Edgar Filing: ESSA Bancorp, Inc.

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended December 31, 2007

¨	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)

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. YES x NO ¨.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer” and “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x Smaller reporting company ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x

As of February 11, 2008 there were 16,980,900 shares of the Registrant’s common stock, par value $0.01 per share, outstanding.

ESSA Bancorp, Inc.

FORM 10-Q

Index


		Page
	Part I. Financial Information

Item 1.	Financial Statements (unaudited)	3

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19

Item 4.	Controls and Procedures	19

	Part II. Other Information

Item 1.	Legal Proceedings	19

Item 1A.	Risk Factors	19

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19

Item 3.	Defaults upon Senior Securities	20

Item 4.	Submission of Matters to a Vote of Security Holders	20

Item 5.	Other Information	20

Item 6.	Exhibits	20

Signature Page		21

Part I. Financial Information

Item 1.

Financial Statements

ESSA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET

(UNAUDITED)


	December 31, 2007			September 30, 2007
	(dollars in thousands)
ASSETS
Cash and due from banks	$	10,745		$	11,604
Interest-bearing deposits with other institutions		8,716			6,175

Total cash and cash equivalents		19,461			16,779
Investment securities available for sale		206,728			205,267
Investment securities held to maturity (fair value of $14,770 and $16,876)		14,862			17,130
Loans receivable (net of allowance for loan losses of $4,357 and $4,206)		638,959			619,845
Federal Home Loan Bank stock		16,488			16,453
Premises and equipment		11,165			11,277
Bank-owned life insurance		14,084			13,941
Other assets		8,889			9,723

TOTAL ASSETS	$	930,636		$	910,415


LIABILITIES
Deposits	$	372,894		$	384,716
Short-term borrowings		32,339			34,230
Other borrowings		309,697			279,697
Advances by borrowers for taxes and insurance		3,055			1,423
Other liabilities		5,554			5,657

TOTAL LIABILITIES		723,539			705,723

Commitment and contingencies		—			—

STOCKHOLDERS’ EQUITY
Preferred stock ($.01 par value: 10,000,000 shares authorized, none issued)		—			—
Common stock ($.01 par value; 40,000,000 shares authorized, 16,980,900 shares issued and outstanding)		170			170
Additional paid in capital		166,802			166,782
Unallocated common stock held by the Employee Stock Ownership Plan(ESOP)		(13,132	)		(13,283	)
Retained earnings		55,097			53,400
Accumulated other comprehensive loss		(1,840	)		(2,377	)

TOTAL STOCKHOLDERS’ EQUITY		207,097			204,692

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	930,636		$	910,415

See accompanying notes to the unaudited consolidated financial statements.

ESSA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF INCOME

(UNAUDITED)


	For the Three Months Ended December 31,
	2007		2006
INTEREST INCOME
Loans receivable	$	9,783	$	8,623
Investment securities:
Taxable		2,702		1,214
Exempt from federal income tax		83		73
Other investment income		321		184

Total interest income		12,889		10,094

INTEREST EXPENSE
Deposits		2,689		2,667
Short-term borrowings		438		480
Other borrowings		3,563		2,687

Total interest expense		6,690		5,834

NET INTEREST INCOME		6,199		4,260
Provision for loan losses		150		90

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		6,049		4,170

NONINTEREST INCOME
Service fees on deposit accounts		906		919
Services charges and fees on loans		152		134
Trust and investment fees		246		211
Gain on sale of loans, net		—		11
Earnings on Bank-owned life insurance		143		135
Other		16		18

Total noninterest income		1,463		1,428

NONINTEREST EXPENSE
Compensation and employee benefits		2,995		2,573
Occupancy and equipment		684		617
Professional fees		289		137
Data processing		479		427
Advertising		145		187
Other		440		490

Total noninterest expense		5,032		4,431

Income before income taxes		2,480		1,167
Income taxes		783		306

NET INCOME	$	1,697	$	861

Basic and diluted earnings per share*:	$	0.11	$	N/A

*	Due to the consummation of the Company’s initial public offering on April 3, 2007, there were no earnings per share for the three months ended December 31, 2006.

See accompanying notes to the unaudited consolidated financial statements.

ESSA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)


	Common Stock											Accumulated
	Number of Shares		Amount		Additional Paid In Capital		Unallocated Common Stock Held by the ESOP			Retained Earnings		Other Comprehensive Loss			Total Stockholders’ Equity		Comprehensive Income
	(in thousands)
Balance, September 30, 2007		16,980,900	$	170	$	166,782	$	(13,283	)	$	53,400	$	(2,377	)	$	204,692

Net income											1,697		—			1,697	$	1,697

Other comprehensive income:
Unrealized gain on securities available for sale, net of income taxes of $257													504			504		504
Change in unrecognized pension cost, net of income taxes of $17													33			33		33

Comprehensive income																	$	2,201

Allocation of ESOP stock						20		151								171

Balance, December 31, 2007	$	16,980,900	$	170	$	166,802	$	(13,132	)	$	55,097	$	(1,840	)	$	207,097

See accompanying notes to the unaudited consolidated financial statements.

ESSA BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)


	For the Three Months Ended December 31,
	2007			2006
	(dollars in thousands)
OPERATING ACTIVITIES
Net income	$	1,697		$	861
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		150			90
Provision for depreciation and amortization.		306			283
Accretion of discounts and premiums, net		(12	)		(166	)
Compensation expense on ESOP		171			—
Decrease (Increase) in accrued interest receivable		404			(211	)
(Decrease) Increase in accrued interest payable		(195	)		483
Earnings on Bank-owned life insurance		(143	)		(135	)
Deferred federal income taxes		132			(22	)
Other, net		175			564

Net cash provided by operating activities		2,685			1,747

INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from principal repayments and maturities		36,141			11,739
Purchases		(36,826	)		(16,428	)
Investment securities held to maturity:
Proceeds from principal repayments and maturities		2,266			758
Increase in loans receivable, net		(19,182	)		(15,897	)
Redemption of FHLB stock		1,443			449
Purchase of FHLB stock		(1,478	)		(1,173	)
Purchase of premises, equipment, and software		(286	)		(244	)

Net cash used for investing activities		(17,922	)		(20,796	)

FINANCING ACTIVITIES
Increase (decrease) in deposits, net		(11,822	)		46,417
Net decrease in short-term borrowings		(1,891	)		(15,299	)
Proceeds from borrowings		41,000			21,000
Repayment of borrowings		(11,000	)		(8,000	)
Increase in advances by borrowers for taxes and insurance		1,632			1,160

Net cash provided by financing activities		17,919			45,278

Increase in cash and cash equivalents		2,682			26,229
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		16,779			12,730

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	19,461		$	38,959

SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash Paid:
Interest	$	6,886		$	5,351
Income taxes	$	117		$	—

See accompanying notes to the unaudited consolidated financial statements.

ESSA BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(unaudited)

1.	Nature of Operations and Basis of Presentation

The unaudited, consolidated financial statements include the accounts of ESSA Bancorp, Inc. (the “Company”), ESSA Bank & Trust (the “Bank”), and the Bank’s wholly owned subsidiaries, ESSACOR Inc. and Pocono Investment Company. The primary purpose of the Company is to act as a holding company for the Bank. The Company is subject to regulation and supervision by the Office of Thrift Supervision (the “OTS”) The Bank is a Pennsylvania chartered savings association located in Stroudsburg, Pennsylvania. The Bank’s primary business consists of the taking of deposits and granting of loans to customers generally in Monroe and Northampton counties, Pennsylvania. The Bank is subject to regulation and supervision by the Pennsylvania Department of Banking and the OTS. The investment in subsidiary 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 is currently inactive. Pocono Investment Company is a Delaware corporation formed as an investment company subsidiary to hold and manage certain investments of the Bank, including certain intellectual property. All intercompany 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, 2007 are not necessarily indicative of the results that may be expected for the year ending September 30, 2008.

2.	Completion of Initial Public Offering

On July 25, 2006, the Bank’s Board of Directors adopted a Plan of Conversion (the “Plan”) pursuant to which the Bank converted to a Pennsylvania chartered stock association and formed ESSA Bancorp, Inc., a Pennsylvania chartered company (the “Company”). On December 7, 2006 the Company filed a Registration Statement on Form S-1 with the Securities and Exchange Commission (File No. 333-139157) with respect to the shares to be offered and sold pursuant to the Plan. The Company registered for offer and sale 16,980,900 shares of common stock, par value $0.01 per share, at a sales price of $10.00 per share.

The stock offering was consummated on April 3, 2007, resulting in gross proceeds of $158.7 million, through the sale of 15,870,000 shares at a price of $10.00 per share. The Company also contributed 1,110,900 shares of its common stock to the ESSA Bank & Trust Foundation (the “Foundation”) and $1.6 million in cash. Expenses related to the offering were approximately $2.9 million which resulted in net proceeds of approximately $155.8 million prior to the contribution to the Foundation.

The Company lent approximately $13.6 million to the Bank’s Employee Stock Ownership Plan (“ESOP”). The Company retained approximately $64.3 million of the net proceeds of the offering prior to the contribution to the Foundation, and the remainder of the net proceeds were contributed to the Bank.

3.	Earnings per Share

There are no convertible securities which would affect the numerator in calculating basic and diluted earnings per share; therefore, net income of $1,697,000 for the three months ended December 31, 2007 will be used as the numerator.

The following table sets for the composition of the weighted-average common shares (denominator) used in the basic and diluted earnings per share computation.


	Three months ended December 31, 2007
Weighted-average common shares outstanding	16,980,900

Average unallocated common shares held by the ESOP	(1,318,388	)

Weighted-average common shares and common stock equivalents used to calculate basic and diluted earnings per share	15,662,512

4.	Use of Estimates in the Preparation of Financial Statements

The accounting principles followed by the Bank and its subsidiaries and the methods of applying these principles conform to U.S. generally accepted accounting principles 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 balance sheet date and related revenues and expenses for the period. Actual results could differ significantly from those estimates.

5.	Comprehensive Income (Loss)

The components of comprehensive income consist of unrealized gains and losses on available for sale securities and the change in minimum pension liability. For the three months ended December 31, 2007, this activity is shown under the heading Comprehensive Income as presented in the Consolidated Statement of Changes in Stockholders’ Equity (Unaudited). For the three months ended December 31, 2006, comprehensive income totaled $875,000.

6.	Recent Accounting Pronouncements

In September 2006, the FASB reached consensus on the guidance provided by Emerging Issues Task Force Issue 06-4 (“EITF 06-4”), Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. The guidance is applicable to endorsement split-dollar life insurance arrangements, whereby the employer owns and controls the insurance policy, that are associated with a postretirement benefit. EITF 06-4 requires that for a split-dollar life insurance arrangement within the scope of the Issue, an employer should recognize a liability for future benefits in accordance with FAS No. 106 (if, in substance, a postretirement benefit plan exists) or Accounting Principles Board Opinion No. 12 (if the arrangement is, in substance, an individual deferred compensation contract) based on the substantive agreement with the employee. EITF 06-4 is effective for fiscal years beginning after December 15, 2007. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s results of operations or financial condition.

In March 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-10 (“EITF 06-10”), Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements. EITF 06-10 provides guidance for determining a liability for the postretirement benefit obligation as well as recognition and measurement of the associated asset on the basis of the terms of the collateral assignment agreement. EITF 06-10 is effective for fiscal years beginning after December 15, 2007. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

In June 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-11 (“EITF 06-11”), Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards. EITF 06-11 applies to share-based payment arrangements with dividend protection features that entitle employees to receive (a) dividends on equity-classified nonvested shares, (b) dividend equivalents on equity-classified nonvested share units, or (c) payments equal to the dividends paid on the underlying shares while an equity-classified share option is

outstanding, when those dividends or dividend equivalents are charged to retained earnings under FAS No. 123R, Share-Based Payment, and result in an income tax deduction for the employer. A consensus was reached that a realized income tax benefit from dividends or dividend equivalents that are charged to retained earnings and are paid to employees for equity-classified nonvested equity shares, nonvested equity share units, and outstanding equity share options should be recognized as an increase in additional paid-in capital. EITF 06-11 is effective for fiscal years beginning after December 15, 2007, and interim periods within those fiscal years. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes. FIN 48 is an interpretation of FAS No. 109, Accounting for Income Taxes, and it seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. In addition, FIN No. 48 requires expanded disclosure with respect to the uncertainty in income taxes and is effective for fiscal years beginning after December 15, 2006. The Company adopted FIN No. 48 October 1, 2007, the adoption of this standard did not have a material effect on the Company’s results of operations or financial position.

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“FAS”) No. 157, Fair Value Measurements, which provides enhanced guidance for using fair value to measure assets and liabilities. The standard applies whenever other standards require or permit assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. FAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Early adoption is permitted. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

In September 2006, the FASB issued FAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Post Retirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R). This Statement requires that employers measure plan assets and obligations as of the balance sheet date. This requirement is effective for fiscal years ending after December 15, 2008. The other provisions of the Statement were effective as of the end of the fiscal year ending after December 15, 2006, for public companies. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position.

In February 2007, the FASB issued FAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115, which provides all entities with an option to report selected financial assets and liabilities at fair value. The objective of the FAS No. 159 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in earnings caused by measuring related assets and liabilities differently without having to apply the complex provisions of hedge accounting. FAS No. 159 is effective as of the beginning of an entity’s first fiscal year beginning on November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007 provided the entity also elects to apply the provisions of FAS No. 157, Fair Value Measurements. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

7.	Investment Securities

The amortized cost and estimated fair value of investment securities available for sale and held to maturity are summarized as follows (in thousands):


	December 31, 2007
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Available for Sale
Fannie Mae	$	27,031	$	241	$	(31	)	$	27,241
Freddie Mac		77,743		351		(104	)		77,990
Governmental National Mortgage Association securities		14,787		218		(25	)		14,980

Total mortgage-backed securities		119,561		810		(160	)		120,211
Obligations of states and political subdivisions		7,172		191		(4	)		7,359
U.S. government agency securities		78,276		198		(14	)		78,460

Total debt securities		205,009		1,199		(178	)		206,030
Equity securities		882		24		(208	)		698

Total	$	205,891	$	1,223	$	(386	)	$	206,728

Held to Maturity
Fannie Mae	$	7,405	$	1	$	(102	)	$	7,304
Freddie Mac		4,460		7		(23	)		4,444

Total mortgage-backed securities		11,865		8		(125	)		11,748
U.S. government agency securities		2,997		26		(1	)		3,022

Total	$	14,862	$	34	$	(126	)	$	14,770


	September 30, 2007
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Available for Sale
Fannie Mae	$	24,850	$	98	$	(63	)	$	24,885
Freddie Mac		74,484		147		(467	)		74,164
Governmental National Mortgage Association securities		15,506		133		(75	)		15,564

Total mortgage-backed securities		114,840		378		(605	)		114,613
Obligations of states and political subdivisions		7,172		166		(6	)		7,332
U.S. government agency securities		82,297		122		(27	)		82,392

Total debt securities		204,309		666		(638	)		204,337
Equity securities		882		85		(37	)		930

Total	$	205,191	$	751	$	(675	)	$	205,267

Held to Maturity
Fannie Mae	$	7,777	$	4	$	(181	)	$	7,600
Freddie Mac		4,622		—		(80	)		4,542

Total mortgage-backed securities		12,399		4		(261	)		12,142
U.S. government agency securities		4,731		8		(5	)		4,734

Total	$	17,130	$	12	$	(266	)	$	16,876

The amortized cost and estimated fair value of debt securities at December 31, 2007, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (in thousands):


	Available For Sale				Held To Maturity
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	$	63,859	$	63,935	$	1,000	$	999
Due after one year through five years		24,443		24,498		7,815		7,794
Due after five years through ten years		2,000		2,013		2,570		2,539
Due after ten years		114,707		115,584		3,477		3,438

Total	$	205,009	$	206,030	$	14,862	$	14,770

The Bank had no sale of investment securities for the three months ended December 31, 2007 or 2006.

8.	Loans Receivable, Net and Allowance for Loan Losses

Loans receivable consist of the following (in thousands):


	December 31, 2007		September 30, 2007
Real Estate Loans:
Residential	$	510,987	$	500,104
Construction		9,395		7,800
Commercial		61,121		58,447
Commercial		10,997		7,699
Home equity loans and lines of credit		47,690		47,544
Other		4,262		3,875

		644,452		625,469
Less deferred loan fees		1,136		1,418

		643,316		624,051
Less allowance for loan losses		4,357		4,206

Net loans	$	638,959	$	619,845

The activity in the allowance for loan losses is summarized as follows (in thousands):


	Three Months Ended December 31,
	2007		2006
Balance, beginning of period	$	4,206	$	3,855
Add
Provision charged to operations		150		90
Loan recoveries		1		—

		4,357		3,945
Less loans charged off		—		—

Balance, end of period	$	4,357	$	3,945

9.	Deposits

Deposits consist of the following major classifications (in thousands):


	December 31, 2007		September 30, 2007
Non-interest bearing demand accounts	$	24,086	$	25,925
NOW accounts		54,643		57,586
Money market accounts		45,612		39,780
Savings and club accounts		62,712		65,989
Certificates of deposit		185,841		195,436

Total	$	372,894	$	384,716

10.

Net Periodic Benefit Cost-Defined Benefit Plan

For a detailed disclosure on the Bank’s pension and employee benefits plans, please refer to Note 15 of the Bank’s Consolidated Financial Statements for the year ended September 30, 2007 included in the Company’s form 10-K.

The following table comprises the components of net periodic benefit cost for the periods ended (in thousands):


	Three Months Ended December 31,
	2007			2006
Service Cost	$	129		$	154
Interest Cost		143			119
Expected return on plan assets		(165	)		(111	)
Amortization of prior service cost		2			2
Amortization of unrecognized loss		52			46
Amortization of transition obligation		—			—

Net periodic benefit cost	$	162		$	210

The Bank expects to contribute $583,000 to its pension plan in 2008.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

This Quarterly Report contains forward-looking statements, which can be identified by the use of such words as estimate, project, believe, intend, anticipate, plan, seek, expect and similar expressions. These forward-looking statements include:

•

statements of our goals, intentions and expectations;

•

statements regarding our business plans and prospects and growth and operating strategies;

•

statements regarding the asset quality of our loan and investment portfolios; and

•

estimates of our risks and future costs and benefits.

These forward-looking statements are subject to significant risks, assumptions and uncertainties, including, among other things, the following important factors that could affect the actual outcome of future events:

•

significantly increased competition among depository and other financial institutions;

•

inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;

•

general economic conditions, either nationally or in our market areas, that are worse than expected;

•

adverse changes in the securities markets;

•

legislative or regulatory changes that adversely affect our business;

•

our ability to enter new markets successfully and take advantage of growth opportunities, and the possible short-term dilutive effect of potential acquisitions or de novo branches, if any;

•

changes in consumer spending, borrowing and savings habits;

•

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies and the Financial Accounting Standards Board; and

•

changes in our organization, compensation and benefit plans.

Overview

The Company consummated its initial stock offering on April 3, 2007 with the sale of 15,870,000 shares of common stock. The Company also contributed 1,110,900 shares of the Company’s outstanding common stock, and contributed $1.6 million in cash, to a charitable foundation established by the Bank. Net proceeds of the offering were approximately $155.9 million prior to the contribution to ESSA Bank & Trust Foundation.

Comparison of Financial Condition at December 31, 2007 and September 30, 2007

Total Assets. Total assets increased by $20.2 million, or 2.2%, to $930.6 million at December 31, 2007 from $910.4 million at September 30, 2007. This increase was primarily due to increases in interest-bearing deposits with other institutions and loans receivable.

Interest-Bearing Deposits with Other Institutions. Interest-bearing deposits with other institutions increased $2.5 million to $8.7 million at December 31, 2007 from $6.2 million at September 30, 2007. The primary reason for the increase was an increase in the Company’s interest-bearing demand deposit account at FHLBank Pittsburgh of $2.3 million. The demand deposit account increased as a result of the Company’s receipt in December, 2007 of the first loan payment from the Bank’s ESOP of $1.2 million along with the accumulated interest income received from the Company’s investment portfolio.

Net Loans. Net loans increased $19.1 million, or 3.1%, to $638.9 million at December 31, 2007 from $619.8 million at September 30, 2007. Loan growth was primarily attributed to growth in several product categories as a result of our continued marketing efforts. During this period residential, construction and commercial real estate loans outstanding increased by $10.9 million to $510.9 million, $1.6 million to $9.4 million and $2.7 million to $61.1 million, respectively. Commercial loans outstanding increased by $3.3 million to $10.9 million. Home equity loans and lines of credit outstanding increased by $146,000 to $47.7 million and other loans outstanding increased by $387,000 to $4.3 million.

Deposits. Deposits decreased $11.8 million, or 3.1%, to $372.9 million at December 31, 2007 from $384.7 million at September 30, 2007. At December 31, 2007 compared to September 30, 2007 money market accounts increased $5.8 million to $45.6 million. This increase was offset during the same period by decreases in non-interest bearing demand accounts of $1.8 million to $24.1 million, NOW accounts of $2.9 million to $54.6 million, savings and club accounts of $3.3 million to $62.7 million and certificates of deposit of $9.6 million to $185.8 million. Included in the certificates of deposit at December 31, 2007 was a decrease of $5.6 million in brokered certificates of deposit to $14.4 million. The decline in brokered certificates was the result of the Company’s decision not to renew maturing certificates based on the cost of renewing those certificates compared to other available funding sources. The decline in retail deposits was primarily attributable to the increasingly competitive environment within the Company’s market.

Borrowed Funds. Borrowed funds increased by $28.1 million to $342.0 million at December 31, 2007, from $313.9 million at September 30, 2007. The increase in borrowed funds was used primarily to offset the decline in deposits and to fund additional loan growth.

Stockholders’ Equity. Stockholders’ equity increased by $2.4 million, to $207.1 million at December 31, 2007 from $204.7 million at September 30, 2007. This increase was primarily the result of the addition of net income for the three months ended December 31, 2007 of $1.7 million together with an increase in the unrealized gain on investment securities available for sale, net of taxes, of $504,000 at December 31, 2007 compared to September 30, 2007 and a decrease in unallocated shares held by the Bank’s ESOP of $171,000 for the same period.

Average Balance Sheets for the Three Months Ended December 31, 2007 and 2006

The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances, The yields set forth below include the effect of deferred fees and discounts and premiums that are amortized or accreted to interest income.


	For the Three Months Ended December 31,
	2007								2006
	Average Balance			Interest Income/ Expense			Yield/ Cost		Average Balance			Interest Income/ Expense			Yield/ Cost
	(Dollars in Thousands)
Interest-earning assets:
Loans (1)	$	634,561		$	9,783		6.12	%	$	565,536		$	8,623		6.05	%
Investment securities
Taxable (2)		86,455			1,071		4.91	%		42,306			490		4.60	%
Exempt from federal income tax(2) (3)		7,349			83		6.79	%		6,453			73		6.80	%

Total investment securities		93,804			1,154		5.06	%		48,759			563		4.89	%
Mortgage-backed securities		129,428			1,631		5.00	%		60,426			724		4.75	%
Federal Home Loan Bank stock		16,869			236		5.55	%		14,020			162		4.58	%
Other		6,822			85		4.94	%		1,949			22		4.48	%

Total interest-earning assets		881,484			12,889		5.82	%		690,690			10,094		5.82	%
Allowance for loan losses		(4,258	)							(3,886	)
Noninterest-earning assets		42,869								40,578

Total assets	$	920,095							$	727,382

Interest-bearing liabilities:
NOW accounts	$	54,355			12		0.09	%	$	55,037			10		0.07	%
Money market accounts		43,976			403		3.64	%		36,147			270		2.96	%
Savings and club accounts		62,406			72		0.46	%		75,664			82		0.43	%
Certificates of deposit		191,295			2,202		4.57	%		208,176			2,305		4.39	%
Borrowed funds		329,999			4,001		4.81	%		263,557			3,167		4.77	%

Total interest-bearing liabilities		682,031			6,690		3.89	%		638,581			5,834		3.62	%
Non-interest bearing NOW accounts		23,617								23,864
Noninterest-bearing liabilities		7,699								5,304

Total liabilities		713,347								667,749
Equity		206,748								59,633

Total liabilities and equity	$	920,095							$	727,382

Net interest income				$	6,199							$	4,260

Interest rate spread							1.93	%							2.20	%
Net interest-earning assets	$	199,453							$	52,109

Net interest margin(4)							2.79	%							2.45	%
Average interest-earning assets to average interest-bearing liabilities					129.24	%							108.16	%

(1)	Non-accruing loans are included in the outstanding loan balances.

(2)	Held to maturity securities are reported at amortized cost. Available for sale securities are reported at fair value.

(3)	Yields on tax exempt securities have been calculated on a fully tax equivalent basis assuming a tax rate of 34%.

(4)	Represents the difference between interest earned and interest paid, divided by average total interest earning assets.

Comparison of Operating Results for the Three Months Ended December 31, 2007 and December 31, 2006

Net Income. Net income increased $836,000, to $1.7 million for the three months ended December 31, 2007 compared to net income of $861,000 for the comparable period in 2006. The primary reason for this increase was an increase in the Company’s net average interest earning assets of $147.3 million for the three months ended December 31, 2007 compared to the corresponding 2006 period. The increase in net average interest earning assets was the result of the Company’s lending volume which resulted in a $69.0 million increase in average loans outstanding from the previous period, together with the Bank’s mutual-to-stock conversion and the Company’s subsequent stock offering.

Net Interest Income. Net interest income increased $1.9 million, to $6.2 million for the three months ended December 31, 2007 from $4.3 million for the comparable period in 2006. The increase was primarily attributable to the increase in net average earning assets and was offset in part by a 27 basis point decrease in the Company’s interest rate spread to 1.93% for the three months ended December 31, 2007, from 2.20% for the comparable period in 2006.

Interest Income. Interest income increased $2.8 million, to $12.9 million for the three months ended December 31, 2007 from $10.1 million for the comparable 2006 period. The increase resulted from a $190.8 million increase in average interest-earning assets. The overall yield on interest earning assets was 5.82% for the three months ended December 31, 2007, and for the comparable 2006 period. Loans increased on average $69.0 million between the two periods along with increases in the average balance of investment securities of $45.0 million and mortgage-backed securities of $69.0 million. In addition, average Federal Home Loan Bank stock increased $2.8 million along with an increase in the average balance of other interest earning assets of $4.9 million. The primary reasons for the increase in investment securities and mortgage-backed securities was the partial reinvestment of borrowing proceeds into these assets along with the investment of the majority of the net proceeds from the stock offering into short-term, investment grade debt and mortgage-backed securities issued by United States government sponsored agencies or entities. Average Federal Home Loan Bank stock increased as a result of the Bank’s increase in borrowings from the FHLBank Pittsburgh. As a member of the Federal Home Loan Bank System, the Bank maintains an investment in the capital stock of the FHLBank Pittsburgh in an amount not less than 70 basis points of the outstanding unused FHLB borrowing capacity or 1/20 of its outstanding FHLB borrowings, whichever is greater, as calculated throughout the year. The increase in average other interest earning assets was the result of an increase in the Company’s interest bearing deposits with other institutions resulting primarily from a small portion of the funds received from the stock offering.

Interest Expense. Interest expense increased $856,000, to $6.7 million for the three months ended December 31, 2007 from $5.8 million for the comparable 2006 period. The increase resulted from a $43.5 million increase in average interest-bearing liabilities, combined with a 27 basis point increase in the overall cost of interest bearing liabilities to 3.89% for the three months ended December 31, 2007 from 3.62% for the comparable 2006 period. Average interest bearing deposits decreased $23.0 million which was offset by an increase in average borrowed funds of $66.4 million.

Provision for Loan Losses. In evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect a borrower’s ability to repay, the estimated value of any underlying collateral, peer group information and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are subject to interpretation and revision as more information becomes available or as future events occur. After an evaluation of these factors, and after considering the growth in the Company’s loan portfolio, management made a provision for loan losses of $150,000 for the three months ended December 31, 2007 as compared to $90,000 for the three months ended December 31, 2006. The allowance for loan losses was $4.4 million, or 0.68% of loans outstanding at December 31, 2007, compared to $3.9 million, or 0.68% of loans outstanding at December 31, 2006.

Non-interest Income. Non-interest income increased $35,000, to $1.5 million for the three months ended December 31, 2007, from $1.4 million for the comparable 2006 period. The increase was primarily due to

increases in trust and investment fees of $35,000, service charges and fees on loans of $18,000 and earnings on Bank-owned life insurance of $8,000. These increases were offset, in part, by decreases in service fees on deposit accounts of $13,000 and other non-interest income of $2,000.

Non-interest Expense. Non-interest expense increased $601,000, to $5.0 million for the three months ended December 31, 2007 from $4.4 million for the comparable period in 2006. The primary reasons for the increase were increases in compensation and employee benefits of $422,000, occupancy and equipment of $67,000, professional fees of $152,000 and data processing fees of $52,000. These increases were offset, in part, by decreases in advertising costs of $42,000 and other expenses of $50,000. Compensation and employee benefits increased primarily as a result of normal compensation and benefit increases of $266,000 along with an expense of $171,000 related to the ESOP which was implemented in April, 2007. Occupancy and equipment costs increased primarily as a result of increases in rental costs of $21,000 along with increases in depreciation expense of $23,000. Professional fees increased primarily as a result of increased legal, accounting, and regulatory fees as a result of being a publicly reporting company. Data processing fees increased due to increased volume and ongoing technology upgrades.

Income Taxes. Income tax expense increased $477,000 to $783,000 for the three months ended December 31, 2007 from $306,000 for the comparable 2006 period. The effective tax rate was 31.6% for the three months ended December 31, 2007 compared to 26.2% for the comparable 2006 period.

NON-PERFORMING ASSETS

The following table provides information with respect to the Bank’s non-performing assets at the dates indicated. (Dollars in thousands)


	December 31, 2007			September 30, 2007
Non-performing assets:
Non-accruing loans	$	620		$	555
Accruing loans past due 90 days or more		—			—

Total non-performing loans		620			555
Real estate owned		—			—

Total non-performing assets	$	620		$	555

Ratio of non-performing loans to total loans		0.10	%		0.09	%

Ratio of non-performing loans to total assets		0.07	%		0.06	%

Ratio of non-performing assets to total assets		0.07	%		0.06	%

Loans are reviewed on a regular basis and are placed on non-accrual status when they become more than 90 days delinquent. When loans are placed on non-accrual status, unpaid accrued interest is fully reserved, and further income is recognized only to the extent received.

Liquidity and Capital Resources

We maintain liquid assets at levels we consider adequate to meet both our short-term and long-term liquidity needs. We adjust our liquidity levels to fund deposit outflows, repay our borrowings and to fund loan commitments. We also adjust liquidity as appropriate to meet asset and liability management objectives.

Our primary sources of liquidity are deposits, and prepayment of loans and mortgage-backed securities, maturities of investment securities and other short-term investments, and earnings and funds provided from operations, as well as access to FHLBank advances and other borrowing sources. While scheduled principal repayments on loans and mortgage-backed securities are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by market interest rates, economic conditions, and rates offered by our competition. We set the interest rates on our deposits to maintain a desired level of total deposits.

A portion of our liquidity consists of cash and cash equivalents and borrowings, which are a product of our operating, investing and financing activities. At December 31, 2007, $19.5 million of our assets were invested in cash and cash equivalents. Our primary sources of cash are principal repayments on loans, proceeds from the maturities of investment securities, principal repayments of mortgage-backed securities and increases in deposit accounts. Short-term investment securities (maturing in one year or less) totaled $64.9 million at December 31, 2007. As of December 31, 2007, we had $312.0 million in borrowings outstanding from FHLBank Pittsburgh and $30.0 million in borrowings through repurchase agreements with another financial institution. We have access to additional FHLBank advances of up to approximately $301.6 million.

At December 31, 2007, we had $65.8 million in loan commitments outstanding, which included, in part, $23.2 million in undisbursed construction loans, $22.2 million in unused home equity lines of credit, $5.7 million in commercial lines of credit and $9.1 million to originate primarily multi-family and nonresidential mortgage loans. Certificates of deposit due within one year of December 31, 2007 totaled $135.6 million, or 72.6 % of certificates of deposit. If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before December 31, 2008. We believe, however, based on past experience, that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

As reported in the Consolidated Statements of Cash Flows, our cash flows are classified for financial reporting purposes as operating, investing or financing cash flows. Net cash provided by operating activities was $2.7 million and $1.7 million for the three months ended December 31, 2007 and 2006, respectively. These amounts differ from our net income because of a variety of cash receipts and disbursements that did not affect net income for the respective periods. Net cash used in investing activities was $17.9 million and $20.8 million for the three months ended December 31, 2007 and 2006, respectively, principally reflecting our loan and investment security activities in the respective periods. Investment security cash flows had the most significant effect, as net cash utilized in purchases amounted to $36.8 million and $16.4 million for the three months ended December 31, 2007 and 2006, respectively. Deposit, and borrowing, cash flows have comprised most of our financing activities which resulted in net cash provided of $17.9 million and $45.3 million for the three months ended December 31, 2007 and 2006, respectively.

Critical Accounting Policies

We consider accounting policies that require management to exercise significant judgment or discretion or make significant assumptions that have, or could have, a material impact on the carrying value of certain assets or on income, to be critical accounting policies. We consider the following to be our critical accounting policies:

Allowance for Loan Losses. The allowance for loan losses is the estimated amount considered necessary to cover credit losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses which is charged against income. In determining the allowance for loan losses, management makes significant estimates and has identified this policy as one of our most critical. The methodology for determining the allowance for loan losses is considered a critical accounting policy by management due to the high degree of judgment involved, the subjectivity of the assumptions utilized and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses.

As a substantial amount of our loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing loans and discounted cash flow valuations of properties are critical in determining the amount of the allowance required for specific loans. Assumptions for appraisals and discounted cash flow valuations are instrumental in determining the value of properties. Overly optimistic assumptions or negative changes to assumptions could significantly impact the valuation of a property securing a loan and the related allowance determined. The assumptions supporting such appraisals and discounted cash flow valuations are carefully reviewed by management to determine that the resulting values reasonably reflect amounts realizable on the related loans.

Management performs a quarterly evaluation of the adequacy of the allowance for loan losses. Consideration is given to a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal and external loan reviews and other relevant factors. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant revision based on changes in economic and real estate market conditions.

The analysis of the allowance for loan losses has two components: specific and general allocations. Specific allocations are made for loans that are determined to be impaired. Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. The general allocation is determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history. We also analyze historical loss experience, delinquency trends, general economic conditions and geographic and industry concentrations. This analysis establishes factors that are applied to the loan groups to determine the amount of the general allocations. Actual loan losses may be significantly more than the allowance for loan losses we have established which could have a material negative effect on our financial results.

Deferred Income Taxes. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. We consider the determination of this valuation allowance to be a critical accounting policy because of the need to exercise significant judgment in evaluating the amount and timing of recognition of deferred tax liabilities and assets, including projections of future taxable income. These judgments and estimates are reviewed on a continual basis as regulatory and business factors change. A valuation allowance for deferred tax assets may be required if the amount of taxes recoverable through loss carryback declines, or if we project lower levels of future taxable income. Such a valuation allowance would be established through a charge to income tax expense which would adversely affect our operating results. At December 31, 2007 the Company had a $2.6 million reserve established against its deferred tax asset. The tax deduction generated by the contribution to the Foundation as part of the Company’s stock offering exceeded the allowable federal income tax deduction limitations resulting in the establishment of this valuation allowance for the contribution carry forward.

Other-than-Temporary Investment Security Impairment. Securities are evaluated periodically to determine whether a decline in their value is other-than-temporary. Management utilizes criteria such as the magnitude and duration of the decline, in addition to the reasons underlying the decline, to determine whether the loss in value is other-than-temporary. The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospect for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements (as such term is defined in applicable Securities and Exchange Commission rules) that are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

Contractual Obligations

During the first three months of 2008, the Company’s contractual obligations have not changed materially from those discussed in the Company’s Financial Statements for the year ended September 30, 2007.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk. Our assets, consisting primarily of mortgage loans, have longer maturities than our liabilities, consisting primarily of deposits and borrowings. As a result, a principal part of our business strategy is to manage interest rate risk and reduce the exposure of our net interest income to changes in market interest rates. Accordingly, our Board of Directors has approved guidelines for managing the interest rate risk inherent in our assets and liabilities, given our business strategy, operating environment, capital, liquidity and performance objectives. Senior management monitors the level of interest rate risk on a regular basis and the asset/liability committee meets quarterly to review our asset/liability policies and interest rate risk position.

We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. The net proceeds from the offering increased our capital and provided management with greater flexibility to manage our interest rate risk. In particular, management used the majority of the capital we received to increase our interest-earning assets. There have been no material changes in our interest rate risk since September 30, 2007.

Item 4.

Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There were no significant changes made in the Company’s internal controls over financial reporting or in other factors that could significantly affect the Company’s internal controls over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II – Other Information

Item 1.

Legal Proceedings

The Company and its subsidiaries are subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s financial condition or results of operations.

Item 1A.

Risk Factors

There have been no material changes in the “Risk Factors” disclosed in the Company’s Annual Report on Form 10-K filed on December 20, 2007.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(a)

There were no sales of unregistered securities during the period covered by this Report.

(b)

The stock offering, which was completed on April 3, 2007, resulted in gross proceeds of $158.7 million, through the sale of 15,870,000 shares at a price of $10.00 per share. The Company also contributed 1,110,900 shares of its common stock to the ESSA Bank & Trust Foundation and $1.6 million in cash. Expenses related to the offering were approximately $2.9 million, including the expenses paid to Ryan, Beck & Co., Inc. No underwriting discounts, commissions or finders fees were paid in connection with the offering. Net proceeds of the offering were approximately $155.8 million prior to the contribution to ESSA Bank & Trust Foundation.

(c)

There were no issuer repurchases of securities during the period covered by this Report.

Item 3.

Defaults Upon Senior Securities

Not applicable.

Item 4.

Submission of Matters to a Vote of Security Holders

During the period covered by this report, the Company did not submit any matters to the vote of security holders.

Item 5.

Other Information

Not applicable.

Item 6.

Exhibits

The following exhibits are either filed as part of this report or are incorporated herein by reference:


3.1		Charter of ESSA Bancorp, Inc. *

3.2		Bylaws of ESSA Bancorp, Inc. *

4		Form of Common Stock Certificate of ESSA Bancorp, Inc.*

10.1		Form of Employee Stock Ownership Plan*

10.2		Form of Employment Agreement for Chief Executive Officer*

10.3		Form of Employment Agreement for Executive Officers*

10.4		Form of Change in Control Agreement*

10.5		[Reserved]

10.6		Supplemental Retirement Plan for Gary S. Olson*

10.7		Supplemental Retirement Plan for Robert S. Howes, Jr.*

10.8		Supplemental Retirement Plan for Diane K. Reimer*

10.9		Supplemental Retirement Plan for Thomas J. Grayuski*

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*	Filed as exhibits to the Company’s Registration Statement on Form S-1, and any amendments thereto, with the Securities and Exchange Commission (Registration No. 333-139157).

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


				ESSA BANCORP, INC.

Date: February 12, 2008				/s/ Gary S. Olson
				Gary S. Olson
				President and Chief Executive Officer

Date: February 12, 2008				/s/ Allan A. Muto
				Allan A. Muto
				Executive Vice President and Chief Financial Officer

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