Essa Bancorp Inc. Annual Report 2019

← All annual reports

FY2019 Annual Report · Essa Bancorp Inc.

Loading PDF…

Building Value.

Empowering People.

VALUE
PEOPLE
PEOPLE
PEOPLE
PEOPLE
PEOPLE

A N N UA L R E P O R T 2019

Delaware Water Gap,
Pocono Mountains

Fellow Shareholders:
ESSA Bancorp, Inc.’s fiscal 2019 was an exciting

one for the Company, in which we

delivered significantly improved year-over-year performance.
This reflects our continued commitment to becoming a
commercially focused financial institution, delivering
sustainable earnings growth, and building long-term
shareholder value. We executed on a strategic plan that
focuses on four tenets: operating in three distinct markets,
fostering speed of innovation, creating customer value,
and delivering long-term shareholder value.

During 2019 we delivered profitable growth through an
integrated regional structure, gained operational efficiencies
generated by enhanced customer information and
technology, maintained strong risk management practices,
and empowered employees to deliver exceptional
service and promote expanded customer relationships.

Our focus on organic growth, changing the balance sheet
mix, and expanding banking relationships with customers
was particularly evident in commercial lending, which
increased 13% year-over-year and reached record levels.
The number of loan originations in fiscal 2019 was the
second-highest in the Company’s history (following a
record year for originations in 2018). For the first time in
the Company’s history, commercial loan balances exceeded
residential mortgage balances. Our ability to execute on
our strategic plan resulted in solid earnings growth and
enhanced shareholder value. This was reflected in an 11%
dividend increase in 2019 and subsequent 10% increase
in the first quarter of 2020.

Net income for the year ended September 30, 2019 rose
23.5% to $12.6 million or $1.18 per diluted share, compared
with adjusted net income of $10.2 million or $0.94 per
diluted share in fiscal 2018, which adds back a one-time
$3.7 million charge to income tax expense due to the Tax
Cuts and Jobs Act of 2017.

Balance Sheet Mix & Growth

Total loans receivable, net of allowance for loan losses,
increased slightly to $1.33 billion at September 30, 2019,
up from $1.31 billion in 2018. The modest growth was the
result of the continued run-off of the indirect auto loan
portfolio, which declined by $64.1 million over the past
twelve months, and our decision to manage the residential
loan portfolio near its current level.

In fiscal 2019, the Company closed $172 million in
commercial loans. As noted earlier, for the first time in our
Company’s history, commercial loans comprised a greater
percentage of total loans than residential mortgage loans.
This was an exciting milestone, reflecting good progress
toward becoming a commercially focused financial
institution. The strongest growth came out of our Lehigh
Valley and Philadelphia regions, markets where we’ve
placed emphasis on growing our commercial banking
business and hiring new bankers.

Progress toward shifting the asset mix continues and
remains consistent with our stated objectives and strategic
plan. Increased commercial banking across many sectors,
complementing longstanding activity in residential and
consumer lending, has created a more balanced, diversified
loan portfolio. Commercial real estate (CRE) loans rose to
$480.6 million at September 30, 2019 from $416.6 million
a year earlier and comprised 36% of ESSA’s loan portfolio.
The growth of CRE lending is evident when compared
to fiscal 2017, when CRE loans were $318.3 million and
comprised 26% of our loan portfolio.

We continue to invest in new team members, hiring
commercial banking professionals, portfolio managers, cash
management personnel, and mortgage professionals in
our Lehigh Valley and Philadelphia regions. The commercial
banking team focused on a mix of small business,
commercial, and commercial real estate loan production,
acquiring new customers and retaining existing customers
with improved customer service.

City Hall/Downtown District,
Scranton

Expanding our base of core deposits (checking
accounts, savings accounts, and money market
accounts) is a critical part of our strategic plan,
providing the most cost-effective source to fund
loan growth. To that end, we hired new branch
managers and made investments in other retail
banking personnel. Core deposits comprised 67%
of total deposits at September 30, 2019, up from
61% of total deposits at year-end 2018. Noninterest-
bearing demand accounts, which primarily reflect
increased commercial banking relationships, grew
11% in 2019. Deposit growth contributed to a reduction
in wholesale borrowings of $50.2 million in 2019.

We continue to evaluate and rationalize our retail branch
delivery model. In 2019, we repositioned the Nazareth branch
to a larger facility and saw positive results from our previous
repositioning of the Allentown branch, with deposits
increasing almost 100%. Other core deposit initiatives in
2019 included launching an online account opening service,
a new index money market account, and improved user
experience and functionality of mobile banking applications.

Growing Revenue, Operating Efficiently

We continued our progress toward shifting balance sheet
assets toward our goal of two-thirds commercial loans and
one-third residential mortgage and consumer loans. Loan
originations and our asset composition were the primary
drivers of revenue growth. Total interest income in fiscal 2019
increased 5% from fiscal 2018 to $67.8 million, which was the
highest in the Company’s history. Our net interest margin was
negatively impacted by increased interest expense, a result
of deposit growth and average short-term interest rates being
34% higher in fiscal 2019 versus 2018. This was offset by a
lower loan loss provision, which was $1.9 million lower in 2019
versus 2018. The Company’s interest rate spread, reflecting
the difference between average yields of interest-earning
assets and interest-bearing liabilities, was 2.50% in 2019

Gary S. Olson,
President & CEO

During 2019, we invested
in products, technology,
and people in order to
improve our fnancial
performance and further
our strategic objectives.

Allentown Skyline,
Lehigh Valley

compared with 2.71% in 2018, and the net interest margin
was 2.73% in 2019 compared with 2.85% in 2018. The
industry continues to be challenged by the flattening
of the yield curve.

We had greater contributions from our noninterest income
lines of business, growing asset management and trust
revenue by 14% and increasing net profit contributions
from our employee benefits brokerage subsidiary. In the
fourth quarter of 2019 we made the decision to change
broker dealers and announced a partnership with Ameriprise
Financial Services that we believe will benefit our investment
services customers.

Noninterest expense declined 4.5% in fiscal 2019 from
the previous year, reflecting actions that included further
leveraging our cost accounting system, more productive
locations in Allentown and Nazareth, and ongoing benefits
from rationalizing facilities in past years. Our strategic plan
has targeted improved operational efficiency, reflected in
the bank’s efficiency ratio, which improved to 68.4% in 2019
from 71.1% in 2018 and 77.1% in 2017. Some of the initiatives
instituted in fiscal 2019 that will continue in fiscal 2020
include implementing teller capture in our retail network,
a new vendor management system, and continued
efficiencies gained from exiting indirect auto lending.
Technology continues to be critical in controlling expenses
and providing a superior customer experience. All of our
noninterest expense categories other than compensation
and employee benefits, and data processing declined in
fiscal 2019 compared with the previous year.

Focus on Asset Quality

Maintaining strong asset quality through disciplined
underwriting and a balanced credit culture is a critical
component of our plan. Based on the rapid growth in
commercial lending, we expanded our credit administration
and support teams by adding commercial portfolio
managers and centralizing our commercial construction

process. Nonperforming assets were $10.3 million or 0.57%
of total assets at September 30, 2019, compared with $11.7
million or 0.64% of total assets at September 30, 2018.

Reflective of our decision to exit indirect auto lending and
our disciplined underwriting standards, total loan charge-offs
declined from $2.5 million in fiscal 2018 to $1.9 million in
fiscal 2019, and most of the total charge-offs were related to
the discontinued auto lending business. By the end of fiscal
2019, we had sharply reduced the amount of foreclosed real
estate owned compared to fiscal 2018.

Based on continuing asset quality and prudent reserving,
the allowance for loan losses to total loans at fiscal year-end
2019 increased to 0.94% from 0.89% at fiscal year-end 2018.
Finally, we’ve managed concentrations in each of our asset
categories. We continue our commitment to a clean, high-
quality balance sheet.

Enterprise Risk Management

As part of our strategic planning process we began an
enterprise-wide risk management program to better assess,
manage, and align all of the Company’s risk with our
strategic plan. During the fourth quarter of 2019 we adopted
a risk appetite statement that was approved by our Board
of Directors. We expect that this approach to enterprise risk
management will enhance strategic decision-making and
the overall performance of the Company.

Customer Service, Product Diversity

The quality, skill, and dedication of our employees are the
most important drivers in achieving our objectives. During
2019 we embarked on a renewed and more focused
customer service culture. We took steps to engage and
empower employees to deliver better service to our
customers, including an employee survey that focused
on providing an environment that fosters the highest level
of customer service.

Ben Franklin Parkway,
Philadelphia

As we expanded our banking teams, we placed greater
emphasis on hiring the right employees and providing
more training. Reporting structures are more defined
and in line with our business objectives. Our regional
delivery model implemented in 2018 continues to put
decision-makers closer to the customer. We will continue
to establish and refine key performance indicators to
enhance both internal and external customer service.

2020 initiatives include new contactless debit cards;
ESSA’s Bank at Work, a personal banking solution for
employees of our commercial clients that has financial
education as its leading feature; evolving our digital strategy;
and continued leveraging of our technology and systems.

We have set higher standards for financial performance in
fiscal 2020. We remain focused on transitioning the balance
sheet, specifically the loan and deposit mix, to reflect

Our strategic plan is designed to build long-term value through
our commitment to growth, asset quality, productivity, technology,
and the empowerment of our employees and customers.

During 2019, we invested in products, technology, and
people in order to improve our financial performance
and further our strategic objectives. Some of our product
initiatives include online account opening for easier access
for our consumer customers, new money market and
savings accounts, providing interest rate hedging for our
commercial loan customers, and as previously mentioned
establishing a new broker-dealer relationship for our
investment services customers.

Delivering Performance & Shareholder Value:
2020 Outlook

Finally, our strategic plan is designed to build long-term
shareholder value through our commitment to generating
sustainable growth, maintaining strong asset quality,
enhancing productivity, leveraging technology, and
empowering our employees and customers.

increasing focus on commercial banking; evolving our
digital strategy and delivery channels for customers;
growing revenue from noninterest income; and enhancing
the productivity of our banking teams. We look forward to
delivering performance in the coming year for customers,
communities, employees, and our shareholders.

Sincerely,
Sincerely,

Gary S. Olson, President & CEO

Consolidated Financial Highlights

The following information is derived from the audited Consolidated Financial Statements of ESSA Bancorp, Inc.
For additional information, reference is made to “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and the Consolidated Financial Statements of ESSA Bancorp, Inc.
and related notes included in Form 10-K as filed with the Securities and Exchange Commission.

Selected Balance Sheet Data (Years ended September 30; data in thousands)

2019

2018

2017

2016

2015

Total assets

$1,799,427

$1,833,790

$1,785,218

$1,772,479

$1,606,544

Investment securities:
Available for sale

Loans, net

Deposits

313,393

371,438

390,452

390,410

379,407

1,328,653

1,305,071

1,236,681

1,219,213

1,102,118

1,342,830

1,336,855

1,274,861

1,214,820

1,096,754

Borrowed funds

248,282

298,496

311,614

360,061

320,440

Equity

189,508

179,186

182,727

176,344

171,280

Selected Operations Data (Years ended September 30; data in thousands)

2019

2018

2017

2016

2015

Net interest income

$47,010

$48,235

$45,519

$46,935

$43,789

Provisions for loan losses

2,076

4,000

3,350

2,550

2,075

Net interest income after
provisions for loan losses

44,934

44,235

42,169

44,385

41,714

Noninterest income

8,157

7,813

8,199

8,783

7,896

Noninterest expense

38,053

39,853

41,438

42,858

36,865

Income before
income tax expense

15,038

12,195

8,930

10,310

12,745

Income tax expense

2,415

5,664

1,591

2,583

Net income

$12,623

$6,531

$7,339

$7,727

Earnings per share:

Basic

Diluted

$1.18

$0.60

$0.69

$0.74

$0.73

Selected Other Data (Years ended September 30)

Return on average assets

Return on average equity

Interest rate spread(1)

Net interest margin(2)

Non-performing assets as
a percentage of total assets

Tier 1 core capital (to
adjusted tangible assets)

2019

0.69%

6.80%

2.50%

2.73%

2018

0.36%

3.61%

2.71%

2.85%

2017

0.42%

4.11%

2.69%

2.77%

2016

0.45%

4.40%

2.81%

2.89%

0.57%

0.64%

0.88%

1.24%

1.41%

9.67%

9.28%

9.19%

8.76%

10.03%

2,954

$9,791

$0.94

$0.93

2015

0.62%

5.68%

2.89%

2.96%

(1) The interest rate spread represents the difference between the weighted-average yield on a fully tax-equivalent basis on interest-earning
assets and the weighted-average cost of interest-bearing liabilities for the year.

(2) The net interest margin represents net interest income on a fully tax-equivalent basis as a percent of average interest-earning assets for
the year.

Stock Price & Market Capitalization

$24.00

$21.00

E $18.00
C
R
P

$15.00

K
C
O
T
S

$12.00

$9.00

2015

2016

2017

2018

2019

(Years ended September 30)

$210,000,000

$190,000,000

$170,000,000

$150,000,000

$130,000,000

$110,000,000

N
O

I
T
A
Z
I
L
A
T
I

P
A
C

T
E
K
R
A
M

Dividends per Share

Earnings per Share (Diluted)

$0.34

$0.36

$0.40

$0.50

$0.40

$0.30

$0.20

$0.10

$1.18

$0.93

$0.73 $0.69

$0.60

$1.20

$1.00

$0.80

$0.60

$0.40

$0.20

2015 2016 2017 2018 2019

(Years ended September 30)

2015 2016 2017 2018 2019

(Years ended September 30)

Tangible Book Value (Per Share)

$20

$15

$14.03 $14.05

$14.41

$13.92

$15.43

$10

2015 2016 2017 2018 2019

(Years ended September 30)

Consolidated Financial Highlights (cont’d)

Net Income (in Thousands)

Deposits (in Thousands)

$14,000

$12,000

$10,000

$8,000

$6,000

$4,000

$2,000

3
2
6
,
2
1
$

1
9
7
,
9
$

7
2
7
,
7
$

9
3
3
,
7
$

1
3
5
,
6
$

2015 2016 2017 2018 2019

(Years ended September 30)

$1,500,000

$1,200,000

$900,000

$600,000

$300,000

0
2
8
,
4
1
2
,
1
$

1
6
8
,
4
7
2
,
1
$

5
5
8
,
6
3
3
,
1
$

0
3
8
,
2
4
3
,
1
$

4
5
7
,
6
9
0
,
1
$

2015 2016 2017 2018 2019

(Years ended September 30)

Return on Average Equity

Net Interest Margin

5.68%

6.80%

4.40% 4.11%

3.61%

2.96% 2.89% 2.77% 2.85% 2.73%

2015 2016 2017 2018 2019

(Years ended September 30)

2015 2016 2017 2018 2019

(Years ended September 30)

Revenue* (in Thousands)

Stockholders’ Equity (in Thousands)

$80,000

$60,000

$40,000

$20,000

8
1
7
,
5
5
$

8
1
7
,
3
5
$

8
4
0
,
6
5
$

7
6
1
,
5
5
$

5
8
6
,
1
5
$

2015 2016 2017 2018 2019

(Years ended September 30)

*Net interest income plus noninterest income.

$200,000

$160,000

$120,000

$80,000

$40,000

0
8
2
,
1
7
1
$

4
4
3
,
6
7
1
$

7
2
7
,
2
8
1
$

6
8
1
,
9
7
1
$

8
0
5
,
9
8
1
$

2015 2016 2017 2018 2019

(Years ended September 30)

Executive Personnel

BOARD OF DIRECTORS & GENERAL COUNSEL

Robert C. Selig, Jr.
Chairman of the Board
President – Selig Construction Company

Joseph S. Durkin
Executive Vice President – Reilly Associates

Brian T. Regan, CPA
Shareholder – Regan, Levin, Bloss, Brown & Savchak, P.C.

Christine D. Gordon, Esq.
Deputy Chief Compliance Officer –
Olympus Corporation of the Americas

Daniel J. Henning
President – A.C. Henning Enterprises, Inc.

Philip H. Hosbach IV
Vice President, Global Public Affairs for Vaccines –
Sanofi Pasteur (retired)

Frederick E. Kutteroff
President – Keystone Savings Bank (retired)

Gary S. Olson
President & CEO – ESSA Bank & Trust

Elizabeth Bensinger Weekes, Esq.
Partner – Bensinger & Weekes, PA

John E. Burrus
Director Emeritus

William P. Douglass
Director Emeritus

John S. Schoonover, Jr.
Director Emeritus

William A. Viechnicki, D.D.S.
Director Emeritus

James V. Fareri, Esq.
General Counsel

Gary S. Olson
President & CEO

Charles D. Hangen
Executive Vice President & COO

Peter A. Gray
Executive Vice President & CBO

ESSA Bancorp, Inc.
200 Palmer Street
Stroudsburg, PA 18360

Mailing Address
P.O. Box L
Stroudsburg, PA 18360

OFFICERS

Allan A. Muto
Executive Vice President & CFO

Diane K. Reimer
Senior Vice President,
Administrative/Operations Division

Thomas J. Grayuski
Senior Vice President,
Human Resources Division

Robert L. Selitto
Senior Vice President & Controller

Stephanie Lefferson
Corporate Secretary,
Investor & Community Relations

CORPORATE HEADQUARTERS

Auditors
S.R. Snodgrass, P.C.
2009 Mackenzie Way, Suite 340
Cranberry Township, PA 16066

General Counsel
Newman, Williams, Mishkin,
Corveleyn, Wolfe & Fareri, P.C.
712 Monroe Street
Stroudsburg, PA 18360

Mission
Statement

ESSA Bank & Trust will be the leading

OUR GUIDING PRINCIPLES

service-oriented community financial

institution offering a full range of

financial products to greater Eastern

Pennsylvania customers. We will ensure

our long-term prosperity by providing

products and service in a manner

consistent with high standards of

quality, on a profitable basis, at the

fairest price, in order to create the

best possible value for our customers.

They will be delivered through

distribution systems staffed and

supported by customer-driven,

friendly, productive employees with

a high degree of integrity.

There are five Guiding Principles on which
our Mission Statement is based:

We believe in long-term success, operating as a safe,
sound, and stable institution. Long-term success is
dependent upon profits, but never will profit-seeking
compromise our mission.

We believe in satisfying the wants and needs of our
customers. Satisfaction is dependent upon a continual
improvement of our service, products, systems,
and operations.

We believe our employees are our most valuable asset.
Our employees will be provided with a work environment
which is “the best in town.”

We believe our decisions should enhance ESSA’s value.
Enhanced value is achieved through quality earnings,
growth, and strong management practices.

We believe in supporting our community through
employee volunteering and charitable giving to
improve the quality of life. The ESSA Bank & Trust
Foundation has been established to support
this principle.

ESSA CODE OF ETHICS &
CONFLICT OF INTEREST POLICY

The ESSA Bancorp, Inc. Board of Directors has approved
an Insider Code of Ethics and Conflict of Interest policy.
This policy provides Directors and employees with
specific guidance promoting honest and ethical
conduct and deterring wrongdoing.

Our policy may be found on our website at essabank.com.

Corporate Information

STOCK LISTING

CORPORATE GOVERNANCE

ESSA Bancorp, Inc. common stock is listed
on the NASDAQ Global MarketSM under the
symbol “ESSA.”

INTERNET INFORMATION

ESSA Bancorp, Inc. financial reports and
information about the products and services
of its wholly owned subsidiary, ESSA Bank &
Trust, are available at essabank.com.

FINANCIAL INFORMATION

We are subject to the informational
requirements of the Securities Exchange
Act of 1934. Therefore, we file annual,
quarterly, and current reports as well as
proxy materials with the Securities and
Exchange Commission (SEC). You can
obtain copies of these and other filings,
including exhibits, electronically at the
SEC’s website at sec.gov or through the
ESSA website at essabank.com by clicking
on the Investor Relations link. Copies of
our Annual Report and Form 10-K may
also be obtained by contacting Investor
Relations at 570-422-0182 or via email
at slefferson@essabank.com.

FORWARD-LOOKING STATEMENTS

Information about our Board and its
committees and about corporate
governance at ESSA is available in the
Governance Documents section of the
Investor Relations link on the ESSA website
at essabank.com. Shareholders who
would like to request printed copies of the
Code of Ethics or the charters of our Board’s
Nominating and Corporate Governance,
Audit, and Compensation committees
(all of which are posted on the ESSA
website through the Investor Relations
link) may do so by sending their requests
in writing to Stephanie Lefferson, Corporate
Secretary, Investor and Community
Relations, at corporate headquarters
at P.O. Box L, Stroudsburg, PA 18360.

INQUIRIES

Individual investors should contact Stephanie
Lefferson, Corporate Secretary, Investor and
Community Relations, at 570-422-0182 or
via email at slefferson@essabank.com.

News media representatives and others
seeking general information should contact
Peter A. Gray, Executive Vice President, CBO,
at 570-422-0198 or via email at
pgray@essabank.com.

ANNUAL SHAREHOLDERS’ MEETING

All eligible shareholders are invited to attend
the ESSA Bancorp, Inc. annual meeting on
Thursday, February 27, 2020, at 10 a.m.
The meeting will be held at:
Northampton Community College,
Monroe Campus
2411 Route 715
Tannersville, PA 18372

REGISTRAR & TRANSFER AGENT

Computershare, Inc.
P.O. Box 505000
Louisville, KY 40233-5000
800-368-5948
computershare.com/investor

Analysts and institutional investors should
contact Allan Muto, Executive Vice President
and CFO, at 570-422-0181 or via email at
amuto@essabank.com.

SPECIAL COUNSEL

Luse Gorman, PC
5335 Wisconsin Avenue, N.W., Suite 780
Washington, DC 20015

Certain statements contained in this Annual Report are “forward-looking statements” within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may be identified by reference to a future
period or periods, or by use of forward-looking terminology, such as “believe,” “expect,” “anticipate,” “intend,” “outlook,” “estimate,” “forecast,”
“project,” and other similar words and expressions. Our forward-looking statements are subject to numerous risks and uncertainties, including,
but not limited to, those related to the economic environment, particularly in the market areas in which the Company operates, competitive
products and pricing, fiscal and monetary policies of the U.S. Government, changes in government regulations affecting financial institutions,
legal developments, technological advances, changes in prevailing interest rates, acquisitions and the integration of acquired businesses,
credit risk management, asset-liability management, the financial and securities markets, and the availability of and costs associated with
sources of liquidity.

Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time. The Company wishes
to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company
does not undertake and specifically declines any obligation to publicly release the result of any revisions, which may be made to any
forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or
unanticipated events. The Company wishes to advise readers that the factors listed above could affect the Company’s financial performance
and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect
to future periods in any current statements. We provide greater detail regarding these factors in our Form 10-K for the year ended September
30, 2019, including the Risk Factors section. Our forward-looking statements may also be subject to other risks and uncertainties, including
those discussed elsewhere in this Annual Report or in our filings with the SEC, accessible on the SEC’s website at sec.gov or through the
Investor Relations link on our corporate website at essabank.com.

Focusing on Three Distinct Market Regions

NORTHERN REGION

Scranton
1
2 Wilkes-Barre
3 Mountainhome
Blakeslee
4
Tannersville
5
Stroudsburg
6
7
East Stroudsburg
8 Marshalls Creek
Brodheadsville
9

LEHIGH VALLEY REGION

10 Wind Gap
11 New Tripoli
12 Bath
13 Nazareth
14 Palmer
15 Alburtis
16 Allentown
17 Bethlehem

PHILADELPHIA REGION

18 Devon
19 Haverford
20 Upper Darby
21 Lansdowne

A Corporate Center
B
Lehigh Valley Regional Oÿce
C Philadelphia Regional Oÿce

ADDITIONAL SERVICES

Asset Management & Trust Services
ESSA Advisory Services
ESSA Investment Services*

*Investments are not federally insured, have no fnancial institution guarantee, and may lose value.
Ameriprise Financial is not affliated with the fnancial institution where investment services are offered.
Investment advisory products and services are made available through Ameriprise Financial Services, Inc.,
a registered investment adviser. Securities and insurance products offered through Ameriprise Financial
Services, Inc., member FINRA and SIPC.

Equal Opportunity Lender • Member FDIC

essabank.com