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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, 2014

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  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “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, 2014:

 

Common Stock, $0.01 par value

 

17,839,439 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, 2014 and December  31, 2013 (Unaudited)

     1   
 

Consolidated Statements of Operations for the three and nine months ended September  30, 2014 and 2013 (Unaudited)

     2   
 

Consolidated Statements of Comprehensive Income for the three and nine months ended September  30, 2014 and 2013 (Unaudited)

     3   
 

Consolidated Statement of Changes in Stockholders’ Equity for the nine months ended September  30, 2014 (Unaudited)

     4   
 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013 (Unaudited)

     5   
 

Notes to Unaudited Consolidated Financial Statements

     7   

Item 2.

 

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

     43   

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

     58   

Item 4.

 

Controls and Procedures

     58   
PART II - OTHER INFORMATION   

Item 1.

 

Legal Proceedings

     58   

Item 1A.

 

Risk Factors

     58   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     58   

Item 3.

 

Defaults Upon Senior Securities

     59   

Item 4.

 

Mine Safety Disclosures

     59   

Item 5.

 

Other Information

     59   

Item 6.

 

Exhibits

     59   
 

Signatures

     60   


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, 2014 and December 31, 2013

(Dollar amounts in thousands)

(Unaudited)

 

     September 30,
2014
    December 31,
2013
 
Assets     

Cash on hand and in banks

   $ 5,807      $ 7,272   

Interest-earning deposits

     15,907        8,942   
  

 

 

   

 

 

 

Cash and cash equivalents

     21,714        16,214   

Securities available for sale; cost of $1,069,502 and $1,051,311

     1,094,549        1,063,016   

Loans receivable, net of allowance for loan losses of $6,751 and $6,805

     706,469        695,636   

Accrued interest receivable

     7,349        7,345   

Federal Home Loan Bank (FHLB) stock

     13,237        15,436   

Premises and equipment, net

     12,809        13,308   

Real estate acquired through foreclosure, net

     2,169        1,977   

Real estate held for investment

     5,399        7,813   

Goodwill

     41,599        41,599   

Intangible assets

     37        127   

Bank owned life insurance

     30,384        30,595   

Securities receivable

     799        654   

Prepaid expenses and other assets

     8,884        13,197   
  

 

 

   

 

 

 

Total assets

   $ 1,945,398      $ 1,906,917   
  

 

 

   

 

 

 
Liabilities and Stockholders’ Equity     

Liabilities:

    

Deposits

   $ 1,336,747      $ 1,222,767   

FHLB advances

     237,777        290,921   

Repurchase agreements

     98,000        138,000   

Other borrowings

     10,476        12,223   

Junior subordinated notes

     36,083        36,083   

Advance payments by borrowers for taxes and insurance

     1,547        2,659   

Accounts payable for land development

     1,022        1,383   

Accrued expenses and other liabilities

     18,510        17,038   
  

 

 

   

 

 

 

Total liabilities

     1,740,162        1,721,074   
  

 

 

   

 

 

 

Stockholders’ Equity:

    

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

     —          —     

Common stock, $.01 par value, 30,000,000 shares authorized; 19,214,226 shares issued; 17,805,441 and 17,729,105 shares outstanding

     192        192   

Additional paid-in capital

     104,460        104,251   

Treasury stock, at cost; 1,408,785 and 1,485,121 shares

     (16,706     (17,540

Unearned Employee Stock Ownership Plan (ESOP) shares

     (1,391     (2,121

Retained Earnings

     105,779        97,605   

Accumulated other comprehensive income

     14,065        4,615   
  

 

 

   

 

 

 

Total ESB Financial Corporation’s stockholders’ equity

     206,399        187,002   

Noncontrolling interest

     (1,163     (1,159
  

 

 

   

 

 

 

Total stockholders’ equity

     205,236        185,843   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 1,945,398      $ 1,906,917   
  

 

 

   

 

 

 

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, 2014 and 2013 (Unaudited)

(Dollar amounts in thousands, except share data)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2014     2013     2014     2013  

Interest and dividend income:

        

Loans receivable, including fees

   $ 7,910      $ 7,965      $ 23,625      $ 24,010   

Taxable securities available for sale

     6,524        6,417        19,654        19,484   

Tax free securities available for sale

     1,593        1,626        4,871        4,930   

FHLB Stock

     139        68        475        86   

Deposits with banks and federal funds sold

     14        2        49        2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest and dividend income

     16,180        16,078        48,674        48,512   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

        

Deposits

     1,706        1,800        5,115        5,643   

Borrowed funds

     1,989        2,917        6,800        9,664   

Junior subordinated notes and guaranteed preferred beneficial interest in subordinated debt

     527        529        1,562        1,608   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     4,222        5,246        13,477        16,915   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     11,958        10,832        35,197        31,597   

Provision for loan losses

     75        75        135        300   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     11,883        10,757        35,062        31,297   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest income:

        

Fees and service charges

     973        997        2,791        2,535   

Increase of cash surrender value of bank owned life insurance

     149        135        424        435   

Net realized gain on securities available for sale

     —          58        288        525   

Total other-than-temporary impairment losses

     —          —          (193     —     

Portion of loss recognized in other comprehensive income before taxes

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net impairment losses on investment securities

     —          —          (193     —     

Net realized (loss) gain on derivatives

     43        (166     (397     51   

Income from real estate held for investment

     158        335        1,303        1,296   

Other

     169        258        441        585   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     1,492        1,617        4,657        5,427   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest expense:

        

Compensation and employee benefits

     4,651        4,463        13,993        13,344   

Premises and equipment

     626        676        1,987        2,066   

Federal deposit insurance premiums

     299        304        862        930   

Data processing

     589        593        1,731        1,769   

Amortization of intangible assets

     25        41        85        130   

Advertising

     162        145        504        468   

Other

     1,355        1,278        3,447        3,460   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     7,707        7,500        22,609        22,167   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     5,668        4,874        17,110        14,557   

Provision for income taxes

     1,125        763        3,387        2,530   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income before noncontrolling interest

     4,543        4,111        13,723        12,027   

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

     (42     140        98        466   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to ESB Financial Corporation

   $ 4,585      $ 3,971      $ 13,625      $ 11,561   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share

        

Basic

     0.26        0.23        0.77        0.67   

Diluted

     0.26        0.23        0.77        0.66   

Cash dividends declared per share

     0.10        0.10        0.30        0.28   

Weighted average shares outstanding

     17,628,849        17,409,820        17,582,131        17,358,818   

Weighted average shares and share equivalents outstanding

     17,811,974        17,602,691        17,782,220        17,530,471   

See accompanying notes to unaudited consolidated financial statements.

 

2


Table of Contents

ESB Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

For the three and nine months ended September 30, 2014 and 2013 (Unaudited)

(Dollar amounts in thousands)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2014     2013     2014     2013  

Net Income before noncontrolling interest

   $ 4,543      $ 4,111      $ 13,723      $ 12,027   

Other comprehensive income (loss) (net of tax and reclassifications)

        

Net change in unrealized (losses) gains:

        

Securities available for sale other-than-temporarily impaired:

        

Reclassification adjustment for losses recognized in earnings

     —          —          193        —     

Income tax effect

     —          —          (66     —     
  

 

 

   

 

 

   

 

 

   

 

 

 
     —          —          127        —     

Securities available for sale not other-than-temporarily impaired:

        

(Losses) gains arising during the period

     (2,825     (1,363     13,614        (25,845

Income tax effect

     961        463        (4,629     8,788   
  

 

 

   

 

 

   

 

 

   

 

 

 
     (1,864     (900     8,985        (17,057
  

 

 

   

 

 

   

 

 

   

 

 

 

Reclassification adjustment for gains recognized in earnings

     —          (58     (288     (525

Income tax effect

     —          20        98        178   
  

 

 

   

 

 

   

 

 

   

 

 

 
     —          (38     (190     (347
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized holding (loss) gain on securities, net

     (1,864     (938     8,922        (17,404
  

 

 

   

 

 

   

 

 

   

 

 

 

Pension and postretirement amortization

     32        36        99        108   

Income tax effect

     (11     (12     (34     (37
  

 

 

   

 

 

   

 

 

   

 

 

 
     21        24        65        71   
  

 

 

   

 

 

   

 

 

   

 

 

 

Fair value adjustment on derivatives

     508        29        701        1,398   

Income tax effect

     (173     (10     (238     (476
  

 

 

   

 

 

   

 

 

   

 

 

 
     335        19        463        922   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

     (1,508     (895     9,450        (16,411
  

 

 

   

 

 

   

 

 

   

 

 

 

Net comprehensive income gain (loss) before noncontrolling interest

     3,035        3,216        23,173        (4,384

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

     (42     140        98        466   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net comprehensive income (loss) attributable to ESB Financial Corporation

   $ 3,077      $ 3,076      $ 23,075        (4,850
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

3


Table of Contents

ESB Financial Corporation and Subsidiaries

Consolidated Statement of Changes in Stockholders’ Equity

For the nine months ended September 30, 2014

(Unaudited)

(Dollar amounts in thousands, except share data)

 

    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, 2014

  $ 192      $ 104,251      $ (17,540   $ (2,121   $ 97,605      $ 4,615      $ (1,159   $ 185,843   

Net income

    —          —          —          —          13,625        —          98        13,723   

Other comprehensive income

    —          —          —          —          —          9,450        —          9,450   

Cash dividends at $0.30 per share

    —          —          —          —          (5,271     —          —          (5,271

Purchase of treasury stock, at cost (9,927 shares)

    —          —          (126     —          —          —          —          (126

Reissuance of treasury stock for stock option exercises (86,263 shares)

    —          —          960        —          (180     —          —          780   

Compensation expense ESOP and MRP

    —          518        —          730        —          —          —          1,248   

Additional ESOP shares purchased

    —          (362     —          —          —          —          —          (362

Tax effect of compensatory stock options

    —          53        —          —          —          —          —          53   

Capital disbursement for noncontrolling interest

    —          —          —          —          —          —          (102     (102
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2014

  $ 192      $ 104,460      $ (16,706   $ (1,391   $ 105,779      $ 14,065      $ (1,163   $ 205,236   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

4


Table of Contents

ESB Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows

For the nine months ended September 30, 2014 and 2013 (Unaudited)

(Dollar amounts in thousands)

 

     Nine months ended
September 30,
 
     2014     2013  

Operating activities:

    

Net income

   $ 13,723      $ 12,027   

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

    

Depreciation and amortization for premises and equipment

     646        729   

Provision for loan losses

     135        300   

Amortization of premiums and accretion of discounts

     1,864        2,951   

Net gain on sale of securities available for sale

     (288     (525

Impairment losses on investment securities

     193        —     

Net realized loss (gain) on derivatives

     397        (51

Amortization of intangible assets

     85        130   

Compensation expense on ESOP and MRP

     1,248        1,166   

Increases in Bank owned life insurance

     (424     (435

(Increase) decrease in accrued interest receivable

     (4     486   

Decrease in prepaid FDIC assessment

     —          2,031   

(Increase) decrease in prepaid expenses and other assets

     (873     2,628   

Increase in accrued expenses and other liabilities

     2,231        1,429   

Gain on sale of real estate acquired through foreclosure

     (12     (58

Other

     (948     (2,784
  

 

 

   

 

 

 

Net cash provided by operating activities

     17,973        20,024   
  

 

 

   

 

 

 

Investing activities:

    

Loan originations

     (113,917     (149,279

Purchases of:

    

Securities available for sale

     (142,523     (165,442

FHLB Stock

     (1,965     (4,937

Premises and equipment

     (147     (50

Principal repayments of:

    

Loans receivable

     104,341        141,572   

Securities available for sale

     122,418        177,813   

Proceeds from the sale of:

    

Securities available for sale

     563        1,956   

Real estate acquired through foreclosure

     45        586   

Premises and equipment

     —          105   

Proceeds from bank owned life insurance

     636        —     

Redemption of FHLB stock

     4,164        6,359   

Funding of real estate held for investment

     (15,037     (5,714

Proceeds from real estate held for investment

     14,994        3,571   
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (26,428     6,540   
  

 

 

   

 

 

 

Financing activities:

    

Net increase in deposits

     113,980        54,377   

Proceeds from long-term borrowings

     33,889        105,291   

Repayments of long-term borrowings

     (108,681     (162,073

Net (decrease) increase in short-term borrowings

     (20,099     (5,504

Capital disbursement to noncontrolling interest

     (102     (649

Redemption of junior subordinated notes

     —          (10,310

Proceeds received from exercise of stock options

     780        1,226   

Dividends paid

     (5,324     (3,232

Payments to acquire treasury stock

     (126     (615

Stock purchased by ESOP

     (362     (300
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     13,955        (21,789
  

 

 

   

 

 

 

Net increase in cash equivalents

     5,500        4,775   

Cash equivalents at beginning of period

     16,214        15,064   
  

 

 

   

 

 

 

Cash equivalents at end of period

   $ 21,714      $ 19,839   
  

 

 

   

 

 

 

 

5


Table of Contents

ESB Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows, (Continued)

For the nine months ended September 30, 2014 and 2013 (Unaudited)

(Dollar amounts in thousands)

 

     Nine months ended
September 30,
 
     2014      2013  

Supplemental information:

     

Interest paid

   $ 12,062       $ 15,605   

Income taxes paid

     3,389         2,050   

Supplemental schedule of non-cash investing and financing activities:

     

Transfers from loans receivable to real estate acquired through foreclosure

     131         86   

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

     2,096         4,733   

Dividends declared but not paid

     1,781         1,767   

See accompanying notes to unaudited consolidated financial statements.

 

6


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), 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 seven real estate joint ventures, all of which are owned 51% or greater by AMSCO. The Bank has provided all development and construction financing. These joint ventures have been included in the consolidated financial statements and reflected within the consolidated statements of financial condition as real estate held for investment and related operating income and expenses are 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, 2013, as contained in the Company’s 2013 Annual Report to Stockholders.

The results of operations for the three and nine month periods ended September 30, 2014 are 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, 2014, the Company was doing business through 23 full service banking branches, one loan production office and through its various other subsidiaries. Loans and deposits are primarily generated from the areas where banking branches are located. The Company derives its income predominantly from

 

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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.

Stock Based Compensation

During the three and nine months ended September 30, 2014, the Company recorded approximately $230,000 and $694,000, respectively, in compensation expense and a tax benefit of $59,000 and $114,000, respectively, related to our share-based compensation awards that are expected to vest in 2014. As of September 30, 2014, there was approximately $841,000 of unrecognized compensation cost related to unvested share-based compensation awards granted. That cost is expected to be recognized over the next four years.

During the three and nine months ended September 30, 2013, the Company recorded approximately $186,000 and $537,000, respectively, in compensation expense and a tax benefit of $12,000 and $49,000, respectively, related to our share-based compensation awards that were expected to vest in 2013. As of September 30, 2013, there was approximately $727,000 of unrecognized compensation cost related to unvested share-based compensation awards granted. That cost is expected to be recognized over the next four years.

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

Financial Instruments

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

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

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

For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (OCI) and subsequently reclassified to earnings when the hedged transaction affects earnings and the ineffective portion of changes in the fair

 

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value of the derivative is recognized directly in earnings. The Company assesses the effectiveness of each hedging relationship by comparing the changes in fair value or cash flows of the derivative hedging instrument with the changes in fair value or cash flows of the designated hedged item or transaction. For derivatives not designated as hedges, changes in fair value are recognized in earnings.

At September 30, 2014, there were twenty-two interest rate cap contracts outstanding with notional amounts totaling $230.0 million. These derivative instruments are not hedged and therefore adjustments to fair value are recorded in current earnings.

The Company entered into two interest rate swap contracts to manage its exposure to interest rate risk. These interest rate swap transactions involved the exchange of the Company’s interest payment on $35.0 million in junior subordinated notes which became floating rate notes in 2011 for a fixed rate interest payment without the exchange of the underlying principal amount. Entering into interest rate derivatives potentially exposes the Company to the risk of counterparties’ failure to fulfill their legal obligations including, but not limited to, potential amounts due or payable under each derivative contract. Notional principal amounts are often used to express the volume of these transactions, but the amounts potentially subject to credit risk are much smaller. Management utilizes the Change in Variable Cash Flows Method to measure hedge ineffectiveness. To the extent that the cumulative change in anticipated cash flows from the hedging derivative offsets from 80% to 125% of the cumulative change in anticipated cash flows from the hedged exposure, the hedged is deemed effective. As of September 30, 2014, the interest rate swaps were deemed to be effective, therefore no amounts were charged to current earnings. The Company also does not expect to reclassify any hedge related amounts from OCI to earnings over the next twelve months.

The fixed rate interest rate swap contract outstanding at September 30, 2014 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, 2014:

 

     Notional      Effective      Pay     Receive     Maturity      Unrealized  

(Dollars in thousands)

   Amount      Date      Rate     Rate (*)     Date      Gain      Loss  
                  

Cash Flow Hedge

   $ 20,000         2/10/2011         4.18     0.23     2/10/2018       $ —         $ 1,855   

Cash Flow Hedge

     15,000         2/10/2011         3.91     0.23     2/10/2018         —           1,256   
  

 

 

              

 

 

    

 

 

 
   $ 35,000                 $ —         $ 3,111   
  

 

 

              

 

 

    

 

 

 

 

* Variable receive rate based upon contract rates in effect at September 30, 2014.

Recent Accounting and Regulatory Pronouncements

In June 2013, the FASB issued ASU 2013-08, Financial Services – Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements. The amendments in this Update affect the scope, measurement, and disclosure requirements for investment companies under U.S. GAAP. The amendments do all of the following: 1. Change the approach to the investment company assessment in Topic 946, clarify the characteristics of an investment company, and provide comprehensive guidance for assessing whether an entity is an investment Company. 2. Require an investment company to measure noncontrolling ownership interests in other investment companies at fair value rather than using the equity method of accounting. 3. Require the following additional disclosures: (a) the fact that the entity is an investment company and is applying the guidance in Topic 946, (b) information about changes, if any, in an entity’s status as an investment company, and (c) information about financial support provided or contractually required to be provided by an investment company to any of its investees. The amendments in this Update were effective for an entity’s interim and annual reporting periods in fiscal years that begin after December 15, 2013. Earlier application is prohibited. This ASU became effective for the Company January 1, 2014 and did not have a significant impact on the Company’s financial statements.

 

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In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This Update applies to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. This ASU did not have a significant impact on the Company’s financial statements.

In January 2014, FASB issued ASU 2014-01, Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects. The amendments in this Update permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The amendments in this Update should be applied retrospectively to all periods presented. A reporting entity that uses the effective yield method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those preexisting investments. The amendments in this Update are effective for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. Early adoption is permitted. This ASU is not expected to have a significant impact on the Company’s financial statements.

In January 2014, the FASB issued ASU 2014-04, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The amendments in this Update clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in this Update are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. An entity can elect to adopt the amendments in this Update using either a modified retrospective transition method or a prospective transition method. This ASU is not expected to have a significant impact on the Company’s financial statements.

 

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In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (a new revenue recognition standard). The Update’s core principle is that a company will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this update specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. This Update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is evaluating the effect of adopting this new accounting Update.

In June 2014, the FASB issued ASU 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The amendments in this Update change the accounting for repurchase-to-maturity transactions to secured borrowing accounting. For repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. The amendments also require enhanced disclosures. The accounting changes in this Update are effective for the first interim or annual period beginning after December 15, 2014. An entity is required to present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Earlier application is prohibited. The disclosure for certain transactions accounted for as a sale is required to be presented for interim and annual periods beginning after December 15, 2014, and the disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. The disclosures are not required to be presented for comparative periods before the effective date. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In June 2014, the FASB issued ASU 2014-12, Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments when the Terms of an Award Provide that a Performance Target Could Be Achieved After the Requisite Service Period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The amendments in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. Entities may apply the amendments in thi Update either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this Update as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date. Additionally, if retrospective transition is adopted, an entity may use hindsight in measuring and recognizing the compensation cost. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In August 2014, the FASB issued ASU 2014-14, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40). The amendments in this Update require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) the loan has a government guarantee that is not separable from the loan before foreclosure, (2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim, and (3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The amendments in this Update are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. This Update is not expected to have a significant impact on the Company’s financial statements.

 

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In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements -Going Concern (Subtopic 205-40). The amendments in this Update provide guidance in accounting principles generally accepted in the United States of America about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. This Update is not expected to have a significant impact on the Company’s financial statements.

 

2. Securities Available for Sale

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

 

(Dollar amounts in thousands)

   Amortized
cost
     Unrealized
gains
     Unrealized
losses
    Fair
value
 

September 30, 2014:

          

Trust preferred securities

   $ 45,400       $ 384       $ (7,048   $ 38,736   

Municipal securities

     170,924         9,877         (165     180,636   

Equity securities- financial institutions

     677         840         —          1,517   

Corporate bonds

     182,211         4,136         (80     186,267   

Mortgage-backed securities

          

U.S. sponsored entities

     669,096         20,179         (3,073     686,202   

Private label

     1,194         3         (6     1,191   
  

 

 

    

 

 

    

 

 

   

 

 

 

Subtotal mortgage-backed securities

     670,290         20,182         (3,079     687,393   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities

   $ 1,069,502       $ 35,419       $ (10,372   $ 1,094,549   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2013:

          

Trust preferred securities

   $ 45,589       $ 225       $ (6,908   $ 38,906   

Municipal securities

     178,579         5,310         (4,149     179,740   

Equity securities- financial institutions

     953         968         —          1,921   

Corporate bonds

     201,268         5,313         (361     206,220   

Mortgage-backed securities

          

U.S. sponsored entities

     623,134         18,397         (7,107     634,424   

Private label

     1,788         21         (4     1,805   
  

 

 

    

 

 

    

 

 

   

 

 

 

Subtotal mortgage-backed securities

     624,922         18,418         (7,111     636,229   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities

   $ 1,051,311       $ 30,234       $ (18,529   $ 1,063,016   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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The following table shows the Company’s investments gross unrealized losses and fair value aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2014:

 

As of September 30, 2014

(Dollar amounts in thousands)

  Less than 12 Months     12 Months or more     Total  
    # of
Securities
    Fair Value     Unrealized
losses
    # of
Securities
    Fair Value     Unrealized
losses
    # of
Securities
    Fair Value     Unrealized
losses
 

Trust preferred securities

    —        $ —        $ —          8      $ 36,886      $ 7,048        8      $ 36,886      $ 7,048   

Municipal securities

    3        2,493        7        7        5,268        158        10        7,761        165   

Corporate bonds

    2        7,152        80        —          —          —          2        7,152        80   

Mortgage-backed securities

                 

U.S. sponsored entities

    20        70,608        299        36        117,006        2,774        56        187,614        3,073   

Private label

    1        632        6        —          —          —          1        632        6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal mortgage-backed securities

    21        71,240        305        36        117,006        2,774        57        188,246        3,079   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    26      $ 80,885      $ 392        51      $ 159,160      $ 9,980        77      $ 240,045      $ 10,372   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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, 2013:

 

As of December 31, 2013

(Dollar amounts in thousands)

   Less than 12 Months      12 Months or more      Total  
     # of
Securities
     Fair Value      Unrealized
losses
     # of
Securities
     Fair
Value
     Unrealized
losses
     # of
Securities
     Fair Value      Unrealized
losses
 

Trust preferred securities

     —         $ —         $ —           8       $ 37,016       $ 6,908         8       $ 37,016       $ 6,908   

Municipal securities

     44         37,243         3,129         6         5,518         1,020         50         42,761         4,149   

Corporate bonds

     6         20,869         109         3         11,474         252         9         32,343         361   

Mortgage-backed securities

                          

U.S. sponsored entities

     69         229,223         6,363         4         16,878         744         73         246,101         7,107   

Private label

     1         502         4         —           —           —           1         502         4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal mortgage-backed securities

     70         229,725         6,367         4         16,878         744         74         246,603         7,111   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     120       $ 287,837       $ 9,605         21       $ 70,886       $ 8,924         141       $ 358,723       $ 18,529   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company primarily invests in mortgage-backed securities, variable and fixed rate corporate bonds, municipal bonds, government bonds and to a lesser extent equity securities. The policy of the Company is to recognize other than temporary impairment (OTTI) on equity securities where the fair value has been significantly below cost for three consecutive quarters. Declines in the fair value of the debt securities that can be attributed to specific adverse conditions affecting the credit quality of the investment would be recorded as OTTI and charged to earnings. In order to determine if a decline in fair value is other than temporary, the Company reviews corporate ratings of the investment, analyst reports and SEC filings of the issuers. For fixed maturity investments with unrealized losses due to interest rates where the Company expects to recover the entire amortized cost basis of the security, declines in value below cost

 

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are not assumed to be other than temporary. The Company reviews its position quarterly and has asserted that at September 30, 2014, the declines outlined in the above table represent temporary declines due to changes in interest rates and are not reflections of impairment in the credit quality of the securities. Additionally, the Company does not intend to sell the investment and it is not more likely than not that the Company will be required to sell the investment before recovery of its amortized cost basis.

The Company reviews investment debt securities on an ongoing basis for the presence of OTTI with formal reviews performed quarterly. Credit-related OTTI losses on individual securities are recognized in earnings while noncredit-related OTTI on securities not expected to be sold is recognized in accumulated other comprehensive income. The $193,000 credit-related OTTI recognized during 2014 consisted of a pooled trust preferred security with no remaining book value. There was no noncredit-related OTTI on this security recognized in OCI during the first nine months of 2014.

The Company holds one pooled trust preferred security that has previously been determined to be other than temporarily impaired by approximately $2.3 million, due solely to credit related factors. As stated at December 31, 2013, the Company’s intention was to sell this investment. The security was written down to its fair value at that time. During the first quarter of 2014, the Company attempted to liquidate this security but was unsuccessful due to the extreme illiquid market for this type of investment. The Company decided that due to the extreme illiquid market, this security has no value and therefore recorded an additional OTTI charge of $193,000, the remaining carrying value of this security.

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

The following table summarizes scheduled maturities of the Company’s securities as of September 30, 2014 and December 31, 2013 excluding equity securities which have no maturity dates:

 

As of September 30, 2014

(Dollar amounts in thousands)

   Available for sale  
     Weighted
Average Yield
    Amortized
cost
     F air
value
 

Due in one year or less

     3.46   $ 62,302       $ 63,396   

Due from one year to five years

     2.66     122,983         126,433   

Due from five to ten years

     3.44     100,469         103,818   

Due after ten years

     3.01     783,071         799,385   
  

 

 

   

 

 

    

 

 

 
     3.04   $ 1,068,825       $ 1,093,032   
  

 

 

   

 

 

    

 

 

 

 

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As of December 31, 2013

(Dollar amounts in thousands)

   Available for sale  
     Weighted
Average Yield
    Amortized
cost
     Fair
value
 

Due in one year or less

     2.79   $ 41,074       $ 41,497   

Due from one year to five years

     2.97     163,785         169,767   

Due from five to ten years

     3.37     106,115         107,917   

Due after ten years

     3.14     739,384         741,914   
  

 

 

   

 

 

    

 

 

 
     3.12   $ 1,050,358       $ 1,061,095   
  

 

 

   

 

 

    

 

 

 

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.

The proceeds from the sale of securities for the nine month period ended September 30, 2014 was $563,000 resulting in gross realized gains of $288,000. The proceeds from the sale of securities for the nine month period ended September 30, 2013 was $2.0 million resulting in gross realized gains of $525,000. There were no gross realized losses for the nine months ended September 30, 2014 and September 30, 2013, respectively.

 

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3. Loans Receivable

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

 

     September 30,     December 31,  

(Dollar amounts in thousands)

   2014     2013  

Mortgage loans:

    

Residential real estate

    

Single family

   $ 354,678      $ 341,775   

Multi family

     41,423        37,857   

Construction

     38,338        44,327   
  

 

 

   

 

 

 

Total residential real estate

     434,439        423,959   

Commercial real estate

    

Commercial

     82,191        77,366   

Construction

     10,486        25,971   
  

 

 

   

 

 

 

Total commercial real estate

     92,677        103,337   
  

 

 

   

 

 

 

Subtotal mortgage loans

     527,116        527,296   
  

 

 

   

 

 

 

Other loans:

    

Consumer loans

    

Home equity loans

     84,198        82,987   

Dealer auto and RV loans

     49,605        46,502   

Other loans

     5,948        6,653   
  

 

 

   

 

 

 

Total consumer loans

     139,751        136,142   

Commercial business

     57,902        52,801   
  

 

 

   

 

 

 

Subtotal other loans

     197,653        188,943   
  

 

 

   

 

 

 

Total loans receivable

     724,769        716,239   

Less:

    

Allowance for loan losses

     6,751        6,805   

Deferred loan fees and net discounts

     (2,449     (2,007

Loans in process

     13,998        15,805   
  

 

 

   

 

 

 

Subtotal

     18,300        20,603   
  

 

 

   

 

 

 

Net loans receivable

   $ 706,469      $ 695,636   
  

 

 

   

 

 

 

At September 30, 2014 and December 31, 2013, the Company conducted its business through 23 offices in Allegheny, Beaver, Butler and Lawrence counties in Pennsylvania which also serves as its primary lending area. Management does not believe it has significant concentrations of credit risk to any one group of borrowers given its underwriting and collateral requirements.

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

 

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percentages to get the adjusted factor to be applied to non classified loans. The following qualitative factors are analyzed for each portfolio segment:

 

    Levels of and trends in delinquencies and nonaccruals

 

    Changes in lending policies and procedures

 

    Volatility of losses within each risk category

 

    Loans and Lending staff acquired through acquisition

 

    Economic trends

 

    Concentrations of credit

 

    Trends in volume and terms

 

    Experience depth and ability of management

These qualitative factors are reviewed each quarter and adjusted based upon relevant changes within the portfolio. During the first nine months of 2014, the qualitative factors for trends in volume and terms for commercial loans increased by 5 basis points while all other factors remained unchanged from December 31, 2013.

In terms of the Company’s loan portfolio, the commercial and industrial loans and commercial real estate loans are deemed to have more risk than the consumer real estate loans and other consumer loans in the portfolio. The commercial loans not secured by real estate are highly dependent on financial condition and are more dependent on economic conditions. The commercial loans secured by real estate are also dependent on economic conditions but generally have stronger forms of collateral. More recently, commercial real estate has been negatively impacted by devaluation so these commercial loans carry a higher qualitative factor for changes in the value of collateral. The commercial loans and commercial real estate loans have historically been responsible for the majority of the Company’s delinquencies, non-accrual loans, and charge-offs so both of these categories carry higher qualitative factors than consumer loans. The Company has historically experienced very low levels of consumer loan charge-offs so these qualitative factors are set lower than the commercial real estate and commercial and industrial loans.

Loans by Segment

The total allowance reflects management’s estimate of loan losses inherent in the loan portfolio at the statement of financial condition date. The Company considers the allowance for loan losses of $6.8 million adequate to cover loan losses inherent in the loan portfolio, at September 30, 2014. The following tables present by portfolio segment, the changes in the allowance for loan losses for the three and nine month periods ended September 30, 2014 and 2013:

 

Three months ended September 30, 2014                                        
(Dollar amounts in thousands)           Commercial                            
     Commercial      Real Estate     Consumer      Residential     Unallocated      Total  

Allowance for loan losses:

               

Beginning balance

   $ 471       $ 1,736      $ 1,072       $ 3,144      $ 393       $ 6,816   

Charge-offs

     —           —          152         —          —           152   

Recoveries

     —           —          12         —          —           12   

Provision

     23         (54     102         (172     176         75   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Ending Balance

   $ 494       $ 1,682      $ 1,034       $ 2,972      $ 569       $ 6,751   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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Three months ended September 30, 2013                                       
(Dollar amounts in thousands)          Commercial                            
     Commercial     Real Estate     Consumer      Residential      Unallocated     Total  

Allowance for loan losses:

              

Beginning balance

   $ 543      $ 2,102      $ 1,062       $ 2,425       $ 596      $ 6,728   

Charge-offs

     17        —          93         13         —          123   

Recoveries

     —          —          33         —           —          33   

Provision

     (26     (44     97         193         (145     75   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Ending Balance

   $ 500      $ 2,058      $ 1,099       $ 2,605       $ 451      $ 6,713   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

Nine months ended September 30, 2014                                        
(Dollar amounts in thousands)          Commercial                             
     Commercial     Real Estate     Consumer      Residential      Unallocated      Total  

Allowance for loan losses:

               

Beginning balance

   $ 523      $ 1,723      $ 1,054       $ 2,996       $ 509       $ 6,805   

Charge-offs

     —          —          323         34         —           357   

Recoveries

     103        —          65         —           —           168   

Provision

     (132     (41     238         10         60         135   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance

   $ 494      $ 1,682      $ 1,034       $ 2,972       $ 569       $ 6,751   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

Nine months ended September 30, 2013                                       
(Dollar amounts in thousands)          Commercial                            
     Commercial     Real Estate     Consumer      Residential      Unallocated     Total  

Allowance for loan losses:

              

Beginning balance

   $ 550      $ 2,075      $ 1,031       $ 2,541       $ 512      $ 6,709   

Charge-offs

     17        7        346         24         2        396   

Recoveries

     —          —          100         —           —          100   

Provision

     (33     (10     314         88         (59     300   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Ending Balance

   $ 500      $ 2,058      $ 1,099       $ 2,605       $ 451      $ 6,713   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

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The following table presents by portfolio segment, the recorded investment in loans at September 30, 2014:

 

     Commercial      Real Estate      Consumer      Residential      Unallocated      Total  

Allowance for loan losses:

                 

Ending Balance

   $ 494       $ 1,682       $ 1,034       $ 2,972       $ 569       $ 6,751   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance: individually evaluated for impairment

   $ 57       $ 640       $ 47       $ 401       $ —         $ 1,145   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance: collectively evaluated for impairment

   $ 437       $ 1,042       $ 987       $ 2,571       $ 569       $ 5,606   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans Receivable:

                 

Ending Balance

   $ 57,902       $ 92,677       $ 139,751       $ 434,439       $ —         $ 724,769   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance: individually evaluated for impairment

   $ 57       $ 13,877       $ 450       $ 2,355       $ —         $ 16,739   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance: collectively evaluated for impairment

   $ 57,845       $ 78,800       $ 139,301       $ 432,084       $ —         $ 708,030   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents by portfolio segment, the recorded investment in loans at December 31, 2013:

 

As of December 31, 2013                                          
(Dollar amounts in thousands)           Commercial                              
     Commercial      Real Estate      Consumer      Residential      Unallocated      Total  

Allowance for loan losses:

                 

Ending Balance

   $ 523       $ 1,723       $ 1,054       $ 2,996       $ 509       $ 6,805   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance: individually evaluated for impairment

   $ 24       $ 989       $ 48       $ —         $ —         $ 1,061   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance: collectively evaluated for impairment

   $ 499       $ 734       $ 1,006       $ 2,996       $ 509       $ 5,744   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans Receivable:

                 

Ending Balance

   $ 52,801       $ 103,337       $ 136,142       $ 423,959       $ —         $ 716,239   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance: individually evaluated for impairment

   $ 24       $ 14,385       $ 407       $ 2,206       $ —         $ 17,022   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance: collectively evaluated for impairment

   $ 52,777       $ 88,952       $ 135,735       $ 421,753       $ —         $ 699,217   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Credit Quality Information

The following tables represent credit exposures by internally assigned grades as of September 30, 2014 and December 31, 2013. The grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all. The Company’s internal credit risk grading system is based on experiences with similarly graded loans.

The Company’s internally assigned grades are as follows:

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

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

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

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

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

 

As of September 30, 2014                                          
(Dollar amounts in thousands)                                          
     Residential
Real Estate
Multi - family
     Residential
Real Estate
Construction
     Commercial
Real Estate
Commercial
     Commercial
Real Estate
Construction
     Commercial      Total  

Pass

   $ 41,423       $ 36,336       $ 68,826       $ 10,486       $ 57,868       $ 214,939   

Special Mention

     —           17         1,291         —           7         1,315   

Substandard

     —           1,985         12,074         —           27         14,086   

Doubtful

     —           —           —           —           —           —     

Loss

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance

   $ 41,423       $ 38,338       $ 82,191       $ 10,486       $ 57,902       $ 230,340   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
As of December 31, 2013                                          
(Dollar amounts in thousands)                                          
     Residential
Real Estate
Multi - family
     Residential
Real Estate
Construction
     Commercial
Real Estate
Commercial
     Commercial
Real Estate
Construction
     Commercial      Total  

Pass

   $ 37,857       $ 40,874       $ 63,532       $ 25,971       $ 52,730       $ 220,964   

Special Mention

     —           382         1,283         —           17         1,682   

Substandard

     —           3,071         12,551         —           54         15,676   

Doubtful

     —           —           —           —           —           —     

Loss

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance

   $ 37,857       $ 44,327       $ 77,366       $ 25,971       $ 52,801       $ 238,322   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following tables present performing and nonperforming single family residential and consumer loans based on payment activity as of September 30, 2014 and December 31, 2013. Payment activity is reviewed by management on a monthly basis to determine how loans are performing. Loans are considered to be nonperforming when they become 90 days delinquent or are placed on nonaccrual.

 

As of September 30, 2014                                   
(Dollar amounts in thousands)                                   
     Residential Real Estate
Single Family
     Consumer
Home Equity
     Dealer
Auto and RV
     Other
Consumer
     Total  

Performing

   $ 351,521       $ 84,013       $ 49,489       $ 5,887       $ 490,910   

Nonperforming

     3,157         185         116         61         3,519   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 354,678       $ 84,198       $ 49,605       $ 5,948       $ 494,429   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

As of December 31, 2013                                   
(Dollar amounts in thousands)                                   
     Residential Real Estate
Single Family
     Consumer
Home Equity
     Dealer
Auto and RV
     Other
Consumer
     Total  

Performing

   $ 338,370       $ 82,692       $ 46,364       $ 6,588       $ 474,014   

Nonperforming

     3,405         295         138         65         3,903   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 341,775       $ 82,987       $ 46,502       $ 6,653       $ 477,917   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

Non-performing loans, which include non-accrual loans and TDRs, were $8.6 million and $8.7 million at September 30, 2014 and December 31, 2013, respectively. The TDRs included in non-performing loans amounted to $176,000 and $107,000 at September 30, 2014 and December 31, 2013, respectively. The Company also had TDRs that were in compliance with their modified terms of $9.3 million and $10.6 million at September 30, 2014 and December 31, 2013, respectively. The Company is not committed to lend additional funds to debtors whose loans are on non-accrual status.

 

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Table of Contents

Age Analysis of Past Due Loans Receivable by Class

The following tables are an aging analysis of the investment of past due loans receivable as of September 30, 2014 and December 31, 2013:

 

(Dollar amounts in thousands)                                                 
As of September 30, 2014                                                 
     30-59 Days
Past Due
     60-89 Days
Past Due
     90 Days
Or Greater
     Total Past
Due
     Current      Total Loans
Receivable
     Recorded
Investment >
90 Days and
Accruing
 

Residential real estate

                    

Single family

   $ 735       $ 64       $ 3,133       $ 3,932       $ 350,746       $ 354,678       $ —     

Construction

     —           —           —           —           38,338         38,338         —     

Multi-family

     —           —           —           —           41,423         41,423         —     

Commercial Real Estate

                    

Commercial

     198         6         5,037         5,241         76,950         82,191         —     

Construction

     —           —           —           —           10,486         10,486         —     

Consumer

                    

Consumer - home equity

     100         79         110         289         83,909         84,198         —     

Consumer - dealer auto and RV

     580         189         95         864         48,741         49,605         —     

Consumer - other

     5         76         61         142         5,805         5,948         —     

Commercial

     —           —           27         27         57,875         57,902         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,618       $ 414       $ 8,463       $ 10,495       $ 714,273       $ 724,769       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(Dollar amounts in thousands)                                                 
As of December 31, 2013                                                 
     30-59 Days
Past Due
     60-89 Days
Past Due
     90 Days
Or Greater
     Total Past
Due
     Current      Total Loans
Receivable
     Recorded
Investment >
90 Days and
Accruing
 

Residential real estate

                    

Single family

   $ 653       $ 319       $ 3,405       $ 4,377       $ 337,398       $ 341,775       $ —     

Construction

     —           —           —           —           44,327         44,327         —     

Multi-family

     —           —           —           —           37,857         37,857         —     

Commercial Real Estate

                    

Commercial

     53         65         4,787         4,905         72,461         77,366         —     

Construction

     —           —           —           —           25,971         25,971         —     

Consumer

                    

Consumer - home equity

     156         65         214         435         82,552         82,987         —     

Consumer - dealer auto and RV

     993         106         136         1,235         45,267         46,502         —     

Consumer - other

     47         43         65         155         6,498         6,653         —     

Commercial

     —           —           30         30         52,771         52,801         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,902       $ 598       $ 8,637       $ 11,137       $ 705,102       $ 716,239       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired Loans

Management considers commercial loans, commercial real estate loans and development loans which are 90 days or more past due to be impaired. Larger commercial loans, commercial real estate loans and

 

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Table of Contents

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

The following tables summarize impaired loans:

Impaired Loans

As of September 30, 2014 and December 31, 2013

 

(Dollar amounts in thousands)                                          
     September 30, 2014      December 31, 2013  
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
 

With no related allowance recorded:

                 

Commercial Real Estate

   $ 6,305       $ 6,412       $ —         $ 3,139       $ 3,246       $ —     

Residential single family

     1,379         1,379         —           1,356         1,356         —     

Residential construction

     —           —           —           850         850         —     

Consumer loans

                 

Home Equity

     277         280         —           249         253         —     

Dealer auto and RV

     22         22         —           6         6         —     

With an allowance recorded:

                 

Commercial Real Estate

   $ 7,572       $ 7,736       $ 640       $ 11,246       $ 11,409       $ 989   

Commercial Business

     57         57         57         24         24         24   

Residential Single Family

     976         976         401         —           —           —     

Consumer Loans:

                 

Home Equity

     148         148         44         149         149         45   

Dealer auto and RV

     3         3         3         3         3         3   

Total:

                 

Commercial Real Estate

     13,877         14,148         640         14,385         14,655         989   

Commercial Business

     57         57         57         24         24         24   

Residential single family

     2,355         2,355         401         1,356         1,356         —     

Residential construction

     —           —           —           850         850         —     

Consumer

     450         453         47         407         411         48   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 16,739       $ 17,013       $ 1,145       $ 17,022       $ 17,296       $ 1,061   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
                                                                                       
(Dollar amounts in thousands)                            
     Three months ended
September 30, 2014
     Three months ended
September 30, 2013
 
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded:

           

Commercial Real Estate:

           

Commercial Real Estate

   $ 6,309       $ 73       $ 5,562       $ 57   

Residential loans

     1,379         1         1,358         3   

Residential construction loans

           885         7   

Consumer Loans:

           

Home equity

     280         4         198         4   

Dealer auto and RV

     22         1         9         —     

With an allowance recorded:

           

Commercial Real Estate:

           

Commercial Real Estate

     7,591         47         9,176         116   

Commercial business loans

     56         1         —           —     

Residential loans

     976         —           —           —     

Consumer Loans:

           

Home equity

     148         3         172         3   

Dealer auto and RV

     3         —           3         —     

Total:

           

Commercial Real Estate

   $ 13,900       $ 120       $ 14,738       $ 173   

Commercial Business

     56         1         —           —     

Residential

     2,355         1         1,358         3   

Residential Construction

     —           —           885         7   

Consumer

     453         8         382         7   

 

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Table of Contents
(Dollar amounts in thousands)                            
     Nine months ended
September 30, 2014
     Nine months ended
September 30, 2013
 
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded:

           

Commercial Real Estate:

           

Commercial Real Estate

   $ 6,454       $ 100       $ 5,325       $ 177   

Residential loans

     1,366         2         1,359         7   

Residential construction loans

     —           —           894         25   

Consumer Loans:

           

Home equity

     268         11         179         10   

Dealer auto and RV

     25         2         10         2   

With an allowance recorded:

           

Commercial Real Estate:

           

Commercial Real Estate

     7,648         273         8,512         374   

Commercial business loans

     56         2         —           —     

Residential loans

     651         —           

Consumer Loans:

           

Home equity

     149         7         174         8   

Dealer auto and RV

     3         —           4         —     

Total:

           

Commercial Real Estate

   $ 14,102       $ 373       $ 13,837       $ 551   

Commercial Business

     56         2         —           —     

Residential

     2,017         2         1,359         7   

Residential construction loans

     —           —           894         25   

Consumer

     445        20        367        20   

Nonaccrual Loans

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

 

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Table of Contents

On the following table are the loans receivable on nonaccrual status as of September 30, 2014 and December 31, 2013. The balances are presented by class of loans:

 

(Dollar amounts in thousands)    September 30,      December 31,  
     2014      2013  

Commercial

   $ 27       $ 30   

Commercial Real Estate

     5,037         4,787   

Residential

     3,133         3,405   

Consumer

     

Consumer - Home Equity

     110         214   

Consumer - Dealer auto and RV

     95         136   

Consumer - other

     61         65   
  

 

 

    

 

 

 

Total

   $ 8,463       $ 8,637   
  

 

 

    

 

 

 

Modifications

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

When the Company modifies a loan, management evaluates any possible impairment based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, except when the sole (remaining) source of repayment for the loan is the operation or liquidation of the collateral. In these cases, management uses the current fair value of the collateral, less selling costs, instead of discounted cash flows. If management determines that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized by segment or class of loan, as applicable, through an allowance estimate or a charge-off to the allowance. Segment and class status is determined by the loan’s classification at origination.

The following tables include the recorded investment and number of modifications for modified loans for the three and nine months ended September 30, 2014 and September 30, 2013. The Company reports the recorded investment in the loans prior to a modification and also the recorded investment in the loans after the loans were restructured.

 

(Dollar amounts in thousands)                                          
     For the Three Months ended  
     September 30, 2014  
            Pre-Modification      Post-Modification Recorded Investment  
            Outstanding                              
     Number of      Recorded      Maturity Date      Deferral of                
     Contracts      Investment      Extension      Principal Payments      Other      Total  

Troubled Debt Restructurings

                 

Commerical

     1       $ 2       $ —           —         $ 2       $ 2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Troubled Debt Restructurings

     1       $ 2       $  —         $ —         $ 2       $ 2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

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Table of Contents
(Dollar amounts in thousands)                                          
     For the Three Months ended  
     September 30, 2013  
            Pre-Modification      Post-Modification Recorded Investment  
            Outstanding                              
     Number of      Recorded      Maturity Date      Deferral of                
     Contracts      Investment      Extension      Principal Payments      Other      Total  

Troubled Debt Restructurings

                 

Consumer

                 

Home equity

     1       $  25       $ 25         —         $ —         $ 25   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Troubled Debt Restructurings

     1       $ 25       $ 25       $ —         $ —         $ 25   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(Dollar amounts in thousands)                                          
     For the Nine Months ended  
     September 30, 2014  
            Pre-Modification      Post-Modification Recorded Investment  
            Outstanding                              
     Number of      Recorded      Maturity Date      Deferral of                
     Contracts      Investment      Extension      Principal Payments      Other      Total  

Troubled Debt Restructurings

                 

Commercial

     2       $ 59       $ —         $ —         $ 59       $ 59   

Consumer

                 

Home equity

     2         57         46         —           11         57   

Dealer auto and RV

     2         24         7         —           17         24   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Troubled Debt Restructurings

     6       $ 140       $ 53       $ —         $ 87       $ 140   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(Dollar amounts in thousands)                                          
     For the Nine Months ended  
     September 30, 2013  
            Pre-Modification      Post-Modification Recorded Investment  
            Outstanding                              
     Number of      Recorded      Maturity Date      Deferral of                
     Contracts      Investment      Extension      Principal Payments      Other      Total  

Troubled Debt Restructurings

                 

Commercial real estate

     12       $ 2,331       $ 26       $ —         $ 2,305       $ 2,331   

Consumer

                 

Home equity

     7         116         116         —           —           116   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Troubled Debt Restructurings

     19       $ 2,447       $ 142       $ —         $ 2,305       $ 2,447   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company did not have any TDRs that defaulted subsequent to their modification during the periods reported.

 

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4. Deposits

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

 

(Dollar amounts in thousands)    September 30, 2014     December 31, 2013  

Type of accounts

   Amount      %     Amount      %  

Noninterest-bearing deposits

   $ 127,302         9.5   $ 124,777         10.2

NOW account deposits

     324,124         24.3     234,163         19.2

Money Market deposits

     42,018         3.1     39,688         3.2

Passbook account deposits

     182,720         13.7     178,412         14.6

Time deposits

     660,583         49.4     645,727         52.8
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 1,336,747         100.0   $ 1,222,767         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

The Company’s time deposits mature as follows:

 

(Dollar amounts in thousands)    September 30, 2014     December 31, 2013  

Time deposits mature as follows:

          

Within one year

   $ 477,259         72.3   $ 437,731         67.8

After one year through two years

     101,674         15.4     115,976         18.0

After two years through three years

     60,924         9.2     60,045         9.3

After three years through four years

     11,836         1.8     16,393         2.5

After four years through five years

     5,444         0.8     10,871         1.7

Thereafter

     3,446         0.5     4,711         0.7
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 660,583         100.0   $ 645,727         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents
5. Borrowed Funds

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

 

(Dollar amounts in thousands)    September 30, 2014      December 31, 2013  
     Weighted
average
rate
    Amount      Weighted
average
rate
    Amount  

FHLB advances:

         

Due within 12 months

     1.68   $ 39,288         2.12   $ 101,492   

Due beyond 12 months but within 2 years

     0.93     67,451         2.14     25,873   

Due beyond 2 years but within 3 years

     1.19     84,585         0.99     78,008   

Due beyond 3 years but within 4 years

     2.06     45,086         1.34     73,380   

Due beyond 4 years but within 5 years

     1.71     1,367         3.26     12,168   
    

 

 

      

 

 

 
     $ 237,777         $ 290,921   
    

 

 

      

 

 

 

Repurchase agreements:

         

Due within 12 months

     1.90   $ 28,000         2.34   $ 58,000   

Due beyond 12 months but within 2 years

     —          —           4.12     10,000   

Due beyone 2 years but within 3 years

     4.28     25,000         —          —     

Due beyond 3 years but within 4 years

     4.49     45,000         4.28     25,000   

Due beyond 4 years but within 5 years

     —          —           4.49     45,000   
    

 

 

      

 

 

 
     $ 98,000         $ 138,000   
    

 

 

      

 

 

 

Other borrowings:

         

ESOP borrowings

         

Due within 12 months

     4.68   $ 1,000         4.68   $ 1,000   

Due beyond 12 months but within 2 years

     4.68     500         4.68     1,000   

Due beyond 2 years but within 3 years

     —          —           4.68     250   
    

 

 

      

 

 

 
     $ 1,500         $ 2,250   
    

 

 

      

 

 

 

Corporate borrowings

         

Due within 12 months

     3.75   $ 1,000         3.75   $ 1,000   

Due beyond 12 months but within 2 years

     3.75     1,000         3.75     1,000   

Due beyond 2 years but within 3 years

     3.75     1,000         3.75     1,000   

Due beyond 3 years but within 4 years

     3.75     5,976         3.75     1,000   

Due beyond 4 years but within 5 years

     —          —           3.75     5,973   
    

 

 

      

 

 

 
     $ 8,976         $ 9,973   
    

 

 

      

 

 

 

Junior subordinated notes

         

Due beyond 5 years

     2.05   $ 36,083         2.06   $ 36,083   
    

 

 

      

 

 

 
         

Included in the $98.0 million of repurchase agreements ( 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. It has historically been the Company’s position to pay off any borrowings and replace them with fixed rate funding if converted by the counterparty.

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

 

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Table of Contents

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

The market value of such securities exceeded the amortized cost of the securities sold under agreements to repurchase. The market value of the securities as of September 30, 2014 was $118.9 million with an amortized cost of $112.1 million. The market value of the securities as of December 31, 2013 was $168.8 million with an amortized cost of $160.4 million. The average maturity date of the mortgage backed securities sold under agreements to repurchase was greater than 90 days for the periods ended September 30, 2014 and December 31, 2013.

As of September 30, 2014 and December 31, 2013, the Company had REPOs with Citigroup of $25.0 million and $45.0 million respectively, Barclays Capital of $30.0 million and $30.0 million, respectively, Credit Suisse of $43.0 million and $43.0 million, respectively and Morgan Stanley of $0 and $20.0 million, respectively.

As of September 30, 2014, the REPOs with Citigroup had $4.7 million at risk (where the market value of the securities exceeds the borrowing), with a weighted average maturity of 31 months, Barclays Capital had $5.7 million at risk with a weighted average maturity of 34 months, Credit Suisse had $10.6 million at risk with a weighted average maturity of 29 months.

Borrowings under REPO averaged $98.0 million and $114.7 million during the three months and nine months ended September 30, 2014, respectively. The maximum amount outstanding at any month-end was $98.0 million and $138.0 million during the three and nine months ended September 30, 2014, respectively.

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

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

 

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Table of Contents
6. Net Income Per Share

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

 

(Amounts, except earnings per share, in thousands)

             
     Three Months
Ended
September 30, 2014
     Three Months
Ended
September 30, 2013
 

Net income

   $ 4,585       $ 3,971   

Weighted-average common shares outstanding

     17,629         17,410   
  

 

 

    

 

 

 

Basic earnings per share

   $ 0.26       $ 0.23   
  

 

 

    

 

 

 

Weighted-average common shares outstanding

   $ 17,629       $ 17,410   

Common stock equivalents due to effect of stock options

     183         193   
  

 

 

    

 

 

 

Total weighted-average common shares and equivalents

     17,812         17,603   
  

 

 

    

 

 

 

Diluted earnings per share

   $ 0.26       $ 0.23   
  

 

 

    

 

 

 
     Nine Months
Ended
September 30, 2014
     Nine Months
Ended
September 30, 2013
 

Net income

   $ 13,625       $ 11,561   

Weighted-average common shares outstanding

     17,582         17,359   
  

 

 

    

 

 

 

Basic earnings per share

   $ 0.77       $ 0.67   
  

 

 

    

 

 

 

Weighted-average common shares outstanding

   $ 17,582       $ 17,359   

Common stock equivalents due to effect of stock options

     200         171   
  

 

 

    

 

 

 

Total weighted-average common shares and equivalents

     17,782         17,530   
  

 

 

    

 

 

 

Diluted earnings per share

   $ 0.77       $ 0.66   
  

 

 

    

 

 

 

The shares controlled by the Company’s Employee Stock Ownership Plan (ESOP) of 200,569 and 296,095 at September 30, 2014 and September 30, 2013, 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 purchase 32,353 shares at $10.35 per diluted share expiring November 2020, 51,707 shares at $11.00 per diluted share expiring November 2021, 120,556 shares at $10.50 per diluted share expiring November 2022 and 258,270 shares at $13.36 per diluted share expiring November 2023 were outstanding as of September 30, 2014, but were not included in the computation of diluted earnings per share because the options’ exercise price combined with its fair value was greater than the average market price of the common shares.

Options to purchase 64,821 shares at $10.35 per diluted share expiring November 2020, 77,872 shares at $11.00 per diluted share expiring November 2021 and 189,699 shares at $10.50 per diluted share expiring November 2022 were outstanding as of September 30, 2013, but were not included in the computation of diluted earnings per share because the options’ exercise price combined with its fair value was greater than the average market price of the common shares.

 

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Table of Contents
7. Comprehensive Income

The Company has developed the following table to present the components of AOCI for the three and nine month periods ended September 30, 2014 and 2013:

 

(Dollar amounts in thousands)                
Details about AOCI Components   Three Months Ended
September 30, 2014
Amount

Reclassifed from AOCI
    Three Months Ended
September 30, 2013
Amount

Reclassifed from AOCI
   

in the Statement where net

income is presented

Available-for-sale securities

     

Realized gain on sale of securities

  $ —        $ (58   Net realized gain on securities available for sale

Impairment expense

    —          —        Net impairment losses on investment securities
 

 

 

   

 

 

   
      Total before tax
    —          20      Provision for income taxes
 

 

 

   

 

 

   
    —          (38   Net of tax

Defined benefit pension plan items

     

Amortization of prior service costs

    22        26      See Note 1 below

Amortization of actuarial gains/(losses)

    10        10      See Note 1 below
 

 

 

   

 

 

   
    32        36      Total before tax
    (11     (12   Provision for income taxes
 

 

 

   

 

 

   
    21        24      Net of tax

Total reclassifications

  $ 21      $ (14   Net of tax
 

 

 

   

 

 

   
Details about AOCI Components   Nine Months Ended
September 30, 2014
Amount

Reclassifed from AOCI
    Nine Months Ended
September 30, 2013
Amount

Reclassifed from AOCI
   

in the Statement where net

income is presented

Available-for-sale securities

     

Realized gain on sale of securities

  $ (288   $ (525   Net realized gain on securities available for sale

Impairment expense

    193        —        Net impairment losses on investment securities
 

 

 

   

 

 

   
    (95     (525  
    32        178      Provision for income taxes
 

 

 

   

 

 

   
    (63     (347   Net of tax

Defined benefit pension plan items

     

Amortization of prior service costs

    69        78      See Note 1 below

Amortization of actuarial gains/(losses)

    30        30      See Note 1 below
 

 

 

   

 

 

   
    99        108      Total before tax
    (34     (37   Provision for income taxes
 

 

 

   

 

 

   
    65        71      Net of tax

Total reclassifications

  $ 2      $ (276   Net of tax
 

 

 

   

 

 

   

Note 1: These items are included in the compensation and employee benefits. See Note 8, Retirement Plans, for additional information.

 

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Table of Contents
(Dollar amounts in thousands)                         
     Three Months ended September 30, 2014  
     Gains/(losses) on
Cash Flow Hedges
    Unrealized gains/(losses) on
available-for-sale  securities
    Defined benefit pension
plan items
    Total  

Beginning balance

   $ (2,388   $ 18,395      $ (434   $ 15,573   

Other comprehensive income/(loss) before reclassification

     335        (1,864     —          (1,529

Amounts reclassified from AOCI

     —          —          21        21   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current period OCI

     335        (1,864     21        (1,508
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ (2,053   $ 16,531      $ (413   $ 14,065   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(Dollar amounts in thousands)                         
     Three Months ended September 30, 2013  
     Gains/(losses) on
Cash Flow Hedges
    Unrealized gains/(losses) on
available-for-sale  securities
    Defined benefit pension
plan items
    Total  

Beginning balance

   $ (2,829   $ 12,996      $ (581   $ 9,586   

Other comprehensive income/(loss) before reclassification

     19        (900     —          (881

Amounts reclassified from AOCI

     —          (38     24        (14
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current period OCI

     19        (938     24        (895
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ (2,810   $ 12,058      $ (557   $ 8,691   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
(Dollar amounts in thousands)                         
     Nine Months ended September 30, 2014  
     Gains/(losses) on
Cash Flow Hedges
    Unrealized gains/(losses) on
available-for-sale  securities
    Defined benefit pension
plan items
    Total  

Beginning balance

   $ (2,515   $ 7,608      $ (478   $ 4,615   

Other comprehensive income/(loss) before reclassification

     462        8,986        —          9,448   

Amounts reclassified from AOCI

     —          (63     65        2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current period OCI

     462        8,923        65        9,450   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ (2,053   $ 16,531      $ (413   $ 14,065   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(Dollar amounts in thousands)                         
     Nine Months ended September 30, 2013  
     Gains/(losses) on
Cash Flow Hedges
    Unrealized gains/(losses) on
available-for-sale  securities
    Defined benefit pension
plan items
    Total  

Beginning balance

   $ (3,733   $ 29,464      $ (628   $ 25,103   

Other comprehensive income/(loss) before reclassification

     923        (17,059       (16,136

Amounts reclassified from AOCI

       (347     71        (276
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current period OCI

     923        (17,406     71        (16,412
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ (2,810   $ 12,058      $ (557   $ 8,691   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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8. Retirement Plans

Supplemental Executive Retirement Plan and Directors’ Retirement Plan

The Company maintains a Supplemental Executive Benefit Plan (SERP) in order to provide supplemental retirement and death benefits for certain key employees of the Company. Under the SERP, participants shall receive an annual retirement benefit following retirement at age 65 equal to 25% of the participant’s final average pay multiplied by a ratio, ranging from 1.25% to 25.0%, based on the participant’s total years of service. Final average pay is based upon the participant’s last three year’s compensation. The maximum ratio of 25% requires twenty or more years of credited service and the minimum ratio of 1.25% requires one year of credited service. Benefits under the plan are payable in either a lump sum or ten equal annual payments and a lesser benefit is payable upon early retirement at age 50 with at least twelve years of service. If a participant dies prior to retirement, the participant’s estate will receive a lump sum payment equal to the net present value of future benefit payments under the plan. At September 30, 2014, the participants in the plan had credited service under the SERP ranging from 23 to 35 years.

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

The following table illustrates the components of the net periodic pension cost for the SERP and Directors Retirement Plan as of September 30, 2014 and 2013:

 

(Dollar amounts in thousands)    SERP      SERP  
     Three Months
Ended
September 30, 2014
     Three Months
Ended
September 30, 2013
     Nine Months
Ended
September 30, 2014
     Nine Months
Ended
September 30, 2013
 

Components of net periodic pension cost

           

Service cost

   $ 22       $ 25       $ 66       $ 75   

Interest cost

     36         28         108         84   

Amortization of unrecognized gains and losses

     22         26         66         78   

Amortization of prior service cost

     10         10         30         30   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic pension cost

   $ 90       $ 89       $ 270       $ 267   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

 

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Table of Contents
(Dollar amounts in thousands)    Directors’ Retirement Plan      Directors’ Retirement Plan  
     Three Months
Ended
September 30, 2014
     Three Months
Ended
September 30, 2013
     Nine Months
Ended
September 30, 2014
     Nine Months
Ended
September 30, 2013
 

Components of net periodic pension cost

           

Service cost

   $ 2       $ 1       $ 6       $ 3   

Interest cost

     9         7         27         21   

Amortization of prior service cost

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic pension cost

   $ 11       $ 8       $ 33       $ 24   
  

 

 

    

 

 

    

 

 

    

 

 

 

9. Fair Value

Fair value is defined by GAAP as the amount that an asset could be bought or sold, or a liability incurred or settled, between willing parties, other than during a liquidation. GAAP established a fair value hierarchy that prioritizes the use of inputs in valuation methodologies into the following three levels:

 

Level I:    Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets, as of the reported date. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available. A contractually binding sales price also provides reliable evidence of fair value.
Level II:    Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets: inputs to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that utilize the model-based techniques for which all significant assumptions are observable in the market.
Level III:    Inputs to the valuation methodology are unobservable and significant to the fair value measurement; inputs to the valuation methodology that utilize a model-based techniques for which significant assumptions are not observable in the market; or inputs to the valuation methodology that requires significant management judgment or estimation, some of which may be internally developed.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Investment Securities Available-for-Sale

Management classifies the Company’s equity securities as Level 1 measurements since quoted market prices were available, unadjusted, for identical securities in active markets. Declines in the fair value of individual equity securities that are deemed to be other than temporary, will be written down to current market value and included in earnings as realized losses. Level 2 investment securities were primarily comprised of debt securities issued by states and municipalities and corporations as well as mortgage-backed securities issued by government agencies. On a monthly basis, the 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 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. Due to recent uncertainties

 

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Table of Contents

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, therefore the Company classifies these securities as Level III. 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 40 to 70 basis points. Liquidity risk adjustments ranged from 20 to 55 basis points where the securities of the 15 largest banks in the United States are assigned 20 to 40 basis points and banks outside of the top 15 were given a higher liquidity risk adjustment. Approximately $18.2 million or 49.44% of the $36.9 million in floating rate trust preferred securities at September 30, 2014 represent investments in three of the four largest banks in the United States.

Derivative Financial Instruments

Derivative financial instruments recorded at fair value on a recurring basis are comprised of interest rate caps and interest rate swap agreements. The Company classifies these instruments as Level II. The Company determines the fair value of the interest rate caps quarterly by using quoted prices from two brokers. The maximum market indication used is the highest price obtained from the brokers, unless this price is Level III as indicated by the broker. If so this price is excluded and the highest Level II is used. The Company utilizes a third-party pricing service to measure its interest rate swap contracts. This service provides pricing information by utilizing evaluated pricing models, supported with market data information. Cash flows are projected for each payment date using the index forward curve. These swap cash flows are then discounted to time zero using LIBOR zero-coupon interest rates, the accepted cost of funds for a financial institution. The implicit assumption is that the risk associated with the cash flows on the derivative is the same as the risk associated with a loan in the interbank market. The present value of the fixed portion is then added to the present value of the floating portion. The sum of both is the fair market value of the interest rate swap.

The following tables present the assets and liabilities reported on the consolidated statements of financial condition at their fair value on a recurring basis as of September 30, 2014 and December 31, 2013 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.

 

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Table of Contents
     As of September 30, 2014  
(Dollar amounts in thousands)    Quoted Prices
in Active
Markets for
Identical Assets
or Liabilities
(Level I)
     Significant Other
Observable
Inputs

(Level II)
     Significant
Unobservable
Inputs

(Level III)
     Total  

Assets:

           

Securities available for sale:

           

Trust preferred securities

   $ —         $ 1,850       $ 36,886       $ 38,736   

Municipal securities

     —           180,636         —           180,636   

Equity securities

     1,517         —           —           1,517   

Corporate bonds

     —           186,267         —           186,267   

Mortgage backed securities:

           

U.S. sponsored entities

     —           686,202         —           686,202   

Private label

     —           1,191         —           1,191   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal mortgage-backed securities

     —           687,393         —           687,393   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 1,517       $ 1,056,146       $ 36,886       $ 1,094,549   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other Assets

           

Interest rate caps

   $ —         $ 663       $ —         $ 663   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other assets

   $ —         $ 663       $ —         $ 663   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Other Liabilities

           

Interest rate swaps

   $ —         $ 3,111       $ —         $ 3,111   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other liabilities

   $ —         $ 3,111       $ —         $ 3,111   
  

 

 

    

 

 

    

 

 

    

 

 

 
     As of December 31, 2013  
(Dollar amounts in thousands)    Quoted Prices
in Active
Markets for
Identical Assets
or Liabilities
(Level I)
     Significant Other
Observable
Inputs

(Level II)
     Significant
Unobservable
Inputs

(Level III)
     Total  

Assets:

           

Securities available for sale:

           

Trust preferred securities

   $ —         $ 1,697       $ 37,209       $ 38,906   

Municipal securities

     —           179,740         —           179,740   

Equity securities

     1,921         —           —           1,921   

Corporate bonds

     —           206,220         —           206,220   

Mortgage backed securities:

           

U.S. sponsored entities

     —           634,424         —           634,424   

Private label

     —           1,805         —           1,805   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal mortgage-backed securities

     —           636,229         —           636,229   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 1,921       $ 1,023,886       $ 37,209       $ 1,063,016   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other Assets

           

Interest rate caps

   $ —         $ 717       $ —         $ 717   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other assets

   $ —         $ 717       $ —         $ 717   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Other Liabilities

           

Interest rate swaps

   $ —         $ 3,870       $ —         $ 3,870   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other liabilities

   $ —         $ 3,870       $ —         $ 3,870   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

There were no transfers between Level I and Level II assets measured at fair value. The following table presents the changes in the Level III assets measured at fair value on a recurring basis for the three and nine month periods ended September 30, 2014 and 2013.

Fair value measurements using significant unobservable inputs (Level III).

 

(Dollar amounts in thousands)   

Securities available for sale
Three months ended

September 30,

    Securities available for sale
Nine months ended
September 30,
 
     2014     2013     2014     2013  

Beginning balance January 1,

   $ 37,055      $ 36,934      $ 37,209      $ 36,179   

Total net realized/unrealized gains (losses)

        

Included in earnings:

        

Interest income on securities

     3        3        10        10   

Net realized loss on securities available for sale

     —          —          (193     —     

Included in other comprehensive income

     (172     (169     (140     579   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance, September 30,

   $ 36,886      $ 36,768      $ 36,886      $ 36,768   
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table summarizes changes in unrealized gains and losses recorded in earnings for the three and nine month periods ended September 30, 2014 and 2013 for Level III assets and liabilities that are still held at September 30, 2014 and 2013.

 

(Dollar amounts in thousands)                           
     Securities available for sale
Three months ended
September 30,
     Securities available for sale
Nine months ended
September 30,
 
     2014      2013      2014     2013  

Interest income on securities

   $ 3       $ 3       $ 10      $ 10   

Net realized loss on securities available for sale

     —           —           (193     —     
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 3       $ 3       $ (183   $ 10   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

For Level III assets measured at fair value on a recurring or non-recurring basis as of September 30, 2014, the significant observable inputs used in the fair value measurements were as follows:

 

(Dollar amounts in
thousands)

   Fair
Value
at
September 30,

2014
     Fair
Value
at
December 31,
2013
    

Valuation

Technique

 

Significant

Unobservable

Inputs

  2014 Range
(Weighted Average)
  2013 Range
(Weighted Average)

Trust Preferred Securities

   $ 36,886       $ 37,209       Discounted Cash Flow   Credit Spreads Liquidity Risk Adjustments Default Rates   40-70 (57.5) basis points

20-55 (36) basis points

.6% -1%

  40-75 (62.5) basis points

20-55 (36) basis points

.6% -1%

Impaired Loans

     15,594         15,961       Appraisal of collateral (1)   Appraisal value and liquidation expense   2.66%-48.93%(9.50%)   2.66%-48.93%(9.50%)

Real estate acquired through foreclosure

     2,169         1,977       Appraisal of collateral (1)   N/A   N/A   N/A

Servicing assets

     4         9       Discounted Cash Flow  

Remaining term

Discount Rate

  .50 yrs to 16.15 yrs (12 yrs)
11.25%-12.25% (11.36%)
  .75 yrs to 16.4 yrs (12.5 yrs)
11.25%-12.25%(11.51%)

 

(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally includes various level III inputs which are not identifiable. Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.

The significant unobservable inputs in the fair value measurement of the Company’s trust preferred securities are the credit spreads, liquidity risk adjustments and default rates as described above under Investment Securities Available for Sale. Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower (higher) fair value measurement.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The Company may be required periodically to measure certain assets and liabilities at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower-of-cost-or-fair value accounting or impairment write-downs of individual assets. During the period ended September 30, 2014 and 2013, the Company incurred write-downs on its REO properties of $26,000 and $56,000, respectively. There were no adjustments to the fair value for the Company’s remaining assets and liabilities measured at fair value on a nonrecurring basis in accordance with GAAP during the respective periods.

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 ( the valuation of the trust preferred securities is discussed in footnote 9, Fair Value), fair values for securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges or matrix pricing, which is a mathematical technique which is widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities.

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

Loans receivable – 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

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

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

Bank owned life insurance (BOLI) – The fair value of BOLI at September 30, 2014 and December 31, 2013 approximated the cash surrender value of the policies at those dates.

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

Deposits – The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date. Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies current market interest rates to a schedule of aggregated expected monthly maturities.

Borrowed funds and junior subordinated notes – 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 tables set forth the carrying amount and fair value of the Company’s financial instruments included in the consolidated statement of financial condition as of September 30, 2014 and December 31, 2013:

 

September 30, 2014

 

(Dollar amounts in thousands)

   Carrying
value
     Quoted Prices
in Active
Markets for
Identical
Assets or
Liabilities
(Level I)
     Significant
Other
Observable
Inputs
(Level II)
     Significant
Unobservable
Inputs

(Level III)
     Total Fair
Value
 

Financial Assets:

              

Cash and Cash Equivalents

   $ 21,714       $ 21,714       $ —         $ —         $ 21,714   

Securities

     1,094,549         1,517         1,056,146         36,886         1,094,549   

Securities Receivable

     799         799         —           —           799   

Loans receivable

     706,469         —           —           720,332         720,332   

Accrued Interest Receivable

     7,349         7,349         —           —           7,349   

FHLB Stock

     13,237         13,237         —           —           13,237   

Bank owned life insurance

     30,384         30,384         —           —           30,384   

Interest rate cap contracts

     663         —           663         —           663   

Financial Liabilities:

              

Deposits

     1,336,747         676,165         —           665,928         1,342,093   

Borrowed funds

     346,253         —           108,871         247,621         356,492   

Junior subordinated notes

     36,083         —           27,062         —           27,062   

Advance payments by borrowers for taxes and insurance

     1,547         1,547         —           —           1,547   

Accrued interest payable

     2,461         2,461         —           —           2,461   

Interest rate swap contracts

     3,111         —           3,111         —           3,111   

 

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Table of Contents

December 31, 2013

 

(Dollar amounts in thousands)

   Carrying
value
     Quoted Prices
in Active
Markets for
Identical
Assets or
Liabilities
(Level I)
     Significant
Other
Observable
Inputs
(Level II)
     Significant
Unobservable
Inputs

(Level III)
     Total Fair
Value
 

Financial Assets:

              

Cash and Cash Equivalents

   $ 16,214       $ 16,214       $ —         $ —         $ 16,214   

Securities

     1,063,016         1,921         1,023,886         37,209         1,063,016   

Securities Receivable

     654         654         —           —           654   

Loans receivable

     695,636         —           —           707,919         707,919   

Accrued Interest Receivable

     7,345         7,345         —           —           7,345   

FHLB Stock

     15,436         15,436         —           —           15,436   

Bank owned life insurance

     30,595         30,595         —           —           30,595   

Interest rate cap contracts

     717         —           717         —           717   

Financial Liabilities:

              

Deposits

     1,222,767         577,040         —           652,395         1,229,435   

Borrowed funds

     441,144         —           151,942         303,436         455,378   

Junior subordinated notes

     36,083         —           25,258         —           25,258   

Advance payments by borrowers for taxes and insurance

     2,659         2,659         —           —           2,659   

Accrued interest payable

     1,046         1,046         —           —           1,046   

Interest rate swap contracts

     3,870         —           3,870         —           3,870   

 

11. Subsequent Event

On October 29, 2014, the Company and WesBanco, Inc. (“WesBanco”) entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”) providing for the merger of the Company with and into WesBanco (the “Merger”). As a result of the Merger, the separate corporate existence of the Company will cease and WesBanco will continue as the surviving corporation. The Merger Agreement also provides that, promptly following the completion of the Merger, ESB Bank will merge with and into Wesbanco Bank, Inc., a West Virginia banking corporation and a wholly-owned subsidiary of WesBanco, with Wesbanco Bank, Inc. continuing as the surviving bank. Under the terms of the Merger Agreement, WesBanco will exchange a combination of shares of its common stock and cash for all of the issued and outstanding shares of the Company’s common stock. Shareholders of the Company will be entitled to receive 0.502 (the “Exchange Ratio”) of a share of WesBanco common stock, plus cash in the amount of $1.76 per share, for each share of common stock of the Company in the exchange. Consummation of the Merger is subject to a number of customary conditions, including, but not limited to, the approval of the Merger Agreement by the shareholders of the Company, approval of the issuance of shares of WesBanco common stock in connection with the Merger by the shareholders of WesBanco and the receipt of required regulatory approvals. The transaction is expected to be completed in the first or second quarter of 2015.

 

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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, 2014 have remained unchanged from the disclosures presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 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, 2013, 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 23 branches.

On October 29, 2014, the Company and WesBanco, Inc. (“WesBanco”) entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”) providing for the merger of the Company with and into WesBanco (the “Merger”). As a result of the Merger, the separate corporate existence of the Company will cease and WesBanco will continue as the surviving corporation. The Merger Agreement also provides that, promptly following the completion of the Merger, ESB Bank will merge with and into Wesbanco Bank, Inc., a West Virginia banking corporation and a wholly-owned subsidiary of WesBanco, with Wesbanco Bank, Inc. continuing as the surviving bank. Under the terms of the Merger Agreement, WesBanco will exchange a combination of shares of its common stock and cash for all of the issued and outstanding shares of the Company’s common stock. Shareholders of the Company will be entitled to receive 0.502 (the “Exchange Ratio”) of a share of WesBanco common stock, plus cash in the amount of $1.76 per share, for each share of common stock of the Company in the exchange. Consummation of the Merger is subject to a number of customary conditions, including, but not limited to, the approval of the Merger Agreement by the shareholders of the Company, approval of the issuance of shares of WesBanco common stock in connection with the Merger by the shareholders of WesBanco and the receipt of required regulatory approvals. The transaction is expected to be completed in the first or second quarter of 2015.

During the three months ended September 30, 2014, the Company reported net income of $4.6 million, an increase of approximately $614,000, or 15.5%, over the same period last year. The Company had an increase in interest income of approximately $102,000 over the same quarter last year, and a decrease in interest expense of $1.0 million during the same period, resulting in an increase of $1.1 million in net interest income. Additionally, there was a decrease in the noncontrolling interest of $182,000 between the periods. These increases to income were partially offset by increases in noninterest expense and provision for income taxes of $207,000 and $362,000, respectively, as well as a decrease of $125,000 in noninterest income.

During the nine months ended September 30, 2014, the Company reported net income of $13.6 million, an increase of approximately $2.1 million, or 17.9%, over the same period last year. The Company had an increase in interest income of approximately $162,000 over the same period last year, and a decrease in interest expense of $3.4 million during the same period, resulting in an increase of $3.6 million in net interest income. In addition, the Company also had decreases in provision for loan losses and net income attributable to the noncontrolling interest of $165,000 and $368,000, respectively, when compared to the nine months ended September 30, 2013. These increases were partially offset by increases in noninterest expense and provision for income taxes of $442,000 and $857,000, respectively, as well as a decrease in noninterest income of $770,000.

The Company is continuing efforts to improve the net interest margin by employing strategies to decrease the cost of funds, while attempting to increase the yield from the investment portfolio. The Company employs a strategy

 

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of purchasing cash-flowing fixed and variable rate mortgage-backed securities funded by wholesale borrowings, which are comprised of FHLB advances and repurchase agreements. This is referred to as the Company’s wholesale strategy. As part of the wholesale strategy, the Company uses a laddered maturity schedule of two to five years on the wholesale borrowings. As part of its ongoing interest rate risk strategy, the Company purchased structured repurchase agreements (REPOs) 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, 2014, the Company had approximately $106.9 million of maturing wholesale borrowings with a weighted average rate of 2.98% and an original call/maturity of 4.5 years. The borrowings that matured were partially replaced with wholesale borrowings of approximately $33.9 million with a weighted average rate of 1.15% and an original call/maturity of 2.8 years and deposit growth of approximately $114.0 million during the period.

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

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

RESULTS OF OPERATIONS

Earnings Summary. The Company recorded net income of $4.6 million, an increase of approximately $614,000, or 15.5%, over the same period last year. The Company had an increase in interest income of approximately $102,000 over the same quarter last year, and a decrease in interest expense of $1.0 million during the same period, resulting in an increase of $1.1 million in net interest income. Additionally there was a decrease in the noncontrolling interest of $182,000 between the periods. These increases were partially offset by increases in noninterest expense and provision for income taxes of $207,000 and $362,000, respectively, as well as a decrease of $125,000 to noninterest income.

The Company recorded net income of $13.6 million, an increase of approximately $2.1 million, or 17.9%, over the same period last year. The Company had an increase in interest income of approximately $162,000 over the same period last year, and a decrease in interest expense of $3.4 million during the same period, resulting in an increase of $3.6 million in net interest income. In addition, the Company also had decreases in provision for loan losses and net income attributable to the noncontrolling interest of $165,000 and $368,000, respectively, when compared to the nine months ended September 30, 2013. These increases were partially offset by increases in noninterest expense and provision for income taxes of $442,000 and $857,000, respectively, as well as a decrease in noninterest income of $770,000.

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.

 

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Management periodically adjusts the mix of assets and liabilities, as well as the rates earned or paid on those assets and liabilities in order to manage and improve net interest income. The level of interest rates and changes in the amount and composition of interest earning assets and liabilities affect the Company’s net interest income. Historically from an interest rate risk perspective, it has been management’s perception that differing interest rate environments, these being extended low long-term interest rates, rapidly rising short-term interest rates as well as a sustained inverted yield curve, can cause sensitivity to the Company’s net interest income.

Net interest income increased $1.1 million, or 10.4%, to $12.0 million for the three months ended September 30, 2014, compared to $10.8 million for the same period in the prior year. This increase in net interest income was the result of an increase in interest income of $102,000 and a decrease in interest expense of $1.0 million.

Net interest income increased $3.6 million, or 11.4%, to $35.2 million for the nine months ended September 30, 2014, compared to $31.6 million for the same period in the prior year. This increase in net interest income was the result of an increase in interest income of $162,000 and a decrease in interest expense of $3.4 million.

Interest income. Interest income increased $102,000, or 0.6%, for the three months ended September 30, 2014, compared to the same period in the prior year. This increase can primarily be attributed to increases in interest earned on securities available for sale, FHLB stock and interest earning deposits of $74,000, $71,000 and $12,000, respectively, partially offset by a decrease in interest earned on loans receivable of $55,000.

Interest earned on loans receivable decreased $55,000, or 0.7%, for the three months ended September 30, 2014, compared to the same period in the prior year. This decrease was primarily attributable to a decrease in the yield on the portfolio of 18 basis points to 4.51% for the three months ended September 30, 2014, compared to 4.69% for the same period in the prior year, partially offset by an increase in the average balance of loans outstanding of $22.5 million, or 3.2%, to $714.6 million for the three months ended September 30, 2014, compared to $692.2 million for the same period in the prior year.

Interest earned on securities increased $74,000, or 0.9%, for the three months ended September 30, 2014, compared to the same period in the prior year. This increase was primarily the result of an increase in the average balance of the securities portfolio of $23.6 million, or 2.3%, to $1.1 billion at September 30, 2014, partially offset by a slight decrease in the tax equivalent yield on securities to 3.35% for the three months ended September 30, 2014 from 3.40% for the three months ended September 30, 2013.

Interest income increased $162,000, or 0.3%, for the nine months ended September 30, 2014, compared to the same period in the prior year. This increase can primarily be attributed to increases in interest earned on securities available for sale, FHLB stock and interest earning deposits of $111,000, $389,000 and $47,000, respectively, partially offset by a decrease in interest earned on loans receivable of $385,000.

Interest earned on loans receivable decreased $385,000, or 1.6%, for the nine months ended September 30, 2014, compared to the same period in the prior year. This decrease was primarily attributable to a decrease in the yield on the portfolio of 22 basis points to 4.53% for the nine months ended September 30, 2014, compared to 4.75% for the same period in the prior year, partially offset by an increase in the average balance of loans outstanding of $22.1 million, or 3.2%, to $710.7 million for the nine months ended September 30, 2014, compared to $688.7 million for the same period in the prior year.

Interest earned on securities increased $111,000, or 0.5%, for the nine months ended September 30, 2014, compared to the same period in the prior year. This increase was primarily the result of an increase in the average balance of the securities portfolio of $17.7 million, or 1.7%, to $1.1 billion at September 30, 2014, partially offset by a 4 basis point decrease in the tax equivalent yield on securities to 3.39% for the nine months ended September 30, 2014 from 3.44% for the nine months ended September 30, 2013.

Interest expense. Interest expense decreased $1.0 million, or 19.5%, for the three months ended September 30, 2014, compared to the same period in the prior year. This decrease in interest expense can be attributed to decreases in interest incurred on deposits and borrowed funds of $94,000 and $928,000, respectively.

 

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Interest incurred on deposits decreased $94,000, or 5.2%, for the three months ended September 30, 2014, compared to the same period in the prior year. This decrease was due to a decrease in the cost of interest-bearing deposits of 7 basis points to 0.57% from 0.64% for the quarters ended September 30, 2014 and 2013, respectively, partially offset by an increase in the average balance of interest-bearing deposits of $86.6 million, or 7.8% to $1.2 billion for the three months ended September 30, 2014. 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 $928,000, or 31.8%, for the three months ended September 30, 2014 compared to the same period in the prior year. This decrease was primarily attributable to a decrease in the average balance of borrowed funds of $55.9 million, or 13.2%, to $367.1 million at September 30, 2014, as well as a decrease to the cost of these funds of 58 basis points to 2.15% for the quarter ended September 30, 2014 as compared to 2.73% for the quarter ended September 30, 2013.

Interest expense decreased $3.4 million, or 20.3%, for the nine months ended September 30, 2014, compared to the same period in the prior year. This decrease in interest expense can be attributed to decreases in interest incurred on deposits and borrowed funds of $528,000 and $2.9 million, respectively.

Interest incurred on deposits decreased $528,000, or 9.4%, for the nine months ended September 30, 2014, compared to the same period in the prior year. This decrease was due to a decrease in the cost of interest-bearing deposits of 10 basis points to 0.59% from 0.69% for the nine months ended September 30, 2014 and 2013, respectively, partially offset by an increase in the average balance of interest-bearing deposits of $67.7 million, or 6.2% to $1.2 billion for the nine months ended September 30, 2014. 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 $2.9 million, or 29.6%, for the nine months ended September 30, 2014 compared to the same period in the prior year. This decrease was primarily attributable to a decrease in the cost of these funds to 2.26% for the nine months ended September 30, 2014 as compared to 2.93%, for the nine months ended September 30, 2013 as well as a decrease in the average balance of borrowed funds of $38.4 million, or 8.7%, to $402.4 million at September 30, 2014.

In addition to its wholesale strategy, the Company manages its cost of borrowings through the use of debt associated with the issuance of trust preferred securities. During the quarter ended September 30, 2014, the interest incurred on these borrowings decreased by $2,000, or 0.4%, due to a slight decrease in the cost of these funds to 5.79% from 5.82% for the same period in the prior year. During the nine months ended September 30, 2014, the interest incurred on these borrowings decreased by $46,000, or 2.9%, due to a decrease in the average balance of these funds of $1.7 million, or 4.5%, partially offset by an increase of 10 basis points in the cost of these funds to 5.79% from 5.69% for the same period in the prior year.

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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(Dollar amounts in thousands)    Three months ended September 30,  
     2014     2013  
     Average
Balance
     Interest      Yield/
Rate
    Average
Balance
     Interest      Yield/
Rate
 

Interest-earning assets:

                

Taxable securities available for sale

   $ 696,278         5,147         2.96   $ 639,262         4,807         3.01

Taxable corporate bonds available for sale

     227,354         1,377         2.42     255,606         1,610         2.52

Tax-exempt securities available for sale

     143,930         1,593         6.71 %(1)      149,132         1,626         6.61
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
     1,067,562         8,117         3.35 %(1)      1,044,000         8,043         3.40
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Mortgage loans

     513,484         5,836         4.55     499,294         5,825         4.67

Other loans

     161,172         1,739         4.28     156,290         1,819         4.62

Tax-exempt loans

     39,983         335         5.04 %(1)      36,585         321         5.27
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
     714,639         7,910         4.51 %(1)      692,169         7,965         4.69
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Cash equivalents

     23,980         14         0.23     12,766         2         0.06

FHLB stock

     13,866         139         3.98     15,472         68         1.74
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
     37,846         153         1.60     28,238         70         0.98
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-earning assets

     1,820,047         16,180         3.77 %(1)      1,764,407         16,078         3.87

Other noninterest-earning assets

     134,265         —           —          130,108         —           —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total assets

   $ 1,954,312         16,180         3.51 %(1)    $ 1,894,515         16,078         3.60
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Interest-bearing liabilities:

                

Interest-bearing demand deposits

     538,795         124         0.09     469,186         91         0.08

Time deposits

     656,094         1,582         0.96     639,129         1,709         1.06
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
     1,194,889         1,706         0.57     1,108,315         1,800         0.64
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

FHLB advances

     256,790         930         1.44     252,395         1,352         2.12

Repurchase Agreements

     99,667         948         3.77     158,000         1,431         3.59

Other borrowings

     10,682         111         4.12     12,672         134         4.20
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
     367,139         1,989         2.15     423,067         2,917         2.73
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Junior subordinated notes- fixed

     36,083         527         5.79     36,083         529         5.82
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
     36,083         527         5.79     36,083         529         5.82
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-bearing liabilities

     1,598,111         4,222         1.05     1,567,465         5,246         1.33

Noninterest-bearing demand deposits

     132,655         —           —          122,651         —           —     

Other noninterest-bearing liabilities

     19,063         —           —          21,622         —           —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total liabilities

     1,749,829         4,222         0.96     1,711,738         5,246         1.22

Stockholders’ equity

     204,483         —           —          182,777         —           —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total liabilities and equity

   $ 1,954,312         4,222         0.86   $ 1,894,515         5,246         1.10
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Net interest income

        11,958              10,832      
     

 

 

         

 

 

    

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

           2.72 %(1)            2.54
        

 

 

         

 

 

 

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

           2.85 %(1)            2.69
        

 

 

         

 

 

 

 

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(Dollar amounts in thousands)    Nine months ended September 30,  
     2014     2013  
     Average
Balance
     Interest      Yield /
Rate
    Average
Balance
     Interest      Yield /
Rate
 

Interest-earning assets:

                

Taxable securities available for sale

   $ 680,926         15,432         3.02   $ 634,959         14,459         3.04

Taxable corporate bonds available for sale

     235,549         4,222         2.39     261,093         5,025         2.57

Tax-exempt securities available for sale

     146,283         4,871         6.73 % (1)      149,052         4,930         6.68 % (1) 
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
     1,062,758         24,525         3.39 % (1)      1,045,104         24,414         3.44 % (1) 
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Mortgage loans

     513,681         17,550         4.56     494,870         17,598         4.74

Other loans

     158,446         5,109         4.31     155,656         5,437         4.67

Tax-exempt loans

     38,602         966         5.07 % (1)      38,150         975         5.18 % (1) 
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
     710,729         23,625         4.53 % (1)      688,676         24,010         4.75 % (1) 
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Cash equivalents

     26,697         49         0.25     10,509         2         0.03

FHLB stock

     14,646         475         4.34     15,348         86         0.75
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
     41,343         524         1.69     25,857         88         0.46
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-earning assets

     1,814,830         48,674         3.80 (1)      1,759,637         48,512         3.91 (1) 

Other noninterest-earning assets

     134,434         —           —          144,199         —           —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total assets

   $ 1,949,264         48,674         3.53 % (1)    $ 1,903,836         48,512         3.61 % (1) 
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Interest-bearing liabilities:

                

Interest-bearing demand deposits

     510,155         333         0.09     464,116         266         0.08

Time deposits

     653,124         4,782         0.98     631,512         5,377         1.14
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
     1,163,279         5,115         0.59     1,095,628         5,643         0.69
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

FHLB advances

     274,539         3,238         1.58     242,096         4,300         2.37

Repurchase Agreements

     116,889         3,218         3.68     187,444         5,008         3.57

Other borrowings

     10,988         344         4.19     11,274         356         4.22
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
     402,416         6,800         2.26     440,814         9,664         2.93
  

 

 

       

 

 

   

 

 

    

 

 

    

 

 

 

Junior subordinated notes- fixed

     36,083         1,562         5.79     36,083         1,562         5.79

Junior subordinated notes- adjustable

     —           —           —          1,718         46         3.58
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
     36,083         1,562         5.79     37,801         1,608         5.69
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-bearing liabilities

     1,601,778         13,477         1.12     1,574,243         16,915         1.44

Noninterest-bearing demand deposits

     129,607         —           —          117,311         —           —     

Other noninterest-bearing liabilities

     18,562         —           —          22,050         —           —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total liabilities

     1,749,947         13,477         1.03     1,713,604         16,915         1.32

Stockholders’ equity

     199,317         —           —          190,232         —           —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total liabilities and equity

   $ 1,949,264         13,477         0.92   $ 1,903,836         16,915         1.19
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Net interest income

        35,197              31,597      
     

 

 

         

 

 

    

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

           2.68 % (1)            2.47 % (1) 
        

 

 

         

 

 

 
                

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

           2.81 % (1)            2.62 % (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, for the three and nine month periods ended September 30, 2014, in terms of: (1) changes in volume of interest-earning assets and interest-bearing liabilities and (2) changes in yields and rates. The table reflects the extent to which changes in the Company’s interest income and interest expense are attributable to changes in rate (change in rate multiplied by prior period volume), changes in volume (changes in volume multiplied by prior period rate) and changes attributable to the combined impact of volume/rate (change in rate multiplied by change in volume). The changes attributable to the combined impact of volume/rate are allocated on a consistent basis between the volume and rate variances. Changes in interest income on securities reflects the changes in interest income on a fully tax equivalent basis.

 

(Dollar amounts in thousands)    Three months ended, September 30,
2014 versus 2013
Increase (decrease) due to
 
     Volume     Rate     Total  

Interest income:

      

Securities

   $ 180      $ (106   $ 74   

Loans

     254        (309     (55

Cash equivalents

     3        9        12   

FHLB stock

     (8     79        71   
  

 

 

   

 

 

   

 

 

 

Total interest-earning assets

     429        (327     102   
  

 

 

   

 

 

   

 

 

 

Interest expense:

      

Deposits

     134        (229     (95

FHLB advances

     23        (444     (421

Repurchase agreements

     (552     69        (483

Other borrowings

     (21     (2     (23

Junior subordinated notes

     —          (2     (2
  

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     (416     (608     (1,024
  

 

 

   

 

 

   

 

 

 

Net interest income

   $ 845      $ 281      $ 1,126   
  

 

 

   

 

 

   

 

 

 
(Dollar amounts in thousands)    Nine months ended September 30,
2014 versus 2013
Increase (decrease) due to
 
     Volume     Rate     Total  

Interest income:

      

Securities

   $ 409      $ (298   $ 111   

Loans

     754        (1,139     (385

Cash equivalents

     7        40        47   

FHLB stock

     (4     393        389   
  

 

 

   

 

 

   

 

 

 

Total interest-earning assets

     1,166        (1,004     162   
  

 

 

   

 

 

   

 

 

 

Interest expense:

      

Deposits

     333        (861     (528

FHLB advances

     521        (1,583     (1,062

Repurchase agreements

     (1,938     148        (1,790

Other borrowings

     (9     (3     (12

Junior subordinated notes

     (74     28        (46
  

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     (1,167     (2,271     (3,438
  

 

 

   

 

 

   

 

 

 

Net interest income

   $ 2,333      $ 1,267      $ 3,600   
  

 

 

   

 

 

   

 

 

 

 

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Provision for loan losses. The provision for loan losses remained the same at $75,000 for the quarters ended September 30, 2014 and September 30, 2013 and decreased $165,000 to $135,000 for the nine months ended September 30, 2014 when compared to the nine months ended September 30, 2013. These provisions were part of the normal operations of the Company for the periods ending September 30, 2014. Determining the appropriate level of allowance for loan losses, management considers historical loss experience, the financial condition of borrowers, economic conditions (particularly as they relate to markets where the Company originates loans), the status of non-performing assets, the estimated underlying value of the collateral and other factors related to the collectability of the loan portfolio. The Company’s total allowance for losses on loans at September 30, 2014 amounted to $6.8 million, or 0.93% of the Company’s total loan portfolio, as compared to $6.8 million, or 0.95%, at December 31, 2013. The Company’s allowance for losses on loans as a percentage of non-performing loans was 78.1% and 77.8% at September 30, 2014 and December 31, 2013, respectively.

Non-interest income. Non-interest income decreased $125,000, or 7.7%, for the three months ended September 30, 2014 compared to the same period in the prior year. The decrease in non-interest income was comprised of decreases to fees and service charges, net gain on sale of securities, income from real estate joint ventures and other income of $24,000, $58,000, $177,000 and $89,000, respectively, partially offset by an increase in net realized gain on derivatives between the quarters of $209,000, or 125.9%.

Non-interest income decreased $770,000, or 14.2%, for the nine months ended September 30, 2014 compared to the same period in the prior year. The decrease in non-interest income was comprised of decreases to net gain on sale of securities, net realized gain on derivatives and other income of $237,000, $448,000 and $144,000, respectively, as well as a decrease to net impairment losses on securities of $193,000. These decreases in income were partially offset by increases in fees and service charges of $256,000.

Net realized gain on securities available for sale decreased $58,000 and $237,000 for the three and nine months ended September 30, 2014, respectively. During the nine months ended September 30, 2014, the Company had $563,000 in equity sales from the portfolio in the first quarter, resulting in a gain of $288,000, and no sales in the quarters ended June 30, 2014 and September 30, 2014. During the nine months ended September 30, 2013, the Company had $1.5 million in fixed rate mortgage-backed security sales in the first quarter, $287,000 of equity sales in the second quarter, and $161,000 of equity sales in the third quarter, resulting in a gain of $58,000 for the quarter and $525,000 for the nine month period.

The Company had gains on derivatives during the quarter ended September 30, 2014 of $43,000 compared to losses in the same period in 2013 of $166,000, resulting in an increase between the periods of $209,000. The Company had losses on derivatives during the nine months ended September 30, 2014 of $397,000 compared to gains in the same period in 2013 of $51,000, resulting in a decrease between the periods of $448,000. These fluctuations were due to market value adjustments to the Company’s interest rate caps.

Real estate joint venture income decreased $177,000 and increased $7,000 for the three and nine months ended September 30, 2014 when compared to the same periods in the prior year. The Company has a 51% ownership in its real estate joint ventures. The Company has a mixture of joint ventures in which it participates either in land development only or construction of units.

Non-interest expense. Non-interest expense increased $207,000, or 2.8%, to $7.7 million for the three months ended September 30, 2014 as compared to $7.5 million for the same period in the prior year. This increase was primarily related to increases in compensation and employee benefits, advertising and other expense of $188,000, $17,000 and $77,000, respectively, partially offset by decreases in premises and equipment and amortization of intangible assets of $50,000 and $16,000, respectively.

Non-interest expense increased $442,000, or 2.0%, to $22.6 million for the nine months ended September 30, 2014, as compared to $22.2 million for the same period in the prior year. This increase was primarily related to increases in compensation and employee benefits and advertising of $649,000 and $36,000, respectively, partially offset by decreases in premises and equipment, federal deposit insurance premiums, data processing, amortization of intangible assets and other expense of $79,000, $68,000, $38,000, $45,000 and $13,000, respectively.

 

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Compensation and employee benefits increased $188,000 and $649,000 for the three and nine months ended September 30, 2014, as compared to the same period in the prior year. The increases were primarily due to normal salary adjustments between the periods as well as increases to compensation expense related to retirement expenses, stock options and the restricted stock and group life and hospital insurance expense.

Premises and equipment expenses decreased $50,000 and $79,000 for the three and nine months ended September 30, 2014, as compared to the same periods in the prior year, primarily due to decreased maintenance costs at the Company’s properties.

Other expenses increased $77,000 for the three months ended September 30, 2014 as compared to the same period in the prior year. This increase was primarily due to increases in legal and consulting fees, partially offset by a decrease the loss reserve the Company places on its unfunded loan commitments as well as decreased costs to the low income housing projects in which the Company participates. Other expenses decreased $13,000 for the nine months ended September 30, 2014, as compared to the same period in the prior year, primarily due to the aforementioned decreases on its unfunded loan commitments as well as decreased costs to the low income housing projects in which the Company participates.

Provision for income taxes. The provision for income taxes increased $362,000, or 47.4%, to $1.1 million for the three months ended September 30, 2014, compared to $763,000 for the same period in the prior year. This provision for income taxes reflects an effective tax rate of 19.7% for the quarter ended September 30, 2014 as compared to 16.1% for the same period in the prior year.

The provision for income taxes increased $857,000, or 33.9%, to $3.4 million for the nine months ended September 30, 2014, compared to $2.5 million for the same period in the prior year. This provision for income taxes reflects an effective tax rate of 19.99% for the period ended September 30, 2014 as compared to 18.0% for the same period in the prior year.

CHANGES IN FINANCIAL CONDITION

General. The Company’s total assets increased by $38.5 million, or 2.0%, during the period to $1.95 billion at September 30, 2014 from $1.91 billion at December 31, 2013 This increase resulted primarily from increases to cash and cash equivalents, securities available for sale, loans receivable, real estate acquired through foreclosure (REO) and securities receivable of $5.5 million, or 33.9%, $31.5 million, or 3.0%, $10.8 million, or 1.6%, $192,000, or 9.7% and $145,000, or 22.2%, respectively. These increases were partially offset by decreases in FHLB stock, premises and equipment, real estate held for investment, intangible assets, bank owned life insurance and prepaid expenses and other assets of $2.2 million, or 14.3%, $499,000, or 3.8%, $2.4 million, or 30.9%, $90,000, or 70.9%, $211,000, or 0.7%, and $4.3 million, or 32.7%, respectively. Total non-performing assets increased slightly to $10.9 million at September 30, 2014 compared to $10.8 million at December 31, 2013 and non-performing assets to total assets were 0.56% at September 30, 2014 and December 31, 2013. The increase in non-performing assets of approximately $150,000, or 1.4%, was primarily the result of increases in REO, repossessed vehicles and troubled debt restructuring of $192,000, $62,000 and $69,000, respectively, partially offset by a decrease in nonperforming loans of $173,000. The Company’s total liabilities increased $19.1 million, or 1.1%, to $1.74 billion at September 30, 2014 from $1.72 billion at December 31, 2013. This increase resulted primarily from increases to deposits and accrued expenses and other liabilities of $114.0 million, or 9.3%, and $1.5 million, or 8.6%, respectively, these increases were partially offset by decreases to borrowed funds, advance payments by borrowers for taxes and insurance and accounts payable for land development of $94.9 million, or 19.9%, $1.1 million, or 41.8%, and $361,000, or 26.1%, respectively. Total stockholders’ equity increased $19.4 million, or 10.4%, to $205.2 million at September 30, 2014 from $185.8 million at December 31, 2013. The increase to stockholders’ equity was primarily the result of increases in additional paid in capital, retained earnings and accumulated other comprehensive income (AOCI) of $209,000, or 0.2%, $8.2 million, or 8.4%, and $9.5 million, or 204.8%, partially offset by decreases in treasury stock and unearned employee stock ownership plan of $834,000, or 4.8%, and $730,000, or 34.4%, respectively. The increase to AOCI is a reflection of an increase of $8.9 million in unrealized gain on securities as a result of a decrease of approximately 54 basis points

 

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in the rate on ten year Treasury securities for the nine months ended September 30, 2014. Average stockholders’ equity to average assets was 10.23%, and book value per share was $11.53 at September 30, 2014 compared to 9.96% and $10.48, respectively, at December 31, 2013.

Cash on hand and Interest-earning deposits. Cash on hand and interest-earning deposits represent cash equivalents. Cash equivalents increased a combined $5.5 million, or 33.9%, to $21.7 million at September 30, 2014, from $16.2 million at December 31, 2013. These accounts are typically increased by deposits from customers into saving and checking accounts, loan and securities repayments and proceeds from borrowed funds. Decreases result from customer withdrawals, new loan originations, security purchases and repayments of borrowed funds.

Securities. The Company’s securities and loan portfolios represent its two largest balance sheet asset classifications. The Company’s securities portfolio increased by $31.5 million, or 3.0%, to $1.1 billion at September 30, 2014. During the nine months ended September 30, 2014, the Company recorded purchases of available for sale securities of $142.5 million, consisting of purchases of fixed-rate mortgage backed securities of $126.9 million, $8.4 million of municipal bonds and $7.2 million of corporate bonds. In addition, the portfolio increased by $13.4 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. Offsetting these increases were sales of $563,000, consisting of sales of common stock resulting in a gain of $288,000. In addition, there were repayments and maturities of securities of $122.4 million, premium amortizations of $1.3 million and realized losses of $193,000 on other than temporarily impaired securities.

The Company’s investment strategy for 2014 is to utilize the cash flows from the mortgage backed securities 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 continues to purchase corporate and municipal bonds to provide structure during this historically low interest rate environment. As an additional step to aid interest rate sensitivity, the Company had $230.0 million notional amount of interest rate caps that are unhedged and marked to market quarterly through the income statement. These interest rate caps help insulate the net interest margin against a rapid rise in short term interest rates. For the nine months ended September 30, 2014, this resulted in approximately $397,000 of non-interest expense due to decreases in the fair value of these interest rate caps.

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

As of September 30, 2014, the Company had securities with unrealized losses for greater than twelve months of $10.0 million, as more fully described in footnote 2 “Securities” to the financial statements included in Item 1. The $10.0 million primarily consists of unrealized losses attributed to the Company’s floating rate trust preferred corporate bonds. Management’s conclusion after reviewing all of the factors, is that although the market value of these securities is below book value and will most likely remain so until the economic environment changes, we believe it to be a function of widening credit spreads that have affected the corporate bond market in general as the economy has weakened and is not a reflection of the issuers’ credit worthiness. Therefore, although some of the bonds exhibit a few of the indicators of an other-than-temporary impairment, the majority of the evidence indicates that no impairment exists at this time and the decline is due to the widening credit spreads as well as the current interest rate environment. Finally, the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, and considers the securities an important part of managing its interest rate risk profile.

Loans receivable. The loans receivable category consists primarily of single family mortgage loans used to purchase or refinance personal residences located within the Company’s market area and commercial real estate loans used to finance properties that are used in the borrowers businesses or to finance investor-owned rental

 

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properties, and to a lesser extent commercial and consumer loans. Net loans receivable increased $10.8 million, or 1.6%, to $706.5 million at September 30, 2014, from $695.6 million at December 31, 2013. Included in this increase in loans receivable were increases in consumer and commercial loans of $3.6 million, or 2.7%, and $5.1 million, or 9.7%, as well as changes in the allowance for loan losses, deferred loan fees and loans in process which combined decreased $2.3 million, or 11.2%, during the nine months ended September 30, 2014.

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 $10.9 million, or 0.56%, of total assets at September 30, 2014 compared to $10.8 million, or 0.56%, of total assets at December 31, 2013. The increase in non-performing assets of approximately $150,000 was primarily the result of increases in the balances of non-performing loans, REO, repossessed vehicles and TDRs of $192,000, $62,000 and $69,000 respectively, partially offset by a decrease in non-performing of $173,000.

FHLB Stock. FHLB stock decreased by $2.2 million, or 14.3%, to $13.2 million at September 30, 2014 compared to $15.4 million at December 31, 2013. 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.

Real Estate Held for Investment. The Company’s real estate held for investment decreased by $2.4 million, or 30.9%, to $5.4 million at September 30, 2014, from $7.8 million at December 31, 2013. This decrease is primarily the result of the sale of the remaining 44 lots in one of the Company’s real estate venture projects as well as 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 $90,000, or 70.9%, to $37,000 at September 30, 2014, from $127,000 at December 31, 2013. The decrease primarily resulted from normal amortization of the core deposit intangible from acquisitions. Amortization is expected to total $110,000 and $8,000 for the years 2014 and 2015, respectively.

Bank owned life insurance. Bank owned life insurance (BOLI) is universal life insurance, purchased by the Bank, on the lives of the Bank’s employees. The beneficial aspects of these universal life insurance policies are tax-free earnings and a tax-free death benefit, which are realized by ESB as the owner of the policies. The cash surrender value of the BOLI as of September 30, 2014 was $30.4 million.

Prepaid Expenses and Other Assets. Prepaid expenses and other assets decreased $4.3 million, or 32.7%, to $8.9 million at September 30, 2014 from $13.2 million at December 31, 2013. This decrease is primarily due to an decrease in the Company’s deferred tax asset of approximately $5.1 million, partially offset by increases in the Company’s receivables. The decrease to the deferred tax asset is a reflection of an increase of $8.9 million in unrealized gain on securities as a result of a decrease of approximately 54 basis points in the rate on ten year Treasury securities for the nine months ended September 30, 2014

Deposits. The Company considers various sources when evaluating funding needs, including but not limited to deposits, which are a significant source of funds. Total deposits increased $114.0 million, or 9.3% to $1.3 billion at September 30, 2014. Deposits represented 77.8% of the Company’s total funding sources at September 30, 2014. The primary source of the growth was $99.1 million in low interest core deposits consisting of interest-bearing demand deposits which increased $96.6 million and non-interest bearing demand deposits which increased $2.5 million during the period. Additionally, time deposits increased $14.9 million during the nine months ended September 30, 2014. The Company continues to pursue low cost core deposit funding through its ongoing campaign to increase commercial, public and personal checking accounts throughout its 23 branch network.

 

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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 and repurchase agreement borrowings. Borrowed funds decreased $94.9 million, or 19.9%, to $382.3 million at September 30, 2014 from $477.2 million at December 31, 2013. FHLB advances decreased $53.1 million, or 18.3%, repurchase agreements decreased $40.0 million or 29.0%, other borrowings decreased approximately $1.7 million, or 14.3%, while junior subordinated notes remained the same at $36.1 million during the nine months ended September 30, 2014. 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 $361,000, or 26.1%, to $1.0 million at September 30, 2014, from $1.4 million at December 31, 2013. 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 $1.5 million, or 8.6%, to $18.5 million at September 30, 2014, from $17.0 million at December 31, 2013. The increase was primarily due to increases various accrued expenses including escrow accounts related to the mortgage and commercial loans.

Stockholders’ equity. Stockholders’ equity increased $19.4 million, or 10.4%, to $205.2 million at September 30, 2014, from $185.8 million at December 31, 2013. The increase to stockholders’ equity was primarily the result of increases in additional paid in capital, retained earnings and accumulated other comprehensive income (AOCI) of $209,000, or 0.2%, $8.2 million, or 8.4%, and $9.5 million, or 204.8%, partially offset by decreases in treasury stock and unearned employee stock ownership plan of $834,000, or 4.8%, and $730,000, or 34.4%, respectively. The increase to AOCI is a reflection of an increase of $8.9 million in unrealized gain on securities as a result of a decrease of approximately 54 basis points in the rate on ten year Treasury securities for the nine months ended September 30, 2014. Average stockholders’ equity to average assets was 10.23%, and book value per share was $11.53 at September 30, 2014 compared to 9.96% and $10.48, respectively, at December 31, 2013.

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

 

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investment in adjustable-rate mortgage-backed securities, corporate bonds and trust preferred securities, (ii) an emphasis on the origination of single-family residential adjustable-rate mortgages (ARMs), residential construction loans and commercial real estate loans, which generally have adjustable or floating interest rates and/or shorter maturities than traditional single-family residential loans, and consumer loans, which generally have shorter terms and higher interest rates than mortgage loans, (iii) increase the duration of the liability base of the Company by extending the maturities of savings deposits, borrowed funds and repurchase agreements and (iv) the purchase of off-balance sheet interest rate caps and structured borrowings with imbedded caps which help to insulate the Bank’s interest rate risk position from increases in interest rates.

As of September 30, 2014, the implementation of these asset and liability initiatives resulted in the following: (i) $114.6 million or 16.7% of the Company’s mortgage-backed securities portfolio, $119.4 million or 64.1% of the Company’s corporate bond portfolio and $38.7 million or 95.2% of the Company’s trust preferred securities portfolio were secured by ARMs; (ii) $160.2 million or 22.1% of the Company’s total loan portfolio had adjustable interest rates or maturities of 12 months or less and $49.5 million or 13.1% of the Company’s portfolio of single-family residential mortgage loans (including residential construction loans) consisted of ARMs, (iii) the weighted average call/maturity of the Company’s FHLB advances and repurchase agreements was 3.5 years and (iv) the Company had $230.0 million in notional amount of interest rate 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 (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, 2014, the Company’s interest-earning assets maturing or repricing within one year totaled $561.0 million while the Company’s interest-bearing liabilities maturing or repricing within one-year totaled $699.8 million, providing a deficiency of interest-earning assets over interest-bearing liabilities of $138.8 million or a negative 7.1% of total assets. At September 30, 2014, the percentage of the Company’s assets to liabilities maturing or repricing within one year was 80.2%. The Company normally strives to maintain its one-year interest rate sensitivity gap between a range of 0.0% and a negative 20.0% of total assets.

Historically, 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.

 

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

The following table presents the simulated impact of a 100 basis point or 200 basis point upward or downward shift of market interest rates on net interest income, return on average equity, diluted earnings per share and the change in EVE. This analysis was done assuming that the interest-earning asset and interest-bearing liability levels at September 30, 2014 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, 2014 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, 2014 for the change in EVE. The impact of the rate change for net interest income is compared to the base amount which can fluctuate from period to period.

 

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

Net interest income - increase (decrease)

     1.45     1.87     (2.38 %)      N/A   

Return on average equity - increase (decrease)

     2.83     3.69     (4.67 %)      N/A   

Diluted earnings per share - increase (decrease)

     3.00     4.34     (4.76 %)      N/A   

EVE - increase (decrease)

     (10.33 %)      (25.26 %)      (4.13 %)      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, 2013 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, 2012 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, 2012 for the change in EVE. The impact of the rate change for net interest income is compared to the base amount which can fluctuate from period to period.

 

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

Net interest income - increase (decrease)

     2.15     3.21     (3.34 %)      N/A   

Return on average equity - increase (decrease)

     4.25     6.32     (6.44 %)      N/A   

Diluted earnings per share - increase (decrease)

     4.39     6.54     (6.65 %)      N/A   

EVE - increase (decrease)

     (10.90 %)      (24.04 %)      (4.75 %)      N/A   

LIQUIDITY

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

Net cash provided by operating activities totaled $18.0 million for the nine months ended September 30, 2014. Net cash provided by operating activities was primarily comprised of net income of $13.7 million and increases in amortization of premiums and discounts and accrued expenses and other liabilities of $1.9 million and $2.2 million, respectively, as well as slight variances in other operating activities.

 

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Funds uses by investing activities totaled $26.4 million during the nine months ended September 30, 2014. Primary uses of funds included $142.5 million for purchases of securities available for sale and $113.9 million for loan originations and purchases, partially offset by principal repayments of loans receivable and securities available for sale of $104.3 million and $122.4 million, respectively.

Funds provided by financing activities totaled $14.0 million for the nine months ended September 30, 2014. The primary sources of funds were an increase in deposits of $114.0 million and proceeds from long-term borrowings of $33.9 million, partially offset by uses of funds were repayments of long-term borrowings, net repayment of short-term borrowings and dividends paid of $108.7 million, $20.1 million and $5.3 million, respectively.

At September 30, 2014, the total approved loan commitments outstanding amounted to $4.3 million. At the same date, commitments under unused lines of credit and credit card lines amounted to $68.6 million and the unadvanced portion of construction loans approximated $14.0 million. Certificates of deposit scheduled to mature in one year or less at September 30, 2014 totaled $477.3 million.

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

On September 16, 2014, the Company’s Board of Directors declared a cash dividend of $0.10 per share on common stock payable October 24, 2014, to shareholders of record at the close of business on September 30, 2014. 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 total 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, 2014, ESB Bank was in compliance with all regulatory capital requirements with leverage and total risk-based capital ratios of 9.5% and 17.3%, respectively.

Recent Developments. In July 2013 the U.S. federal banking agencies issued final rules implementing Basel III and the Dodd-Frank Act capital requirements to be fully-phased in on a global basis on January 1, 2019. The new regulations establish a new tangible common equity capital requirement, increase the minimum requirement for the current Tier 1 risk-weighted asset (“RWA”) ratio, phase out certain kinds of intangibles treated as capital and certain types of instruments and change the risk weightings of certain assets used to determine required capital ratios. The new common equity Tier 1 capital component requires capital of the highest quality – predominantly composed of retained earnings and common stock instruments. For community banks such as the Bank, a common equity Tier 1 capital ratio 4.5% will become effective on January 1, 2015. The new capital rules will also increase the current minimum Tier 1 capital ratio from 4.0% to 6.0% beginning on January 1, 2015. In addition, institutions that seek the freedom to make capital distributions and pay discretionary bonuses to executive officers without restriction must also maintain greater than 2.5% in common equity attributable to a capital conservation buffer to be phased in from January 1, 2016 until January 1, 2019. The new rules also increase the risk weights for several categories of assets, including an increase from 100% to 150% for certain acquisition, development and construction loans and more than 90-day past due exposures.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Quantitative and qualitative disclosures about market risk are presented at December 31, 2013 in Item 7A of the Company’s Annual Report on Form 10-K, for the year ended December 31, 2013, filed with the SEC on March 15, 2014. Management believes there have been no material changes in the Company’s market risk since December 31, 2013.

Item 4. Controls and Procedures

As of September 30, 2014, 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, 2014. During the period ended September 30, 2014, there have been no significant changes in the Company’s internal controls over financial reporting or in other factors that could significantly affect internal controls.

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

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There are no material changes to the risk factors included in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on March 15, 2014.

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

 

(a) – (b)

  Not applicable

(c)

  The following table sets forth information with respect to purchases made by or on behalf of the Company of shares of common stock of the Company during the indicated periods.

 

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Period

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

July 1-31, 2014

     230       $ 13.11         230         860,283   

August 1-31, 2014

     —           —           —           860,283   

September 1-30, 2014

     —           —           —           860,283   
  

 

 

    

 

 

    

 

 

    

 

 

 

Totals

     230       $ 13.11         230         860,283   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) On April 22, 2013, the Company announced a new program to repurchase up to 5%, or 880,000 shares, of the Company’s outstanding common stock. The program does not have an expiration date and all shares are purchased in the open market or in privately negotiated transactions, as in the opinion of management, market conditions warrant.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None.

It em 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 Section 906 of the Sarbanes-Oxley Act of 2002.

(18 U.S.C. 1350)

  32.2   

Certification of Chief Financial Officer Pursuant Section 906 of the Sarbanes-Oxley Act of 2002.

(18 U.S.C. 1350)

101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definitions Linkbase Document

 

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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 10, 2014   By:  

/s/ Charlotte A. Zuschlag

    Charlotte A. Zuschlag
    President and Chief Executive Officer

 

Date: November 10, 2014   By:  

/s/ Charles P. Evanoski

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

 

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