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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

Quarterly Report Pursuant to Section 13 or 15 (d) of the

Securities Exchange Act of 1934

For Quarter Ended: March 31, 2011

Commission File Number: 0-19345

 

 

ESB FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Pennsylvania   25-1659846

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

600 Lawrence Avenue, Ellwood City, PA   16117
(Address of principal executive offices)   (Zip Code)

(724) 758-5584

(Registrant’s telephone number, including area code)

 

 

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 filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨    Not applicable  x

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”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b2 of the Exchange Act)    Yes  ¨    No  x

Number of shares of common stock outstanding as of April 30, 2011:

 

Common Stock, $0.01 par value   14,872,216 shares
(Class)   (Outstanding)

 

 

 


Table of Contents

ESB FINANCIAL CORPORATION

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION   
Item 1.   

Financial Statements

  
  

Consolidated Statements of Financial Condition as of March 31, 2011 and December 31, 2010 (Unaudited)

     1   
  

Consolidated Statements of Operations for the three months ended March 31, 2011 and 2010 (Unaudited)

     2   
  

Consolidated Statement of Changes in Stockholders’ Equity for the three months ended March 31, 2011 (Unaudited)

     3   
  

Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010 (Unaudited)

     4   
  

Notes to Unaudited Consolidated Financial Statements

     6   
Item 2.   

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

     32   
Item 3.   

Quantitative and Qualitative Disclosures about Market Risk

     43   
Item 4.   

Controls and Procedures

     43   
PART II - OTHER INFORMATION   
Item 1.   

Legal Proceedings

     43   
Item 1A.   

Risk Factors

     43   
Item 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

     43   
Item 3.   

Defaults Upon Senior Securities

     44   
Item 4.   

(Removed and Reserved)

     44   
Item 5.   

Other Information

     44   
Item 6.   

Exhibits

     44   
  

Signatures

  


Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

ESB Financial Corporation and Subsidiaries

Consolidated Statements of Financial Condition

As of March 31, 2011 (Unaudited) and December 31, 2010

(Dollar amounts in thousands)

 

     March 31,
2011
    December 31,
2010
 
Assets     

Cash on hand and in banks

   $ 5,786      $ 5,632   

Interest-earning deposits

     8,831        30,072   

Federal funds sold

     4        3   
                

Cash and cash equivalents

     14,621        35,707   

Securities available for sale; cost of $1,088,275 and $1,050,712

     1,114,556        1,077,672   

Loans receivable, net of allowance for loan losses of $6,597 and $6,547

     638,039        640,887   

Loans held for sale

     —          80   

Accrued interest receivable

     8,941        9,607   

Federal Home Loan Bank (FHLB) stock

     24,792        26,097   

Premises and equipment, net

     14,209        13,882   

Real estate acquired through foreclosure, net

     899        1,083   

Real estate held for investment

     21,525        22,293   

Goodwill

     41,599        41,599   

Intangible assets

     802        895   

Bank owned life insurance

     30,269        30,098   

Securities receivable

     2,187        2,173   

Prepaid expenses and other assets

     12,315        11,794   
                

Total assets

   $ 1,924,754      $ 1,913,867   
                
Liabilities and Stockholders’ Equity     

Liabilities:

    

Deposits

   $ 1,054,731      $ 1,012,645   

FHLB advances

     251,937        290,440   

Repurchase agreements

     363,000        363,000   

Other borrowings

     20,065        15,623   

Junior subordinated notes

     46,393        46,393   

Advance payments by borrowers for taxes and insurance

     2,467        2,441   

Accounts payable for land development

     3,238        3,409   

Accrued expenses and other liabilities

     13,777        12,563   
                

Total liabilities

     1,755,608        1,746,514   
                

Stockholders’ Equity:

    

Preferred stock, $.01 par value, 5,000,000 shares authorized;
none issued

     —          —     

Common stock, $.01 par value, 30,000,000 shares authorized;
16,274,438 and 16,212,600 shares issued; (1)
14,811,756 and 14,440,728 shares outstanding (1)

     138        138   

Additional paid-in capital

     102,240        102,229   

Treasury stock, at cost; 1,462,682 and 1,771,872 shares

     (16,530     (20,412

Unearned Employee Stock Ownership Plan (ESOP) shares

     (5,000     —     

Retained earnings

     73,867        70,605   

Accumulated other comprehensive income, net

     15,163        15,334   
                

Total ESB Financial Corporation’s stockholders’ equity

     169,878        167,894   

Noncontrolling interest

     (732     (541
                

Total stockholders’ equity

     169,146        167,353   
                

Total liabilities and stockholders’ equity

   $ 1,924,754      $ 1,913,867   
                

 

(1) Shares issued and outstanding have been adjusted to reflect the six-for-five stock split declared April 19, 2011.

See accompanying notes to unaudited consolidated financial statements.

 

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Table of Contents

ESB Financial Corporation and Subsidiaries

Consolidated Statements of Operations

For the three months ended March 31, 2011 and 2010 (Unaudited)

(Dollar amounts in thousands, except share data)

 

     Three Months Ended
March 31,
 
     2011     2010  

Interest income:

    

Loans receivable

   $ 8,661      $ 9,522   

Taxable securities available for sale

     9,735        11,160   

Tax free securities available for sale

     1,556        1,438   

Deposits with banks and federal funds sold

     3        2   
                

Total interest income

     19,955        22,122   
                

Interest expense:

    

Deposits

     3,233        3,813   

Borrowed funds

     5,305        6,901   

Junior subordinated notes and guaranteed preferred beneficial interest in subordinated debt

     600        612   
                

Total interest expense

     9,138        11,326   
                

Net interest income

     10,817        10,796   

Provision for loan losses

     300        354   
                

Net interest income after provision for loan losses

     10,517        10,442   
                

Noninterest income:

    

Fees and service charges

     820        912   

Net gain on sale of loans

     7        3   

Increase of cash surrender value of bank owned life insurance

     171        186   

Net realized gain on securities available for sale

    

Total other-than-temporary impairment losses

     —          (309

Portion of loss recognized in other comprehensive income before taxes

     —          —     
                

Net impairment losses on investment securities

     —          (309

Net realized loss on derivatives

     (125     (319

Income (loss) from real estate joint ventures

     464        (444

Other

     152        145   
                

Total noninterest income

     1,489        174   
                

Noninterest expense:

    

Compensation and employee benefits

     4,221        3,824   

Premises and equipment

     724        703   

Federal deposit insurance premiums

     468        478   

Data processing

     572        527   

Amortization of intangible assets

     88        108   

Advertising

     78        120   

Other

     1,031        915   
                

Total noninterest expense

     7,182        6,675   
                

Income before income taxes

     4,824        3,941   

Provision for income taxes

     896        820   
                

Net income before noncontrolling interest

     3,928        3,121   

Less: net income (loss) attributable to the noncontrolling interest

     268        (259
                

Net income attributable to ESB Financial Corporation

   $ 3,660      $ 3,380   
                

Net income per share (1)

    

Basic

   $ 0.25      $ 0.24   

Diluted

   $ 0.25      $ 0.23   

Cash dividends declared per share (1)

   $ 0.08      $ 0.08   

Weighted average shares outstanding (1)

     14,440,697        14,358,559   

Weighted average shares and share equivalents outstanding (1)

     14,553,265        14,423,684   

 

(1) Outstanding shares and per share data have been adjusted to reflect the six-for-five stock split declared April 19, 2011.

See accompanying notes to unaudited consolidated financial statements.

 

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ESB Financial Corporation and Subsidiaries

Consolidated Statement of Changes in Stockholders’ Equity

For the three months ended March 31, 2011 (Unaudited)

(Dollar amounts in thousands)

 

    Common
stock
    Additional
paid-in
capital
    Treasury
stock
    Unearned
ESOP
shares
    Retained
earnings
    Accumulated
other
comprehensive
income,
net of tax
    Noncontrolling
Interest
    Total
stockholders’
equity
 

Balance at January 1, 2011

  $ 138      $ 102,229      $ (20,412   $ —        $ 70,605      $ 15,334      $ (541   $ 167,353   

Comprehensive results:

               

Net income

    —          —          —          —          3,660        —          268        3,928   

Other comprehensive results, net

    —          —          —          —          —          (171     —          (171

Reclassification adjustment

    —          —          —          —          —          —          —          —     
                                                               

Total comprehensive results

    —          —          —          —          3,660        (171     268        3,757   

Cash dividends at $0.08 per share (1)

    —          —          —          —          (1,234     —          —          (1,234

Purchase of treasury stock, at cost (27,305 shares)

    —          —          (374     —          —          —          —          (374

Reissuance of treasury stock for stock option exercises (8,196 shares)

    —          —          105        —          (13     —          —          92   

Compensation expense ESOP

    —          381        —          —          —          —          —          381   

Additional ESOP shares purchased

    —          (381     —          —          —          —          —          (381

Tax effect of compensatory stock options

    —          2        —          —          —          —          —          2   

Purchase of 328,299 shares of treasury stock for ESOP

    —          —          4,151        (5,000     849        —          —          —     

Capital disbursement for noncontrolling interest

    —          —          —          —          —          —          (459     (459

Accrued compensation expense MRP

    —          9        —          —          —          —          —          9   
                                                               

Balance at March 31, 2011

  $ 138      $ 102,240      $ (16,530   $ (5,000   $ 73,867      $ 15,163      $ (732   $ 169,146   
                                                               

 

(1) Per share data has been adjusted to reflect the six-for-five stock split declared April 19, 2011.

See accompanying notes to unaudited consolidated financial statements.

 

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ESB Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows

For the three months ended March 31, 2011 and 2010 (Unaudited)

(Dollar amounts in thousands)

 

     Three months ended
March  31,
 
     2011     2010  

Operating activities:

    

Net income

   $ 3,928      $ 3,121   

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

    

Depreciation and amortization for premises and equipment

     228        223   

Provision for loan losses

     300        354   

Amortization of premiums and accretion of discounts

     570        449   

Origination of loans available for sale

     (325     (228

Proceeds from sale of loans available for sale

     412        383   

Gain on sale of loans available for sale

     (7     (3

Impairment losses on investment securities

     —          309   

Net realized loss on derivatives

     125        319   

Amortization of intangible assets

     88        108   

Compensation expense on ESOP and MRP

     390        322   

Increases in Bank owned life insurance

     (171     (186

Decrease in accrued interest receivable

     666        800   

Decrease in prepaid FDIC assessment

     440        448   

Increase in prepaid expenses and other assets

     (587     (2,159

Increase in accrued expenses and other liabilities

     1,214        243   

Gain on sale of real estate acquired through foreclosure

     (5     (21

Writedown of real estate held for investment

     —          852   

Other

     (425     31   
                

Net cash provided by operating activities

     6,841        5,365   
                

Investing activities:

    

Loan originations

     (42,541     (40,922

Purchases of:

    

Securities available for sale

     (108,618     (54,006

Premises and equipment

     (555     (146

Principal repayments of:

    

Loans receivable

     45,569        43,266   

Securities available for sale

     70,659        55,159   

Proceeds from the sale of:

    

Real estate acquired through foreclosure

     150        231   

Redemption of FHLB stock

     1,305        —     

Funding of real estate held for investment

     (2,074     (2,276

Proceeds from real estate held for investment

     2,017        1,693   
                

Net cash (used in) provided by investing activities

     (34,088     2,999   
                

Financing activities:

    

Net increase in deposits

     42,086        34,690   

Proceeds from long-term borrowings

     7,198        42,993   

Repayments of long-term borrowings

     (50,000     (70,000

Net increase (decrease) in short-term borrowings

     8,741        (16,094

Proceeds received from exercise of stock options

     94        92   

Dividends paid

     (1,203     (1,204

Payments to acquire treasury stock

     (374     (101

Stock purchased by ESOP

     (381     (78
                

Net cash provided by (used in) financing activities

     6,161        (9,702
                

Net decrease in cash equivalents

     (21,086     (1,338

Cash equivalents at beginning of period

     35,707        16,300   
                

Cash equivalents at end of period

   $ 14,621      $ 14,962   
                

 

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ESB Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows, (Continued)

For the three months ended March 31, 2011 and 2010 (Unaudited)

(Dollar amounts in thousands)

 

     Three months ended
March 31,
 
     2011      2010  

Supplemental information:

     

Interest paid

   $ 9,118       $ 11,164   

Income taxes paid

     518         311   

Supplemental schedule of non-cash investing and financing activities:

     

Transfers from loans receivable to real estate acquired through foreclosure

     —           192   

Transfers from loan originations to proceeds on real estate held for investment

     654         905   

Dividends declared but not paid

     1,267         1,204   

Securities receivable

     2,187         13,844   

See accompanying notes to unaudited consolidated financial statements.

 

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ESB Financial Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

 

1. Summary of Significant Accounting Policies

Principles of Consolidation

ESB Financial Corporation (the Company) is a publicly traded Pennsylvania thrift holding company. The consolidated financial statements include the accounts of the Company and its direct and indirect wholly-owned subsidiaries, which are ESB Bank (ESB or the Bank), THF, Inc. (THF), ESB Financial Services, Inc. (EFS) and AMSCO, Inc. (AMSCO). ESB is a Pennsylvania chartered, Federal Deposit Insurance Corporation (FDIC) insured stock savings bank.

AMSCO is engaged in real estate development and construction of 1-4 family residential units independently or in conjunction with its joint ventures. AMSCO is currently involved in nine real estate joint ventures, all of which are owned 51% or greater by AMSCO. The Bank has provided all development and construction financing. These joint ventures have been included in the consolidated financial statements and reflected within the consolidated statements of financial condition as real estate held for investment and related operating income and expenses reflected within other non-interest income or expense. The Bank’s loans to AMSCO and related interest have been eliminated in consolidation.

In addition to the elimination of the loans and interest to the joint ventures described above, all other significant intercompany transactions and balances have been eliminated in consolidation.

Basis of Presentation

The accompanying unaudited consolidated financial statements for the interim periods include all adjustments, consisting only of normal recurring accruals, which are necessary, in the opinion of management, to fairly reflect the Company’s financial position and results of operations. Additionally, these consolidated financial statements for the interim periods have been prepared in accordance with instructions for the Securities and Exchange Commission’s Form 10-Q and therefore do not include all information or footnotes necessary for a complete presentation of financial condition, results of operations and cash flows in conformity with U.S. generally accepted accounting principles (GAAP). For further information, refer to the audited consolidated financial statements and footnotes thereto for the year ended December 31, 2010, as contained in the Company’s 2010 Annual Report to Stockholders.

The results of operations for the three month period ended March 31, 2011 is not necessarily indicative of the results that may be expected for the entire year. Certain amounts previously reported have been reclassified to conform to the current periods’ reporting format, such reclassifications did not have an effect on stockholders’ equity or net income.

The accounting principles followed by the Company and the methods of applying these principles conform with GAAP and with 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 Statement of Financial Condition date and revenues and expenses for the period. Actual results could differ significantly from those estimates.

Operating Segments

An operating segment is defined as a component of an enterprise that engages in business activities that generate revenue and incur expense, the operating results of which are reviewed by management. At March 31, 2011, the Company was doing business through 24 full service banking branches, one loan production office and through its various other subsidiaries. Loans and deposits are primarily generated from the areas where banking branches are located. The Company derives its income predominantly from interest on loans and securities and to a lesser extent, non-interest income. The Company’s principal expenses are interest paid on deposits and borrowed funds and normal operating costs. The Company’s operations are

 

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principally in the banking industry. Consistent with internal reporting, the Company’s operations are reported in one operating segment, which is community banking.

Stock Based Compensation

During the three months ended March 31, 2011 and March 31, 2010, the Company recorded approximately $100,000 and $71,000 respectively, in compensation expense and a tax benefit of $6,535 and $4,800 respectively, related to its share-based compensation awards that are expected to vest in 2011. As of March 31, 2011, there was approximately $725,000 of unrecognized compensation cost related to unvested share-based compensation awards granted. That cost is expected to be recognized over the next four years.

As required by GAAP, cash flows from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for stock-based awards (excess tax benefits) are classified as financing cash flows.

Financial Instruments

As part of its overall interest rate risk management activities, the Company utilizes derivative instruments to manage its exposure to various types of interest rate risk. Interest rate swaps and interest rate caps are the primary instruments the Company uses for interest rate risk management. Derivative instruments are recorded at fair value as either part of prepaid expenses and other assets or accrued expenses and other liabilities on the consolidated statements of financial condition. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.

The Company formally documents the relationship between the hedging instruments and hedged items, as well as the risk management objective and strategy, before undertaking an accounting hedge. To qualify for hedge accounting, the derivatives and related hedged items must be designated as a hedge at inception of the hedge relationship. For accounting hedge relationships, we formally assess, both at the inception of the hedge and on an ongoing basis, if the derivatives are highly effective in offsetting designated changes in the fair value or cash flows of the hedged item. If it is determined that the derivative instrument is not highly effective, hedge accounting is discontinued.

For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized in earnings. To the extent the change in fair value of the derivative does not offset the change in fair value of the hedged item, the difference or ineffectiveness is reflected in earnings in the same financial statement category as the hedged item.

For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in OCI and subsequently reclassified to earnings when the hedged transaction affects earnings and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. The Company assesses the effectiveness of each hedging relationship by comparing the changes in fair value or cash flows of the derivative hedging instrument with the changes in fair value or cash flows of the designated hedged item or transaction. For derivatives not designated as hedges, changes in fair value are recognized in earnings.

At March 31, 2011 there were fifteen interest rate cap contracts outstanding with notional amounts totaling $150.0 million. These derivative instruments are not hedged and therefore adjustments to fair value are recorded in current earnings.

During the second and third quarters of fiscal year 2009, the Company entered into two interest rate swap contracts to manage its exposure to interest rate risk. These interest rate swap transactions involved the exchange of the Company’s interest payment on $35.0 million in junior subordinated notes which become

 

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floating rate notes in 2011 for a fixed rate interest payment without the exchange of the underlying principal amount. Entering into interest rate derivatives potentially exposes the Company to the risk of counterparties’ failure to fulfill their legal obligations including, but not limited to, potential amounts due or payable under each derivative contract. Notional principal amounts are often used to express the volume of these transactions, but the amounts potentially subject to credit risk are much smaller. Management utilizes the Change in Variable Cash Flows Method to measure hedge ineffectiveness. To the extent that the cumulative change in anticipated cash flows from the hedging derivative offsets from 80% to 125% of the cumulative change in anticipated cash flows from the hedged exposure, the hedged is deemed effective. As of March 31, 2011 the interest rate swaps were deemed to be effective, therefore no amounts were charged to current earnings. The Company also does not expect to reclassify any hedge related amounts from OCI to earnings over the next twelve months.

The pay fixed interest rate swap contract outstanding at March 31, 2011 is being utilized to hedge $35.0 million in floating rate junior subordinated notes. Below is a summary of the interest rate swap contract and the terms at March 31, 2011:

 

     Notional      Effective      Pay     Receive     Maturity      Unrealized  

(Dollars in thousands)

   Amount      Date      Rate     Rate (*)     Date      Gain      Loss  

Cash Flow Hedge

   $ 20,000         2/10/2011         4.18     0.31     2/10/2018         —         $ 1,568   

Cash Flow Hedge

     15,000         2/10/2011         3.91     0.31     2/10/2018         —           914   
                                    
   $ 35,000                   —         $ 2,482   
                                    

 

* Variable receive rate based upon contract rates in effect at March 31, 2011

Recent Accounting and Regulatory Pronouncements

In April 2011, the FASB issued ASU 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The amendments in this Update provide additional guidance or clarification to help creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. The amendments in this Update are effective for the first interim or annual reporting period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning annual period of adoption. As a result of applying these amendments, an entity may identify receivables that are newly considered impaired. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In July 2010, the FASB issued ASU No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU 2010-20 is intended to provide additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. The disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The amendments in ASU 2010-20 encourage, but do not require, comparative disclosures for earlier reporting periods that ended before initial adoption. However, an entity should provide comparative disclosures for those reporting periods ending after initial adoption. The Company has presented the necessary disclosures in footnote 3 “Loans Receivable”.

In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. ASU 2010-06 amends Subtopic 820-10 to clarify existing disclosures, require new disclosures, and includes conforming amendments to guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2010-06 is effective for interim and

 

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annual periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The Company has presented the necessary disclosures in footnote 9 “Fair Value”.

Reclassifications

Certain amounts in the 2010 financial statements have been reclassified to conform to the 2011 presentation format. These reclassifications had no effect on stockholders’ equity or net income.

 

2. Securities

The Company’s securities available for sale portfolio is summarized as follows:

 

(Dollar amounts in thousands)

   Amortized
cost
     Unrealized
gains
     Unrealized
losses
    Fair
value
 

March 31, 2011:

          

Trust preferred securities

   $ 46,468       $ 134       $ (6,595   $ 40,007   

Municipal securities

     168,909         2,413         (3,788     167,534   

Equity securities

     2,022         523         (13     2,532   

Corporate bonds

     101,475         3,693         —          105,168   

Mortgage-backed securities

          

U.S. sponsored entities

     757,972         31,712         (2,232     787,452   

Private label

     11,429         450         (16     11,863   
                                  

Subtotal mortgage-backed securities

     769,401         32,162         (2,248     799,315   
                                  

Total securities

   $ 1,088,275       $ 38,925       $ (12,644   $ 1,114,556   
                                  

December 31, 2010:

          

Trust preferred securities

   $ 46,467       $ 116       $ (7,607   $ 38,976   

Municipal securities

     165,479         2,040         (4,342     163,177   

Equity securities

     1,424         434         (8     1,850   

Corporate bonds

     118,862         3,800         —          122,662   

Mortgage-backed securities

          

U.S. sponsored entities

     706,034         33,752         (1,524     738,262   

Private label

     12,446         463         (164     12,745   
                                  

Subtotal mortgage-backed securities

     718,480         34,215         (1,688     751,007   
                                  

Total securities

   $ 1,050,712       $ 40,605       $ (13,645   $ 1,077,672   
                                  

 

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The following table shows the Company’s investments gross unrealized losses and fair value aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2011:

 

As of March 31, 2011                                                               
(Dollar amounts in thousands)    Less than 12 Months      12 Months or more      Total  
      # of
Securities
     Fair Value      Unrealized
losses
     # of
Securities
     Fair Value      Unrealized
losses
     # of
Securities
     Fair Value      Unrealized
losses
 

Trust preferred securities

     —         $ —         $ —           9       $ 37,876       $ 6,595         9       $ 37,876       $ 6,595   

Municipal securities

     69         54,843         2,509         21         21,231         1,279         90         76,074         3,788   

Equity securities

     —           —           —           1         125         13         1         125         13   

Mortgage-backed securities

                          

U.S. sponsored entities

     40         172,473         2,229         1         1,456         3         41         173,929         2,232   

Private label

     —           —           —           1         1,600         16         1         1,600         16   
                                                                                

Subtotal mortgage-backed securities

     40         172,473         2,229         2         3,056         19         42         175,529         2,248   
                                                                                

Total

     109       $ 227,316       $ 4,738         33       $ 62,288       $ 7,906         142       $ 289,604       $ 12,644   
                                                                                

The following table shows the Company’s investments gross unrealized losses and fair value aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2010:

 

As of December 31, 2010                                                               
(Dollar amounts in thousands)    Less than 12 Months      12 Months or more      Total  
      # of
Securities
     Fair Value      Unrealized
losses
     # of
Securities
     Fair Value      Unrealized
losses
     # of
Securities
     Fair Value      Unrealized
losses
 

Trust preferred securities

     —         $ —         $ —           10       $ 37,360       $ 7,607         10       $ 37,360       $ 7,607   

Municipal securities

     85         67,411         2,750         21         19,773         1,592         106         87,184         4,342   

Equity securities

     —           —           —           1         130         8         1         130         8   

Mortgage-backed securities

                          

U.S. sponsored entities

     21         87,741         1,524         —           —           —           21         87,741         1,524   

Private label

     —           —           —           3         3,914         164         3         3,914         164   
                                                                                

Subtotal mortgage-backed securities

     21         87,741         1,524         3         3,914         164         24         91,655         1,688   
                                                                                

Total

     106       $ 155,152       $ 4,274         35       $ 61,177       $ 9,371         141       $ 216,329       $ 13,645   
                                                                                

The Company primarily invests in mortgage-backed securities, variable and fixed rate corporate bonds, municipal bonds, government bonds and to a lesser extent equity securities. The policy of the Company is to recognize other than temporary impairment (OTTI) on equity securities where the fair value has been significantly below cost for three consecutive quarters. Declines in the fair value of the debt securities that can be attributed to specific adverse conditions affecting the credit quality of the investment would be recorded as OTTI and charged to earnings. In order to determine if a decline in fair value is other than temporary, the Company reviews corporate ratings of the investment, analyst reports and SEC filings of the issuers. For fixed maturity investments with unrealized losses due to interest rates where the Company expects to recover the entire amortized cost basis of the security, declines in value below cost are not assumed to be other than temporary. The Company reviews its position quarterly and has asserted that at

 

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March 31, 2011, the declines outlined in the above table represent temporary declines due to changes in interest rates and are not reflections of impairment in the credit quality of the securities. Additionally, the Company does not intend to sell the investment and it is not more likely than not that the Company will be required to sell the investment before recovery of its amortized cost basis.

The Company reviews investment debt securities on an ongoing basis for the presence of OTTI with formal reviews performed quarterly. Credit-related OTTI losses on individual securities are recognized in earnings while noncredit-related OTTI on securities not expected to be sold is recognized in accumulated other comprehensive income. There were no OTTI charges during the quarter ended March 31, 2011.

One pooled trust preferred security has previously been determined to be other than temporarily impaired due solely to credit related factors. This security is a collateralized debt obligation currently comprised of trust preferred securities of 16 financial institutions and has a Moody’s rating of Ca, which is below investment grade. The Company utilized a discounted cash flow method to determine the amount of impairment. During this analysis, the Company determined that seven of these financial institutions are currently deferring interest payments. In addition, two financial institutions have defaulted. Currently seven of the sixteen financial institutions are performing. Five of the seven financial institutions that are deferring interest payments as of March 2011 either lost money or broke even for the most recently reported quarter. Four of the seven financial institutions on deferral had a Tier 1 Risk Ratio at or less than the required well capitalized institution level under prompt corrective action provisions of 6%. Also, there were six financial institutions (including five of the seven deferrals) within this pool that the non-performing assets to loans plus real estate owned ratio was greater than 10%. However, during the fourth quarter of 2010, two financial institutions that are currently deferring interest payments were able to raise capital to further strengthen their capital positions. The Company has factored this into the current quarter analysis and has found no additional credit impairment as of March 31, 2011.

Because of the subprime crisis current markets for variable rate corporate trust preferred securities are illiquid. This includes the Company’s nine stand alone trust preferred securities and the Company’s one pooled trust preferred security. The Company used a discounted cash flow method to price these securities due to the lack of liquidity for resale of this investment type and the absence of reliable pricing information. This method is described more fully in footnote 9, “Fair Value”.

The following table summarizes scheduled maturities of the Company’s securities as of March 31, 2011 and December 31, 2010 excluding equity securities which have no maturity dates:

 

As of March 31, 2011                    
(Dollar amounts in thousands)    Available for sale  
     Weighted
Average Yield
    Amortized
cost
     Fair
value
 

Due in one year or less

     3.77   $ 26,807       $ 27,191   

Due from one year to five years

     5.14     64,329         68,202   

Due from five to ten years

     4.90     116,599         122,128   

Due after ten years

     4.06     878,518         894,503   
                         
     4.21   $ 1,086,253       $ 1,112,024   
                         

 

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As of December 31, 2010                    
(Dollar amounts in thousands)    Available for sale  
     Weighted
Average Yield
    Amortized
cost
     Fair
value
 

Due in one year or less

     5.24   $ 39,276       $ 39,865   

Due from one year to five years

     5.05     68,296         72,037   

Due from five to ten years

     4.86     124,832         130,678   

Due after ten years

     4.08     816,884         833,242   
                         
     4.28   $ 1,049,288       $ 1,075,822   
                         

For purposes of the maturity table, mortgage backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on weighted-average contractual maturities of underlying collateral. The mortgage-backed securities may mature earlier than their weighted-average contractual maturities because of principal prepayments.

 

3. Loans Receivable

The Company’s loans receivable as of the respective dates are summarized as follows:

 

(In thousands)

   March 31,
2011
    December 31,
2010
 

Mortgage loans:

    

Residential real estate

    

Single family

   $ 311,202      $ 314,051   

Multi family

     31,897        30,091   

Construction

     47,220        48,687   
                

Total residential real estate

     390,319        392,829   

Commercial real estate

    

Commercial

     82,194        82,347   

Construction

     12,793        9,701   
                

Total commercial real estate

     94,987        92,048   
                

Subtotal mortgage loans

     485,306        484,877   
                

Other loans:

    

Consumer loans

    

Home equity loans

     71,532        71,645   

Dealer auto and RV loans

     49,530        50,781   

Other loans

     9,777        9,960   
                

Total consumer loans

     130,839        132,386   

Commercial business

     42,787        40,431   
                

Subtotal other loans

     173,626        172,817   
                

Total loans receivable

     658,932        657,694   

Less:

    

Allowance for loan losses

     6,597        6,547   

Deferred loan fees and net discounts

     (2,004     (1,983

Loans in process

     16,300        12,243   
                

Net loans receivable

   $ 638,039      $ 640,887   
                

Loans held for sale

    

Mortgage loans:

    

Residential - single family

   $ —        $ 80   
                

 

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At March 31, 2011 and December 31, 2010, the Company conducted its business through 24 offices in Allegheny, Beaver, Butler and Lawrence counties in Pennsylvania which also serves as its primary lending area. Management does not believe it has significant concentrations of credit risk to any one group of borrowers given its underwriting and collateral requirements.

Management has an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. For purposes of determining the allowance for loan losses, the Company has segmented certain loans in the portfolio by product type. Loans are segmented into the following pools: commercial business loans, commercial real estate loans, residential real estate loans and consumer loans. The Company sub-segments residential real estate loans into the following three classes: single family, construction and multi-family. Commercial real estate is sub-segmented into commercial and construction classes. The Company also sub-segments the consumer loan portfolio into the following three classes: home equity, dealer automobile and recreational vehicle (RV) and other consumer loans. Historical loss percentages for each risk category are calculated and used as the basis for calculating allowance allocations. These historical loss percentages are calculated over a three year period for all portfolio segments. Certain qualitative factors are then added to the historical loss percentages to get the adjusted factor to be applied to non classified loans. The following qualitative factors are analyzed for each portfolio segment:

 

   

Levels of and trends in delinquencies and nonaccruals

 

   

Changes in lending policies and procedures

 

   

Volatility of losses within each risk category

 

   

Loans and Lending staff acquired through acquisition

 

   

Economic trends

 

   

Concentrations of credit

 

   

Trends in volume and terms

 

   

Experience depth and ability of management

These qualitative factors are reviewed each quarter and adjusted based upon relevant changes within the portfolio. During the first quarter of 2011, the qualitative factors for changes in levels of and trends in delinquencies were increased for residential mortgages, commercial real estate and commercial business loans. Changes in portfolio volumes during 2011 resulted in a reduction to the related factors for all residential real estate loans.

In terms of the Company’s loan portfolio, the consumer, commercial business and commercial real estate loans are deemed to have more risk than the residential real estate loans in the portfolio. The commercial loans not secured by real estate are highly dependent on the borrowers’ financial condition and are more dependent on economic conditions. The commercial loans secured by real estate are also dependent on economic conditions but generally have stronger forms of collateral. Within the consumer loan portfolio, the dealer auto and RV loans have historically carried more risk than the other segments of the consumer portfolio.

Loans by Segment

The total allowance reflects management’s estimate of loan losses inherent in the loan portfolio at the balance sheet date. The Company considers the allowance for loan losses of $6.6 million adequate to cover loan losses inherent in the loan portfolio, at March 31, 2011. The following tables present by portfolio segment, the changes in the allowance for loan losses and the recorded investment in loans for the periods ended March 31, 2011 and December 31, 2010. The table reflects two primary differences between the periods. The commercial loans evaluated for impairment were reduced as a result of a settlement in regards to a loan to a local automobile dealer. The residential loans evaluated for impairment were impacted by a loan to a local developer to construct 1-4 family residences, which became delinquent during the quarter:

 

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As of March 31, 2011                                        
(Dollar amounts in thousands)    Commercial     Commercial
Real Estate
     Consumer     Residential      Unallocated      Total  

Allowance for loan losses:

               

Beginning balance

   $ 784      $ 1,831       $ 1,125      $ 2,573       $ 234       $ 6,547   

Charge-offs

     177        —           133        —           —           310   

Recoveries

     12        —           48        —           —           60   

Provision

     —          —           125        100         75         300   

Reallocations

     (281     180         (11     3         109         —     
                                                   

Ending Balance

   $ 338      $ 2,011       $ 1,154      $ 2,676       $ 418       $ 6,597   
                                                   

Ending balance: individually evaluated for impairment

   $ 2      $ 850       $ 51      $ 271       $ —         $ 1,174   
                                                   

Ending balance: collectively evaluated for impairment

   $ 336      $ 1,175       $ 1,103      $ 2,405       $ 418       $ 5,423   
                                                   

Ending balance: loans acquired with deteriorated credit quality

   $ —        $ —         $ —        $ —         $ —         $ —     
                                                   

Loans Receivable:

               

Ending Balance

   $ 42,787      $ 94,987       $ 130,839      $ 390,319       $ —         $ 658,932   
                                                   

Ending balance: individually evaluated for impairment

   $ 109      $ 8,505       $ 155      $ 2,436       $ —         $ 11,205   
                                                   

Ending balance: collectively evaluated for impairment

   $ 42,678      $ 86,482       $ 130,684      $ 387,883       $ —         $ 647,727   
                                                   

Ending balance: loans acquired with deteriorated credit quality

   $ —        $ —         $ —        $ —         $ —         $ —     
                                                   

 

As of December 31, 2010                                        
(Dollar amounts in thousands)    Commercial     Commercial
Real Estate
     Consumer      Residential      Unallocated     Total  

Allowance for loan losses:

               

Beginning balance

   $ 864      $ 1,620       $ 1,093       $ 2,206       $ 244      $ 6,027   

Charge-offs

     58        168         583         177         —          986   

Recoveries

     1        —           98         3         —          102   

Provision

     365        350         464         225         —          1,404   

Reallocations

     (388     29         53         316         (10     —     
                                                   

Ending Balance

   $ 784      $ 1,831       $ 1,125       $ 2,573       $ 234      $ 6,547   
                                                   

Ending balance: individually evaluated for impairment

   $ 472      $ 839       $ 47       $ —         $ —        $ 1,358   
                                                   

Ending balance: collectively evaluated for impairment

   $ 312      $ 992       $ 1,078       $ 2,573       $ 234      $ 5,189   
                                                   

Ending balance: loans acquired with deteriorated credit quality

   $ —        $ —         $ —         $ —         $ —        $ —     
                                                   

Loans Receivable:

               

Ending Balance

   $ 40,431      $ 92,048       $ 132,386       $ 392,829       $ —        $ 657,694   
                                                   

Ending balance: individually evaluated for impairment

   $ 837      $ 8,432       $ 155       $ —         $ —        $ 9,424   
                                                   

Ending balance: collectively evaluated for impairment

   $ 39,594      $ 83,616       $ 132,231       $ 392,829       $ —        $ 648,270   
                                                   

Ending balance: loans acquired with deteriorated credit quality

   $ —        $ —         $ —         $ —         $ —        $ —     
                                                   

 

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The following is a summary of the changes in the allowance for loan losses for the periods ended March 31, 2011 and 2010:

 

(Dollar amounts in thousands)

   2011     2010  

Balance, January 1,

   $ 6,547      $ 6,027   

Provision for loan losses

     300        354   

Charge offs

     (310     (272

Recoveries

     60        26   
                

Balance March 31,

   $ 6,597      $ 6,135   
                

Credit Quality Information

The following tables represent credit exposures by internally assigned grades as of March 31, 2011 and December 31, 2010. The grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all. The Company’s internal credit risk grading system is based on experiences with similarly graded loans.

The Company’s internally assigned grades are as follows:

Pass – loans which are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral.

Special Mention – loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected.

Substandard – loans that have a well-defined weakness based on objective evidence and be characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful – loans classified as doubtful have all the weaknesses inherent in a substandard asset. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances.

Loss – loans classified as a loss are considered uncollectible, or of such value that continuance as an asset is not warranted.

 

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As of March 31, 2011                                   
(Dollar amounts in thousands)    Residential
Real Estate
Multi - family
     Residential
Real Estate
Construction
     Commercial
Real Estate
Commercial
     Commercial
Real Estate
Construction
     Commercial  

Pass

   $ 31,897       $ 38,946       $ 71,794       $ 12,793       $ 42,631   

Special Mention

     —           5,762         1,930         —           59   

Substandard

     —           2,241         8,470         —           97   

Doubtful

     —           —           —           —           —     

Loss

     —           271         —           —           —     
                                            

Ending Balance

   $ 31,897       $ 47,220       $ 82,194       $ 12,793       $ 42,787   
                                            

 

As of December 31, 2010                                   
(Dollar amounts in thousands)    Residential
Real Estate
Multi - family
     Residential
Real Estate
Construction
     Commercial
Real Estate
Commercial
     Commercial
Real Estate
Construction
     Commercial  

Pass

   $ 30,091       $ 41,302       $ 71,999       $ 9,701       $ 39,483   

Special Mention

     —           4,876         1,863         —           75   

Substandard

     —           2,509         8,485         —           403   

Doubtful

     —           —           —           —           —     

Loss

     —           —           —           —           470   
                                            

Ending Balance

   $ 30,091       $ 48,687       $ 82,347       $ 9,701       $ 40,431   
                                            

The following tables present performing and nonperforming single family residential and consumer loans based on payment activity as of March 31, 2011 and December 31, 2010. Payment activity is reviewed by management on a monthly basis to determine how loans are performing. Loans are considered to be nonperforming when they become 90 days delinquent.

 

As of March 31, 2011                            
(Dollar amounts in thousands)    Residential
Real Estate
Single Family
     Consumer
Home Equity
     Dealer
Auto and RV
     Other
Consumer
 

Performing

   $ 307,066       $ 70,918       $ 49,295       $ 9,647   

Nonperforming

     4,136         614         235         130   
                                   

Total

   $ 311,202       $ 71,532       $ 49,530       $ 9,777   
                                   

 

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As of December 31, 2010                            
(Dollar amounts in thousands)    Residential
Real Estate
Single Family
     Consumer
Home Equity
     Dealer
Auto and RV
     Other
Consumer
 

Performing

   $ 311,092       $ 71,011       $ 50,563       $ 9,889   

Nonperforming

     2,959         634         218         71   
                                   

Total

   $ 314,051       $ 71,645       $ 50,781       $ 9,960   
                                   

Nonperforming loans also include certain loans that have been modified in TDRs where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months.

Non-performing loans, which include non-accrual loans and TDRs, were $16.2 million and $13.2 million at March 31, 2011 and December 31, 2010. The TDRs amounted to $7.5 million at March 31, 2011 and December 31, 2010. The Company is not committed to lend additional funds to debtors whose loans are on non-accrual status.

Age Analysis of Past Due Loans Receivable by Class

Following tables are an aging analysis of the investment of past due loans receivable as of March 31, 2011 and December 31, 2010.

 

(Dollar amounts in thousands)                                              Recorded
Investment >
 
As of March 31, 2011    30-59 Days
Past Due
     60-89 Days
Past Due
     90 Days
Or Greater
     Total Past
Due
     Current      Total Loans
Receivable
     90 Days and
Accruing
 

Residential real estate

                    

Single family

   $ 1,661       $ 36       $ 4,136       $ 5,833       $ 305,369       $ 311,202       $ —     

Construction

     —           —           2,436         2,436         44,784         47,220         —     

Multi-family

     130         —           —           130         31,767         31,897         —     

Commercial Real Estate

                    

Commercial

     494         88         1,192         1,774         80,420         82,194         —     

Construction

     —           —           —           —           12,793         12,793         —     

Consumer

                    

Consumer - home equity

     35         —           459         494         71,038         71,532         —     

Consumer - dealer auto and RV

     430         73         235         738         48,792         49,530         —     

Consumer - other

     26         65         130         221         9,556         9,777         —     

Commercial

     2         —           109         111         42,676         42,787         —     
                                                              

Total

   $ 2,778       $ 262       $ 8,697       $ 11,737       $ 647,195       $ 658,932       $ —     
                                                              

 

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Table of Contents
(Dollar amounts in thousands)                                                 
As of December 31, 2010    30-59 Days
Past Due
     60-89 Days
Past Due
     90 Days
Or Greater
     Total Past
Due
     Current      Total Loans
Receivable
     Investment >
90 Days and
Accruing
 

Residential real estate

                    

Single family

   $ 2,440       $ 879       $ 2,959       $ 6,278       $ 307,773       $ 314,051       $ —     

Construction

     —           2,431         13         2,444         46,243         48,687         —     

Multi-family

     —           —           —           —           30,091         30,091         —     

Commercial Real Estate

                    

Commercial

     133         48         1,106         1,287         81,060         82,347         —     

Construction

     —           —           —           —           9,701         9,701         —     

Consumer

                    

Consumer - home equity

     181         58         479         718         70,927         71,645         —     

Consumer - dealer auto and RV

     872         219         218         1,309         49,472         50,781         —     

Consumer - other

     48         83         71         202         9,758         9,960         —     

Commercial

     26         —           837         863         39,568         40,431         —     
                                                              

Total

   $ 3,700       $ 3,718       $ 5,683       $ 13,101       $ 644,593       $ 657,694       $ —     
                                                              

Impaired Loans

Management considers commercial loans and commercial real estate loans which are 90 days or more past due to be impaired. Larger commercial loans and commercial real estate loans which are 60 days or more past due are selected for impairment testing in accordance with GAAP. These loans are analyzed to determine if it is probable that all amounts will not be collected according to the contractual terms of the loan agreement. If management determines that the fair value of the impaired loan is less than the recorded investment in the loan, impairment is recognized through a provision for loan loss estimate or a charge-off to the allowance for loan losses. The Company collectively reviews all residential real estate and consumer loans for impairment.

The following tables are the recorded investment and unpaid principal balances for impaired loans receivable as of March 31, 2011 and December 31, 2010 with the associated allowance for loan losses amount, if applicable.

 

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Table of Contents
(Dollar amounts in thousands)                                   
As of March 31, 2011    Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded:

              

Commercial real estate

              

Commercial real estate

   $ 1,152       $ 1,259       $ —         $ 1,159       $ 6   

Commercial business loans

     93         140         —           112         2   

With an allowance recorded:

              

Residential real estate

              

Construction

     2,436         2,436         271         1,825         —     

Commercial real estate

              

Commercial real estate

     7,353         7,353         850         7,318         138   

Consumer loans

              

Home equity

     155         155         51         155         2   

Commercial business loans

     17         17         2         354         —     

Total:

              

Residential Real Estate

     2,436         2,436         271         1,825         —     

Commercial Real Estate

     8,505         8,612         850         8,477         144   

Consumer

     155         155         51         155         2   

Commercial

     109         157         2         466         2   
(Dollar amounts in thousands)                                   
As of December 31, 2010    Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded:

              

Commercial real estate

              

Commercial real estate

   $ 1,162       $ 1,269       $ —         $ 732       $ 57   

Commercial business loans

     145         192         —           195         4   

With an allowance recorded:

              

Commercial real estate

              

Commercial real estate

     7,270         7,270         839         1,198         564   

Consumer loans

              

Home equity

     155         155         47         24         10   

Commercial business loans

     692         692         472         75         21   

Total:

              

Commercial Real Estate

     8,432         8,539         839         1,930         621   

Consumer

     155         155         47         24         10   

Commercial

     837         884         472         270         25   

 

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Table of Contents

Nonaccrual Loans

Loans are considered nonaccrual upon reaching 90 days delinquency, although the Company may be receiving partial payments of interest and partial repayments of principal on such loans. When a loan is placed in nonaccrual status, previously accrued but unpaid interest is deducted from interest income.

On the following table are the loans receivable on nonaccrual status as of March 31, 2011 and December 31, 2010. The balances are presented by class of loans:

 

(Dollar amounts in thousands)    March 31,
2011
     December 31,
2010
 

Commercial

   $ 109       $ 837   

Commercial Real Estate

     8,505         8,432   

Consumer

     

Consumer - Home Equity

     614         634   

Consumer - Dealer auto and RV

     235         218   

Consumer - other

     130         71   

Residential

     6,572         2,959   
                 

Total

   $ 16,165       $ 13,151   
                 

 

4. Deposits

The Company’s deposits as of the respective dates are summarized as follows:

 

(Dollar amounts in thousands)    March 31, 2011     December 31, 2010  

Type of accounts

   Amount      %     Amount      %  

Noninterest-bearing deposits

   $ 85,487         8.1   $ 84,272         8.3

NOW account deposits

     139,839         13.3     128,020         12.6

Money Market deposits

     36,444         3.5     32,759         3.2

Passbook account deposits

     150,042         14.1     136,730         13.6

Time deposits

     642,919         61.0     630,864         62.3
                                  
   $ 1,054,731         100.0   $ 1,012,645         100.0
                                  

Time deposits mature as follows:

          

Within one year

   $ 378,457         58.9   $ 410,474         65.1

After one year through two years

     125,742         19.6     96,689         15.3

After two years through three years

     63,073         9.8     62,428         9.9

After three years through four years

     37,566         5.8     28,949         4.6

After four years through five years

     33,551         5.2     28,384         4.5

Thereafter

     4,530         0.7     3,940         0.6
                                  
   $ 642,919         100.0   $ 630,864         100.0
                                  

 

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5. Borrowed Funds

The Company’s borrowed funds as of the respective dates are summarized as follows:

 

(Dollar amounts in thousands)    March 31, 2011      December 31, 2010  
      Weighted
average
rate
    Amount      Weighted
average
rate
    Amount  

FHLB advances:

         

Due within 12 months

     2.29   $ 61,850         2.87   $ 71,866   

Due beyond 12 months but within 2 years

     2.95     21,755         2.80     30,684   

Due beyond 2 years but within 3 years

     3.56     83,082         3.62     72,647   

Due beyond 3 years but within 4 years

     2.87     57,876         2.89     90,066   

Due beyond 4 years but within 5 years

     3.25     16,811         3.36     14,613   

Due beyond 5 years

     3.63     10,563         3.63     10,564   
                     
     $ 251,937         $ 290,440   
                     

Repurchase agreements:

         

Due within 12 months

     2.26   $ 63,000         1.61   $ 38,000   

Due beyond 12 months but within 2 years

     3.42     140,000         3.74     75,000   

Due beyond 2 years but within 3 years

     3.45     60,000         3.30     130,000   

Due beyond 3 years but within 4 years

     3.28     20,000         3.07     40,000   

Due beyond 4 years but within 5 years

     4.12     10,000         4.12     10,000   

Due beyond 5 years

     4.42     70,000         4.42     70,000   
                     
     $ 363,000         $ 363,000   
                     

Other borrowings:

         

ESOP borrowings

         

Due within 12 months

     4.68     1,000         —          —     

Due beyond 12 months but within 2 years

     4.68     1,000         —          —     

Due beyond 2 years but within 3 years

     4.68     1,000         —          —     

Due beyond 3 years but within 4 years

     4.68     1,000         —          —     

Due beyond 4 years but within 5 years

     4.68     1,000         —          —     
                     
     $ 5,000         $ —     
                     

Corporate borrowings

         

Due within 12 months

     6.30   $ 1,400         6.30   $ 1,400   

Due beyond 12 months but within 2 years

     6.30     1,400         6.30     1,400   

Due beyond 2 years but within 3 years

     6.30     1,400         6.30     1,400   

Due beyond 3 years but within 4 years

     6.30     1,400         6.30     1,400   

Due beyond 4 years but within 5 years

     6.30     5,600         6.30     5,600   

Due beyond 5 years

     —          —           —          —     
                     
     $ 11,200         $ 11,200   
                     

Treasury tax and loan note payable

         

Due within 12 months

     —        $ 150         —        $ 191   
                     

Borrowings for joint ventures

         

Due beyond 2 years but within 3 years

     3.75   $ 3,715         3.75   $ 4,232   
                     

Junior subordinated notes

         

Due beyond 5 years

     2.42   $ 46,393         5.44   $ 46,393   
                     

Included in the $251.9 million of FHLB advances at March 31, 2011 are $20.0 million in structured advances in which the rate is fixed for four years, and after four years on a specified date, the FHLB has the one time right (European Call) to call the advance. If the FHLB does not call these advances on the specified date, the rate remains the same for the remaining term. Should these advances be called, the

 

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Company has the right to pay off the advances without penalty. The Company also has $50.0 million in structured advances with imbedded caps at various strike rates based on the 3 month LIBOR rate. If during the term of the advance, the 3 month LIBOR rate exceeds the strike rate, the interest rate on the structured advance is reduced by the difference between the rate and the strike rate.

Included in the $363.0 million of Repurchase Agreements (REPOs) are $40.0 million in structured REPOs with imbedded caps at various strike rates based on the 3 month LIBOR rate. The terms and conditions of $30.0 million of these structured REPOs are that the rate is fixed for the entire term of the REPO and the terms and conditions of $10.0 million of these structured REPOs is the rate is fixed for three years and after 3 years, on a specified date the counterparty has the one time right (European Call) to call the REPO. If the counterparty does not call the REPO on the specified date, the rate remains the same for the remaining two years. This structured REPO also includes an imbedded cap for the first three year period with a strike rate to the 3 month LIBOR rate. If during the first three years, the 3 month LIBOR rate exceeds the strike rate, the interest rate on the structured REPO is reduced by the difference between the rate and the strike rate. In addition, the Company has $25.0 million in structured REPOs with double, or $50.0 million notional amount of imbedded caps, at a strike rate of 3.75% based on the 3 month LIBOR rate. The terms and conditions of these structured REPOs are that the rate is fixed for five years and after 5 years, on a specified date the counterparty has the one time right (European Call) to call the REPO. If the counterparty does not call the REPO on the specified date, the rate remains the same for the remaining five years. These structured REPOs also include a double imbedded cap for the first five year period with a strike rate to the 3 month LIBOR rate. If during the first five years, the 3 month LIBOR rate exceeds the strike rate, the interest rate on the structured REPO is reduced by two times the difference between the rate and the strike rate. At no point shall the interest rate on these structured REPOs with imbedded caps be less than zero.

Also included in the $363.0 million of REPOs is a $25.0 million structured REPO in which the Company pays a fixed rate of interest. At the reset date and every quarterly period thereafter, the counterparty has the right to terminate the transaction. In addition, the Company has $30.0 million in structured REPOs in which the rate is fixed for four years, and after four years on a specified date, the counterparty has the one time right (European Call) to call the REPO. If the counterparty does not call the REPO on the specified date, the rate remains the same for the remaining term. It has historically been the Company’s position to pay off any borrowings and replace them with fixed rate funding if converted by the counterparty.

The Company enters into sales of securities under agreements to repurchase. Such REPO’s are treated as borrowed funds. The dollar amount of the securities underlying the agreements remains in their respective asset accounts.

REPO’s are collateralized by various securities that are either held in safekeeping at the FHLB or delivered to the dealer who arranged the transaction and the Company maintains control of these securities.

The market value of such securities exceeded the amortized cost of the securities sold under agreements to repurchase. The market value of the securities as of March 31, 2011 was $423.2 million with an amortized cost of $398.3 million. The market value of the securities as of December 31, 2010 was $426.7 million with an amortized cost of $400.8 million. The average maturity date of the mortgage backed securities sold under agreements to repurchase was greater than 90 days as of March 31, 2011 and December 31, 2010.

As of March 31, 2011 and December 31, 2010, the Company had REPO’s with Citigroup of $155.0 million, Barclays Capital of $70.0 million, Credit Suisse of $103.0 million, PNC Bank of $5.0 million and Morgan Stanley of $30.0 million.

As of March 31, 2011, the REPO’s with Citigroup had $19.5 million at risk (where the market value of the securities exceeds the borrowing), with a weighted average maturity of 32 months, Barclays Capital had $7.9 million at risk with a weighted average maturity of 43 months, Credit Suisse had $12.5 million at risk with a weighted average maturity of 34 months, PNC Bank had $924,000 at risk with a weighted average maturity of 12 months and Morgan Stanley had $2.5 million at risk with a weighted average maturity of 35 months.

 

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Borrowings under REPO averaged $364.7 million during the first three months of 2011. The maximum amount outstanding at any month-end was $368.0 million.

The Company, through ESB, has an agreement with the Federal Reserve Bank of Cleveland whereby ESB is an authorized treasury tax loan depository. Under the terms of the note agreement, funds deposited to the Company’s treasury tax and loan account (limited to $150,000 per deposit) accrue interest at a rate of 0.25% below the overnight federal funds rate. The treasury tax loan deposit balance was $150,000 and $191,000 at March 31, 2011 and December 31, 2010, respectively.

The junior subordinated notes have various maturities, interest rate structures and call dates. The characteristics of these notes are detailed in the following paragraphs.

On April 10, 2003, ESB Capital Trust II (Trust II), a statutory business trust established under Delaware law that is a subsidiary of the Company, issued $10.0 million variable rate preferred securities with a stated value and liquidation preference of $1,000 per share. The Company purchased $310,000 of common securities of Trust II. The preferred securities reset quarterly to equal the LIBOR plus 3.25%. Trust II’s obligations under the preferred securities issued are fully and unconditionally guaranteed by the Company. The proceeds from the sale of the preferred securities and the common securities were utilized by the Trust II to invest in $10.3 million of variable rate subordinated debt of the Company. The subordinated debt is unsecured and ranks subordinate and junior in right of payment to all indebtedness, liabilities and obligations of the Company. The subordinated debt primarily represents the sole assets of the Trust II. Interest on the preferred securities is cumulative and payable quarterly in arrears. The Company has the right to optionally redeem the subordinated debt prior to the maturity date of April 24, 2033, on or after April 24, 2008, at the redemption price, plus accrued and unpaid distributions, if any, at the redemption date. Under the occurrence of certain events, specifically, a tax event, investment company event or capital treatment event as more fully defined in the Indenture dated April 10, 2003, the Company may redeem in whole, but not in part, the subordinated debt at any time within 90 days following the occurrence of such event. Proceeds from any redemption of the subordinated debt would cause a mandatory redemption of the preferred securities and the common securities having an aggregate liquidation amount equal to the principal amount of the subordinated debt redeemed. On July 23, 2008, the Company redeemed $5.0 million of the preferred securities of ESB Capital Trust II with proceeds from a $14.0 million loan with First Tennessee Bank National Association (“First Tennessee”). The remainder of the First Tennessee loan was used to repay an existing loan with First Tennessee with a remaining balance of $9.0 million, which had an interest rate of 5.55% and was due on December 31, 2008. No unamortized deferred debt issuance costs remain on this issuance.

On December 17, 2003, ESB Statutory Trust (Trust III), a statutory business trust established under Delaware law that is a subsidiary of the Company, issued $5.0 million variable rate preferred securities with a stated value and liquidation preference of $1,000 per share. The Company purchased $155,000 of common securities of Trust III. The preferred securities reset quarterly to equal the LIBOR Index plus 2.95%. Trust III’s obligations under the preferred securities issued are fully and unconditionally guaranteed by the Company. The proceeds from the sale of the preferred securities and the common securities were utilized by Trust III to invest in $5.2 million of variable rate subordinated debt of the Company. The subordinated debt is unsecured and ranks subordinate and junior in right of payment to all indebtedness, liabilities and obligations of the Company. The subordinated debt primarily represents the sole assets of Trust III. Interest on the preferred securities is cumulative and payable quarterly in arrears. The Company has the right to optionally redeem the subordinated debt prior to the maturity date of December 17, 2033, on or after December 17, 2008, at the redemption price, plus accrued and unpaid distributions, if any, at the redemption date. Under the occurrence of certain events, specifically, a tax event, investment company event or capital treatment event as more fully defined in the Indenture dated December 17, 2003; the Company may redeem in whole, but not in part, the subordinated debt at any time within 90 days following the occurrence of such event. Proceeds from any redemption of the subordinated debt would cause a mandatory redemption of the preferred securities and the common securities having an aggregate liquidation amount equal to the principal amount of the subordinated debt redeemed. No unamortized deferred debt issuance costs remain on this issuance.

 

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Table of Contents

On February 10, 2005, ESB Capital Trust IV (Trust IV), a statutory business trust established under Delaware law that is a subsidiary of the Company, issued $35.0 million fixed rate preferred securities. The Company purchased $1.1 million of common securities of Trust IV. The preferred securities are fixed at a rate of 6.03% for six years and then are variable at three month LIBOR plus 1.82%. The preferred securities have a stated maturity of thirty years. Trust IV’s obligations under the preferred securities issued are fully and unconditionally guaranteed by the Company. The proceeds from the sale of the preferred securities and the common securities were utilized by Trust IV to invest in $36.1 million of fixed/variable rate subordinated debt of the Company. The subordinated debt is unsecured and ranks subordinate and junior in right of payment to all indebtedness, liabilities and obligations of the Company. The subordinated debt primarily represents the sole assets of Trust IV. Interest on the preferred securities is cumulative and payable quarterly in arrears. The Company has the right to optionally redeem the subordinated debt prior to the maturity date of February 10, 2035, on or after February 10, 2011, at the redemption price, which is equal to the liquidation amount, plus accrued and unpaid distributions, if any, at the redemption date. Under the occurrence of certain events, specifically, a tax event, investment company event or capital treatment event as more fully defined in the Indenture dated February 10, 2005, the Company may redeem in whole, but not in part, the subordinated debt at any time within 90 days following the occurrence of such event. Proceeds from any redemption of the subordinated debt would cause a mandatory redemption of the preferred securities and the common securities having an aggregate liquidation amount equal to the principal amount of the subordinated debt redeemed. The Company did not have any deferred debt issuance costs associated with the preferred securities.

 

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Table of Contents
6. Net Income Per Share

The following table summarizes the Company’s net income per share:

 

(Amounts, except earnings per share, in thousands)    Three Months
Ended
March 31, 2011
     Three Months
Ended
March 31, 2010
 

Net income

   $ 3,660       $ 3,380   

Weighted-average common shares outstanding

     14,441         14,359   
                 

Basic earnings per share

   $ 0.25       $ 0.24   
                 

Weighted-average common shares outstanding

     14,441         14,359   

Common stock equivalents due to effect of stock options

     112         65   
                 

Total weighted-average common shares and equivalents

     14,553         14,424   
                 

Diluted earnings per share

   $ 0.25       $ 0.23   
                 

The shares controlled by the Company’s Employee Stock Ownership Plan (ESOP) of 393,959 and 89,219 at March 31, 2011 and March 31, 2010, respectively, are not considered in the weighted average shares outstanding until the shares are committed for allocation to an employee’s individual account.

Options to purchases 92,016 shares at $12.79 per diluted share expiring November 2013, 100,092 shares at $12.08 per diluted share expiring November 2014 and 151,956 shares at $12.42 per diluted share expiring November 2015 were outstanding as of March 31, 2011 but were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares.

Options to purchase 95,976 shares at $12.79 per diluted share expiring November 2013 and 100,452 shares at $12.08 per diluted share expiring November 2014 were outstanding as of March 31, 2010 but were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares.

 

7. Comprehensive Income

The Company has developed the following table, which includes the tax effects of the components of other comprehensive income (loss). Other comprehensive income (loss) consists of fair value adjustments on securities available for sale, realized gains or losses on securities available for sale, the net fair value adjustment on derivatives and the amortization of pension and post retirement benefits. Other comprehensive income and related tax effects for the indicated periods, consists of:

 

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Table of Contents

(Dollar amounts in thousands)

   Three Months
Ended
March 31, 2011
    Three Months
Ended
March 31, 2010
 

Net Income before noncontrolling interest:

   $ 3,928      $ 3,121   

Other comprehensive income (loss)- net of tax

    

Fair value adjustment on securities available for sale, net of tax (benefit) of $231 in 2011 and tax expense of $707 in 2010

     (448     1,372   

Securities losses reclassified into earnings, net of tax benefit of $105 in 2010

     —          204   

Pension and postretirement amortization, net of tax expense of $16 in 2011 and $16 in 2010

     30        31   

Fair value adjustment on derivatives, net of tax expense of $127 in 2011 and tax (benefit) of ($255) in 2010

     247        (494
                

Other comprehensive income - net of tax

     (171     1,113   
                

Comprehensive income

     3,757        4,234   
                

The components of accumulated OCI, at the end of the respective periods were as follows:

 

(Dollar amounts in thousands)

   March 31,
2011
    December 31,
2010
 

Net unrealized gain on securities available for sale

   $ 17,345      $ 17,794   

Accumulated loss on effective cash flow hedging derivatives

     (1,638     (1,886

Net unrecognized pension cost

     (544     (574
                

Total

   $ 15,163      $ 15,334   
                

 

8. Retirement Plans

Supplemental Executive Retirement Plan and Directors’ Retirement Plan

The Company maintains a Supplemental Executive Benefit Plan (SERP) in order to provide supplemental retirement and death benefits for certain key employees of the Company. Under the SERP, participants shall receive an annual retirement benefit following retirement at age 65 equal to 25% of the participant’s final average pay multiplied by a ratio, ranging from 1.25% to 25.0%, based on the participant’s total years of service. Final average pay is based upon the participant’s last three year’s compensation. The maximum ratio of 25% requires twenty or more years of credited service and the minimum ratio of 1.25% requires one year of credited service. Benefits under the plan are payable in either a lump sum or ten equal annual payments and a lesser benefit is payable upon early retirement at age 50 with at least twelve years of service. If a participant dies prior to retirement, the participant’s estate will receive a lump sum payment equal to the net present value of future benefit payments under the plan. At March 31, 2011, the participants in the plan had credited service under the SERP ranging from 20 to 32 years.

The Company and the Bank maintain the ESB Financial Corporation Directors’ Retirement Plan and have entered into director retirement agreements with each director of the Company and the Bank. The plan provides that any retiring director with a minimum of five or more years of service with the Company or the Bank and a minimum of 10 total years of service, including years of service with any bank acquired by the Company or the Bank, that remains in continuous service as a board member until age 75 will be entitled to receive an annual retirement benefit equal to his or her director’s fees earned during the last full calendar year prior to his or her retirement date, multiplied by a ratio, ranging from 25% to 80%, based on the director’s total years of service. The maximum ratio of 80% of fees requires 20 or more years of service

 

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and the minimum ratio of 25% of fees requires 10 years of service. Retirement benefits may also be payable under the plan if a director retires from service as a director prior to attaining age 75. Three directors are currently receiving monthly benefits under the plan.

The following table illustrates the components of the net periodic pension cost for the SERP and Directors Retirement Plan as of March 31, 2011 and 2010:

 

(Dollar amounts in thousands)    SERP  
     Three Months
Ended
March 31, 2011
     Three Months
Ended
March 31, 2010
 

Components of net periodic pension cost

     

Service cost

   $ 16       $ 15   

Interest cost

     31         31   

Amortization of unrecognized gains and losses

     14         14   

Amortization of prior service cost

     10         11   
                 

Net periodic pension cost

   $ 71       $ 71   
                 

 

(Dollar amounts in thousands)    Directors’ Retirement Plan  
     Three Months
Ended

March 31,  2011
     Three Months
Ended

March 31,  2010
 

Components of net periodic pension cost

     

Service cost

   $ 1       $ 6   

Interest cost

     10         11   

Amortization of prior service cost

     22         22   
                 

Net periodic pension cost

   $ 33       $ 39   
                 

 

9. Fair Value

The following disclosures show the hierarchal disclosure framework associated with the level of pricing observations utilized in measuring assets and liabilities at fair value. The three broad levels defined by U.S. generally accepted accounting principles are as follows:

 

Level I:    Quoted prices are available in the active markets for identical assets or liabilities as of the reported date.
Level II:    Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed.

 

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Level III:    Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

The following table presents the assets and liabilities reported on the consolidated statements of financial condition at their fair value on a recurring basis as of March 31, 2011 and December 31, 2010 by level within the fair value hierarchy. As required by GAAP, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

     As of March 31, 2011  
(Dollar amounts in thousands)    Level 1      Level II      Level III      Total  

Assets:

           

Securities available for sale

           

Trust preferred securities

   $ —         $ 1,631       $ 38,376       $ 40,007   

Municipal securities

     —           167,534         —           167,534   

Equity securities

     2,532         —           —           2,532   

Corporate bonds

     —           105,168         —           105,168   

Mortgage backed securities

           

U.S. sponsored entities

     —           787,452         —           787,452   

Private label

     —           11,863         —           11,863   
                                   

Subtotal mortgage-backed securites

     —           799,315         —           799,315   
                                   

Total securities available for sale

   $ 2,532       $ 1,073,648       $ 38,376       $ 1,114,556   
                                   

Other Assets

           

Interest rate caps

   $ —         $ 1,783       $ —         $ 1,783   
                                   

Total other assets

   $ —         $ 1,783       $ —         $ 1,783   
                                   

Liabilities

           

Other Liabilities

           

Interest rate swaps

   $ —         $ 2,482       $ —         $ 2,482   
                                   

Total other liabilities

   $ —         $ 2,482       $ —         $ 2,482   
                                   

 

     As of December 31, 2010  
(Dollar amounts in thousands)    Level 1      Level II      Level III      Total  

Assets:

           

Securities available for sale

           

Trust preferred securities

   $ —         $ 1,615       $ 37,361       $ 38,976   

Municipal securities

     —           163,177         —           163,177   

Equity securities

     1,850         —           —           1,850   

Corporate bonds

     —           122,662         —           122,662   

Mortgage backed securities

           

U.S. sponsored entities

     —           738,262         —           738,262   

Private label

     —           12,745         —           12,745   
                                   

Subtotal mortgage-backed securites

     —           751,007         —           751,007   
                                   

Total securities available for sale

   $ 1,850       $ 1,038,461       $ 37,361       $ 1,077,672   
                                   

Other Assets

           

Interest rate caps

   $ —         $ 725       $ —         $ 725   
                                   

Total other assets

   $ —         $ 725       $ —         $ 725   
                                   

Liabilities

           

Other Liabilities

           

Interest rate swaps

   $ —         $ 2,857       $ —         $ 2,857   
                                   

Total other liabilities

   $ —         $ 2,857       $ —         $ 2,857   
                                   

Due to recent uncertainties in the credit markets broadly, and the lack of both trading and new issuance of floating rate trust preferred securities, market price indications generally reflect the lack of liquidity in these markets. Due to this lack of practical quoted prices, fair value for floating rate trust preferred securities has

 

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been determined using a discounted cash-flow technique. Cash flows are estimated based upon the contractual terms of each instrument. Market rates have been calculated based upon the five year historical discount margin for these instruments from August 2002 through August 2007, when the market was more liquid. These market rates were then adjusted for credit spreads and liquidity risk given the current markets. Credit spreads are based upon the Moody’s rating for each bond and range from 25 to 85 basis points. Liquidity risk adjustments ranged from 15 to 55 basis points where the securities of the 10 largest banks in the United States are assigned 15 to 20 basis points and banks outside of the top 10 were given a higher liquidity risk adjustment. Approximately $19.4 million or 50.5% of the $38.4 million in floating rate trust preferred securities represent investments in three of the four largest banks in the United States.

The following table presents the changes in the Level III fair-value category for the periods ended March 31, 2011 and 2010. The Company classifies financial instruments in Level III of the fair-value hierarchy when there is reliance on at least one significant unobservable input to the valuation model. In addition to these unobservable inputs, the valuation models for Level III financial instruments typically also rely on a number of inputs that are readily observable either directly or indirectly.

Fair value measurements using significant unobservable inputs (Level III)

 

     Securities available for sale
March 31,
 
     2011      2010  

Beginning balance January 1,

   $ 37,361       $ 39,003   

Total net realized/unrealized gains (losses)

     

Included in earnings:

     

Interest income on securities

     3         4   

Net realized loss on securities available for sale

     —           (298

Included in other comprehensive income

     1,012         (1,102

Transfers in and/or out of Level III

     —           —     

Purchases, issuances and settlements

     

Purchases

     —           —     

Issuances

     —           —     

Sales

     —           —     

Settlements

     —           —     
                 

Ending balance, March 31,

   $ 38,376       $ 37,607   
                 

The following table summarizes changes in unrealized gains and losses recorded in earnings for the three month period ended March 31, 2011 and 2010 for Level III assets and liabilities that are still held at March 31, 2011 and 2010.

 

     Securities available for sale
March 31,
 
     2011      2010  

Interest income on securities

   $ 3       $ 4   

Net realized loss on securities available for sale

     —           (298
                 

Total

   $ 3       $ (294
                 

 

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The following table presents the assets and liabilities reported on the consolidated statements of financial condition at their fair value on a non-recurring basis as of March 31, 2011 and December 31, 2010 by level within the fair value hierarchy. As required by GAAP, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

     As of March 31, 2011  
(Dollar amounts in thousands)    Level 1      Level II      Level III      Total  

Assets:

           

Impaired Loans

   $ —         $ —         $ 10,031       $ 10,031   

Loans held for sale

     —           —           —           —     

Real estate acquired through foreclosure

     —           —           899         899   

Servicing assets

     —           —           20         20   

 

     As of December 31, 2010  
(Dollar amounts in thousands)    Level 1      Level II      Level III      Total  

Assets:

           

Impaired Loans

   $ —         $ —         $ 8,066       $ 8,066   

Loans held for sale

     —           80         —           80   

Real estate acquired through foreclosure

     —           —           1,083         1,083   

Servicing assets

     —           —           24         24   

 

10. Financial Instruments

In the ordinary course of business, the Company has entered into off-balance sheet financial instruments, consisting of commitments to extend credit, commitments under line of credit lending arrangements and letters of credit. Such financial instruments are recorded in the financial statements when they are funded or related fees are received.

The following methods and assumptions were used in estimating fair values of financial instruments.

Cash and cash equivalents – The carrying amounts of cash equivalents approximate their fair values.

Securities – With the exception of floating rate trust preferred securities, fair values for securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges or matrix pricing, which is a mathematical technique which is widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities.

Securities receivable – The carrying amount of securities receivable approximates their fair values.

Loans receivable and held for sale – Fair values for loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values of impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable. The carrying amounts of loans held for sale approximate their fair values.

Accrued interest receivable and payable – The carrying amounts of accrued interest approximate their fair values.

FHLB stock – FHLB stock is restricted from trading purposes and thus, the carrying value approximates its fair value.

Bank owned life insurance (BOLI) – The fair value of BOLI at March 31, 2011 and December 31, 2010 approximated the cash surrender value of the policies at those dates.

Interest rate cap and interest rate swap contractsFair values of interest rate cap and interest rate swap contracts are based on dealer quotes.

Deposits – The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date. Fair values for certificates of deposit are estimated using a discounted

 

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cash flow calculation that applies current market interest rates to a schedule of aggregated expected monthly maturities.

Borrowed funds and subordinated debt – For variable rate borrowings, fair values are based on carrying values. For fixed rate borrowings, fair values are based on the discounted value of contractual cash flows and on the Company’s current incremental borrowing rates for similar types of borrowing arrangements. Fair values of structured borrowings are based on dealer quotes.

Advance payments by borrowers for taxes and insuranceThe fair value of the advance payments by borrowers for taxes and insurance approximated the carrying value of those commitments at those dates.

The following table sets forth the carrying amount and fair value of the Company’s financial instruments included in the consolidated statement of financial condition as of the respective dates:

 

(Dollar amounts in thousands)    March 31, 2011      December 31, 2010  
     Carrying
amount
     Fair
value
     Carrying
amount
     Fair
value
 

Financial assets:

           

Cash and cash equivalents

   $ 14,621       $ 14,621       $ 35,707       $ 35,707   

Securities

     1,114,556         1,114,556         1,077,672         1,077,672   

Securities receivable

     2,187         2,187         2,173         2,173   

Loans receivable and held for sale

     638,039         656,759         640,967         658,989   

Accrued interest receivable

     8,941         8,941         9,607         9,607   

FHLB stock

     24,792         24,792         26,097         26,097   

Bank owned life insurance

     30,269         30,269         30,098         30,098   

Interest rate cap contracts

     1,783         1,783         725         725   

Financial liabilities:

           

Deposits

     1,054,731         1,066,320         1,012,645         1,023,877   

Borrowed funds

     635,002         664,682         669,063         701,969   

Junior subordinated notes

     46,393         22,217         46,393         19,897   

Advance payment by borrowers for taxes and insurance

     2,467         2,467         2,441         2,441   

Accrued interest payable

     2,340         2,340         2,320         2,320   

Interest rate swap contracts

     2,482         2,482         2,857         2,857   

 

11. Subsequent Events

On April 19, 2011 the Company announced a six-for-five stock split of the ESBF common stock payable on May 16, 2011 to the stockholders of record on May 5, 2011. All per share data within this filing has been adjusted to reflect this split.

 

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

The following discussion and analysis provides further detail to the financial condition and results of operations of the Company. The section should be read in conjunction with the notes and financial statements presented elsewhere in this report.

The Company’s critical accounting policies involving the significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of March 31, 2011 have remained unchanged from the disclosures presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 under the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Forward-looking statements in this report relating to the Company’s plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The information contained in this report should be read in conjunction with ESB’s most recent annual report filed with the Securities and Exchange Commission on Form 10-K for the year ended December 31, 2010, which is available at the SEC’s website, www.sec.gov, or at ESB’s website, www.esbbank.com. Investors are cautioned that forward-looking statements, which are not historical fact, involve risks and uncertainties that could cause actual results to differ materially from those contemplated by such statements, including without limitation, the effect of changing regional and national economic conditions; changes in interest rates, spreads on earning assets and interest-bearing liabilities, and associated interest rate sensitivity; sources of liquidity available to the parent company and its related subsidiary operations; potential future credit losses and the credit risk of commercial, real estate, and consumer loan customers and their borrowing activities; actions of the Federal Reserve Board, Federal Deposit Insurance Corporation, the Securities and Exchange Commission, and other regulatory bodies; potential legislative and federal and state regulatory actions and reform; competitive conditions in the financial services industry; rapidly changing technology affecting financial services, and/or other external developments materially impacting the Company’s operational and financial performance. The Company does not assume any duty to update forward-looking statements.

OVERVIEW

ESB Financial Corporation is a Pennsylvania corporation and thrift holding company that provides a wide array of retail and commercial financial products and services to customers in Western Pennsylvania through its wholly-owned subsidiary ESB Bank. ESB Bank currently operates 24 branches.

During the three months ended March 31, 2011, the Company reported net income of $3.7 million, an increase of approximately $280,000, or 8.3%, over the same period in the prior year. This increase was primarily due to an increase in non-interest income over the same quarter in the prior year, partially offset by increases to noninterest expense and net income attributable to the noncontrolling interest. The quarter ended March 31, 2010 included write downs of land acquisition and development costs and impairment charges on securities that did not exist in 2011.

The Company is continuing efforts to improve the net interest margin by employing strategies to decrease the cost of funds, while attempting to increase the yield from the investment portfolio. The Company employs a strategy of purchasing cash-flowing fixed and variable rate mortgage-backed securities funded by wholesale borrowings, which are comprised of FHLB advances and repurchase agreements. This is referred to as the Company’s wholesale strategy. As part of the wholesale strategy, the Company uses a laddered maturity schedule of two to five years on the wholesale borrowings. Recently, as part of its ongoing interest rate risk strategy, the Company purchased structured repurchase agreements (repo’s) with imbedded interest rate caps. These interest rate caps will aid in insulating the Company’s net interest margin against a rapid rise in interest rates which can cause significant pressure to the Company’s interest rate margin.

During the three months ended March 31, 2011, the Company had approximately $50.0 million of wholesale borrowings that matured with a weighted average rate of 3.07% and an original call/maturity of 2.2 years. For purposes of determining the average life of the borrowings, the Company utilizes the call date if applicable. The Company did not take down any wholesale borrowings during the quarter ended March 31, 2011. The borrowings that matured were replaced with the deposit growth of approximately $42.1 million during the quarter.

 

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The wholesale strategy operates with a lower cost of operations, although with lower interest rate spreads and therefore at a lower margin than the retail operations of the Company. The Company has utilized this strategy for several years. The Company manages this strategy through its interest rate risk management on a macro level. This strategy historically produces wider margins during periods of lower short-term interest rates, reflected in a steep yield curve and can be susceptible to net interest margin strain in both rapidly rising rates and rapidly declining rates as well as a sustained inverted yield curve.

Management continues to pursue methods of insulating this wholesale strategy from significant fluctuations in interest rates by: (1) incorporating a laddered maturity schedule of up to five years on the wholesale borrowings; (2) the purchase of off-balance sheet interest rate caps and interest rate caps imbedded in structured borrowing’s, which help to insulate the Company’s interest rate risk position from increases in interest rates; (3) providing structure in the investment portfolio in the form of corporate bonds and municipals securities; (4) utilizing cash flows from fixed and adjustable rate mortgage-backed securities; and (5) the placing of the Company’s securities in the available for sale portfolio thereby creating the flexibility to change the composition of the portfolio through restructuring as management deems it necessary due to interest rate fluctuations. Management believes that this insulation affords them the ability to react to measured changes in interest rates and restructure the Company’s statement of financial condition accordingly. This strategy is continually evaluated by management on an ongoing basis.

RESULTS OF OPERATIONS

Earnings Summary. The Company’s net income increased $280,000, or 8.3%, to $3.7 million for the three months ended March 31, 2011 as compared to the same period in the prior year. This increase was primarily attributable to an increase to non-interest income of $1.3 million, partially offset by increases to non-interest expense, provision for income taxes and net income attributable to the noncontrolling interest of $507,000, $76,000 and $527,000, respectively.

Net interest income. Net interest income, the primary source of revenue for the Company, is determined by the Company’s interest rate spread, which is defined as the difference between income on earning assets and the cost of funds supporting those assets, and the relative amounts of interest earning assets and interest bearing liabilities. Management periodically adjusts the mix of assets and liabilities, as well as the rates earned or paid on those assets and liabilities in order to manage and improve net interest income. The level of interest rates and changes in the amount and composition of interest earning assets and liabilities affect the Company’s net interest income. Historically from an interest rate risk perspective, it has been management’s perception that differing interest rate environments, these being, extended low long-term interest rates, rapidly rising short-term interest rates as well as a sustained inverted yield curve, can cause sensitivity to the Company’s net interest income.

Net interest income increased a nominal $21,000, or 0.2%, to $10.8 million for the three months ended March 31, 2011, compared to $10.8 million for the same period in the prior year.

Interest income. Interest income decreased $2.2 million, or 9.8%, for the three months ended March 31, 2011, compared to the same period in the prior year. This decrease was primarily attributable to decreases in interest earned on loans receivable and securities available for sale of $861,000 and $1.3 million, respectively.

Interest earned on loans receivable decreased $861,000, or 9.0%, for the three months ended March 31, 2011, compared to the same period in the prior year. This decrease was primarily attributable to a decrease in average balance of loans outstanding of $33.4 million, or 4.9%, as well as a decrease to the yield on loans receivable of 23 basis points to 5.48% at March 31, 2011 from 5.71% at March 31, 2010.

Interest earned on securities decreased $1.3 million, or 10.4%, for the three months ended March 31, 2011, compared to the same period in the prior year. This decrease was primarily the result of a decrease in the tax equivalent yield on securities to 4.54% for the three months ended March 31, 2011 from 4.99% for the three months ended March 31, 2010, as well as a decrease in the average balance of the securities portfolio of $2.0 million, or 0.2%, to $1.1 billion at March 31, 2011.

 

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These changes are reflected in the quarterly rate volume table presented below which depicts that the decreases to the expense associated with the Company’s interest bearing liabilities are the primary sources of the overall increase to net interest income.

Interest expense. Interest expense decreased $2.2 million, or 19.3%, for the three months ended March 31, 2011, compared to the same period in the prior year. This decrease in interest expense was attributable to decreases in interest incurred on deposits and borrowed funds of $580,000 and $1.6 million, respectively.

Interest incurred on deposits decreased $580,000, or 15.2%, for the three months ended March 31, 2011, compared to the same period in the prior year. This decrease was due to a decrease in the cost of interest-bearing deposits to 1.38% from 1.74% for the quarters ended March 31, 2011 and 2010, respectively, partially offset by an increase in the average balance of interest-bearing deposits of $62.2 million, or 7.0% to $950.8 million for the three months ended March 31, 2011, compared to $888.7 million for the same period in the prior year. The Company manages its cost of interest bearing deposits by diligently monitoring the interest rates on its products as well as the rates being offered by its competition through weekly interest rate committee meetings and utilizing rate surveys and hence subsequently adjusting rates accordingly.

Interest incurred on borrowed funds decreased $1.6 million, or 23.1%, for the three months ended March 31, 2011 compared to the same period in the prior year. This decrease was primarily attributable to a decrease in the average balance of borrowed funds of $126.3 million, or 16.5%, as well as a decrease in the cost of these funds to 3.36% from 3.65%, for the quarters ended March 31, 2011 and 2010, respectively.

In addition to its wholesale strategy, the Company manages its cost of borrowings through the use of debt associated with the issuance of trust preferred securities. During the quarter ended March 31, 2011, the interest incurred on these borrowings decreased by $12,000, or 2.0%, due to a decrease in the cost of these funds to 5.25% from 5.35% for the same period in the prior year.

Average Balance Sheet and Yield/Rate Analysis. The following table sets forth, for the periods indicated, information concerning the total dollar amounts of interest income from interest-earning assets and the resultant average yields, the total dollar amounts of interest expense on interest-bearing liabilities and the resultant average costs, net interest income, interest rate spread and the net interest margin earned on average interest-earning assets. For purposes of these tables, average balances are calculated using monthly averages and the average loan balances include non-accrual loans and exclude the allowance for loan losses, and interest income includes accretion of net deferred loan fees. Yields on tax-exempt securities (tax-exempt for federal income tax purposes) are shown on a fully tax equivalent basis utilizing a federal tax rate of 34%. Yields and rates have been calculated on an annualized basis utilizing monthly interest amounts.

 

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(Dollar amounts in thousands)    Three months ended March 31,  
     2011     2010  
     Average             Yield /     Average             Yield /  
     Balance      Interest      Rate     Balance      Interest      Rate  

Interest-earning assets:

                

Taxable securities available for sale

   $ 772,081       $ 8,160         4.23   $ 810,629       $ 9,765         4.82

Taxable corporate bonds available for sale

     157,642         1,575         4.05     131,630         1,394         4.29

Tax-exempt securities available for sale

     138,443         1,556         6.81 % (1)      127,861         1,439         6.82 % (1) 
                                                    
     1,068,166         11,291         4.54 % (1)      1,070,120         12,598         4.99 % (1) 
                                                    

Mortgage loans

     469,250         6,395         5.45     492,879         7,003         5.68

Other loans

     150,314         2,040         5.50     164,926         2,324         5.71

Tax-exempt loans

     23,612         226         5.88 % (1)      18,741         195         6.38 % (1) 
                                                    
     643,176         8,661         5.48 % (1)      676,546         9,522         5.71 % (1) 
                                                    

Cash equivalents

     15,304         3         0.08     13,284         2         0.06

FHLB stock

     25,444         —           —          27,470         —           —     
                                                    
     40,748         3         0.03     40,754         2         0.02
                                                    

Total interest-earning assets

     1,752,090         19,955         4.78 (1)      1,787,420         22,122         5.15 % (1) 

Other noninterest-earning assets

     157,442         —           —          174,082         —           —     
                                                    

Total assets

   $ 1,909,532       $ 19,955         4.38 % (1)    $ 1,961,502       $ 22,122         4.69 % (1) 
                                                    

Interest-bearing liabilities:

                

Interest-bearing demand deposits

   $ 310,803       $ 269         0.35   $ 268,158       $ 210         0.32

Time deposits

     640,039         2,964         1.88     620,502         3,603         2.36
                                                    
     950,842         3,233         1.38     888,660         3,813         1.74
                                                    

FHLB advances

     258,263         1,981         3.11     394,352         3,668         3.77

Repurchase Agreements

     364,667         3,109         3.46     346,333         3,021         3.54

Other borrowings

     17,833         215         4.89     26,341         212         3.26
                                                    
     640,763         5,305         3.36     767,026         6,901         3.65
                                                    

Preferred securities- fixed

     36,083         515         5.79     36,083         528         5.93

Preferred securities- adjustable

     10,310         85         3.34     10,310         84         3.30
                                                    
     46,393         600         5.25     46,393         612         5.35
                                                    

Total interest-bearing liabilities

     1,637,998         9,138         2.26     1,702,079         11,326         2.70

Noninterest-bearing demand deposits

     85,758         —           —          73,605         —           —     

Other noninterest-bearing liabilities

     17,275         —           —          16,614         —           —     
                                                    

Total liabilities

     1,741,031         9,138         2.13     1,792,298         11,326         2.56

Stockholders’ equity

     168,501         —           —          169,204         —           —     
                                                    

Total liabilities and equity

   $ 1,909,532       $ 9,138         1.94   $ 1,961,502       $ 11,326         2.34
                                                    

Net interest income

      $ 10,817            $ 10,796      
                            

Interest rate spread (difference between weighted average rate on interest-earning assets and interest-bearing liabilities)

           2.52 % (1)            2.45 % (1) 
                            
                

Net interest margin (net interest income as a percentage of average interest-earning assets)

           2.66 % (1)            2.58 % (1) 
                            

 

(1) The yield on earning assets and the net interest margin are presented on a fully taxable-equivalent (FTE) and annualized basis. The FTE basis adjusts for the tax benefit of income on certain tax-exempt investments and tax-exempt loans using the federal statutory rate of 34% for each period presented. ESB believes this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts.

Analysis of Changes in Net Interest Income. The following table analyzes the changes in interest income and interest expense, between the three month periods ended March 31, 2011 in terms of: (1) changes in volume of interest-earning assets and interest-bearing liabilities and (2) changes in yields and rates. The table reflects the extent to which changes in the Company’s interest income and interest expense are attributable to changes in rate (change in rate multiplied by prior period volume), changes in volume (changes in volume multiplied by prior period rate) and changes attributable to the combined impact of volume/rate (change in rate multiplied by change in

 

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volume). The changes attributable to the combined impact of volume/rate are allocated on a consistent basis between the volume and rate variances. Changes in interest income on securities reflects the changes in interest income on a fully tax equivalent basis.

 

(Dollar amounts in thousands)    Three months ended, March 31,  
     2011 versus 2010
Increase (decrease) due to
 
     Volume     Rate     Total  

Interest income:

      

Securities

   $ (23   $ (1,284   $ (1,307

Loans

     (459     (402     (861

Cash equivalents

     —          1        1   

FHLB stock

     —          —          —     
                        

Total interest-earning assets

     (482     (1,685     (2,167
                        

Interest expense:

      

Deposits

     253        (833     (580

FHLB advances

     (1,118     (570     (1,688

Repurchase agreements

     157        (69     88   

Other borrowings

     (82     85        3   

Preferred securities

     —          (12     (12
                        

Total interest-bearing liabilities

     (790     (1,399     (2,189
                        

Net interest income

   $ 308      $ (286   $ 22   
                        

Provision for loan losses. The provision for loan losses decreased $54,000 to $300,000 for the quarter ended March 31, 2011 as compared to $354,000 for the same period last year. These provisions were part of the normal operations of the Company for the first quarter of 2011. In determining the appropriate level of allowance for loan losses, management considers historical loss experience, the financial condition of borrowers, economic conditions (particularly as they relate to markets where the Company originates loans), the status of non-performing assets, the estimated underlying value of the collateral and other factors related to the collectability of the loan portfolio. The Company’s total allowance for losses on loans at March 31, 2011 amounted to $6.6 million, or 1.0% of the Company’s total loan portfolio, as compared to $6.5 million, or 1.0%, at December 31, 2010. The Company’s allowance for losses on loans as a percentage of non-performing loans was 40.81% and 49.78% at March 31, 2011 and December 31, 2010, respectively.

Non-interest income. Non-interest income increased $1.3 million for the three months ended March 31, 2011 compared to the same period in the prior year. The increase to non-interest income was comprised of increases to income from real estate joint ventures of $908,000 and decreases to impairment losses on investment securities and net realized loss on derivatives of $309,000 and $194,000, respectively, partially offset by a decrease in fees and service charges of $92,000.

Impairment losses on investment securities decreased $309,000 for the three months ended March 31, 2011 compared to the same period in the prior year. During the quarter ended March 31, 2010, the Company took impairment charges of approximately $298,000 on a $2.5 million collateralized debt obligation that is comprised of sixteen financial institutions, as well as $11,000 on one of its equity investments in community banks. The Company had no impairment losses on securities during the quarter ended March 31, 2011.

Additionally, the Company had a loss on derivatives in 2011 of $125,000 compared to losses in 2010 of $319,000, or a gain of $194,000 between the periods. These fluctuations were due to market value adjustments to the Company’s interest rate caps.

Real estate joint venture income increased $908,000 for the three months ended March 31, 2011 compared to the same period ended March 31, 2010. The Company has a 51% ownership in its real estate joint ventures. The Company has a mixture of joint ventures in which it participates either in land development only or construction of units. During the first quarter of 2010, the Company took an impairment charge to land acquisition and development

 

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costs of $852,000 at one of the Company’s joint ventures, as a result of a recent appraisal of the property. This charge reduced the income recognized during the three months ended March 31, 2010.

Non-interest expense. Non-interest expense increased $507,000, or 7.6%, to $7.2 million for the three months ended March 31, 2011 as compared to $6.7 million for the same period in the prior year. This increase was primarily related to increases in compensation and employee benefits and other expenses of $397,000 and $116,000, respectively.

Compensation and employee benefits increased by $397,000, or 10.4%, for the quarter ended March 31, 2011, as compared to the same period in the prior year. The increases were primarily due to normal salary adjustments between the periods as well as increases to the compensation expense related to stock options and the ESOP.

Other expense increased by $116,000, or 12.7%, for the three months ended March 31, 2011, as compared to the same period in the prior year. This increase was primarily related to losses on the Companies partnership in a tax credit, consulting contracts and employee education expenses.

Provision for income taxes. The provision for income taxes increased $76,000, or 9.3%, to $896,000 for the three months ended March 31, 2011, compared to $820,000 for the same period in the prior year. This provision for income taxes reflects an effective tax rate of 19.7% for the quarter ended March 31, 2011 as compared to 19.5% for the same period in the prior year.

CHANGES IN FINANCIAL CONDITION

General. The Company’s total assets increased by $10.9 million, or 0.6%, during the quarter to $1.92 billion at March 31, 2011 from $1.91 billion at December 31, 2010. This increase resulted primarily from increases to securities available for sale, premises and equipment, bank owned life insurance and prepaid expenses and other assets of $36.9 million, or 3.4%, $327,000, or 2.4%, $171,000, or 0.6% and $521,000, or 4.4%, partially offset by decreases in cash and cash equivalents, loans receivable, loans held for sale, accrued interest receivable, FHLB stock, real estate acquired through foreclosure, real estate held for investment and intangible assets of $21.1 million, or 59.1%, $2.8 million, or 0.4%, $80,000, or 100.0%, $666,000 or 6.9%, $1.3 million, or 5.0%, $184,000, or 17.0%, $768,000, or 3.4%, $93,000, or 10.4%. Total non-performing assets increased to $17.2 million at March 31, 2011 compared to $14.4 million at December 31, 2010 and non-performing assets to total assets were 0.89% at March 31, 2011 compared to 0.75% at December 31, 2010. The Company’s total liabilities increased $9.1 million, or 0.5%, to $1.76 billion at March 31, 2011. This increase resulted primarily from an increase in deposits of $42.1 million, or 4.2%, partially offset by a decrease in borrowings of $34.1 million, or 4.8%. Total stockholders’ equity increased $1.8 million, or 1.1%, to $169.1 million at March 31, 2011, from $167.4 million at December 31, 2010. The increase to stockholders’ equity was primarily the result of increases in retained earnings of $3.3 million and a decrease in treasury stock of $3.9 million, partially offset by an increase in unearned employee stock ownership plan shares of $5.0 million and a decrease in accumulated other comprehensive income of $171,000.

Cash on hand, Interest-earning deposits and Federal funds sold. Cash on hand, interest-earning deposits and federal funds sold represent cash equivalents. Cash equivalents decreased a combined $21.1 million, or 59.1%, to $14.6 million at March 31, 2011 from $35.7 million at December 31, 2010. These accounts are typically increased by deposits from customers into saving and checking accounts, loan and security repayments and proceeds from borrowed funds. Decreases result from customer withdrawals, new loan originations, security purchases and repayments of borrowed funds.

Securities. The Company’s securities and loan portfolios represent its two largest balance sheet asset classifications, respectively. The Company’s securities portfolio increased by $36.9 million, or 3.4%, to $1.1 billion at March 31, 2011. During the three months ended March 31, 2011, the Company recorded purchases of available for sale securities of $108.6 million, consisting of purchases of fixed-rate mortgage backed securities of $104.6 million, $3.4 million of municipal bonds and $600,000 of equity securities. Partially offsetting these purchases were repayments and maturities of securities of $70.7 million, premium amortizations of $396,000 and a $679,000 decrease in the market value of the portfolio. These fair value adjustments represent temporary fluctuations resulting from changes in market rates in relation to average yields in the available for sale portfolio.

 

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The Company’s investment strategy for 2011 is to utilize the cash flows from the mortgage backed security and investment portfolios for the funding of loans and for reinvestment into similar investment products to maintain or improve the Company’s interest rate sensitivity. The Company intends to also purchase corporate or municipal bonds to provide structure should a low interest rate environment prevail. As an additional step to aid interest rate sensitivity, the Company secured $115.0 million of wholesale borrowings with embedded interest rate caps totaling $140.0 million, to help insulate the net interest margin against a rapid rise in short term interest rates and $150.0 million, notional amount, of interest rate caps that are unhedged and marked to market quarterly through the income statement. In the first three months of 2011, this resulted in approximately $125,000 of non-interest expense due to decreases in the fair value of these interest rate caps.

Quarterly, the Company reviews its securities portfolio for other-than-temporary impairment. This review includes an assessment of the following factors; the rating of the security, the length of time that the decline in fair value has existed, the financial condition of the issuer and the issuer’s ability to continue to pay interest or dividends, whether the decline can be attributed to specific adverse conditions in the geographic area or industry, the extent that fair value is below cost and management’s ability to hold the investment for a period of time to allow for recovery.

As of March 31, 2011, the Company had securities with unrealized losses for greater than twelve months of $7.9 million, as more fully described in footnote 2 “Securities” to the Consolidated Financial Statements included in Item 1. Included in the $7.9 million of unrealized losses was $6.6 million of unrealized losses attributed to the Company’s floating rate trust preferred corporate bonds. Management’s conclusion after reviewing all of the factors is that although the market value of these securities is below book value and will most likely remain so until the economic environment changes, we believe it to be a function of widening credit spreads that have affected the corporate bond market in general as the economy has weakened and is not a reflection of the issuers’ credit worthiness. Therefore, although some of the bonds exhibit a few of the indicators of an other-than-temporary impairment, the majority of the evidence indicates that no impairment exists at this time and the decline is due to the widening credit spreads as well as the current interest rate environment. Finally, the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, and considers the securities an important part of managing its interest rate risk profile.

Loans receivable. The loans receivable category consists primarily of single family mortgage loans used to purchase or refinance personal residences located within the Company’s market area and commercial real estate loans used to finance properties that are used in the borrowers businesses or to finance investor-owned rental properties, and to a lesser extent commercial and consumer loans. Net loans receivable decreased $2.8 million, or 0.4%, to $638.0 million at March 31, 2011 from $640.9 million at December 31, 2010. Included in this decrease in loans receivable were decreases in consumer loans of $1.5 million, or 1.2%, which was partially offset by an increase in mortgage loans and commercial business loans of $429,000, or 0.1%, and $2.4 million, or 5.8%, respectively. Additionally the portfolio is affected by changes in the allowance for loan losses, deferred loan fees and loans in process which combined increased $4.1 million, or 24.3%, during the three months ended March 31, 2011, causing a reduction to the portfolio.

Loans held for sale. Loans held for sale decreased $80,000, or 100.0%, at March 31, 2011. During the three month period the Company originated loans held for sale of approximately $325,000 and sold approximately $412,000, with a resulting gain of approximately $7,000.

Non-performing assets. Nonperforming assets consist of nonaccrual loans, repossessed automobiles, real estate acquired through foreclosure (REO) and troubled debt restructuring (TDR). A loan is placed on nonaccrual status when, in the judgment of management, the probability of collection of interest is deemed insufficient to warrant further accrual. When a loan is placed on nonaccrual status, previously accrued but uncollected interest is deducted from interest income. The Company does not accrue interest on loans past due 90 days or more.

Non-performing assets amounted to $17.2 million, or 0.89%, of total assets at March 31, 2011 compared to $14.4 million, or 0.75%, of total assets at December 31, 2010. The increase in non-performing assets of approximately $2.8 million was primarily the result of increases in non-performing loans of $3.0 million, partially offset by a decrease to REO of $184,000. The $3.0 million increase in non-performing loans was primarily due a loan to a local developer to construct 1-4 family residences, which became delinquent during the quarter.

 

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FHLB Stock. FHLB stock decreased by $1.3 million, or 5.0%, to $24.8 million at March 31, 2011 compared to $26.1 million at December 31, 2010. The Bank is required to maintain an investment in capital stock of the FHLB of Pittsburgh in an amount not less than 5.0% of its outstanding notes payable to the FHLB of Pittsburgh. In 2008 the FHLB suspended both the payment of dividends and the repurchase of excess capital stock. During the fourth quarter of 2010 the FHLB partially lifted the suspension with a limited repurchase of excess stock. The dividend suspension remains in effect and no dividends were paid in 2010. This repurchase restriction could result in the Bank’s investment in FHLB stock being greater than 5.0% of its outstanding notes payable to the FHLB.

Real Estate Held for Investment. The Company’s real estate held for investment decreased by $768,000 or 3.5%, to $21.5 million at March 31, 2011 from $22.3 million at December 31, 2010. This decrease was partially the result of sales activity in the joint ventures in which the Company has a 51% ownership, offset by construction activity within those joint ventures.

Intangible assets. Intangible assets decreased $93,000, or 10.4%, to $802,000 at March 31, 2011 from $895,000 at December 31, 2010. The decrease primarily resulted from normal amortization of the core deposit intangible from acquisitions. Amortization is expected to total $332,000, $251,000, $170,000, $110,000 and $8,000 for the years 2011, 2012, 2013, 2014 and 2015, respectively.

Bank owned life insurance. Bank owned life insurance (BOLI) is universal life insurance, purchased by the Bank, on the lives of the Bank’s employees. The beneficial aspects of these universal life insurance policies are tax-free earnings and a tax-free death benefit, which are realized by ESB as the owner of the policies. The cash surrender value of the BOLI as of March 31, 2011 was $30.3 million.

Prepaid Expenses and Other Assets. Prepaid expenses and other assets increased $521,000, or 4.4%, to $12.3 million at March 31, 2011 from $11.8 million at December 31, 2010. This increase is primarily due to the purchase of six interest rate caps during the quarter at a cost of $1.3 million, partially offset by the sale of an interest rate cap of $189,000 and a decrease in the prepaid FDIC assessment of $440,000, or 9.7%. In 2009, the FDIC amended its regulations and required insured institutions to prepay their estimated quarterly risk-based assessments through the year 2012. The Company’s prepaid assessment was $4.5 million at December 31, 2010 and has declined to $4.1 million at March 31, 2011. In addition to this decrease, there were decreases to various receivable accounts.

Deposits. The Company considers various sources when evaluating funding needs, including but not limited to deposits, which are a significant source of funds. Deposits totaled $1.1 billion, or 60.8%, of the Company’s total funding sources at March 31, 2011. Total deposits increased $42.1 million, or 4.2%, to $1.1 billion at March 31, 2011 from $1.0 billion at December 31, 2010. Interest-bearing demand deposits increased $28.8 million and time deposits increased $12.1 million, respectively, during the three months ended March 31, 2011, while non-interest bearing deposits increased approximately $1.2 million during the same period. The deposit growth was comprised primarily of low interest core deposits which increased approximately $30.0 million during the quarter. The Company continues to pursue low cost core deposit funding through its ongoing campaign to increase commercial, public and personal checking accounts throughout its 24 branch network. The Company will continue to offer these products to its customers through its 25th branch opening later this year in Cranberry Township, PA.

Borrowed funds. The Company utilizes short and long-term borrowings as another source of funding used for asset growth and liquidity needs. These borrowings include FHLB advances, repurchase agreements, junior subordinated notes, borrowings from the Federal Reserve and corporate debt. Borrowed funds decreased $34.1 million, or 4.8%, to $681.4 million at March 31, 2011 from $715.5 million at December 31, 2010. FHLB advances decreased $38.5 million, or 13.3%, repurchase agreements remained the same at $363.0 million, other borrowings increased approximately $4.4 million, or 28.4%, while junior subordinated notes remained the same at $46.4 million during the three months ended March 31, 2011. Borrowed funds and deposits are two of the primary sources of funds for the Company. As part of its general business practice, the Company seeks out the most competitive rate on the products and will adjust the mix of FHLB advances and repurchase agreements accordingly.

Accounts payable for land development. The accounts payable for land development decreased $171,000, or 5.0%, to $3.2 million at March 31, 2011 from $3.4 million at December 31, 2010. This account represents the unpaid portion of the development costs for the Company’s joint ventures.

 

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Accrued Expenses and Other Liabilities. Accrued expenses and other liabilities increased by $1.2 million, or 9.7%, to $13.8 million at March 31, 2011 from $12.6 million at December 31, 2010. This increase was primarily due to the market value fluctuation on the Company’s interest rate swaps as well as increases in various accrued and liability accounts.

Stockholders’ equity. Stockholders’ equity increased $1.8 million, or 1.1%, to $169.1 million at March 31, 2011, from $167.4 million at December 31, 2010. The increase in stockholders’ equity was primarily the result of increases in retained earnings of $3.3 million and a decrease in treasury stock of $3.9 million, partially offset by an increase in unearned employee stock ownership plan shares of $5.0 million and a decrease in accumulated other comprehensive income of $171,000. Average stockholders’ equity to average assets was 8.82%, and book value per share was $11.42 at March 31, 2011 compared to 8.87% and $11.63, respectively, at December 31, 2010.

ASSET AND LIABILITY MANAGEMENT

The primary objective of the Company’s asset and liability management function is to maximize the Company’s net interest income while simultaneously maintaining an acceptable level of interest rate risk given the Company’s operating environment, capital and liquidity requirements, performance objectives and overall business focus. The principal determinant of the exposure of the Company’s earnings to interest rate risk is the timing difference between the repricing or maturity of interest-earning assets and the repricing or maturity of its interest-bearing liabilities. The Company’s asset and liability management policies are designed to decrease interest rate sensitivity primarily by shortening the maturities of interest-earning assets while at the same time extending the maturities of interest-bearing liabilities. The Board of Directors of the Company continues to believe in strong asset/liability management in order to insulate the Company from material and prolonged increases in interest rates. As a result of this policy, the Company emphasizes a larger, more diversified portfolio of residential mortgage loans in the form of mortgage-backed securities. Mortgage-backed securities generally increase the quality of the Company’s assets by virtue of the insurance or guarantees that back them, are more liquid than individual mortgage loans and may be used to collateralize borrowings or other obligations of the Company.

The Company’s Board of Directors has established an Asset and Liability Management Committee consisting of outside directors, the President and Chief Executive Officer, Group Senior Vice President/Chief Financial Officer, Group Senior Vice President/Operations and Group Senior Vice President/Lending. This committee, which meets quarterly, generally monitors various asset and liability management policies and strategies, which were implemented by the Company over the past few years. These strategies have included: (i) an emphasis on the investment in adjustable-rate and shorter duration mortgage-backed securities, (ii) an emphasis on the origination of single-family residential adjustable-rate mortgages (ARMs), residential construction loans and commercial real estate loans, which generally have adjustable or floating interest rates and/or shorter maturities than traditional single-family residential loans, and consumer loans, which generally have shorter terms and higher interest rates than mortgage loans, (iii) increase the duration of the liability base of the Company by extending the maturities of savings deposits, borrowed funds and repurchase agreements and (iv) the purchase of off-balance sheet interest rate caps and structured borrowings with imbedded caps which help to insulate the Bank’s interest rate risk position from increases in interest rates.

As of March 31, 2011, the implementation of these asset and liability initiatives resulted in the following: (i) $164.6 million or 20.6% of the Company’s portfolio of mortgage-backed securities were secured by ARMs; (ii) $199.7 million or 30.3% of the Company’s total loan portfolio had adjustable interest rates or maturities of 12 months or less and $63.9 million or 19.0% of the Company’s portfolio of single-family residential mortgage loans (including residential construction loans) consisted of ARMs, (iii) the weighted average call/maturity of the Company’s FHLB advances and repurchase agreements was 3.9 years and (iv) the Company had $150.0 million in notional amount of interest rate caps and $115.0 million in structured borrowings with $140.0 million in notional amount of imbedded caps.

The implementation of the foregoing asset and liability initiatives and strategies, combined with other external factors such as demand for the Company’s products and economic and interest rate environments in general, has resulted in the Company historically being able to maintain a one-year interest rate sensitivity gap ranging between 0.0% of total assets to a negative 20.0% of total assets. The one-year interest rate sensitivity gap is defined as the difference between the Company’s interest-earning assets, which are scheduled to mature or reprice within one year and its interest-bearing liabilities, which are scheduled to mature or reprice within one year. At March 31, 2011, the

 

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Company’s interest-earning assets maturing or repricing within one year totaled $633.0 million while the Company’s interest-bearing liabilities maturing or repricing within one-year totaled $642.5 million, providing a deficiency of interest-earning assets over interest-bearing liabilities of $9.5 million or a negative 0.5% of total assets. At March 31, 2011, the percentage of the Company’s assets to liabilities maturing or repricing within one year was 98.5%. The Company strives to maintain its one-year interest rate sensitivity gap between a range of 0.0% and a negative 20.0% of total assets.

The one-year interest rate sensitivity gap has been the most common industry standard used to measure an institution’s interest rate risk position. In recent years, in addition to utilizing interest rate sensitivity gap analysis, the Company has increased its emphasis on the utilization of interest rate sensitivity simulation analysis to evaluate and manage interest rate risk.

The Company also utilizes income simulation modeling in measuring its interest rate risk and managing its interest rate sensitivity. The Asset and Liability Management Committee of the Company believes that simulation modeling enables the Company to more accurately evaluate and manage the possible effects on net interest income due to the exposure to changing market interest rates, the slope of the yield curve and different loan and mortgage-backed security prepayment and deposit decay assumptions under various interest rate scenarios.

As with gap analysis and earnings simulation modeling, assumptions about the timing and variability of cash flows are critical in economic value of equity (EVE) valuation analysis. Particularly important are the assumptions driving mortgage prepayments and the assumptions about expected attrition of the core deposit portfolios. These assumptions are based on the Company’s historical experience and industry standards and are applied consistently across the different rate risk measures.

The Company has established the following guidelines for assessing interest rate risk:

Net interest income simulation: Given a 200 basis point parallel and gradual increase or decrease in market interest rates, the Company strives to maintain the change in net interest income to no more than approximately 10% for a one-year period.

Economic Value of Equity (EVE): EVE is the net present value of the Company’s existing assets and liabilities. EVE is expressed as a percentage of the value of equity to total assets. Given a 200 basis point immediate and permanent increase or decrease in market interest rates, the Company strives to maintain the EVE increase or decrease to no more than approximately 50% of stockholders equity.

The following table presents the simulated impact of a 100 basis point or 200 basis point upward or downward shift of market interest rates on net interest income, return on average equity, diluted earnings per share and the change in EVE. This analysis was done assuming that the interest-earning asset and interest-bearing liability levels at March 31, 2011 remained constant. The impact of the market rate movements was developed by simulating the effects of rates changing gradually over a one-year period from the March 31, 2011 levels for net interest income, return on average equity and diluted earnings per share. The impact of market rate movements was developed by simulating the effects of an immediate and permanent change in rates at March 31, 2011 for the change in EVE. The impact of the rate change for net interest income is compared to the base amount which can fluctuate from period to period.

 

     Increase     Decrease  
     +100
BP
    +200
BP
    -100
BP
    -200
BP
 

Net interest income - increase (decrease)

     3.81     6.05     (5.18 %)      N/A   

Return on average equity - increase (decrease)

     6.75     10.72     (9.22 %)      N/A   

Diluted earnings per share - increase (decrease)

     6.99     11.24     (9.56 %)      N/A   

EVE - increase (decrease)

     (8.36 %)      (19.56 %)      (11.69 %)      N/A   

The following table presents the simulated impact of a 100 basis point or 200 basis point upward or downward shift of market interest rates on net interest income, return on average equity, diluted earnings per share and the change in EVE. This analysis was done assuming that the interest-earning asset and interest-bearing liability levels at

 

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December 31, 2010 remained constant. The impact of the market rate movements was developed by simulating the effects of rates changing gradually over a one-year period from the December 31, 2010 levels for net interest income, return on average equity and diluted earnings per share. The impact of market rate movements was developed by simulating the effects of an immediate and permanent change in rates at December 31, 2010 for the change in EVE. The impact of the rate change for net interest income is compared to the base amount which can fluctuate from period to period.

 

     Increase     Decrease  
     +100
BP
    +200
BP
    -100
BP
    -200
BP
 

Net interest income - increase (decrease)

     2.88     4.91     (4.19 %)      N/A   

Return on average equity - increase (decrease)

     5.25     8.89     (7.49 %)      N/A   

Diluted earnings per share - increase (decrease)

     5.38     9.19     (7.85 %)      N/A   

EVE - increase (decrease)

     (6.14 %)      (14.38 %)      (16.73 %)      N/A   

LIQUIDITY

The Company’s primary sources of funds generally have been deposits obtained through the offices of the Bank, borrowings from the FHLB, repurchase agreement borrowings and amortization and prepayments of outstanding loans and maturing investment securities.

Net cash provided by operating activities totaled $6.8 million for the three months ended March 31, 2011. Net cash provided by operating activities was primarily comprised of net income of $3.9 million and slight variances in other operating activities. Other operating activities included the proceeds from the sale of loans available for sale of $412,000 and origination of loans available for sale of $325,000.

Funds used in investing activities totaled $34.1 million during the three months ended March 31, 2011. Primary uses of funds included $108.6 million for purchases of securities available for sale and $42.5 million for loan originations and purchases. These uses were partially offset by sources of funds from principal repayments of loans receivable and securities available for sale of $45.6 million and $70.7 million, respectively.

Funds provided by financing activities totaled $6.2 million for the three months ended March 31, 2011. The primary sources of funds included an increase in deposits, proceeds from long-term borrowings and net proceeds from short term borrowings of $42.1 million, $7.2 million and $8.7 million, respectively. These sources were offset by uses of funds for repayments of long-term borrowings, payments of dividends, the purchase of treasury stock and the purchase of ESOP stock of $50.0 million, $1.2 million, $374,000 and $381,000, respectively.

At March 31, 2011, the total approved loan commitments outstanding amounted to $3.8 million. At the same date, commitments under unused lines of credit and credit card lines amounted to $86.2 million and the unadvanced portion of construction loans approximated $16.3 million. Certificates of deposit scheduled to mature in one year or less at March 31, 2011 totaled $378.5 million.

Historically, the Company used its sources of funds primarily to meet its ongoing commitments to pay maturing savings certificates and savings withdrawals, fund loan commitments and maintain a substantial portfolio of investment securities. The Company has been able to generate sufficient cash through the retail deposit market, its traditional funding source, and through FHLB advances and other borrowings, to provide the cash utilized in investing activities. Management believes that the Company currently has adequate liquidity available to respond to liquidity demands.

On March 15, 2011 the Company’s Board of Directors declared a cash dividend of $0.10 per share of common stock payable April 25, 2011, to shareholders of record at the close of business on March 31, 2011. Dividends are subject to determination and declaration by the Board of Directors, which take into account the Company’s financial condition, statutory and regulatory restrictions, general economic conditions and other factors. There can be no assurance that dividends will in fact be paid on the common stock in future periods or that, if paid, such dividends will not be reduced or eliminated.

 

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REGULATORY CAPITAL REQUIREMENTS

Current regulatory requirements specify that the Bank and similar institutions must maintain leverage capital equal to 4% of adjusted total assets and risk-based capital equal to 8% of risk-weighted assets. The Federal Deposit Insurance Corporation (FDIC) may require higher core capital ratios if warranted, and institutions are to maintain capital levels consistent with their risk exposures. The FDIC reserves the right to apply this higher standard to any insured financial institution when considering an institution’s capital adequacy. At March 31, 2011, ESB Bank was in compliance with all regulatory capital requirements with leverage and risk-based capital ratios of 8.2% and 15.3%, respectively.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Quantitative and qualitative disclosures about market risk are presented at December 31, 2010 in Item 7A of the Company’s Annual Report on Form 10-K, filed with the SEC on March 11, 2011. Management believes there have been no material changes in the Company’s market risk since December 31, 2010.

Item 4. Controls and Procedures

As of March 31, 2011, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), on the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2011. During the quarter ended March 31, 2011 there have been no significant changes in the Company’s internal controls over financial reporting or in other factors that could significantly affect internal controls.

Disclosure controls and procedures are the controls and other procedures that are designed to ensure that the information required to be disclosed by the Company in its reports filed and submitted under the Securities Exchange Act of 1934, as amended (“Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in its reports filed under the Exchange Act is accumulated and communicated to the Company’s management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

The Company and its subsidiaries are involved in various legal proceedings occurring in the ordinary course of business. It is the opinion of management, after consultation with legal counsel, that these matters will not materially affect the Company’s consolidated financial position or results of operations.

Item 1A. Risk Factors

There are no material changes to the risk factors included in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

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

 

(a) – (b)    Not applicable
(c)    The following table sets forth information with respect to purchases made by or on behalf of the Company of shares of common stock of the Company during the indicated periods.

 

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Period

   Total Number
of Shares
Purchased
     Average
Price Paid
per Share
     Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
     Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs (1)
 

January 1-31, 2011

     1,150       $ 14.86         1,150         430,108   

February 1-28, 2011

     2,124         14.06         2,124         427,984   

March 1-31, 2011

     24,031         13.61         24,031         403,953   
                                   

Totals

     27,305       $ 13.70         27,305         403,953   
                                   

 

(1) On May 20, 2009, the Company announced a new program to repurchase up to 5% of the outstanding shares of common stock of the Company, or 600,000 shares, of the Company’s outstanding common stock. The program began upon the completion of the existing plan. The program does not have an expiration date and all shares are purchased in the open market or in privately negotiated transactions, as in the opinion of management, market conditions warrant.

Item 3. Defaults Upon Senior Securities

None.

Item 4. (Removed and Reserved)

Item 5. Other Information

None.

Item 6. Exhibits

(a) Exhibits:

 

31.1    Certification of Chief Executive Officer Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002
31.2    Certification of Chief Financial Officer Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934 and Section 302 of the Sarbanes- Oxley Act of 2002
32.1    Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 (18 U.S.C. 1350)
32.2    Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)

 

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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.

ESB FINANCIAL CORPORATION

 

Date: May 6, 2011   By:  

    /s/ Charlotte A. Zuschlag

  Charlotte A. Zuschlag
  President and Chief Executive Officer
Date: May 6, 2011   By:  

    /s/ Charles P. Evanoski

  Charles P. Evanoski
  Group Senior Vice President and
  Chief Financial Officer