13.

EMPLOYEE BENEFITS

Employee Stock Ownership Plan ("ESOP")

The Company created an ESOP for the benefit of employees who meet the eligibility requirements, which include having completed one year of service with the Company or its subsidiary and attained age 21. The ESOP trust acquired 1,358,472 shares of the Company's stock from proceeds from a loan with the Company. The Company makes cash contributions to the ESOP on an annual basis sufficient to enable the ESOP to make the required loan payments. Cash dividends paid on allocated shares are distributed to participants and cash dividends paid on unallocated shares are used to repay the outstanding debt of the ESOP. The ESOP trust's outstanding loan bears interest at 3.25 percent and requires an annual payment of principal and interest of $718,000 through December of 2036. The Company's ESOP, which is internally leveraged, does not report the loans receivable extended to the ESOP as assets and does not report the ESOP debt due to the Company.

As the debt is repaid, shares are released from the collateral and allocated to qualified employees based on the proportion of payments made during the year to the remaining amount of payments due on the loan through maturity. Accordingly, the shares pledged as collateral are reported as unallocated common stock held by the ESOP shares in the Consolidated Balance Sheet. As shares are released from collateral, the Company reports compensation expense equal to the current market price of the shares, and the shares become outstanding for earnings-per-share computations. The Company recognized ESOP expense of $555,000, $556,000, and $614,000, for the years ended September 30, 2011, 2010, and 2009, respectively.

The following table presents the components of the ESOP shares:


	2011		2010
Allocated shares	$	181,130	$	135,847
Shares committed to be released		33,962		33,962
Unreleased shares		1,143,380		1,188,663

Total ESOP shares		1,358,472		1,358,472

Fair value of unreleased shares (in thousands)	$	12,017	$	14,074

Equity Incentive Plan

The Company implemented the ESSA Bancorp, Inc. Equity Incentive Plan (the "Plan"). The Plan provides for a total of 2,377,326 shares of common stock for issuance upon the grant or exercise of awards. Of the shares available under the Plan, 1,698,090 may be issued in connection with the exercise of stock options and 679,236 may be issued as restricted stock. The Plan allows for the granting of non-qualified stock options ("NSOs"), incentive stock options ("ISOs"), and restricted stock. Options are granted at no less than the fair value of the Company's common stock on the date of the grant.

Certain officers, employees and outside directors were granted in aggregate 1,140,469 NSOs; 317,910 ISOs; and 590,320 shares of restricted stock. In accordance with generally accepted accounting principles, the Company began to expense the fair value of all share-based compensation grants over the requisite service periods.

The Company classifies share-based compensation for employees and outside directors within "Compensation and employee benefits" in the consolidated statement of income to correspond with the same line item as compensation paid. Additionally, generally accepted accounting principles require the Company to report: (1) the expense associated with the grants as an adjustment to operating cash flows, and (2) any benefits of realized tax deductions in excess of previously recognized tax benefits on compensation expense as a financing cash flow.

Stock options vest over a five-year service period and expire ten years after grant date. Management recognizes compensation expense for the fair values of these awards, which vest on a straight-line basis over the requisite service period of the awards.

Restricted shares vest over a five-year service period. The product of the number of shares granted and the grant date market price of the Company's common stock determines the fair value of restricted shares under the Company's restricted stock plan. Management recognizes compensation expense for the fair value of restricted shares on a straight-line basis over the requisite service period for the entire award.

During the year ended September 30, 2011 and 2010, the Company recorded $2.2 million and $2.1 million, respectively, of share-based compensation expense, consisting of stock option expense of $705,000 and $694,000, respectively, and restricted stock expense of $1.5 million and $1.5 million, respectively. Expected future expense relating to the 577,352 non-vested options outstanding as of September 30, 2011, is $1.1 million over the remaining vesting period of 1.67 years. Expected future compensation expense relating to the 234,425 restricted shares at September 30, 2011, is $2.4 million over the remaining vesting period of 1.67 years.

The following is a summary of the Company's stock option activity and related information for its option plan for the year ended September 30, 2011.


	Number of Stock Options		Weighted- average Exercise Price		Weighted- average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)



Outstanding, September 30, 2010		1,458,379	$	12.35		7.67	$	—
Granted		—		—		—		—
Exercised		—		—		—		—
Forfeited		—		—		—		—

Outstanding, September 30, 2011		1,458,379	$	12.35		6.67	$	—

Exercisable at year-end		881,027	$	12.35		6.67	$	—

The weighted-average grant date fair value of the Company's non-vested options as of September 30, 2011 and 2010, was $2.38.

The following is a summary of the status of the Company's restricted stock as of September 30, 2011, and changes therein during the year then ended:


	Number of Restricted Stock			Weighted- average Grant Date Fair Value



Nonvested at September 30, 2010		352,448		$	12.35
Granted		—			—
Vested		(118,023	)		12.35
Forfeited		—			—

Nonvested at September 30, 2011		234,425		$	12.35

Defined Benefit Plan

The Bank sponsors a trusteed, noncontributory defined benefit pension plan covering substantially all employees and officers. The plan calls for benefits to be paid to eligible employees at retirement based primarily upon years of service with the Bank and compensation rates near retirement. The Bank's funding policy is to make annual contributions, if needed, based upon the funding formula developed by the plan's actuary.

The following table sets forth the change in plan assets and benefit obligation at September 30 (in thousands):


	2011			2010
Change in benefit obligation:
Benefit obligation at beginning of year	$	13,303		$	10,377
Service cost		533			421
Interest cost		698			570
Actuarial gains		575			2,082
Benefits paid		(85	)		(147	)

Benefit obligation at end of year		15,024			13,303

Change in plan assets:
Fair value of plan assets at beginning of year		10,155			7,804
Actual return on plan assets		(113	)		998
Contributions		1,500			1,500
Benefits paid		(85	)		(147	)

Fair value of plan assets at end of year		11,457			10,155

Funded status	$	(3,567	)	$	(3,148	)


Amounts not yet recognized as a component of net periodic pension cost (in thousands):
Amounts recognized in accumulated other comprehensive income consist of:	2011		2010		2009
Net loss	$	7,697	$	6,644	$	5,265
Prior service cost		—		8		18

Total	$	7,697	$	6,652	$	5,283

The accumulated benefit obligation for the defined benefit pension plan was $9,373,000 and $7,676,000 at September 30, 2011 and 2010, respectively.

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


	2011			2010			2009
Service cost	$	533		$	421		$	358
Interest cost		698			570			510
Expected return on plan assets		(769	)		(598	)		(509	)
Amortization of prior service cost		8			10			10
Amortization of unrecognized loss		404			302			202

Net periodic benefit cost	$	874		$	705		$	571

The estimated net loss and prior service cost for the defined benefit pension plans that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost over the next fiscal year are $475,000 and $405,000, respectively.

Weighted-average assumptions used to determine benefit obligations:


	2011			2010
Discount rate		4.75	%		5.25	%
Rate of compensation increase		5.00			5.00

Weighted-average assumptions used to determine net periodic benefit cost for years ended:


	2011			2010			2009
Discount rate		5.25	%		5.50	%		6.00	%
Expected long-term return on plan assets		7.00			7.00			8.00
Rate of compensation increase		5.00			5.00			5.50

The expected long-term rate of return was estimated using market benchmarks by which the plan assets would outperform the market in the future, based on historical experience adjusted for changes in asset allocation and expectations for overall lower future returns on similar investments compared with past periods.

Plan Assets

The following table sets forth by level, within the fair value hierarchy, the plan's financial assets at fair value as of September 30, 2011:


	September 30, 2011
	Level I		Level II		Level III		Total
Assets:
Investment in collective trusts
Fixed income	$	—	$	—	$	4,130	$	4,130
Equity		—		—		7,261		7,261
Investment in short-term investments		66		—		—		66

Total assets at fair value	$	66	$	—	$	11,390	$	11,457

The following table sets forth by level, within the fair value hierarchy, the plan's financial assets at fair value as of September 30, 2011:


	September 30, 2010
	Level I		Level II		Level III		Total
Assets:
Investment in collective trusts
Fixed income	$	—	$	—	$	3,503	$	3,503
Equity		—		—		6,638		6,638

Total assets at fair value	$	—	$	—		10,141	$	10,141

Investments in collective trusts and short-term investments are valued at the net asset value of shares held by the plan.

The table below sets forth a summary of changes in the fair value of the Plan's Level III assets for the years ended September 30, 2011 and 2010.


	Fair Value Measurements Using Significant Unobservable Inputs (Level III)
Beginning Balance October 1, 2009	$	7,772
Total gains or losses (realized/unrealized) relating to instruments still held at the reporting date		972
Purchases, sales, issuances, and settlements (net)		1,397

Ending Balance September 30, 2010		10,141
Total gains or losses (realized/unrealized) relating to instruments still held at the reporting date		(158	)
Purchases, sales, issuances, and settlements (net)		1,407

Ending Balance September 30, 2011	$	11,390

The Bank's defined benefit pension plan weighted-average asset allocations at September 30, by asset category, are as follows:


Asset Category	2011			2010
Cash and fixed income securities		36.0	%		34.1	%
Equity securities		63.4			65.9
Other		0.6			—

Total		100.0	%		100.0	%

The Bank believes that the plan's risk and liquidity position are, in large part, a function of the asset class mix. The Bank desires to utilize a portfolio mix that results in a balanced investment strategy. Two asset classes are outlined, as above. The target allocations of these classes are as follows: equities, 65 percent, and cash and fixed income, 35 percent.

Cash Flows

The Bank expects to contribute $395,000 to its pension plan in 2012.

Estimated future benefit payments, which reflect expected future service, as appropriate, are as follows (in thousands):


2012	$	38
2013		52
2014		69
2015		77
2016		82
2017-2021		2,440

401(k) Plan

The Bank also has a savings plan qualified under Section 401(k) of the Internal Revenue Code, which covers substantially all employees over 21 years of age. Employees can contribute to the plan, but are not required to. Employer contributions were suspended in January 2011. The expense related to the plan for the years ended September 30, 2011, 2010, and 2009, were $65,000, $240,000, and $224,000, respectively.

Supplemental Executive Retirement Plan

The Bank maintains a salary continuation agreement with certain executives of the Bank, which provides for benefits upon retirement to be paid to the executive for no less than 192 months, unless the executive elects to receive the present value of the payments as a lump sum. The Bank has recorded accruals of $677,000 and $687,000, at September 30, 2011 and September 30, 2010, respectively, which represents the estimated present value (using a discount rate of 6.25 percent) of the benefits earned under this agreement.