ESB Financial (ESBF) 10-Q 2012 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

For Quarter Ended:June 30, 2012

Commission File Number:0-19345

ESB FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Pennsylvania	25-1659846
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

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

(724) 758-5584

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:

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

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

Number of shares of common stock outstanding as of July 31, 2012:

Common Stock, $0.01 par value	14,653,189 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, 2012 and December 31, 2011 (Unaudited)	1
	Consolidated Statements of Operations for the three and six months ended June 30, 2012 and 2011 (Unaudited)	2
	Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2012 and 2011 (Unaudited)	3
	Consolidated Statement of Changes in Stockholders’ Equity for the six months ended June 30, 2012 (Unaudited)	4
	Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011 (Unaudited)	5
	Notes to Unaudited Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Results of Operations and Financial Condition	39
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	52
Item 4.	Controls and Procedures	52
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	53
Item 1A.	Risk Factors	53
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53
Item 3.	Defaults Upon Senior Securities	54
Item 4.	Mine Safety Disclosures	54
Item 5.	Other Information	54
Item 6.	Exhibits	54
	Signatures	55

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

ESB Financial Corporation and Subsidiaries

Consolidated Statements of Financial Condition

As of June 30, 2012 and December 31, 2011

(Dollar amounts in thousands)

(Unaudited)

	June 30, 2012			December 31, 2011
Assets
Cash on hand and in banks	$	3,717		$	4,720
Interest-earning deposits		39,577			34,117
Federal funds sold		10			11
Cash and cash equivalents		43,304			38,848
Securities available for sale; cost of $1,107,595 and $1,091,497		1,149,417			1,130,116
Loans receivable, net of allowance for loan losses of $6,741 and $6,537		664,476			648,921
Accrued interest receivable		8,779			9,227
Federal Home Loan Bank (FHLB) stock		19,183			21,256
Premises and equipment, net		14,866			15,071
Real estate acquired through foreclosure, net		3,710			3,883
Real estate held for investment		12,940			15,268
Goodwill		41,599			41,599
Intangible assets		420			554
Bank owned life insurance		29,722			30,802
Securities receivable		1,891			1,148
Prepaid expenses and other assets		6,824			8,098
Total assets	$	1,997,131		$	1,964,791
Liabilities and Stockholders’ Equity
Liabilities:
Deposits	$	1,218,369		$	1,156,410
FHLB advances		191,599			207,355
Repurchase agreements		318,000			343,000
Other borrowings		8,558			10,212
Junior subordinated notes		46,393			46,393
Advance payments by borrowers for taxes and insurance		3,281			2,519
Accounts payable for land development		2,257			2,634
Accrued expenses and other liabilities		21,593			17,193
Total liabilities		1,810,050			1,785,716
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 16,278,045 shares issued; 14,635,565 or 14,600,871 shares outstanding		163			163
Additional paid-in capital		102,723			102,667
Treasury stock, at cost; 1,642,080 and 1,677,174 shares		(19,162	)		(19,537	)
Unearned Employee Stock Ownership Plan (ESOP) shares		(3,653	)		(4,184	)
Retained earnings		84,708			80,231
Accumulated other comprehensive income, net		23,206			20,904
Total ESB Financial Corporation’s stockholders’ equity		187,985			180,244
Noncontrolling interest		(904	)		(1,169	)
Total stockholders’ equity		187,081			179,075
Total liabilities and stockholders’ equity	$	1,997,131		$	1,964,791

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, 2012 and 2011 (Unaudited)

(Dollar amounts in thousands, except share data)

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Interest income:
Loans receivable	$	8,334		$	8,754		$	16,683		$	17,415
Taxable securities available for sale		8,554			9,851			17,400			19,586
Tax free securities available for sale		1,665			1,592			3,312			3,148
FHLB Stock		6			—			16			—
Deposits with banks and federal funds sold		31			2			49			5
Total interest income		18,590			20,199			37,460			40,154
Interest expense:
Deposits		2,437			3,083			4,988			6,316
Borrowed funds		4,533			5,290			9,243			10,595
Junior subordinated notes and guaranteed preferred beneficial interest in subordinated debt		611			606			1,223			1,206
Total interest expense		7,581			8,979			15,454			18,117
Net interest income		11,009			11,220			22,006			22,037
Provision for loan losses		300			200			500			500
Net interest income after provision for loan losses		10,709			11,020			21,506			21,537
Noninterest income:
Fees and service charges		827			871			1,662			1,691
Net (loss) gain on sale of loans		(1	)		(1	)		(1	)		6
Increase of cash surrender value of bank owned life insurance		148			172			306			343
Net realized gain on securities available for sale		—			532			267			532
Total other-than-temporary impairment losses		(406	)		—			(406	)		—
Portion of loss recognized in other comprehensive income before taxes		375			—			375			—
Net impairment losses on investment securities		(31	)		—			(31	)		—
Net realized loss on derivatives		(269	)		(744	)		(400	)		(868	)
Income from real estate joint ventures		700			698			1,119			1,162
Other		164			150			339			301
Total noninterest income		1,538			1,678			3,261			3,167
Noninterest expense:
Compensation and employee benefits		4,325			4,101			8,683			8,322
Premises and equipment		717			633			1,434			1,357
Federal deposit insurance premiums		351			314			758			782
Data processing		594			578			1,183			1,150
Amortization of intangible assets		61			81			129			169
Advertising		144			158			283			236
Other		1,299			1,158			2,743			2,189
Total noninterest expense		7,491			7,023			15,213			14,205
Income before income taxes		4,756			5,675			9,554			10,499
Provision for income taxes		799			1,160			1,644			2,056
Net income before noncontrolling interest		3,957			4,515			7,910			8,443
Less: net income attributable to the noncontrolling interest		276			230			444			498
Net income attributable to ESB Financial Corporation	$	3,681		$	4,285		$	7,466		$	7,945
Net income per share (1)
Basic	$	0.26		$	0.30		$	0.52		$	0.55
Diluted	$	0.25		$	0.29		$	0.52		$	0.55
Cash dividends declared per share (1)	$	0.10		$	0.10		$	0.20		$	0.18
Weighted average shares outstanding (1)		14,331,252			14,436,606			14,312,348			14,438,363
Weighted average shares and share equivalents outstanding (1)		14,477,759			14,558,751			14,458,855			14,555,719

See accompanying notes to unaudited consolidated financial statements.

2

ESB Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

For the three and six months ended June 30, 2012 and 2011 (Unaudited)

(Dollar amounts in thousands)

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Net Income before noncontrolling interest	$	3,957		$	4,515		$	7,910		$	8,443
Other comprehensive income (net of tax and reclassifications)
Net change in unrealized gains (losses):
Securities available for sale other-than-temporarily impaired:
Total losses		(406	)		—			(406	)		—
Losses recognized in earnings		31			—			31			—
Losses recognized in comprehensive income		(375	)		—			(375	)		—
Income tax effect		127			—			127			—
Unrealized holding losses on other-than-temporarily impaired securities available for sale, net of tax		(248	)		—			(248	)		—
Securities available for sale not other-than-temporarily impaired:
Gains (losses) arising during the year		(937	)		9,797			4,430			9,118
Income tax effect		319			(3,331	)		(1,505	)		(3,100	)
		(618			6,466			2,925			6,018
Gains (losses) recognized in earnings		—			532			267			532
Income tax effect		—			(181	)		(91	)		(181	)
		—			351			176			351
Unrealized holding gains (losses) on securities available for sale not other-than-temporarily-impaired, net of tax		(618	)		6,817			2,749			5,667
Unrealized holding gain (loss) on securities, net		(866	)		6,817			2,501			5,667
Pension and Postretirement Amortization		52			46			105			91
Income tax effect		(18	)		(16	)		(36	)		(31	)
		34			30			69			60
Fair Value adjustment on derivatives		(626	)		(965	)		(406	)		(591	)
Income tax effect		213			328			138			201
		(413	)		(637	)		(268	)		(390	)
Other comprehensive income (loss)		(1,245	)		6,210			2,302			5,337
Net comprehensive income before noncontrolling interest		2,712			10,725			10,212			13,780
Less: net income attributable to the noncontrolling interest		276			230			444			498
Net comprehensive income attributable to ESB Financial Corporation	$	2,436		$	10,495		$	9,768		$	13,282

3

ESB Financial Corporation and Subsidiaries

Consolidated Statement of Changes in Stockholders’ Equity

For the six months ended June 30, 2012 (Unaudited)

(Dollar amounts in thousands, except share data)

	Common stock		Additional paid-in capital			Treasury stock			Unearned ESOP shares			Retained earnings			Accumulated other comprehensive income, net of tax		Noncontrolling Interest			Total stockholders’ equity
Balance at January 1, 2012	$	163	$	102,667		$	(19,537	)	$	(4,184	)	$	80,231		$	20,904	$	(1,169	)	$	179,075
Comprehensive results:
Net income		—		—			—			—			7,466			—		444			7,910
Other comprehensive results, net		—		—			—			—			—			2,281		—			2,281
Reclassification adjustment		—		—			—			—			—			21		—			21
Total comprehensive results		—		—			—			—			7,466			2,302		444			10,212
Cash dividends at $0.20 per share		—		—			—			—			(2,862	)		—		—			(2,862	)
Purchase of treasury stock, at cost (8,534 shares)		—		—			(110	)		—			—			—		—			(110	)
Reissuance of treasury stock for stock option exercises (43,228 shares)		—		—			485			—			(127	)		—		—			358
Compensation expense ESOP		—		186			—			531			—			—		—			717
Additional ESOP shares purchased		—		(162	)		—			—			—			—		—			(162	)
Tax effect of compensatory stock options		—		32			—			—			—			—		—			32
Capital disbursement for noncontrolling interest		—		—			—			—			—			—		(179	)		(179	)
Balance at June 30, 2012	$	163	$	102,723		$	(19,162	)	$	(3,653	)	$	84,708		$	23,206	$	(904	)	$	187,081

See accompanying notes to unaudited consolidated financial statements.

4

ESB Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows

For the six months ended June 30, 2012 and 2011 (Unaudited)

(Dollar amounts in thousands)

	Six months ended June 30,
	2012			2011
Operating activities:
Net income	$	7,910		$	8,443
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization for premises and equipment		514			467
Provision for loan losses		500			500
Amortization of premiums and accretion of discounts		1,607			1,077
Origination of loans available for sale		—			(325	)
Proceeds from sale of loans available for sale		—			411
Gain on sale of loans available for sale		(1	)		(6	)
Net gain on sale of securities available for sale		(267	)		(532	)
Impairment losses on investment securities		31			—
Net realized loss on derivatives		400			868
Amortization of intangible assets		129			169
Compensation expense on ESOP and MRP		717			678
Increases in Bank owned life insurance		(306	)		(343	)
Decrease in accrued interest receivable		448			475
Decrease in prepaid FDIC assessment		699			727
Increase in prepaid expenses and other assets		(563	)		(1,323	)
Increase in accrued expenses and other liabilities		3,500			4,040
Gain on sale of real estate acquired through foreclosure		(17	)		(5	)
Other		1,032			(133	)
Net cash provided by operating activities		16,333			15,188
Investing activities:
Loan originations		(109,925	)		(80,144	)
Purchases of:
Securities available for sale		(143,081	)		(157,447	)
Premises and equipment		(309	)		(1,149	)
Principal repayments of:
Loans receivable		95,510			81,990
Securities available for sale		125,229			113,090
Proceeds from the sale of:
Securities available for sale		767			5,026
Real estate acquired through foreclosure		587			160
Proceeds from bank owned life insurance		1,386			—
Redemption of FHLB stock		2,073			2,545
Funding of real estate held for investment		(4,640	)		(4,316	)
Proceeds from real estate held for investment		3,783			4,436
Net cash used in investing activities		(28,620	)		(35,809	)
Financing activities:
Net increase in deposits		61,959			92,134
Proceeds from long-term borrowings		4,931			8,669
Repayments of long-term borrowings		(47,338	)		(60,250	)
Net decrease in short-term borrowings		(3	)		(1,521	)
Proceeds received from exercise of stock options		390			307
Dividends paid		(2,924	)		(2,438	)
Payments to acquire treasury stock		(110	)		(515	)
Stock purchased by ESOP		(162	)		(397	)
Net cash provided by financing activities		16,743			35,989
Net increase in cash equivalents		4,456			15,368
Cash equivalents at beginning of period		38,848			35,707
Cash equivalents at end of period	$	43,304		$	51,075

5

ESB Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows, (Continued)

For the six months ended June 30, 2012 and 2011 (Unaudited)

(Dollar amounts in thousands)

	Six months ended June 30,
	2012		2011
Supplemental information:
Interest paid	$	14,052	$	17,523
Income taxes paid		1,634		1,512
Supplemental schedule of non-cash investing and financing activities:
Transfers from loans receivable to real estate acquired through foreclosure		784		522
Transfers from accrued expenses and other liabilities to deposits		—		2,518
Transfers from loan originations to proceeds on real estate held for investment		2,808		2,138
Dividends declared but not paid		1,431		1,484

See accompanying notes to unaudited consolidated financial statements.

6

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 are reflected within other non-interest income or expense. The Bank’s loans to AMSCO and related interest have been eliminated in consolidation.

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

Basis of Presentation

The accompanying unaudited consolidated financial statements for the interim periods include all adjustments, consisting only of normal recurring accruals, which are necessary, in the opinion of management, to fairly reflect the Company’s financial position and results of operations. Additionally, these consolidated financial statements for the interim periods have been prepared in accordance with instructions for the Securities and Exchange Commission’s Form 10-Q and therefore do not include all information or footnotes necessary for a complete presentation of financial condition, results of operations and cash flows in conformity with U.S. generally accepted accounting principles (GAAP). For further information, refer to the audited consolidated financial statements and footnotes thereto for the year ended December 31, 2011, as contained in the Company’s 2011 Annual Report to Stockholders.

The results of operations for the six month period ended June 30, 2012 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, 2012, the Company was doing business through 25 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

7

on loans and securities and to a lesser extent, non-interest income. The Company’s principal expenses are interest paid on deposits and borrowed funds and normal operating costs. The Company’s operations are principally in the banking industry. Consistent with internal reporting, the Company’s operations are reported in one operating segment, which is community banking.

Stock Based Compensation

During the three and six months ended June 30, 2012, the Company recorded approximately $103,000 and $211,000, respectively, in compensation expense and a tax benefit of $8,000 and $17,000, respectively, related to our share-based compensation awards that are expected to vest in 2012. 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 were expected to vest in 2011. As of June 30, 2012, there was approximately $710,000 of unrecognized compensation cost related to unvested share-based compensation awards granted. That cost is expected to be recognized over the next four years.

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

Financial Instruments

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

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

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

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

8

At June 30, 2012, there were sixteen interest rate cap contracts outstanding with notional amounts totaling $170.0 million. These derivative instruments are not hedged and therefore adjustments to fair value are recorded in current earnings.

The Company entered into two interest rate swap contracts to manage its exposure to interest rate risk. These interest rate swap transactions involved the exchange of the Company’s interest payment on $35.0 million in junior subordinated notes which became floating rate notes in 2011 for a fixed rate interest payment without the exchange of the underlying principal amount. Entering into interest rate derivatives potentially exposes the Company to the risk of counterparties’ failure to fulfill their legal obligations including, but not limited to, potential amounts due or payable under each derivative contract. Notional principal amounts are often used to express the volume of these transactions, but the amounts potentially subject to credit risk are much smaller. Management utilizes the Change in Variable Cash Flows Method to measure hedge ineffectiveness. To the extent that the cumulative change in anticipated cash flows from the hedging derivative offsets from 80% to 125% of the cumulative change in anticipated cash flows from the hedged exposure, the hedged is deemed effective. As of June 30, 2012 the interest rate swaps were deemed to be effective, therefore no amounts were charged to current earnings. The Company also does not expect to reclassify any hedge related amounts from OCI to earnings over the next twelve months.

The fixed rate interest rate swap contract outstanding at June 30, 2012 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, 2012:

(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	%		0.47	%		2/10/2018	$	—	$	3,474
Cash Flow Hedge		15,000		2/10/2011		3.91	%		0.47	%		2/10/2018		—		2,380
	$	35,000											$	—	$	5,854

* Variable receive rate based upon contract rates in effect at June 30, 2012

Recent Accounting and Regulatory Pronouncements

In December 2011, the FASB issued ASU 2011-10,Property, Plant, and Equipment (Topic 360): Derecognition of in Substance Real Estate-a Scope Clarification. The amendments in this Update affect entities that cease to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt. Under the amendments in this Update, when a parent (reporting entity) ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt, the reporting entity should apply the guidance in Subtopic 360-20 to determine whether it should derecognize the in substance real estate. Generally, a reporting entity would not satisfy the requirements to derecognize the in substance real estate before the legal transfer of the real estate to the lender and the extinguishment of the related nonrecourse indebtedness. That is, even if the reporting entity ceases to have a controlling financial interest under Subtopic 810-10, the reporting entity would continue to include the real estate, debt, and the results of the subsidiary’s operations in its consolidated financial statements until legal title to the real estate is transferred to legally satisfy the debt. The amendments in this Update should be applied on a prospective basis to deconsolidation events occurring after the effective date. Prior periods should not be adjusted even if the reporting entity has continuing involvement with previously derecognized in substance real estate entities. For public entities, the amendments in this Update are effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2012. For nonpublic entities, the amendments are effective for fiscal years ending after December 15, 2013, and interim and annual periods thereafter. Early adoption is permitted. This ASU did not have a significant impact on the Company’s financial statements.

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In December 2011, the FASB issued ASU 2011-11,Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. The amendments in this Update affect all entities that have financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement. The requirements amend the disclosure requirements on offsetting in Section 210-20-50. This information will enable users of an entity’s financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments in the scope of this Update. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. This ASU is not expected to have a significant impact on the Company’s financial statements.

In December 2011, the FASB issued ASU 2011-12,Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. In order to defer only those changes in Update 2011-05 that relate to the presentation of reclassification adjustments, the paragraphs in this Update supersede certain pending paragraphs in Update 2011-05. Entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before Update 2011-05. All other requirements in Update 2011-05 are not affected by this Update, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. Nonpublic entities should begin applying these requirements for fiscal years ending after December 15, 2012, and interim and annual periods thereafter. The Company has provided the necessary disclosure in Statement of Comprehensive Income.

In September 2011, the FASB issued ASU 2011-09,Compensation-Retirement Benefits-Multiemployer Plans (Subtopic 715-80):Disclosures about an Employer’s Participation in a Multiemployer Plan. The amendments in this Update will require additional disclosures about an employer’s participation in a multiemployer pension plan to enable users of financial statements to assess the potential cash flow implications relating to an employer’s participation in multiemployer pension plans. The disclosures also will indicate the financial health of all of the significant plans in which the employer participates and assist a financial statement user to access additional information that is available outside the financial statements. For public entities, the amendments in this Update are effective for annual periods for fiscal years ending after December 15, 2011, with early adoption permitted. For nonpublic entities, the amendments are effective for annual periods of fiscal years ending after December 15, 2012, with early adoption permitted. The amendments should be applied retrospectively for all prior periods presented. This ASU did not have a significant impact on the Company’s financial statements.

In September 2011, the FASB issued ASU 2011-08,Intangibles – Goodwill and Other Topics (Topic 350), Testing Goodwill for Impairment. The objective of this update is to simplify how entities, both public and nonpublic, test goodwill for impairment. The amendments in the Update permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. Under the amendments in this Update, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The amendments in this Update apply to all entities, both public and nonpublic, that have goodwill reported in their financial statements and are effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment

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tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. This ASU did not have a significant impact on the Company’s financial statements.

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. The Company has provided the necessary disclosure in the Statement of Comprehensive Income.

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. The Company has included the disclosure requirements in Footnote Nine.

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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, 2012:
Trust preferred securities	$	45,892	$	341	$	(8,801	)	$	37,432
Municipal securities		175,110		12,594		(278	)		187,426
Equity securities		1,355		369		—			1,724
Corporate bonds		204,647		3,311		(3,303	)		204,655
Mortgage-backed securities
U.S. sponsored entities		673,259		37,741		(15	)		710,985
Private label		7,332		192		(329	)		7,195
Subtotal mortgage-backed securities		680,591		37,933		(344	)		718,180
Total securities	$	1,107,595	$	54,548	$	(12,726	)	$	1,149,417
December 31, 2011:
Trust preferred securities	$	45,894	$	265	$	(8,615	)	$	37,544
Municipal securities		174,288		10,427		(230	)		184,485
Equity securities		1,754		351		(2	)		2,103
Corporate bonds		165,923		1,784		(2,928	)		164,779
Mortgage-backed securities
U.S. sponsored entities		694,674		37,636		(8	)		732,302
Private label		8,964		241		(302	)		8,903
Subtotal mortgage-backed securities		703,638		37,877		(310	)		741,205
Total securities	$	1,091,497	$	50,704	$	(12,085	)	$	1,130,116

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, 2012:

As of June 30, 2012
(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	$	35,604	$	8,801		9	$	35,604	$	8,801
Municipal securities		6		7,137		278		—		—		—		6		7,137		278
Corporate bonds		16		51,461		3,303		—		—		—		16		51,461		3,303
Mortgage-backed securities
U.S. sponsored entities		2		7,502		15		—		—		—		2		7,502		15
Private label		2		2,133		283		1		659		46		3		2,792		329
Subtotal mortgage-backed securities		4		9,635		298		1		659		46		5		10,294		344
Total		26	$	68,233	$	3,879		10	$	36,263	$	8,847		36	$	104,496	$	12,726

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

As of December 31, 2011
(Dollar amounts in thousands)	Less than 12 Months						12 Months or more						Total
	# of Securities		Fair Value		Unrealized losses		# of Securities		Fair Value		Unrealized losses		# of Securities		Fair Value		Unrealized losses
Trust preferred securities		—	$	—	$	—		9	$	35,789	$	8,615		9	$	35,789	$	8,615
Municipal securities		2		3,094		149		3		2,627		81		5		5,721		230
Equity securities		—		—		—		1		130		2		1		130		2
Corporate bonds		27		91,046		2,928		—		—		—		27		91,046		2,928
Mortgage-backed securities
U.S. sponsored entities		1		4,596		8		—		—		—		1		4,596		8
Private label		3		3,084		302		—		—		—		3		3,084		302
Subtotal mortgage-backed securities		4		7,680		310		—		—		—		4		7,680		310
Total		33	$	101,820	$	3,387		13	$	38,546	$	8,698		46	$	140,366	$	12,085

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, 2012, the declines outlined in the above table represent temporary declines due to changes in interest rates and are not reflections of impairment in the credit quality of the securities. Additionally, the Company does not intend to sell the investment and it is not more likely than not that the Company will be required to sell the investment before recovery of its amortized cost basis.

The Company reviews investment debt securities on an ongoing basis for the presence of OTTI with formal reviews performed quarterly. Credit-related OTTI losses on individual securities are recognized in earnings while noncredit-related OTTI on securities not expected to be sold is recognized in accumulated other comprehensive income. The $31,000 credit-related OTTI recognized during the second quarter 2012 consisted of $4,800 on a pooled trust preferred security having a book value of $503,000 and $26,000 on one of the Company’s equity investments in community banks that had experienced a decline in its market value for the last several quarters. There was noncredit-related OTTI on these securities recognized in OCI during the second quarter of 2012 of approximately $375,000.

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 four of these financial institutions are currently deferring interest payments. In addition, four financial institutions have defaulted. Currently eight of the sixteen financial institutions are performing. Two of the four financial institutions that are deferring interest payments as of June 30, 2012 either lost money or broke even for the most recently reported quarter and had a Tier 1 Risk Ratio at or less than the required well capitalized institution level

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under prompt corrective action provisions of 6%. Also, there were four financial institutions (including two of the four 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 record a profit during the most recently reported quarter.

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, 2012 and December 31, 2011 excluding equity securities which have no maturity dates:

As of June 30, 2012
(Dollar amounts in thousands)	Available for sale
	Weighted Average Yield			Amortized cost		Fair value
Due in one year or less		3.89	%	$	33,579	$	33,855
Due from one year to five years		3.37	%		160,980		164,208
Due from five to ten years		4.86	%		101,153		103,808
Due after ten years		3.58	%		810,528		845,822
		3.67	%	$	1,106,240	$	1,147,693

As of December 31, 2011
(Dollar amounts in thousands)	Available for sale
	Weighted Average Yield			Amortized cost		Fair value
Due in one year or less		4.65	%	$	43,232	$	43,644
Due from one year to five years		3.62	%		106,858		107,452
Due from five to ten years		5.03	%		102,525		106,384
Due after ten years		3.74	%		837,128		870,533
		3.89	%	$	1,089,743	$	1,128,013

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

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The proceeds from the sale of securities for the six month period ended June 30, 2012 was $767,000 resulting in gross realized gains of $267,000 and the proceeds from the sale of securities for the six month period ended June 30, 2011 was $5.0 million resulting in gross realized gains of $532,000.

3. Loans Receivable

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

(In thousands)	June 30, 2012			December 31, 2011
Mortgage loans:
Residential real estate
Single family	$	326,487		$	312,723
Multi family		33,426			32,370
Construction		44,795			45,363
Total residential real estate		404,708			390,456
Commercial real estate
Commercial		79,779			83,447
Construction		19,095			17,307
Total commercial real estate		98,874			100,754
Subtotal mortgage loans		503,582			491,210
Other loans:
Consumer loans
Home equity loans		72,536			72,493
Dealer auto and RV loans		47,841			47,039
Other loans		8,305			9,255
Total consumer loans		128,682			128,787
Commercial business		52,375			50,337
Subtotal other loans		181,057			179,124
Total loans receivable		684,639			670,334
Less:
Allowance for loan losses		6,741			6,537
Deferred loan fees and net discounts		(1,974	)		(1,852	)
Loans in process		15,396			16,728
Subtotal		20,163			21,413
Net loans receivable	$	664,476		$	648,921

At June 30, 2012 and December 31, 2011, the Company conducted its business through 25 offices in Allegheny, Beaver, Butler and Lawrence counties in Pennsylvania which also serves as its primary lending area. Management does not believe it has significant concentrations of credit risk to any one group of borrowers given its underwriting and collateral requirements.

Management has an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. For purposes of determining the allowance for loan losses, the Company has segmented certain loans in the portfolio by product type. Loans are segmented into the following pools: commercial business loans, commercial real estate loans, residential real estate loans and consumer loans. The Company sub-segments residential real estate loans into the

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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 three months of 2012, the qualitative factors for levels of and trends in delinquencies & nonaccruals were increased for residential mortgages, commercial loans and consumer loans. Trends in volume and terms were also increased for residential mortgages.

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

Loans by Segment

The total allowance reflects management’s estimate of loan losses inherent in the loan portfolio at the statement of financial condition 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, 2012. The following tables present by portfolio segment, the changes in the allowance for loan losses for the six month periods ended June 30, 2012 and 2011.

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As of June 30, 2012
(Dollar amounts in thousands)	Commercial		Commercial Real Estate			Consumer		Residential		Unallocated			Total
Allowance for loan losses:
Beginning balance	$	384	$	2,442		$	1,045	$	2,115	$	551		$	6,537
Charge-offs		—		—			239		124		—			363
Recoveries		—		—			50		17		—			67
Provision		—		—			—		500		—			500
Reallocations		50		(143	)		148		11		(66	)		—
Ending Balance	$	434	$	2,299		$	1,004	$	2,519	$	485		$	6,741

As of June 30, 2011
(Dollar amounts in thousands)	Commercial			Commercial Real Estate		Consumer			Residential			Unallocated		Total
Allowance for loan losses:
Beginning balance	$	784		$	1,831	$	1,125		$	2,573		$	234	$	6,547
Charge-offs		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

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The following tables present by portfolio segment, the recorded investment in loans at June 30, 2012 and December 31, 2011.

As of June 30, 2012
(Dollar amounts in thousands)	Commercial		Commercial Real Estate		Consumer		Residential		Unallocated		Total
Ending balance: individually evaluated for impairment	$	3	$	1,386	$	48	$	—	$	—	$	1,437
Ending balance: collectively evaluated for impairment	$	431	$	913	$	956	$	2,519	$	485	$	5,304
Ending balance: loans acquired with deteriorated credit quality	$	—	$	—	$	—	$	—	$	—	$	—
Loans Receivable:
Ending Balance	$	52,375	$	98,874	$	128,682	$	404,708	$	—	$	684,639
Ending balance: individually evaluated for impairment	$	38	$	13,857	$	152	$	2,508	$	—	$	16,555
Ending balance: collectively evaluated for impairment	$	52,337	$	85,017	$	128,530	$	402,200	$	—	$	668,084
Ending balance: loans acquired with deteriorated credit quality	$	—	$	—	$	—	$	—	$	—	$	—

As of December 11, 2011
(Dollar amounts in thousands)	Commercial		Commercial Real Estate		Consumer		Residential		Unallocated		Total
Ending balance: individually evaluated for impairment	$	2	$	850	$	50	$	271	$	—	$	1,173
Ending balance: collectively evaluated for impairment	$	336	$	1,161	$	1,103	$	2,405	$	418	$	5,423
Ending balance: loans acquired with deteriorated credit quality	$	—	$	—	$	—	$	—	$	—	$	—
Loans Receivable:
Ending Balance	$	50,337	$	100,754	$	128,787	$	390,456	$	—	$	670,334
Ending balance: individually evaluated for impairment	$	63	$	14,023	$	153	$	1,364	$	—	$	15,603
Ending balance: collectively evaluated for impairment	$	50,274	$	86,731	$	128,634	$	389,092	$	—	$	654,731
Ending balance: loans acquired with deteriorated credit quality	$	—	$	—	$	—	$	—	$	—	$	—

Credit Quality Information

The following tables represent credit exposures by internally assigned grades as of June 30, 2012 and December 31, 2011. 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.

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

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

As of June 30, 2012
(Dollar amounts in thousands)
	Residential Real Estate Multi - family		Residential Real Estate Construction		Commercial Real Estate Commercial		Commercial Real Estate Construction		Commercial
Pass	$	33,426	$	38,694	$	63,809	$	19,095	$	52,290
Special Mention		—		4,954		2,079		—		49
Substandard		—		1,147		13,891		—		36
Doubtful		—		—		—		—		—
Loss		—		—		—		—		—
Ending Balance	$	33,426	$	44,795	$	79,779	$	19,095	$	52,375

As of December 31, 2011
(Dollar amounts in thousands)
	Residential Real Estate Multi - family		Residential Real Estate Construction		Commercial Real Estate Commercial		Commercial Real Estate Construction		Commercial
Pass	$	32,370	$	38,219	$	67,119	$	17,307	$	50,232
Special Mention		—		7,144		2,319		—		57
Substandard		—		—		14,009		—		39
Doubtful		—		—		—		—		—
Loss		—		—		—		—		9
Ending Balance	$	32,370	$	45,363	$	83,447	$	17,307	$	50,337

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The following tables present performing and nonperforming single family residential and consumer loans based on payment activity as of June 30, 2012 and December 31, 2011. 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, 2012
(Dollar amounts in thousands)
	Residential Real Estate Single Family		Consumer Home Equity		Dealer Auto and RV		Other Consumer
Performing	$	322,319	$	72,123	$	47,741	$	8,187
Nonperforming		4,168		413		100		118
Total	$	326,487	$	72,536	$	47,841	$	8,305

As of December 31, 2011
(Dollar amounts in thousands)
	Residential Real Estate Single Family		Consumer Home Equity		Dealer Auto and RV		Other Consumer
Performing	$	310,263	$	72,091	$	46,907	$	9,162
Nonperforming		2,460		402		132		93
Total	$	312,723	$	72,493	$	47,039	$	9,255

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 $16.6 million and $13.4 million at June 30, 2012 and December 31, 2011. The TDRs amounted to $8.8 million and $7.8 million at June 30, 2012 and December 31, 2011, respectively. The Company is not committed to lend additional funds to debtors whose loans are on non-accrual status.

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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, 2012 and December 31, 2011.

(Dollar amounts in thousands)													Recorded
As of June 30, 2012													Investment >
	30-59 Days		60-89 Days		90 Days		Total Past				Total Loans		90 Days and
	Past Due		Past Due		Or Greater		Due		Current		Receivable		Accruing
Residential real estate
Single family	$	414	$	509	$	4,168	$	5,091	$	321,396	$	326,487	$	—
Construction		—		—		—		—		44,795		44,795		—
Multi-family		—		—		—		—		33,426		33,426		—
Commercial Real Estate
Commercial		223		772		3,104		4,099		75,680		79,779		—
Construction		—		—		—		—		19,095		19,095		—
Consumer
Consumer - home equity		124		48		260		432		72,104		72,536		—
Consumer - dealer auto and RV		469		106		100		675		47,166		47,841		—
Consumer - other		25		15		118		158		8,147		8,305		—
Commercial		60		4		37		101		52,274		52,375		—
Total	$	1,315	$	1,454	$	7,787	$	10,556	$	674,083	$	684,639	$	—

(Dollar amounts in thousands)													Recorded
As of December 31, 2011													Investment >
	30-59 Days		60-89 Days		90 Days		Total Past				Total Loans		90 Days and
	Past Due		Past Due		Or Greater		Due		Current		Receivable		Accruing
Residential real estate
Single family	$	464	$	2,933	$	2,460	$	5,857	$	306,866	$	312,723	$	—
Construction		—		—		—		—		45,363		45,363		—
Multi-family		—		—		—		—		32,370		32,370		—
Commercial Real Estate
Commercial		48		1,507		2,629		4,184		79,263		83,447		—
Construction		—		—		—		—		17,307		17,307		—
Consumer
Consumer - home equity		143		9		249		401		72,092		72,493		—
Consumer - dealer auto and RV		698		101		132		931		46,108		47,039		—
Consumer - other		98		23		93		214		9,041		9,255		—
Commercial		59		—		54		113		50,224		50,337		—
Total	$	1,510	$	4,573	$	5,617	$	11,700	$	658,634	$	670,334	$	—

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

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The following tables summarize impaired loans:

(Dollar amounts in thousands)
	June 30, 2012						December 31, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Commercial Real Estate:
Commercial Real Estate	$	5,509	$	5,616	$	—	$	5,568	$	5,675	$	—
Commercial business loans		—		—		—		39		39		—
Residential loans		1,362		1,362		—		1,364		1,364		—
Residential Construction loans		1,147		1,147		—		—		—		—
With an allowance recorded:
Commercial Real Estate:
Commercial Real Estate	$	8,348		8,348		1,385	$	8,454		8,454		1,489
Consumer Loans:
Home Equity		152		152		48		153		153		50
Commercial business loans		38		38		3		25		25		10
Total:
Commercial Real Estate	$	13,857	$	13,964	$	1,385	$	14,023	$	14,129	$	1,489
Consumer		152		152		48		153		153		50
Residential		1,362		1,362		—		1,364		1,364		—
Residential Construction loans		1,147		1,147		—		—		—		—
Commercial		38		38		3		63		63		10

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(Dollar amounts in thousands)
	Six months ended				Six months ended
	June 30, 2012				June 30, 2011
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial Real Estate:
Commercial Real Estate	$	5,503	$	112	$	1,149	$	10
Commercial business loans		—		—		93		6
Residential loans		1,363		5		—		—
Residential construction loans		164		22		—		—
With an allowance recorded:
Residential Real Estate
Construction		—		—		2,046		—
Commercial Real Estate:
Commercial Real Estate		8,398		214		7,339		276
Consumer Loans:
Home Equity		153		5		155		4
Commercial business loans		43		—		205		2
Total:
Commercial Real Estate	$	13,901	$	326	$	8,488	$	286
Consumer		153		5		155		4
Residential		1,363		5		2,046		—
Residential construction loans		164		22
Commercial		43		—		298		8

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.

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On the following table are the loans receivable on nonaccrual status as of June 30, 2012 and December 31, 2011. The balances are presented by class of loans:

(Dollar amounts in thousands)	June 30, 2012		December 31, 2011
Commercial	$	37	$	54
Commercial Real Estate		11,714		10,237
Consumer
Consumer - Home Equity		413		402
Consumer - Dealer auto and RV		100		132
Consumer - other		118		93
Residential		4,168		2,460
Total	$	16,550	$	13,378

Modifications

The Company’s loan portfolio also includes TDR’s, 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.

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

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The following table includes the recorded investment and number of modifications for modified loans, as of June 30, 2012 and December 31, 2011. The Company reports the recorded investment in the loans prior to a modification and also the recorded investment in the loans after the loans were restructured.

(Dollar amounts in thousands)
	As of June 30, 2012						As of December 31, 2011
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings
Residential construction loans		3	$	947	$	947		—	$	—	$	—
Commercial Real Estate		1		100		100		3		7,368		7,528
Consumer		—		—		—		—		—		—
Troubled Debt Restructurings
That Subsequently Defaulted		—		—		—		—		—		—
Troubled Debt Restructurings
Commercial Real Estate		—		—		—		—		—		—

4. Deposits

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

(Dollar amounts in thousands)	June 30, 2012					December 31, 2011
Type of accounts	Amount		%			Amount		%
Noninterest-bearing deposits	$	103,293		8.5	%	$	95,691		8.3	%
NOW account deposits		253,359		20.8	%		208,975		18.1	%
Money Market deposits		43,273		3.6	%		34,484		3.0	%
Passbook account deposits		170,031		14.0	%		153,644		13.3	%
Time deposits		648,413		53.1	%		663,616		57.3	%
	$	1,218,369		100.0	%	$	1,156,410		100.0	%
Time deposits mature as follows:
Within one year	$	393,866		60.8	%	$	387,857		58.5	%
After one year through two years		118,902		18.3	%		118,470		17.9	%
After two years through three years		69,579		10.7	%		81,282		12.2	%
After three years through four years		38,859		6.0	%		33,395		5.0	%
After four years through five years		22,193		3.4	%		37,235		5.6	%
Thereafter		5,014		0.8	%		5,377		0.8	%
	$	648,413		100.0	%	$	663,616		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, 2012					December 31, 2011
	Weighted average rate			Amount		Weighted average rate			Amount
FHLB advances:
Due within 12 months		3.58	%	$	37,656		2.80	%	$	30,684
Due beyond 12 months but within 2 years		3.45	%		89,203		3.62	%		72,647
Due beyond 2 years but within 3 years		2.76	%		37,180		2.88	%		71,392
Due beyond 3 years but within 4 years		2.15	%		8,815		3.36	%		14,613
Due beyond 4 years but within 5 years		1.38	%		8,745		2.15	%		8,019
Due beyond 5 years		3.61	%		10,000		3.61	%		10,000
				$	191,599				$	207,355
Repurchase agreements:
Due within 12 months		3.19	%	$	178,000		3.12	%	$	93,000
Due beyond 12 months but within 2 years		3.30	%		50,000		3.30	%		130,000
Due beyond 2 years but within 3 years		3.65	%		20,000		3.07	%		40,000
Due beyond 4 years but within 5 years		4.28	%		25,000		4.12	%		10,000
Due beyond 5 years		4.49	%		45,000		4.42	%		70,000
				$	318,000				$	343,000
Other borrowings:
ESOP borrowings
Due within 12 months		4.68	%	$	1,000		4.68	%	$	1,000
Due beyond 12 months but within 2 years		4.68	%		1,000		4.68	%		1,000
Due beyond 2 years but within 3 years		4.68	%		1,000		4.68	%		1,000
Due beyond 3 years but within 4 years		4.68	%		750		4.68	%		1,000
Due beyond 4 years but within 5 years		—			—		4.68	%		250
				$	3,750				$	4,250
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
				$	4,200				$	4,200
Borrowings for joint ventures
Due beyond 2 years but within 3 years		3.75	%	$	608		3.75	%	$	1,762
Junior subordinated notes
Due beyond 5 years		2.57	%	$	46,393		2.56	%	$	46,393

Included in the $191.6 million of FHLB advances at June 30, 2012 is a $10.0 million structured advance 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 advance

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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 $318.0 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 $318.0 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 a $10.0 million structured REPO 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, 2012 was $378.8 million with an amortized cost of $352.7 million. The market value of the securities as of December 31, 2011 was $402.1 million with an amortized cost of $375.0 million. The average maturity date of the mortgage backed securities sold under agreements to repurchase was greater than 90 days for the periods ended June 30, 2012 and December 31, 2011.

As of June 30, 2012 and December 31, 2011, the Company had REPO’s with Citigroup of $135.0 million and $145.0 million, respectively, Barclays Capital of $60.0 million and $70.0 million, respectively, Credit Suisse of $93.0 million and $93.0 million, respectively, PNC Bank of $0 and $5.0 million, respectively, and Morgan Stanley of $30.0 million and $30.0 million, respectively.

As of June 30, 2012, the REPO’s with Citigroup had $18.1 million at risk (where the market value of the securities exceeded the borrowing), with a weighted average maturity of 21 months, Barclays Capital had $8.6 million at risk with a weighted average maturity of 33 months, Credit Suisse had $11.5 million at risk with a weighted average maturity of 25 months and Morgan Stanley had $4.1 million at risk with a weighted average maturity of 19 months.

Borrowings under REPO averaged $326.3 million during the first six months of 2012. The maximum amount outstanding at any month-end was $343.0 million.

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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 dividend rate on 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. Dividends on the preferred securities are 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.

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

28

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.

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, 2012		Three Months Ended June 30, 2011
Net income	$	3,681	$	4,285
Weighted-average common shares outstanding		14,331		14,437
Basic earnings per share	$	0.26	$	0.30
Weighted-average common shares outstanding		14,331		14,437
Common stock equivalents due to effect of stock options		117		122
Total weighted-average common shares and equivalents		14,448		14,559
Diluted earnings per share	$	0.25	$	0.29

	Six Months Ended June 30, 2012		Six Months Ended June 30, 2011
Net income	$	7,466	$	7,945
Weighted-average common shares outstanding		14,312		14,438
Basic earnings per share	$	0.52	$	0.55
Weighted-average common shares outstanding		14,312		14,438
Common stock equivalents due to effect of stock options		146		118
Total weighted-average common shares and equivalents		14,458		14,556
Diluted earnings per share	$	0.52	$	0.55

The shares controlled by the Company’s Employee Stock Ownership Plan (ESOP) of 329,656 and 393,959 at June 30, 2012 and June 30, 2011, respectively, are not considered in the weighted average shares outstanding until the shares are committed for allocation to an employee’s individual account.

Options to purchase 78,876 shares at $12.80 per diluted share expiring November 2013, 116,002 shares at $13.19 per diluted share expiring November 2021, were outstanding as of June 30, 2012 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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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.

7. Comprehensive Income

The Company has developed the following table to present the components of accumulated OCI:

(Dollar amounts in thousands)	June 30, 2012			December 31, 2011
Net unrealized gain on securities available for sale	$	27,603		$	25,101
Accumulated loss on effective cash flow hedging derivatives		(3,863	)		(3,596	)
Net unrecognized pension cost		(534	)		(601	)
Total	$	23,206		$	20,904

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, 2012, the participants in the plan had credited service under the SERP ranging from 21 to 33 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, 2012 and 2011:

(Dollar amounts in thousands)	SERP				SERP
	Three Months Ended June 30, 2012		Three Months Ended June 30, 2011		Six Months Ended June 30, 2012		Six Months Ended June 30, 2011
Components of net periodic pension cost
Service cost	$	20	$	16	$	40	$	32
Interest cost		31		31		62		62
Amortization of unrecognized gains and losses		20		14		40		28
Amortization of prior service cost		10		10		20		20
Net periodic pension cost	$	81	$	71	$	162	$	142

(Dollar amounts in thousands)	Directors’ Retirement Plan				Directors’ Retirement Plan
	Three Months Ended June 30,  2012		Three Months Ended June 30,  2011		Six Months Ended June 30,  2012		Six Months Ended June 30,  2011
Components of net periodic pension cost
Service cost	$	1	$	1	$	2	$	2
Interest cost		9		10		18		20
Amortization of prior service cost		22		22		45		43
Net periodic pension cost	$	32	$	33	$	65	$	65

9. Fair Value

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

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

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Assets and Liabilities Measured at Fair Value on a Recurring Basis

Investment Securities Available-for-Sale

Management classifies the Company’s equity securities as Level 1 measurements since quoted market prices were available, unadjusted, for identical securities in active markets. Declines in the fair value of individual equity securities that are deemed to be other than temporary, will be written down to current market value and included in earnings as realized losses. Level 2 investment securities were primarily comprised of debt securities issued by states and municipalities and corporations as well as mortgage-backed securities issued by government agencies. On a monthly basis, the fair values for securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Due to recent uncertainties in the credit markets broadly, and the lack of both trading and new issuance of floating rate trust preferred securities, market price indications generally reflect the lack of liquidity in these markets, therefore the Company classifies these securities as Level III. Due to this lack of practical quoted prices, fair value for floating rate trust preferred securities has been determined using a discounted cash-flow technique. Cash flows are estimated based upon the contractual terms of each instrument. Market rates have been calculated based upon the five year historical discount margin for these instruments from August 2002 through August 2007, when the market was more liquid. These market rates were then adjusted for credit spreads and liquidity risk given the current markets. Credit spreads are based upon the Moody’s rating for each bond and range from 55 to 90 basis points. Liquidity risk adjustments ranged from 20 to 65 basis points where the securities of the 15 largest banks in the United States are assigned 20 to 40 basis points and banks outside of the top 15 were given a higher liquidity risk adjustment. Approximately $17.6 million or 49.5% of the $35.6 million in floating rate trust preferred securities represent investments in three of the four largest banks in the United States.

Derivative Financial Instruments

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

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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, 2012 and December 31, 2011 by level within the fair value hierarchy. As required by GAAP, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

	As of June 30, 2012
(Dollar amounts in thousands)	Quoted Prices in Active Markets for Identical Assets or Liabilities (Level I)		Significant Other Observable Inputs (Level II)		Significant Unobservable Inputs (Level III)		Total
Assets:
Securities available for sale
Trust preferred securities	$	—	$	1,828	$	35,604	$	37,432
Municipal securities		—		187,426		—		187,426
Equity securities		1,724		—		—		1,724
Corporate bonds		—		204,655		—		204,655
Mortgage backed securities
U.S. sponsored entities		—		710,985		—		710,985
Private label		—		7,195		—		7,195
Subtotal mortgage-backed securites		—		718,180		—		718,180
Total securities available for sale	$	1,724	$	1,112,089	$	35,604	$	1,149,417
Other Assets
Interest rate caps	$	—	$	132	$	—	$	132
Total other assets	$	—	$	132	$	—	$	132
Liabilities
Other Liabilities
Interest rate swaps	$	—	$	5,854	$	—	$	5,854
Total other liabilities	$	—	$	5,854	$	—	$	5,854

	As of December 31, 2011
(Dollar amounts in thousands)	Quoted Prices in Active Markets for Identical Assets or Liabilities (Level I)		Significant Other Observable Inputs (Level II)		Significant Unobservable Inputs (Level III)		Total
Assets:
Securities available for sale
Trust preferred securities	$	—	$	1,755	$	35,789	$	37,544
Municipal securities		—		184,485		—		184,485
Equity securities		2,103		—		—		2,103
Corporate bonds		—		164,779		—		164,779
Mortgage backed securities
U.S. sponsored entities		—		732,302		—		732,302
Private label		—		8,903		—		8,903
Subtotal mortgage-backed securities		—		741,205		—		741,205
Total securities available for sale	$	2,103	$	1,092,224	$	35,789	$	1,130,116
Other Assets
Interest rate caps	$	—	$	532	$	—	$	532
Total other assets	$	—	$	532	$	—	$	532
Liabilities:
Other Liabilties
Interest rate swaps	$	—	$	5,531	$	—	$	5,531
Total other liabilities	$	—	$	5,531	$	—	$	5,531

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There were no transfers between Level I and Level II assets measured at fair value. The following table presents the changes in the Level III assets measured at fair value on a recurring basis for the six month periods ended June 30, 2012 and 2011

Fair value measurements using significant unobservable inputs (Level III)

	Securities available for sale June 30,
	2012			2011
Beginning balance January 1,	$	35,789		$	37,361
Total net realized/unrealized gains (losses)
Included in earnings:
Interest income on securities		7			7
Net realized loss on securities available for sale		(5	)		—
Included in other comprehensive income		(187	)		813
Transfers in and/or out of Level III		—			—
Purchases, issuances and settlements
Purchases		—			—
Issuances		—			—
Sales		—			—
Settlements		—			(500	)
Ending balance, June 30,	$	35,604		$	37,681

The following table summarizes changes in unrealized gains and losses recorded in earnings for the three month period ended June 30, 2012 and 2011 for Level III assets and liabilities that are still held at June 30, 2012 and 2011.

	Securities available for sale June 30,
	2012			2011
Interest income on securities	$	7		$	7
Net realized loss on securities available for sale		(5	)		—
Total	$	2		$	7

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For Level III assets measured at fair value on a recurring or non-recurring basis as of June 30, 2012, the significant observable inputs used in the fair value measurements were as follows:

(Dollar amounts in thousands)	Fair Value at June 30, 2012		Fair Value at December 31, 2011		Valuation Technique	Significant Unobservable Inputs	Significant Unobservable Input Value
Trust Preferred Securities	$	35,604	$	35,789	Discounted Cash Flow	Credit Spreads	40-85 basis points
						Liquidity Risk Adjustments	15-65 basis points
						Default Rates	.5% -1%
Impaired Loans		15,118		14,054	Discounted Cash Flow	N/A	N/A
					Appraisal of collateral (1)	N/A	N/A
Real estate acquired through foreclosure		3,710		3,883	Appraisal of collateral (1)	N/A	N/A
Servicing assets		9		16	Discounted Cash Flow	N/A	N/A

(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally includes various level III inputs which are not identifiable.

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

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The Company may be required periodically to measure certain assets and liabilities at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower-of-cost-or-fair value accounting or impairment write-downs of individual assets. During the six month period ended June 30, 2012 and 2011, the Company incurred write-downs on its REO properties of $238,000 and $8,000, respectively, there were no adjustments to the fair value for the Company’s remaining assets and liabilities measured at fair value on a nonrecurring basis in accordance with GAAP during the respective periods.

10. Financial Instruments

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

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

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

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

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

Loans receivable 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.

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Bank owned life insurance (BOLI) – The fair value of BOLI at June 30, 2012 and December 31, 2011 approximated the cash surrender value of the policies at those dates.

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

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

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

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

The following 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 June 30, 2012:

June 30, 2012
(Dollar amounts in thousands)	Carrying amount		Quoted Prices in Active Markets for Identical Assets or Liabilities (Level I)		Significant Other Observable Inputs (Level II)		Significant Unobservable Inputs (Level III)		Total Fair Value
Financial Assets:
Cash and Cash Equivalents	$	43,304	$	43,304	$	—	$	—	$	43,304
Securities		1,149,417		1,724		1,112,089		35,604		1,149,417
Securities Receivable		1,891		1,891		—		—		1,891
Loans receivable and held for sale		664,476		—		—		696,796		696,796
Accrued Interest Receivable		8,779		8,779		—		—		8,779
FHLB Stock		19,183		19,183		—		—		19,183
Bank owned life insurance		29,722		29,722		—		—		29,722
Interest rate cap contracts		132		—		132		—		132
Financial Liabilities:
Deposits		1,218,369		—		—		1,229,421		1,229,421
Borrowed funds		518,157		—		262,288		286,436		548,724
Junior subordinated notes		46,393		—		22,681		—		22,681
Advance payments by borrowers for taxes and insurance		3,281		3,281		—		—		3,281
Accrued interest payable		3,078		3,078		—		—		3,078
Interest rate swap contracts		5,854		—		5,854		—		5,854

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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 December 31, 2011:

(Dollar amounts in thousands)	December 31, 2011
	Carrying amount		Fair value
Financial assets:
Cash and cash equivalents	$	38,848	$	38,848
Securities		1,130,116		1,130,116
Securities receivable		1,148		1,148
Loans receivable and held for sale		648,921		679,819
Accrued interest receivable		9,227		9,227
FHLB stock		21,256		21,256
Bank owned life insurance		30,802		30,802
Interest rate cap contracts		532		532
Financial liabilities:
Deposits		1,156,410		1,168,438
Borrowed funds		560,567		594,080
Junior subordinated notes		46,393		20,361
Advance payment by borrowers for taxes and insurance		2,519		2,519
Accrued interest payable		1,676		1,676
Interest rate swap contracts		5,531		5,531

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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, 2012 have remained unchanged from the disclosures presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 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, 2011, 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 25 branches.

During the three months ended June 30, 2012, the Company reported net income of $3.7 million, a decrease of approximately $604,000, or 14.1%, over the same period last year. The Company had a decrease in interest income of approximately $1.6 million over the same quarter last year, offset partially by a decrease in interest expense of $1.4 million during the same period. The result was a decrease of $211,000 in net interest income. The Company recorded a decrease of $140,000 in noninterest income when compared to the same quarter last year as well as an increase in noninterest expense of $468,000.

During the six months ended June 30, 2012, the Company reported net income of $7.5 million, a decrease of approximately $479,000, or 6.0%, over the same period last year. The Company had decreases in both interest income and interest expense of approximately $2.7 million resulting in a slight decrease in net interest income of $31,000 over the same period in the prior year. Additionally, the Company had an increase of $1.0 million in noninterest expense, partially offset by an increase in noninterest income of $94,000.

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

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During the six months ended June 30, 2012, the Company had approximately $45.7 million of maturing wholesale borrowings at a weighted average rate of 2.87% and an original call/maturity of 3.5 years. The borrowings that matured were replaced with the deposit growth of approximately $62.0 million during the period.

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

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

RESULTS OF OPERATIONS

Earnings Summary.The Company recorded net income of $3.7 million for the three months ended June 30, 2012 as compared to $4.3 million for the same period in the prior year. The $604,000, or 14.1%, decrease in net income for the quarter ended June 30, 2012 as compared to the same period in the prior year was primarily the result of decreases in net interest income and noninterest income of $211,000 and $140,000, respectively, as well as increases in provision for loan losses, noninterest expense and net income attributable to the non-controlling interest of $100,000, $468,000 and $46,000, respectively, partially offset by decreases in the provision for income taxes of $361,000.

The Company recorded net income of $7.5 million for the six months ended June 30, 2012 as compared to $7.9 million for the same period in the prior year. The $479,000, or 6.0%, decrease in net income for the six month period ended June 30, 2012 as compared to the same period in the prior year was primarily the result of decreases in net interest income of $31,000, as well as an increase in noninterest expense of $1.0 million, partially offset by an increase in noninterest income of $94,000 and decreases in provision for income taxes and net income attributable to the non-controlling interest of $412,000 and $54,000, respectively.

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

Net interest income decreased $211,000, or 1.9%, to $11.0 million for the three months ended June 30, 2012, compared to $11.2 million for the same period in the prior year. This decrease in net interest income was the result of a decrease in interest income of $1.6 million, partially offset by a decrease in interest expense of $1.4 million.

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Net interest income decreased a nominal $31,000, or 0.1%, to $22.0 million for the six months ended June 30, 2012.

Interest income. Interest income decreased $1.6 million, or 8.0%, for the three months ended June 30, 2012, 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 $420,000 and $1.2 million, respectively.

Interest earned on loans receivable decreased $420,000, or 4.8%, for the three months ended June 30, 2012, compared to the same period in the prior year. This decrease was primarily attributable to a decrease in the yield on the portfolio of 43 basis points to 5.08% for the three months ended June 30, 2012, compared to 5.51% for the same period in the prior year, partially offset by an increase in the average balance of loans outstanding of $24.6 million, or 3.8%, to $670.3 million for the three months ended June 30, 2012, compared to $645.8 million for the same period in the prior year.

Interest earned on securities decreased $1.2 million, or 10.7%, for the three months ended June 30, 2012, compared to the same period in the prior year. This decrease was primarily the result of a 47 basis point decrease in the tax equivalent yield on securities to 4.04% for the three months ended June 30, 2012 from 4.51% for the three months ended June 30, 2011, partially offset by an increase in the average balance of the securities portfolio of $8.3 million, or 0.8%, to $1.1 billion at June 30, 2012.

Interest income decreased $2.7 million, or 6.7%, for the six months ended June 30, 2012, 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 $732,000 and $2.0 million, respectively.

Interest earned on loans receivable decreased $732,000, or 4.2%, for the six months ended June 30, 2012, compared to the same period in the prior year. This decrease was primarily attributable to a decrease in the yield on the portfolio of 37 basis points to 5.12% for the three months ended June 30, 2012, compared to 5.49% for the same period in the prior year, partially offset by an increase in the average balance of loans outstanding of $20.8 million, or 3.2%, to $665.2 million for the six months ended June 30, 2012, compared to $644.5 million for the same period in the prior year.

Interest earned on securities decreased $2.0 million, or 8.8%, for the six months ended June 30, 2012, compared to the same period in the prior year. This decrease was primarily the result of a 43 basis point decrease in the tax equivalent yield on securities to 4.09% for the six months ended June 30, 2012 from 4.52% for the six months ended June 30, 2011, partially offset by an increase in the average balance of the securities portfolio of $14.6 million, or 1.4%, to $1.1 billion at June 30, 2012.

Interest expense. Interest expense decreased $1.4 million, or 15.6%, for the three months ended June 30, 2012, compared to the same period in the prior year. This decrease in interest expense can be attributed to decreases in interest incurred on deposits and borrowed funds of $646,000 and $757,000, respectively.

Interest incurred on deposits decreased $646,000, or 21.0%, for the three months ended June 30, 2012, compared to the same period in the prior year. This decrease was due to a decrease in the cost of interest-bearing deposits of 36 basis points to 0.88% from 1.24% for the quarters ended June 30, 2012 and 2011, respectively, partially offset by an increase in the average balance of interest-bearing deposits of $118.1 million, or 11.9% to $1.1 billion for the three months ended June 30, 2012, compared to $995.1 million for the same period in the prior year. The Company manages its cost of interest bearing deposits by diligently monitoring the interest rates on its products as well as the rates being offered by its competition through weekly interest rate committee meetings and utilizing rate surveys and hence subsequently adjusting rates accordingly.

Interest incurred on borrowed funds decreased $757,000, or 14.3%, for the three months ended June 30, 2012 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 $100.1 million, or 16.0%, partially offset by an increase in the cost of these funds to 3.47% for the quarter ended June 30, 2012 as compared to 3.39%, for the quarter ended June 30, 2011.

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Interest expense decreased $2.7 million, or 14.7%, for the six months ended June 30, 2012, compared to the same period in the prior year. This decrease in interest expense can be attributed to decreases in interest incurred on deposits and borrowed funds of $1.3 million and $1.4 million, respectively.

Interest incurred on deposits decreased $1.3 million, or 21.0%, for the six months ended June 30, 2012, compared to the same period in the prior year. This decrease was due to a decrease in the cost of interest-bearing deposits of 39 basis points to 0.92% from 1.31% for the periods ended June 30, 2012 and 2011, respectively, partially offset by an increase in the average balance of interest-bearing deposits of $118.3 million, or 12.2% to $1.1 billion for the six months ended June 30, 2012, compared to $973.0 million for the same period in the prior year. The Company manages its cost of interest bearing deposits by diligently monitoring the interest rates on its products as well as the rates being offered by its competition through weekly interest rate committee meetings and utilizing rate surveys and hence subsequently adjusting rates accordingly.

Interest incurred on borrowed funds decreased $1.4 million, or 12.8%, for the six months ended June 30, 2012 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 $96.3 million, or 15.2%, partially offset by an increase in the cost of these funds to 3.46% for the six months ended June 30, 2012 as compared to 3.37%, for the six months ended June 30, 2011.

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, 2012, the interest incurred on these borrowings increased by $5,000, or 0.8%, due to an increase in the cost of these funds to 5.30% from 5.24% for the same period in the prior year. During the six months ended June 30, 2012, the interest incurred on these borrowings increased by $17,000, or 1.4%, due to an increase in the cost of these funds to 5.30% from 5.24% for the same period in the prior year.

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

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(Dollar amounts in thousands)	Three months ended June 30,
	2012							2011
	Average Balance		Interest		Yield / Rate			Average Balance		Interest		Yield / Rate
Interest-earning assets:
Taxable securities available for sale	$	719,027	$	6,572		3.70	%	$	799,615	$	8,420		4.21	%
Taxable corporate bonds available for sale		231,424		1,982		3.40	%		147,573		1,431		3.89	%
Tax-exempt securities available for sale		146,518		1,665		6.89	%(1)		141,506		1,592		6.82	%(1)
		1,096,969		10,219		4.04	%(1)		1,088,694		11,443		4.51	%(1)
Mortgage loans		484,730		6,175		5.10	%		468,546		6,455		5.51	%
Other loans		149,233		1,832		4.94	%		151,240		2,049		5.43	%
Tax-exempt loans		36,366		327		5.47	%(1)		25,971		250		5.85	%(1)
		670,329		8,334		5.08	%(1)		645,757		8,754		5.51	%(1)
Cash equivalents		53,068		31		0.23	%		31,232		2		0.03	%
FHLB stock		19,351		6		0.10	%		23,759		—		—
		72,419		37		0.20	%		54,991		2		0.01	%
Total interest-earning assets		1,839,717		18,590		4.27	%(1)		1,789,442		20,199		4.73	%(1)
Other noninterest-earning assets		165,074		—		—			162,424		—		—
Total assets	$	2,004,791	$	18,590		3.91	%(1)	$	1,951,866	$	20,199		4.34	%(1)
Interest-bearing liabilities:
Interest-bearing demand deposits	$	454,459	$	166		0.15	%	$	348,273	$	329		0.38	%
Time deposits		658,653		2,271		1.39	%		646,789		2,754		1.71	%
		1,113,112		2,437		0.88	%		995,062		3,083		1.24	%
FHLB advances		198,781		1,601		3.24	%		243,255		1,910		3.15	%
Repurchase Agreements		318,000		2,818		3.56	%		363,000		3,143		3.47	%
Other borrowings		9,010		114		5.09	%		19,666		237		4.83	%
		525,791		4,533		3.47	%		625,921		5,290		3.39	%
Junior subordinated notes - fixed		36,083		521		5.81	%		36,083		520		5.78	%
Junior subordinated notes - adjustable		10,310		90		3.51	%		10,310		86		3.35	%
		46,393		611		5.30	%		46,393		606		5.24	%
Total interest-bearing liabilities		1,685,296		7,581		1.81	%		1,667,376		8,979		2.16	%
Noninterest-bearing demand deposits		105,159		—		—			89,223		—		—
Other noninterest-bearing liabilities		25,843		—		—			18,486		—		—
Total liabilities		1,816,298		7,581		1.68	%		1,775,085		8,979		2.03	%
Stockholders’ equity		188,493		—		—			176,781		—		—
Total liabilities and equity	$	2,004,791	$	7,581		1.52	%	$	1,951,866	$	8,979		1.85	%
Net interest income			$	11,009						$	11,220
Interest rate spread (difference between weighted average rate on interest-earning assets and interest-bearing liabilities)						2.46	%(1)						2.57	%(1)
Net interest margin (net interest income as a percentage of average interest-earning assets)						2.61	%(1)						2.72	%(1)

42

(Dollar amounts in thousands)	Six months ended June 30,
	2012							2011
	Average Balance		Interest		Yield / Rate			Average Balance		Interest		Yield / Rate
Interest-earning assets:
Taxable securities available for sale	$	723,494	$	13,491		3.73	%	$	785,848	$	16,580		4.22	%
Taxable corporate bonds available for sale		223,043		3,909		3.49	%		152,607		3,006		3.97	%
Tax-exempt securities available for sale		146,515		3,312		6.85	%(1)		139,974		3,148		6.82	%(1)
		1,093,052		20,712		4.09	%(1)		1,078,429		22,734		4.52	%(1)
Mortgage loans		482,013		12,342		5.12	%		468,898		12,850		5.48	%
Other loans		148,118		3,713		5.04	%		150,777		4,089		5.47	%
Tax-exempt loans		35,094		628		5.46	%(1)		24,792		476		5.86	%(1)
		665,225		16,683		5.12	%(1)		644,467		17,415		5.49	%(1)
Cash equivalents		43,660		49		0.23	%		23,268		5		0.04	%
FHLB stock		20,038		16		0.16	%		24,601		—		—
		63,698		65		0.21	%		47,869		5		0.02	%
Total interest-earning assets		1,821,975		37,460		4.33	%(1)		1,770,765		40,154		4.75	%(1)
Other noninterest-earning assets		165,630		—		—			159,933		—		—
Total assets	$	1,987,605	$	37,460		3.97	%(1)	$	1,930,698	$	40,154		4.36	%(1)
Interest-bearing liabilities:
Interest-bearing demand deposits	$	429,839	$	326		0.15	%	$	329,539	$	597		0.37	%
Time deposits		661,447		4,662		1.42	%		643,414		5,719		1.79	%
		1,091,286		4,988		0.92	%		972,953		6,316		1.31	%
FHLB advances		199,129		3,217		3.25	%		250,759		3,890		3.13	%
Repurchase Agreements		328,417		5,796		3.55	%		363,833		6,253		3.47	%
Other borrowings		9,458		230		4.89	%		18,749		452		4.86	%
		537,004		9,243		3.46	%		633,341		10,595		3.37	%
Junior subordinated notes - fixed		36,083		1,041		5.80	%		36,083		1,035		5.78	%
Junior subordinated notes - adjustable		10,310		182		3.55	%		10,310		171		3.34	%
		46,393		1,223		5.30	%		46,393		1,206		5.24	%
Total interest-bearing liabilities		1,674,683		15,454		1.86	%		1,652,687		18,117		2.21	%
Noninterest-bearing demand deposits		102,039		—		—			87,490		—		—
Other noninterest-bearing liabilities		24,347		—		—			17,880		—		—
Total liabilities		1,801,069		15,454		1.73	%		1,758,057		18,117		2.08	%
Stockholders’ equity		186,536		—		—			172,641		—		—
Total liabilities and equity	$	1,987,605	$	15,454		1.56	%	$	1,930,698	$	18,117		1.89	%
Net interest income			$	22,006						$	22,037
Interest rate spread (difference between weighted average rate on interest-earning assets and interest-bearing liabilities)						2.47	%(1)						2.54	%(1)
Net interest margin (net interest income as a percentage of average interest-earning assets)						2.62	%(1)						2.69	%(1)

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

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Analysis of Changes in Net Interest Income. The following tables analyze the changes in interest income and interest expense, for the three and six month periods ended June 30, 2012 in terms of: (1) changes in volume of interest-earning assets and interest-bearing liabilities and (2) changes in yields and rates. The table reflects the extent to which changes in the Company’s interest income and interest expense are attributable to changes in rate (change in rate multiplied by prior period volume), changes in volume (changes in volume multiplied by prior period rate) and changes attributable to the combined impact of volume/rate (change in rate multiplied by change in volume). The changes attributable to the combined impact of volume/rate are allocated on a consistent basis between the volume and rate variances. Changes in interest income on securities reflects the changes in interest income on a fully tax equivalent basis.

(Dollar amounts in thousands)	Three months ended, June 30,
	2012 versus 2011
	Increase (decrease) due to
	Volume			Rate			Total
Interest income:
Securities	$	86		$	(1,310	)	$	(1,224	)
Loans		324			(744	)		(420	)
Cash equivalents		2			27			29
FHLB stock		—			6			6
Total interest-earning assets		412			(2,021	)		(1,609	)
Interest expense:
Deposits		335			(981	)		(646	)
FHLB advances		(357	)		48			(309	)
Repurchase agreements		(397	)		72			(325	)
Other borrowings		(134	)		11			(123	)
Junior subordinated notes		—			5			5
Total interest-bearing liabilities		(553	)		(845	)		(1,398	)
Net interest income	$	965		$	(1,176	)	$	(211	)

(Dollar amounts in thousands)	Six months ended June 30,
	2012 versus 2011
	Increase (decrease) due to
	Volume			Rate			Total
Interest income:
Securities	$	305		$	(2,327	)	$	(2,022	)
Loans		548			(1,280	)		(732	)
Cash equivalents		7			37			44
FHLB stock		—			16			16
Total interest-earning assets		860			(3,554	)		(2,694	)
Interest expense:
Deposits		702			(2,030	)		(1,328	)
FHLB advances		(829	)		156			(673	)
Repurchase agreements		(621	)		164			(457	)
Other borrowings		(226	)		4			(222	)
Junior subordinated notes		—			17			17
Total interest-bearing liabilities		(974	)		(1,689	)		(2,663	)
Net interest income	$	1,834		$	(1,865	)	$	(31	)

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Provision for loan losses. The provision for loan losses increased $100,000 to $300,000 for the quarter ended June 30, 2012 when compared to June 30, 2011 and remained the same at $500,000 for the six months ended June 30, 2012 when compared to the quarter ended June 30, 2011. These provisions were part of the normal operations of the Company for the periods ending June 30, 2012. 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, 2012 amounted to $6.7 million, or 0.98% of the Company’s total loan portfolio, as compared to $6.5 million, or 0.98%, at December 31, 2011. The Company’s allowance for losses on loans as a percentage of non-performing loans was 40.73% and 48.86% at June 30, 2012 and December 31, 2011, respectively.

Non-interest income. Non-interest income decreased $140,000, or 8.3%, for the three months ended June 30, 2012 compared to the same period in the prior year. The decrease in non-interest income was comprised of decreases to fees and service charges, cash surrender value of bank owned life insurance and net realized gain on securities available for sale of $44,000, $23,000 and $532,000, respectively, as well as an increase in net impairment losses on securities of $31,000. These decreases were partially offset by increases in income from joint ventures and other income of $2,000 and $13,000, respectively, as well as a decrease in net realized loss on derivatives of $475,000.

Non-interest income increased $94,000, or 3.0%, for the six months ended June 30, 2012 compared to the same period in the prior year. The increase in non-interest income was comprised of a decrease in the net realized loss on derivatives of $468,000, as well as an increase in other income of $38,000, partially offset by decreases to fees and service charges, net gain on sale of loans, cash surrender value of bank owned life insurance, net realized gain on securities available for sale, net impairment losses on securities and income from joint ventures of $29,000, $7,000, $37,000, $265,000, $31,000 and $43,000, respectively.

Net realized gain on securities available for sale decreased $532,000 and $265,000 for the three and six months ended June 30, 2012, respectively. During 2012, the Company had $500,000 in equity sales from the portfolio in the first quarter, resulting in a gain of $267,000, and no sales in the quarter ended June 30, 2012. During the six months ended June 30, 2011 the Company had sales of $5.0 million consisting of sales of fixed-rate mortgage backed securities of $4.2 million, adjustable-rate mortgage backed securities of $648,000 and common stock of $204,000 resulting in a gain of $532,000.

The Company had losses on derivatives during the quarter ended June 30, 2012 of $269,000 compared to losses in the same period in 2011 of $744,000, resulting in an increase between the periods of $475,000. The Company had losses on derivatives during the six months ended June 30, 2012 of $400,000 compared to losses in the same period in 2011 of $868,000, resulting in an increase between the periods of $468,000. These fluctuations were due to market value adjustments to the Company’s interest rate caps.

Real estate joint venture income increased a nominal $2,000 and decreased $43,000 for the three and six months ended June 30, 2012 when compared to the same periods in the prior year. The Company has a 51% ownership in its real estate joint ventures. The Company has a mixture of joint ventures in which it participates either in land development only or construction of units.

Non-interest expense. Non-interest expense increased $468,000, or 6.7%, to $7.5 million for the three months ended June 30, 2012 as compared to $7.0 million for the same period in the prior year. This increase was primarily related to increases in compensation and employee benefits, premises and equipment, federal deposit insurance premiums, data processing, and other expenses of $353,000, $84,000, $37,000, $16,000 and $12,000, respectively, partially offset by decreases in amortization of intangible assets and advertising of $20,000 and $14,000, respectively.

Non-interest expense increased $1.0 million, or 7.1%, to $15.2 million for the six months ended June 30, 2012 as compared to $14.2 million for the same period in the prior year. This increase was primarily related to increases

45

in compensation and employee benefits, premises and equipment, data processing, advertising and other expenses of $566,000, $77,000, $33,000, $47,000 and $349,000, respectively, partially offset by decreases in federal deposit insurance premiums, and amortization of intangible assets of $24,000 and $40,000, respectively.

Compensation and employee benefits increased $353,000 and $566,000 for the three and six months ended June 30, 2012, as compared to the same period in the prior year. The increases were primarily due to normal salary adjustments between the periods as well as increases to compensation expense related to retirement expenses, stock options and the MRP and group life and hospital insurance expense.

Premises and equipment expenses increased $84,000 and $77,000 for the three and six months ended June 30, 2012, as compared to the same period in the prior year. These increase occurred due to costs related to the demolition of one of the Company’s properties held for investment. This property was charged off the Company’s balance sheet in 2011.

Provision for income taxes. The provision for income taxes decreased $361,000, or 31.1%, to $799,000 for the three months ended June 30, 2012, compared to $1.2 million for the same period in the prior year. This provision for income taxes reflects an effective tax rate of 17.8% for the quarter ended June 30, 2012 as compared to 21.3% for the same period in the prior year.

The provision for income taxes decreased $412,000, or 20.0%, to $1.6 million for the six months ended June 30, 2012, compared to $2.1 million for the same period in the prior year. This provision for income taxes reflects an effective tax rate of 18.1% for the quarter ended June 30, 2012 as compared to 20.6% for the same period in the prior year.

CHANGES IN FINANCIAL CONDITION

General. The Company’s total assets increased by $32.3 million, or 1.7%, to $2.00 billion at June 30, 2012. This increase resulted primarily from increases to cash and cash equivalents, securities available for sale, loans receivable and securities receivable of $4.5 million, or 11.5%, $19.3 million, or 1.7%, $15.6 million, or 2.4%, and $743,000, or 64.7%, respectively, partially offset by decreases in accrued interest receivable, FHLB stock, premises and equipment, real estate acquired through foreclosure, real estate held for investment, intangible assets, bank owned life insurance and prepaid expenses and other assets of $448,000, or 4.9%, $2.1 million, or 9.8%, $205,000, or 1.4%, $173,000, or 4.5%, $2.3 million, or 15.3%, $134,000, or 24.2%, $1.1 million, or 3.5%, and $1.3 million, or 15.7%, respectively. Total non-performing assets increased to $20.4 million at June 30, 2012 compared to $17.3 million at December 31, 2011 and non-performing assets to total assets were 1.02% at June 30, 2012 compared to 0.88% at December 31, 2011. The Company’s total liabilities increased $24.3 million, or 1.4%, to $1.8 billion at June 30, 2012. This increase resulted primarily from increases in deposits, advance payments by borrowers for taxes and insurance and accrued expenses and other liabilities of $62.0 million, or 5.4%, $762,000, or 30.3%, and $4.4 million, or 25.6%, respectively, partially offset by a decrease in borrowed funds of $42.4 million, or 7.0%. Total stockholders’ equity increased $8.0 million, or 4.5%, to $187.1 million at June 30, 2012, from $179.1 million at December 31, 2011. The increase in stockholders’ equity was primarily the result of increases in retained earnings and accumulated other comprehensive income of $4.5 million and $2.3 million, respectively. Average stockholders’ equity to average assets was 9.38%, and book value per share was $12.84 at June 30, 2012 compared to 9.08% and $12.34, respectively, at December 31, 2011.

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 $4.5 million, or 11.5%, to $43.3 million at June 30, 2012 from $38.8 million at December 31, 2011. 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 $19.3 million, or 1.7%, to $1.1 billion at June 30, 2012. During the six months ended June 30, 2012, the Company recorded purchases of

46

available for sale securities of $143.1 million, consisting of purchases of fixed-rate mortgage backed securities of $64.8 million, adjustable-rate mortgage backed securities of $13.4 million, $7.2 million of municipal bonds, $57.6 million of corporate bonds and $127,000 of equity securities. In addition, the portfolio increased by $3.2 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 securities of $767,000, consisting of sales of common stock resulting in a gain of $267,000. In addition, there were repayments and maturities of securities of $125.2 million, premium amortizations of $1.2 million and realized losses of $31,000.

The Company’s investment strategy for 2012 is to utilize the cash flows from the mortgage backed security and investment portfolios for the funding of loans and for reinvestment into similar investment products to maintain or improve the Company’s interest rate sensitivity. The Company intends to also purchase corporate or municipal bonds to provide structure should a low interest rate environment prevail. As an additional step to aid interest rate sensitivity the Company secured $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 $170.0 million, notional amount, of interest rate caps that are un-hedged and marked to market quarterly through the income statement. In the first six months of 2012, this resulted in approximately $400,000 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, 2012, the Company had securities with unrealized losses for greater than twelve months of $8.8 million, as more fully described in footnote 2 “Securities” to the financial statement in Item 1. The $8.8 million primarily consists of unrealized losses attributed to the Company’s floating rate trust preferred corporate bonds. Management’s conclusion after reviewing all of the factors, with the exception of the Company’s $2.5 million collateralized debt obligation, which is part of the OTTI, 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 increased $15.6 million, or 2.4%, to $664.5 million at June 30, 2012 from $648.9 million at December 31, 2011. Included in this increase in loans receivable were increases in mortgage loans and commercial loans of $12.4 million, or 2.5%, and $2.0 million, or 4.0%, respectively, partially offset by a decrease in consumer loans of $105,000, or 0.1%. Additionally the portfolio was increased by changes in the allowance for loan losses, deferred loan fees and loans in process which combined decreased $1.3 million, or 5.8%, during the six months ended June 30, 2012.

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.

47

Non-performing assets amounted to $20.4 million, or 1.02%, of total assets at June 30, 2012 compared to $17.3 million, or 0.88%, of total assets at December 31, 2011. The increase in non-performing assets of approximately $3.1 million was primarily the result of increases in the balances of non-performing loans and TDR’s of $2.2 million and $1.0 million, respectively, partially offset by a decrease to REO of approximately $173,000. The Company had an increase in its loans over 90 days and restructured approximately $1.0 million of residential construction loans in the quarter ended June 30, 2012.

FHLB Stock.FHLB stock decreased by $2.1 million, or 9.8%, to $19.2 million at June 30, 2012 compared to $21.3 million at December 31, 2011, due to redemption of the stock by the FHLB. 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. 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 $2.3 million, or 15.3%, to $12.9 million at June 30, 2012 from $15.3 million at December 31, 2011. 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 $134,000, or 24.2%, to $420,000 at June 30, 2012 from $554,000 at December 31, 2011. The decrease primarily resulted from normal amortization of the core deposit intangible from acquisitions. Amortization is expected to total $203,000, $170,000, $110,000 and $8,000 for the years 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, 2012 was $29.7 million.

Prepaid Expenses and Other Assets.Prepaid expenses and other assets decreased $1.3 million, or 15.7%, to $6.8 million at June 30, 2012 from $8.1 million at December 31, 2011. This decrease is primarily due to a decrease in the prepaid FDIC assessment of $699,000 as well as declines in the Company’s receivables. 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 $3.4 million at December 31, 2011 and has declined to $2.7 million at June 30, 2012.

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 $1.2 billion, or 68.3%, of the Company’s total funding sources at June 30, 2012. Total deposits increased $62.0 million, or 5.4%, to $1.2 billion at June 30, 2012. Interest-bearing demand deposits increased $69.6 million and time deposits decreased $15.2 million, during the three months ended June 30, 2012, while non-interest bearing deposits increased approximately $7.6 million during the same period. The deposit growth was comprised primarily of low interest core deposits which increased approximately $77.3 million during the period. The Company continues to pursue low cost core deposit funding through its ongoing campaign to increase commercial, public and personal checking accounts throughout its 25 branch network.

Borrowed funds. The Company utilizes short and long-term borrowings as another source of funding used for asset growth and liquidity needs. These borrowings include FHLB advances and repurchase agreement borrowings. Borrowed funds decreased $42.4 million, or 7.0%, to $564.6 million at June 30, 2012 from $607.0 million at December 31, 2011. FHLB advances decreased $15.8 million, or 7.6%, repurchase agreements decreased $25.0 million, or 7.3%, other borrowings decreased approximately $1.6 million, or 16.2%, while junior subordinated notes remained the same at $46.4 million during the six months ended June 30, 2012. 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.

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Accounts payable for land development.The accounts payable for land development decreased $377,000, or 14.3%, to $2.3 million at June 30, 2012 from $2.6 million at December 31, 2011. 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 $4.4 million, or 25.6%, to $21.6 million at June 30, 2012 from $17.2 million at December 31, 2011. The increase was primarily due to increases various accrued expenses including escrow accounts related to the mortgage and commercial loans.

Stockholders’ equity.Stockholders’ equity increased $8.0 million, or 4.5%, to $187.1 million at June 30, 2012, from $179.1 million at December 31, 2011. The increase to stockholders’ equity was primarily the result of increases in retained earnings from net income of $4.5 million, or 5.6%, and accumulated other comprehensive income of $2.3 million, or 11.0%, and decreases in treasury stock of $375,000, or 1.9%, and unearned employee stock ownership plan shares of $531,000, or 12.7%. Average stockholders’ equity to average assets was 9.38%, and book value per share was $12.84 at June 30, 2012 compared to 9.08% and $12.34, respectively, at December 31, 2011.

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

As of June 30, 2012, the implementation of these asset and liability initiatives resulted in the following: (i) $151.3 million or 21.1% of the Company’s mortgage-backed securities portfolio, $111.3 million or 54.4% of the Company’s corporate bond portfolio and $35.6 million or 95.1% of the Company’s trust preferred securities portfolio were secured by ARMs; (ii) $192.1 million or 28.1% of the Company’s total loan portfolio had

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adjustable interest rates or maturities of 12 months or less and $56.9 million or 16.2% of the Company’s portfolio of single-family residential mortgage loans (including residential construction loans) consisted of ARMs, (iii) the weighted average call/maturity of the Company’s FHLB advances and repurchase agreements was 4.1 years and (iv) the Company had $170.0 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 (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, 2012, the Company’s interest-earning assets maturing or repricing within one year totaled $749.1 million while the Company’s interest-bearing liabilities maturing or repricing within one-year totaled $783.1 million, providing a deficiency of interest-earning assets over interest-bearing liabilities of $34.0 million or a negative 1.7% of total assets. At June 30, 2012, the percentage of the Company’s assets to liabilities maturing or repricing within one year was 95.7%. The Company normally strives to maintain its one-year interest rate sensitivity gap between a range of 0.0% and a negative 20.0% of total assets.

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

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

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

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

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

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, 2012 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, 2012 levels for net

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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, 2012 for the change in EVE. The impact of the rate change for net interest income is compared to the base amount which can fluctuate from period to period.

	Increase						Decrease
	+100 BP			+200 BP			-100 BP			-200 BP
Net interest income - increase (decrease)		3.27	%		5.72	%		(3.58	%)		N/A
Return on average equity - increase (decrease)		6.63	%		11.54	%		(7.16	%)		N/A
Diluted earnings per share - increase (decrease)		6.74	%		11.87	%		(7.44	%)		N/A
EVE - increase (decrease)		(3.52	%)		(11.46	%)		(15.10	%)		N/A

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

	Increase						Decrease
	+100 BP			+200 BP			-100 BP			-200 BP
Net interest income - increase (decrease)		3.35	%		6.05	%		(4.14	%)		N/A
Return on average equity - increase (decrease)		6.47	%		11.63	%		(7.91	%)		N/A
Diluted earnings per share - increase (decrease)		6.72	%		12.13	%		(8.21	%)		N/A
EVE - increase (decrease)		0.84	%		(9.80	%)		(9.24	%)		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 $16.3 million for the six months ended June 30, 2012. Net cash provided by operating activities was primarily comprised of net income of $7.9 million and increases in amortization of premiums and discounts and accrued expenses and other liabilities of $1.6 million and $1.0 million, respectively, as well as a decrease in the prepaid FDIC assessment of $699,000 and slight variances in other operating activities.

Funds used in investing activities totaled $28.6 million during the six months ended June 30, 2012. Primary uses of funds included $143.1 million for purchases of securities available for sale and $109.9 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 $95.5 million and $125.2 million, respectively.

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Funds provided by financing activities totaled $16.7 million for the six months ended June 30, 2012. The primary sources of funds were from an increase in deposits and proceeds from long-term borrowings of $62.0 million and $4.9 million, partially offset by uses of funds including repayments of long-term borrowings and payments of dividends of $47.3 million and $2.9 million, respectively.

At June 30, 2012, the total approved loan commitments outstanding amounted to $8.3 million. At the same date, commitments under unused lines of credit and credit card lines amounted to $81.1 million and the unadvanced portion of construction loans approximated $15.5 million. Certificates of deposit scheduled to mature in one year or less at June 30, 2012 totaled $393.9 million.

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

On June 19, 2012 the Company’s Board of Directors declared a cash dividend of $0.10 per share of common stock payable July 25, 2012, to shareholders of record at the close of business on March 31, 2012. Dividends are subject to determination and declaration by the Board of Directors, which take into account the Company’s financial condition, statutory and regulatory restrictions, general economic conditions and other factors. There can be no assurance that dividends will in fact be paid on the common stock in future periods or that, if paid, such dividends will not be reduced or eliminated.

REGULATORY CAPITAL REQUIREMENTS

Current regulatory requirements specify that the Bank and similar institutions must maintain leverage capital equal to 4% of adjusted total assets and total risk-based capital equal to 8% of risk-weighted assets. The Federal Deposit Insurance Corporation (FDIC) may require higher core capital ratios if warranted, and institutions are to maintain capital levels consistent with their risk exposures. The FDIC reserves the right to apply this higher standard to any insured financial institution when considering an institution’s capital adequacy. At June 30, 2012, ESB Bank was in compliance with all regulatory capital requirements with leverage and total risk-based capital ratios of 8.2% and 14.9%, respectively.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Quantitative and qualitative disclosures about market risk are presented at December 31, 2011 in Item 7A of the Company’s Annual Report on Form 10-K, for the year ended December 31, 2011, filed with the SEC on March 15, 2012. Management believes there have been no material changes in the Company’s market risk since December 31, 2011.

Item 4. Controls and Procedures

As of June 30, 2012, 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, 2012. During the period ended June 30, 2012 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

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

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There are no material changes to the risk factors included in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

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, 2012		423	$	12.78		423		72,143
May 1-31, 2012		1,084		13.08		1,084		71,059
June 1-30, 2012		3,915		12.47		3,915		67,144
Totals		5,422	$	12.62		5,422		67,144

(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.

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Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None.

Item 6. Exhibits

(a) Exhibits:

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

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

ESB FINANCIAL CORPORATION
Date: August 8, 2012	By: /s/ Charlotte A. Zuschlag
	Charlotte A. Zuschlag
	President and Chief Executive Officer
Date: August 8, 2012	By: /s/ Charles P. Evanoski
	Charles P. Evanoski
	Group Senior Vice President and
	Chief Financial Officer

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