36	$	—	$	40	$	117	$	—	$	—	$	66	$	9	$	—	$	268
Collectively evaluated for impairment		4,294		55		4,523		2,063		359		351		1,038		20		208		12,911
ALL balance at March 31, 2020	$	4,330	$	55	$	4,563	$	2,180	$	359	$	351	$	1,104	$	29	$	208	$	13,179
Individually evaluated for impairment	$	36	$	—	$	56	$	6	$	—	$	—	$	144	$	6	$	—	$	248
Collectively evaluated for impairment		4,207		53		3,750		1,864		343		329		1,240		22		574		12,382
ALL balance at September 30, 2019	$	4,243	$	53	$	3,806	$	1,870	$	343	$	329	$	1,384	$	28	$	574	$	12,630

The allowance for loan losses is based on estimates, and actual losses will vary from current estimates. Management believes that the granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALL that is representative of the risk found in the components of the portfolio at any given date. Despite the above allocations, the allowance for loan losses is general in nature and is available to absorb losses from any loan segment.

The following is a summary of troubled debt restructuring granted during the six months ended March 31, 2020 and 2019 (dollars in thousands):

	For the Six Months Ended March 31, 2020
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings
Real estate loans:
Residential		1	$	540	$	540
Construction		—		—		—
Commercial		—		—		—
Commercial		—		—		—
Obligations of states and political subdivisions		—		—		—
Home equity loans and lines of credit		—		—		—
Auto loans		—		—		—
Other		—		—		—
Total		1	$	540	$	540

	For the Six Months Ended March 31, 2019
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings
Real estate loans:
Residential		2	$	95	$	95
Construction		—		—		—
Commercial		—		—		—
Commercial		—		—		—
Obligations of states and political subdivisions		—		—		—
Home equity loans and lines of credit		2		159		159
Auto loans		1		21		21
Other		—		—		—
Total		5	$	275	$	275

There were no new troubled debt restructurings granted for the three months ended March 31, 2020 and 2019.

The one new troubled debt restructuring granted for the six months ended March 31, 2020, totaled $540,000 and was granted an interest rate concession.

Of the five new troubled debt restructurings granted for the six months ended March 31, 2019, one loan totaling $14,000 was granted terms concessions, one loan totaling $81,000 was granted an interest rate concession, and three loans totaling $180,000 were granted term and rate concessions.

For the three and six months ended March 31, 2020 and 2019, no loans defaulted on a restructuring agreement within one year of modification.

As of May 5, 2020, over 100 of our commercial clients had requested loan payment deferrals or payments of interest only on loans totaling $151.9 million. We have had similar request from over 270 mortgage customers and over 270 auto loan customers. In accordance with interagency guidance issued in March 2020, these short-term deferrals are not considered troubled debt restructurings (“TDRs”) unless the borrower was previously experiencing financial difficulty.

In addition, the risk-rating on COVID-19 modified loans did not change, and these loans will not be considered past due until after the deferral period is over and scheduled payments resume. The credit quality of these loans will be reevaluated after the deferral period ends.

Through May 5, 2020, we have modified loans totaling $193.9 million which remain predominately in the commercial loan categories.

At March 31, 2020, our non-performing assets were not yet materially impacted by the economic pressures of COVID-19. In addition, we will continue to closely monitor credit risk and our exposure to increased loan losses resulting from the impact of COVID-19 on our commercial and consumer clients.

Deposits

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

	March 31, 2020		September 30, 2019
Non-interest bearing demand accounts	$	181,140	$	175,932
Interest bearing demand accounts		195,207		224,673
Money market accounts		347,043		364,635
Savings and club accounts		141,818		135,012
Certificates of deposit		462,405		442,578
Total	$	1,327,613	$	1,342,830

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, 2019 included in the Company’s Annual Report on Form 10-K.

The following table comprises the components of net periodic benefit cost for the three and six month periods ended March 31, 2020 and 2019 (in thousands):

	For the Three Months Ended March 31,						For the Six Months Ended March 31,
	2020			2019			2020			2019
Service Cost	$	—		$	—		$	—		$	—
Interest Cost		122			173			243			347
Expected return on plan assets		(270	)		(293	)		(539	)		(586	)
Amortization of unrecognized loss		—			—			—			—
Net periodic benefit cost	$	(148	)	$	(120	)	$	(296	)	$	(239	)

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

9.	Equity Incentive Plan

The Company previously maintained the ESSA Bancorp, Inc. 2007 Equity Incentive Plan (the “Plan”). The Plan provided for a total of 2,377,326 shares of common stock for issuance upon the grant or exercise of awards. Of the shares that were available under the Plan, 1,698,090 were available to be issued in connection with the exercise of stock options and 679,236 were available to be issued as restricted stock. The Plan allowed for the granting of non-qualified stock options (“NSOs”), incentive stock options (“ISOs”), and restricted stock. Options granted under the plan were granted at no less than the fair value of the Company’s common stock on the date of the grant. As of the effective date of the 2016 Equity Incentive Plan (detailed below), no further grants will be made under the Plan and forfeitures of outstanding awards under the Plan will be added to the shares available under the 2016 Equity Incentive Plan.

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

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

Restricted stock shares outstanding at March 31, 2020 vest over periods ranging from 5 to 42 months. The product of the number of shares granted and the grant date market price of the Company’s common stock determines the fair value of restricted shares under the Company’s restricted stock plan. The Company expenses the fair value of all share based compensation grants over the requisite service period.

For the three months ended March 31, 2020 and 2019, the Company recorded $93,000 and $98,000 of share-based compensation expense, respectively, comprised of restricted stock expense. For the six months ended March 31, 2020 and 2019, the Company recorded $333,000 and $350,000 of share-based compensation expense, respectively, comprised of restricted stock expense. Expected future compensation expense relating to the restricted shares outstanding at March 31, 2020 is $772,000 over the remaining vesting period of 3.5 years.

The following is a summary of the status of the Company’s restricted stock as of March 31, 2020, and changes therein during the six month period then ended:

	Number of Restricted Stock			Weighted- average Grant Date Fair Value
Nonvested at September 30, 2019		34,963		$	16.13
Granted		33,367			16.19
Vested		(8,819	)		16.25
Forfeited		—			—
Nonvested at March 31, 2020		59,511		$	16.17

10.	Fair Value

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.

Assets and Liabilities Required to be Measured and Reported at Fair Value on a Recurring Basis

The following tables provide the fair value for assets and liabilties required to be measured and reported at fair value on a recurring basis on the Consolidated Balance Sheet as of March 31, 2020 and September 30, 2019 by level within the fair value hierarchy (in thousands).

Recurring Fair Value Measurements at Reporting Date
	March 31, 2020
Assets	Level I		Level II		Level III		Total
Investment securities available for sale:
Mortgage backed securities	$	—	$	216,094	$	—	$	216,094
Obligations of states and political subdivisions		—		22,721		—		22,721
U.S. government agencies		—		10,090		—		10,090
Corporate obligations		—		35,374		6,734		42,108
Other debt securities		—		15,394		—		15,394
Total Debt Securities	$	—	$	299,673	$	6,734	$	306,407
Equity securities- financial services		20		—		—		20
Derivatives and hedging activities		—		1,397		—		1,397
Liabilities
Derivatives and hedging activities		—		4,515		—		4,515

	September 30, 2019
	Level I		Level II		Level III		Total
Investment securities available for sale:
Mortgage backed securities	$	—	$	226,440	$	—	$	226,440
Obligations of states and political subdivisions		—		20,212		—		20,212
U.S. government agencies		—		6,688		—		6,688
Corporate obligations		—		35,342		7,792		43,134
Other debt securities		—		16,919		—		16,919
Total debt securities	$	—	$	305,601	$	7,792	$	313,393
Equity securities-financial services		25		—		—		25
Derivatives and hedging activities		—		303		—		303
Liabilities:
Derivatives and hedging activities		—		1,011		—		1,011

The following table presents a summary of changes in the fair value of the Company’s Level III investments for the three and six month periods ended March 31, 2020 and 2019 (in thousands).

	Fair Value Measurement Using Significant Unobservable Inputs (Level III)
	Three Months Ended
	March 31, 2020			March 31, 2019
Beginning balance	$	7,821		$	7,642
Purchases, sales, issuances, settlements, net		(1,000	)		—
Total unrealized gain (loss):
Included in earnings		—			—
Included in other comprehensive income (loss)		(87	)		91
Transfers in and/or out of Level III		—			—
	$	6,734		$	7,733

	Fair Value Measurement Using Significant Unobservable Inputs (Level III)
	Six Months Ended
	March 31, 2020			March 31, 2019
Beginning balance	$	7,792		$	7,738
Purchases, sales, issuances, settlements, net		(1,000	)		—
Total unrealized gain (loss):
Included in earnings		—			—
Included in other comprehensive (loss) income		(58	)		(5	)
Transfers in and/or out of Level III		—			—
	$	6,734		$	7,733

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 comparable. Multiples might lie in ranges with a different multiple for each comparable. The selection of where within the range the appropriate multiple falls requires judgment, considering factors specific to the measurement (qualitative and quantitative). Valuation techniques consistent with the market approach include matrix pricing. Matrix pricing is a mathematical technique used principally to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on a security’s relationship to other benchmark quoted securities. Most of the securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quoted market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. Securities reported at fair value utilizing Level 1 inputs are limited to actively traded equity securities whose market price is readily available from the New York Stock Exchange or the NASDAQ exchange. A few securities are valued using Level 3 inputs, all of these are classified as available for sale and are reported at fair value using Level 3 inputs.

Assets and Liabilities Required to be Measured and Reported on a Non-Recurring Basis

The following tables provide the fair value for assets required to be measured and reported at fair value on a non recurring basis on the Consolidated Balance Sheet as of March 31, 2020 and September 30, 2019 by level within the fair value hierarchy:

Non-Recurring Fair Value Measurements at Reporting Date (in thousands)
	March 31, 2020
	Level I		Level II		Level III		Total
Foreclosed real estate	$	—	$	—	$	408	$	408
Impaired loans		—		—		9,035		9,035


	September 30, 2019
	Level I		Level II		Level III		Total
Foreclosed real estate	$	—	$	—	$	240	$	240
Impaired loans		—		—		8,128		8,128

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

	Quantitative Information about Level 3 Fair Value Measurements
(dollars in thousands)	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range
March 31, 2020
Impaired loans	$	9,035	Appraisal of collateral (1)	Appraisal adjustments (2)	0% to 35% (20.8%)
Foreclosed real estate owned		408	Appraisal of collateral (1)	Appraisal adjustments (2)	20% to 46% (25.2%)

	Quantitative Information about Level 3 Fair Value Measurements
(dollars in thousands)	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range
September 30, 2019
Impaired loans	$	8,128	Appraisal of collateral (1)	Appraisal adjustments (2)	0% to 35% (20.3%)
Foreclosed real estate owned		240	Appraisal of collateral (1)	Appraisal adjustments (2)	20% to 35% (26.6%)

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

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

Foreclosed real estate is measured at fair value, less cost to sell at the date of foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value, less cost to sell. Income and expenses from operations and changes in valuation allowance are included in the net expenses from foreclosed real estate. Impaired loans are reported at fair value utilizing level three inputs. For these loans, a review of the collateral is conducted and an appropriate allowance for loan losses is allocated to the loan. At March 31, 2020, 110 impaired loans with a carrying value of $9.3 million were reduced by specific valuation allowance totaling $268,000 resulting in a net fair value of $9.0 million based on Level 3 inputs. At September 30, 2019, 138 impaired loans with a carrying value of $8.4 million were reduced by a specific valuation totaling $248,000 resulting in a net fair value of $8.1 million based on Level 3 inputs.

Assets and Liabilities not Required to be Measured and Reported at Fair Value

The following tables provide the carrying value and fair value for certain financial instruments that are not required to be measured or reported at fair value on the consolidated Balance Sheet at March 31, 2020 and September 30, 2019 by level within the fair value hierarchy:

	March 31, 2020
(in thousands)	Carrying Value		Level I		Level II		Level III		Total Fair Value
Financial assets:
Cash and cash equivalents	$	173,519	$	173,519	$	—	$	—	$	173,519
Loans receivable, net		1,358,167		—		—		1,351,054		1,351,054
Accrued interest receivable		6,593		6,593		—		—		6,593
Regulatory stock		17,284		17,284		—		—		17,284
Mortgage servicing rights		188		—		—		212		212
Bank owned life insurance		40,077		40,077		—		—		40,077
Financial liabilities:
Deposits	$	1,327,613	$	865,208	$	—	$	465,543	$	1,330,751
Short-term borrowings		238,898		238,898		—		—		238,898
Other borrowings		161,762		—		—		167,235		167,235
Advances by borrowers for taxes and insurance		11,721		11,721		—		—		11,721
Accrued interest payable		1,558		1,558		—		—		1,558

	September 30, 2019
(in thousands)	Carrying Value		Level I		Level II		Level III		Total Fair Value
Financial assets:
Cash and cash equivalents	$	52,242	$	52,242	$	—	$	—	$	52,242
Certificates of deposit		—		—		—		—		—
Loans receivable, net		1,328,653		—		—		1,313,231		1,313,231
Accrued interest receivable		6,225		6,225		—		—		6,225
Regulatory stock		11,579		11,579		—		—		11,579
Mortgage servicing rights		177		—		—		241		241
Bank owned life insurance		39,601		39,601		—		—		39,601
Financial liabilities:
Deposits	$	1,342,830	$	900,252	$	—	$	443,063	$	1,343,315
Short-term borrowings		107,701		107,701		—		—		107,701
Other borrowings		140,581		—		—		141,427		141,427
Advances by borrowers for taxes and insurance		6,700		6,700		—		—		6,700
Accrued interest payable		1,384		1,384		—		—		1,384

11.	Accumulated Other Comprehensive Income (Loss)

The activity in accumulated other comprehensive income (loss) for the three and six month periods ended March 31, 2020 and 2019 is as follows (in thousands):

	Accumulated Other Comprehensive Income/(Loss)
	Defined Benefit Pension Plan			Unrealized Gains (Losses) on Securities Available for Sale			Derivatives			Total
Balance at December 31, 2019	$	(1,527	)	$	616		$	(441	)	$	(1,352	)
Other comprehensive income (loss) before reclassifications		—			4,497			(2,031	)		2,466
Amounts reclassified from accumulated other comprehensive income (loss)		—			(126	)		8			(118	)
Period change		—			4,371			(2,023	)		2,348
Balance at March 31, 2020	$	(1,527	)	$	4,987		$	(2,464	)	$	996
Balance at December 31, 2018	$	(477	)	$	(7,377	)	$	1,192		$	(6,662	)
Other comprehensive income (loss) before reclassifications		—			3,844			(265	)		3,579
Amounts reclassified from accumulated other comprehensive income (loss)		—			(31	)		(215	)		(246	)
Period change		—			3,813			(480	)		3,333
Balance at March 31, 2019	$	(477	)	$	(3,564	)	$	712		$	(3,329	)

	Accumulated Other Comprehensive Income/(Loss)
	Defined Benefit Pension Plan			Unrealized Gains (Losses) on Securities Available for Sale			Derivatives			Total
Balance at September 30, 2019	$	(1,527	)	$	807		$	(560	)	$	(1,280	)
Other comprehensive income (loss) before reclassifications		—			4,481			(1,858	)		2,623
Amounts reclassified from accumulated other comprehensive income (loss)		—			(301	)		(46	)		(347	)
Period change		—			4,180			(1,904	)		2,276
Balance at March 31, 2020	$	(1,527	)	$	4,987		$	(2,464	)	$	996
Balance at September 30, 2018	$	(477	)	$	(11,369	)	$	1,936		$	(9,910	)
Other comprehensive income (loss) before reclassifications		—			7,835			(838	)		6,997
Amounts reclassified from accumulated other comprehensive income (loss)		—			(34	)		(386	)		(420	)
Reclassification of certain income tax effects from accumulated other comprehensive income (loss)		—			4			—			4
Period change		—			7,805			(1,224	)		6,581
Balance at March 31, 2019	$	(477	)	$	(3,564	)	$	712		$	(3,329	)

The following table presents significant amounts reclassified out of each component of accumulated other comprehensive income (loss) for the three and six month periods ended March 31, 2020 and 2019 (in thousands):

	Amount Reclassified from Accumulated Other Comprehensive Income (Loss)
Details About Accumulated Other Comprehensive Income (Loss) Components	Accumulated Other Comprehensive Income (Loss) for the Three Months Ended March 31,						Affected Line Item in the Consolidated Statement of Income
	2020			2019
Securities available for sale
Net securities gains reclassified into earnings	$	160		$	39		Gain on sale of investment securities available for sale, net
Related income tax expense		(34	)		(8	)	Income taxes
Net effect on accumulated other comprehensive income (loss) for the period		126			31
Derivatives and hedging activities:
Interest expense, effective portion		(10	)		271		Short-term borrowings interest expense
Related income tax expense		2			(56	)	Income taxes
Net effect on accumulated other comprehensive income (loss) for the period		(8	)		215
Total reclassification for the period	$	118		$	246


	Amount Reclassified from Accumulated Other Comprehensive Income (Loss)
	Accumulated Other Comprehensive Income (Loss) For the Six Months Ended March 31,						Affected Line Item in the Consolidated Statement of Income
	2020			2019
Securities available for sale:
Net securities gains reclassified into earnings	$	381		$	43		Gain on sale of investment securities available for sale, net
Related income tax expense		(80	)		(9	)	Income taxes
Net effect on accumulated other comprehensive income (loss) for the period		301			34		Net of tax
Derivative and hedging activities:
Interest expense, effective portion		58			488		Short-term borrowings interest expense
Related income tax expense		(12	)		(102	)	Income taxes
Net effect on accumulated other comprehensive income (loss) for the period		46			386
Total reclassification for the period	$	347		$	420

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 March 31, 2020 and September 30, 2019 (in thousands).

			Fair Values of Derivative Instruments
			Asset Derivatives
			As of March 31, 2020					As of September 30, 2019
Hedged Item	Notional Amount		Balance Sheet Location	Fair Value		Notional Amount		Balance Sheet Location	Fair Value

FHLB Advances	$	25,000	Other Assets	$	36	$	50,000	Other Assets	$	303
Commercial Loans		22,578	Other Assets		1,361		-	Other Assets		-
Total	$	47,578		$	1,397	$	50,000		$	303

			Fair Values of Derivative Instruments
			Liability Derivatives
			As of March 31, 2020					As of September 30, 2019
Hedged Item	Notional Amount		Balance Sheet Location	Fair Value		Notional Amount		Balance Sheet Location	Fair Value

FHLB Advances	$	160,000	Other Liabilities	$	1,119	$	35,000	Other Liabilities	$	513
Brokered Deposits		75,000	Other Liabilities		2,035		50,000	Other Liabilities		498
Commercial Loans		31,777	Other Liabilities		1,361		-	Other Liabilities		-
Total	$	266,777		$	4,515	$	85,000		$	1,011

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 March 31, 2020, the Company had twenty one interest rate swaps with a notional principal amount of $314.4 million associated with the Company’s cash outflows associated with various FHLB advances, brokered certificates and commercial loans.

For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings), net of tax, and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. The Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged transactions. The Company did not recognize any hedge ineffectiveness in earnings during the periods ended March 31, 2020 and 2019.

Amounts reported in accumulated other comprehensive income ( loss) related to derivatives that will be reclassified to interest income/expense as interest payments are made/received on the Company’s variable-rate assets/liabilities. During the three months ended March 31, 2020 and 2019, the Company had $10,000 of losses and $271,000 of gains reclassified to interest expense. During the six months ended March 31, 2020 and 2019, the Company had $58,000 and $488,000 of gains reclassified to interest expense. During the next twelve months, the Company estimates that $1.7 million will be reclassified as a decrease in interest expense.

The table below presents the effect of the Company’s cash flow hedge accounting on Accumulated Other Comprehensive Income (Loss) for the three and six month periods ended March 31, 2020 and 2019 (in thousands).

The Effect of Fair Value and Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income (Loss)
Derivatives in Hedging Relationships	Loss Recognized in OCI on Derivative (Effective Portion) Three Months Ended March 31,						Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	Gain (Loss) Recognized in OCI on Derivative (Effective Portion) Three Months Ended March 31,
Derivatives in Cash Flow Hedging Relationships	2020			2019				2020			2019
Interest Rate Products	$	(2,545	)	$	(609	)	Interest expense	$	(10	)	$	271
Total	$	(2,545	)	$	(609	)		$	(10	)	$	271
Derivatives in Cash Flow Hedging Relationships	Loss Recognized in OCI on Derivative (Effective Portion) Six Months Ended March 31,						Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	Gain Reclassified from Accumulated OCI into Income (Effective Portion) Six Months Ended March 31,
	2020			2019				2020			2019
Interest Rate Products	$	(2,410	)	$	(1,550	)	Interest expense	$	58		$	488
Total	$	(2,410	)	$	(1,550	)		$	58		$	488

Credit-risk-related Contingent Features

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

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

As of March 31, 2020, the Company had derivatives in a net liability position and was required to post $4.5 million in collateral against its obligations under these agreements. As of September 30, 2019, the Company was required to post $710,000 in collateral against its obligations under these agreements. If the Company had breached any of these provisions at March 31, 2020 and September 30, 2019, it could have been required to settle its obligations under the agreements at the termination value.

13.	Contingent Liabilities

Legal Proceedings

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

The Bank was named as a defendant in an action commenced on December 8, 2016 by one plaintiff who will also seek to pursue this action as a class action on behalf of the entire class of people similarly situated. The plaintiff alleges that a bank previously acquired by ESSA Bancorp received unearned fees and kickbacks in the process of making loans, in violation of the Real Estate Settlement Procedures Act. In an order dated January 29, 2018, the district court granted the Bank’s motion to dismiss the case. The plaintiff appealed the court’s ruling. In an opinion and order dated April 26, 2019, the appellate court reversed the district court’s order dismissing the plaintiff’s case against the Bank, and remanded the case back to the district court in order to continue the litigation. The litigation is now proceeding before the district court. On December 9, 2019, the Court permitted an amendment to the complaint to add two new plaintiffs to the case asserting similar claims. Plaintiffs have moved to certify a class, Defendants have opposed that motion, and the Court is scheduled to hold a class certification hearing on May 15, 2020. The Bank will continue 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.

14.	Revenue Recognition

Effective October 1, 2018, the Company adopted ASU 2014-09 Revenue from Contracts with Customers- Topic 606 and all subsequent ASC’s that modified ASC 606. The Company elected to apply the standard utilizing the modified retrospective approach with a cumulative effect of adoption for the impact from uncompleted contracts as of the date of adoption.

The main types of non interest income within the scope of the standard are:

Trust and Investment Fees

Trust and asset management income is primarily comprised of fees earned from the management and administration of trusts and other customer assets. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days after month end through a direct charge to customer’s accounts. The Company does not earn performance-based incentives. Optional services such as real estate sales and tax return preparation services are also available to existing trust and asset management customers. The Company’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e. as incurred). Payment is received shortly after services are rendered.

Service Charges on Deposit Accounts

Service charges on deposit accounts consist of account analysis fees (i.e. net fees earned on analyzed business and public checking accounts), monthly service fees, check orders, and other deposit account related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.

Fees, Exchange, and Other Service Charges

Fees, interchange, and other service charges are primarily comprised of debit card income, ATM fees, cash management income, and other services charges. Debit card income is primarily comprised of interchange fees earned whenever the Company’s debit cards are processed through card payment networks such as Mastercard. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a company ATM. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. The Company’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized when the services are rendered or upon completion., Payment is typically received immediately or in the following month.

Insurance Commissions

Insurance income primarily consists of commissions received on product sales. The Company acts as an intermediary between the Company’s customer and the insurance carrier. The Company’s performance obligation is generally satisfied upon the issuance of the policy. Shortly after the policy is issued, the carrier remits the commission payment to the Company, and the Company recognizes the revenue.

15. Leases

A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. On October 1, 2019, the Company adopted ASU No. 2016-02 “Leases” (Topic 842) and all subsequent ASUs that modified Topic 842. For the Company, Topic 842 primarily affected the accounting treatment for operating lease agreements in which the Company is the lessee.

Lessee Accounting

Substantially all of the leases in which the Company is the lessee are comprised of real estate property for branches, ATM locations, and office space with terms extending through 2044. All of our leases are classified as operating leases, and therefore, were

previously not recognized on the Company’s Consolidated Balance sheet. With the adoption of Topic 842, operating lease agreements are required to be recognized on the Consolidated Balance sheet as a right-of-use (“ROU”) asset and a corresponding lease liability.

The following table presents the Consolidated Balance Sheet classification of the Company’s ROU assets and lease liabilities. The Company elected not to include short-term leases (i.e., leases with initial terms of twelve months or less), or equipment leases (deemed immaterial) on the Consolidated Balance sheet.

(in thousands)		March 31, 2020
Lease Right-of-Use Assets	Classification
Operating lease right-of-use assets	Other assets	$	6,829
Total Lease Right-Of-Use Assets		$	6,829

(in thousands)		March 31, 2020
Lease Liabilities	Classification
Operating lease Liabilities	Other liabilities	$	6,870
Total Lease Liabilities		$	6,870

The calculated amount of the ROU assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. The Company’s lease agreements often include one or more options to renew at the Company’s discretion. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROU asset and lease liability. Regarding the discount rate, Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. For operating leases existing prior to October 1, 2019, the rate for the remaining lease term as of October 1, 2019 was used.

	March 31, 2020
Weighted average remaining lease term
Operating leases	14.1 years
Weighted average discount rate
Operating leases		2.38	%

The following table represents lease costs and other lease information. As the Company elected, for all classes of underlying assets, not to separate lease and non-lease components and instead to account for them as a single lease component, the variable lease cost primarily represents variable payments such as common area maintenance and utilities.

Lease Costs (in thousands)	Three Months Ended March 31, 2020
Operating lease cost	$	254
Variable lease cost		63
Net lease cost	$	317


Lease Costs (in thousands)	Six Months Ended March 31,2020
Operating lease cost	$	508
Variable lease cost		122
Net lease cost	$	630

Future minimum payments for finance leases and operating leases with initial or remaining terms of one year or more as of March 31, 2020 were as follows:

(in thousands)	Operating leases
Twelves months Ended:
March 31, 2021	$	1,143
March 31, 2022		801
March 31, 2023		708
March 31, 2024		685
March 31, 2025		501
Therafter		4,642
Total future minimum lease payments		8,480
Amounts representing interest		(1,610	)
Present Value of Net Future Minimum Lease Payments	$	6,870

Item 2.

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

Forward Looking Statements

This Quarterly Report on Form 10-Q 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 and any previous Quarterly Report on Form 10-Q filed since our most recent Annual Report on Form 10-K, 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 FASB; and

•

changes in our organization, compensation and benefit plans.

Further, the COVID-19 pandemic has caused local and national economic disruption and has had an impact on the Company’s operations and financial results. Given its ongoing and dynamic nature, it is difficult to predict what effects the pandemic will have on our business and results of operations in the future. The pandemic and related local and national economic disruption may, among other effects, result in a decline in demand for our products and services; increased levels of loan delinquencies, problem assets and foreclosures; branch closures, work stoppages and unavailability of personnel; and increased cybersecurity risks, as employees increasingly work remotely.

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 March 31, 2020 and September 30, 2019

Total Assets. Total assets increased by $155.7 million, or 8.66%, to $1.96 billion at March 31, 2020 from $1.80 billion at September 30, 2019 due primarily to increases in cash and due from banks, interest bearing deposits with other institutions and loans receivable partially offset by declines in investment securities available for sale. At the onset of the Pandemic slowdown, the Company moved quickly to build its liquidity as an offset to the economic uncertainty caused by the slowdown. The Company built a laddered maturity of, primarily FHLB borrowings, at attractive interest rates to support that liquidity. The Company will continue to maintain a strong liquidity position against the changing economic forecasts through daily monitoring.

Total Cash and Cash Equivalents. Total cash and cash equivalents increased $121.3 million, or 231.1%, to $173.5 million at March 31, 2020 from $52.2 million at September 30, 2019 as a result of pandemic-oriented balance sheet adjustments made to mitigate related risks.

Net Loans. Net loans increased $29.5 million, or 2.2%, to $1.36 billion at March 31, 2020 from $1.33 billion at September 30, 2019. During this period, residential loans increased $3.0 million to $600.5 million, construction loans increased $5.0 million to $10.6 million, commercial real estate loans increased $28.0 million to $508.7 million, commercial loans increased $15.1 million to $70.6 million, obligations of states and political subdivisions increased $4.4 million to $76.2 million, home equity loans and lines of credit decreased $1.3 million to $43.8 million, auto loans decreased $23.5 million to $58.5 million, and other loans decreased $509,000 to $2.4 million.

Investment Securities Available for Sale. Investment securities available for sale decreased $7.0 million, or 2.2%, to $306.4 million at March 31, 2020 from $313.4 million at September 30, 2019.

Deposits. Deposits decreased $15.2 million, or 1.13%, to $1.33 billion at March 31, 2020 from $1.34 billion at September 30, 2019 due primarily to a decrease interest bearing demand accounts and money markets accounts offset by increases in certificate of deposits, non-interest bearing demand accounts and savings and club accounts. Decreases in interest bearing demand accounts of $29.5 million and money market accounts of $17.6 million were offset in part by increases in certificates of deposit of $19.8 million and savings and club accounts of $6.8 million. The overall increase in certificates of deposit, reflected an increase in retail certificates of $1.2 million and an increase in brokered certificates of deposit of $18.7 million to $177.2 million.

Borrowed Funds. Borrowed funds increased by $152.4 million, or 61.4%, to $400.7 million at March 31, 2020, from $248.3 million at September 30, 2019. The increase in borrowed funds was due to an increase in short term borrowings of $131.2 million and an increase in other borrowings of $21.2 million. All borrowings at March 31, 2020 represent advances from the Federal Home Loan Bank of Pittsburgh (the “FHLB”) and were a result of pandemic-oriented balance sheet adjustments made to mitigate related risks.

Stockholders’ Equity. Stockholders’ equity increased by $4.2 million, or 2.2%, to $193.7 million at March 31, 2020 from $189.5 million at September 30, 2019. The increase in stockholders’ equity was primarily due to net income of $6.8 million, which was partially offset by an increase in treasury stock due to the repurchase by the Company of 248,664 shares of its common stock at an aggregate cost of $3.6 million under a previously disclosed stock repurchase plan and regular cash dividends of $0.11 per share, which reduced stockholders equity by $2.3 million.

Average Balance Sheets for the Three and Six Months Ended March 31, 2020 and 2019

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 March 31,
	2020									2019
	Average Balance			Interest Income/ Expense			Yield/Cost			Average Balance			Interest Income/ Expense			Yield/Cost
	(dollars in thousands)
Interest-earning assets:
Loans⁽¹⁾	$	1,358,627		$	14,005			4.18	%	$	1,343,464		$	14,042			4.24	%
Investment Securities
Taxable⁽²⁾		67,435			626			3.76	%		71,248			702			4.00	%
Exempt from federal income tax⁽²⁾⁽³⁾		9,700			48			2.54	%		19,033			94			2.54	%
Total investment securities		77,135			674			3.61	%		90,281			796			3.69	%
Mortgage-backed securities		229,300			1,319			2.33	%		279,370			1,828			2.65	%
Federal Home Loan Bank stock		11,749			219			7.56	%		14,680			307			8.48	%
Other		44,461			127			1.15	%		25,072			155			2.51	%
Total interest-earning assets		1,721,272			16,344			3.85	%		1,752,867			17,128			3.97	%
Allowance for loan losses		(12,830	)								(12,355	)
Noninterest-earning assets		118,028									109,611
Total assets	$	1,826,470								$	1,850,123
Interest-bearing liabilities:
NOW accounts	$	189,746		$	163			0.35	%	$	190,855		$	170			0.36	%
Money market accounts		348,479			911			1.06	%		324,930			976			1.22	%
Savings and club accounts		138,675			20			0.06	%		132,625			17			0.05	%
Certificates of deposit		480,988			2,135			1.80	%		499,734			2,392			1.94	%
Borrowed funds		262,846			1,383			2.13	%		336,235			1,841			2.22	%
Total interest-bearing liabilities		1,420,734			4,612			1.32	%		1,484,379			5,396			1.47	%
Non-interest-bearing NOW accounts		181,780									160,029
Non-interest-bearing liabilities		29,821									20,355
Total liabilities		1,632,335									1,664,763
Equity		194,135									185,360
Total liabilities and equity	$	1,826,470								$	1,850,123
Net interest income				$	11,732								$	11,732
Interest rate spread								2.53	%								2.50	%
Net interest-earning assets	$	300,538								$	268,488
Net interest margin⁽⁴⁾								2.76	%								2.71	%
Average interest-earning assets to average interest-bearing liabilities					121.15	%								118.09	%

	For the Six Months Ended March 31,
	2020									2019
	Average Balance			Interest Income/ Expense			Yield/Cost			Average Balance			Interest Income/ Expense			Yield/Cost
	(dollars in thousands)
Interest-earning assets:
Loans⁽¹⁾	$	1,350,538		$	28,195			4.19	%	$	1,331,758		$	27,949			4.21	%
Investment Securities
Taxable⁽²⁾		67,368			1,252			3.73	%		69,719			1,378			3.96	%
Exempt from federal income tax⁽²⁾⁽³⁾		9,687			96			2.52	%		22,205			230			2.63	%
Total investment securities		77,055			1,348			3.57	%		91,924			1,608			3.64	%
Mortgage-backed securities		232,216			2,650			2.29	%		278,897			3,634			2.61	%
Federal Home Loan Bank stock		11,426			428			7.51	%		14,072			529			7.54	%
Other		37,027			236			1.28	%		24,722			277			2.25	%
Total interest-earning assets		1,708,262			32,857			3.86	%		1,741,373			33,997			3.92	%
Allowance for loan losses		(12,748	)								(12,110	)
Noninterest-earning assets		111,822									112,109
Total assets	$	1,807,336								$	1,841,372
Interest-bearing liabilities:
NOW accounts	$	207,054		$	392			0.38	%	$	199,945		$	358			0.36	%
Money market accounts		348,167			1,885			1.09	%		320,184			1,798			1.13	%
Savings and club accounts		137,423			38			0.06	%		131,903			35			0.05	%
Certificates of deposit		461,752			4,246			1.84	%		506,133			4,752			1.88	%
Borrowed funds		255,376			2,738			2.15	%		321,669			3,437			2.14	%
Total interest-bearing liabilities		1,409,772			9,299			1.32	%		1,479,834			10,380			1.41	%
Non-interest-bearing NOW accounts		180,056									159,011
Non-interest-bearing liabilities		24,812									19,263
Total liabilities		1,614,640									1,658,108
Equity		192,696									183,264
Total liabilities and equity	$	1,807,336								$	1,841,372
Net interest income				$	23,558								$	23,617
Interest rate spread								2.54	%								2.51	%
Net interest-earning assets	$	298,490								$	261,539
Net interest margin⁽⁴⁾								2.77	%								2.72	%
Average interest-earning assets to average interest-bearing liabilities					121.17	%								117.67	%

_____________________

(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 21.00% for the three and six months ended March 31, 2020 and 2019.

(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 March 31, 2020 and March 31, 2019

Net Income. Net income increased $548,000, or 19.2%, to $3.4 million for the three months ended March 31, 2020 compared to net income of $2.9 million for the comparable period in 2019. The increase was primarily due to a decrease in the provision for loan losses and an increase in non-interest income partially offset by increases in non-interest expense and the income tax provision.

Net Interest Income. Net interest income was unchanged at $11.7 million for the three months ended March 31, 2020 and 2019.

Interest Income. Interest income decreased $784,000, or 4.6%, to $16.4 million for the three months ended March 31, 2020 from $17.1 million for the comparable 2019 period. The decrease resulted from a decrease in the average balance of interest earnings assets of $31.6 million and a decrease in the yield on interest earning assets from the comparable 2019 period. The average balance of loans increased $15.2 million between the two periods. In addition, between the two periods, the average balance of investment securities decreased $13.1 million, mortgage-backed securities decreased $50.1 million, FHLB stock decreased $2.9 million and other interest earning assets increased $19.4 million.

Interest Expense. Interest expense decreased $784,000, or 14.5%, to $4.6 million for the three months ended March 31, 2020 from $5.4 million for the comparable 2019 period. The decrease resulted from a decrease in the cost of interest bearing liabilities of sixteen basis point from 1.47% to 1.32% and a decrease in the average balance of interest bearing liabilities of $63.6 million between the two periods. The interest expense decrease of $784,000 for the three months ended March 31, 2020 was due primarily to an decrease in certificates of deposit expense of $257,000 and borrowed funds of $458,000.

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 $500,000 for the three month period ended March 31, 2020 compared to $600,000 for the three month period ended March 31, 2019. The allowance for loan losses was $13.2 million, or 0.96% of loans outstanding at March 31, 2020, compared to $12.6 million, or 0.94% of loans outstanding, at September 30, 2019. As the economic slowdown continues to evolve due to COVID-19 restrictions, our customers may experience decreased cash flows, which may correlate to an inability to make timely loan payments. This, in turn may require further increases in our allowance for loan losses and increases in the level of charge-offs in our loan portfolio.

Non-interest Income. Non-interest income increased $637,000, or 30.8%, to $2.7 million for the three months ended March 31, 2020 from $2.1 million at March 31, 2019. Increases in service changes and fees on loans of $424,000, trust and investment fees of $194,000 and gain on sale of investment securities available for sale, net, of $121,000 were partially offset by declines in other income of $241,000 and service fees on deposit accounts of $36,000.

Non-interest Expense. Non-interest expense increased $113,000, or 1.2%, to $9.8 million for the three months ended March 31, 2020 from $9.7 million for the comparable period in 2019. Increases in compensation and employee benefits, FDIC premiums, foreclosed real estate, other and data processing were partially offset by decreases in occupancy and equipment, professional fees, advertising, and intangible expenses.

Income Taxes. Income tax expense increased $76,000 to $706,000 for the three months ended March 31, 2020 from $630,000 for the comparable 2019 period. The effective tax rate for the three months ended March 31, 2020 was 17.2% compared to 18.1% for the 2019 period.

Comparison of Operating Results for the Six Months Ended March 31, 2020 and March 31, 2019

Net Income. Net income increased $949,000, or 16.2%, to $6.8 million for the six months ended March 31, 2020 compared to net income of $5.9 million for the comparable period in 2019. The increase was primarily due to a decrease in the provision for loan losses and an increase in non-interest income partially offset by increases in non-interest expense and the income tax provision.

Net Interest Income. Net interest income decreased $59,000, or 0.5%, to $11.8 million for the six months ended March 31, 2020 from $11.9 million for the comparable period in 2019.

Interest Income. Interest income decreased $1.1 million, or 3.4%, to $32.9 million for the six months ended March 31, 2020 from $34.0 million for the comparable 2019 period. The decrease resulted primarily from a decrease in the average balance of interest earnings assets of $33.1 million from the comparable 2019 period and a decline of six basis points in earnings on interest bearing assets from 3.92% in 2019 to 3.86% in 2020. The average balance of loans increased $18.8 million between the two periods. In addition, between the two periods, the average balance of investment securities decreased $14.9 million, mortgage-backed securities decreased $46.7 million, FHLB stock decreased $2.6 million and other interest earning assets increased $12.3 million.

Interest Expense. Interest expense decreased $1.1 million or 10.4%, to $9.3 million for the six months ended March 31, 2020 from $10.4 million for the comparable 2019 period. The decrease resulted from a decrease in the cost of interest bearing liabilities of nine basis points from 1.41% to 1.32% and a decrease in the average balance of interest bearing liabilities of $70.1 million between the two periods. The interest expense decrease of $1.1 million for the six months ended March 31, 2020 was due primarily to an decrease in certificates of deposit expense of $506,000 and borrowed funds of $699,000.

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 $875,000 for the six month period ended March 31, 2020 compared to $1.5 million for the six month period ended March 31, 2019. The allowance for loan losses was $13.2 million, or 0.96% of loans outstanding at March 31, 2020, compared to $12.6 million, or 0.94% of loans outstanding, at September 30, 2019. As the economic slowdown continues to evolve due to COVID-19 restrictions, our customers may experience decreased cash flows, which may correlate to an inability to make timely loan payments. This, in turn may require further increases in our allowance for loan losses and increases in the level of charge-offs in our loan portfolio.

Non-interest Income. Non-interest income increased $937,000, or 22.3%, to $5.1 million for the six months ended March 31, 2020 from $4.2 million at March 31, 2019. Increases in service changes and fees on loans of $627,000, trust and investment fees of $273,000 and gain on sale of investment securities available for sale, net, of $338,000 were partially offset by declines in other income of $440,000 and service fees on deposit accounts of $42,000.

Non-interest Expense. Non-interest expense increased $224,000, or 1.2%, to $19.6 million for the six months ended March 31, 2020 from $19.4 million for the comparable period in 2019. Increases in compensation and employee benefits and data processing and a decrease in gain on foreclosed real estate were partially offset by decreases in professional fees, advertising, FDIC premiums and other expenses.

Income Taxes. Income tax expense increased $306,000 to $1.4 million for the six months ended March 31, 2020 from $1.1 million for the comparable 2019 period. The effective tax rate for the six months ended March 31, 2020 was 17.1% compared to 15.8% for the 2019 period.

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

	March 31, 2020			September 30, 2019
Non-performing assets:
Non-accruing loans	$	9,732		$	9,007
Non-accruing purchased credit impaired loans		903			1,056
Total non-performing loans		10,635			10,063
Foreclosed real estate		408			240
Other repossessed assets		-			9
Total non-performing assets	$	11,043		$	10,312
Ratio of non-performing loans to total loans		0.78	%		0.75	%
Ratio of non-performing loans to total assets		0.54	%		0.56	%
Ratio of non-performing assets to total assets		0.56	%		0.57	%
Ratio of allowance for loan losses to total loans		0.96	%		0.94	%

Loans are reviewed on a regular basis and are placed on non-accrual status when they become 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 $732,000 from September 30, 2019 to March 31, 2020. The number of nonperforming residential loans was 52 at March 31, 2020 compared to 52 at September 30, 2019. The $10.6 million of non-accruing loans at March 31, 2020 included 52 residential loans with an aggregate outstanding balance of $4.4 million, 31 commercial and commercial real estate loans with aggregate outstanding balances of $5.5 million and 74 consumer loans with aggregate balances of $764,000. Within the residential loan balance were $2.5 million of loans less than 90 days past due. In the quarter ended March 31, 2020, the Company identified 20 residential loans which, although paying as agreed, have a high probability of default. Foreclosed real estate increased $168,000 to $408,000 at March 31, 2020. Foreclosed real estate consists of 10 residential properties and one commercial property.

At March 31, 2020, the principal balance of troubled debt restructures (“TDRs”) was $3.2 million compared to $3.1 million at September 30, 2019. Of the $3.2 million of troubled debt restructures at March 31, 2020, $75,000 are performing loans and $3.1 million are non-accrual loans.

As of March 31, 2020, TDRs were comprised of 18 residential loans totaling $2.5 million, two commercial and commercial real estate loans totaling $602,000 and eight consumer (home equity loans, home equity lines and credit, indirect auto and other loans totaling $106,000.

For the three month period ended March 31, 2020, no loans were removed from non-performing TDR status. For the six month period ended March 31, 2020, two loans were removed from non-performing TDR status.

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 FHLB 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 March 31, 2020, $173.5 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 and borrowings. As of March 31, 2020, we had $400.7 million in borrowings outstanding from the Pittsburgh FHLB. We have access to total FHLB advances of up to approximately $686.3 million.

At March 31, 2020, we had $260.0 million in loan commitments outstanding, which included, in part, $95.8 million in undisbursed construction loans and land development loans, $41.0 million in unused home equity lines of credit, $83.2 million in commercial lines of credit and commitments to originate commercial loans, $8.7 million in performance standby letters of credit and $31.3 million in other unused commitments which are primarily to originate residential mortgage loans and multifamily loans. Certificates of deposit due within one year of March 31, 2020 totaled $334.7 million, or 72.4% 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 March 31, 2021. 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 Flow, our cash flows are classified for financial reporting purposes as operating, investing or financing cash flows. Net cash provided by operating activities was $10.4 million and $7.9 million for the six months ended March 31, 2020 and 2019, 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 $25.4 million and $1.6 million for the six months ended March 31, 2020 and 2019, 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 (used for), of $136.3 million and $8.7 million for the six months ended March 31, 2020 and 2019, 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 2020 or 2019.

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 2020 or 2019.

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.

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.

•

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.

•

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.

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, 2019.

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

The Bank was named as a defendant in an action commenced on December 8, 2016 by one plaintiff who will also seek to pursue this action as a class action on behalf of the entire class of people similarly situated. The plaintiff alleges that a bank previously acquired by ESSA Bancorp received unearned fees and kickbacks in the process of making loans, in violation of the Real Estate Settlement Procedures Act. In an order dated January 29, 2018, the district court granted the Bank’s motion to dismiss the case. The plaintiff appealed the court’s ruling. In an opinion and order dated April 26, 2019, the appellate court reversed the district court’s order dismissing the plaintiff’s case against the Bank and remanded the case back to the district court in order to continue the litigation. The litigation is now proceeding before the district court. On December 9, 2019, the Court permitted an amendment to the complaint to add two new plaintiffs to the case asserting similar claims. Plaintiffs have moved to certify a class, Defendants have opposed that motion, and the Court is scheduled to hold a class certification hearing on May 15, 2020. The Bank will continue 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, 2019, filed on December 16, 2019, other than disclosed below.

The Economic Impact of the COVID-19 Outbreak Has Adversely Affected, and is Likely to Continue to Adversely Affect, Our Business and Results of Operations

In December 2019, a novel coronavirus was reported in China, and, in March 2020, the World Health Organization declared COVID-19 a pandemic. On March 12, 2020 the President of the United States declared the COVID-19 outbreak in the United States a national emergency. The COVID-19 pandemic has caused significant economic dislocation in the United States as many state and local governments, including New York, have ordered non-essential businesses to close and residents to shelter in place at home. This has resulted in an unprecedented slow-down in economic activity and a related increase in unemployment. Since the COVID-19 outbreak, more than 30 million people nationwide have filed claims for unemployment, and stock markets have declined in value and in particular bank stocks have significantly declined in value. In response to the COVID-19 outbreak, the Federal Reserve has reduced the benchmark fed funds rate to a target range of 0% to 0.25%, and the yields on 10 and 30-year treasury notes have declined to historic lows. Various state governments and federal agencies are requiring lenders to provide forbearance and other relief to borrowers (e.g., waiving late payment and other fees). The federal banking agencies have encouraged financial institutions to prudently work with affected borrowers and recently passed legislation has provided relief from reporting loan classifications due to modifications related to the COVID-19 outbreak. Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry. In particular, the spread of the coronavirus has caused the Company to modify business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. The Company has many employees working remotely and may take further actions required by government authorities or that the Company determines are in the best interests of its employees, customers and business partners.

Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including the extent to which the coronavirus can be controlled and abated and when and how the economy may be reopened. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we may be subject to the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:

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demand for our products and services may decline, making it difficult to grow assets and income;

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if the economy is unable to substantially reopen, and high levels of unemployment continue, for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;

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collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;

•

our allowance for loan losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect net income;

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the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments;

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as the result of the decline in the Federal Reserve Board’s target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in its cost of interest-bearing liabilities, reducing its net interest margin and spread and reducing net income;

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a material decrease in net income or a net loss over several quarters could result in a decrease in the rate or a cancellation of our quarterly cash dividend;

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cyber security risks are increased as the result of an increase in the number of employees working remotely; and

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we rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on our operations.

Moreover, the Company’s future success and profitability substantially depends on its executive officers and directors, many of whom have held positions with the Company for many years. The unanticipated loss or unavailability of key employees due to the outbreak could harm the Company’s ability to execute its business strategy. The Company may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability. Any one or a combination of the factors identified above could negatively impact the Company’s business, financial condition and results of operations and prospects.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Company Purchases of Common Stock
Month Ending	Total number of shares purchased		Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs(1)		Maximum number of shares that may yet be purchased under the plans or programs
January 31, 2020		—	$	—		—		354,600
February 29, 2020		2,000	$	16.48		2,000		352,600
March 31, 2020		182,564	$	13.91		182,564		170,036
Total		184,564	$	13.94		184,564		170,036

______________________

(1) On July 25, 2019 the Company announced the authorization of an eighth repurchase program for up to 500,000 shares of its common stock. This program has no expiration date.

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. (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)

3.2	Bylaws of ESSA Bancorp, Inc. (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)

4	Form of Common Stock Certificate of ESSA Bancorp, Inc. (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)

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; (iv) the Consolidated Statement of Cash Flows; and (v) the Notes to Consolidated Financial Statements.

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: May 11, 2020	/s/ Gary S. Olson
	Gary S. Olson
	President and Chief Executive Officer

Date: May 11, 2020	/s/ Allan A. Muto
	Allan A. Muto
	Executive Vice President and Chief Financial Officer