News Column

ESSA Bancorp Updates on Fiscal 1Q 2014 Financial Results

February 8, 2014

ESSA Bancorp, the holding Company for ESSA Bank and Trust, announced results for fiscal first quarter.

In a release on Jan. 29, the Company said that the Company reported net income of $2.0 million, or $0.18 per diluted share, for the three months ended Dec. 31, 2013, compared with net income of $2.9 million, or $0.24 per diluted share, for the three months ended Dec. 31, 2012.

Results for the quarter ended Dec. 31, 2013 reflect a decline in the accretion of the fair market adjustments that resulted from the Company's acquisition of First Star Bancorp to $630,000 from $1.5 million for the comparable 2012 period. In addition, the Company did not sell any loans during the 2013 period compared to a $334,000 gain from loan sales during the comparable 2012 period. The quarter ended Dec. 31, 2013 also included $258,000 in merger related costs associated with the previously announced proposed merger between the Company and Franklin Security Bancorp.

Gary Olson, President and CEO, said: "Core results continued to reflect the traction we are building in commercial lending and deposits, expanded banking relationships with retail and business customers, and meaningful efficiencies from the infrastructure we put in place. We have continued to grow the ESSA franchise through leveraging the capabilities and efficiencies of our existing banking network, and through strategic acquisitions to provide access to new markets and expand ESSA's presence in our served markets.

"During the quarter, we announced the planned acquisition of Franklin Security Bancorp, which would open new markets for us in the Scranton and Wilkes-Barre metropolitan areas and would be immediately accretive to earnings. We recently completed a branch facility, loan and deposit acquisition in Monroe County, adding an attractive facility and enabling us to consolidate two existing locations into this new branch. We are very pleased with the results from expanded operations in the Lehigh Valley, and we anticipate ESSA's long-term performance will demonstrate positive results from our numerous initiatives."

Income Statement Review

As noted, net income in first quarter 2014 reflected the impact of fair value adjustments to acquired First Star loans. Net interest income decreased $1.2 million, or 11.5 percent, to $9.5 million for the three months ended Dec. 31, 2013, from $10.7 million for the comparable period in 2012. The change primarily reflected a decrease in the Company's interest rate spread to 2.88 percent for the three months ended Dec. 31, 2013, from 3.14 percent for the comparable period in 2012 and a decrease in the Company's average net earning assets of $2.7 million.

Net interest margin was 2.98 percent for the three months ended Dec. 31, 2013 compared to a net interest margin of 3.26 percent for the comparable period in 2012. For purposes of consecutive quarter comparison, net interest income for the quarter ended Sept. 30, 2013 was $9.4 million. The Company's net interest rate spread was 2.83 percent and the net interest margin was 2.92 percent for the September, 2013 quarter.

Interest income for the three months ended Dec. 31, 2013 included approximately $89,000 of net accretion of fair market value adjustments for credit and yield applied to First Star loans at the acquisition closing date of July 31, 2012 compared to $424,000 for the comparable 2012 period. In addition, interest income in the fiscal first quarter, included approximately $541,000 of the recapture of fair value adjustments to loans acquired as part of the First Star acquisition that were either fully or partially repaid during the quarter, compared to $973,000 of similar repayments for the comparable 2012 period.

The Company lowered interest expense 16.7 percent to $2.7 million in fiscal first quarter 2014, compared with $3.2 million in fiscal first quarter 2013. Total cost of funds on all interest bearing liabilities for the three months ended Dec. 31, 2013 was 0.95 percent compared with 1.11 percent for the same period in 2012. Total cost of funds on all interest bearing liabilities for the three months ended Sept. 30, 2013 was 0.99 percent.

The provision for loan losses decreased to $750,000 for the three months ended Dec. 31, 2013, compared with $1.0 million for the three months ended Dec. 31, 2012. Net loan charge-offs in fiscal first quarter 2014 were $445,000 compared to $746,000 in fiscal first quarter 2013.

Noninterest income decreased 19.7 percent to $1.6 million for the three months ended Dec. 31, 2013, compared with the three months ended Dec. 31, 2012, primarily reflecting a decrease in the gains on sale of loans of $334,000 and decreased gain on sale of investments of $30,000.

"ESSA remains cautious with respect to its mortgage origination business," said Olson. "However, with the slowing of mortgage refinancing activity and an uptick in rates, we decided last year to return to our historical practice of retaining originated mortgages and building our loan portfolio."

Noninterest expense was $7.7 million for the three months ended Dec. 31, 2013 compared with $7.5 million for the comparable period in 2012. Noninterest expense for the 2013 period included $258,000 of merger related costs related to the Company's previously announced proposed merger with Franklin Security Bancorp. The Company also had a gain on foreclosed real estate of $226,000 in the comparable 2012 period compared to a loss of $42,000 for the quarter ended Dec. 31, 2013. Olson said that the consolidation of two ESSA branches into the newly acquired Monroe County location is expected to have a positive impact on noninterest expense in future periods.

Balance Sheet, Asset Quality and Capital Adequacy

Total assets decreased $17.1 million, or 1.25 percent, to $1.36 billion at Dec. 31, 2013, compared to $1.37 billion at Sept. 30, 2013. Decreases in cash and cash equivalents of $11.8 million and loans receivable of $5.9 million, compared to Sept. 30, 2013, accounted for the majority of the decrease.

Total deposits decreased $44.7 million, or 4.29 percent, to $996.4 million at Dec. 31, 2013, from $1.04 billion at Sept. 30, 2013. Included in the deposit decrease was a decrease of $32.5 million in brokered certificates of deposit. During the same period, borrowings increased $26.5 million. Olson explained that in fiscal first quarter 2014, FHLB borrowings were attractively priced compared to brokered certificates.

Nonperforming assets totaled $26.8 million, or 1.98 percent, of total assets at Dec. 31, 2013, compared with $26.0 million, or 1.89 percent, of total assets at Sept. 30, 2013. The increase in nonperforming assets of $900,000 at Dec. 31, 2013 compared to Sept. 30, 2013 was due primarily to the addition of a $1.7 million commercial real estate loan.

Olson said, "Overall asset quality continues to trend positively, and while we continue our work to reduce non-performing assets, we have been pleased with the stability and quality of ESSA's loan portfolio."

The Company recorded a provision for loan losses of $750,000 for the three-month period ended Dec. 31, 2013, compared with a provision of $1.0 million for the comparable period in 2012. The allowance for loan losses was $8.4 million, or 0.90 percent, of loans outstanding at Dec. 31, 2013, compared to $8.1 million, or 0.86 percent, of loans outstanding at Sept. 30, 2013.

The Bank continued to demonstrate financial strength, with a tier 1 leverage ratio of 11.46 percent, exceeding accepted regulatory standards for a well-capitalized institution. The Company also maintains a tangible equity to total assets ratio of 11.24 percent.

Stockholders' equity increased $103,000 to $166.5 million at Dec. 31, 2013, from $166.4 million at Sept. 30, 2013. For the three months ended Dec. 31, 2013, the Company repurchased 17,600 shares at an average cost of $11.14 per share. Tangible book value per share at Dec. 31, 2013 increased to $13.04 compared with $12.99 at Dec. 31, 2012.

The Company's return on average assets and return on average equity, respectively, were 0.59 percent and 4.77 percent, compared with 0.82 percent and 6.49 percent, in the corresponding period of fiscal 2012, the year-over-year comparisons partially reflecting the previously referenced changes in fair valuation adjustments. Return on average assets and return on average equity, respectively, were 0.59 percent and 4.95 percent for the quarter ended Sept. 30, 2013.

Olson said, "We are building a franchise with the size and scale to leverage our strengths and comfortably manage regulatory expenses, capital requirements, while fully serving the financial needs of a larger market area. We are maintaining the tradition of providing customers with the highest level of personal service, attention and professionalism. And we remain committed to our tradition of growing shareholder value."

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