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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

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

For the quarterly period ended December 31, 2023

OR

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. YesNo

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). YesNo

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). YesNo

As of February 7, 2024, there were 10,131,521 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

 

35

 

 

 

 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

 

41

 

 

 

 

Item 4

Controls and Procedures

 

42

 

 

 

 

 

Part II. Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

43

 

 

 

 

Item 1A.

Risk Factors

 

43

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

43

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

44

 

 

 

 

Item 4.

Mine Safety Disclosures

 

44

 

 

 

 

Item 5.

Other Information

 

44

 

 

 

 

Item 6.

Exhibits

 

45

 

 

 

 

Signature Page

 

46

 

 

 


 

Part I. Financial Information

Item 1. Financial Statements

ESSA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

 

 

 

December 31,

 

 

September 30,

 

 

 

2023

 

 

2023

 

 

 

(dollars in thousands)

 

ASSETS

 

 

 

 

 

 

Cash and due from banks

 

$

32,682

 

 

$

39,008

 

Interest-bearing deposits with other institutions

 

 

14,498

 

 

 

46,394

 

Total cash and cash equivalents

 

 

47,180

 

 

 

85,402

 

Investment securities available for sale, at fair value (net of allowance for credit losses of $0)

 

 

288,768

 

 

 

334,056

 

Investment securities held to maturity, at amortized cost net of allowance for credit losses of $0

 

 

51,012

 

 

 

52,242

 

Loans held for sale

 

 

 

 

 

250

 

Loans receivable (net of allowance for credit losses of $15,430 and $18,525)

 

 

1,704,728

 

 

 

1,680,525

 

Regulatory stock, at cost

 

 

18,759

 

 

 

17,890

 

Premises and equipment, net

 

 

11,936

 

 

 

12,913

 

Bank-owned life insurance

 

 

39,238

 

 

 

39,026

 

Foreclosed real estate

 

 

3,195

 

 

 

3,311

 

Intangible assets, net

 

 

44

 

 

 

91

 

Goodwill

 

 

13,801

 

 

 

13,801

 

Deferred income taxes

 

 

5,857

 

 

 

6,877

 

Derivative and hedging assets

 

 

13,401

 

 

 

19,662

 

Other assets

 

 

27,519

 

 

 

27,200

 

TOTAL ASSETS

 

$

2,225,438

 

 

$

2,293,246

 

LIABILITIES

 

 

 

 

 

 

Deposits

 

$

1,590,218

 

 

$

1,661,016

 

Short-term borrowings

 

 

361,500

 

 

 

374,652

 

Other borrowings

 

 

10,000

 

 

 

-

 

Advances by borrowers for taxes and insurance

 

 

10,077

 

 

 

6,550

 

Derivative and hedging liabilities

 

 

8,413

 

 

 

9,579

 

Other liabilities

 

 

24,506

 

 

 

21,741

 

TOTAL LIABILITIES

 

 

2,004,714

 

 

 

2,073,538

 

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;
   
10,131,521 and 10,394,689 outstanding at December 31, 2023 and September 30,
   2023, respectively)

 

 

181

 

 

 

181

 

Additional paid in capital

 

 

182,528

 

 

 

182,681

 

Unallocated common stock held by the Employee Stock Ownership Plan (ESOP)

 

 

(5,896

)

 

 

(6,009

)

Retained earnings

 

 

155,247

 

 

 

151,856

 

Treasury stock, at cost; 8,001,574 and 7,738,406 shares outstanding at
   December 31, 2023 and September 30, 2023, respectively

 

 

(104,050

)

 

 

(99,508

)

Accumulated other comprehensive loss

 

 

(7,286

)

 

 

(9,493

)

TOTAL STOCKHOLDERS’ EQUITY

 

 

220,724

 

 

 

219,708

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

2,225,438

 

 

$

2,293,246

 

 

See accompanying notes to the unaudited consolidated financial statements.

2


 

ESSA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF OPERATIONS

(UNAUDITED)

 

 

 

For the Three Months
Ended December 31,

 

 

 

2023

 

 

2022

 

 

 

(dollars in thousands, except per
share data)

 

INTEREST INCOME

 

 

 

 

 

 

Loans receivable, including fees

 

$

21,414

 

 

$

16,085

 

Investment securities:

 

 

 

 

 

 

Taxable

 

 

3,887

 

 

 

2,091

 

Exempt from federal income tax

 

 

11

 

 

 

11

 

Other investment income

 

 

778

 

 

 

432

 

Total interest income

 

 

26,090

 

 

 

18,619

 

INTEREST EXPENSE

 

 

 

 

 

 

Deposits

 

 

8,462

 

 

 

2,001

 

Short-term borrowings

 

 

2,656

 

 

 

958

 

Other borrowings

 

 

108

 

 

 

 

Total interest expense

 

 

11,226

 

 

 

2,959

 

NET INTEREST INCOME

 

 

14,864

 

 

 

15,660

 

(Release of) provision for credit losses

 

 

(397

)

 

 

150

 

NET INTEREST INCOME AFTER PROVISION FOR CREDIT
   LOSSES

 

 

15,261

 

 

 

15,510

 

NONINTEREST INCOME

 

 

 

 

 

 

Service fees on deposit accounts

 

 

696

 

 

 

799

 

Services charges and fees on loans

 

 

330

 

 

 

367

 

Loan swap fees

 

 

-

 

 

 

2

 

Unrealized (loss) gain on equity securities, net

 

 

(3

)

 

 

2

 

Trust and investment fees

 

 

393

 

 

 

402

 

Gain on sale of loans, net

 

 

118

 

 

 

-

 

Earnings on bank-owned life insurance

 

 

212

 

 

 

191

 

Insurance commissions

 

 

128

 

 

 

146

 

Other

 

 

87

 

 

 

6

 

Total noninterest income

 

 

1,961

 

 

 

1,915

 

NONINTEREST EXPENSE

 

 

 

 

 

 

Compensation and employee benefits

 

 

6,746

 

 

 

6,740

 

Occupancy and equipment

 

 

1,229

 

 

 

1,046

 

Professional fees

 

 

1,025

 

 

 

1,243

 

Data processing

 

 

1,342

 

 

 

1,179

 

Advertising

 

 

136

 

 

 

186

 

Federal Deposit Insurance Corporation (FDIC) premiums

 

 

380

 

 

 

188

 

Foreclosed real estate

 

 

101

 

 

 

(21

)

Amortization of intangible assets

 

 

47

 

 

 

47

 

Other

 

 

851

 

 

 

826

 

Total noninterest expense

 

 

11,857

 

 

 

11,434

 

Income before income taxes

 

 

5,365

 

 

 

5,991

 

Income taxes

 

 

1,028

 

 

 

1,125

 

NET INCOME

 

$

4,337

 

 

$

4,866

 

Earnings per share

 

 

 

 

 

 

Basic

 

$

0.45

 

 

$

0.50

 

Diluted

 

$

0.45

 

 

$

0.50

 

Dividends per share

 

$

0.15

 

 

$

0.15

 

 

See accompanying notes to the unaudited consolidated financial statements.

3


 

ESSA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

 

 

 

For the Three Months
Ended December 31,

 

 

 

2023

 

 

2022

 

 

 

(dollars in thousands)

 

Net income

 

$

4,337

 

 

$

4,866

 

Other comprehensive income (loss)

 

 

 

 

 

 

Investment securities available for sale:

 

 

 

 

 

 

Unrealized holding gains

 

 

7,885

 

 

 

1,061

 

Tax effect

 

 

(1,656

)

 

 

(223

)

Net of tax amount

 

 

6,229

 

 

 

838

 

Derivative and hedging activities adjustments:

 

 

 

 

 

 

Changes in unrealized holding (losses) gains on derivatives included in net income

 

 

(2,745

)

 

 

668

 

Tax effect

 

 

579

 

 

 

(140

)

Reclassification adjustment for gains on derivatives included in net income

 

 

(2,350

)

 

 

(1,834

)

Tax effect

 

 

494

 

 

 

385

 

Net of tax amount

 

 

(4,022

)

 

 

(921

)

Total other comprehensive income (loss)

 

 

2,207

 

 

 

(83

)

Comprehensive income

 

$

6,544

 

 

$

4,783

 

 

See accompanying notes to the unaudited consolidated financial statements.

4


 

ESSA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

Unallocated

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

Common Stock

 

 

Additional

 

 

Common

 

 

 

 

 

 

 

 

Other

 

 

Total

 

 

 

Number of

 

 

 

 

 

Paid In

 

 

Stock Held by

 

 

Retained

 

 

Treasury

 

 

Comprehensive

 

 

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

the ESOP

 

 

Earnings

 

 

Stock

 

 

Loss

 

 

Equity

 

 

 

(dollars in thousands except share data)

 

Balance, September 30, 2022

 

 

10,371,022

 

 

$

181

 

 

$

182,173

 

 

$

(6,462

)

 

$

139,139

 

 

$

(99,800

)

 

$

(2,894

)

 

$

212,337

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,866

 

 

 

 

 

 

 

 

 

4,866

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(83

)

 

 

(83

)

Cash dividends declared ($0.15 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,463

)

 

 

 

 

 

 

 

 

(1,463

)

Stock based compensation

 

 

 

 

 

 

 

 

295

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

295

 

Allocation of ESOP stock

 

 

 

 

 

 

 

 

117

 

 

 

113

 

 

 

 

 

 

 

 

 

 

 

 

230

 

Allocation of treasury shares to incentive plan

 

 

30,848

 

 

 

 

 

 

(403

)

 

 

 

 

 

 

 

 

399

 

 

 

 

 

 

(4

)

Balance, December 31, 2022

 

 

10,401,870

 

 

$

181

 

 

$

182,182

 

 

$

(6,349

)

 

$

142,542

 

 

$

(99,401

)

 

$

(2,977

)

 

$

216,178

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unallocated

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

Common Stock

 

 

Additional

 

 

Common

 

 

 

 

 

 

 

 

Other

 

 

Total

 

 

 

Number of

 

 

 

 

 

Paid In

 

 

Stock Held by

 

 

Retained

 

 

Treasury

 

 

Comprehensive

 

 

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

the ESOP

 

 

Earnings

 

 

Stock

 

 

Loss

 

 

Equity

 

 

 

(dollars in thousands except share data)

 

Balance, September 30, 2023

 

 

10,394,689

 

 

$

181

 

 

$

182,681

 

 

$

(6,009

)

 

$

151,856

 

 

$

(99,508

)

 

$

(9,493

)

 

$

219,708

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,337

 

 

 

 

 

 

 

 

 

4,337

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,207

 

 

 

2,207

 

Cash dividends declared ($0.15 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,476

)

 

 

 

 

 

 

 

 

(1,476

)

Cumulative effect of adoption of ASU 2016-13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

530

 

 

 

 

 

 

 

 

 

530

 

Stock based compensation

 

 

 

 

 

 

 

 

293

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

293

 

Allocation of ESOP stock

 

 

 

 

 

 

 

 

75

 

 

 

113

 

 

 

 

 

 

 

 

 

 

 

 

188

 

Allocation of treasury shares to incentive plan

 

 

40,441

 

 

 

 

 

 

(521

)

 

 

 

 

 

 

 

 

521

 

 

 

 

 

 

 

Purchase of common stock

 

 

(303,609

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,063

)

 

 

 

 

 

(5,063

)

Balance, December 31, 2023

 

 

10,131,521

 

 

$

181

 

 

$

182,528

 

 

$

(5,896

)

 

$

155,247

 

 

$

(104,050

)

 

$

(7,286

)

 

$

220,724

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

 

5


 

ESSA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

 

 

 

For the Three Months
Ended December 31,

 

 

 

2023

 

 

2022

 

 

 

(dollars in thousands)

 

OPERATING ACTIVITIES

 

 

 

 

 

 

Net income

 

$

4,337

 

 

$

4,866

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

(Release of) provision for credit losses

 

 

(397

)

 

 

150

 

Provision for depreciation and amortization

 

 

281

 

 

 

277

 

(Amortization) and accretion of discounts and premiums, net

 

 

(1,682

)

 

 

41

 

Unrealized loss (gain) on equity securities

 

 

3

 

 

 

(2

)

Gain on sale of loans, net

 

 

(118

)

 

 

 

Origination of residential real estate loans for sale

 

 

(4,261

)

 

 

 

Proceeds on sale of residential real estate loans

 

 

4,629

 

 

 

 

Compensation expense on ESOP

 

 

188

 

 

 

230

 

Amortization of right-of-use asset

 

 

224

 

 

 

243

 

Stock based compensation

 

 

293

 

 

 

295

 

Increase in accrued interest receivable

 

 

(520

)

 

 

(2,083

)

Increase in accrued interest payable

 

 

2,324

 

 

 

341

 

Earnings on bank-owned life insurance

 

 

(212

)

 

 

(191

)

Deferred federal income taxes

 

 

433

 

 

 

306

 

Increase in accrued pension

 

 

(89

)

 

 

(78

)

Loss (gain) on foreclosed real estate, net

 

 

101

 

 

 

(21

)

Amortization of intangible assets

 

 

47

 

 

 

47

 

Other, net

 

 

1,130

 

 

 

(1,299

)

Net cash provided by operating activities

 

 

6,711

 

 

 

3,122

 

INVESTING ACTIVITIES

 

 

 

 

 

 

Investment securities available for sale:

 

 

 

 

 

 

Proceeds from principal repayments and maturities

 

 

79,906

 

 

 

5,364

 

Purchases

 

 

(25,181

)

 

 

(1,000

)

Investment securities held to maturity:

 

 

 

 

 

 

Proceeds from principal repayments and maturities

 

 

1,224

 

 

 

1,260

 

Increase in loans receivable, net

 

 

(22,999

)

 

 

(68,678

)

Redemption of regulatory stock

 

 

7,345

 

 

 

3,295

 

Purchase of regulatory stock

 

 

(8,214

)

 

 

(6,006

)

Proceeds from sale of foreclosed real estate

 

 

15

 

 

 

50

 

Purchase of premises, equipment and software, net

 

 

(67

)

 

 

(399

)

Net cash provided by (used for) investing activities

 

 

32,029

 

 

 

(66,114

)

FINANCING ACTIVITIES

 

 

 

 

 

 

Decrease in deposits, net

 

 

(70,798

)

 

 

(10,037

)

Net (decrease)increase in short-term borrowings

 

 

(13,152

)

 

 

74,772

 

Proceeds from other borrowings

 

 

10,000

 

 

 

-

 

Purchase of common stock

 

 

(5,063

)

 

 

 

Increase in advances by borrowers for taxes and insurance

 

 

3,527

 

 

 

555

 

Dividends on common stock

 

 

(1,476

)

 

 

(1,463

)

Net cash (used for) provided by financing activities

 

 

(76,962

)

 

 

63,827

 

 (Decrease) increase in cash and cash equivalents

 

 

(38,222

)

 

 

835

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

 

 

85,402

 

 

 

27,937

 

CASH AND CASH EQUIVALENTS AT END OF YEAR

 

$

47,180

 

 

$

28,772

 

SUPPLEMENTAL CASH FLOW DISCLOSURES

 

 

 

 

 

 

Cash Paid:

 

 

 

 

 

 

Interest

 

$

8,901

 

 

$

2,618

 

Noncash items:

 

 

 

 

 

 

Transfers from loans to foreclosed real estate

 

 

-

 

 

 

26

 

Unrealized holding gains

 

 

7,885

 

 

 

1,061

 

 

See accompanying notes to the unaudited consolidated financial statements.

6


 

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. 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 wholly owned by ESSA Bank & Trust. ESSA Advisory Services, LLC is a full-service insurance benefits consulting company offering group services such as health insurance, life insurance, short-term and long-term disability, dental, vision, and 401(k) retirement planning as well as individual health products. Integrated Financial Corporation is a Pennsylvania corporation that provided investment advisory services to the general public and is currently inactive. Integrated Abstract Incorporated is a Pennsylvania corporation that provided title insurance services and is currently inactive. All significant intercompany accounts and transactions have been eliminated in consolidation.

The unaudited consolidated financial statements reflect all adjustments, which in the opinion of management, are necessary for a fair presentation of the results of the interim periods and are of a normal and recurring nature. Operating results for the three month period ended December 31, 2023 are not necessarily indicative of the results that may be expected for the year ending September 30, 2024.

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 months ended December 31, 2023 and 2022.

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2023

 

 

2022

 

Weighted-average common shares outstanding

 

 

18,133,095

 

 

 

18,133,095

 

Average treasury stock shares

 

 

(7,862,516

)

 

 

(7,734,761

)

Average unearned ESOP shares

 

 

(603,596

)

 

 

(648,860

)

Average unearned non-vested shares

 

 

(31,568

)

 

 

(52,619

)

Weighted average common shares and common stock
   equivalents used to calculate basic earnings per share

 

 

9,635,415

 

 

 

9,696,855

 

Additional common stock equivalents (nonvested stock)
   used to calculate diluted earnings per share

 

 

1,766

 

 

 

8,818

 

Weighted average common shares and common stock
   equivalents used to calculate diluted earnings per share

 

 

9,637,181

 

 

 

9,705,673

 

 

At December 31, 2023 and December 31, 2022 there were no shares of nonvested stock outstanding that were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive.

7


 

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

 

Accounting Pronouncements Recently Adopted

 

In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" and subsequent related updates. This ASU replaces the incurred loss methodology for recognizing credit losses and requires the Company to measure the current expected credit losses (CECL) on financial assets measured at amortized cost, including loans, held to maturity investment securities, off-balance sheet credit exposures such as unfunded commitments, and other financial instruments. In addition, ASC 326 requires credit losses on available-for-sale debt securities to be presented as an allowance rather than as a write-down when management does not intend to sell or believes that it is not more likely than not they will be required to sell. This guidance became effective on October 1, 2023 for the Bank. The results reported for periods beginning after October 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable accounting standards.

The Company adopted this guidance, and subsequent related updates, using the modified retrospective approach for all financial assets measured at amortized cost, including loans, held to maturity debt securities and unfunded commitments. As a result the allowance for credit losses related to loans was decreased by $2,755,000. No reserve was required for investment securities held to maturity. The Company also recorded a reserve for unfunded commitments of $2,083,000. The corresponding increase to retained earnings as a result of these reserve changes was $672,000, before taxes and $530,000, net of tax.

The Company adopted the provisions of ASC 326 related to presenting other-than-temporary impairment on available-for-sale debt securities prior to October 1, 2023 using the prospective transition approach, though no such charges had been recorded on the securities held by the Company as of the date of adoption.

 

The impact of the change from the incurred loss model to the current expected credit loss model is detailed below (in thousands).

 

 

 

October 1, 2023

 

 

 

Pre-adoption

 

Adoption Impact

 

As Reported

 

Assets

 

 

 

 

 

 

 

ACL on debt securities held-to-maturity

 

$

-

 

$

-

 

$

-

 

ACL on debt securities available for sale

 

 

-

 

 

-

 

 

-

 

ACL on debt securities loans

 

 

 

 

 

 

 

Real estate loans:

 

 

-

 

 

-

 

 

-

 

Residential

 

 

4,897

 

 

503

 

 

5,400

 

Construction

 

 

183

 

 

254

 

 

437

 

Commercial

 

 

11,983

 

 

(3,729

)

 

8,254

 

Commercial

 

 

941

 

 

(292

)

 

649

 

Obligations of states and political subdivisions

 

 

110

 

 

129

 

 

239

 

Home equity loans and lines of credit

 

 

346

 

 

423

 

 

769

 

Auto loans

 

 

2

 

 

2

 

 

4

 

Other

 

 

22

 

 

(4

)

 

18

 

Unallocated

 

 

41

 

 

(41

)

 

-

 

Liabilites

 

 

 

 

 

 

 

ACL for unfunded commitments

 

 

52

 

 

2,083

 

 

2,135

 

 

 

$

18,577

 

$

(672

)

$

17,905

 

 

In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (ASC 326): Troubled Debt Restructurings (TDRs) and Vintage Disclosures. The guidance amends ASC 326 to eliminate the accounting guidance for TDRs by creditors, while enhancing disclosure requirements for certain loan refinancing and restructuring activities by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying TDR recognition and measurement guidance, creditors will determine whether a modification results in a new loan or continuation of existing loan. These amendments are intended to enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. Additionally, the amendments to ASC 326 require that an entity disclose current-period gross writeoffs by year of origination within the vintage disclosures, which requires that an entity disclose the amortized cost basis of

8