ESSA Bancorp(ESSA) - 2019 Q3 - Quarterly Report

Part I. Financial Information Item 1. Financial Statements Unaudited consolidated financial statements for June 30, 2019, reflect a slight asset decrease and increased net income, influenced by a prior-year tax charge Consolidated Balance Sheet The balance sheet as of June 30, 2019, shows a slight decrease in total assets to $1.80 billion, with liabilities decreasing and equity increasing Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2019 | September 30, 2018 | | :--- | :--- | :--- | | Total Assets | $1,800,024 | $1,833,790 | | Net Loans Receivable | $1,326,623 | $1,305,071 | | Investment Securities | $325,327 | $371,438 | | Total Deposits | $1,331,583 | $1,336,855 | | Total Liabilities | $1,611,947 | $1,654,604 | | Total Stockholders' Equity | $188,077 | $179,186 | Consolidated Statement of Operations Net income for Q3 2019 increased to $3.0 million, while nine-month net income surged to $8.9 million, largely due to a prior-year tax charge Key Operating Results (in thousands, except per share data) | Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Nine Months Ended June 30, 2019 | Nine Months Ended June 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $11,715 | $12,562 | $35,332 | $36,265 | | Provision for Loan Losses | $400 | $975 | $1,876 | $3,075 | | Net Income | $3,047 | $2,821 | $8,915 | $3,446 | | Diluted EPS | $0.29 | $0.26 | $0.83 | $0.32 | Consolidated Statement of Cash Flows For the nine months ended June 30, 2019, operating cash flow was $16.8 million, investing activities provided $35.3 million, and financing activities used $55.0 million Cash Flow Summary (Nine Months Ended June 30, in thousands) | Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $16,827 | $18,206 | | Net cash provided by (used for) investing activities | $35,326 | $(64,882) | | Net cash (used for) provided by financing activities | $(54,994) | $42,900 | | Decrease in cash and cash equivalents | $(2,841) | $(3,776) | Notes to Consolidated Financial Statements Notes detail accounting policies, investment and loan portfolios, credit quality, and fair value measurements, including a disclosure on a legal proceeding - The Company adopted ASU 2016-01 on October 1, 2018, requiring equity investments to be measured at fair value with changes recognized in net income, resulting in a cumulative effect adjustment from accumulated other comprehensive loss to retained earnings[36] - The upcoming adoption of ASU 2016-13 (Credit Losses) is expected to result in a one-time cumulative effect adjustment to the allowance for loan losses, though the magnitude is not yet determined[40] - The Bank is a defendant in a class action lawsuit alleging a previously acquired bank received unearned fees in violation of the Real Estate Settlement Procedures Act; litigation is proceeding, and potential exposure is not currently estimable[153] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q3 net income growth, a nine-month surge due to a prior-year tax charge, and changes in assets, loans, and non-performing assets Financial Condition Analysis (June 30, 2019 vs. Sept 30, 2018) Total assets decreased by 1.8% to $1.80 billion, driven by reduced investment securities, while net loans and stockholders' equity increased - Total assets decreased by 1.84% to $1.80 billion[165] - Net loans increased by 1.7% to $1.33 billion, led by a $46.2 million increase in commercial real estate loans[167] - Investment securities available for sale decreased by 12.4% to $325.3 million, mainly due to sales of $45.7 million[168] - Stockholders' equity increased by 5.0% to $188.1 million, aided by net income and reduced AOCI loss, despite the repurchase of 405,384 shares for $6.5 million[172] Results of Operations Q3 2019 net income rose 8.0% to $3.1 million, while nine-month net income surged 158.7% to $8.9 million, influenced by a prior-year tax charge - Q3 2019 vs Q3 2018: Net income increased by $226,000 (8.0%) to $3.1 million[183] - Nine Months 2019 vs 2018: Net income increased by $5.5 million (158.7%) to $8.9 million, with the prior year impacted by a $3.7 million one-time charge due to the Tax Cuts and Jobs Act of 2017[192] - Net interest income decreased in both periods, primarily due to a decline in the interest rate spread to 2.49% and 2.51%, respectively[184][193] - The provision for loan losses decreased to $400,000 for the quarter (from $975,000) and to $1.9 million for the nine months (from $3.1 million)[187][196] Asset Quality Non-performing assets significantly increased to $19.1 million, raising the ratio to total assets to 1.06%, primarily due to one commercial loan participation Non-Performing Assets (in thousands) | Metric | June 30, 2019 | September 30, 2018 | | :--- | :--- | :--- | | Total non-performing loans | $18,618 | $10,511 | | Total non-performing assets | $19,133 | $11,668 | | Ratio of non-performing assets to total assets | 1.06% | 0.64% | - The increase in non-performing assets was primarily due to one commercial loan participation relationship totaling $8.3 million being placed on non-accrual status[201] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, managed by the Board and asset/liability committee, with no material changes since September 30, 2018 - The company's primary market risk is interest rate risk due to its asset/liability structure, where assets have longer maturities than liabilities[225] - Management actively manages interest rate risk to minimize exposure to earnings and capital, with oversight from the Board and an asset/liability committee, and no material changes to this risk profile occurred since the last fiscal year-end[225][226] Controls and Procedures Disclosure controls and procedures were deemed effective by management, with no material changes to internal controls over financial reporting during the quarter - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of June 30, 2019[227] - No material changes were made to the company's internal controls over financial reporting during the quarter[228] Part II. Other Information Legal Proceedings The company is involved in ongoing legal proceedings regarding alleged unearned fees by a previously acquired bank, with potential exposure not currently estimable - The Bank is a defendant in a lawsuit alleging violations of the Real Estate Settlement Procedures Act by a previously acquired bank[231] - A district court's dismissal reversed by an appellate court on April 26, 2019, and the litigation is ongoing, with the potential financial impact not currently estimable[231] Risk Factors No material changes to the risk factors previously disclosed in the Annual Report on Form 10-K for the fiscal year ended September 30, 2018 - No material changes to risk factors were reported for the quarter[232]