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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: September 30, 2009

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 October 31, 2009:

 

Common Stock, $0.01 par value   12,056,238 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 September 30, 2009 and December  31, 2008 (Unaudited)

   1
 

Consolidated Statements of Operations for the three and nine months ended September  30, 2009 and 2008 (Unaudited)

   2
 

Consolidated Statement of Changes in Stockholders’ Equity for the nine months ended September  30, 2009 (Unaudited)

   3
 

Consolidated Statements of Cash Flows for the nine months ended September  30, 2009 and 2008 (Unaudited)

   4
 

Notes to Unaudited Consolidated Financial Statements

   6

Item 2.

 

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

   27

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

   41

Item 4.

 

Controls and Procedures

   41
PART II - OTHER INFORMATION

Item 1.

 

Legal Proceedings

   41

Item 1A.

 

Risk Factors

   41

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

   42

Item 3.

 

Defaults Upon Senior Securities

   42

Item 4.

 

Submission of Matters to a Vote of Security Holders

   42

Item 5.

 

Other Information

   42

Item 6.

 

Exhibits

   42
 

Signatures

   43


Table of Contents

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

ESB Financial Corporation and Subsidiaries

Consolidated Statements of Financial Condition

As of September 30, 2009 and December 31, 2008 (Unaudited)

(Dollar amounts in thousands)

 

     September 30,
2009
    December 31,
2008
 
Assets     

Cash on hand and in banks

   $ 5,628      $ 6,680   

Interest-earning deposits

     29,991        11,032   

Federal funds sold

     12        1,181   
                

Cash and cash equivalents

     35,631        18,893   

Securities available for sale; cost of $1,073,087 and $1,086,061

     1,114,466        1,096,806   

Loans receivable, net of allowance for loan losses of $6,239 and $6,006

     669,466        691,315   

Loans held for sale

     256        —     

Accrued interest receivable

     9,743        10,052   

Federal Home Loan Bank (FHLB) stock

     27,470        27,470   

Premises and equipment, net

     12,979        11,657   

Real estate acquired through foreclosure, net

     681        539   

Real estate held for investment

     33,226        34,594   

Goodwill

     41,599        41,599   

Intangible assets

     1,444        1,830   

Bank owned life insurance

     29,169        28,481   

Prepaid expenses and other assets

     3,176        11,603   
                

Total assets

   $ 1,979,306      $ 1,974,839   
                
Liabilities and Stockholders’ Equity     

Liabilities:

    

Deposits

   $ 926,467      $ 877,329   

FHLB advances

     452,279        525,684   

Repurchase agreements

     343,000        337,500   

Other borrowings

     20,633        23,324   

Junior subordinated notes

     46,393        46,393   

Advance payments by borrowers for taxes and insurance

     1,484        2,816   

Accounts payable for land development

     5,869        6,621   

Accrued expenses and other liabilities

     15,325        12,107   
                

Total liabilities

     1,811,450        1,831,774   
                

Stockholders’ Equity:

    

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

     —          —     

Common stock, $.01 par value, 30,000,000 shares authorized;

    

13,805,812 and 13,805,812 shares issued;

    

12,056,606 and 12,123,076 shares outstanding

     138        138   

Additional paid-in capital

     101,317        101,041   

Treasury stock, at cost; 1,749,206 and 1,682,736 shares

     (20,047     (19,371

Unearned Employee Stock Ownership Plan (ESOP) shares

     (1,025     (1,672

Retained earnings

     60,519        55,789   

Accumulated other comprehensive income, net

     26,319        6,459   
                

Total ESB Financial Corporation stockholders’ equity

     167,221        142,384   

Noncontrolling interest

     635        681   
                

Total stockholders’ equity

     167,856        143,065   
                

Total liabilities and stockholders’ equity

   $ 1,979,306      $ 1,974,839   
                

See accompanying notes to unaudited consolidated financial statements.

 

1


Table of Contents

ESB Financial Corporation and Subsidiaries

Consolidated Statements of Operations

For the three and nine months ended September 30, 2009 and 2008 (Unaudited)

(Dollar amounts in thousands, except share data)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
     2009     2008     2009     2008

Interest income:

        

Loans receivable

   $ 9,733      $ 10,124      $ 29,530      $ 29,749

Taxable securities available for sale

     11,797        12,499        36,243        37,366

Tax free securities available for sale

     1,362        1,221        4,003        3,595

FHLB stock

     —          257        —          952

Deposits with banks and federal funds sold

     6        34        16        146
                              

Total interest income

     22,898        24,135        69,792        71,808
                              

Interest expense:

        

Deposits

     4,333        5,123        13,759        17,210

Borrowed funds

     8,186        10,089        26,255        29,715

Junior subordinated notes and guaranteed preferred beneficial interest in subordinated debt

     622        702        1,905        2,280
                              

Total interest expense

     13,141        15,914        41,919        49,205
                              

Net interest income

     9,757        8,221        27,873        22,603

Provision for loan losses

     236        409        752        920
                              

Net interest income after provision for loan losses

     9,521        7,812        27,121        21,683
                              

Noninterest income:

        

Fees and service charges

     1,052        1,040        2,949        2,916

Net gain on sale of loans

     25        —          191        2

Increase of cash surrender value of bank owned life insurance

     227        285        688        862

Net realized gain on securities available for sale

     —          —          246        —  

Impairment losses on investment securities

     (210     —          (463     —  

Income from real estate joint ventures

     215        207        618        1,072

Other

     12        (1     557        517
                              

Total noninterest income

     1,321        1,531        4,786        5,369
                              

Noninterest expense:

        

Compensation and employee benefits

     3,597        3,364        10,755        10,126

Premises and equipment

     586        593        1,838        1,894

Federal deposit insurance premiums

     450        35        2,096        83

Data processing

     538        476        1,577        1,436

Amortization of intangible assets

     122        150        373        458

Advertising

     142        107        407        309

Other

     979        940        2,882        2,875
                              

Total noninterest expense

     6,414        5,665        19,928        17,181
                              

Income before income taxes

     4,428        3,678        11,979        9,871

Provision for income taxes

     848        591        2,142        1,506
                              

Net income

     3,580        3,087        9,837        8,365

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

     74        (37     173        125
                              

Net income

   $ 3,506      $ 3,124      $ 9,664      $ 8,240
                              

Net income per share

        

Basic

   $ 0.29      $ 0.26      $ 0.81      $ 0.68

Diluted

   $ 0.29      $ 0.26      $ 0.80      $ 0.68

Cash dividends declared per share

   $ 0.10      $ 0.10      $ 0.30      $ 0.30

Weighted average shares outstanding

     11,940,076        12,032,516        11,939,619        12,059,687

Weighted average shares and share equivalents outstanding

     12,035,005        12,106,184        12,036,093        12,141,998

See accompanying notes to unaudited consolidated financial statements.

 

2


Table of Contents

ESB Financial Corporation and Subsidiaries

Consolidated Statement of Changes in Stockholders’ Equity

For the nine months ended September 30, 2009 (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, 2009    $ 138    $ 101,041      $ (19,371   $ (1,672   $ 55,789      $ 6,459      $ 681      $ 143,065   

Comprehensive results:

                 

Net income

     —        —          —          —          9,664        —          173        9,837   

Other comprehensive results, net

     —        —          —          —          —          20,003        —          20,003   

Reclassification adjustment

     —        —          —          —          —          (143     —          (143
                                                               

Total comprehensive results

     —        —          —          —          9,664        19,860        173        29,697   

Cash dividends at $0.30 per share

     —        —          —          —          (3,570     —          —          (3,570

Purchase of treasury stock, at cost (209,352 shares)

     —        —          (2,642     —          —          —          —          (2,642

Reissuance of treasury stock for stock option exercises (142,882 shares)

     —        —          1,966        —          (1,364     —          —          602   

Compensation expense on ESOP

     —        139        —          647        —          —          —          786   

Additional ESOP shares purchased

     —        (56     —          —          —          —          —          (56

Tax effect of compensatory stock options

     —        165        —          —          —          —          —          165   

Unvested shares in MRP

     —        28        —          —          —          —          —          28   

Capital disbursement for noncontrolling interest

     —        —          —          —          —          —          (219     (219
                                                               
Balance at September 30, 2009    $ 138    $ 101,317      $ (20,047   $ (1,025   $ 60,519      $ 26,319      $ 635      $ 167,856   
                                                               

See accompanying notes to unaudited consolidated financial statements.

 

3


Table of Contents

ESB Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows

For the nine months ended September 30, 2009 and 2008 (Unaudited)

(Dollar amounts in thousands)

 

     Nine months ended
September 30,
 
     2009     2008  

Operating activities:

    

Net income

   $ 9,664      $ 8,240   

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

    

Depreciation and amortization for premises and equipment

     676        714   

Provision for loan losses

     752        920   

Amortization of premiums and accretion of discounts

     1,601        1,274   

Origination of loans available for sale

     (17,612     (364

Proceeds from sale of loans available for sale

     17,547        366   

Gain on sale of loans available for sale

     (191     (2

Loss on sale of securities available for sale

     217        —     

Amortization of intangible assets

     373        458   

Compensation expense on ESOP and MRP

     814        650   

Compensation expense on stock options

     112        80   

Increases in bank owned life insurance

     (688     (862

Decrease (increase) in accrued interest receivable

     309        (103

Increase in prepaid expenses and other assets

     (12,335     (4,864

Decrease in deferred tax asset

     10,191        4,647   

Increase in accrued expenses and other liabilities

     3,106        3,148   

Other

     (1,265     (847
                

Net cash provided by operating activities

     13,271        13,455   
                

Investing activities:

    

Loan originations

     (126,697     (170,487

Purchases of:

    

Securities available for sale

     (151,251     (170,878

Interest rate cap contracts

     (189     (774

FHLB stock

     —          (6,044

Premises and equipment

     (2,008     (397

Principal repayments of:

    

Loans receivable

     146,272        112,125   

Securities available for sale

     162,692        131,321   

Proceeds from the sale of:

    

Securities available for sale

     992        —     

Real estate acquired through foreclosure

     52        1,072   

Redemption of FHLB stock

     —          9,000   

Funding of real estate held for investment

     (6,830     (13,568

Proceeds from real estate held for investment

     7,446        9,894   
                

Net cash provided by (used in) investing activities

     30,479        (98,736
                

Financing activities:

    

Net increase in deposits

     49,138        30,104   

Proceeds from long-term borrowings

     165,956        283,512   

Repayments of long-term borrowings

     (213,788     (202,779

Net decrease in short-term borrowings

     (22,764     (14,936

Redemption of junior subordinated notes

     —          (5,155

Proceeds received from exercise of stock options

     767        247   

Dividends paid

     (3,623     (3,707

Payments to acquire treasury stock

     (2,642     (2,579

Stock purchased by ESOP

     (56     —     
                

Net cash (used in) provided by financing activities

     (27,012     84,707   
                

Net increase (decrease) in cash equivalents

     16,738        (574

Cash equivalents at beginning of period

     18,893        19,258   
                

Cash equivalents at end of period

   $ 35,631      $ 18,684   
                

 

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Table of Contents

ESB Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows, (Continued)

For the nine months ended September 30, 2009 and 2008 (Unaudited)

(Dollar amounts in thousands)

 

     Nine months ended
September 30,
     2009    2008

Supplemental information:

     

Interest paid

   $ 42,487    $ 48,451

Income taxes paid

     2,385      1,304

Supplemental schedule of non-cash investing and financing activities:

     

Transfers from loans receivable to real estate acquired through foreclosure

     245      81

Dividends declared but not paid

     1,190      1,220

See accompanying notes to unaudited consolidated financial statements.

 

5


Table of Contents

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), PennFirst Financial Services, Inc. (PFSI), 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 ten real estate joint ventures, all of which are owned 51% or greater by AMSCO. The Bank has provided all development and construction financing. These ten 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, 2008, as contained in the Company’s 2008 Annual Report to Stockholders.

The results of operations for the three and nine month periods ended September 30, 2009 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 September 30, 2009, the Company was doing business through 24 full service banking branches, one loan production office and 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 principally in the banking industry. Consistent with internal reporting, the Company’s operations are reported in one operating segment, which is community banking.

 

6


Table of Contents

ESB Financial Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements—(Continued)

 

Stock Based Compensation

During the three and nine months ended September 30, 2009, the Company recorded approximately $37,000 and $112,000, respectively, in compensation expense and a tax benefit of $3,300 and $9,800 respectively, related to its share-based compensation awards that are expected to vest in 2009. During the three and nine months ended September 30, 2008, the Company recorded approximately $27,000 and $80,000 in compensation expense and a tax benefit of $24,400 related to its share-based compensation awards that are expected to vest in 2008. As of September 30, 2009, there was approximately $334,000 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. During the three and nine months ended September 30, 2009 there were $63,000 and $165,000 of excess tax benefits classified as a financing cash inflow in the Consolidated Statement of Cash Flows. During the three and nine months ended September 30, 2008 there were $4,000 and $14,000 of excess tax benefits classified as a financing cash inflow in the Consolidated Statement of Cash Flows.

Financial Instruments

When the Company establishes a derivative position, it is recorded in accordance with GAAP on the Consolidated Statement of Financial Condition as either assets or liabilities at fair value through adjustments to either the hedged items, accumulated other comprehensive income (loss) or current earnings. 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.

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. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings) 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.

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. These derivative instruments consist of interest rate caps and interest rate swaps. There were five interest rate cap contracts and two interest rate swap contracts outstanding as of September 30, 2009.

At September 30, 2009 there were five interest rate cap contracts outstanding with notional amounts totaling $50.0 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 2009, the Company entered into two interest rate swap contracts to manage its exposure to interest rate risk. This interest rate swap transaction involved the exchange of the Company’s interest payment on $35.0 million in junior subordinated notes which become floating rate notes in 2011 for a fixed rate interest payment without the exchange of the underlying

 

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Table of Contents

ESB Financial Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements—(Continued)

 

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.

This hedge relationship fails to qualify for the assumption of no ineffectiveness (short cut method) as defined by GAAP. Therefore, consistent with the GAAP requirements and with the risk management objective of hedging the variability of expected future cash flows, the Company accounts for this hedge relationship as a cash flow hedge.

The cumulative change in fair value of the hedging derivative, to the extent that it is expected to be offset by the cumulative change in anticipated interest cash flows from the hedged exposure, will be deferred and reported as a component of other comprehensive income (OCI). Any hedge ineffectiveness will be charged to current earnings. Consistent with the risk management objective and the hedge accounting designation, management measured the degree of hedge effectiveness by comparing the cumulative change in anticipated interest cash flows from the hedged exposure over the hedging period to the cumulative change in anticipated cash flows from the hedging derivative. Management will utilize the “Change in Variable Cash Flows Method” to compute the cumulative change in anticipated interest cash flows from the hedged exposure. 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 interest cash flows from the hedged exposure, the hedge will be deemed effective. The Company will use the Change in Variable Cash Flows Method to measure ineffectiveness. Under this method, the calculation of ineffectiveness, as required under GAAP, will be done by using the change in the variable cash flows of the hedging derivative and the hedged exposure. That is, the swap will be recorded at fair value on the balance sheet and other comprehensive income will be adjusted to an amount that reflects the cumulative change in fair value of the hedging derivative. Management will determine the ineffectiveness of the hedging relationship by comparing the cumulative change in anticipated interest cash flows from the hedged exposure over the hedging period to the cumulative change in anticipated cash flows from the hedging derivative. Any difference between these two measures will be deemed hedge ineffectiveness and recorded in current earnings. As of September 30, 2009 the hedge instrument was deemed to be effective, therefore, no amounts were charged to current earnings. The Company does not expect to reclassify any hedge-related amounts from accumulated other comprehensive income (loss) to earnings over the next twelve months.

The pay fixed interest rate swap contract outstanding at September 30, 2009 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 September 30, 2009:

 

     Notional
Amount
   Effective
Date
   Pay
Rate
    Receive
Rate (*)
    Maturity
Date
   Unrealized
(Dollars in thousands)                 Gain    Loss

Cash flow hedge

   20,000    2/10/2011    4.18   0.29   2/10/2018       521

Cash flow hedge

   15,000    2/10/2011    3.91   0.29   2/10/2018       139
                      
   35,000                 660
                      

 

(*) Variable receive rate based upon contract rates in effect at September 30, 2009.

Recent Accounting and Regulatory Pronouncements

In September 2006, the FASB issued an accounting standard related to fair value measurements, which was effective for the Company on January 1, 2008. This standard defined fair value, established a framework for measuring fair value, and expanded disclosure requirements about fair value measurements. On January 1, 2008, the Company adopted this accounting standard related to fair value measurements for the Company’s financial assets and financial liabilities. The Company deferred adoption of this accounting standard related to fair value measurements for the Company’s nonfinancial assets and nonfinancial liabilities, except for those items recognized or disclosed at fair value on an annual or more frequently recurring basis, until January 1, 2009. The

 

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Notes to Unaudited Consolidated Financial Statements—(Continued)

 

adoption of this accounting standard related to fair value measurements for the Company’s nonfinancial assets and nonfinancial liabilities had no impact on retained earnings and is not expected to have a material impact on the Company’s statements of income and condition. This accounting standard was subsequently codified into ASC Topic 820, Fair Value Measurements and Disclosures.

In December 2007, the FASB issued an accounting standard related to noncontrolling interests in consolidated financial statements, which is effective for fiscal years beginning on or after December 15, 2008. This standard establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. Among other requirements, this statement requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. This accounting standard was subsequently codified into ASC 810-10, Consolidation. The adoption of this standard did not have a material effect on the Company’s results of operations or financial position.

In December 2007, the FASB issued an accounting standard related to business combinations which is effective for fiscal years beginning on or after December 15, 2008. This standard establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination. This accounting standard was subsequently codified into Accounting Standards Codification (ASC) Topic 805, Business Combinations. The adoption of this standard did not have a material effect on the Company’s results of operations or financial position.

In March 2008, the FASB issued an accounting standard related to disclosures about derivatives and hedging activities, which was effective for fiscal years and interim periods beginning after November 15, 2008. This standard requires enhanced disclosures about derivative instruments and hedging activities and therefore should improve the transparency of financial reporting. This accounting standard was subsequently codified into ASC 815-10, Derivatives and Hedging. The adoption of this standard did not have a material effect on the Company’s results of operations or financial position.

In June 2008, the FASB issued accounting guidance related to determining whether instruments granted in share-based payment transactions are participating securities, which is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. This guidance clarified that instruments granted in share-based payment transactions can be participating securities prior to the requisite service having been rendered. A basic principle of this guidance is that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are to be included in the computation of EPS pursuant to the two-class method. All prior-period EPS data presented (including interim financial statements, summaries of earnings, and selected financial data) are required to be adjusted retrospectively to conform with this guidance. This accounting guidance was subsequently codified into ASC Topic 260, Earnings Per Share. The adoption of this standard did not expect to have a material effect on the Company’s results of operations or financial position.

In April 2009, the FASB issued new guidance impacting ASC Topic 820, Fair Value Measurements and Disclosures. This ASC provides additional guidance in determining fair values when there is no active market or where the price inputs being used represent distressed sales. It reaffirms the need to use judgment to ascertain if a formerly active market has become inactive and in determining fair values when markets have become inactive. The adoption of this new guidance did not have a material effect on the Company’s results of operations or financial position.

 

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Notes to Unaudited Consolidated Financial Statements—(Continued)

 

In April 2009, the FASB issued new guidance impacting ASC 825-10-50, Financial Instruments, which relates to fair value disclosures for any financial instruments that are not currently reflected on the balance sheet of companies at fair value. This guidance amended existing GAAP to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This guidance is effective for interim and annual periods ending after June 15, 2009. The adoption of this new guidance did not have a material impact on the Company’s financial position or results of operations.

In April 2009, the FASB issued new guidance impacting ASC 320-10, Investments — Debt and Equity Securities, which provides additional guidance designed to create greater clarity and consistency in accounting for and presenting impairment losses on securities. This guidance is effective for interim and annual periods ending after June 15, 2009. The adoption of this new guidance did not have a material impact on the Company’s financial position or results of operations.

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2009-01, Topic 105 - Generally Accepted Accounting Principles - FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles. The Codification is the single source of authoritative nongovernmental U.S. generally accepted accounting principles (GAAP). The Codification does not change current GAAP, but is intended to simplify user access to all authoritative GAAP by providing all the authoritative literature related to a particular topic in one place. Rules and interpretive releases of the SEC under federal securities laws are also sources of authoritative GAAP for SEC registrants. The Company adopted this standard for the interim reporting period ending September 30, 2009. The adoption of this standard did not have a material impact on the Company’s results of operations or financial position.

In August 2009, the FASB issued ASU No. 2009-05, Fair Value Measurements and Disclosures (Topic 820) – Measuring Liabilities at Fair Value. This ASU provides amendments for fair value measurements of liabilities. It provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more techniques. ASU 2009-05 also clarifies that when estimating a fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. ASU 2009-05 is effective for the first reporting period (including interim periods) beginning after issuance or fourth quarter 2009. The Company is currently evaluating the impact of this standard on the Company’s financial condition, results of operations, and disclosures.

 

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Notes to Unaudited Consolidated Financial Statements—(Continued)

 

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

Available for sale:

          

As of September 30, 2009:

          

Trust preferred securities

   $ 500    $ —      $ (6   $ 494

Municipal securities

     143,986      8,211      (503     151,694

Equity securities

     786      155      (16     925

Corporate bonds

     131,097      3,483      (7,320     127,260

Mortgage-backed securities

     796,718      38,111      (736     834,093
                            
   $ 1,073,087    $ 49,960    $ (8,581   $ 1,114,466
                            

As of December 31, 2008:

          

Trust Preferred securities

   $ 500    $ —      $ (21   $ 479

Municipal securities

     135,220      1,624      (2,799     134,045

Equity securities

     676      30      —          706

Corporate bonds

     67,883      128      (9,528     58,483

Mortgage-backed securities

     881,782      22,068      (757     903,093
                            
   $ 1,086,061    $ 23,850    $ (13,105   $ 1,096,806
                            

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 September 30, 2009:

 

As of September 30, 2009    Less than 12 Months    12 Months or more    Total

(Dollar amounts in thousands)

   # of
Securities
   Fair Value    Unrealized
losses
   # of
Securities
   Fair Value    Unrealized
losses
   # of
Securities
   Fair Value    Unrealized
losses

Trust Preferred Securities

   —      $ —      $ —      1    $ 494    $ 6    1    $ 494    $ 6

Municipal securities

   2      3,441      75    5      6,355      428    7      9,796      503

Equity Securities

   —        —        —      2      243      16    2      243      16

Corporate bonds

   1      2,964      71    9      40,389      7,249    10      43,353      7,320

Mortgage-backed securities

   1      1,782      4    5      10,558      732    6      12,340      736
                                                        
   4    $ 8,187    $ 150    22    $ 58,039    $ 8,431    26    $ 66,226    $ 8,581
                                                        

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, 2008:

 

As of December 31, 2008    Less than 12 Months    12 Months or more    Total

(Dollar amounts in thousands)

   # of
Securities
   Fair Value    Unrealized
losses
   # of
Securities
   Fair Value    Unrealized
losses
   # of
Securities
   Fair Value    Unrealized
losses

Trust Preferred Securities

   —      $ —      $ —      1    $ 479    $ 21    1    $ 479    $ 21

Municipal securities

   53      43,714      1,830    23      20,571      969    76      64,285      2,799

Corporate bonds

   4      12,598      1,458    8      35,785      8,070    12      48,383      9,528

Mortgage-backed securities

   6      9,535      359    12      18,625      398    18      28,160      757
                                                        
   63    $ 65,847    $ 3,647    44    $ 75,460    $ 9,458    107    $ 141,307    $ 13,105
                                                        

 

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Notes to Unaudited Consolidated Financial Statements—(Continued)

 

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 an other than temporary impairment on equity securities where the fair value has been significantly below cost for three consecutive quarters. Declines in the fair value of the corporate bonds that can be attributed to specific adverse conditions affecting the credit quality of the investment would be recorded as other than temporary impairment losses, 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 September 30, 2009, the declines outlined in the above table represent temporary declines due to changes in interest rates and are not reflections of an 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 other than temporary impairment (OTTI) with formal reviews performed quarterly. As required by GAAP, credit –related OTTI losses on individual securities were recognized during the third quarter of 2009 in earnings while noncredit-related OTTI on securities not expected to be sold is recognized in other comprehensive income (loss) (OCI). The credit-related OTTI recognized during the third quarter 2009 was $154,000 and was solely related to securities having a book value of $1.5 million. There were no noncredit-related OTTI on these securities recognized in OCI during the third quarter of 2009.

One corporate bond has 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 which is a level three pricing method. During this analysis, the Company determined that four of these financial institutions are currently deferring interest payments, and the Company is aware of one additional financial institution that will begin deferring interest payments in February 2010. In addition, one financial institution has defaulted. All five financial institutions that are/will be deferring interest payments as of February 2010 either lost money or broke even for the most recent quarter. Two of the five 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% at the end of the first quarter. Also, there were three financial institutions (including one of the five deferrals) within this pool that the non-performing assets to loans plus real estate owned ratio was greater than 10%.

Because of the subprime crisis current markets for variable rate corporate trust preferred bonds are illiquid. In order to determine prices of these securities the Company utilizes a discounted cash flow method, mentioned above. This method is described more fully in footnote nine Fair Value.

The following table summarizes scheduled maturities of the Company’s securities as of September 30, 2009 and December 31, 2008 excluding equity securities which have no maturity dates:

 

     Available for Sale
As of September 30, 2009

(Dollar amounts in thousands)

   Weighted
Average Yield
    Amortized
cost
   Fair
value

Due from one year to five years

   5.82   $ 73,396    $ 76,172

Due from five to ten years

   4.71     123,026      129,095

Due after ten years

   4.86     875,879      908,274
                   
   4.90   $ 1,072,301    $ 1,113,541
                   

 

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Notes to Unaudited Consolidated Financial Statements—(Continued)

 

     Available for sale
As of December 31, 2008
(Dollar amounts in thousands)    Weighted
Average Yield
    Amortized
cost
   Fair
value

Due in one year or less

   7.00   $ 1    $ 1

Due from one year to five years

   4.34     12,885      13,331

Due from five to ten years

   4.76     111,235      112,243

Due after ten years

   5.19     961,264      970,525
                   
   5.13   $ 1,085,385    $ 1,096,100
                   

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.

 

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Notes to Unaudited Consolidated Financial Statements—(Continued)

 

3. Loans Receivable

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

 

(Dollar amounts in thousands)

   September 30,
2009
    December 31,
2008
 

Mortgage loans:

    

Residential - single family

   $ 331,779      $ 353,658   

Residential - multi family

     37,411        33,680   

Commercial real estate

     72,716        76,633   

Construction

     51,336        55,979   
                

Subtotal mortgage loans

     493,242        519,950   

Other loans:

    

Consumer loans

    

Home equity loans

     73,151        71,271   

Dealer auto and RV loans

     59,721        60,896   

Other loans

     10,593        10,656   

Commercial business

     46,362        44,508   
                

Subtotal other loans

     189,827        187,331   

Total Loans

     683,069        707,281   

Less:

    

Allowance for loan losses

     6,239        6,006   

Deferred loan fees and net discounts

     (2,640     (2,825

Loans in process

     10,004        12,785   
                
   $ 669,466      $ 691,315   
                

Loans Held for Sale

    

Mortgage loans:

    

Residential - single family

   $ 256      $ —     
                

The following is a summary of the changes in the allowance for loan losses:

 

(Dollar amounts in thousands)

   Totals  

Balance, January 1, 2009

   $ 6,006   

Provision for loan losses

     752   

Charge offs

     (615

Recoveries

     96   
        

Balance September 30, 2009

   $ 6,239   
        

 

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Notes to Unaudited Consolidated Financial Statements—(Continued)

 

4. Deposits

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

 

(Dollar amounts in thousands)    September 30, 2009     December 31, 2008  

Type of accounts

   Amount    %     Amount    %  

Noninterest-bearing deposits

   $ 64,895    7.0   $ 65,726    7.5

NOW account deposits

     108,003    11.7     105,235    12.0

Money Market deposits

     36,413    3.9     26,876    3.0

Passbook account deposits

     116,965    12.6     104,109    11.9

Time deposits

     600,191    64.8     575,383    65.6
                          
   $ 926,467    100.0   $ 877,329    100.0
                          

Time deposits mature as follows:

          

Within one year

   $ 408,788    44.1   $ 399,167    45.5

After one year through two years

     123,240    13.3     90,832    10.3

After two years through three years

     36,056    3.9     75,145    8.6

After three years through four years

     6,512    0.7     2,364    0.3

After four years through five years

     23,028    2.5     6,461    0.7

Thereafter

     2,567    0.3     1,414    0.2
                          
   $ 600,191    64.8   $ 575,383    65.6
                          

 

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Notes to Unaudited Consolidated Financial Statements—(Continued)

 

5. Borrowed Funds

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

 

(Dollar amounts in thousands)

   September 30, 2009    December 31, 2008
   Weighted
average
rate
    Amount    Weighted
average
rate
    Amount

FHLB advances:

         

Due within 12 months

   4.97   $ 215,393    4.82   $ 249,750

Due beyond 12 months but within 2 years

   3.57     70,000    4.98     165,000

Due beyond 2 years but within 3 years

   2.71     32,550    3.32     51,866

Due beyond 3 years but within 4 years

   3.62     57,639    3.59     10,000

Due beyond 4 years but within 5 years

   3.59     56,127    3.83     29,027

Due beyond 5 years

   3.86     20,570    3.85     20,041
                 
     $ 452,279      $ 525,684
                 

Repurchase agreements:

         

Due within 12 months

   2.11   $ 28,000    4.55   $ 72,500

Due beyond 12 months but within 2 years

   1.74     10,000    5.02     10,000

Due beyond 2 years but within 3 years

   3.73     65,000    3.56     10,000

Due beyond 3 years but within 4 years

   3.34     120,000    3.74     75,000

Due beyond 4 years but within 5 years

   3.28     40,000    3.47     90,000

Due beyond 5 years

   4.38     80,000    4.38     80,000
                 
     $ 343,000      $ 337,500
                 

Other borrowings:

         

ESOP borrowings

         

Due within 12 months

   5.25   $ 945    5.25   $ 945

Due beyond 12 months but within 2 years

   5.25     236    5.25     945
                 
     $ 1,181      $ 1,890
                 

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     1,400    6.30     1,400

Due beyond 5 years

   6.30     5,600    6.30     7,000
                 
     $ 12,600      $ 14,000
                 

Treasury tax and loan note payable

   —        $ 62    —        $ 203
                 

Borrowings for joint ventures

   3.75   $ 6,790    3.75   $ 7,231
                 

Junior subordinated notes

         

Due beyond 5 years

   5.47   $ 46,393    5.94   $ 46,393
                 

Included in the $452.3 million of FHLB advances at September 30, 2009 is approximately $20.0 million of convertible select advances. These advances reset to the three month LIBOR index and have various spreads and call dates. At the reset date, if the three month LIBOR plus the spread is lower than the contract rate on the advance, the advance will remain at the contracted rate. The FHLB has the right to call these convertible select advances on the call date or quarterly thereafter. Also included in the $452.3 million of FHLB advances is $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 Company has the right to pay off the advances

 

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Notes to Unaudited Consolidated Financial Statements—(Continued)

 

without penalty. Also included in the $452.3 million of FHLB advances is $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 $343.0 million of repurchase agreements (REPOs) are $60.0 million in structured REPOs with imbedded caps at various strike rates based on the 3 month LIBOR rate. The terms and conditions of these structured REPOs are that 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. These structured REPOs also include 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 $343.0 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. Also included in the $343.0 million of REPOs are $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 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 London Interbank Offer Rate Index (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.

 

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Table of Contents

ESB Financial Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements—(Continued)

 

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.

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

ESB Financial Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements—(Continued)

 

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
September 30, 2009
   Three Months
Ended
September 30, 2008

Net income

   $ 3,506    $ 3,124

Weighted-average common shares outstanding

     11,940      12,033
             

Basic earnings per share

   $ 0.29    $ 0.26
             

Weighted-average common shares outstanding

     11,940      12,033

Common stock equivalents due to effect of stock options

     95      73
             

Total weighted-average common shares and equivalents

     12,035      12,106
             

Diluted earnings per share

   $ 0.29    $ 0.26
             
     Nine Months
Ended
September 30, 2009
   Nine Months
Ended
September 30, 2008

Net income

   $ 9,664    $ 8,240

Weighted-average common shares outstanding

     11,940      12,060
             

Basic earnings per share

   $ 0.81    $ 0.68
             

Weighted-average common shares outstanding

     11,940      12,060

Common stock equivalents due to effect of stock options

     96      82
             

Total weighted-average common shares and equivalents

     12,036      12,142
             

Diluted earnings per share

   $ 0.80    $ 0.68
             

The shares controlled by the Company’s Employee Stock Ownership Plan (ESOP) of 152,687 and 234,809 at September 30, 2009 and September 30, 2008, 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 80,310 shares at $15.35 per diluted share expiring November 2013 and 84,040 shares at $14.50 per diluted share expiring November 2014 were outstanding as of September 30, 2009 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 97,092 shares at $10.83 per diluted share expiring November 2012, 84,860 shares at $15.35 per diluted share expiring November 2013, 88,590 shares at $14.50 per diluted share expiring November 2014, 82,300 shares at $12.20 per diluted share expiring May 2015, 16,660 shares at $12.40 per diluted share expiring May 2015, 91,550 shares at $10.75 per diluted share, expiring November 2016, were outstanding as of September 30, 2008 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.

 

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Table of Contents

ESB Financial Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements—(Continued)

 

7. Comprehensive Income

In accordance with GAAP 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 net unrealized gain (loss) on securities available for sale, the net fair value adjustment on derivatives and the amortization of post retirement benefits. Other comprehensive income (loss) and related tax effects for the indicated periods, consists of:

 

(Dollar amounts in thousands)

   Three Months
Ended
September 30, 2009
    Three Months
Ended
September 30, 2008
 

Net Income:

   $ 3,580      $ 3,087   

Other comprehensive income (loss) - net of tax

    

Fair value adjustment on securities available for sale, net of tax expense (benefit) of $6,639 in 2009, ($434) in 2008

     12,887        (842

Net securities losses reclassified into earnings, net of tax benefit of $71 in 2009

     (138     —     

Pension and postretirement amortization, net of tax expense of $13 in 2009 and $13 in 2008

     26        25   

Fair value adjustment on derivatives, net of tax benefit of $230 in 2009

     (446     —     
                

Other comprehensive income (loss) - net of tax

     12,329        (817
                

Comprehensive income

     15,909        2,270   

Comprehensive (loss) income attributable to the noncontrolling interest

     (74     37   
                

Comprehensive income attributable to ESB Financial Corporation

   $ 15,835      $ 2,307   
                

(Dollar amounts in thousands)

   Nine Months
Ended
September 30, 2009
    Nine Months
Ended
September 30, 2008
 

Net Income:

   $ 9,837      $ 8,365   

Other comprehensive income (loss) - net of tax

    

Fair value adjustment on securities available for sale, net of tax expense (benefit) of $10,489 in 2009 and ($4,647) in 2008

     20,361        (9,020

Net securities gains reclassified into earnings, net of tax benefit of $74 in 2009

     (143     —     

Pension and postretirement amortization, net of tax expense of $40 in 2009 and $39 in 2008

     78        75   

Fair value adjustment on derivatives, net of tax benefit of $225 in 2009

     (436     —     
                

Other comprehensive income (loss) - net of tax

     19,860        (8,945
                

Comprehensive income (loss)

     29,697        (580

Comprehensive loss attributable to the noncontrolling interest

     (173     (125
                

Comprehensive income (loss) attributable to ESB Financial Corporation

   $ 29,524      $ (705
                

 

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Table of Contents

ESB Financial Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements—(Continued)

 

8. Retirement Plans

Supplemental Executive Retirement Plan and Directors’ Retirement Plan

The Company has adopted 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 September 30, 2009, the participants in the plan had credited service under the SERP ranging from 18 to 30 years.

The Company and the Bank have adopted the ESB Financial Corporation Directors’ Retirement Plan and 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 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. Two 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 September 30, 2009 and 2008:

 

(Dollar amounts in thousands)    SERP    SERP
   Three Months
Ended
September 30, 2009
   Three Months
Ended
September 30, 2008
   Nine Months
Ended
September 30, 2009
   Nine Months
Ended
September 30, 2008

Components of net periodic pension cost

           

Service cost

   $ 12    $ 11    $ 36    $ 33

Interest cost

     26      27      78      81

Amortization of unrecognized gains and losses

     8      6      24      18

Amortization of prior service cost

     10      10      30      30
                           

Net periodic pension cost

   $ 56    $ 54    $ 168    $ 162
                           
     Directors’ Retirement Plan    Directors’ Retirement Plan
(Dollar amounts in thousands)    Three Months
Ended
September 30, 2009
   Three Months
Ended
September 30, 2008
   Nine Months
Ended
September 30, 2009
   Nine Months
Ended
September 30, 2008

Components of net periodic pension cost

           

Service cost

   $ 7    $ 8    $ 21    $ 24

Interest cost

     12      12      36      36

Amortization of prior service cost

     22      22      66      66
                           

Net periodic pension cost

   $ 41    $ 42    $ 123    $ 126
                           

 

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Table of Contents

ESB Financial Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements—(Continued)

 

9. Fair Value

GAAP requires, among other things, enhanced disclosures about assets and liabilities carried at fair value. Disclosures follow a hierarchal framework associated with the level of pricing observability utilized in measuring assets and liabilities at fair value. The three broad levels 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.
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 September 30, 2009 and December 31, 2008 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 September 30, 2009
(Dollar amounts in thousands)    Level I    Level II    Level III    Total

Assets:

           

Securities available for sale

           

Trust preferred securities

   $ —      $ —      $ 494    $ 494

Municipal securities

     —        151,694      —        151,694

Equity securities

     925      —        —        925

Corporate bonds

     —        89,044      38,216      127,260

Mortgage backed securities

     —        834,093      —        834,093
                           

Total securities available for sale

   $ 925    $ 1,074,831    $ 38,710    $ 1,114,466
                           

Other Assets

           

Interest rate caps

   $ —      $ 434    $ —      $ 434
                           

Total other assets

   $ —      $ 434    $ —      $ 434
                           

Liabilities:

           

Other Liabilities

           

Interest rate swaps

     —        660      —        660
                           

Total other liabilities

   $ —      $ 660    $ —      $ 660
                           

 

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ESB Financial Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements—(Continued)

 

     As of December 31, 2008
(Dollar amounts in thousands)    Level I    Level II    Level III    Total

Assets:

           

Securities available for sale

           

Trust preferred securities

   $ —      $ —      $ 479    $ 479

Municipal securities

     —        134,045      —        134,045

Equity securities

     706      —        —        706

Corporate bonds

     —        20,751      37,732      58,483

Mortgage backed securities

     —        903,093      —        903,093
                           

Total securities available for sale

   $ 706    $ 1,057,889    $ 38,211    $ 1,096,806
                           

Other assets

           

Interest rate caps

   $ —      $ 157    $ —      $ 157
                           

Total other assets

   $ —      $ 157    $ —      $ 157
                           

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 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 20 to 145 basis points. Liquidity risk adjustments ranged from 30 to 100 basis points where the securities of the 10 largest banks in the United States are assigned 30 basis points and banks outside of the top 10 were given a higher liquidity risk adjustment. Approximately $14.5 million or 37.5% of the $38.7 million in floating rate trust preferred securities represent investments in two of the four largest banks in the United States.

The following table presents the changes in the Level III fair-value category for the nine month period ended September 30, 2009. 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
 

Beginning balance January 1, 2009

   $ 38,211   

Total net realized/unrealized gains (losses)

  

Included in earnings:

  

Interest income on securities

     10   

Net realized loss on securities available for sale

     (407

Included in other comprehensive income

     896   

Transfers in and/or out of Level III

     —     

Purchases, issuances and settlements

     —     
        

Ending balance, September 30, 2009

   $ 38,710   
        

 

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Table of Contents

ESB Financial Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements—(Continued)

 

The following table summarizes changes in unrealized gains and losses recorded in earnings for the nine month period ended September 30, 2009 for Level III assets and liabilities that are still held at September 30, 2009.

 

     Securities
available
for sale
 

Interest income on securities

   $ 10   

Net realized loss on securities available for sale

     (407
        

Total

   $ (397
        

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 September 30, 2009 and December 31, 2008 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 September 30, 2009
(Dollar amounts in thousands)    Level I    Level II    Level III    Total

Assets:

           

Impaired Loans

   $ —      $ —      $ 1,235    $ 1,235
     As of December 31, 2008
(Dollar amounts in thousands)    Level I    Level II    Level III    Total

Assets:

           

Impaired Loans

   $ —      $ —      $ 590    $ 590

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.

Loans receivable – 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.

 

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Table of Contents

ESB Financial Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements—(Continued)

 

Loan commitments – The fair value of loan commitments at September 30, 2009 and December 31, 2008 approximated the cash surrender value of the policies at those dates.

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

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

Bank owned life insurance (BOLI) – The fair value of BOLI at September 30, 2009 and December 31, 2008 approximated the cash surrender value of the policies at those dates.

Interest rate cap contracts – Fair values of interest rate cap 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 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 insurance – The 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 statements of financial condition as of the respective dates below:

 

     September 30, 2009    December 31, 2008

(Dollar amounts in thousands)

   Carrying
amount
   Fair
value
   Carrying
amount
   Fair
value

Financial assets:

           

Cash and cash equivalents

   $ 35,631    $ 35,631    $ 18,893    $ 18,893

Securities

     1,114,466      1,114,466      1,096,806      1,096,806

Loans receivable and held for sale

     669,722      692,860      691,315      711,324

Accrued interest receivable

     9,743      9,743      10,052      10,052

FHLB stock

     27,470      27,470      27,470      27,470

Bank owned life insurance

     29,169      29,169      28,481      28,481

Interest rate cap contracts

     434      434      157      157

Financial liabilities:

           

Deposits

     926,467      937,215      877,329      886,647

Borrowed funds

     815,912      848,406      886,508      925,396

Junior subordinated notes

     46,393      75,157      46,393      66,402

Advance payment by borrowers for taxes and insurance

     1,484      1,484      2,816      2,816

Accrued interest payable

     4,552      4,552      5,119      5,119

Interest rate swap contracts

     660      660      —        —  

 

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Table of Contents

ESB Financial Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements—(Continued)

 

11. Adoption of Accounting Standards

In January 2009, the Company adopted GAAP relating to Noncontrolling Interests in Consolidated Financial Statements, it is intended to improve the relevance, comparability, and transparency of financial information provided to investors by requiring all entities to report noncontrolling (minority) interests in subsidiaries in the same way – as equity in the consolidated financial statements. Moreover, it eliminates the diversity that currently exists in accounting for transactions between an entity and noncontrolling interests by requiring that they be treated as equity transactions. In accordance with GAAP, the presentation and disclosure requirements were applied retrospectively. Other than the change in presentation of noncontrolling interests, the adoption of this guidance had no material impact on the Company’s financial position and results of operations. The presentation of the statement of condition was affected by renaming the minority interest to noncontrolling interest, removing it from other liabilities and reclassifying it as a component of stockholders equity separate from the Company’s equity. The Company’s statement of operations was affected by reclassifying the noncontrolling interest from noninterest expense and presenting it separately from the income attributable to the Company.

In May 2009, the Company adopted GAAP related to, Subsequent Events, which requires companies to evaluate events and transactions that occur after the balance sheet date but before the date the financial statements are issued, or available to be issued in the case of non-public entities. It required entities to recognize in the financial statements the effect of all events or transactions that provide additional evidence of conditions that existed at the balance sheet date, including the estimates inherent in the financial preparation process. Entities shall not recognize the impact of events or transactions that provide evidence about conditions that did not exist at the balance sheet date but arose after that date. It also required entities to disclose the date through which subsequent events have been evaluated. The adoption did not have a material impact on Company’s results of operations or financial position.

12. Subsequent Events

The Company assessed events occurring subsequent to September 30, 2009 through November 5, 2009 for potential recognition and disclosure in the consolidated financial statements. No events have occurred that would require adjustment to or disclosure in the consolidated financial statements which were issued on November 5, 2009.

 

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Table of Contents
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 September 30, 2009 have remained unchanged from the disclosures presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 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, 2008, 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 after opening an additional branch in Butler County in July 2009.

During the three months ended September 30, 2009, the Company reported net income of $3.5 million, an increase of approximately $382,000, or 12.2%, over the same period last year. The Company realized a decrease to interest income of approximately $1.2 million over the same quarter last year. However, interest expense decreased by approximately $2.8 million during the same period. The result was an increase of $1.5 million in net interest income and an increase of 37 basis points to the Company’s net interest margin.

During the nine months ended September 30, 2009, the Company reported net income of $9.7 million, a $1.4 million, or 17.3%, increase in earnings over the same period last year. The Company realized a decrease to interest income of approximately $2.0 million over the same period last year. However, interest expense decreased by approximately $7.3 million during the same period. The result was an increase of $5.3 million in net interest income and an increase of 37 basis points to the Company’s net interest margin.

The increase in income for the quarter and year to date reflects management’s sustained efforts to manage the net interest margin during the recent difficult interest rate environment which included either a flat or inverted yield curve.

The Company is continuing efforts to improve the net interest margin by employing strategies to minimize the impact on 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 the wholesale borrowings, which are comprised of FHLB advances and repurchase agreements. This is referred to as

 

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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 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 nine months ended September 30, 2009, the Company had approximately $211.4 million of wholesale borrowings maturing with a weighted average rate of 5.23% and an original call/maturity of 2.8 years. These borrowings were replaced during the nine months ended September 30, 2009 with $166.0 million of borrowings with a weighted average rate of 2.98% and a weighted average call/maturity of 4.0 years. For purposes of determining the average life of the borrowings, the Company utilizes the call date if applicable.

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 since its initial public offering in 1990. 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 Bank’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 balance sheet accordingly. This strategy is continually evaluated by management on an ongoing basis.

RESULTS OF OPERATIONS

Earnings Summary. The Company recorded net income of $3.5 million for the three months ended September 30, 2009 as compared to $3.1 million for the same period in the prior year. The $382,000, or 12.2%, increase in net income for the quarter ended September 30, 2009, as compared to the same period in the prior year was primarily attributable to a increase in net interest income after provision for loan losses of $1.7 million, partially offset by decreases in non interest income of $210,000 and increases in non interest expense, provision for income taxes and net income attributable to the non controlling interest of $749,000, $257,000 and $111,000, respectively.

The Company recorded net income of $9.7 million for the nine months ended September 30, 2009, as compared to net income of $8.2 million for the same period in the prior year. The $1.4 million, or 17.3% increase in net income for the nine months ended September 30, 2009, as compared to the same period in the prior year was primarily attributable to increases in net interest income after provision for loan losses of $5.4 million, partially offset by a decrease in non interest income of $583,000 and increases in non interest expense, provision for income taxes and net income attributable to the non controlling interest of $2.7 million, $636,000 and $48,000, 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 can cause sensitivity to the Company’s net interest income, these being extended low long-term interest rates or rapidly rising short-term interest rates as well as a sustained inverted yield curve.

 

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Net interest income increased $1.5 million, or 18.7%, to $9.8 million for the three months ended September 30, 2009, compared to $8.2 million for the same period in the prior year. This increase in net interest income was the result of interest expense decreasing by $2.8 million, partially offset by a decrease to interest income of $1.2 million.

Net interest income increased by $5.3 million, or 23.3%, to $27.9 million for the nine months ended September 30, 2009 compared to $22.6 million for the same period in the prior year. This increase in net interest income was the result of interest expense decreasing by $7.3 million, partially offset by a decrease to interest income of $2.0 million.

Interest income. Interest income decreased $1.2 million, or 5.1%, for the three months ended September 30, 2009, compared to the same period in the prior year. This decrease can primarily be attributed to decreases in interest earned on loans receivable, securities available for sale, Federal Home Loan Bank (FHLB) stock and interest earning deposits of $391,000, $561,000, $257,000 and $28,000, respectively.

Interest earned on loans receivable decreased $391,000, or 3.9%, for the three months ended September 30, 2009, compared to the same period in the prior year. This decrease was primarily attributable to a decrease in the yield on loans receivable of 21 basis points to 5.83% at September 30, 2009 from 6.04% at September 30, 2008, as well as a decrease in the average balance of loans outstanding of $1.7 million, or 0.25%, to $672.8 million for the three months ended September 30, 2009, compared to $674.5 million for the same period in the prior year.

Interest earned on securities decreased $561,000, or 4.09%, for the three months ended September 30, 2009, 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 5.17% for the three months ended September 30, 2009 from 5.31% for the three months ended September 30, 2008, as well as a decrease in the average balance of the securities portfolio of $10.2 million, or 0.95%, to $1.1 billion at September 30, 2009.

Interest earned on FHLB stock decreased $257,000, or 100.0%, for the three months ended September 30, 2009, compared to the same period in the prior year. This decrease was primarily the result of the decision by the FHLB of Pittsburgh to suspend dividends on FHLB stock during the fourth quarter of 2008.

Interest income decreased $2.0 million, or 2.8%, for the nine months ended September 30, 2009, compared to the same period in the prior year. This decrease can primarily be attributed to decreases in interest earned on loans receivable, securities available for sale, FHLB stock and interest-earning deposits of $219,000, $715,000, $952,000 and $130,000, respectively.

Interest earned on loans receivable decreased $219,000, or 0.7%, for the nine months ended September 30, 2009 compared to the same period in the prior year. This decrease was primarily attributable to a decrease in the yield on loans receivable of 28 basis points to 5.82% at September 30, 2009 from 6.10% at September 30, 2008, partially offset by an increase in the average balance of loans outstanding of $28.2 million, or 4.3%, to $684.2 million for the nine months ended September 30, 2009 as compared to $656.0 million for the same period in the prior year.

Interest earned on securities decreased $715,000, or 1.7%, for the nine months ended September 30, 2009 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 of 8 basis points to 5.23% at September 30, 2009 as compared to 5.31% at September 30, 2008, partially offset by an increase in the average balance of the securities portfolio of $5.0 million, or 0.5%, to $1.1 billion at September 30, 2009.

Interest earned on FHLB stock decreased $952,000, or 100.0%, for the nine months ended September 30, 2009, compared to the same period in the prior year. This decrease was primarily the result of the decision by the FHLB of Pittsburgh to suspend dividends on FHLB stock during the fourth quarter of 2008.

These changes are reflected in the quarterly and year to date rate volume tables 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.

 

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Interest expense. Interest expense decreased $2.8 million, or 17.4%, for the three months ended September 30, 2009, compared to the same period in the prior year. This decrease in interest expense can be attributed to decreases in interest incurred on deposits, borrowed funds and junior subordinated notes of $790,000, $1.9 million and $80,000, respectively.

Interest incurred on deposits decreased $790,000, or 15.4%, for the three months ended September 30, 2009, compared to the same period in the prior year. This decrease was due to a decrease in the cost of interest-bearing deposits to 2.01% from 2.55% for the quarters ended September 30, 2009 and 2008, respectively, partially offset by an increase in the average balance of interest-bearing deposits of $58.3 million, or 7.3%, to $856.6 million for the three months ended September 30, 2009, compared to $798.3 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 $1.9 million or 18.9%, for the three months ended September 30, 2009 compared to the same period in the prior year. This decrease was primarily attributable to a decrease in the cost of these funds to 4.02% from 4.60%, as well as a decrease in the average balance of $64.7 million, or 7.4%, for the quarters ended September 30, 2009 and 2008.

Interest expense decreased $7.3 million, or 14.8%, for the nine months ended September 30, 2009, compared to the same period in the prior year. This decrease in interest expense can be attributed to decreases in interest incurred on deposits, borrowed funds and junior subordinated notes of $3.5 million, $3.5 million and $375,000, respectively.

Interest incurred on deposits decreased $3.5 million, or 20.1%, for the nine months ended September 30, 2009, compared to the same period in the prior year. This decrease was due to a decrease in the cost of interest-bearing deposits to 2.20% from 2.89% for the nine months ended September 30, 2009 and 2008, respectively, partially offset by an increase in the average balance of interest-bearing deposits of $40.9 million, or 5.2%, to $836.0 million for the nine months ended September 30, 2009, compared to $795.1 million for the same period in the prior year.

Interest incurred on borrowed funds decreased $3.5 million, or 11.6%, for the nine months ended September 30, 2009 compared to the same period in the prior year. This decrease was primarily attributable to a decrease in the cost of these funds between the periods to 4.15% from 4.64%, as well as a decrease in the average balance of $8.9 million, or 1.0%, to $846.1 million for the nine months ended September 30, 2009, compared to $855.0 million for the same period in the prior year.

In addition to the wholesale strategy at the Bank, the Company manages its cost of borrowings through the use of debt associated with the issuance of trust preferred securities. During the quarter ended September 30, 2009, the interest incurred on these borrowings decreased by $80,000, or 11.4%, due primarily to a decrease in the cost of these funds to 5.32% from 5.91% for the same period in the prior year as well as a decline in the average balance of $855,000, or 1.8%. For the nine months ended September 30, 2009, the interest incurred on these borrowings decreased by $375,000, or 16.5% due primarily to a decrease in the cost of these funds to 5.49% for the nine months ended September 30, 2009 from 6.08% for the same period in the prior year, as well as a decline in the average balance of $3.7 million, or 7.4%.

Average Balance Sheet and Yield/Rate Analysis. The following tables set 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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     Three months ended September 30,  
      2009     2008  

(Dollar amounts in thousands)

   Average
Balance
   Interest    Yield /
Rate
    Average
Balance
   Interest    Yield /
Rate
 

Interest-earning assets:

                

Taxable securities available for sale

   $ 821,290    $ 10,382    5.06   $ 902,954    $ 11,769    5.21

Taxable corporate bonds available for sale

     127,663      1,415    4.40     67,787      730    4.28

Tax-exempt securities available for sale

     122,230      1,362    6.75 % (1)      110,676      1,221    6.69 % (1) 
                                        
     1,071,183      13,159    5.17 % (1)      1,081,417      13,720    5.31 % (1) 
                                        

Mortgage loans

     480,772      7,004    5.83     492,216      7,378    6.00

Other loans

     174,008      2,531    5.77     166,233      2,586    6.19

Tax-exempt loans

     18,030      198    6.60 % (1)      16,054      160    6.00 % (1) 
                                        
     672,810      9,733    5.83 % (1)      674,503      10,124    6.04 % (1) 
                                        

Cash equivalents

     26,137      6    0.09     18,184      34    0.72

FHLB stock

     27,470      —      —          29,311      257    3.50
                                        
     53,607      6    0.04     47,495      291    2.44
                                        

Total interest-earning assets

     1,797,600      22,898    5.27 (1)      1,803,415      24,135    5.51 (1) 

Other noninterest-earning assets

     166,808      —      —          133,088      —      —     
                                        

Total assets

   $ 1,964,408    $ 22,898    4.82 % (1)    $ 1,936,503    $ 24,135    5.13 % (1) 
                                        

Interest-bearing liabilities:

                

Interest-bearing demand deposits

   $ 261,422    $ 197    —        $ 249,341    $ 354    0.56

Time deposits

     595,196      4,136    2.76     548,979      4,769    3.46
                                        
     856,618      4,333    2.01     798,320      5,123    2.55
                                        

FHLB advances

     439,029      4,794    4.33     563,827      6,864    4.84

Repurchase Agreements

     343,500      3,160    3.65     288,167      2,992    4.13

Other borrowings

     26,167      232    3.52     21,352      233    4.34
                                        
     808,696      8,186    4.02     873,346      10,089    4.60
                                        

Preferred securities- fixed

     36,083      528    5.81     36,083      528    5.82

Preferred securities- adjustable

     10,310      94    3.62     11,165      174    6.20
                                        
     46,393      622    5.32     47,248      702    5.91
                                        

Total interest-bearing liabilities

     1,711,707      13,141    3.05     1,718,914      15,914    3.68

Noninterest-bearing demand deposits

     70,328      —      —          69,289      —      —     

Other noninterest-bearing liabilities

     21,528      —      —          24,934      —      —     
                                        

Total liabilities

     1,803,563      13,141    2.89     1,813,137      15,914    3.49

Stockholders’ equity

     160,845      —      —          123,366      —      —     
                                        

Total liabilities and equity

   $ 1,964,408    $ 13,141    2.65   $ 1,936,503    $ 15,914    3.27
                                        

Net interest income

      $ 9,757         $ 8,221   
                        

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

         2.22 % (1)          1.83 % (1) 
                        

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

         2.37 % (1)          2.00 % (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.

 

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     Nine months ended September 30,  
     2009     2008  

(Dollar amounts in thousands)

   Average
Balance
   Interest    Yield /
Rate
    Average
Balance
   Interest    Yield /
Rate
 

Interest-earning assets:

                

Taxable securities available for sale

   $ 857,918    $ 32,943    5.12   $ 896,703    $ 34,946    5.20

Taxable corporate bonds available for sale

     101,569      3,300    4.34     68,874      2,419    4.69

Tax-exempt securities available for sale

     119,744      4,003    6.75 % (1)      108,614      3,595    6.69 % (1) 
                                        
     1,079,231      40,246    5.23 % (1)      1,074,191      40,960    5.31 % (1) 
                                        

Mortgage loans

     491,472      21,416    5.81     479,953      21,667    6.02

Other loans

     173,259      7,505    5.79     161,205      7,599    6.30

Tax-exempt loans

     19,501      609    6.33 % (1)      14,848      483    6.59 % (1) 
                                        
     684,232      29,530    5.82 % (1)      656,006      29,749    6.10 % (1) 
                                        

Cash equivalents

     21,220      16    0.10     16,897      146    1.15

FHLB stock

     27,470      —      —          30,292      952    4.20
                                        
     48,690      16    0.04     47,189      1,098    3.11
                                        

Total interest-earning assets

     1,812,153      69,792    5.31 (1)      1,777,386      71,807    5.55 (1) 

Other noninterest-earning assets

     159,224      —      —          142,594      —      —     
                                        

Total assets

   $ 1,971,377    $ 69,792    4.88 % (1)    $ 1,919,980    $ 71,807    5.13 % (1) 
                                        

Interest-bearing liabilities:

                

Interest-bearing demand deposits

   $ 253,603    $ 564    0.30   $ 236,959    $ 1,065    0.60

Time deposits

     582,441      13,195    3.03     558,146      16,145    3.86
                                        
     836,044      13,759    2.20     795,105      17,210    2.89
                                        

FHLB advances

     469,108      15,881    4.53     590,322      21,289    4.82

Repurchase Agreements

     344,528      9,638    3.74     247,389      7,868    4.25

Other borrowings

     32,463      736    3.03     17,313      558    4.31
                                        
     846,099      26,255    4.15     855,024      29,715    4.64
                                        

Preferred securities- fixed

     36,083      1,583    5.87     36,083      1,583    5.86

Preferred securities- adjustable

     10,310      322    4.18     14,022      697    6.64
                                        
     46,393      1,905    5.49     50,105      2,280    6.08
                                        

Total interest-bearing liabilities

     1,728,536      41,919    3.24     1,700,234      49,205    3.87

Noninterest-bearing demand deposits

     69,843      —      —          64,766      —      —     

Other noninterest-bearing liabilities

     20,433      —      —          25,097      —      —     
                                        

Total liabilities

     1,818,812      41,919    3.08     1,790,097      49,205    3.67

Stockholders’ equity

     152,565      —      —          129,883      —      —     
                                        

Total liabilities and equity

   $ 1,971,377    $ 41,919    2.84   $ 1,919,980    $ 49,205    3.42
                                        

Net interest income

      $ 27,873         $ 22,602   
                        

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

         2.07 % (1)          1.68 % (1) 
                        

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

         2.22 % (1)          1.85 % (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.

 

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Analysis of Changes in Net Interest Income. The following tables analyze the changes in interest income and interest expense, between the three and nine month periods ended September 30, 2009 and 2008 in terms of: (1) changes in volume of interest-earning assets and interest-bearing liabilities and (2) changes in yields and rates. The tables reflect 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 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.

 

     Three months ended, September 30,
2009 versus 2008

Increase (decrease) due to
 

(Dollar amounts in thousands)

   Volume     Rate     Total  

Interest income:

      

Securities

   $ (129   $ (432   $ (561

Loans

     (25     (366     (391

Cash equivalents

     11        (39     (28

FHLB stock

     (15     (242     (257
                        

Total interest-earning assets

     (158     (1,079     (1,237
                        

Interest expense:

      

Deposits

     354        (1,144     (790

FHLB advances

     (1,412     (658     (2,070

Repurchase agreements

     533        (365     168   

Other borrowings

     47        (48     (1

Preferred securities

     (13     (67     (80
                        

Total interest-bearing liabilities

     (491     (2,282     (2,773
                        

Net interest income

   $ 333      $ 1,203      $ 1,536   
                        

 

     Nine months ended, September 30,
2009 versus 2008

Increase (decrease) due to
 

(Dollar amounts in thousands)

   Volume     Rate     Total  

Interest income:

      

Securities

   $ 191      $ (905   $ (714

Loans

     1,251        (1,470     (219

Cash equivalents

     30        (160     (130

FHLB stock

     (81     (871     (952
                        

Total interest-earning assets

     1,391        (3,406     (2,015
                        

Interest expense:

      

Deposits

     849        (4,300     (3,451

FHLB advances

     (4,165     (1,243     (5,408

Repurchase agreements

     2,805        (1,035     1,770   

Other borrowings

     380        (202     178   

Preferred securities

     (162     (213     (375
                        

Total interest-bearing liabilities

     (293     (6,993     (7,286
                        

Net interest income

   $ 1,684      $ 3,587      $ 5,271   
                        

Provision for loan losses. The provision for loan losses decreased $173,000 to $236,000 for the quarter ended September 30, 2009, compared to $409,000 for the same period last year. The provision for loan losses decreased $168,000 for the nine months ended September 30, 2009 compared to the same period last year. These provisions were part of the normal operations of the Company for the third quarter and first nine months of 2009. 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

 

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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 September 30, 2009 amounted to $6.2 million, or .91% of the Company’s total loan portfolio, as compared to $6.0 million, or .85%, at December 31, 2008. The Company’s allowance for losses on loans as a percentage of non-performing loans was 139.17% and 239.9% at September 30, 2009 and December 31, 2008, respectively.

Non-interest income. Non-interest income decreased $210,000, or 13.7%, for the three months ended September 30, 2009, compared to the same period in the prior year. This decrease can be attributed to decreases in cash surrender value of BOLI and loss on securities available for sale of $58,000 and $210,000, respectively, partially offset by increases to fees and service charges, gain on sale of loans, income from real estate joint venture and other income of $12,000, $25,000, $8,000 and $13,000, respectively.

Non-interest income decreased $583,000, or 10.8%, for the nine months ended September 30, 2009, as compared to the same period in the prior year. This decrease can be attributable to decreases in cash surrender value of BOLI, net realized loss on securities available for sale and income from real estate joint ventures of $174,000, $217,000 and $454,000, respectively, partially offset by an increase in fees and service charges, net gain on sale of loans and other income of $33,000, $189,000 and $40,000, respectively.

Net realized loss on securities available for sale increased $210,000 for the three months ended September 30, 2009 compared to the same period in the prior year. The Company took an impairment charge of approximately $154,000 on a collateralized debt obligation and charges of approximately $56,000 on two of its equity investments in small banks. Net realized loss on securities available for sale increased $217,000 for the nine months ended September 30, 2009 compared to the same period in the prior year. During the nine month period the Company took impairment charges on a collateralized debt obligation of $407,000 and impairment charges on two equity securities of $56,000, these charges were offset by gains on the sale of equity securities of $246,000. A complete discussion of the impairment charges can be found in Note 2 to the financial statements.

Income from real estate joint ventures had a nominal increase of $8,000, or 3.9%, for the three months ended September 30, 2009 compared to the three months ended September 30, 2008 and decreased $454,000, or 42.4%, to $618,000 for the nine months ended September 30, 2009 compared to income of $1.1 million for the same period in the prior year. The Company has a 51% ownership in its ten 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 nine months of 2009 the Company experienced decreased sales over the same period last year.

Non-interest expense. Non-interest expense increased $749,000, or 13.2%, to $6.4 million for the three months ended September 30, 2009 as compared to $5.7 million for the same period in the prior year. This increase was primarily related to increases in compensation and employee benefits and federal deposit insurance premiums, data processing, advertising and other expense of $233,000, $415,000, $62,000, $35,000 and $39,000, respectively.

Non-interest expense increased $2.7 million, or 16.0%, to $19.9 million for the nine months ended September 30, 2009 as compared to $17.2 million for the same period in the prior year. This increase was primarily related to increases in compensation and employee benefits, federal deposit insurance premiums, data processing advertising and other expense of $629,000, $2.0 million, $141,000, $98,000 and $7,000, respectively.

Compensation and employee benefits increased by $233,000, or 6.9%, to $3.6 million for the quarter ended September 30, 2009, as compared to the same quarter in the prior year and by $629,000, or 6.2%, to $10.8 million for the nine months ended September 30, 2009, as compared to the same period in the prior year. The increases were due to normal salary adjustments between the periods.

Federal deposit insurance premiums increased by $415,000 for the quarter ended September 30, 2009, as compared to the same quarter in the prior year and by $2.0 million for the nine months ended September 30, 2009, as compared to the same period in the prior year. These increases are primarily due to increases in the quarterly rates assessed by the Federal Deposit Insurance Corporation, as well as a special assessment by the FDIC in the amount of $891,000 in the nine months ended September 30, 2009.

 

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Provision for income taxes. The provision for income taxes increased $257,000 to $848,000 for the three months ended September 30, 2009, compared to $591,000 for the same period in the prior year. This increase in provision for income taxes is indicative of the increases to pre-tax income between the quarters and reflects an effective tax rate of 19.5% for the quarter ended September 30, 2009 as compared to 15.9% for the same period in the prior year.

The provision for income taxes increased $636,000 to $2.1 million for the nine months ended September 30, 2009, compared to $1.5 million for the same period in the prior year. This increase in provision for income taxes is indicative of the increases to pre-tax income and reflects an effective tax rate of 18.1% for the nine months ended September 30, 2009 as compared to 15.5% for the same period in the prior year.

CHANGES IN FINANCIAL CONDITION

General. The Company’s total assets increased by $4.5 million, or 0.2%, during the nine month period, to $2.0 billion at September 30, 2009. Cash and cash equivalents, securities available for sale, loans held for sale, premises and equipment, real estate acquired through foreclosure, and bank owned life insurance increased by $16.7 million, $17.7 million, $256,000, $1.3 million, $142,000 and $688,000, respectively. These increases were offset by decreases to loans receivable, accrued interest receivable real estate held for investment, intangible assets and prepaid expenses and other assets of $21.8 million, $309,000, $1.4 million, $386,000 and $8.4 million, respectively. Total liabilities decreased $20.3 million, or 1.1%, to $1.8 billion at September 30, 2009 and stockholders’ equity increased $24.8 million, or 17.3%, to $167.9 million at September 30, 2009 as compared to $143.1 million at December 31, 2008. The decrease in total liabilities was primarily the result of decreases in borrowings, advance payments by borrowers for taxes and insurance and accounts payable for land development of $70.6 million, $1.3 million and $752,000, respectively, partially offset by increases in deposits and accrued expenses and other liabilities of $49.1 million and $3.2 million, respectively. The increase to stockholders’ equity was primarily the result of increases in accumulated other comprehensive income, retained earnings and additional paid in capital of $19.9 million, $4.7 million and $276,000, respectively, and a decrease in unearned employee stock ownership plan shares of $647,000, partially offset by a net increase in treasury stock of $676,000.

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 increased a combined $16.7 million, or 88.6%, to $35.6 million at September 30, 2009 from $18.9 million at December 31, 2008. 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 portfolio increased by $17.7 million, or 1.6%, to $1.1 billion at September 30, 2009. During the nine months ended September 30, 2009, the Company recorded purchases of available for sale securities of $151.3 million, consisting of purchases of fixed-rate mortgage backed securities of $55.2 million, adjustable-rate mortgage backed securities of $23.1 million, $8.8 million of municipal bonds, $63.3 million of corporate bonds and $911,000 of equity securities. There were gross realized gains of approximately $246,000 on the sale of securities and the portfolio increased by $30.7 million due to increases in market value. These fair value adjustments represent temporary fluctuations resulting from changes in market rates in relation to average yields in the available for sale portfolio. If securities are held to their respective maturity dates, no fair value gain or loss is realized. Offsetting these increases were repayments and maturities of securities of $162.7 million, premium amortizations of $324,000, security sales of $992,000 and realized losses of $463,000.

The Company’s investment strategy for 2009 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 $135.0 million of wholesale borrowings with embedded interest rate caps totaling $160.0 million, to help insulate the net interest margin against a rapid rise in short term interest rates and $50.0 million, notional amount, of interest rate caps that are unhedged and marked to market quarterly through the income statement. In the first nine months of 2009, this resulted in $88,000 of non-interest income due to increases in the fair value of these interest rate caps.

 

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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 September 30, 2009, the Company had securities with unrealized losses for greater than twelve months of $8.4 million, as more fully described in footnote 2 to the unaudited consolidated financial statements on page 12. Included in the $8.4 million was $7.2 million of unrealized losses attributed to the Company’s floating rate trust preferred corporate bonds. Management’s conclusion after reviewing all of the factors, with the exception of the Company’s $2.5 million collateralized debt obligation, 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 $21.8 million, or 3.2%, to $669.5 million at September 30, 2009 from $691.3 million at December 31, 2008. Included in this decrease were decreases in mortgage loans of $26.7 million, or 5.1%, partially offset by an increase to other loans of $2.5 million, or 1.3%, and a decrease in allowance for loan losses, deferred loan fees and loans in process of a combined $2.4 million, or 14.8%, during the nine months ended September 30, 2009. During the nine month period, the Company had loan originations of approximately $126.5 million and loan repayments of approximately $145.9 million, resulting in the overall decline to the portfolio.

Loans held for sale. Loans held for sale increased $256,000, or 100.0%, at September 30, 2009. During the nine month period the Company originated loans held for sale of approximately $17.6 million and sold approximately $17.7 million, with a resulting gain of approximately $191,000.

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 $5.3 million, or 0.27%, of total assets at September 30, 2009 compared to $3.3 million, or 0.17%, of total assets at December 31, 2008. The increase in non-performing assets of approximately $2.0 million was primarily the result of increases in non-performing loans and REO of $1.9 million and $142,000, respectively, partially offset by a decrease in repossessed vehicles of approximately $165,000. The $1.4 million increase in non-performing loans was primarily due to an increase in non-performing 1-4 family mortgages of $1.1 million along with an increase in non-performing commercial and commercial real estate loans of $715,000.

FHLB Stock. FHLB stock remained the same at $27.5 million at September 30, 2009 and December 31, 2008. 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; however the FHLB Bank of Pittsburgh has currently restricted future redemptions of its stock, therefore the investment could be greater than 5.0% of such notes.

 

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Premises and Equipment. The Company’s premises and equipment increased $1.3 million, or 11.3%, to $13.0 million at September 30, 2009 from $11.7 million at December 31, 2008. This increase was primarily due to the construction of the Company’s second Butler County office. The Company has incurred costs of approximately $1.4 million related to the construction, $298,000 of which were incurred in 2008. The office was opened in July 2009.

Real Estate Held for Investment. The Company’s real estate held for investment decreased by $1.4 million or 4.0%, to $33.2 million at September 30, 2009 from $34.6 million at December 31, 2008. This decrease was 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 $386,000, or 21.1%, to $1.4 million at September 30, 2009 from $1.8 million at December 31, 2008. The decrease primarily resulted from normal amortization of the core deposit intangible of acquisitions. Amortization is expected to total $494,000, $413,000, $332,000, $251,000, $170,000 and $95,000 for the years 2009, 2010, 2011, 2012, 2013 and thereafter, respectively.

Prepaid Expenses and Other assets. Prepaid expenses and other assets decreased $8.4 million, or 72.6%, to $3.2 million at September 30, 2009 from $11.6 million at December 31, 2008. The decrease primarily resulted from a decrease in the deferred tax asset of approximately $10.2 million resulting from market value adjustments on the securities available for sale portfolio, partially offset by increases 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 $926.5 million, or 5.6%, of the Company’s total funding sources at September 30, 2009. Total deposits increased $49.1 million, or 5.6%, to $926.5 million at September 30, 2009 from $877.3 million at December 31, 2008. Interest-bearing demand deposits increased $25.2 million and time deposits increased $24.8 million, respectively, during the nine months ended September 30, 2009, while non-interest bearing deposits decreased approximately $831,000 during the same period. The increase to interest-bearing demand deposits is primarily due to the Company’s ongoing campaign to increase commercial, public and personal checking accounts.

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 $70.6 million, or 7.6%, to $862.3 million at September 30, 2009 from $932.9 million at December 31, 2008. FHLB advances decreased $73.4 million, or 14.0%, repurchase agreements increased $5.5 million, or 1.6%, other borrowings decreased approximately $2.7 million, or 11.5%, while junior subordinated notes remained the same at $46.4 million during the nine months ended September 30, 2009. 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 by $752,000 to $5.9 million at September 30, 2009 from $6.6 million at December 31, 2008. This account represents the unpaid portion of the development costs for the Company’s joint ventures.

Accrued Expenses and Other Liabilities. Accrued expenses and other liabilities increased by $3.2 million, or 26.6%, to $15.3 million at September 30, 2009 from $12.1 million at December 31, 2008. This increase was due to increases in accrued interest payable on certificates of deposit, accrued FDIC insurance and increases to various other payable accounts of $896,000, $456,000 and $3.3 million, respectively, partially offset by a decrease to interest payable on borrowings of approximately $1.5 million.

Stockholders’ equity. Stockholders’ equity increased $24.8 million, or 17.3%, to $167.9 million at September 30, 2009 from $143.1 million at December 31, 2008. The increase to stockholders’ equity was primarily the result of increases in accumulated other comprehensive income, retained earnings and additional paid in capital of $19.9 million, $4.7 million and $276,000, respectively, and a decrease in unearned employee stock ownership plan shares

 

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of $647,000, partially offset by a net increase in treasury stock of $676,000. The increase in the accumulated other comprehensive income of $19.9 million was primarily related to an increase in the pre-tax fair value of the floating rate corporate bonds of $1.9 million, fixed rate corporate bonds of $3.7 million, municipal bonds of $8.9 million, fixed rate mortgage backed securities of $10.9 million and adjustable rate mortgage backed securities of $4.9 million.

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 embedded caps which help to insulate the Bank’s interest rate risk position from increases in interest rates.

As of September 30, 2009, the implementation of these asset and liability initiatives resulted in the following: (i) $195.5 million or 28.6% of the Company’s total loan portfolio had adjustable interest rates or maturities of 12 months or less; (ii) $78.8 million or 22.3% of the Company’s portfolio of single-family residential mortgage loans (including residential construction loans) consisted of ARMs, (iii) $251.1 million or 30.1% of the Company’s portfolio of mortgage-backed securities were secured by ARMs and (iv) the Company had $50.0 million in notional amount of interest rate caps and $135.0 million in structured borrowings with $160.0 million in notional amount of embedded 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 September 30, 2009, the Company’s interest-earning assets maturing or repricing within one year totaled $647.7 million while the Company’s interest-bearing liabilities maturing or repricing within one-year totaled $750.3 million, providing a deficiency of interest-earning assets over interest-bearing liabilities of $102.6 million or a negative 5.2% of total assets. At September 30, 2009, the percentage of the Company’s assets to liabilities maturing or repricing within one year was 86.3%. 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.

 

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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. 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 September 30, 2009 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 September 30, 2009 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 September 30, 2009 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. The base amount of net income at September 30, 2009, increased from December 31, 2008.

 

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

Net interest income - increase (decrease)

   1.08   2.26   (1.57 )%    N/A

Return on average equity - increase (decrease)

   3.30   3.70   (2.60 )%    N/A

Diluted earnings per share - increase (decrease)

   3.42   3.90   (2.71 )%    N/A

EVE - increase (decrease)

   (6.80 )%    (16.19 )%    (18.10 )%    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 December 31, 2008 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, 2008 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, 2008 for the change in EVE:

 

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

Net interest income - increase (decrease)

   0.55   0.17   (1.53 )%    N/A

Return on average equity - increase (decrease)

   1.11   0.60   (2.62 )%    N/A

Diluted earnings per share - increase (decrease)

   1.07   0.49   (2.79 )%    N/A

EVE - increase (decrease)

   (12.06 )%    (29.72 )%    (22.03 )%    N/A

 

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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 $13.3 million during the nine months ended September 30, 2009. Net cash provided by operating activities was primarily comprised of net income of $9.7 million.

Funds provided by investing activities totaled $30.5 million during the nine months ended September 30, 2009. Primary sources of funds were $146.3 million for repayments of loans receivable, $162.7 million for repayments of securities available for sale, $992,000 for proceeds from the sale of securities, $52,000 for sale of real estate acquired through foreclosure and $7.4 million for proceeds from the sale of real estate held for investment. Offsetting these sources were uses of funds for $126.7 million for origination of loans, $151.3 million for security purchases, $189,000 for interest rate cap purchases, $2.0 million for purchases of premises and equipment and $6.8 million for funding of real estate held for investment.

Funds used by financing activities totaled $27.0 million for the nine months ended September 30, 2009. The primary uses of funds were repayment of long-term borrowings of $213.8 million, net repayment of short-term borrowings of $22.8 million, payments of dividends of $3.6 million, $56,000 for the purchase of ESOP stock and payments to acquire treasury stock of $2.6 million. Offsetting these uses were sources of funds were $49.1 million from the increase in deposits and $166.0 million from proceeds from long-term borrowings. Management believes that it currently is maintaining adequate liquidity and continues to match funding sources with lending and investment opportunities.

During the nine months ended September 30, 2009, the Company had approximately $211.4 million of wholesale borrowings maturing with a weighted average rate of 5.23% and an original call/maturity of 2.8 years. These borrowings were replaced during the nine months ended September 30, 2009 with $166.0 million of borrowings with a weighted average rate of 2.98% and a weighted average call/maturity of 4.0 years. For purposes of determining the average life of the borrowings, the Company utilizes the call date if applicable.

The Company’s primary sources of funds are deposits, amortization, repayments and maturities of existing loans, mortgage-backed securities and investment securities, funds from operations, and funds obtained through FHLB advances and other borrowings. At September 30, 2009, the total approved loan commitments outstanding amounted to $17.6 million. At the same date, commitments under unused lines of credit and credit card lines amounted to $80.9 million and the unadvanced portion of construction loans approximated $7.2 million. Certificates of deposit scheduled to mature in one year or less at September 30, 2009 totaled $408.8 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.

 

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On September 16, 2009, the Company’s Board of Directors declared a cash dividend of $0.10 per share of common stock payable October 23, 2009, to shareholders of record at the close of business on September 30, 2009. 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.

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 September 30, 2009, ESB Bank was in compliance with all regulatory capital requirements with leverage and risk-based capital ratios of 7.5% and 14.1%, respectively.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Quantitative and qualitative disclosures about market risk are presented at December 31, 2008 in Item 7A of the Company’s Annual Report on Form 10-K, filed with the SEC on March 17, 2009. Management believes there have been no material changes in the Company’s market risk since December 31, 2008.

 

Item 4. Controls and Procedures

As of September 30, 2009, 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 September 30, 2009. 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 during the quarter.

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, 2008.

 

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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.

 

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)

July 1-31, 2009

   5,595    $ 14.57    5,595    539,424

August 1-31, 2009

   1,988      13.47    1,988    537,436

September 1-30, 2009

   3,237      13.55    3,237    534,199
                     

Totals

   10,820    $ 14.06    10,820    534,199
                     

 

(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 by privately negotiated transactions, as in the opinion of management, market conditions warrant.

 

Item 3. Defaults Upon Senior Securities

None.

 

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

None.

 

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: November 5, 2009   By:  

/S/    CHARLOTTE A. ZUSCHLAG        

    Charlotte A. Zuschlag
    President and Chief Executive Officer
Date: November 5, 2009   By:  

/S/    CHARLES P. EVANOSKI        

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