ESSA Bancorp(US:ESSA)2024-08-13 20:51Part I. Financial Information Financial Statements The unaudited consolidated financial statements for ESSA Bancorp, Inc. as of June 30, 2024, show a decrease in total assets to $2.23 billion from $2.29 billion at September 30, 2023, primarily due to a reduction in investment securities Consolidated Balance Sheet Total assets decreased to $2.23 billion as of June 30, 2024, from $2.29 billion at September 30, 2023, mainly driven by a significant reduction in investment securities available for sale, partially offset by an increase in cash and net loans Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2024 | September 30, 2023 | Change | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Assets | $2,233,634 | $2,293,246 | ($59,612) | -2.6% | | Cash and cash equivalents | $127,999 | $85,402 | $42,597 | 49.9% | | Investment securities available for sale | $215,201 | $334,056 | ($118,855) | -35.6% | | Loans receivable, net | $1,708,572 | $1,680,525 | $28,047 | 1.7% | | Total Liabilities | $2,008,139 | $2,073,538 | ($65,399) | -3.2% | | Deposits | $1,554,300 | $1,661,016 | ($106,716) | -6.4% | | Short-term borrowings | $396,458 | $374,652 | $21,806 | 5.8% | | Total Stockholders' Equity | $225,495 | $219,708 | $5,787 | 2.6% | Consolidated Statement of Operations Net income for the nine months ended June 30, 2024, was $12.8 million, a decrease from $13.9 million in the prior year period, primarily due to a decline in net interest income as interest expense growth outpaced interest income growth Key Performance Indicators (3 Months Ended June 30, in thousands, except per share) | Metric | 2024 | 2023 | Change (%) | | :--- | :--- | :--- | :--- | | Net Interest Income | $14,165 | $15,244 | -7.1% | | (Release of) provision for credit losses | ($347) | $150 | N/A | | Noninterest Income | $2,119 | $1,939 | 9.3% | | Noninterest Expense | $11,808 | $11,493 | 2.7% | | Net Income | $3,914 | $4,396 | -11.0% | | Diluted EPS | $0.41 | $0.45 | -8.9% | Key Performance Indicators (9 Months Ended June 30, in thousands, except per share) | Metric | 2024 | 2023 | Change (%) | | :--- | :--- | :--- | :--- | | Net Interest Income | $43,883 | $46,014 | -4.6% | | (Release of) provision for credit losses | ($1,240) | $450 | N/A | | Noninterest Income | $6,084 | $5,923 | 2.7% | | Noninterest Expense | $35,379 | $34,219 | 3.4% | | Net Income | $12,813 | $13,947 | -8.1% | | Diluted EPS | $1.34 | $1.44 | -6.9% | Consolidated Statement of Cash Flows For the nine months ended June 30, 2024, net cash provided by operating activities was $14.2 million, while investing activities provided a net cash inflow of $104.1 million, and financing activities resulted in a net cash outflow of $75.7 million Cash Flow Summary (9 Months Ended June 30, in thousands) | Activity | 2024 | 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $14,238 | $15,307 | | Net cash provided by (used for) investing activities | $104,069 | ($261,498) | | Net cash (used for) provided by financing activities | ($75,710) | $313,435 | | Increase in cash and cash equivalents | $42,597 | $67,244 | Notes to Consolidated Financial Statements The notes detail the company's accounting policies, including the adoption of CECL which decreased the allowance for credit losses, and provide breakdowns of the loan portfolio and ongoing class-action lawsuits with potentially substantial exposure - The Company adopted ASU No. 2016-13 (CECL) on October 1, 2023, resulting in a $2.76 million decrease in the allowance for credit losses on loans and a $2.08 million increase in the reserve for unfunded commitments, leading to a net increase in retained earnings of $530,000 after tax1617 - The company is involved in two separate class-action lawsuits alleging that a subsidiary of a previously acquired bank received unearned fees and kickbacks in violation of real estate and antitrust laws, with potential financial exposure not currently estimable but possibly substantial105107 Loan Portfolio Composition (in thousands) | Loan Type | June 30, 2024 | September 30, 2023 | | :--- | :--- | :--- | | Residential Real Estate | $713,413 | $713,326 | | Commercial Real Estate | $847,592 | $821,958 | | Commercial | $47,719 | $48,143 | | Home equity loans and lines of credit | $50,004 | $48,212 | | Other | $65,142 | $67,611 | | Total Loans | $1,723,870 | $1,699,050 | Allowance for Credit Losses (ACL) Roll-Forward (9 Months Ended June 30, 2024, in thousands) | Description | Amount | | :--- | :--- | | Balance at Sep 30, 2023 | $18,525 | | Impact of adopting ASC 326 | ($2,755) | | Charge-offs | ($52) | | Recoveries | $189 | | Provision (Release) | ($609) | | Balance at June 30, 2024 | $15,298 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 8.1% decrease in net income for the nine months ended June 30, 2024, to net interest margin compression, where a significant increase in interest expense outpaced the growth in interest income, leading to a 2.6% decrease in total assets Financial Condition Total assets decreased by $59.6 million (2.6%) to $2.2 billion at June 30, 2024, primarily due to a $118.7 million decrease in investment securities available for sale, partially offset by increases in cash and net loans - Total assets decreased by 2.6% to $2.2 billion, mainly due to a 35.5% decrease in investment securities available for sale from maturities115117 - Net loans grew by 1.7% to $1.71 billion, driven by a $25.6 million increase in commercial real estate loans116 - Deposits fell by 6.4% to $1.55 billion, with decreases in demand, savings, and money market accounts partially offset by a $60.6 million increase in certificates of deposit119 Results of Operations Net income for the three months ended June 30, 2024, fell 11.0% year-over-year to $3.9 million, primarily due to net interest margin compression as interest expense more than doubled while interest income grew by a smaller margin Net Interest Margin Analysis (3 Months Ended June 30) | Metric | 2024 | 2023 | | :--- | :--- | :--- | | Net Interest Income | $14.2M | $15.2M | | Net Interest Margin | 2.77% | 3.22% | | Yield on Earning Assets | 5.02% | 4.60% | | Cost of Interest-Bearing Liabilities | 2.80% | 1.75% | Net Interest Margin Analysis (9 Months Ended June 30) | Metric | 2024 | 2023 | | :--- | :--- | :--- | | Net Interest Income | $43.9M | $46.0M | | Net Interest Margin | 2.81% | 3.34% | | Yield on Earning Assets | 4.96% | 4.38% | | Cost of Interest-Bearing Liabilities | 2.66% | 1.34% | - For the nine months ended June 30, 2024, the provision for credit losses was a release of $1.2 million, compared to a provision expense of $450,000 in the prior year period, reflecting the adoption of CECL and improved credit metrics135 Non-performing Assets Total non-performing assets decreased by $1.9 million to $12.4 million at June 30, 2024, from $14.4 million at September 30, 2023, driven by a reduction in non-accruing loans, improving the ratio of non-performing assets to total assets to 0.56% Non-Performing Assets (in thousands) | Metric | June 30, 2024 | September 30, 2023 | | :--- | :--- | :--- | | Non-accruing loans | $9,246 | $11,061 | | Foreclosed real estate | $3,195 | $3,311 | | Total non-performing assets | $12,441 | $14,372 | | Ratio of non-performing assets to total assets | 0.56% | 0.63% | Liquidity and Capital Resources The company maintains adequate liquidity through primary sources like deposits, loan and security repayments, and access to FHLB advances, with cash and cash equivalents at $128.0 million as of June 30, 2024 - Primary liquidity sources include deposits, loan/security repayments, and borrowings, with cash and cash equivalents at $128.0 million at June 30, 2024140141 - The company has access to total FHLB advances of up to approximately $896.9 million and a $105.0 million borrowing line from the Federal Reserve Bank of Philadelphia141 - The company has outstanding loan commitments of $384.1 million and certificates of deposit totaling $435.5 million maturing within one year142 Quantitative and Qualitative Disclosures About Market Risk The company's most significant market risk is interest rate risk, stemming from the mismatch in maturities between its longer-term assets and shorter-term liabilities, which is actively monitored and managed with no material changes since September 30, 2023 - The company's primary market risk is interest rate risk due to its asset and liability structure, which is actively managed by senior management and the asset/liability committee153 - There have been no material changes in the company's interest rate risk since the fiscal year ended September 30, 2023154 Controls and Procedures Management, including the Principal Executive Officer and Principal Financial Officer, concluded that the company's disclosure controls and procedures were effective as of June 30, 2024, with no material changes to internal controls over financial reporting during the quarter - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2024155 - There were no changes during the quarter that have materially affected, or are reasonably likely to materially affect, the company's internal controls over financial reporting155 Part II. Other Information Legal Proceedings The company is a defendant in two separate class-action lawsuits alleging violations of RESPA and the Sherman Act, with potential financial exposure that is not currently estimable but could be substantial - The company is defending against two class-action lawsuits related to a subsidiary of a previously acquired bank, alleging unearned fees and kickbacks in violation of RESPA and other acts157158 - In one case, claims against the Company and its main subsidiary were dismissed, but continue against a dissolved entity, while the other case is in the discovery phase157158 - Management states that the potential financial exposure from these legal actions is not currently estimable but could be substantial157158 Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended September 30, 2023 - The company refers to its Annual Report on Form 10-K for the fiscal year ended September 30, 2023, for a discussion of risk factors, indicating no material changes since that filing159 Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase any of its common stock during the three months ended June 30, 2024, under its ninth repurchase program, with 86,242 shares remaining available for repurchase - Under the ninth stock repurchase program, no shares were purchased during the three months ended June 30, 2024159 - There are 86,242 shares remaining available for repurchase under the current program159