ESB Financial (ESBF) 10-Q 2011 Q2 Quarterly report

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

June 30, 2011 For Quarter Ended: June 30, 2011

Commission File Number: 0-19345

ESB FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Pennsylvania	25-1659846
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
600 Lawrence Avenue, Ellwood City, PA	16117
(Address of principal executive offices)	(Zip Code)

(724) 758-5584

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

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 July 29, 2011:

Common Stock, $0.01 par value	14,867,348 shares
(Class)	(Outstanding)

ESB FINANCIAL CORPORATION

TABLE OF CONTENTS

	PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Statements of Financial Condition as of June 30, 2011 and December 31, 2010 (Unaudited)	1
	Consolidated Statements of Operations for the three and six months ended June 30, 2011 and 2010 (Unaudited)	2
	Consolidated Statement of Changes in Stockholders’ Equity for the six months ended June 30, 2011 (Unaudited)	3
	Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010 (Unaudited)	4
	Notes to Unaudited Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Results of Operations and Financial Condition	34
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	48
Item 4.	Controls and Procedures	48
	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	49
Item 1A.	Risk Factors	49
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 3.	Defaults Upon Senior Securities	49
Item 4.	(Removed and Reserved)	49
Item 5.	Other Information	49
Item 6.	Exhibits	50
	Signatures	50

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

ESB Financial Corporation and Subsidiaries

Consolidated Statements of Financial Condition

As of June 30, 2011 (Unaudited) and December 31, 2010

(Dollar amounts in thousands)

	June 30, 2011			December 31, 2010
Assets
Cash on hand and in banks	$	6,068		$	5,632
Interest-earning deposits		44,988			30,072
Federal funds sold		19			3
Cash and cash equivalents		51,075			35,707
Securities available for sale; cost of $1,089,843 and $1,050,712		1,125,389			1,077,672
Loans receivable, net of allowance for loan losses of $6,653 and $6,547		639,812			640,887
Loans held for sale		—			80
Accrued interest receivable		9,132			9,607
Federal Home Loan Bank (FHLB) stock		23,552			26,097
Premises and equipment, net		14,564			13,882
Real estate acquired through foreclosure, net		1,329			1,083
Real estate held for investment		19,652			22,293
Goodwill		41,599			41,599
Intangible assets		715			895
Bank owned life insurance		30,441			30,098
Securities receivable		1,518			2,173
Prepaid expenses and other assets		8,939			11,794
Total assets	$	1,967,717		$	1,913,867
Liabilities and Stockholders’ Equity
Liabilities:
Deposits	$	1,102,261		$	1,012,645
FHLB advances		234,106			290,440
Repurchase agreements		363,000			363,000
Other borrowings		18,855			15,623
Junior subordinated notes		46,393			46,393
Advance payments by borrowers for taxes and insurance		3,105			2,441
Accounts payable for land development		3,026			3,409
Accrued expenses and other liabilities		19,121			12,563
Total liabilities		1,789,867			1,746,514
Stockholders’ Equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued		—			—
Common stock, $.01 par value, 30,000,000 shares authorized; 16,278,045 and 13,805,812 shares issued; 14,841,348 and 12,033,940 shares outstanding		163			138
Additional paid-in capital		102,220			102,229
Treasury stock, at cost; 1,436,697 and 1,771,872 shares		(16,247	)		(20,412	)
Unearned Employee Stock Ownership Plan (ESOP) shares		(4,725	)		—
Retained earnings		76,512			70,605
Accumulated other comprehensive income, net		20,671			15,334
Total ESB Financial Corporation’s stockholders’ equity		178,594			167,894
Noncontrolling interest		(744	)		(541	)
Total stockholders’ equity		177,850			167,353
Total liabilities and stockholders’ equity	$	1,967,717		$	1,913,867

See accompanying notes to unaudited consolidated financial statements.

1

ESB Financial Corporation and Subsidiaries

Consolidated Statements of Operations

For the three and six months ended June 30, 2011 and 2010 (Unaudited)

(Dollar amounts in thousands, except share data)

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Interest income:
Loans receivable	$	8,754		$	9,475		$	17,415		$	18,997
Taxable securities available for sale		9,851			10,457			19,586			21,617
Tax free securities available for sale		1,592			1,472			3,148			2,910
Deposits with banks and federal funds sold		2			3			5			5
Total interest income		20,199			21,407			40,154			43,529
Interest expense:
Deposits		3,083			3,601			6,316			7,414
Borrowed funds		5,290			6,389			10,595			13,290
Junior subordinated notes and guaranteed preferred beneficial interest in subordinated debt		606			613			1,206			1,225
Total interest expense		8,979			10,603			18,117			21,929
Net interest income		11,220			10,804			22,037			21,600
Provision for loan losses		200			200			500			554
Net interest income after provision for loan losses		11,020			10,604			21,537			21,046
Noninterest income:
Fees and service charges		871			987			1,691			1,899
Net (loss) gain on sale of loans		(1	)		2			6			5
Increase of cash surrender value of bank owned life insurance		172			189			343			375
Net realized gain on securities available for sale		532			—			532			—
Total other-than-temporary impairment losses		—			(691	)		—			(1,000	)
Portion of loss recognized in other comprehensive income before taxes		—			419			—			419
Net impairment losses on investment securities		—			(272	)		—			(581	)
Net realized loss on derivatives		(744	)		(414	)		(868	)		(733	)
Income (loss) from real estate joint ventures		698			939			1,162			495
Other		150			154			301			298
Total noninterest income		1,678			1,585			3,167			1,758
Noninterest expense:
Compensation and employee benefits		4,101			3,832			8,322			7,656
Premises and equipment		633			604			1,357			1,307
Federal deposit insurance premiums		314			501			782			979
Data processing		578			531			1,150			1,058
Amortization of intangible assets		81			102			169			210
Advertising		158			161			236			281
Other		1,158			982			2,189			1,896
Total noninterest expense		7,023			6,713			14,205			13,387
Income before income taxes		5,675			5,476			10,499			9,417
Provision for income taxes		1,160			1,100			2,056			1,920
Net income before noncontrolling interest		4,515			4,376			8,443			7,497
Less: net income attributable to the noncontrolling interest		230			407			498			148
Net income attributable to ESB Financial Corporation	$	4,285		$	3,969		$	7,945		$	7,349
Net income per share (1)
Basic	$	0.30		$	0.28		$	0.55		$	0.51
Diluted	$	0.29		$	0.27		$	0.55		$	0.51
Cash dividends declared per share (1)	$	0.10		$	0.08		$	0.18		$	0.17
Weighted average shares outstanding (1)		14,436,606			14,380,016			14,438,363			14,369,349
Weighted average shares and share equivalents outstanding (1)		14,558,751			14,471,566			14,555,719			14,447,686

(1) Outstanding shares and per share data have been adjusted to reflect the six-for-five stock split paid on May 16, 2011.

See accompanying notes to unaudited consolidated financial statements.

2

ESB Financial Corporation and Subsidiaries

Consolidated Statement of Changes in Stockholders’ Equity

For the six months ended June 30, 2011 (Unaudited)

(Dollar amounts in thousands)

	Common stock		Additional paid-in capital			Treasury stock			Unearned ESOP shares			Retained earnings			Accumulated other comprehensive income, net of tax			Noncontrolling Interest			Total stockholders’ equity
Balance at January 1, 2011	$	138	$	102,229		$	(20,412	)	$	—		$	70,605		$	15,334		$	(541	)	$	167,353
Comprehensive results:
Net income		—		—			—			—			7,945			—			498			8,443
Other comprehensive results, net		—		—			—			—			—			5,688			—			5,688
Reclassification adjustment		—		—			—			—			—			(351	)		—			(351	)
Total comprehensive results		—		—			—			—			7,945			5,337			498			13,780
Cash dividends at $0.18 per share (1)		—		—			—			—			(2,647	)		—			—			(2,647	)
Six-for-five stock split, payment in lieu of fractional shares		25		(33	)		—			—			—			—			—			(8	)
Purchase of treasury stock, at cost (36,326 shares)		—		—			(515	)		—			—			—			—			(515	)
Reissuance of treasury stock for stock option exercises (43,202 shares)		—		—			529			—			(240	)		—			—			289
Compensation expense ESOP		—		388			—			275			—			—			—			663
Additional ESOP shares purchased		—		(397	)		—			—			—			—			—			(397	)
Tax effect of compensatory stock options		—		18			—			—			—			—			—			18
Purchase of 328,299 shares of treasury stock for ESOP		—		—			4,151			(5,000	)		849			—			—			—
Capital disbursement for noncontrolling interest		—		—			—			—			—			—			(701	)		(701	)
Accrued compensation expense MRP		—		15			—			—			—			—			—			15
Balance at June 30, 2011	$	163	$	102,220		$	(16,247	)	$	(4,725	)	$	76,512		$	20,671		$	(744	)	$	177,850

(1) Per share data has been adjusted to reflect the six-for-five stock split paid on May 16, 2011.

See accompanying notes to unaudited consolidated financial statements.

3

ESB Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows

For the six months ended June 30, 2011 and 2010 (Unaudited)

(Dollar amounts in thousands)

	Six months ended June 30,
	2011			2010
Operating activities:
Net income	$	8,443		$	7,497
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization for premises and equipment		467			444
Provision for loan losses		500			554
Amortization of premiums and accretion of discounts		1,077			1,163
Origination of loans available for sale		(325	)		(455	)
Proceeds from sale of loans available for sale		411			434
Gain on sale of loans available for sale		(6	)		(5	)
Net gain on sale of securities available for sale		(532	)		—
Impairment losses on investment securities		—			581
Net realized loss on derivatives		868			733
Amortization of intangible assets		169			210
Compensation expense on ESOP and MRP		678			582
Increases in Bank owned life insurance		(343	)		(375	)
Decrease in accrued interest receivable		475			347
Decrease in prepaid FDIC assessment		727			917
Increase in prepaid expenses and other assets		(1,323	)		(3,155	)
Increase in accrued expenses and other liabilities		4,040			1,456
Gain on sale of real estate acquired through foreclosure		(5	)		(28	)
Writedown of real estate held for investment		—			852
Other		(133	)		253
Net cash provided by operating activities		15,188			12,005
Investing activities:
Loan originations		(80,144	)		(81,377	)
Purchases of:
Securities available for sale		(157,447	)		(117,227	)
Premises and equipment		(1,149	)		(769	)
Principal repayments of:
Loans receivable		81,990			87,713
Securities available for sale		113,090			144,087
Proceeds from the sale of:
Securities available for sale		5,026			—
Real estate acquired through foreclosure		160			418
Redemption of FHLB stock		2,545			—
Funding of real estate held for investment		(4,316	)		(5,356	)
Proceeds from real estate held for investment		4,436			3,001
Net cash (used in) provided by investing activities		(35,809	)		30,490
Financing activities:
Net increase in deposits		92,134			51,015
Proceeds from long-term borrowings		8,669			55,810
Repayments of long-term borrowings		(60,250	)		(115,236	)
Net increase (decrease) in short-term borrowings		(1,521	)		(16,631	)
Proceeds received from exercise of stock options		307			258
Dividends paid		(2,438	)		(2,408	)
Payments to acquire treasury stock		(515	)		(483	)
Stock purchased by ESOP		(397	)		(78	)
Net cash provided by (used in) financing activities		35,989			(27,753	)
Net increase in cash equivalents		15,368			14,742
Cash equivalents at beginning of period		35,707			16,300
Cash equivalents at end of period	$	51,075		$	31,042

4

ESB Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows, (Continued)

For the six months ended June 30, 2011 and 2010 (Unaudited)

(Dollar amounts in thousands)

	Six months ended June 30,
	2011		2010
Supplemental information:
Interest paid	$	17,523	$	21,823
Income taxes paid		1,512		2,313
Supplemental schedule of non-cash investing and financing activities:
Transfers from loans receivable to real estate acquired through foreclosure		522		368
Transfers from accrued expenses and other liabilities to deposits		2,518		2,600
Transfers from loan originations to proceeds on real estate held for investment		2,138		4,226
Dividends declared but not paid		1,484		1,204

See accompanying notes to unaudited consolidated financial statements.

5

ESB Financial Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

1. Summary of Significant Accounting Policies

Principles of Consolidation

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

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

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

Basis of Presentation

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

The results of operations for the three and six month period ended June 30, 2011 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 June 30, 2011, the Company was doing business through 24 full service banking branches, one loan production office and through its various other subsidiaries. Loans and deposits are primarily generated from the areas where banking branches are located. The Company derives its income predominantly from interest on loans and securities and to a lesser extent, non-interest income. The Company’s principal expenses are interest paid on deposits and borrowed funds and normal operating costs. The Company’s operations are principally in the banking industry. Consistent with internal reporting, the Company’s operations are reported in one operating segment, which is community banking.

6

Stock Based Compensation

During the three and six months ended June 30, 2011, the Company recorded approximately $96,000 and $196,000, respectively, in compensation expense and a tax benefit of $6,500 and $13,100, respectively, related to our share-based compensation awards that are expected to vest in 2011. During the three and six months ended June 30, 2010, the Company recorded approximately $71,000 and $142,000, respectively, in compensation expense and a tax benefit of $4,800 and $9,700, respectively, related to our share-based compensation awards that are expected to vest in 2010. As of June 30, 2011, there was approximately $666,300 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 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 June 30, 2011 there were sixteen interest rate cap contracts outstanding with notional amounts totaling $160.0 million. These derivative instruments are not hedged and therefore adjustments to fair value are recorded in current earnings.

7

The Company entered into two interest rate swap contracts to manage its exposure to interest rate risk. These interest rate swap transactions involved the exchange of the Company’s interest payment on $35.0 million in junior subordinated notes which become 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 June 30, 2011 the interest rate swaps were deemed to be effective, therefore no amounts were charged to current earnings. The Company also does not expect to reclassify any hedge related amounts from OCI to earnings over the next twelve months.

The pay fixed interest rate swap contract outstanding at June 30, 2011 is being utilized to hedge $35.0 million in floating rate junior subordinated notes. Below is a summary of the interest rate swap contract and the terms at June 30, 2011:

(Dollars in thousands)	Notional Amount		Effective Date		Pay Rate			Receive Rate (*)			Maturity Date		Unrealized
													Gain		Loss
Cash Flow Hedge	$	20,000		2/10/2011		4.18	%		0.27	%		2/10/2018		—	$	2,117
Cash Flow Hedge		15,000		2/10/2011		3.91	%		0.27	%		2/10/2018		—		1,331
	$	35,000												—	$	3,448

* Variable receive rate based upon contract rates in effect at June 30, 2011

Recent Accounting and Regulatory Pronouncements

In June 2011, the FASB issuedASU 2011-05, Presentation of Comprehensive Income. The amendments in this Update improve the comparability, clarity, consistency, and transparency of financial reporting and increase the prominence of items reported in other comprehensive income. To increase the prominence of items reported in other comprehensive income and to facilitate convergence of U.S. GAAP and IFRS, the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. All entities that report items of comprehensive income, in any period presented, will be affected by the changes in this update. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. For nonpublic entities, the amendments are effective for fiscal years ending after December 15, 2012, and interim and annual periods thereafter. The amendments in this Update should be applied retrospectively, and early adoption is permitted. This ASU is not expected to have a significant impact on the Company’s financial statements.

In May 2011, the FASB issuedASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in this Update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The amendments in this Update are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. For nonpublic entities, the amendments are effective for annual periods beginning after December 15, 2011. Early application by public entities is not permitted. This ASU is not expected to have a significant impact on the Company’s financial statements.

8

In April 2011, the FASB issuedASU 2011-03, Reconsideration of Effective Control for Repurchase Agreements. The main objective in developing this Update is to improve the accounting for repurchase agreements (repos) and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The amendments in this Update remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. The amendments in this Update apply to all entities, both public and nonpublic. The amendments affect all entities that enter into agreements to transfer financial assets that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity. The guidance in this Update is effective for the first interim or annual period beginning on or after December 15, 2011 and should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. 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 April 2011, the FASB issued ASU 2011-02,Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The amendments in this Update provide additional guidance or clarification to help creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. The amendments in this Update are effective for the first interim or annual reporting period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning annual period of adoption. As a result of applying these amendments, an entity may identify receivables that are newly considered impaired. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

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

In January 2010, the FASB issued ASU No. 2010-06,Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. ASU 2010-06 amends Subtopic 820-10 to clarify existing disclosures, require new disclosures, and includes conforming amendments to guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The Company has presented the necessary disclosures in footnote 9 “Fair Value”.

Reclassifications

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

9

2. Securities

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

(Dollar amounts in thousands)	Amortized cost		Unrealized gains		Unrealized losses			Fair value
June 30, 2011:
Trust preferred securities	$	45,969	$	185	$	(6,794	)	$	39,360
Municipal securities		169,899		4,219		(1,301	)		172,817
Equity securities		2,041		378		(28	)		2,391
Corporate bonds		101,566		3,626		—			105,192
Mortgage-backed securities
U.S. sponsored entities		759,655		35,568		(605	)		794,618
Private label		10,713		399		(101	)		11,011
Subtotal mortgage-backed securities		770,368		35,967		(706	)		805,629
Total securities	$	1,089,843	$	44,375	$	(8,829	)	$	1,125,389
December 31, 2010:
Trust preferred securities	$	46,467	$	116	$	(7,607	)	$	38,976
Municipal securities		165,479		2,040		(4,342	)		163,177
Equity securities		1,424		434		(8	)		1,850
Corporate bonds		118,862		3,800		—			122,662
Mortgage-backed securities
U.S. sponsored entities		706,034		33,752		(1,524	)		738,262
Private label		12,446		463		(164	)		12,745
Subtotal mortgage-backed securities		718,480		34,215		(1,688	)		751,007
Total securities	$	1,050,712	$	40,605	$	(13,645	)	$	1,077,672

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 June 30, 2011:

As of June 30, 2011
(Dollar amounts in thousands)	Less than 12 Months						12 Months or more						Total
	# of Securities		Fair Value		Unrealized losses		# of Securities		Fair Value		Unrealized losses		# of Securities		Fair Value		Unrealized losses
Trust preferred securities		—	$	—	$	—		9	$	37,681	$	6,794		9	$	37,681	$	6,794
Municipal securities		44		39,682		1,301		—		—		—		44		39,682		1,301
Equity securities		2		707		24		1		133		4		3		840		28
Mortgage-backed securities
U.S. sponsored entities		20		81,714		605		—		—		—		20		81,714		605
Private label		3		3,634		101		—		—		—		3		3,634		101
Subtotal mortgage-backed securities		23		85,348		706		—		—		—		23		85,348		706
Total		69	$	125,737	$	2,031		10	$	37,814	$	6,798		79	$	163,551	$	8,829

10

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

As of December 31, 2010
(Dollar amounts in thousands)	Less than 12 Months						12 Months or more						Total
	# of Securities		Fair Value		Unrealized losses		# of Securities		Fair Value		Unrealized losses		# of Securities		Fair Value		Unrealized losses
Trust preferred securities		—	$	—	$	—		10	$	37,360	$	7,607		10	$	37,360	$	7,607
Municipal securities		85		67,411		2,750		21		19,773		1,592		106		87,184		4,342
Equity securities		—		—		—		1		130		8		1		130		8
Mortgage-backed securities
U.S. sponsored entities		21		87,741		1,524		—		—		—		21		87,741		1,524
Private label		—		—		—		3		3,914		164		3		3,914		164
Subtotal mortgage-backed securities		21		87,741		1,524		3		3,914		164		24		91,655		1,688
Total		106	$	155,152	$	4,274		35	$	61,177	$	9,371		141	$	216,329	$	13,645

The Company primarily invests in mortgage-backed securities, variable and fixed rate corporate bonds, municipal bonds, government bonds and to a lesser extent equity securities. The policy of the Company is to recognize other than temporary impairment (OTTI) on equity securities where the fair value has been significantly below cost for three consecutive quarters. Declines in the fair value of the debt securities that can be attributed to specific adverse conditions affecting the credit quality of the investment would be recorded as OTTI and charged to earnings. In order to determine if a decline in fair value is other than temporary, the Company reviews corporate ratings of the investment, analyst reports and SEC filings of the issuers. For fixed maturity investments with unrealized losses due to interest rates where the Company expects to recover the entire amortized cost basis of the security, declines in value below cost are not assumed to be other than temporary. The Company reviews its position quarterly and has asserted that at June 30, 2011, the declines outlined in the above table represent temporary declines due to changes in interest rates and are not reflections of impairment in the credit quality of the securities. Additionally, the Company does not intend to sell the investment and it is not more likely than not that the Company will be required to sell the investment before recovery of its amortized cost basis.

The Company reviews investment debt securities on an ongoing basis for the presence of OTTI with formal reviews performed quarterly. Credit-related OTTI losses on individual securities are recognized in earnings while noncredit-related OTTI on securities not expected to be sold is recognized in accumulated other comprehensive income. There were no OTTI charges during either the quarter or six month period ended June 30, 2011.

One pooled trust preferred security has previously been determined to be other than temporarily impaired due solely to credit related factors. This security is a collateralized debt obligation currently comprised of trust preferred securities of 16 financial institutions and has a Moody’s rating of Ca, which is below investment grade. The Company utilized a discounted cash flow method to determine the amount of impairment. During this analysis, the Company determined that seven of these financial institutions are currently deferring interest payments. In addition, two financial institutions have defaulted. Currently seven of the sixteen financial institutions are performing. Three of the seven financial institutions that are deferring interest payments as of June 2011 either lost money or broke even for the most recently reported quarter. Four of the seven financial institutions on deferral had a Tier 1 Risk Ratio at or less than the required well capitalized institution level under prompt corrective action provisions of 6%. Also, there were six financial institutions (including five of the seven deferrals) within this pool that the non-performing assets to loans plus real estate owned ratio was greater than 10%. However, during the fourth quarter of 2010, two financial institutions that are currently deferring interest payments were able to raise capital to further strengthen their capital positions and were able to report earnings during the most recently reported quarter. The Company has factored this into the current quarter analysis and has found no additional credit impairment as of June 30, 2011.

11

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 the lack of liquidity for resale of this investment type and the absence of reliable pricing information. This method is described more fully in footnote 9, “Fair Value”.

The following table summarizes scheduled maturities of the Company’s securities as of June 30, 2011 and December 31, 2010 excluding equity securities which have no maturity dates:

As of June 30, 2011
(Dollar amounts in thousands)	Available for sale
	Weighted			Amortized		Fair
	Average Yield			cost		value
Due in one year or less		4.95	%	$	36,823	$	37,649
Due from one year to five years		4.60	%		52,542		55,815
Due from five to ten years		5.01	%		125,854		132,866
Due after ten years		4.01	%		872,583		896,668
		4.19	%	$	1,087,802	$	1,122,998

As of December 31, 2010
(Dollar amounts in thousands)	Available for sale
	Weighted			Amortized		Fair
	Average Yield			cost		value
Due in one year or less		5.24	%	$	39,276	$	39,865
Due from one year to five years		5.05	%		68,296		72,037
Due from five to ten years		4.86	%		124,832		130,678
Due after ten years		4.08	%		816,884		833,242
		4.28	%	$	1,049,288	$	1,075,822

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

The proceeds from the sale of securities for the period ended June 30, 2011 was $5.0 million resulting in gross realized gains of $532,000. There were no gross realized losses during the period and there were no security sales in the period ended June 30, 2010.

12

3. Loans Receivable

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

(In thousands)	June 30, 2011			December 31, 2010
Mortgage loans:
Residential real estate
Single family	$	311,150		$	314,051
Multi family		47,415			30,091
Construction		31,679			48,687
Total residential real estate		390,244			392,829
Commercial real estate
Commercial		86,055			82,347
Construction		8,393			9,701
Total commercial real estate		94,448			92,048
Subtotal mortgage loans		484,692			484,877
Other loans:
Consumer loans
Home equity loans		71,734			71,645
Dealer auto and RV loans		50,266			50,781
Other loans		9,633			9,960
Total consumer loans		131,633			132,386
Commercial business		42,903			40,431
Subtotal other loans		174,536			172,817
Total loans receivable		659,228			657,694
Less:
Allowance for loan losses		6,653			6,547
Deferred loan fees and net discounts		(2,103	)		(1,983	)
Loans in process		14,866			12,243
Net loans receivable	$	639,812		$	640,887
Loans held for sale
Mortgage loans:
Residential - single family	$	—		$	80

At June 30, 2011 and December 31, 2010, the Company conducted its business through 24 offices in Allegheny, Beaver, Butler and Lawrence counties in Pennsylvania which also serves as its primary lending area. Management does not believe it has significant concentrations of credit risk to any one group of borrowers given its underwriting and collateral requirements.

13

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

• Levels of and trends in delinquencies and nonaccruals

• Changes in lending policies and procedures

• Volatility of losses within each risk category

• Loans and Lending staff acquired through acquisition

• Economic trends

• Concentrations of credit

• Trends in volume and terms

• Experience depth and ability of management

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

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

14

Loans by Segment

The total allowance reflects management’s estimate of loan losses inherent in the loan portfolio at the balance sheet date. The Company considers the allowance for loan losses of $6.7 million adequate to cover loan losses inherent in the loan portfolio, at June 30, 2011. The following tables present by portfolio segment, the changes in the allowance for loan losses and the recorded investment in loans for the periods ended June 30, 2011 and December 31, 2010. The table reflects two primary differences between the periods. The commercial loans evaluated for impairment were reduced as a result of a settlement in regards to a loan to a local automobile dealer. The residential loans evaluated for impairment were impacted by a loan to a local developer to construct 1-4 family residences, which became delinquent during the quarter:

As of June 30, 2011	Commercial			Commercial Real Estate		Consumer			Residential			Unallocated		Total
(Dollar amounts in thousands)
Allowance for loan losses:
Beginning balance	$	784		$	1,831	$	1,125		$	2,573		$	234	$	6,547
Charge-offs		178			—		267			58			—		503
Recoveries		24			—		84			1			—		109
Provision		—			25		225			175			75		500
Reallocations		(263	)		171		(59	)		(55	)		206		—
Ending Balance	$	367		$	2,027	$	1,108		$	2,636		$	515	$	6,653
Ending balance: individually evaluated for impairment	$	—		$	850	$	50		$	406		$	—	$	1,306
Ending balance: collectively evaluated for impairment	$	367		$	1,177	$	1,058		$	2,230		$	515	$	5,347
Ending balance: loans acquired with deteriorated credit quality	$	—		$	—	$	—		$	—		$	—	$	—
Loans Receivable:
Ending Balance	$	42,903		$	94,448	$	131,633		$	390,244		$	—	$	659,228
Ending balance: individually evaluated for impairment	$	42		$	8,494	$	154		$	2,341		$	—	$	11,031
Ending balance: collectively evaluated for impairment	$	42,861		$	85,954	$	131,479		$	387,903		$	—	$	648,197
Ending balance: loans acquired with deteriorated credit quality	$	—		$	—	$	—		$	—		$	—	$	—

As of December 31, 2010	Commercial			Commercial Real Estate		Consumer		Residential		Unallocated			Total
(Dollar amounts in thousands)
Allowance for loan losses:
Beginning balance	$	864		$	1,620	$	1,093	$	2,206	$	244		$	6,027
Charge-offs		58			168		583		177		—			986
Recoveries		1			—		98		3		—			102
Provision		365			350		464		225		—			1,404
Reallocations		(388	)		29		53		316		(10	)		—
Ending Balance	$	784		$	1,831	$	1,125	$	2,573	$	234		$	6,547
Ending balance: individually evaluated for impairment	$	472		$	839	$	47	$	—	$	—		$	1,358
Ending balance: collectively evaluated for impairment	$	312		$	992	$	1,078	$	2,573	$	234		$	5,189
Ending balance: loans acquired with deteriorated credit quality	$	—		$	—	$	—	$	—	$	—		$	—
Loans Receivable:
Ending Balance	$	40,431		$	92,048	$	132,386	$	392,829	$	—		$	657,694
Ending balance: individually evaluated for impairment	$	837		$	8,432	$	155	$	—	$	—		$	9,424
Ending balance: collectively evaluated for impairment	$	39,594		$	83,616	$	132,231	$	392,829	$	—		$	648,270
Ending balance: loans acquired with deteriorated credit quality	$	—		$	—	$	—	$	—	$	—		$	—

15

The following is a summary of the changes in the allowance for loan losses for the periods ended June 30, 2011 and 2010:

(Dollar amounts in thousands)	2011			2010
Balance, January 1,	$	6,547		$	6,027
Provision for loan losses		500			554
Charge offs		(503	)		(384	)
Recoveries		109			61
Balance June 30,	$	6,653		$	6,258

Credit Quality Information

The following tables represent credit exposures by internally assigned grades as of June 30, 2011 and December 31, 2010. The grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all. The Company’s internal credit risk grading system is based on experiences with similarly graded loans.

The Company’s internally assigned grades are as follows:

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

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

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

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

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

16

As of June 30, 2011
(Dollar amounts in thousands)
	Residential Real Estate Multi - family		Residential Real Estate Construction		Commercial Real Estate Commercial		Commercial Real Estate Construction		Commercial
Pass	$	31,679	$	38,978	$	75,752	$	8,393	$	42,759
Special Mention		—		6,020		1,856		—		65
Substandard		—		2,011		8,447		—		79
Doubtful		—		—		—		—		—
Loss		—		406		—		—		—
Ending Balance	$	31,679	$	47,415	$	86,055	$	8,393	$	42,903

As of December 31, 2010
(Dollar amounts in thousands)
	Residential Real Estate Multi - family		Residential Real Estate Construction		Commercial Real Estate Commercial		Commercial Real Estate Construction		Commercial
Pass	$	30,091	$	41,302	$	71,999	$	9,701	$	39,483
Special Mention		—		4,876		1,863		—		75
Substandard		—		2,509		8,485		—		403
Doubtful		—		—		—		—		—
Loss		—		—		—		—		470
Ending Balance	$	30,091	$	48,687	$	82,347	$	9,701	$	40,431

The following tables present performing and nonperforming single family residential and consumer loans based on payment activity as of June 30, 2011 and December 31, 2010. Payment activity is reviewed by management on a monthly basis to determine how loans are performing. Loans are considered to be nonperforming when they become 90 days delinquent.

As of June 30, 2011
(Dollar amounts in thousands)
	Residential Real Estate Single Family		Consumer Home  Equity		Dealer Auto and  RV		Other Consumer
Performing	$	305,677	$	71,045	$	50,151	$	9,531
Nonperforming		5,473		689		115		102
Total	$	311,150	$	71,734	$	50,266	$	9,633

17

As of December 31, 2010
(Dollar amounts in thousands)
	Residential Real Estate Single Family		Consumer Home  Equity		Dealer Auto and  RV		Other Consumer
Performing	$	311,092	$	71,011	$	50,563	$	9,889
Nonperforming		2,959		634		218		71
Total	$	314,051	$	71,645	$	50,781	$	9,960

Nonperforming loans also include certain loans that have been modified 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. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months.

Non-performing loans, which include non-accrual loans and TDRs, were $14.9 million and $13.2 million at June 30, 2011 and December 31, 2010. The TDRs amounted to $7.6 million and $7.5 million at June 30, 2011 and December 31, 2010, respectively. The Company is not committed to lend additional funds to debtors whose loans are on non-accrual status.

Age Analysis of Past Due Loans Receivable by Class

Following tables are an aging analysis of the investment of past due loans receivable as of June 30, 2011 and December 31, 2010.

	30-59 Days Past Due		60-89 Days Past Due		90 Days Or Greater		Total  Past Due		Current		Total  Loans Receivable		Recorded Investment >
(Dollar amounts in thousands)
As of June 30, 2011
													90 Days and Accruing
Residential real estate
Single family	$	1,794	$	173	$	3,132	$	5,099	$	306,051	$	311,150	$	—
Construction		—		—		2,341		2,341		45,074		47,415		—
Multi-family		—		—		—		—		31,679		31,679		—
Commercial Real Estate
Commercial		30		562		1,030		1,622		84,433		86,055		—
Construction		—		—		—		—		8,393		8,393		—
Consumer
Consumer - home equity		84		15		535		634		71,100		71,734		—
Consumer - dealer auto and RV		442		89		115		646		49,620		50,266		—
Consumer - other		35		20		102		157		9,476		9,633		—
Commercial		2,742		26		55		2,823		40,080		42,903		—
Total	$	5,127	$	885	$	7,310	$	13,322	$	645,906	$	659,228	$	—

18

(Dollar amounts in thousands)
As of December 31, 2010													Investment >
	30-59 Days Past Due		60-89 Days Past Due		90 D1ays Or Greater		Total  Past Due		Current		Total  Loans Receivable		90 Days and Accruing
Residential real estate
Single family	$	2,440	$	879	$	2,959	$	6,278	$	307,773	$	314,051	$	—
Construction		—		2,431		13		2,444		46,243		48,687		—
Multi-family		—		—		—		—		30,091		30,091		—
Commercial Real Estate
Commercial		133		48		1,106		1,287		81,060		82,347		—
Construction		—		—		—		—		9,701		9,701		—
Consumer
Consumer - home equity		181		58		479		718		70,927		71,645		—
Consumer - dealer auto and RV		872		219		218		1,309		49,472		50,781		—
Consumer - other		48		83		71		202		9,758		9,960		—
Commercial		26		—		837		863		39,568		40,431		—
Total	$	3,700	$	3,718	$	5,683	$	13,101	$	644,593	$	657,694	$	—

Impaired Loans

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

The following tables are the recorded investment and unpaid principal balances for impaired loans receivable as of June 30, 2011 and December 31, 2010 with the associated allowance for loan losses amount, if applicable.

19

(Dollar amounts in thousands)
As of June 30, 2011			Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
	Recorded Investment
With no related allowance recorded:
Commercial real estate
Commercial real estate	$	1,128	$	1,235	$	—	$	1,149	$	10
Commercial business loans		42		54		—		93		6
With an allowance recorded:
Residential real estate
Construction		2,341		2,341		406		2,046		—
Commercial real estate
Commercial real estate		7,366		7,354		850		7,339		276
Consumer loans
Home equity		154		154		50		155		4
Commercial business loans		—		—		—		205		2
Total:
Residential Real Estate		2,341		2,341		406		2,046		—
Commercial Real Estate		8,494		8,589		850		8,488		286
Consumer		154		154		50		155		4
Commercial		42		54		—		298		8

(Dollar amounts in thousands)
As of December 31, 2010
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial real estate
Commercial real estate	$	1,162	$	1,269	$	—	$	732	$	57
Commercial business loans		145		192		—		195		4
With an allowance recorded:
Commercial real estate
Commercial real estate		7,270		7,270		839		1,198		564
Consumer loans
Home equity		155		155		47		24		10
Commercial business loans		692		692		472		75		21
Total:
Commercial Real Estate		8,432		8,539		839		1,930		621
Consumer		155		155		47		24		10
Commercial		837		884		472		270		25

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Nonaccrual Loans

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

On the following table are the loans receivable on nonaccrual status as of June 30, 2011 and December 31, 2010. The balances are presented by class of loans:

(Dollar amounts in thousands)	June 30, 2011		December 31, 2010
Commercial	$	55	$	837
Commercial Real Estate		8,481		8,432
Consumer
Consumer - Home Equity		689		634
Consumer - Dealer auto and RV		115		218
Consumer - other		102		71
Residential		5,473		2,959
Total	$	14,915	$	13,151

4. Deposits

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

(Dollar amounts in thousands)	June 30, 2011					December 31, 2010
Type of accounts	Amount		%			Amount		%
Noninterest-bearing deposits	$	87,527		7.9	%	$	84,272		8.3	%
NOW account deposits		180,564		16.4	%		128,020		12.6	%
Money Market deposits		40,575		3.7	%		32,759		3.2	%
Passbook account deposits		149,503		13.6	%		136,730		13.6	%
Time deposits		644,092		58.4	%		630,864		62.3	%
	$	1,102,261		100.0	%	$	1,012,645		100.0	%
Time deposits mature as follows:
Within one year	$	367,617		57.1	%	$	410,474		65.1	%
After one year through two years		128,913		20.0	%		96,689		15.3	%
After two years through three years		70,887		11.0	%		62,428		9.9	%
After three years through four years		32,995		5.1	%		28,949		4.6	%
After four years through five years		38,913		6.0	%		28,384		4.5	%
Thereafter		4,767		0.8	%		3,940		0.6	%
	$	644,092		100.0	%	$	630,864		100.0	%

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5. Borrowed Funds

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

(Dollar amounts in thousands)	June 30, 2011					December 31, 2010
	Weighted average rate			Amount		Weighted average rate			Amount
FHLB advances:
Due within 12 months		2.67	%	$	52,550		2.87	%	$	71,866
Due beyond 12 months but within 2 years		3.58	%		37,656		2.80	%		30,684
Due beyond 2 years but within 3 years		3.45	%		89,203		3.62	%		72,647
Due beyond 3 years but within 4 years		2.83	%		35,854		2.89	%		90,066
Due beyond 4 years but within 5 years		2.15	%		8,815		3.36	%		14,613
Due beyond 5 years		3.60	%		10,028		3.63	%		10,564
				$	234,106				$	290,440
Repurchase agreements:
Due within 12 months		2.26	%	$	63,000		1.61	%	$	38,000
Due beyond 12 months but within 2 years		3.46	%		160,000		3.74	%		75,000
Due beyond 2 years but within 3 years		3.30	%		50,000		3.30	%		130,000
Due beyond 3 years but within 4 years		3.65	%		20,000		3.07	%		40,000
Due beyond 4 years but within 5 years		—			—		4.12	%		10,000
Due beyond 5 years		4.42	%		70,000		4.42	%		70,000
				$	363,000				$	363,000
Other borrowings:
ESOP borrowings
Due within 12 months		4.68	%	$	1,000		—		$	—
Due beyond 12 months but within 2 years		4.68	%		1,000		—			—
Due beyond 2 years but within 3 years		4.68	%		1,000		—			—
Due beyond 3 years but within 4 years		4.68	%		1,000		—			—
Due beyond 4 years but within 5 years		4.68	%		750		—			—
				$	4,750				$	—
Corporate borrowings
Due within 12 months		6.30	%	$	1,400		6.30	%	$	1,400
Due beyond 12 months but within 2 years		6.30	%		1,400		6.30	%		1,400
Due beyond 2 years but within 3 years		6.30	%		1,400		6.30	%		1,400
Due beyond 3 years but within 4 years		6.30	%		1,400		6.30	%		1,400
Due beyond 4 years but within 5 years		6.30	%		5,600		6.30	%		5,600
				$	11,200				$	11,200
Treasury tax and loan note payable
Due within 12 months		—		$	115		—		$	191
Borrowings for joint ventures
Due beyond 2 years but within 3 years		3.75	%	$	2,790		3.75	%	$	4,232
Junior subordinated notes
Due beyond 5 years		2.37	%	$	46,393		5.44	%	$	46,393

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Included in the $234.1 million of FHLB advances at June 30, 2011 are $20.0 million in structured advances in which the rate is fixed for four years, and after four years on a specified date, the FHLB has the one time right (European Call) to call the advance. If the FHLB does not call these advances on the specified date, the rate remains the same for the remaining term. Should these advances be called, the Company has the right to pay off the advances without penalty. The Company also has $50.0 million in structured advances with imbedded caps at various strike rates based on the 3 month LIBOR rate. If during the term of the advance, the 3 month LIBOR rate exceeds the strike rate, the interest rate on the structured advance is reduced by the difference between the rate and the strike rate.

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

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

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

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

The market value of such securities exceeded the amortized cost of the securities sold under agreements to repurchase. The market value of the securities as of June 30, 2011 was $423.0 million with an amortized cost of $395.8 million. The market value of the securities as of December 31, 2010 was $426.7 million with an amortized cost of $400.8 million. The average maturity date of the mortgage backed securities sold under agreements to repurchase was greater than 90 days for the quarter ended June 30, 2011 and December 31, 2010.

As of June 30, 2011 and December 31, 2010, the Company had REPO’s with Citigroup of $155.0 million and $155.0 million respectively, Barclays Capital of $70.0 million and $70.0 million, respectively, Credit Suisse of $103.0 million and $103.0 million, respectively, PNC Bank of $5.0 million and $5.0 million, respectively and Morgan Stanley of $30.0 million and $30.0 million, respectively.

As of June 31, 2011, the REPO’s with Citigroup had $18.2 million at risk (where the market value of the securities exceeds the borrowing), with a weighted average maturity of 29 months, Barclays Capital had $7.8 million at risk with a weighted average maturity of 40 months, Credit Suisse had $15.0 million at risk with a weighted average maturity of 31 months, PNC Bank had $1.0 million at risk with a weighted average maturity of 9 months and Morgan Stanley had $3.0 million at risk with a weighted average maturity of 31 months.

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Borrowings under REPO’s averaged $363.8 million during the first six months of 2011. The maximum amount outstanding at any month-end was $368.0 million.

The Company, through ESB, has an agreement with the Federal Reserve Bank of Cleveland whereby ESB is an authorized treasury tax loan depository. Under the terms of the note agreement, funds deposited to the Company’s treasury tax and loan account (limited to $150,000 per deposit) accrue interest at a rate of 0.25% below the overnight federal funds rate. The treasury tax loan deposit balance was $115,000 and $191,000 at June 30, 2011 and December 31, 2010, respectively.

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

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

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

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

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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 June 30, 2011		Three  Months Ended June 30, 2010
Net income	$	4,285	$	3,969
Weighted-average common shares outstanding		14,437		14,380
Basic earnings per share	$	0.30	$	0.28
Weighted-average common shares outstanding		14,437		14,380
Common stock equivalents due to effect of stock options		122		92
Total weighted-average common shares and equivalents		14,559		14,472
Diluted earnings per share	$	0.29	$	0.27
	Six Months Ended June 30, 2011		Six Months Ended June 30, 2010
Net income	$	7,945	$	7,349
Weighted-average common shares outstanding		14,438		14,369
Basic earnings per share	$	0.55	$	0.51
Weighted-average common shares outstanding		14,438		14,369
Common stock equivalents due to effect of stock options		118		79
Total weighted-average common shares and equivalents		14,556		14,448
Diluted earnings per share	$	0.55	$	0.51

The shares controlled by the Company’s Employee Stock Ownership Plan (ESOP) of 393,959 and 89,219 at June 30, 2011 and June 30, 2010, respectively, are not considered in the weighted average shares outstanding until the shares are committed for allocation to an employee’s individual account.

Options to purchases 84,816 shares at $12.79 per diluted share expiring November 2013, 92,892 shares at $12.08 per diluted share expiring November 2014 and 150,996 shares at $12.42 per diluted share expiring November 2015 were outstanding as of June 30, 2011 but were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares.

Options to purchase 95,796 shares at $12.79 per diluted share expiring November 2013 and 100,272 shares at $12.08 per diluted share expiring November 2014 were outstanding as of June 30, 2010 but were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares.

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7. Comprehensive Income

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

(Dollar amounts in thousands)	Three  Months Ended June 30, 2011			Three  Months Ended June 30, 2010
Net Income:	$	4,515		$	4,376
Other comprehensive income - net of tax
Fair value adjustment on securities available for sale, net of tax expense of $3,331 in 2011, $1,990 in 2010.		6,466			3,863
Net securities (gains) losses reclassified into earnings, net of tax
(expense) benefit of ($181) in 2011 and $92 in 2010.		(351	)		180
Comprehensive loss on securities for which an other-than-temporary impairment has been recognized in earnings, net of tax of $142 in 2010		—			(277	)
Pension and postretirement amortization, net of tax expense of $15 in 2011 and $16 in 2010.		30			30
Fair value adjustment on derivatives, net of tax benefit of $328 in 2011 and $801 in 2010.		(637	)		(1,555	)
Other comprehensive income - net of tax		5,508			2,241
Comprehensive income		10,023			6,617
Comprehensive income attributable to the noncontrolling interest		(230	)		(407	)
Comprehensive income attributable to ESB Financial Corporation	$	9,793		$	6,210

(Dollar amounts in thousands)	Six  Months Ended June 30, 2011			Six  Months Ended June 30, 2010
Net Income:	$	8,443		$	7,497
Other comprehensive income - net of tax
Fair value adjustment on securities available for sale, net of tax expense of $3,100 in 2011 and $2,697 in 2010.		6,018			5,235
Net securities (gains) losses reclassified into earnings, net of tax
(benefit) expense of $181 in 2011 and $198 in 2010.		(351	)		384
Comprehensive loss on securities for which an other-than-temporary impairment has been recognized in earnings, net of tax of $142 in 2010		—			(277	)
Pension and postretirement amortization, net of tax expense of $31 in 2011 and $31 in 2010.		60			61
Fair value adjustment on derivatives, net of tax benefit of $201 in 2011 and $1,055 in 2010.		(390	)		(2,049	)
Other comprehensive income - net of tax		5,337			3,354
Comprehensive income		13,780			10,851
Comprehensive income attributable to the noncontrolling interest		(498	)		(148	)
Comprehensive income attributable to ESB Financial Corporation	$	13,282		$	10,703

27

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

(Dollar amounts in thousands)	June  30, 2011			December  31, 2010
Net unrealized gain on securities available for sale	$	23,460		$	17,794
Accumulated loss on effective cash flow hedging derivatives		(2,275	)		(1,886	)
Net unrecognized pension cost		(514	)		(574	)
Total	$	20,671		$	15,334

8. Retirement Plans

Supplemental Executive Retirement Plan and Directors’ Retirement Plan

The Company maintains a Supplemental Executive Benefit Plan (SERP) in order to provide supplemental retirement and death benefits for certain key employees of the Company. Under the SERP, participants shall receive an annual retirement benefit following retirement at age 65 equal to 25% of the participant’s final average pay multiplied by a ratio, ranging from 1.25% to 25.0%, based on the participant’s total years of service. Final average pay is based upon the participant’s last three year’s compensation. The maximum ratio of 25% requires twenty or more years of credited service and the minimum ratio of 1.25% requires one year of credited service. Benefits under the plan are payable in either a lump sum or ten equal annual payments and a lesser benefit is payable upon early retirement at age 50 with at least twelve years of service. If a participant dies prior to retirement, the participant’s estate will receive a lump sum payment equal to the net present value of future benefit payments under the plan. At June 30, 2011, the participants in the plan had credited service under the SERP ranging from 20 to 32 years.

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

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The following table illustrates the components of the net periodic pension cost for the SERP and Directors Retirement Plan as of June 30, 2011 and 2010:

	SERP				SERP
(Dollar amounts in thousands)	Three Months Ended June 30, 2011		Three Months Ended June 30, 2010		Six Months Ended June 30, 2011		Six Months Ended June 30, 2010
Components of net periodic pension cost
Service cost	$	16	$	15	$	32	$	30
Interest cost		31		31		62		62
Amortization of unrecognized gains and losses		14		14		28		28
Amortization of prior service cost		10		11		20		22
Net periodic pension cost	$	71	$	71	$	142	$	142

	Directors’ Retirement Plan				Directors’ Retirement Plan
(Dollar amounts in thousands)	Three Months Ended June 30, 2011		Three Months Ended June 30, 2010		Six Months Ended June 30, 2011		Six Months Ended June 30, 2010
Components of net periodic pension cost
Service cost	$	1	$	6	$	2	$	12
Interest cost		10		11		20		22
Amortization of prior service cost		22		22		44		44
Net periodic pension cost	$	33	$	39	$	66	$	78

9. Fair Value

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

Level I:	Quoted prices are available in the active markets for identical assets or liabilities as of the reported date.
Level II:	Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities include items for which quoted prices are available but traded less frequently, and items that are fair valued using other financial instruments, the parameters of which can be directly observed.
Level III:	Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

The following tables present the assets and liabilities reported on the consolidated statements of financial condition at their fair value on a recurring basis as of June 30, 2011 and December 31, 2010 by level within the fair value hierarchy. As required by GAAP, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

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	As of June 30, 2011
(Dollar amounts in thousands)	Level 1		Level II		Level III		Total
Assets:
Securities available for sale
Trust preferred securities	$	—	$	1,679	$	37,681	$	39,360
Municipal securities		—		172,817		—		172,817
Equity securities		2,391		—		—		2,391
Corporate bonds		—		105,192		—		105,192
Mortgage backed securities
U.S. sponsored entities		—		794,618		—		794,618
Private label		—		11,011		—		11,011
Subtotal mortgage-backed securites		—		805,629		—		805,629
Total securities available for sale	$	2,391	$	1,085,317	$	37,681	$	1,125,389
Other Assets
Interest rate caps	$	—	$	1,196	$	—	$	1,196
Total other assets	$	—	$	1,196	$	—	$	1,196
Liabilities
Other Liabilities
Interest rate swaps	$	—	$	3,448	$	—	$	3,448
Total other liabilities	$	—	$	3,448	$	—	$	3,448

	As of December 31, 2010
(Dollar amounts in thousands)	Level 1		Level II		Level III		Total
Assets:
Securities available for sale
Trust preferred securities	$	—	$	1,615	$	37,361	$	38,976
Municipal securities		—		163,177		—		163,177
Equity securities		1,850		—		—		1,850
Corporate bonds		—		122,662		—		122,662
Mortgage backed securities
U.S. sponsored entities		—		738,262		—		738,262
Private label		—		12,745		—		12,745
Subtotal mortgage-backed securites		—		751,007		—		751,007
Total securities available for sale	$	1,850	$	1,038,461	$	37,361	$	1,077,672
Other Assets
Interest rate caps	$	—	$	725	$	—	$	725
Total other assets	$	—	$	725	$	—	$	725
Liabilities
Other Liabilities
Interest rate swaps	$	—	$	2,857	$	—	$	2,857
Total other liabilities	$	—	$	2,857	$	—	$	2,857

Due to recent uncertainties in the credit markets broadly, and the lack of both trading and new issuance of floating rate trust preferred securities, market price indications generally reflect the lack of liquidity in these markets. Due to this lack of practical quoted prices, fair value for floating rate trust preferred securities has 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 30 to 85 basis points. Liquidity risk adjustments ranged from 15 to 55 basis points where the securities of the 10 largest banks in the United States are assigned 15 to 20 basis points and banks outside of the top 10 were given a higher liquidity risk adjustment. Approximately $18.7 million or 49.6% of the $37.7 million in floating rate trust preferred securities represent investments in three of the four largest banks in the United States.

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The following table presents the changes in the Level III fair-value category for the periods ended June 30, 2011 and 2010. The Company classifies financial instruments in Level III of the fair-value hierarchy when there is reliance on at least one significant unobservable input to the valuation model. In addition to these unobservable inputs, the valuation models for Level III financial instruments typically also rely on a number of inputs that are readily observable either directly or indirectly.

Fair value measurements using significant unobservable inputs (Level III)

	Securities available for sale June 30,
	2011			2010
Beginning balance January 1,	$	37,361		$	39,003
Total net realized/unrealized gains (losses)
Included in earnings:
Interest income on securities		7			7
Net realized loss on securities available for sale		—			(426	)
Included in other comprehensive income		813			(2,582	)
Transfers in and/or out of Level III		—			—
Purchases, issuances and settlements
Purchases		—			—
Issuances		—			—
Sales		—			—
Settlements		(500	)		—
Ending balance, June 30,	$	37,681		$	36,002

The following table summarizes changes in unrealized gains and losses recorded in earnings for the six month period ended June 30, 2011 and 2010 for Level III assets and liabilities that are still held at June 30, 2011 and 2010.

	Securities available for sale June 30,
	2011		2010
Interest income on securities	$	7	$	7
Net realized loss on securities available for sale		—		(426	)
Total	$	7	$	(419	)

The following table presents the assets and liabilities reported on the consolidated statements of financial condition at their fair value on a non-recurring basis as of June 30, 2011 and December 31, 2010 by level within the fair value hierarchy. As required by GAAP, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

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	As of June 30, 2011
(Dollar amounts in thousands)	Level 1		Level II		Level III		Total
Assets:
Impaired Loans	$	—	$	—	$	9,723	$	9,723
Loans held for sale		—		—		—		—
Real estate acquired through foreclosure		—		—		1,329		1,329
Servicing assets		—		—		14		14
	As of December 31, 2010
(Dollar amounts in thousands)	Level 1		Level II		Level III		Total
Assets:
Impaired Loans	$	—	$	—	$	8,066	$	8,066
Loans held for sale		—		80		—		80
Real estate acquired through foreclosure		—		—		1,083		1,083
Servicing assets		—		—		24		24

10. Financial Instruments

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

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

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

Securities – With the exception of floating rate trust preferred securities ( 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 and held for sale– Fair values for loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values of impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable. The carrying amounts of loans held for sale approximate their fair values.

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

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

Bank owned life insurance (BOLI) – The fair value of BOLI at June 30, 2011 and December 31, 2010 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.

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

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

(Dollar amounts in thousands)	June 30, 2011				December 31, 2010
	Carrying amount		Fair value		Carrying amount		Fair value
Financial assets:
Cash and cash equivalents	$	51,075	$	51,075	$	35,707	$	35,707
Securities		1,125,389		1,125,389		1,077,672		1,077,672
Securities receivable		1,518		1,518		2,173		2,173
Loans receivable and held for sale		639,812		666,983		640,967		658,989
Accrued interest receivable		9,132		9,132		9,607		9,607
FHLB stock		23,552		23,552		26,097		26,097
Bank owned life insurance		30,441		30,441		30,098		30,098
Interest rate cap contracts		1,196		1,196		725		725
Financial liabilities:
Deposits		1,102,261		1,113,634		1,012,645		1,023,877
Borrowed funds		615,961		648,881		669,063		701,969
Junior subordinated notes		46,393		22,217		46,393		19,897
Advance payment by borrowers for taxes and insurance		3,105		3,105		2,441		2,441
Accrued interest payable		2,914		2,914		2,320		2,320
Interest rate swap contracts		3,448		3,448		2,857		2,857

11. Stock Split

On April 19, 2011 the Company paid a six-for-five stock split, in the form of a 20% stock dividend, to stockholders of record as of May 5, 2011. Stockholders received one additional share of common stock for every five shares held on the record date. All prior period per share data have been adjusted for the split.

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

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

The Company’s critical accounting policies involving the significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of June 30, 2011 have remained unchanged from the disclosures presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 under the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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

OVERVIEW

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

During the three months ended June 30, 2011 the Company reported net income of $4.3 million, an increase of approximately $316,000, or 8.0%, over the same period last year. The Company realized a decrease in interest income of approximately $1.2 million over the same quarter last year. However, interest expense decreased by approximately $1.6 million during the same period. The result was an increase of $416,000 in net interest income. The Company recorded an increase of $93,000 in noninterest income when compared to the same quarter last year. Non-interest income for the quarter ended June 30, 2011 was affected by a write-down of the market value of the Company’s interest rate caps of approximately $744,000, compared to $414,000 during the quarter ended June 30, 2010. The quarter ended June 30, 2010 was also affected by impairment charges on a collateralized debt obligation that is comprised of sixteen financial institutions, a collateralized mortgage obligation bond and equity securities that the Company holds in community banks of $128,000, $115,000 and $29,000, respectively.

During the six months ended June 30, 2011, the Company reported net income of $7.9 million, an increase of approximately $596,000, or 8.1%, over the same period last year. The Company realized a decrease in interest income of approximately $3.4 million over the same period last year. However, interest expense decreased by approximately $3.8 million during that period. Non-interest income for the six month period ended June 30, 2011 was affected by a write-down of the market value of the Company’s interest rate caps of approximately $868,000, compared to $733,000 for the six months ended June 30, 2010. During the six months ended June 30, 2010, the Company also incurred impairment charges on a collateralized debt obligation that is comprised of sixteen financial institutions, a collateralized mortgage obligation bond and equity securities that the Company holds in community banks of $426,000, $115,000 and $40,000, respectively, as well as write downs of land acquisition and development costs of approximately $852,000 at one of the Company’s joint ventures.

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

During the six months ended June 30, 2011, the Company had approximately $60.0 million of maturing wholesale borrowings at a weighted average rate of 2.87% and an original call/maturity of 2.2 years. The borrowings that matured were replaced with deposit growth of approximately $89.6 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 $4.3 million for the three months ended June 30, 2011 as compared to $4.0 million for the same period in the prior year. The $316,000, or 8.0%, increase in net income for the quarter ended June 30, 2011 as compared to the same period in the prior year was primarily the result of increases in net interest income and noninterest income of $416,000 and $93,000, respectively, as well as a decrease in net income attributable to the noncontrolling interest of $177,000. These increases were offset by increases in noninterest expense and provision for income taxes of $310,000 and $60,000, respectively.

The Company recorded net income of $7.9 million for the six months ended June 30, 2011, as compared to net income of $7.3 million for the same period in the prior year. The $596,000, or 8.1%, increase in net income for the six months ended June 30, 2011, as compared to the same period in the prior year was primarily the result of increases in net interest income after provision for loan losses and noninterest income of $491,000 and $1.4 million, respectively, partially offset by increases in noninterest expense, provision for income taxes and net income attributable to the noncontrolling interest of $818,000, $136,000 and $350,000, respectively.

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

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Net interest income increased $416,000, or 3.9%, to $11.2 million for the three months ended June 30, 2011, compared to $10.8 million for the same period in the prior year. This increase in net interest income was the result of a decrease in interest expense of $1.6 million, partially offset by a decrease in interest income of $1.2 million.

Net interest income increased by $437,000, or 2.0%, to $22.0 million for the six months ended June 30, 2011 compared to $21.6 million for the same period in the prior year. This increase in net interest income was the result of interest expense decreasing by $3.8 million, partially offset by a decrease to interest income of $3.4 million.

Interest income. Interest income decreased $1.2 million, or 5.6%, for the three months ended June 30, 2011, compared to the same period in the prior year. This decrease can primarily be attributed to decreases in interest earned on loans receivable and securities available for sale of $721,000 and $486,000, respectively.

Interest earned on loans receivable decreased $721,000, or 7.6%, for the three months ended June 30, 2011, compared to the same period in the prior year. This decrease was primarily attributable to a decrease in the average balance of loans outstanding of $30.8 million, or 4.6%, to $645.8 million for the three months ended June 30, 2011, compared to $676.6 million for the same period in the prior year, as well as a decrease in the yield on the portfolio of 15 basis points to 5.51% for the three months ended June 30, 2011, compared to 5.66% for the same period in the prior year.

Interest earned on securities decreased $486,000, or 4.1%, for the three months ended June 30, 2011, compared to the same period in the prior year. This decrease was primarily the result of a 31 basis point decrease in the tax equivalent yield on securities to 4.51% for the three months ended June 30, 2011 from 4.82% for the three months ended June 30, 2010, partially offset by an increase in the average balance of the securities portfolio of $34.9 million, or 3.3%, to $1.1 billion at June 30, 2011.

Interest income decreased $3.4 million, or 7.8%, for the six months ended June 30, 2011, compared to the same period in the prior year. This decrease can primarily be attributed to decreases in interest earned on loans receivable and securities available for sale of $1.6 million and $1.8 million, respectively.

Interest earned on loans receivable decreased $1.6 million, or 8.3%, for the six months ended June 30, 2011 compared to the same period in the prior year. This decrease was primarily attributable to a decrease in the average balance of loans outstanding of $32.1 million, or 4.7%, to $644.5 million for the six months ended June 30, 2011 as compared to $676.6 million for the same period in the prior year. Additionally, the yield on loans receivable decreased by 20 basis points to 5.49% at June 30, 2011 from 5.69% at June 30, 2010, respectively.

Interest earned on securities decreased $1.8 million, or 7.3%, for the six months ended June 30, 2011 compared to the same period in the prior year. This decrease was primarily the result of a decrease in the tax equivalent yield on securities of 39 basis points to 4.52% at June 30, 2011 as compared to 4.91% at June 30, 2010, partially offset by an increase in the average balance of the securities portfolio of $16.5 million, or 1.6%, to $1.1 billion at June 30, 2011.

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

Interest expense. Interest expense decreased $1.6 million, or 15.3%, for the three months ended June 30, 2011, compared to the same period in the prior year. This decrease in interest expense can be attributed to decreases in interest incurred on deposits, borrowed funds and junior subordinated notes of $518,000, $1.1 million and $7,000, respectively.

Interest incurred on deposits decreased $518,000, or 14.4%, for the three months ended June 30, 2011, compared to the same period in the prior year. This decrease was due to a decrease in the cost of interest-bearing deposits to 1.24% from 1.58% for the quarters ended June 30, 2011 and 2010, respectively, partially offset by an increase in the average balance of interest-bearing deposits of $79.4 million, or 8.7% to $995.1 million for the three months ended June 30, 2011, compared to $915.6 million for the same period in the prior year. The Company manages its cost of

36

interest bearing deposits by diligently monitoring the interest rates on its products as well as the rates being offered by its competition through weekly interest rate committee meetings and utilizing rate surveys and hence subsequently adjusting rates accordingly.

Interest incurred on borrowed funds decreased $1.1 million, or 17.2%, for the three months ended June 30, 2011 compared to the same period in the prior year. This decrease was primarily attributable to a decrease in the average balance of borrowed funds of $90.1 million, or 12.6%, as well as a decrease in the cost of these funds to 3.39% for the quarter ended June 30, 2011 as compared to 3.58%, for the quarter ended June 30, 2010.

Interest expense decreased $3.8 million, or 17.4%, for the six months ended June 30, 2011, compared to the same period in the prior year. This decrease in interest expense can be attributed to decreases in interest incurred on deposits, borrowed funds and junior subordinated notes of $1.1 million, $2.7 million and $19,000, respectively.

Interest incurred on deposits decreased $1.1 million, or 14.8%, for the six months ended June 30, 2011, compared to the same period in the prior year. This decrease was due to a 35 basis point decrease in the cost of interest-bearing deposits to 1.31% from 1.66% for the six months ended June 30, 2011 and 2010, respectively, partially offset by an increase in the average balance of interest-bearing deposits of $70.8 million, or 7.8%, to $973.0 million for the six months ended June 30, 2011, compared to $902.2 million for the same period in the prior year.

Interest incurred on borrowed funds decreased $2.7 million, or 20.2%, for the six months ended June 30, 2011 compared to the same period in the prior year. This decrease was primarily attributable to a decrease in the average balance of borrowed funds of $108.2 million, or 14.6%, to $633.3 million for the six months ended June 30, 2011, compared to $741.5 million for the same period in the prior year, as well as a 24 basis point decrease in the cost of these funds between the periods to 3.37% from 3.61% for the periods ended June 30, 2011 and 2010.

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 June 30, 2011, the interest incurred on these borrowings decreased by $7,000, or 1.1%, due to a decrease in the cost of these funds to 5.24% from 5.31% for the same period in the prior year. During the six months ended June 30, 2011, the interest incurred on these borrowings decreased by $19,000, or 1.6%, due to a decrease in the cost of these funds to 5.24% from 5.32% 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.

37

	Three months ended June 30,
	2011							2010
(Dollar amounts in thousands)	Average Balance		Interest		Yield / Rate			Average Balance		Interest		Yield / Rate
Interest-earning assets:
Taxable securities available for sale	$	799,615	$	8,420		4.21	%	$	784,424	$	9,010		4.59	%
Taxable corporate bonds available for sale		147,573		1,431		3.89	%		137,986		1,447		4.21	%
Tax-exempt securities available for sale		141,506		1,592		6.82	%(1)		131,335		1,472		6.79	%(1)
		1,088,694		11,443		4.51	%(1)		1,053,745		11,929		4.82	%(1)
Mortgage loans		468,546		6,455		5.51	%		494,656		7,006		5.67	%
Other loans		151,240		2,049		5.43	%		163,745		2,275		5.57	%
Tax-exempt loans		25,971		250		5.85	%(1)		18,197		194		6.48	%(1)
		645,757		8,754		5.51	%(1)		676,598		9,475		5.66	%(1)
Cash equivalents		31,232		2		0.03	%		13,837		3		0.09	%
FHLB stock		23,759		—		—			27,470		—		—
		54,991		2		0.01	%		41,307		3		0.03	%
Total interest-earning assets		1,789,442		20,199		4.73	%(1)		1,771,650		21,407		5.03	%(1)
Other noninterest-earning assets		162,424		—		—			174,319		—		—
Total assets	$	1,951,866	$	20,199		4.34	%(1)	$	1,945,969	$	21,407		4.58	%(1)
Interest-bearing liabilities:
Interest-bearing demand deposits	$	348,273	$	329		0.38	%	$	294,187	$	248		0.34	%
Time deposits		646,789		2,754		1.71	%		621,457		3,353		2.16	%
		995,062		3,083		1.24	%		915,644		3,601		1.58	%
FHLB advances		243,255		1,910		3.15	%		334,062		3,000		3.60	%
Repurchase Agreements		363,000		3,143		3.47	%		363,000		3,181		3.51	%
Other borrowings		19,666		237		4.83	%		18,912		208		4.41	%
		625,921		5,290		3.39	%		715,974		6,389		3.58	%
Junior subordinated notes- fixed		36,083		520		5.78	%		36,083		527		5.87	%
Junior subordinated notes- adjustable		10,310		86		3.35	%		10,310		86		3.35	%
		46,393		606		5.24	%		46,393		613		5.31	%
Total interest-bearing liabilities		1,667,376		8,979		2.16	%		1,678,011		10,603		2.53	%
Noninterest-bearing demand deposits		89,223		—		—			76,875		—		—
Other noninterest-bearing liabilities		18,486		—		—			20,399		—		—
Total liabilities		1,775,085		8,979		2.03	%		1,775,285		10,603		2.40	%
Stockholders’ equity		176,781		—		—			170,684		—		—
Total liabilities and equity	$	1,951,866	$	8,979		1.85	%	$	1,945,969	$	10,603		2.19	%
Net interest income			$	11,220						$	10,804
Interest rate spread (difference between weighted average rate on interest-earning assets and interest-bearing liabilities)						2.57	%(1)						2.50	%(1)
Net interest margin (net interest income as a percentage of average interest-earning assets)						2.72	%(1)						2.63	%(1)

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	Six months ended June 30,
	2011							2010
	Average Balance		Interest		Yield  / Rate			Average Balance		Interest		Yield  / Rate
(Dollar amounts in thousands)
Interest-earning assets:
Taxable securities available for sale	$	785,848	$	16,580		4.22	%	$	797,526	$	18,774		4.71	%
Taxable corporate bonds available for sale		152,607		3,006		3.97	%		134,808		2,843		4.25	%
Tax-exempt securities available for sale		139,974		3,148		6.82	%(1)		129,598		2,910		6.80	%(1)
		1,078,429		22,734		4.52	%(1)		1,061,932		24,527		4.91	%(1)
Mortgage loans		468,898		12,850		5.48	%		493,767		14,009		5.67	%
Other loans		150,777		4,089		5.47	%		164,336		4,599		5.64	%
Tax-exempt loans		24,792		476		5.86	%(1)		18,469		389		6.43	%(1)
		644,467		17,415		5.49	%(1)		676,572		18,997		5.69	%(1)
Cash equivalents		23,268		5		0.04	%		13,560		5		0.07	%
FHLB stock		24,601		—		—			27,470		—		—
		47,869		5		0.02	%		41,030		5		0.02	%
Total interest-earning assets		1,770,765		40,154		4.75	%(1)		1,779,534		43,529		5.09	%(1)
Other noninterest-earning assets		159,933		—		—			174,203		—		—
Total assets	$	1,930,698	$	40,154		4.36	%(1)	$	1,953,737	$	43,529		4.64	%(1)
Interest-bearing liabilities:
Interest-bearing demand deposits	$	329,539	$	597		0.37	%	$	281,173	$	457		0.33	%
Time deposits		643,414		5,719		1.79	%		620,980		6,957		2.26	%
		972,953		6,316		1.31	%		902,153		7,414		1.66	%
FHLB advances		250,759		3,890		3.13	%		364,207		6,667		3.69	%
Repurchase Agreements		363,833		6,253		3.47	%		354,667		6,202		3.53	%
Other borrowings		18,749		452		4.86	%		22,627		421		3.75	%
		633,341		10,595		3.37	%		741,501		13,290		3.61	%
Junior subordinated notes- fixed		36,083		1,035		5.78	%		36,083		1,055		5.90	%
Junior subordinated notes- adjustable		10,310		171		3.34	%		10,310		170		3.33	%
		46,393		1,206		5.24	%		46,393		1,225		5.32	%
Total interest-bearing liabilities		1,652,687		18,117		2.21	%		1,690,047		21,929		2.62	%
Noninterest-bearing demand deposits		87,490		—		—			75,240		—		—
Other noninterest-bearing liabilities		17,880		—		—			18,506		—		—
Total liabilities		1,758,057		18,117		2.08	%		1,783,793		21,929		2.48	%
Stockholders’ equity		172,641		—		—			169,944		—		—
Total liabilities and equity	$	1,930,698	$	18,117		1.89	%	$	1,953,737	$	21,929		2.26	%
Net interest income			$	22,037						$	21,600
Interest rate spread (difference between weighted average rate on interest-earning assets and interest-bearing liabilities)						2.54	%(1)						2.47	%(1)
Net interest margin (net interest income as a percentage of average interest-earning assets)						2.69	%(1)						2.61	%(1)

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

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Analysis of Changes in Net Interest Income. The following tables analyze the changes in interest income and interest expense, between the three and six month periods ended June 30, 2011 in terms of: (1) changes in volume of interest-earning assets and interest-bearing liabilities and (2) changes in yields and rates. The table reflects the extent to which changes in the Company’s interest income and interest expense are attributable to changes in rate (change in rate multiplied by prior period volume), changes in volume (changes in volume multiplied by prior period rate) and changes attributable to the combined impact of volume/rate (change in rate multiplied by change in volume). The changes attributable to the combined impact of volume/rate are allocated on a consistent basis between the volume and rate variances. Changes in interest income on securities reflects the changes in interest income on a fully tax equivalent basis.

	Three months ended, June 30,
	2011 versus 2010
	Increase (decrease) due to
(Dollar amounts in thousands)	Volume			Rate			Total
Interest income:
Securities	$	387		$	(873	)	$	(486	)
Loans		(424	)		(297	)		(721	)
Cash equivalents		2			(3	)		(1	)
FHLB stock		—			—			—
Total interest-earning assets		(35	)		(1,173	)		(1,208	)
Interest expense:
Deposits		293			(811	)		(518	)
FHLB advances		(745	)		(345	)		(1,090	)
Repurchase agreements		—			(38	)		(38	)
Other borrowings		9			20			29
Junior subordinated notes		—			(7	)		(7	)
Total interest-bearing liabilities		(443	)		(1,181	)		(1,624	)
Net interest income	$	408		$	8		$	416

	Six months ended June 30,
	2011 versus 2010
	Increase (decrease) due to
(Dollar amounts in thousands)	Volume			Rate			Total
Interest income:
Securities	$	376		$	(2,169	)	$	(1,793	)
Loans		(883	)		(699	)		(1,582	)
Cash equivalents		3			(3	)		—
FHLB stock		—			—			—
Total interest-earning assets		(504	)		(2,871	)		(3,375	)
Interest expense:
Deposits		549			(1,647	)		(1,098	)
FHLB advances		(1,864	)		(913	)		(2,777	)
Repurchase agreements		159			(108	)		51
Other borrowings		(80	)		111			31
Junior subordinated notes		—			(19	)		(19	)
Total interest-bearing liabilities		(1,236	)		(2,576	)		(3,812	)
Net interest income	$	732		$	(295	)	$	437

Provision for loan losses. The provision for loan losses remained the same at $200,000 for the quarters ended June 30, 2011 and June 30, 2010 and decreased $54,000 to $500,000 for the six months ended June 30, 2011 as compared to $554,000 for the same period last year. These provisions were part of the normal operations of the

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Company for the second quarter and first six months of 2011. In determining the appropriate level of allowance for loan losses, management considers historical loss experience, the financial condition of borrowers, economic conditions (particularly as they relate to markets where the Company originates loans), the status of non-performing assets, the estimated underlying value of the collateral and other factors related to the collectability of the loan portfolio. The Company’s total allowance for losses on loans at June 30, 2011 amounted to $6.7 million, or 1.01% of the Company’s total loan portfolio, as compared to $6.5 million, or 1.00%, at December 31, 2010. The Company’s allowance for losses on loans as a percentage of non-performing loans was 44.61% and 49.78% at June 30, 2011 and December 31, 2010, respectively.

Non-interest income. Non-interest income increased $93,000, or 5.9%, for the three months ended June 30, 2011 compared to the same period in the prior year. The $93,000 increase in non-interest income was comprised of an increase to net gain on sale of securities of $532,000 and a decrease in net impairment losses on securities of $272,000, partially offset by decreases in fees and service charges, net gain on sale of loans, net surrender value of bank owned life insurance and income from real estate joint ventures of $116,000, $3,000, $17,000 and $241,000, respectively, as well as an increase in net realized loss on derivatives of $330,000.

Non-interest income increased $1.4 million, or 80.2%, for the six months ended June 30, 2011 compared to the same period in the prior year. The $1.4 million increase in non-interest income was comprised of increases in net gain on sale of securities and income from real estate joint venture of $532,000 and $667,000, respectively and a decrease to net impairment losses on securities of $581,000, partially offset by decreases in fees and service charges and net surrender value of bank owned life insurance of $208,000 and $32,000, respectively, as well as an increase in net realized loss on derivatives of $135,000.

Fees and service charges decreased $116,000 and $208,000 for the three and six months ended June 30, 2011 compared to the same periods in the prior year. These decreases are due to decreases in fees charged on checking accounts, primarily related to a decline in non-sufficient funds fees.

Net realized gain on sale of securities available for sale increased $532,000 for both the quarter and six months ended June 30, 2011. The Company had $5.0 million in sales from the portfolio during 2011, consisting of sales of fixed-rate mortgage backed securities of $4.2 million, adjustable-rate mortgage back securities of $648,000 and common stock of $204,000 resulting in a gain of $532,000.

Impairment losses on investment securities decreased $272,000 and $581,000 for the three and six months ended June 30, 2011 compared to the same periods in the prior year. The Company took impairment charges during the six months ended June 30, 2010 of approximately $426,000 on a $2.5 million collateralized debt obligation that is comprised of sixteen financial institutions, $115,000 on a collateralized mortgage obligation and $40,000 on two of its equity investments in community banks that had experienced a decline in its market value during the last several quarters.

The Company had losses on derivatives during the quarter ended June 30, 2011 of $744,000 compared to losses in the same period in 2010 of $414,000. During the six months ended June 30, 2011 the Company had losses on derivatives of $868,000 compared to losses during the same period in 2010 of $733,000. These fluctuations were due to market value adjustments to the Company’s interest rate caps.

Real estate joint venture income decreased $241,000 for the three months ended June 30, 2011 and increased $667,000 for the six month period when compared to the same periods ended June 30, 2010. The Company has a 51% ownership in its real estate joint ventures. The Company has a mixture of joint ventures in which it participates either in land development only or construction of units. During the first quarter of 2010, the Company took an impairment charge to land acquisition and development costs of $852,000 at one of the Company’s joint ventures, as a result of a recent appraisal of the property. This charge partially offsets the income recognized during the six months ended June 30, 2010.

Non-interest expense. Non-interest expense increased $310,000, or 4.6%, to $7.0 million for the three months ended June 30, 2011 as compared to $6.7 million for the same period in the prior year. This increase was primarily related to increases in compensation and employee benefits and other expenses of $269,000 and $176,000, respectively, partially offset by a decrease in federal deposit insurance premiums of $187,000.

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Non-interest expense increased $818,000, or 6.1%, to $14.2 million for the six months ended June 30, 2011 as compared to $13.4 million for the same period in the prior year. This increase was primarily related to increases in compensation and employee benefits, premises and equipment, data processing and other expenses of $666,000, $50,000, $92,000 and $293,000, respectively, partially offset by a decrease in federal deposit insurance premiums of $197,000.

Compensation and employee benefits increased $269,000 and $666,000 for the quarter and six months ended June 30, 2011, as compared to the same periods 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 stock options and the ESOP.

Other expenses increased $176,000 and $293,000 for the quarter and six months ended June 30, 2011, as compared to the same periods in the prior year. These increases were primarily due to increased operating costs for the Company’s joint ventures and REO properties as well as losses on the Company’s partnership in a tax credit, consulting contracts and employee education expenses.

Provision for income taxes. The provision for income taxes increased $60,000, or 5.5%, to $1.2 million for the three months ended June 30, 2011, compared to $1.1 million for the same period in the prior year. This provision for income taxes reflects an effective tax rate of 21.3% for the quarter ended June 30, 2011 as compared to 21.7% for the same period in the prior year.

The provision for income taxes increased $136,000, or 7.1%, to $2.1 million for the six months ended June 30, 2011, compared to $1.9 million for the same period in the prior year. This provision for income taxes reflects an effective tax rate of 20.6% for the six months ended June 30, 2011 as compared to 20.7% for the same period in the prior year.

CHANGES IN FINANCIAL CONDITION

General. The Company’s total assets increased by $53.9 million, or 2.8%, during the quarter to $1.97 billion at June 30, 2011 from $1.91 billion at December 31, 2010. This increase resulted primarily from increases to cash and cash equivalents, securities available for sale, premises and equipment, real estate acquired through foreclosure and bank owned life insurance of $15.4 million, or 43.0%, $47.7 million, or 4.4%, $682,000, or 4.9%, $246,000 or 22.7% and $343,000, or 1.1%, partially offset by decreases in loans receivable, loans held for sale, accrued interest receivable, FHLB stock, real estate held for investment, intangible assets, securities receivable and prepaid expenses and other assets of $1.1 million, or 0.2%, $80,000, or 100.0%, $475,000, or 4.9%, $2.5 million or 9.8%, $2.6 million, or 11.9%, $180,000, or 20.1%, $655,000, or 30.1% and $2.9 million, or 24.2%. Total non-performing assets increased to $16.3 million at June 30, 2011 compared to $14.4 million at December 31, 2010 and non-performing assets to total assets were 0.83% at June 30, 2011 compared to 0.75% at December 31, 2010. The Company’s total liabilities increased $43.4 million, or 2.5%, to $1.79 billion at June 30, 2011. Total stockholders’ equity increased $10.5 million, or 6.3%, to $177.9 million at June 30, 2011, from $167.4 million at December 31, 2010. This increase resulted primarily from increases in deposits and accrued expenses and other liabilities of $89.6 million, or 8.9%, and $6.6 million, or 52.2%, respectively, partially offset by a decrease in borrowed funds of $53.1 million, or 7.4%. The increase in stockholders’ equity was primarily the result of increases in retained earnings and accumulated other comprehensive income of $5.9 million and $5.3 million, respectively, and a decrease in treasury stock of $4.2 million, partially offset by an increase in unearned employee stock ownership plan shares of $4.7 million. Average stockholders’ equity to average assets was 8.94%, and book value per share was $12.03 at June 30, 2011 compared to 8.87% and $11.63, respectively, at December 31, 2010.

Cash on hand, Interest-earning deposits and Federal funds sold. Cash on hand, interest-earning deposits and federal funds sold represent cash equivalents. Cash equivalents increased a combined $15.4 million, or 43.0%, to $51.1 million at June 30, 2011 from $35.7 million at December 31, 2010. These accounts are typically increased by deposits from customers into saving and checking accounts, loan and security repayments and proceeds from borrowed funds. Decreases result from customer withdrawals, new loan originations, security purchases and repayments of borrowed funds.

Securities. The Company’s securities and loan portfolios represent its two largest balance sheet asset classifications, respectively. The Company’s securities portfolio increased by $47.7 million, or 4.4%, to $1.1 billion

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at June 30, 2011. During the six months ended June 30, 2011, the Company recorded purchases of available for sale securities of $157.4 million, consisting of purchases of fixed-rate mortgage backed securities of $146.8 million, adjustable-rate securities of $5.1 million, $4.9 million of municipal bonds and $681,000 of equity securities. In addition, the portfolio increased by $8.6 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 $5.0 million, consisting of sales of fixed-rate mortgage backed securities of $4.2 million, adjustable-rate mortgage back securities of $648,000 and common stock of $204,000 resulting in a gain of $532,000. In addition, there were repayments and maturities of securities of $113.1 million and premium amortizations of $732,000.

The Company’s investment strategy for 2011 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 intends to also purchase corporate or municipal bonds to provide structure should a low interest rate environment prevail. As an additional step to aid interest rate sensitivity the Company secured $105.0 million of wholesale borrowings with embedded interest rate caps totaling $130.0 million to help insulate the net interest margin against a rapid rise in short term interest rates and $160.0 million, notional amount, of interest rate caps that are unhedged and marked to market quarterly through the income statement. In the first six months of 2011, this resulted in approximately $868,000 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 June 30, 2011, the Company had securities with unrealized losses for greater than twelve months of $6.8 million, as more fully described in footnote 2 “Securities”. Included in the $6.8 million were unrealized losses attributed to the Company’s floating rate trust preferred corporate bonds. Management’s conclusion after reviewing all of the factors is that although the market value of these securities is below book value and will most likely remain so until the economic environment changes, we believe it to be a function of widening credit spreads that have affected the corporate bond market in general as the economy has weakened and is not a reflection of the issuers’ credit worthiness. Therefore, although some of the bonds exhibit a few of the indicators of an other-than-temporary impairment, the majority of the evidence indicates that no impairment exists at this time and the decline is due to the widening credit spreads as well as the current interest rate environment. Finally, the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, and considers the securities an important part of managing its interest rate risk profile.

Loans receivable.The loans receivable category consists primarily of single family mortgage loans used to purchase or refinance personal residences located within the Company’s market area and commercial real estate loans used to finance properties that are used in the borrowers businesses or to finance investor-owned rental properties, and to a lesser extent commercial and consumer loans. Net loans receivable decreased $1.1 million, or 0.2%, to $639.8 million at June 30, 2011 from $640.9 million at December 31, 2010. Included in this decrease in loans receivable were decreases in mortgage loans and consumer loans of $185,000, or 0.04%, and $753,000, or 0.6%, respectively, partially offset by an increase in commercial business loans of $2.5 million, or 6.1%,. Additionally the portfolio is affected by changes in the allowance for loan losses, deferred loan fees and loans in process which combined increased $2.6 million, or 15.5%, during the six months ended June 30, 2011, causing a reduction to the portfolio.

Loans held for sale.Loans held for sale decreased $80,000, or 100.0%, during the six months ended June 30, 2011. During the six month period, the Company originated loans held for sale of approximately $325,000 and sold approximately $411,000, with a resulting gain of approximately $6,000.

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

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Non-performing assets amounted to $16.3 million, or 0.83%, of total assets at June 30, 2011 compared to $14.4 million, or 0.75%, of total assets at December 31, 2010. The increase in non-performing assets of approximately $1.9 million was primarily the result of increases in non-performing loans, REO and TDR of $1.6 million, $246,000 and $136,000, partially offset by a decrease to the repossessed vehicles of $106,000. The $1.6 million increase in non-performing loans was primarily due a loan to a local developer to construct 1-4 family residences, which became delinquent during the period.

FHLB Stock.FHLB stock decreased by $2.5 million, or 9.8%, to $23.6 million at June 30, 2011 compared to $26.1 million at December 31, 2010. The Bank is required to maintain an investment in capital stock of the FHLB of Pittsburgh in an amount not less than 5.0% of its outstanding notes payable to the FHLB of Pittsburgh. In 2008 the FHLB suspended both the payment of dividends and the repurchase of excess capital stock. During the fourth quarter of 2010 the FHLB partially lifted the suspension with a limited repurchase of excess stock. The dividend suspension remains in effect and no dividends were paid in 2011 or 2010. This repurchase restriction could result in the Bank’s investment in FHLB stock being greater than 5.0% of its outstanding notes payable to the FHLB.

Real Estate Held for Investment.The Company’s real estate held for investment decreased by $2.6 million or 11.8%, to $19.7 million at June 30, 2011 from $22.3 million at December 31, 2010. This decrease was partially the result of sales activity in the joint ventures in which the Company has a 51% ownership, offset by construction activity within those joint ventures.

Intangible assets. Intangible assets decreased $180,000, or 20.1%, to $715,000 at June 30, 2011 from $895,000 at December 31, 2010. The decrease primarily resulted from normal amortization of the core deposit intangible from acquisitions. Amortization is expected to total $332,000, $251,000, $170,000, $110,000 and $8,000 for the years 2011, 2012, 2013, 2014 and 2015, respectively.

Bank owned life insurance. Bank owned life insurance (BOLI) is universal life insurance, purchased by the Bank, on the lives of the Bank’s employees. The beneficial aspects of these universal life insurance policies are tax-free earnings and a tax-free death benefit, which are realized by ESB as the owner of the policies. The cash surrender value of the BOLI as of June 30, 2011 was $30.4 million.

Prepaid Expenses and Other Assets.Prepaid expenses and other assets decreased $2.9 million, or 24.2%, to $8.9 million at June 30, 2011 from $11.8 million at December 31, 2010. This decrease is primarily due to the sale of an interest rate cap of $189,000, a decrease in the prepaid FDIC assessment of $727,000, and a decline in the fair value of the interest rate caps of $759,000, partially offset by the purchase of six interest rate caps during the quarter at a cost of $1.3 million and a decline in the deferred tax asset of $2.8 million. In 2009, the FDIC amended its regulations and required insured institutions to prepay their estimated quarterly risk-based assessments through the year 2012. The Company’s prepaid assessment was $4.5 million at December 31, 2010 and has declined to $3.8 million at June 30, 2011.

Deposits.The Company considers various sources when evaluating funding needs, including but not limited to deposits, which are a significant source of funds. Deposits totaled $1.1 billion, or 62.5%, of the Company’s total funding sources at June 30, 2011. Total deposits increased $89.6 million, or 8.8%, to $1.1 billion at June 30, 2011 from $1.0 billion at December 31, 2010. Interest-bearing demand deposits increased $73.1 million and time deposits increased $13.2 million, respectively, during the six months ended June 30, 2011, while non-interest bearing deposits increased approximately $3.3 million during the same period. The deposit growth was comprised primarily of low interest core deposits which increased approximately $76.4 million during the quarter. The Company continues to pursue low cost core deposit funding through its ongoing campaign to increase commercial, public and personal checking accounts throughout its 24 branch network. The Company will continue to offer these products to its customers through its 25^th branch opening later this year in Cranberry Township, PA.

Borrowed funds. The Company utilizes short and long-term borrowings as another source of funding used for asset growth and liquidity needs. These borrowings include FHLB advances, repurchase agreements, junior subordinated notes, borrowings from the Federal Reserve and corporate debt. Borrowed funds decreased $53.1 million, or 7.4%, to $662.4 million at June 30, 2011 from $715.5 million at December 31, 2010. FHLB advances

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decreased $56.3 million, or 19.4%, repurchase agreements remained the same at $363.0 million, other borrowings increased approximately $3.2 million, or 20.7%, while junior subordinated notes remained the same at $46.4 million during the six months ended June 30, 2011. Borrowed funds and deposits are two of the primary sources of funds for the Company. As part of its general business practice, the Company seeks out the most competitive rate on the products and will adjust the mix of FHLB advances and repurchase agreements accordingly.

Accounts payable for land development.The accounts payable for land development decreased $383,000, or 11.2%, to $3.0 million at June 30, 2011 from $3.4 million at December 31, 2010. This account represents the unpaid portion of the development costs for the Company’s joint ventures.

Accrued Expenses and Other Liabilities. Accrued expenses and other liabilities increased by $6.6 million, or 52.2%, to $19.1 million at June 30, 2011 from $12.6 million at December 31, 2010. The increase was primarily due to an increase in the deferred tax liability of $2.8 million as well as increases in accrued interest and escrow accounts and various liability accounts.

Stockholders’ equity.Stockholders’ equity increased $10.5 million, or 6.3%, to $177.9 million at June 30, 2011, from $167.4 million at December 31, 2010. The increase in stockholders’ equity was primarily the result of increases in retained earnings and accumulated other comprehensive income of $5.9 million and $5.3 million, respectively, and a decrease in treasury stock of $4.2 million, partially offset by an increase in unearned employee stock ownership plan shares of $4.7 million. Average stockholders’ equity to average assets was 8.94%, and book value per share was $12.03 at June 30, 2011 compared to 8.87% and $11.63, respectively, at December 31, 2010.

ASSET AND LIABILITY MANAGEMENT

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

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

As of June 30, 2011, the implementation of these asset and liability initiatives resulted in the following: (i) $159.4 million or 19.8% of the Company’s portfolio of mortgage-backed securities were secured by ARMs; (ii) $191.8 million or 29.1% of the Company’s total loan portfolio had adjustable interest rates or maturities of 12 months or less and $60.5 million or 18.1% 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

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advances and repurchase agreements was 3.9 years and (iv) the Company had $160.0 million in notional amount of interest rate caps and $105.0 million in structured borrowings with $130.0 million in notional amount of imbedded caps

The implementation of the foregoing asset and liability initiatives and strategies, combined with other external factors such as demand for the Company’s products and economic and interest rate environments in general, has resulted in the Company historically being able to maintain a one-year interest rate sensitivity gap ranging between 0.0% of total assets to a negative 20.0% of total assets. The one-year interest rate sensitivity gap is defined as the difference between the Company’s interest-earning assets, which are scheduled to mature or reprice within one year and its interest-bearing liabilities, which are scheduled to mature or reprice within one year. At June 30, 2011, the Company’s interest-earning assets maturing or repricing within one year totaled $641.4 million while the Company’s interest-bearing liabilities maturing or repricing within one-year totaled $655.7 million, providing a deficiency of interest-earning assets over interest-bearing liabilities of $14.3 million or a negative 0.7% of total assets. At June 30, 2011, the percentage of the Company’s assets to liabilities maturing or repricing within one year was 97.8%. The Company strives to maintain its one-year interest rate sensitivity gap between a range of 0.0% and a negative 20.0% of total assets.

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

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

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

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

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

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

The following table presents the simulated impact of a 100 basis point or 200 basis point upward or downward shift of market interest rates on net interest income, return on average equity, diluted earnings per share and the change in EVE. This analysis was done assuming that the interest-earning asset and interest-bearing liability levels at June 30, 2011 remained constant. The impact of the market rate movements was developed by simulating the effects of rates changing gradually over a one-year period from the June 30, 2011 levels for net interest income, return on average equity and diluted earnings per share. The impact of market rate movements was developed by simulating the effects of an immediate and permanent change in rates at June 30, 2011 for the change in EVE. The impact of the rate change for net interest income is compared to the base amount which can fluctuate from period to period.

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	Increase		Decrease
	+100 BP	+200 BP	-100 BP	-200 BP
Net interest income - increase (decrease)	1.69%	4.32%	(7.53%)	N/A
Return on average equity - increase (decrease)	3.00%	7.50%	(13.08%)	N/A
Diluted earnings per share - increase (decrease)	3.04%	7.85%	(13.59%)	N/A
EVE - increase (decrease)	(8.32%)	(20.50%)	(12.30%)	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, 2010 remained constant. The impact of the market rate movements was developed by simulating the effects of rates changing gradually over a one-year period from the December 31, 2010 levels for net interest income, return on average equity and diluted earnings per share. The impact of market rate movements was developed by simulating the effects of an immediate and permanent change in rates at December 31, 2010 for the change in EVE. The impact of the rate change for net interest income is compared to the base amount which can fluctuate from period to period.

	Increase		Decrease
	+100 BP	+200 BP	-100 BP	-200 BP
Net interest income - increase (decrease)	2.88%	4.91%	(4.19%)	N/A
Return on average equity - increase (decrease)	5.25%	8.89%	(7.49%)	N/A
Diluted earnings per share - increase (decrease)	5.38%	9.19%	(7.85%)	N/A
EVE - increase (decrease)	(6.14%)	(14.38%)	(16.73%)	N/A

LIQUIDITY

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

Net cash provided by operating activities totaled $15.2 million for the six months ended June 30, 2011. Net cash provided by operating activities was primarily comprised of net income of $8.4 million and increases in amortization of premiums and discounts and accrued expenses and other liabilities of $1.1 million and $4.0 million, respectively as well as slight variances in other operating activities. Other operating activities included the proceeds from the sale of loans available for sale of $411,000 and origination of loans available for sale of $325,000.

Funds used in investing activities totaled $35.8 million during the six months ended June 30, 2011. Primary uses of funds included $157.4 million for purchases of securities available for sale and $80.1 million for loan originations and purchases. These uses were partially offset by sources of funds from principal repayments of loans receivable and securities available for sale of $82.0 million and $113.1 million, respectively.

Funds provided by financing activities totaled $36.0 million for the six months ended June 30, 2011. The primary sources of funds included an increase in deposits and proceeds from long-term borrowings of $92.1 million and $8.7 million, respectively. These sources were offset by uses of funds for repayments of long-term borrowings, net decrease in short-term borrowings, payments of dividends, the purchase of treasury stock and the purchase of ESOP stock of $60.3 million, $1.5 million, $2.4 million, $515,000 and $397,000, respectively.

At June 30, 2011, the total approved loan commitments outstanding amounted to $4.5 million. At the same date, commitments under unused lines of credit and credit card lines amounted to $87.0 million and the unadvanced portion of construction loans approximated $14.9 million. Certificates of deposit scheduled to mature in one year or less at June 30, 2011 totaled $367.7 million.

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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 June 21, 2011 the Company’s Board of Directors declared a cash dividend of $0.10 per share of common stock payable July 25, 2011, to shareholders of record at the close of business on June 30, 2011. Dividends are subject to determination and declaration by the Board of Directors, which take into account the Company’s financial condition, statutory and regulatory restrictions, general economic conditions and other factors. There can be no assurance that dividends will in fact be paid on the common stock in future periods or that, if paid, such dividends will not be reduced or eliminated.

REGULATORY CAPITAL REQUIREMENTS

Current regulatory requirements specify that the Bank and similar institutions must maintain leverage capital equal to 4% of adjusted total assets and risk-based capital equal to 8% of risk-weighted assets. The Federal Deposit Insurance Corporation (FDIC) may require higher core capital ratios if warranted, and institutions are to maintain capital levels consistent with their risk exposures. The FDIC reserves the right to apply this higher standard to any insured financial institution when considering an institution’s capital adequacy. At June 30, 2011, ESB Bank was in compliance with all regulatory capital requirements with leverage and risk-based capital ratios of 7.6% and 15.0%, respectively.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

Item 4. Controls and Procedures

As of June 30, 2011, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), on the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2011. During the period ended June 30, 2011 there have been no significant changes in the Company’s internal controls over financial reporting or in other factors that could significantly affect internal controls.

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

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

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

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

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

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)
April 1-30, 2011		7,154	$	16.51		7,154		396,799
May 1-31, 2011		325		11.98		325		396,474
June 1-30, 2011		1,542		12.65		1,542		394,932
Totals		9,021	$	15.69		9,021		394,932

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

Item 3. Defaults Upon Senior Securities

None.

Item 4. (Removed and Reserved)

Item 5. Other Information

None.

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Item 6. Exhibits

(a) Exhibits:

31.1	Certification of Chief Executive Officer Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer Pursuant 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 *

* These interactive data files shall not be deemed filed for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.

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: August 8, 2011	By:     /s/ Charlotte A. Zuschlag
	Charlotte A. Zuschlag President and Chief Executive Officer
Date: August 8, 2011	By:     /s/ Charles P. Evanoski
	Charles P. Evanoski Group Senior Vice President and Chief Financial Officer

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