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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _____________
Commission file number 0-19345
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ESB FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
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<S> <C>
Pennsylvania 25-1659846
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
600 Lawrence Avenue, Ellwood City, PA 16117
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(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (724) 758-5584
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
---------------------------------------
(Title of class)
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 report(s)), and (2) has been subject to such filing
requirements for the past 90 days. X
-----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
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As of March 10, 1999, the aggregate value of the 4,626,109 shares of Common
Stock of the Registrant outstanding on such date, which excludes 637,951 shares
held by all directors and officers of the Registrant as a group, was
approximately $72.9 million. This amount is based on the closing sales price of
$15.75 per share of the Registrant's Common Stock on March 10, 1999.
Number of shares of Common Stock outstanding as of March 10, 1999: 5,264,060
DOCUMENTS INCORPORATED BY REFERENCE
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<CAPTION>
Documents Where Incorporated
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<S> <C>
1. Portions of the 1998 Annual Report to Stockholders. Part II
2. Portions of Proxy Statement for the April 20, 1999 Annual Meeting of Stockholders. Part III
</TABLE>
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<PAGE>
ESB FINANCIAL CORPORATION
TABLE OF CONTENTS
PART I
------
<TABLE>
<S> <C>
Item 1. Business........................................................... 1
Item 2. Properties......................................................... 25
Item 3. Legal Proceedings.................................................. 26
Item 4. Submission of Matters to a Vote of Security Holders................ 26
PART II
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Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters............................................................ 27
Item 6. Selected Financial Data............................................ 27
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 27
Item 7A. Quantitative and Qualitative Disclosures about Market Risk......... 27
Item 8. Financial Statements and Supplementary Data........................ 27
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................... 27
PART III
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Item 10. Directors and Executive Officers of the Registrant................. 28
Item 11. Executive Compensation............................................. 28
Item 12. Security Ownership of Certain Beneficial Owners and Management..... 28
Item 13. Certain Relationships and Related Transactions..................... 28
PART IV
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Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K... 29
SIGNATURES.................................................................. 30
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
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GENERAL
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ESB Financial Corporation (the Company) is a Pennsylvania corporation and thrift
holding company that provides a wide range of retail and commercial financial
products and services to customers in western Pennsylvania through its
wholly-owned subsidiary bank, ESB Bank, F.S.B. (ESB or the Bank). The Company is
also the parent company of PennFirst Financial Services, Inc., a Delaware
corporation engaged in the management of certain investment activities on behalf
of the Company, PennFirst Capital Trust I (the Trust), a Delaware statutory
business trust established during 1997 to facilitate the issuance of trust
preferred securities to the public by the Company, and THF, Inc., a Pennsylvania
corporation established to provide loan closing services and issue title
insurance.
As of December 31, 1998, the Company had consolidated total assets of $972.4
million and stockholders' equity of $61.1 million. For the year ended December
31, 1998, the Company realized consolidated net income and diluted net income
per share of $6.0 million and $1.08, respectively.
ESB is a federally chartered, Federal Deposit Insurance Corporation (FDIC)
insured stock savings bank which conducts business through eleven offices in
Allegheny, Beaver, Butler and Lawrence counties, Pennsylvania. ESB operates a
wholly-owned subsidiary, AMSCO, Inc., which engages in the management of certain
real estate development partnerships on behalf of the Company.
The Bank is a financial intermediary whose principal business consists of
attracting deposits from the general public and investing such deposits in real
estate loans secured by liens on residential and commercial properties, consumer
loans, commercial business loans, securities and interest-earning deposits. In
addition, the Company utilizes borrowed funds, including primarily advances from
the Federal Home Loan Bank (FHLB) of Pittsburgh and reverse repurchase
agreements to fund the Company's investment portfolio. The Company invests in
securities issued by the U.S. government and agencies and other investments
permitted by federal law and regulations.
The Company and the Bank are subject to examination and comprehensive regulation
by the Office of Thrift Supervision (OTS), the chartering authority of the Bank,
and the FDIC, the administrator of the Savings Association Insurance Fund
(SAIF). Additionally, the Company is subject to the various reporting and filing
requirements of the Securities and Exchange Commission (SEC). Customer deposits
with the Bank are insured to the maximum extent provided by the law through the
SAIF. The Bank is a member of the FHLB of Pittsburgh, which is one of the twelve
regional banks comprising the FHLB system. The Bank is further subject to
regulations of the Board of Governors of the Federal Reserve System which
governs the reserves required to be maintained against deposits and certain
other matters.
COMPETITION
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The Company and its subsidiaries face substantial competition for both loans and
deposits. Numerous financial institutions, some larger and several of which are
similar in size and resources to the Company, are competitors of the Company to
varying degrees. Competition for loans comes principally from commercial banks,
credit unions, mortgage-banking companies and savings banks. The Company
competes for loans principally through the interest rates and loan fees that are
charged and the efficiency and quality of services provided to borrowers,
sellers, real estate brokers and attorneys. The most direct competition for
deposits has historically come from commercial banks, credit unions and other
depository institutions. The Company faces additional competition for deposits
from securities brokers, mutual funds and insurance companies. The Company
competes for deposits through pricing, service, the branch network and by
offering a wide variety of products and services. Competition may increase as a
result of reduced restrictions on the interstate operations of financial
institutions and legislation authorizing the acquisition of savings institutions
by bank holding companies.
1
<PAGE>
MARKET AREA
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The Company's primary market area includes Allegheny, Butler, Beaver and
Lawrence counties in western Pennsylvania. The Company's business is conducted
through its corporate office located in Ellwood City, PA, and the Bank's 11
offices. Substantially all of the Bank's deposits are received from residents of
their principal market area and most loans are secured by properties in western
Pennsylvania.
LENDING ACTIVITIES
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GENERAL. As of December 31, 1998, the Company's net loans receivable amounted to
$360.3 million or 37.0% of the Company's total assets. Loans secured by real
estate amounted to $309.8 million or 81.3% of total loans receivable. Consumer
loans and commercial business loans amounted to $56.9 million or 14.9% and $14.2
million or 3.8%, respectively, of the Company's total loan portfolio.
The Company's lending activities are conducted through the Bank. The Company's
loan origination activities have primarily involved the origination of
single-family residential loans and, to a lesser extent, multi-family
residential mortgage loans, primarily secured by properties in the Company's
market area. In addition, the Company has in recent years increased its
involvement in the origination of other types of loans within its primary market
area. These types include construction loans, commercial real estate loans and a
variety of consumer loans. Loans originated in the Company's market area, both
fixed and adjustable rate, are made primarily for retention in the Company's own
portfolio. On occasion, the Company has utilized its nationwide lending
authority by purchasing whole loans and loan participations secured by
properties located outside its primary market area. Notwithstanding this
nationwide authority, the Company estimates that approximately 95% of its
mortgage loans are secured by properties located in western Pennsylvania.
Moreover, substantially all of the Company's non-mortgage loan portfolio, with
the exception of certain financing leases, consists of loans made to residents
and businesses located in the Company's primary market area.
The following table sets forth the composition of the Company's portfolio of
loans receivable in dollar amounts and in percentages as of December 31:
<TABLE>
<CAPTION>
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(Dollar amounts in thousands) 1998 1997 1996
-------------------------- ---------------------- -----------------------
Dollar Dollar Dollar
Amount % Amount % Amount %
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential - single family $225,054 59.1% $222,994 63.2% $126,854 55.9%
Residential - multi family 11,206 2.9% 8,685 2.5% 3,516 1.5%
Commercial real estate 32,300 8.5% 31,489 8.9% 20,473 9.0%
Construction 41,215 10.8% 29,710 8.4% 20,942 9.2%
--------- ------- --------- ------- --------- -------
Total real estate loans 309,775 81.3% 292,878 83.0% 171,785 75.6%
Other loans:
Consumer loans 56,897 14.9% 51,718 14.6% 45,486 20.1%
Commercial business loans 14,216 3.8% 8,359 2.4% 9,656 4.3%
--------- ------- --------- ------- --------- -------
Total other loans 71,113 18.7% 60,077 17.0% 55,142 24.4%
--------- ------- --------- ------- --------- -------
Total loans receivable 380,888 100.0% 352,955 100.0% 226,927 100.0%
======= ======= =======
Less:
Allowance for loan losses 4,815 4,807 3,309
Net deferred fees/discounts 785 723 380
Loans in process 15,008 10,668 6,373
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Net loans receivable $360,280 $336,757 $216,865
========= ========= =========
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<CAPTION>
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(Dollar amounts in thousands) 1995 1994
-------------------------- ----------------------
Dollar Dollar
Amount % Amount %
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real estate loans:
Residential - single family $105,551 55.3% $ 91,756 53.0%
Residential - multi family 4,015 2.1% 4,451 2.6%
Commercial real estate 16,650 8.7% 17,136 9.9%
Construction 13,495 7.1% 17,851 10.3%
-------- ----- --------- -----
Total real estate loans 139,711 73.2% 131,194 75.8%
Other loans:
Consumer loans 41,322 21.6% 33,794 19.5%
Commercial business loans 9,950 5.2% 8,127 4.7%
-------- ----- --------- -----
Total other loans 51,272 26.8% 41,921 24.2%
-------- ----- --------- -----
Total loans receivable 190,983 100.0% 173,115 100.0%
===== =====
Less:
Allowance for loan losses 2,471 2,475
Net deferred fees/discounts 467 638
Loans in process 4,167 8,372
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Net loans receivable $183,878 $ 161,630
======== =========
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</TABLE>
2
<PAGE>
The following table sets forth the scheduled contractual principal repayments of
loans in the Company's portfolio at December 31, 1998. Demand loans having no
stated schedule of repayment and no stated maturity are reported as due within
one year.
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<CAPTION>
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(In thousands) Due in one Due from one Due from five Due after
year or less to five years to ten years ten years Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Real estate loans $ 40,467 $ 61,145 $ 46,691 $ 161,472 $ 309,775
Consumer loans 22,042 22,825 9,247 2,783 56,897
Commercial business loans 8,537 5,257 422 - 14,216
--------- --------- --------- ---------- ----------
$ 71,046 $ 89,227 $ 56,360 $ 164,255 $ 380,888
========= ========= ========= ========== ==========
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</TABLE>
The following table sets forth the dollar amount of the Company's fixed and
adjustable rate loans due after one year as of December 31, 1998:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
(In thousands) Fixed Adjustable
rates rates
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<S> <C> <C>
Real estate loans $ 154,111 $ 115,197
Consumer loans 31,374 3,481
Commercial business loans 1,266 4,413
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$ 186,751 $ 123,091
========== ==========
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</TABLE>
Fixed and adjustable rate loans represented $203.6 million or 53.5% and $177.2
million or 46.5%, respectively, of the Company's total loan portfolio as of
December 31, 1998.
Contractual maturities of loans do not reflect the actual term of the Company's
loan portfolio. The average life of mortgage loans is substantially less than
their contractual terms because of loan prepayments and enforcement of
due-on-sale clauses which give the Company the right to declare a loan
immediately payable in the event, among other things, that the borrower sells
the real property subject to the mortgage. Scheduled principal amortization also
reduces the average life of the loan portfolio. The average life of mortgage
loans tends to increase when current market mortgage rates substantially exceed
rates on existing mortgages and conversely, decrease when rates on existing
mortgages substantially exceed current market interest rates.
ORIGINATION, PURCHASE AND SALE OF LOANS. The Company originates loans secured by
residential and commercial real estate as well as consumer and commercial
business loans in its primary lending area, which includes western Pennsylvania,
through officers of the Company who evaluate applications received at all of the
Company's locations. Such applications are primarily received through referrals
by real estate agents, attorneys and builders, as well as through customer
walk-ins. The Company also originates loans secured by residential and
commercial real estate in its market area through a network of correspondent
lenders who offer the Bank's loan products to a variety of customers throughout
western Pennsylvania. Loans originated through correspondents are underwritten
according to the same strict guidelines as loans originated at the Company's
locations in the primary market area.
Applications are obtained by loan officers who are full-time, salaried employees
of the Company as well as through the Company's mortgage banking correspondent
relationships. The processing, underwriting and approval of real estate and
commercial business loans is performed primarily at the Company's Ellwood City
and Wexford offices. The Company believes this centralized approach to
evaluating such loan applications allows it to review, process and approve such
applications more efficiently and effectively than would be afforded by a
decentralized approach. The Company also believes that this approach enhances
its ability to service and monitor these types of loans. The Company's mortgage
banking correspondents originate and process one-to-four family residential
mortgage loans for a fee generally equal to 1% of the loan amount. Underwriting
of these loans is performed by the Company. Due to the average size of the
consumer loans originated by the Company, processing, underwriting, approval and
servicing of such loans is generally performed at the branch offices where such
loans are originated.
3
<PAGE>
In the past, funds generated by the Company's operations have exceeded the
amount of loan demand experienced in its primary market area. On occasion, the
Company has used these excess funds to purchase single-family, owner-occupied
residential, whole loans or loan participations. These loans are secured by real
estate properties located within the U.S. As of December 31, 1998, $10.1 million
or 2.7% of the Company's total loans receivable consisted of whole loans, leases
and participation interests in loans purchased from other financial
institutions.
The Company requires that all purchased loans be underwritten in accordance with
its underwriting guidelines and standards. The Company reviews the loans,
particularly scrutinizing the borrower's ability to repay the obligation, the
appraisal and the loan-to-value ratio. Servicing of loans or loan participations
purchased by the Company generally is performed by the seller, with a portion of
the interest being paid by the borrower retained by the seller to cover
servicing costs. As of December 31, 1998 all of the Company's purchased loans
were serviced by the sellers.
The Company's residential real estate loans are generally originated under
terms, conditions and documentation requirements which permit their sale in the
secondary market. The Company in the past has not been an active seller of loans
in the secondary market and has chosen, instead, to hold the loans it originates
in its own portfolio until maturity. However, from time to time over the past
several years, the Company has originated and sold 15 and 30-year fixed-rate
residential loans, servicing released, as a means of satisfying the demand for
such loans within the Company's primary market area when market interest rates
on such loans did not meet the Company's prevailing asset/liability gap and
investment objectives. Any loan held in the available for sale portfolio, is
subject to a takedown commitment from an investor.
The following table sets forth the Company's loan activity including,
originations, purchases, principal repayments, sales, transfers to real estate
acquired through foreclosure and other changes for the years ended December 31:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
(In thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loans receivable at beginning of period $ 336,757 $ 216,865 $ 183,878
Loans associated with acquisition of Troy Hill - 90,037 -
Originations:
Single family residential real estate 73,836 66,807 44,206
Multi-familiy residential and commercial real estate 24,423 5,266 9,157
Construction 12,660 11,472 5,623
Consumer 31,627 24,528 24,154
Commercial business 11,240 9,046 5,872
-------------- ------------- -------------
153,786 117,119 89,012
Purchases - - 492
Repayments on loans (118,792) (82,973) (55,481)
Sales (11,266) (3,726) (274)
Transfers to real estate acquired through foreclosure (53) (201) (55)
Other changes (152) (364) (707)
-------------- ------------- -------------
Net loans receivable at end of period $ 360,280 $ 336,757 $ 216,865
============== ============= =============
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
LOAN UNDERWRITING POLICIES. The Company's lending activities are
subject to written non-discriminatory underwriting standards and loan procedures
prescribed by the Board of Directors and management. Detailed loan applications
are obtained to determine the borrower's ability to repay, and the more
significant items on these applications are verified through the use of credit
reports, financial statements and confirmations. Property valuations are
performed by independent outside appraisers approved by the Board of Directors.
The Company has established three levels of lending authority. Loans must be
approved by loan officers, internal loan committees and/or, depending on the
amount and characteristics of the loan, the Board of Directors.
Loans may be approved by certain loan officers within designated characteristics
and dollar limits, which are established and modified from time to time to
reflect expertise and experience.
4
<PAGE>
All loans in excess of an individual's designated limits are referred to the
officer with the requisite authority or the Officers' Loan Committee of the
Bank. The President and Chief Executive Officer of the Company has approval
authority equal to the Federal Home Loan Mortgage Corporation's (FHLMC) maximum
conforming loan amount as revised from time to time for loans secured by
residential real estate, up to $100,000 for secured commercial business loans
and up to $75,000 for unsecured commercial business loans and consumer loans.
Other members of the Officers' Loan Committees have individual lending
authorities that range from $10,000 to the FHLMC maximum conforming loan amount.
The Officers' Loan Committees, which consist of the President and Chief
Executive Officer, Senior Vice President of Lending, Senior Vice President -
Community Reinvestment Officer, Vice President - Manager Commercial Real Estate
Lending, Vice President - Consumer Lending, Vice President - Residential Lending
Manager, Vice President - Loan Servicing Manager and Vice President - Commercial
Lending are authorized to act on all loan applications up to an aggregate of
$750,000.
The third level of lending authority is reserved for the Board of Directors or
the Board's Executive Committee, which serve as the approval bodies for all
loans above the aggregate of $750,000. In addition, the Board of Directors
ratifies all loans originated by the Company.
For residential real estate loans, it is the Company's policy to have a mortgage
creating a valid lien on real estate and to obtain a title insurance policy,
which ensures that the property is free of prior encumbrances. Borrowers must
also obtain hazard insurance policies prior to closing and, when the property is
in a flood plain as designated by the Department of Housing and Urban
Development, flood insurance policies. Many borrowers are also required to
advance funds on a monthly basis together with each payment of principal and
interest to a mortgage escrow account from which disbursements for items such as
real estate taxes and insurance are made.
The Company is permitted by regulation to lend up to 100% of the appraised value
of the real property securing a mortgage loan. For loans secured by real
property, the Company generally lends up to 80% of the appraised value of such
property (the loan-to-value or LTV ratio). The Company also offers several other
programs where loans are granted in excess of that limit. The primary program is
available on all mortgage products, including new construction, and permits LTV
ratios of up to 95% provided that private mortgage insurance is obtained.
Depending on the LTV ratio, the Company requires such insurance coverage in
amounts equal to 20% to 30% of the principal balance of the loan. On a more
limited basis, the Company also offers other programs where loans can be granted
in excess of the 80% LTV ratio. These programs are limited since they do not
require private mortgage insurance. Annual production limits are established by
the Board of Directors. The programs include a 90% LTV ratio mortgage product
and a 100% LTV ratio home equity product. The Company has also offered products
for low- and moderate-income borrowers which can exceed the 80% LTV ratio. These
low- and moderate-income borrower programs were designed to help the Company
fulfill its responsibilities under the Community Reinvestment Act. With respect
to loans for multi-family and commercial real estate mortgages, the Company
generally limits the LTV ratio to 80%.
Under federal law, loans-to-one-borrower may not exceed 15% of unimpaired
capital and surplus. As of December 31, 1998, ESB was permitted to lend
approximately $10.3 million to any one borrower under this standard. Loans in an
amount equal to an additional 10% of unimpaired capital and surplus also may be
made to a borrower if the loans are fully secured by readily marketable
securities. Higher limits may be available in certain circumstances. The Company
generally will limit its maximum exposure to any one borrower to approximately
$5.0 million. As of December 31, 1998, the Company had three lending
relationships which exceeded the Bank's internal lending limit, but did not
exceed the regulatory lending limit to one borrower at the time made or
committed.
RESIDENTIAL MORTGAGE AND CONSTRUCTION LENDING. The Company offers single-family
residential mortgage loans with fixed and adjustable rates of interest. As of
December 31, 1998, $225.1 million or 59.1% of the total loan portfolio consisted
of single-family residential mortgage loans.
Fixed rate residential loans are generally originated by the Company with 15 to
30 year terms. Substantially all of the Company's long-term, fixed rate
residential mortgage loans originated include "due-on-sale" clauses, which are
provisions giving the Company the right to declare a loan immediately due and
payable in the event, among other things, that the borrower sells or otherwise
disposes of the real property subject to the mortgage. The Company enforces
due-on-sale clauses. In addition to standard fixed rate mortgage loans, the
Company offers adjustable-rate mortgage loans (ARMs) with 30 year terms, on
which the interest rate adjusts based upon changes in various indices which
generally
5
<PAGE>
reflect market rates of interest. One-year ARMs presently originated by the
Company have an interest rate which adjusts annually according to changes in an
index that is based upon the weekly average yield on U.S. Treasury securities
adjusted to a constant maturity of one year, as made available by the Federal
Reserve Board, plus a margin. The amount of any increase or decrease in the
interest rate is limited to 2.0% per year, with a limit of 6.0% over the life of
the loan. The Company also offers three, five, seven and ten-year ARM loan
products with margins and caps similar to the one-year ARM product whose
interest rates are fixed for the first three, five, seven or ten years after the
origination date and then reprice periodically based upon an appropriate index.
The first rate change on the Company's seven and ten year products is capped at
6.0%. The ARMs offered by the Company, as well as many other thrift
institutions, provide for initial rates of interest below the rates which would
prevail were the index used for repricing applied initially. ARM loans decrease
the risks associated with changing market interest rates, but involve certain
risks because as interest rates increase, the underlying payments required of
the borrower increase, and this could increase the potential for default. At the
same time, the marketability of the underlying collateral may be adversely
affected by higher interest rates. However, these risks have not had an adverse
effect on the Company to date, and the Company, during the application process,
assesses the borrowers ability to repay based on the fully-indexed rate for the
first two years.
The Company also grants loans to borrowers, including developers and
construction contractors, for the construction of spec homes and owner-occupied
single family dwellings in the Company's primary market area. As of December 31,
1998 the Company had $41.2 million or 10.8% of the total loan portfolio
outstanding in construction loans. Generally, the loan-to-value ratio for
construction loans does not exceed 80%, provided that with respect to
construction/permanent loans to individual borrowers for their primary
residences, the Company will lend up to 95% subject to private mortgage
insurance requirements. The interest rate on the permanent portion of the
financing is set upon conversion to the permanent loan, based upon terms agreed
to in the loan commitment, including the index to be used, the interest-rate
margin and the frequency of the adjustment.
The Company finances the purchase of developed lots and presold residential
dwellings and spec homes, with various contractors in the Company's primary
market area. These loans do not have a permanent portion as they are short term
loans repaid via the proceeds from the sale of the lots or spec homes
constructed with the loan proceeds. These projects are typically financed under
builder lines-of-credit. As of December 31, 1998, builder lines-of-credit were
extended to 17 builders with $7.4 million outstanding under lines approved in
the aggregate amount of $15.6 million.
COMMERCIAL REAL ESTATE AND MULTI-FAMILY RESIDENTIAL MORTGAGE LENDING. The
Company originates commercial real estate and multi-family residential mortgage
loans and has in its portfolio both whole loans and participation interests. As
of December 31, 1998, the Company had $43.5 million, or 11.4% of the total loan
portfolio, invested in mortgages secured by commercial real estate and
multi-family residential properties.
Commercial real estate and multi-family mortgage loans are generally priced at
prevailing market interest rates at the time of origination. Loans originated
are typically adjustable-rate loans. The commercial real estate loans in the
Company's portfolio are generally secured by apartment buildings, office
buildings, small retail shopping centers and other income-producing properties
in the Company's primary market area.
The Company generally will not originate a commercial real estate or
multi-family mortgage loan with a loan balance of greater than 80% of the
appraised value of the property. The Company requires a positive cash flow at
least sufficient to cover the debt service on all commercial real estate loans.
Commercial real estate and multi-family residential mortgage lending entails
significant additional risks as compared with single-family residential mortgage
lending. These loans typically involve large loan balances concentrated in
single borrowers or groups of related borrowers. In addition, the payment
experience on loans secured by income producing properties is typically
dependent on the successful operation of the related real estate project and
thus may be subject to a greater extent to adverse conditions in the real estate
market or in the economy in general.
6
<PAGE>
CONSUMER LENDING. As of December 31, 1998, the Company's consumer loan portfolio
totaled $56.9 million or 14.9% of its total loan portfolio. Under federal law,
the Company, through its subsidiary savings bank, may make secured and unsecured
consumer loans in an aggregate amount up to 35% of the respective institution's
total assets. The 35% limitation does not include home equity loans (loans
secured by the equity in the borrower's residence but not necessarily for the
purpose of improvement), home improvement loans or loans secured by deposit
accounts. The Company offers consumer loans in order to provide a broader range
of financial services to its customers and because the shorter terms and
normally higher interest rates on such loans help the Company maintain a
profitable spread between its average loan yield and its cost of funds. The
Company has increased its emphasis on the origination of consumer loans within
its primary market area during the past several years. The increase in consumer
lending was accomplished through marketing techniques, including the targeting
of specific customer profiles through the Company's branch office locations. The
Company has adopted underwriting standards for such lending designed to maintain
asset quality. The Company offers a variety of consumer loans, including loans
secured by deposit accounts, student education loans, automobile loans, home
equity loans and personal unsecured loans. On all consumer loans originated, the
Company's underwriting standards include a determination of the applicant's
payment history on other debts and an assessment of the borrower's ability to
meet existing obligations and payment on the proposed loan.
As of December 31, 1998, the Company's largest group of consumer loans were home
equity loans. The Company originates both adjustable rate home equity
lines-of-credit and fixed rate home equity loans with terms up to 15 years. As
of December 31, 1998, $37.8 million or 66.4% of the Company's consumer loan
portfolio was made up of home equity loans.
Consumer loans generally have shorter terms and higher interest rates than
mortgage loans but generally involve more credit risk than mortgage loans
because of the type and nature of the collateral and, in certain cases, the
absence of collateral. The Company believes that the generally higher yields
earned on consumer loans compensate for the increased credit risk associated
with such loans and that consumer loans are important in its efforts to maintain
diversity as well as to shorten the average maturity of its loan portfolio.
COMMERCIAL BUSINESS LENDING. Commercial business loans and lines of credit of
both a secured and unsecured nature are made by the Company for business
purposes to incorporated and unincorporated businesses. Typically, these loans
are made for the purchase of equipment, to finance accounts receivable and to
finance inventory, as well as other business purposes. As of December 31, 1998,
commercial business loans amounted to $14.2 million or 3.8% of the Company's
total loan portfolio.
LOAN SERVICING. The Company services all loans it has originated for its
portfolio. In addition, fees are received for servicing loans which were
originated by the Company and sold to third-party investors. Loans purchased are
generally serviced by the financial institution which originated the loans.
Those financial institutions collect a fee for servicing the loans.
LOAN ORIGINATION FEES AND OTHER FEES. The Company receives income in the form of
loan origination and other fees on both loans originated and on loans purchased
in the secondary market. Such loan origination fees and certain related direct
loan origination costs are offset and the resulting net amount is deferred and
amortized over the life of the related loan as an adjustment to the yield on the
loan.
DELINQUENCIES AND CLASSIFIED ASSETS
- -----------------------------------
DELINQUENT LOANS AND REAL ESTATE ACQUIRED THROUGH FORECLOSURE (REO). Typically,
a loan is considered delinquent and a late charge is assessed when the borrower
has not made a payment within fifteen days from the payment due date. When a
borrower fails to make a required payment on a loan, the Company attempts to
cure the deficiency by contacting the borrower. The initial contact with the
borrower is made shortly after the seventeenth day following the due date for
which a payment was not received. In most cases, delinquencies are cured
promptly.
If the delinquency exceeds 60 days, the Company works with the borrower to set
up a satisfactory repayment schedule. Loans are considered non-accruing 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 non-accrual status, previously accrued but unpaid interest is
deducted from interest income. The Company institutes foreclosure action on
secured loans only if all other remedies have been exhausted. If an action to
7
<PAGE>
foreclose is instituted and the loan is not reinstated or paid in full, the
property is sold at a judicial or trustee's sale at which the Company may be the
buyer.
Real estate properties acquired through, or in lieu of, mortgage foreclosure are
to be sold and are initially recorded at fair value at the date of foreclosure
establishing a new cost basis. After foreclosure, valuations are periodically
performed by management and the real estate is carried at the lower of carrying
amount or fair value less cost to sell. Revenue and expenses from operations and
changes in the valuation allowance are included in loss on foreclosed real
estate. The Company generally attempts to sell its REO properties as soon as
practical upon receipt of clear title. The original lender typically handles
disposition of those REO properties resulting from loans purchased in the
secondary market.
As of December 31, 1998, the Company's non-performing assets, which include
non-accrual loans, loans delinquent due to maturity, troubled debt restructuring
and REO, amounted to $5.0 million or 0.51% of the Company's total assets.
CLASSIFIED ASSETS. Regulations applicable to insured institutions require the
classification of problem assets as "substandard," "doubtful," or "loss"
depending upon the existence of certain characteristics as discussed below. A
category designated "special mention" must also be maintained for assets
currently not requiring the above classifications but having potential weakness
or risk characteristics that could result in future problems. An asset is
classified as substandard if not adequately protected by the current net worth
and paying capacity of the obligor or of the collateral pledged, if any. A
substandard asset is characterized by the distinct possibility that the Company
will sustain some loss if the deficiencies are not corrected. Assets classified
as doubtful have all the weaknesses inherent in those classified as substandard.
In addition, these weaknesses make collection or liquidation in full, on the
basis of currently existing facts, conditions and values, highly questionable
and improbable. Assets classified as loss are considered uncollectible and of
such little value that their continuance as assets is not warranted.
The Company's classification of assets policy requires the establishment of
valuation allowances for loan losses in an amount deemed prudent by management.
Valuation allowances represent loss allowances that have been established to
recognize the inherent risk associated with lending activities. When the Company
classifies a problem asset as a loss, the asset is charged off within a
reasonable period of time.
The Company regularly reviews the problem loans and other assets in its
portfolio to determine whether any require classification in accordance with the
Company's policy and applicable regulations. As of December 31, 1998, the
Company's classified and criticized assets amounted to $8.6 million with $3.6
million classified as substandard, $1.9 million classified as doubtful, $4,000
classified as loss and $3.1 million identified as special mention.
The following table sets forth information regarding the Company's non-
performing assets as of December 31:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Real estate loans $ 2,943 $ 1,416 $ 285 $ 599 $ 2,165
Consumer and commercial business 2,038 2,386 3,799 200 104
------------- ------------- ------------- ------------- --------------
Total non-accrual loans 4,981 3,802 4,084 799 2,269
------------- ------------- ------------- ------------- --------------
Total as a percentage of total assets 0.51% 0.42% 0.58% 0.12% 0.35%
------------- ------------- ------------- ------------- --------------
Real estate acquired through foreclosure 21 288 37 52 294
------------- ------------- ------------- ------------- --------------
Total as a percentage of total assets 0.00% 0.03% 0.01% 0.01% 0.05%
------------- ------------- ------------- ------------- --------------
Total non-performing assets $ 5,002 $ 4,090 $ 4,121 $ 851 $ 2,563
============= ============= ============= ============= ==============
Total non-performing assets
as a percentage of total assets 0.51% 0.45% 0.59% 0.13% 0.40%
============= ============= ============= ============= ==============
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
As of December 31, 1998, non-accrual consumer and commercial business loans
included $1.9 million in non-performing Bennett Funding Group lease loans
discussed further in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section on pages 11, 12 and 14 of the
Company's 1998 Annual Report to Stockholders attached hereto as Exhibit 13.
ALLOWANCE FOR LOAN LOSSES. Management establishes reserves for estimated losses
on loans based upon its evaluation of the pertinent factors underlying the types
and quality of loans; historical loss experience based on volume and types of
loans; trend in portfolio volume and composition; level and trend on
non-performing assets; detailed analysis of individual loans for which full
collectibility may not be assured; determination of the existence and realizable
value of the collateral and guarantees securing such loans; and the current
economic conditions affecting the collectibility of loans in the portfolio. The
Company analyzes its loan portfolio and REO properties each month to determine
the adequacy of its allowance for losses. Management believes that the Company's
allowance for losses as of December 31, 1998 of $4.8 million is adequate to
cover embedded losses in the portfolio.
The following table sets forth an analysis of the allowance for losses on loans
receivable for the years ended December 31:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 4,807 $ 3,309 $ 2,471 $ 2,475 $ 1,393
Allowance for loan losses of acquired companies - 866 - - 1,128
Provision for loan losses 5 799 873 13 41
Charge-offs:
Real estate loans - (120) (3) (25) (27)
Consumer and commercial business loans (18) (125) (49) (22) (76)
---------- ----------- ----------- ----------- ------------
(18) (245) (52) (47) (103)
Recoveries 21 78 17 30 16
---------- ----------- ----------- ----------- ------------
Balance at end of period $ 4,815 $ 4,807 $ 3,309 $ 2,471 $ 2,475
========== =========== =========== =========== ============
Ratio of net charge-offs to average loans outstanding N/A 0.05% 0.02% 0.01% 0.07%
========== =========== =========== =========== ============
Ratio of allowance to total loans at end of period 1.26% 1.36% 1.46% 1.29% 1.43%
========== =========== =========== =========== ============
Balance at end of period applicable to:
Real estate loans $ 2,147 $ 2,283 $ 1,733 $ 1,803 $ 1,889
Consumer and commercial business loans 2,668 2,524 1,576 668 586
---------- ----------- ----------- ----------- ------------
Balance at end of period $ 4,815 $ 4,807 $ 3,309 $ 2,471 $ 2,475
========== =========== =========== =========== ============
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
INTEREST-EARNING DEPOSITS
- -------------------------
The Company maintains daily interest-earning cash accounts at the FHLB of
Pittsburgh. The accounts consist generally of excess funds, which are available
to meet loan funding requirements, investment and mortgage-backed securities
purchases and withdrawal of deposit accounts. Such funds also satisfy, in part,
the OTS liquidity requirement. The accounts earn interest daily at a rate, which
approximates the rate on federal funds. Such funds are withdrawable upon demand
and are not federally insured. Interest-bearing deposits at the FHLB of
Pittsburgh totaled $5.8 million as of December 31, 1998.
INVESTMENT ACTIVITIES
- ---------------------
GENERAL. The Company's investment activities involve investment in numerous
types of investment securities, including U.S. Treasury obligations and
securities of various federal agencies, certificates of deposit at insured banks
and savings institutions, commercial paper, corporate debt securities,
tax-exempt obligations (including primarily municipal obligations of state and
local governments), mutual funds, bankers' acceptances and federal funds.
9
<PAGE>
The Company also maintains a portfolio of mortgage-backed securities which are
insured or guaranteed by FHLMC, the Federal National Mortgage Association (FNMA)
and the Government National Mortgage Association (GNMA). Mortgage-backed
securities increase the quality of the Company's assets by virtue of the
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 following table summarizes the Company's investment securities as of
December 31:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
(In thousands) Amortized Unrealized Unrealized Fair
cost gains losses value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
- -------------------
DECEMBER 31, 1998:
Trust Preferred securities $ 3,275 $ 54 $ (29) $ 3,300
Municipal securities 99,035 2,258 (195) 101,098
Corporate Bonds 52,649 - (2,329) 50,320
Equity securities 2,101 348 (157) 2,292
---------- -------- --------- ----------
$ 157,060 $ 2,660 $ (2,710) $ 157,010
========== ======== ========= ==========
DECEMBER 31, 1997:
U.S. Government securities $ 4,015 $ 39 $ - $ 4,054
Municipal securities 53,782 1,864 (4) 55,642
Equity securities 1,265 29 - 1,294
---------- -------- --------- ----------
$ 59,062 $ 1,932 $ (4) $ 60,990
========== ======== ========= ==========
HELD TO MATURITY:
- ----------------
DECEMBER 31, 1998:
U.S. Government securities $ 4,986 $ 41 $ - $ 5,027
Municipal securities 7,994 210 - 8,204
---------- -------- --------- ----------
$ 12,980 $ 251 $ - $ 13,231
========== ======== ========= ==========
DECEMBER 31, 1997:
U.S. Government securities $ 15,479 $ 57 $ (58) $ 15,478
Municipal securities 7,536 96 (1) 7,631
---------- -------- --------- ----------
$ 23,015 $ 153 $ (59) $ 23,109
========== ======== ========= ==========
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
The following table summarizes the Company's mortgage-backed securities as of
December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
(In thousands) Amortized Unrealized Unrealized Fair
cost gains losses value
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
- -------------------
DECEMBER 31, 1998:
GNMA $ 164,392 $ 461 $ (479) $ 164,374
FNMA 41,923 334 (65) 42,192
FHLMC 35,147 491 (96) 35,542
Collateralized mortgage obligations 82,015 351 (250) 82,116
---------- -------- ------- ----------
$ 323,477 $ 1,637 $ (890) $ 324,224
========== ======== ======= ==========
DECEMBER 31, 1997:
GNMA $ 183,156 $ 803 $ (299) $ 183,660
FNMA 89,607 616 (285) 89,938
FHLMC 73,681 664 (168) 74,177
Collateralized mortgage obligations 17,844 121 (68) 17,897
---------- -------- ------- ----------
$ 364,288 $ 2,204 $ (820) $ 365,672
========== ======== ======= ==========
HELD TO MATURITY:
- -----------------
DECEMBER 31, 1998:
FNMA $ 36,282 $ 61 $ (125) $ 36,218
FHLMC 14,553 44 (13) 14,584
---------- -------- ------- ----------
$ 50,835 $ 105 $ (138) $ 50,802
========== ======== ======= ==========
DECEMBER 31, 1997:
FNMA $ 49,589 $ 26 $ (638) $ 48,977
FHLMC 18,755 - (256) 18,499
---------- -------- ------- ----------
$ 68,344 $ 26 $ (894) $ 67,476
========== ======== ======= ==========
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table sets forth the activity in the Company's mortgage-backed
securities for the years ended December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage-backed securities at the beginning of period $ 434,016 $ 337,560 $ 378,094
Mortgage-backed securities acquired in connection with
acquisition of Troy Hill - 2,335 -
Purchases 161,573 200,311 97,406
Sales (83,123) (35,269) (66,185)
Repayments (134,693) (71,042) (70,413)
Net premium amortization (1,994) (922) (1,035)
Change in unrealized gain (loss) on mortgage-backed
securities available for sale (720) 1,043 (307)
---------- ---------- ----------
Mortgage-backed securities at the end of period $ 375,059 $ 434,016 $ 337,560
========== ========== ==========
Weighted average yield at the end of the period 6.23% 6.84% 6.72%
========== ========== ==========
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
The following table shows the maturities of the Company's investment and
mortgage-backed securities portfolio as of December 31, 1998.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
(In thousands) Available for sale Held to maturity
------------------------------ -------------------------------
Amortized Fair Amortized Fair
cost value cost value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 8,366 $ 8,643 $ 2,993 $ 3,030
Due from one year to five years 23,790 24,687 19,416 19,327
Due from five to ten years 14,145 14,440 31,347 31,371
Due after ten years 434,236 433,464 10,059 10,305
--------- --------- -------- --------
$ 480,537 $ 481,234 $ 63,815 $ 64,033
========= ========= ======== ========
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Due to prepayments of the underlying loans collateralizing mortgage-backed
securities, the actual maturities of the securities are expected to be
substantially less than the scheduled maturities.
As a member of the FHLB system, the Bank is required to meet certain minimum
levels of liquid assets, which are subject to change from time to time. The
Company's liquidity fluctuates with deposit flows, funding requirements for
loans and other assets and the relative returns between liquid investments and
various loan products.
The Board of Directors has established an investment policy, which provides for
priorities for the Company's investments with respect to the safety of the
principal amount, liquidity, generation of income, management of interest rate
risk and capital appreciation. The policy permits investment in various types of
liquid assets including, among others, U.S. Treasury and federal agency
securities, municipal obligations, investment grade corporate bonds, and federal
funds.
SOURCES OF FUNDS
- ----------------
GENERAL. The Company's primary sources of funds for its lending and investment
activities are deposits, principal and interest payments on loans and
mortgage-backed securities, interest on securities and interest-bearing
deposits, advances from the FHLB of Pittsburgh and reverse repurchase agreement
borrowings.
DEPOSITS. The Company offers a wide variety of deposit accounts with a range of
interest rates and terms. The primary types of deposit accounts are regular
savings, checking and money market accounts and certificate accounts. The
primary source of these deposits is the market area in which the Bank's offices
are located. The Company typically relies on customer service, advertising and
existing relationships with customers to attract and retain deposits. Deposit
flows are significantly influenced by the general state of the economy, general
market interest rates and the effects of competition. The Company typically pays
competitive interest rates within its market area but does not seek to match the
highest rates paid by competing institutions in its primary market area.
The following table sets forth the distribution of the Company's deposits by
type as of December 31:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) 1998 1997 1996
------------------------- ------------------------- -------------------------
Amount % Amount % Amount %
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing deposits $ 6,002 1.4% $ 4,675 1.2% $ 5,082 1.5%
Interest-bearing demand deposits 156,994 37.1% 150,994 37.8% 137,807 41.4%
Time deposits 260,055 61.5% 243,899 61.0% 190,000 57.1%
---------- ------- ---------- ------- ---------- -------
$ 423,051 100.0% $ 399,568 100.0% $ 332,889 100.0%
========== ======= ========== ======= ========== =======
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company had a total of $19.8 million, $24.1 million and $17.5 million in
jumbo certificates of $100,000 or more as of December 31, 1998, 1997 and 1996,
respectively.
12
<PAGE>
The following table sets forth, by various rate categories, the amount of time
deposits outstanding as of December 31, 1998 which mature in the periods
presented:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
(In thousands) 1 to 12 More than 1 More than 2 After 3
Range of Rates months to 2 years to 3 years years Total
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2.50% to 4.49% $ 41,140 $ 2 $ 520 $ 2 $ 41,664
4.50% to 6.49% 101,679 70,859 13,293 21,040 206,871
6.50% to 8.49% 1,213 1,984 4,625 2,499 10,321
8.50% to 10.49% 1,194 - - - 1,194
10.50% to 12.49% 5 - - - 5
---------- --------- --------- --------- ----------
$ 145,231 $ 72,845 $ 18,438 $ 23,541 $ 260,055
========== ========= ========= ========= ==========
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table sets forth, by various rate categories, the amount of time
deposit accounts outstanding as of December 31:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
(In thousands)
Range of Rates 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2.50% to 4.49% $ 41,664 $ 11,376 $ 1,492
4.50% to 6.49% 206,871 211,695 170,129
6.50% to 8.49% 10,321 18,658 14,767
8.50% to 10.49% 1,194 2,067 3,519
10.50% to 12.49% 5 103 93
---------- ---------- ----------
$ 260,055 $ 243,899 $ 190,000
========== ========== ==========
- -----------------------------------------------------------------------------------------------------------
</TABLE>
As of December 31, 1998, the Company had jumbo certificates in amounts of
$100,000 or more maturing as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
(In thousands) Amount
- ---------------------------------------------------------------------------------------
<S> <C>
Three months or less $ 6,016
More than three through six months 4,089
More than six through twelve months 4,617
More than twelve months 5,116
---------
$ 19,838
=========
- ---------------------------------------------------------------------------------------
</TABLE>
The following table sets forth the net deposit flows during the year ended
December 31:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
(In thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase (decrease) before interest credited and acquisition $ 5,683 $ (3,829) $ (20,089)
Deposits assumed in connection with acquisition of Troy Hill - 53,783 -
Interest credited 17,800 16,725 14,484
--------- --------- ----------
Net deposit increase (decrease) $ 23,483 $ 66,679 $ (5,605)
========= ========= ==========
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
BORROWINGS. While deposits are the primary source of funds for the Company's
lending and investment activities and general business purposes, the Company,
also borrows funds from the FHLB of Pittsburgh and through reverse repurchase
agreements with third parties. In addition, the Company participates as an
authorized depository for treasury tax and loan accounts on behalf of the
Federal Reserve Bank of Cleveland (FRB of Cleveland). Advances from the FHLB of
Pittsburgh are secured by the Company's stock in the FHLB, a portion of its
first mortgage loans and certain investment securities. The FHLB has a variety
of different advance programs, each with different interest rates, provisions,
maximum sizes and maturities. As of December 31, 1998, the Company had
outstanding advances with the FHLB of $306.0 million. See also "Regulation -
Regulation of the Bank - Federal Home Loan Bank System".
13
<PAGE>
The Company has entered into sales of securities under agreements to repurchase
(reverse repurchase agreements). Fixed coupon reverse repurchase agreements are
treated as financings and the obligations to repurchase securities sold are
reflected as a liability of the Company. The dollar amount of securities
underlying the agreements remains as an asset of the Company. The securities
underlying the agreements were delivered to the FHLB (who holds the majority of
the Company's securities in safekeeping) or the respective independent third
party brokerage firm who arranged the transaction.
The following table sets forth the Company's borrowing as of December 31:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
(In thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FHLB advances $ 305,965 $ 355,051 $ 295,522
Reverse repurchase agreements 150,360 55,800 13,450
Treasury tax and loan note payable 30 173 223
--------- --------- ---------
$ 456,355 $ 411,024 $ 309,195
========= ========= =========
- -----------------------------------------------------------------------------------------------
</TABLE>
The following table presents certain information regarding aggregate short-term
(maturities within one year) borrowings of the Company as of and for the years
ended December 31:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding for the year $ 141,321 $ 203,890 $ 162,894
Maximum amount outstanding at any month end
during the year 206,044 252,899 160,941
Balance outstanding at year end 153,944 214,986 158,335
Weighted average interest rate during the year 5.98% 6.08% 6.10%
Weighted average interest rate at year end 5.97% 6.05% 6.17%
Reverse repurchase agreements:
Average balance outstanding for the year $ 21,528 $ 14,336 $ 13,112
Maximum amount outstanding at any month end
during the year 23,805 14,855 14,000
Balance outstanding at year end 23,560 13,400 13,450
Weighted average interest rate during the year 5.53% 5.89% 5.50%
Weighted average interest rate at year end 5.16% 5.90% 5.58%
Treasury tax and loan note:
Average balance outstanding for the year $ 109 $ 125 $ 4
Maximum amount outstanding at any month end
during the year 140 173 223
Balance outstanding at year end 77 173 223
Weighted average interest rate during the year 5.33% 5.30% 3.34%
Weighted average interest rate at year end 4.69% 5.31% 5.18%
Total short term borrowings:
Average balance outstanding for the year $ 162,958 $ 218,351 $ 176,010
Maximum amount outstanding at any month end
during the year 229,989 267,927 175,164
Balance outstanding at year end 177,581 228,559 172,008
Weighted average interest rate during the year 5.92% 6.07% 6.06%
Weighted average interest rate at year end 5.86% 6.04% 6.12%
- -----------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
TRUST PREFERRED SECURITIES. On December 9, 1997, the Trust, a statutory business
trust established under Delaware law that is a subsidiary of the Company, issued
$25.3 million, 8.625% Trust Preferred Securities (Preferred Securities) with a
stated value and liquidation preference of $10 per share. The Trust's
obligations under the Preferred Securities issued are fully and unconditionally
guaranteed by the Company.
The proceeds from the sale of the Preferred Securities were utilized by the
Trust to invest in $25.3 million of 8.625% Junior Subordinated Debentures (the
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. 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 31, 2027, on or after
December 31, 2002, at 100% of the stated 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 December 7, 1997, the Company may redeem in whole, but not in part, the
Subordinated Debt prior to December 31, 2027.
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.
SUBSIDIARIES
- ------------
The Bank is permitted by current OTS regulations to invest an amount up to 2% of
its respective assets in stock, paid-in surplus and secured and unsecured loans
in service corporations. The Bank may invest an additional 1% of its assets when
the additional funds are utilized for community or inner-city purposes. In
addition, federally chartered savings institutions under certain circumstances
also may make conforming loans to service corporations in which the lender owns
or holds more than 10% of the capital stock in an aggregate amount of up to 50%
of regulatory capital. Savings institutions meeting these requirements also may
make, subject to the loans-to-one borrower limitations, an unlimited amount of
conforming loans to service corporations in which the lender does not own or
hold more than 10% of the capital stock of certain other corporations meeting
specified requirements.
At December 31, 1998, ESB was authorized under the current regulations to have a
maximum investment of $18.7 million in service corporations, exclusive of the
additional 1% of assets, investment permitted for community or inner-city
purposes but inclusive of the ability to make conforming loans to its
subsidiaries. On that date, ESB had a $661,000 investment in AMSCO, Inc.
(AMSCO), its wholly owned service corporation.
AMSCO was incorporated in 1974 as a wholly-owned subsidiary of ESB to engage in
real estate development, property management and condominium conversions,
independently or in conjunction with joint ventures. As of December 31, 1998
AMSCO had total assets, consisting primarily of investments in three joint
ventures, of $1.9 million.
The first joint venture, ESB Bank Building Associates, consists of a 99%
interest in a partnership with a businessman in Wexford, PA to develop a parcel
of property and construct a commercial office building to be partially utilized
as a branch office and loan production office for ESB. ESB is providing
financing for the project. As of December 31, 1998, AMSCO had a $429,000
investment in ESB Bank Building Associates.
The second joint venture, McCormick Place, consists of a 40% interest in a
partnership with two local developers. McCormick Place purchased approximately 9
acres of undeveloped land in Moon Township, Allegheny County, PA in April 1998
and developed the land into a 12 lot subdivision for the purpose of building
single-family residential dwellings. ESB is providing financing for the project.
As of December 31, 1998, 7 of the 12 lots remain unsold. On that date, AMSCO had
a $43,000 investment in McCormick Place.
15
<PAGE>
The third joint venture, Madison Woods, consists of a 40% interest in a
partnership with two local developers. Madison Woods purchased approximately 57
acres of undeveloped land in Moon Township, Allegheny County, PA in October 1998
for the purpose of development and building of single-family residential
dwellings. ESB is providing financing for the project. As of December 31, 1998,
AMSCO had a $26,000 investment in Madison Woods.
A savings institution is required to deduct the amount of investment in, and
extensions of credit to, a subsidiary engaged in activities not permissible for
national banks. Because the acquisition and development of real estate is not a
permissible activity for national banks, the investments in and loans to any
subsidiary of the Bank which are engaged in such activities are subject to
exclusion from their respective regulatory capital calculation. See "Regulation
- - Regulation of the Bank - Regulatory Capital Requirements".
REGULATION
Set forth below is a brief description of certain laws and regulations, which
relate to the regulation of the Company and the Bank. The description of these
laws and regulations, as well as descriptions of laws and regulations contained
elsewhere herein does not purport to be complete and is qualified in its
entirety by reference to applicable laws and regulations.
REGULATION OF THE COMPANY
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GENERAL. The Company is a registered savings and loan holding company pursuant
to the Home Owners' Loan Act, as amended (HOLA). As such, the Company is subject
to OTS regulations, examinations, supervision and reporting requirements. As a
subsidiary of a savings and loan holding company, ESB is subject to certain
restrictions in its dealings with the Company and affiliates thereof.
ACTIVITIES RESTRICTIONS. There are generally no restrictions on the activities
of a savings and loan holding company, which holds only one subsidiary savings
association. However, if the Director of the OTS determines that there is
reasonable cause to believe that the continuation by a savings and loan holding
company of an activity constitutes a serious risk to the financial safety,
soundness or stability of its subsidiary savings association, the Director may
impose such restrictions as deemed necessary to address such risk, including
limiting (i) payment of dividends by the savings association; (ii) transactions
between the savings association and its affiliates; and (iii) any activities of
the savings association that might create a serious risk that the liabilities of
the holding company and its affiliates may be imposed on the saving association.
Notwithstanding the above rules as to permissible business activities of unitary
savings and loan holding companies, if the savings association subsidiary of
such a holding company fails to meet a qualified thrift lender (QTL) test, then
such unitary holding company also shall become subject to the activities
restrictions applicable to multiple savings and loan holding companies and,
unless the savings association requalifies as a QTL within one year thereafter,
shall register as, and become subject to the restrictions applicable to, a bank
holding company. See "Regulation - Regulation of the Bank - Qualified Thrift
Lender Test".
If the Company were to acquire control of another savings institution, other
than through merger or other business combination with the Bank, the Company
would thereupon become a multiple savings and loan holding company. Except where
such acquisition is pursuant to the authority to approve emergency thrift
acquisitions and where each subsidiary savings institution meets the QTL test,
as set forth below, the activities of the Company and any of its subsidiaries
(other than the Bank or other subsidiary savings institutions) would thereafter
be subject to further restrictions. Among other things, no multiple savings and
loan holding company or subsidiary thereof which is not a savings association
shall commence or continue for a limited period of time after becoming a
multiple savings and loan holding company or subsidiary thereof any business
activity, upon prior notice to, and non-objection by the OTS, other than: (i)
furnishing or performing management services for a subsidiary savings
association; (ii) conducting an insurance agency or escrow business; (iii)
holding, managing, or liquidating assets owned by or acquired from a subsidiary
savings association; (iv) holding or managing properties used or occupied by a
subsidiary savings association; (v) acting as trustee under deeds of trust; (vi)
those activities authorized by regulation as of March 5, 1987 to be engaged in
by multiple savings and loan holding companies; or (vii) unless the Director of
the OTS by regulation prohibits or limits such activities for savings and loan
holding companies, those activities authorized by the Federal Reserve Board as
permissible for bank holding companies. Those activities described in (vii)
above also must be approved by the Director of the OTS prior to being engaged in
by a multiple savings and loan holding company.
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The HOLA requires every savings association subsidiary of a savings and loan
holding company to give the OTS at least 30 days' advance notice of any proposed
dividends to be made on its guarantee, permanent or other non-withdrawable
stock, or else such dividend will be invalid. See "--Regulation of the
Bank--Restrictions on Capital Distributions."
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. Transactions between savings
associations and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of a savings association is any company or
entity which controls, is controlled by or is under common control with the
savings association. In a holding company context, the parent holding company of
a savings association (such as the Company) and any companies which are
controlled by such parent holding company are affiliates of the savings
association. Generally, Sections 23A and 23B (i) limit the extent to which the
savings association or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such association's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus and
(ii) require that all transactions be on terms substantially the same, or at
least favorable, to the association or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar other types of
transactions. In addition to the restrictions imposed by Sections 23A and 23B,
no savings association may (i) loan or otherwise extend credit to an affiliate,
except for any affiliate which engages only in activities which are permissible
for bank holding companies, or (ii) purchase or invest in any stocks, bonds,
debentures, notes or similar obligations of any affiliate, except for affiliates
which are subsidiaries of the savings association.
In addition, Section 22(g) and (h) of the Federal Reserve Act places
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer and
to a greater than 10% stockholder of a savings institution ("a principal
stockholder"), and certain affiliated interests of either, may not exceed,
together with all other outstanding loans to such person and affiliated
interests, the savings institution's loans to one borrower limit (generally
equal to 15% of the institution's unimpaired capital and surplus). Section 22(h)
also requires that loans to directors, executive officers and principal
stockholders be made on terms substantially the same as offered in comparable
transactions to other persons unless the loans are made pursuant to a benefit or
compensation program that (i) is widely available to employees of the
institution and (ii) does not give preference to any director, executive officer
or principal stockholder, or certain affiliated interests of either, over other
employees of the savings institution. Section 22(h) also requires prior board
approval for certain loans. In addition, the aggregate amount of extensions of
credit by a savings institution to all insiders cannot exceed the institution's
unimpaired capital and surplus. Furthermore, Section 22(g) places additional
restrictions on loans to executive officers. At December 31, 1998, the Bank was
in compliance with the above restrictions.
RESTRICTIONS ON ACQUISITIONS. Except under limited circumstances, savings and
loan holding companies are prohibited from acquiring, without prior approval of
the Director of the OTS, (i) control of any other savings association or savings
and loan holding company or substantially all the assets thereof or (ii) more
than 5% of the voting shares of a savings association or holding company thereof
which is not a subsidiary. Except with the prior approval of the Director of the
OTS, no director or officer of a savings and loan holding company or person
owning or controlling by proxy or otherwise more than 25% of such company's
stock, may acquire control of any savings association, other than a subsidiary
savings association, or of any other savings and loan holding company.
The Director of the OTS may only approve acquisitions resulting in the formation
of a multiple savings and loan holding company which controls savings
associations in more than one state if (i) the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office located in the state of the association to be acquired as of March 5,
1987; (ii) the acquirer is authorized to acquire control of the savings
association pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act (FDIA); or (iii) the statutes of the state in which the
association to be acquired is located specifically permit institutions to be
acquired by the state-chartered banks or savings and loan holding companies
located in the state where the acquiring entity is located (or by a holding
company that controls such state-chartered savings associations).
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The Federal Reserve Board may approve an application by a bank holding company
to acquire control of a savings association. A bank holding company that
controls a savings association may merge or consolidate the assets and
liabilities of the savings association with, or transfer assets and liabilities
to, any subsidiary bank which is a member of the Bank Insurance Fund with the
approval of the appropriate federal banking agency and the Federal Reserve
Board. As a result of these provisions, there have been a number of acquisitions
of savings associations by bank holding companies in recent years.
REGULATION OF THE BANK
- ----------------------
GENERAL. The Bank is a federally chartered savings bank, the deposits of which
are federally insured and backed by the full faith and credit of the U.S.
Government. Accordingly, the Bank is subject to broad federal regulation and
oversight by the OTS and the FDIC extending to all aspects of its operations.
The Bank is a member of the FHLB of Pittsburgh and is subject to certain limited
regulation by the Federal Reserve Board.
FEDERAL SAVINGS ASSOCIATION REGULATION. The OTS has extensive regulatory
authority over the operations of savings associations. As part of this
authority, savings associations are required to file periodic reports with the
OTS and are subject to periodic examinations by the OTS. Such regulation and
supervision is primarily intended for the protection of depositors.
The investment and lending authority of the Bank is prescribed by federal laws
and regulations, and is prohibited from engaging in any activities not permitted
by such laws and regulations. These laws and regulations generally are
applicable to all federally chartered savings associations and many also apply
to state-chartered savings associations.
There are limitations on the aggregate amount of loans that a savings
association could make to any one borrower, including related entities. For
further information about the Company's regulatory lending limits, see "Business
- - Lending Activities - Loan Underwriting Policies".
OTS enforcement authority over all savings associations and their holding
companies includes, among other things, the ability to assess civil money
penalties, to issue cease and desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inaction may provide the basis for enforcement action, including
misleading or untimely reports filed with the OTS.
INSURANCE OF ACCOUNTS. The deposits of the Bank are insured up to $100,000 per
insured member (as defined by law and regulation) by the SAIF, administered by
the FDIC and are backed by the full faith and credit of the U.S. Government. As
insurer, the FDIC is authorized to conduct examinations of, and to require
reporting by, FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious threat to the FDIC. The FDIC also has the authority to
initiate enforcement actions against savings associations, after giving the OTS
an opportunity to take such action.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances, which could result
in termination of the Bank's deposit insurance.
On September 30, 1996, President Clinton signed into law legislation which
eliminated the premium differential between SAIF-insured institutions and
BIF-insured institutions by recapitalizing the SAIF's reserves to the required
ratio. The legislation required all SAIF member institutions to pay a one-time
special assessment to recapitalize the SAIF, with the aggregate amount to be
sufficient to bring the reserve ratio in the SAIF to 1.25% of insured deposits.
The legislation also provided for the merger of the BIF and the SAIF, with such
merger being conditioned upon the prior elimination of the thrift charter.
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Implementing FDIC regulations imposed a one-time special assessment equal to
65.7 basis points for all SAIF-assessable deposits as of March 31, 1995, which
was accrued as an expense on September 30, 1996. The Company's one-time special
assessment amounted to $2.2 million ($1.3 million net of tax) or $.31 per
diluted share. The payment of such special assessment had the effect of
immediately reducing the Company's capital by such amount.
In the fourth quarter of 1996, the FDIC lowered the assessment rates for SAIF
members to reduce the disparity in the assessment rates paid by BIF and SAIF
members. Beginning October 1, 1996, effective SAIF rates generally range from
zero basis points to 27 basis points, except that during the fourth quarter of
1996, the rates for SAIF members ranged from 18 basis points to 27 basis points
in order to include assessments paid to the Financing Corporation (FICO). From
1997 through 1999, SAIF members will pay 6.5 basis points to fund the FICO,
while BIF member institutions will pay approximately 1.3 basis points. The
Company's insurance premiums, which had amounted to 23 basis points, were thus
reduced to 6.5 basis points effective January 1, 1997.
THRIFT CHARTER. Congress has been considering legislation in various forms that
would require thrifts, such as the Bank, to convert their charters to national
or state bank charters. Recent legislation required the Treasury Department to
prepare for Congress a comprehensive study on development of a common charter
for federal savings associations and commercial banks; and, in the event that
the thrift charter was eliminated by January 1, 1999, would require the merger
of the BIF and the SAIF into a single Deposit Insurance Fund on that date. The
Company cannot determine whether, or in what form, such legislation may
eventually be enacted and there can be no assurance that any legislation that is
enacted would not adversely affect the Bank.
LIQUIDITY REQUIREMENTS. The Bank is required to maintain an average daily
balance of liquid assets equal to at least 4% of the sum of its respective
average daily balance of net withdrawable deposit accounts and borrowings
payable in one year or less. This liquidity requirement may be changed from time
to time by the OTS to any amount within the range of 4.0% to 10.0% depending
upon economic conditions and savings flows of all savings banks and is currently
4.0%.
Liquid assets for purposes of this ratio include specified short-term assets
(e.g., cash, certain time deposits, certain banker's acceptances and short-term
U.S. Government obligations), and long-term assets (e.g., U.S. Government
obligations of more than one and less than five years and state agency
obligations with a minimum term of 18 months). The OTS designates as liquid
assets certain mortgage-related securities with less than one year to maturity.
Monetary penalties may be imposed for failure to meet liquidity requirements. As
of December 31, 1998, ESB's liquidity ratio was in compliance with regulatory
requirements at 19.4%. The sources of liquidity and capital resources discussed
above are believed by management to be sufficient to fund outstanding loan
commitments and meet other obligations. The Company has consistently maintained
liquidity levels in excess of the minimum requirements.
REGULATORY CAPITAL REQUIREMENTS. OTS capital regulations require savings
institutions to satisfy minimum capital standards: risk-based capital
requirements, a leverage requirement and a tangible capital requirement. Savings
institutions must meet each of these standards in order to be deemed in
compliance with OTS capital requirements. In addition, the OTS may require a
savings institution to maintain capital above the minimum capital levels.
All savings institutions are required to meet a minimum risk-based capital
requirement of total capital (core capital plus supplementary capital) equal to
8% of risk-weighted assets (which includes the credit risk equivalents of
certain off-balance sheet items). In calculating total capital for purposes of
the risk-based requirement, supplementary capital may not exceed 100% of core
capital. Under the leverage requirement, a savings institution is required to
maintain core capital equal to a minimum of 3% of adjusted total assets. (In
addition, under the prompt corrective action provisions of the OTS regulations,
all but the most highly-rated institutions must maintain a minimum leverage
ratio of 4% in order to be adequately capitalized. See"--Prompt Corrective
Action"). A savings institution is also required to maintain tangible capital in
an amount at least equal to 1.5% of its adjusted total assets.
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As of December 31, 1998, ESB was in compliance with all regulatory capital
requirements with tangible, core and risk-based capital ratios of 6.9%, 6.9% and
17.6%, respectively.
The foregoing capital requirements are viewed as minimum standards by the OTS,
and most institutions are expected to maintain capital levels well above the
minimum. In addition, the OTS regulations provide that minimum capital levels
higher than those provided in the regulations may be established by the OTS for
individual savings institutions, upon a determination that the savings
institution's capital is or may become inadequate in view of its circumstances.
The OTS regulations provide that higher individual minimum regulatory capital
requirements may be appropriate in circumstances where, among others: (1) a
savings institution has a high degree of exposure to interest rate risk,
prepayment risk, credit risk, concentration of credit risk, certain risks
arising from nontraditional activities, or similar risks or a high proportion of
off-balance sheet risk; (2) a savings institution is growing, either internally
or through acquisitions, at such a rate that supervisory problems are presented
that are not dealt with adequately by OTS regulations; and (3) a savings
institution may be adversely affected by activities or condition of its holding
company, affiliates, subsidiaries or other persons or savings institutions with
which it has significant business relationships. The Bank is not subject to any
such individual minimum regulatory capital requirement.
In March 1999, the federal banking agencies amended their risk-based and
leverage capital standards to make uniform their regulations. In particular, the
agencies made risk-based capital treatments for construction loans on presold
residential properties, real estate loans secured by junior liens on 1 to
4-family residential properties, and investments in mutual funds consistent
among the agencies, and simplified and made uniform the agencies' Tier 1
leverage capital standards. The most highly-rated institutions must maintain a
minimum Tier1 leverage ratio of 3.0 percent, with all other institutions
required to maintain a minimum leverage ratio of 4.0 percent. The OTS
regulations now state that higher-than-minimum capital levels may be required if
warranted, and that institutions should maintain capital levels consistent with
their risk exposures.
A savings institution which is not in capital compliance or which is otherwise
deemed to require more than normal supervision is subject to restrictions on its
ability to grow pursuant to Regulatory Bulletin 3a-1. In addition, a provision
of HOLA generally provides that the Director of OTS must restrict the asset
growth of savings institutions not in regulatory compliance, subject to a
limited exception for growth not exceeding interest credited.
A savings institution which is not in capital compliance is also automatically
subject to the following: (i) new directors and senior executive officers and
employment contracts for senior executive officers must be approved by the OTS
in advance; (ii) the savings institution may not accept or renew any brokered
deposits; (iii) the savings institution is subject to higher OTS assessments as
a capital-deficient institution; and (iv) the savings institution may not make
any capital distributions without prior written approval.
Any savings association that fails any of the capital requirements is subject to
possible enforcement actions by the OTS or the FDIC. Such actions could include
a capital directive, a cease and desist order, civil money penalties, the
establishment of restrictions on an association's operations, termination of
federal deposit insurance and the appointment of a conservator or receiver.
Certain actions are required by law, as discussed below. The OTS's capital
regulation provides that such actions, through enforcement proceedings or
otherwise, could require one or more of a variety of corrective actions.
PROMPT CORRECTIVE ACTION. Under Section 38 of the FDIA as added by the Federal
Deposit Insurance Corporation Improvement Act (FDICIA), each federal banking
agency is required to implement a system of prompt corrective action for
institutions which it regulates. In September 1992, the federal banking agencies
(including the OTS) adopted substantially similar regulations which are intended
to implement Section 38 of the FDIA. These regulations became effective December
19, 1992. Under the regulations, a savings association shall be deemed to be (i)
"well capitalized" if it has total risk-based capital of 10.0% or more, has a
Tier 1 risk-based ratio of 6.0% or more, has a Tier 1 leverage capital ratio of
5.0% or more and is not subject to any order or final capital directive to meet
and maintain a specific capital level for any capital measure, (ii) "adequately
capitalized" if it has a total risk-based capital ratio of 8.0% or more, a Tier
1 risk-based capital ratio of 4.0% or more and a Tier 1 leverage capital ratio
of 4.0% or more (3.0% under certain circumstances) and does not meet the
definition of "well capitalized," (iii) "undercapitalized" if it has a total
risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital
ratio that is less than 4.0% or a Tier 1 leverage capital ratio that is less
than 4.0% (3.0% under certain circumstances), (iv) "significantly
undercapitalized" if it has a total risk-based ratio that is
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less than 6.0%, a Tier 1 risk-based capital ratio that is less than 3.0% or a
Tier 1 leverage capital ratio that is less than 3.0%, and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%. Section 38 of the FDIA and the regulations
promulgated thereunder also specify circumstances under which the OTS may
reclassify a well capitalized savings association as adequately capitalized and
may require an adequately capitalized savings association or an undercapitalized
savings association to comply with supervisory actions as if it were in the next
lower category (except that the OTS may not reclassify a significantly
undercapitalized savings association as critically undercapitalized). At
December 31, 1998, ESB was in the "well capitalized" category.
QUALIFIED THRIFT LENDER TEST. Under Section 2303 of the Economic Growth and
Regulatory Paperwork Reduction Act of 1996, a savings association can comply
with the QTL test by either meeting the QTL test set forth in the HOLA and
implementing regulations or qualifying as a domestic building and loan
association as defined in Section 7701(a)(19) of the Internal Revenue Code of
1986, as amended (Code). The QTL test set forth in the HOLA requires a thrift
institution to maintain 65% of portfolio assets in Qualified Thrift Investments
(QTIs). Portfolio assets are defined as total assets less intangibles, property
used by a savings institution in its business and liquidity investments in an
amount not exceeding 20% of assets. Generally, QTIs are residential housing
related assets. At December 31, 1998, the amount of the Bank's assets which were
invested in QTIs exceeded the percentage required to qualify the Bank under the
QTL test. A savings institution that does not meet the QTL test must either
convert to a bank charter or comply with the following restrictions on its
operations: (i) the institution may not engage in any new activity or make any
new investment, directly or indirectly, unless such activity or investment is
permissible for a national bank; (ii) the branching powers of the institution
shall be restricted to those of a national bank; (iii) the institution shall not
be eligible to obtain any advances from its FHLB; and (iv) payment of dividends
by the institution shall be subject to the rules regarding payment of dividends
by a national bank. Upon the expiration of three years from the date the
institution ceases to be a QTL, it must cease any activity and not retain any
investment not permissible for a national bank and immediately repay any
outstanding FHLB advances (subject to safety and soundness considerations).
RESTRICTIONS ON CAPITAL DISTRIBUTIONS. The OTS regulates capital distributions
by savings banks, which include cash dividends, stock redemptions or
repurchases, cash-out mergers, interest payments on certain convertible debt and
other transactions charged to the capital account of a savings association to
make capital distributions. In January 1999, the OTS amended its capital
distribution regulation to bring such regulations into greater conformity with
the other bank regulatory agencies. Under the regulation, certain savings
associations would not be required to file with the OTS. Specifically, savings
associations that would be well capitalized following a capital distribution
would not be subject to any requirement for notice or application unless the
total amount of all capital distributions, including any proposed capital
distribution, for the applicable calendar year would exceed an amount equal to
the savings association's net income for that year to date plus the savings
association's retained net income for the preceding two years. Because the Bank
is a subsidiary of the Company, the regulation, however, would require the Bank
to provide notice to the OTS of its intent to make a capital distribution,
unless an application is otherwise required. The Bank does not believe that the
regulation will adversely affect its ability to make capital distributions.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB System which
consists of 12 regional FHLBs, with each subject to supervision and regulation
by the Federal Housing Finance Board. The FHLBs provide a central credit
facility primarily for member savings institutions. ESB as a member of the FHLB
of Pittsburgh, is required to acquire and hold shares of capital stock in that
FHLB in an amount equal to at least 1.0% of the aggregate principal amount of
its unpaid residential mortgage loans, home purchase contracts and similar
obligations at the beginning of each year, or 5.0% of its advances (borrowings)
from the FHLB of Pittsburgh, whichever is greater. As of December 31, 1998, ESB
had $18.4 million investment in the stock of the FHLB of Pittsburgh, and was in
compliance with this requirement.
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Advances from the FHLB of Pittsburgh are secured by a member's shares of stock
in the FHLB of Pittsburgh, certain types of mortgages and other assets. Interest
rates charged for advances vary depending upon maturity, the cost of funds to
the FHLB of Pittsburgh and the purpose of the borrowing. As of December 31,
1998, the Company had $306.0 million in borrowings from the FHLB of Pittsburgh
outstanding.
The FHLBs are required to provide funds for the resolution of troubled savings
banks and to contribute to affordable housing programs through direct loans or
interest subsidies on advances targeted for community investment and low- and
moderate-income housing projects. These contributions have adversely affected
the level of FHLB dividends paid and could continue to do so in the future.
These contributions also could have an adverse effect on the value of FHLB stock
in the future. For the year ended December 31, 1998, dividends paid by the FHLB
of Pittsburgh to the Company totaled $1.2 million.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all depository
institutions to maintain reserves against their transaction accounts (primarily
NOW and Super NOW checking accounts) and certain non-personal time deposits. At
December 31, 1998, the Bank was in compliance with the applicable requirements.
However, because required reserves must be maintained in the form of vault cash
or a noninterest bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce an institution's earning assets.
BRANCHING BY FEDERAL ASSOCIATIONS. The OTS "Policy Statement on Branching by
Federal Savings Associations" permits interstate branching to the full extent
permitted by statute (which is essentially unlimited).
Generally, federal law prohibits federal thrifts from establishing, retaining or
operating a branch outside the state in which the federal association has its
home office unless the association meets the Internal Revenue's domestic
building and loan test (generally, 60% of a thrift's assets must be
housing-related) (IRS Test). The IRS Test requirement does not apply if: (i) the
branch(es) result(s) from an emergency acquisition of a troubled thrift
(however, if the troubled association is acquired by a bank holding company,
does not have its home office in the state of the bank holding company bank
subsidiary and does not quality under the IRS Test, its branching is limited to
the branching laws for state-chartered banks in the state where the thrift is
located); (ii) the law of the state where the branch would be located would
permit the branch to be established if the federal association were chartered by
the state in which its home office is located; or (iii) the branch was operated
lawfully as a branch under state law prior to the association's conversion to a
federal charter.
The OTS will also evaluate a branching applicant's record of compliance with the
Community Reinvestment Act of 1977, as amended (CRA). A poor CRA record may be
the basis for denial of a branching application.
SAFETY AND SOUNDNESS. FDICIA requires each federal banking regulatory agency to
prescribe, by regulation or guideline, standards for all insured depository
institutions and depository institution holding companies relating to (i)
internal controls, information systems and audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v)
asset growth; (vi) compensation, fees and benefits; and (vii) such other
operational and managerial standards as the agency determines to be appropriate.
The compensation standards would prohibit employment contracts or other
compensatory arrangements that provide excess compensation, fees or benefits or
could lead to material financial loss. In addition, each federal banking
regulatory agency must prescribe, by regulation or guideline, standards relating
to asset quality, earnings and stock valuation as the agency determines to be
appropriate. Effective August 9, 1995, the federal banking agencies, including
the OTS, implemented final rules and guidelines concerning standards for safety
and soundness required to be prescribed by regulation pursuant to Section 39 of
the FDIA. In general, the standards relate to (1) operational and managerial
matters; (2) asset quality and earnings; and (3) compensation. The operational
and managerial standards cover (a) internal controls and information systems,
(b) internal audit systems, (c) loan documentation, (d) credit underwriting, (e)
interest rate exposure, (f) asset growth, and (g) compensation, fees and
benefits. Under the asset quality and earnings standards, the Bank is required
to establish and maintain systems to (i) identify problem assets and prevent
deterioration in those assets, and (ii) evaluate and monitor earnings and ensure
that earnings are sufficient to maintain adequate capital reserves. Finally, the
compensation standard states that compensation will be considered excessive if
it is unreasonable or disproportionate to the services actually performed by the
individual being compensated. Effective October 1, 1996, the federal banking
agencies also adopted asset quality and earnings standards. If a savings
institution fails to meet any of the standards promulgated by regulation, then
such institution will be required to submit a plan within 30 days to the OTS
specifying the steps it will take to correct the deficiency. In the event that a
savings institution fails to submit or fails in any material respect to
implement a compliance plan within the time allowed by the federal banking
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agency, Section 39 of the FDIA provides that the OTS must order the institution
to correct the deficiency and may (1) restrict asset growth; (2) require the
savings institution to increase its ratio of tangible equity to assets; (3)
restrict the rates of interest that the savings institution may pay; or (4) take
any other action that would better carry out the purpose of prompt corrective
action. The Bank believes that it has been and will continue to be in compliance
with each of the standards as they have been adopted by the OTS.
FEDERAL AND STATE TAXATION
GENERAL. The Company and the Bank are subject to federal income taxation in the
same general manner as other corporations with some exceptions, including
particularly the reserve for bad debts discussed below. The following discussion
of federal taxation is intended to only summarize certain pertinent federal
income tax matters and is not a comprehensive description of the tax rules
applicable to the thrifts.
METHOD OF ACCOUNTING. For federal income tax purposes, the Company currently
reports its income and expenses on the accrual method of accounting and uses a
tax year ending December 31 for filing its federal income tax returns.
BAD DEBT RESERVES. Prior to 1996, the Bank was permitted under the Code to
deduct an annual addition to a reserve for bad debts in determining taxable
income, subject to certain limitations. Subsequent to 1995, the Bank's bad debt
deduction is based on actual net charge-offs. Bad debt deductions for income tax
purposes are included in taxable income of later years only if the Bank's base
year bad debt reserve is used subsequently for purposes other than to absorb bad
debt losses. Because the Bank does not intend to use the reserve for purposes
other than to absorb losses, no deferred income taxes have been provided prior
to 1987. Retained earnings at December 31, 1997 (the most recent date for which
a tax return has been filed) include approximately $13.9 million representing
such bad debt deductions for which no deferred income taxes have been provided.
DISTRIBUTIONS. If the Bank distributes cash or property to its sole stockholder,
and the distribution is treated as being from its pre-1987 bad debt reserves,
the distribution will cause the Bank to have additional taxable income. A
distribution to stockholders is deemed to have been made from pre-1987 bad debt
reserves to the extent that (a) the distribution exceeds the Banks' accumulated
earnings and profit subsequent to December 31, 1951 or (b) the distribution is a
"non-dividend distribution". A distribution in respect of stock is a
non-dividend distribution to the extent that, for federal income tax purposes,
(i) it is in redemption of shares, (ii) it is pursuant to a liquidation of the
institution, or (iii) in the case of a current distribution, together with all
other such distributions during the taxable year, exceeds the current and
post-1951 accumulated earnings and profits of the Bank. The amount of additional
taxable income created by a non-dividend distribution is an amount that when
reduced by the tax attributable to it is equal to the amount of the
distribution.
MINIMUM TAX. For taxable years beginning after December 31, 1986, the Code
imposes an alternative minimum tax at a rate of 20%. The alternative minimum tax
generally will apply to a base of regular taxable income plus certain tax
preferences (alternative minimum taxable income or AMTI) and will be payable to
the extent such AMTI is in excess of regular income tax. Items of tax preference
that constitute AMTI include (a) tax-exempt interest on newly-issued (generally,
issued on or after August 8, 1986) private activity bonds other than certain
qualified bonds and (b) 75% of the excess (if any) of (i) adjusted current
earnings as defined in the Code, over (ii) AMTI (determined without regard to
this preference and prior to reduction by net operating losses). Net operating
losses can offset no more than 90% of AMTI. Certain payments of alternative
minimum tax may be used as credits against regular tax liabilities in future
years.
NET OPERATING LOSS CARRYOVERS. For the years beginning after August 5, 1997, a
financial institution, like the Bank, may carry back net operating losses to the
preceding two taxable years and forward to the succeeding 20 taxable years. As
of December 31, 1998, the Bank had no net operating loss carryforwards for
federal income tax purposes.
23
<PAGE>
CAPITAL GAINS AND CORPORATE DIVIDENDS-RECEIVED DEDUCTION. The capital gains
income tax which was previously imposed at a rate of 28% on a corporation's net
long-term capital gains was repealed effective December 31, 1986. Consequently,
corporate net capital gains are taxed at a maximum rate of 34% after December
31, 1986. The corporate dividends-received deduction is 80% in the case of
dividends received from corporations with which a corporate recipient does not
file a consolidated tax return and the stock of which the corporate recipient
owns 20% or more, and corporations which own less than 20% of the stock of a
corporation distributing a dividend may deduct only 70% of dividends received or
accrued on their behalf. However, a corporation may deduct 100% of dividends
from a member of the same affiliated group of corporations.
PENNSYLVANIA TAXATION. The Company is subject to the Pennsylvania Corporate Net
Income Tax and Capital Stock and Franchise Tax. The Corporate Net Income Tax
rate is currently 9.99% and is imposed on the Company's unconsolidated taxable
income for federal purposes with certain adjustments. In general, the Capital
Stock Tax is a property tax imposed at a rate of 1.199% of a corporation's
capital stock value, which is determined in accordance with a fixed formula
based on average net income and net worth.
The Bank is subject to tax under the Pennsylvania Mutual Thrift Institutions Tax
Act (MITA), which previously imposes a tax at a rate of 11.5% of a qualified
thrift savings institution's net earnings, determined in accordance with
generally accepted accounting principles, as shown on its books. For fiscal
years beginning in 1983, and thereafter, net operating losses may be carried
forward and allowed as a deduction for three succeeding years. MITA exempts
qualified savings institutions from all other corporate taxes imposed by
Pennsylvania for state tax purposes, and from all local taxes imposed by
political subdivisions thereof, except taxes on real estate and real estate
transfers.
Interest earned on U.S. and Commonwealth of Pennsylvania government obligations
are exempt from MITA income tax.
OTHER MATTERS. The Company and its subsidiaries file a consolidated federal
income tax return. Tax years 1995, 1996 and 1997 are open under the statute of
limitations and subject to review by the Internal Revenue Service.
PERSONNEL
- ---------
As of December 31, 1998, the Company had 125 full-time and 54 part-time
employees, respectively. The employees are not represented by a collective
bargaining unit, and the Company considers its relationship with its employees
to be good.
24
<PAGE>
ITEM 2. PROPERTIES
- -------------------
The following table sets forth certain information with respect to the offices
and real property of the Company as of December 31, 1998.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
OWNED LEASE NET BOOK PERCENT
OR EXPIRATION VALUE OR OF TOTAL
LOCATION LEASED DATE ANNUAL RENT DEPOSITS
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CORPORATE HEADQUARTERS AND ESB MAIN OFFICE:
- ------------------------------------------
Ellwood City Office Owned -- $ 819,000 25.0%
600 Lawrence Avenue, Ellwood City, PA 16117
ESB BRANCH OFFICES:
- -------------------
Aliquippa Office Owned -- $ 131,000 9.7%
2301 Sheffield Road, Aliquippa, PA 15001
Ambridge Office Owned -- $ 92,000 13.4%
506 Merchant Street, Ambridge, PA 15003
Center Township Office Owned -- $ 128,000 2.8%
1207 Brodhead Road, Monaca, PA 15061
Coraopolis Office Owned -- $ 53,000 3.2%
900 Fifth Avenue, Coraopolis, PA 15108
Fox Chapel Office Owned -- $ 280,000 9.0%
1060 Freeport Road, Pittsburgh, PA 15238
Franklin Township Office Owned -- $ 584,000 5.7%
Mercer Road and Mecklem Lane, Ellwood City, PA 16117
New Castle Office Leased 04/30/04 $ 44,000 11.6%
Route 65, New Castle, PA 16101
Troy Hill Office Owned -- $ 454,000 12.2%
1706 Lowrie Street, Pittsburgh, PA 15212
Wexford Office Leased Month to Month $ 8,800 2.0%
11279 Perry Highway, Wexford, PA 15090
Zelienople Office Leased 11/30/07 $ 15,600 5.4%
Route 19, Zelienople, PA 16063
OTHER PROPERTIES:
- ----------------
Drive-through Facility Owned -- $ 73,000 NA
618 Beaver Avenue, Ellwood City, PA 16117
Parking Lot Owned -- $ 22,000 NA
611 Lawrence Avenue, Ellwood City, PA 16117
Findlay Township Property Owned -- $ 259,000 NA
Route 30, Clinton, PA 15026
Wexford Property Owned -- $ 1,401,000 NA
Route 910, Wexford, PA 15090
Building Owned -- $ 147,000 NA
612 Lawrence Avenue, Ellwood City, PA 16117
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
The Company is subject to a number of asserted and unasserted potential legal
claims encountered in the normal course of business. In the opinion of both
management and counsel, there is no present basis to conclude that the
resolution of these claims will have a material adverse impact on the
consolidated financial condition or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
Not applicable.
26
<PAGE>
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------------------------------------------------------------------------------
The information required herein is incorporated by reference from the section
captioned "Stock and Dividend Information" on pages 50 and 51 of the Company's
1998 Annual Report to Stockholders attached hereto as Exhibit 13 (1998 Annual
Report).
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
The information required herein is incorporated by reference from the section
captioned "Selected Consolidated Financial Data" on page 4 of the Company's 1998
Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
The information required herein is incorporated by reference from the section
captioned "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 5 to 20 of the Company's 1998 Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
The information required herein is incorporated by reference from the section
captioned "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Asset and Liability Management" on pages 16 to 18 of the
Company's 1998 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The information required herein is incorporated by reference from pages 21 to 49
of the Company's 1998 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
None.
27
<PAGE>
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
The information required herein is incorporated by reference from the section
captioned "Election of Directors" on pages 4 to 10 of the definitive proxy
statement of the Company (Proxy Statement).
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The information required herein is incorporated by reference from the section
captioned "Executive Compensation" on pages 11 to 20 of the Company's Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The information required herein in incorporated by reference from pages 2, 3 and
5 to 8 of the Company's Proxy Statement.
Management of the Company knows of no arrangements, including any pledge by any
person of securities of the Company, the operation of which may at a subsequent
date result in a change of control of the registrant.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information required herein is incorporated by reference from the subsection
captioned "Executive Compensation - Indebtedness of Management" on pages 19 and
20 of the Company's Proxy Statement.
28
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
(a) DOCUMENTS FILED AS PART OF THIS REPORT
(1) The following financial statements are incorporated by reference
from Item 8 hereof (See Exhibit 13):
Accountant's Report
Consolidated Statements of Financial Condition as of December 31,
1998 and 1997
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
(2) All schedules for which provision is made in the applicable
accounting regulation of the SEC are omitted because of the
absence of conditions under which they are required or because
the required information is included in the Consolidated
Financial Statements and related notes thereto.
(3) (a) The following exhibits are filed as part of this Form 10-K, and
this list includes the Exhibit Index.
No. Exhibits
--- --------
3 (a) Amended and Restated Articles of Incorporation (1)
3 (b) Bylaws(1)
4 Specimen Common Stock Certificate (2)
10(a) Stock Option Plan (2) (5)
10(b) Employee Stock Ownership Plan (2) (5)
10(c) Management Development and Recognition Plan and
Trust Agreement (2) (5)
10(d) Employment Agreement with Charlotte A. Zuschlag
(2) (5)
10(e) 1992 Stock Incentive Plan (3) (5)
10(f) 1997 Stock Option Plan (4) (5)
10(g) Change of Control Agreement among the Company, ESB
and Charles P. Evanoski (Representative of similar
agreements entered into with Frank D. Martz, Todd
F. Palkovich and Robert C. Hilliard) (5)
11 Statement RE Computation of Per Share Earnings
13 1998 Annual Report to Stockholders
22 Subsidiaries of the Registrant - Reference is made
to Item 1. "Business - Subsidiaries" for the
required information.
23 Consent of KPMG LLP
27 Financial Data Schedule
(1) Incorporated by reference from the Current Report
on Form 8-K filed by the Company with the SEC on
March 27, 1991.
(2) Incorporated by reference from the Registration
Statement on Form S-4 (Registration No. 33-39219)
filed by the Company with the SEC on March 1,
1991.
(3) Incorporated by reference from the Annual Report
on Form 10-K filed by the Company with the SEC on
March 29, 1993.
(4) Incorporated by reference from the Annual Report
on Form 10-K filed by the Company with the SEC on
March 30, 1998.
(5) Management contract or compensatory plan or
arrangement.
(b) The Company filed a Form 8-K dated December 16, 1998, to report
the declaration of a cash dividend of $0.09 per common share
payable on January 25, 1999 to stockholders of record at the
close of business on December 31, 1998.
(c) See (a)(3) above for all exhibits filed herewith and the exhibit
index
(d) There are no other financial statements and financial statement
schedules which were excluded from the 1998 Annual Report which
are required to be included herein.
29
<PAGE>
SIGNATURES
- ----------
Pursuant to the requirements of Section 13 or 15(d) 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: March 29, 1999 By: /s/ Charlotte A. Zuschlag
-------------------------------------
Charlotte A. Zuschlag
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By: /s/ Charlotte A. Zuschlag Date: March 29, 1999
-----------------------------------
Charlotte A. Zuschlag
President and Chief Executive Officer, Director
(Principal Executive Officer)
By: /s/ Charles P. Evanoski Date: March 29, 1999
-----------------------------------
Charles P. Evanoski
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
By: /s/ William B. Salsgiver Date: March 29, 1999
-----------------------------------
William B. Salsgiver
Chairman of the Board
By: /s/ Herbert S. Skuba Date: March 29, 1999
-----------------------------------
Herbert S. Skuba
Vice Chairman of the Board of Directors
By: /s/ George William Blank, Jr. Date: March 29, 1999
-----------------------------------
George William Blank, Jr.
Director
By: /s/ Charles Delman Date: March 29, 1999
-----------------------------------
Charles Delman
Director
By: /s/ Lloyd L. Kildoo Date: March 29, 1999
-----------------------------------
Lloyd L. Kildoo
Director
By: /s/ Edmund C. Smith Date: March 29, 1999
-----------------------------------
Edmund C. Smith
Director
By: /s/ Edwin A. Thaner Date: March 29, 1999
-----------------------------------
Edwin A. Thaner
Director
30
<PAGE>
EXHIBIT 10(g)
AGREEMENT AMONG
ESB FINANCIAL CORPORATION
AND ESB BANK, F.S.B.
AND CHARLES P. EVANOSKI
AGREEMENT, dated this 1st day of December 1998, among ESB Financial
Corporation (the "Corporation"), and ESB Bank, F.S.B., a Federally chartered
savings and loan association and a wholly owned subsidiary of the Corporation
and Charles P. Evanoski (the "Executive"). Hereinafter, any reference to the
"Employers" shall mean both the Corporation and ESB Bank and any reference to an
"Employer" shall mean either the Corporation or ESB Bank.
WITNESSETH:
WHEREAS, the Executive is presently an officer of the Employers; and
WHEREAS, the Employers desire to be ensured of the Executive's continued
active participation in the business of the Employers; and
WHEREAS, in order to induce the Executive to remain in the employ of the
Employers and in consideration of the Executive's agreeing to remain in the
employ of the Employers, the parties desire to specify the severance benefits
which shall be due the Executive in the event that his employment with the
Employers is terminated under specified circumstances;
NOW THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the parties hereby agree as follows:
1. DEFINITIONS. The following words and terms shall have the meanings set
forth below for the purposes of this Agreement:
(a) ANNUAL COMPENSATION. The Executive's "Annual Compensation" for
purposes of this Agreement shall be deemed to mean the highest level of base
salary and cash bonus paid to the Executive by the Employers or any subsidiary
thereof during any of the three calendar years ending prior to the calendar year
in which the Date of Termination occurs.
(b) CAUSE. Termination by the Employers of the Executive's employment for
"Cause" shall mean termination because of personal dishonesty, incompetence,
willful misconduct, breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of any law, rule
or regulation (other than traffic violations or similar offenses) or final
cease-and-desist order. For purposes of this paragraph, no act or failure to act
on the Executive's part shall be considered "willful" unless done, or omitted to
be done, by the Executive not in good faith and without reasonable belief that
the Executive's action or omission was in the best interest of the Employers.
<PAGE>
(c) CHANGE IN CONTROL OF THE EMPLOYER. "Change in Control of the Employer
shall mean a change in control of a nature that would be required to be reported
in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the
Securities Exchange Act of 1934, as amended ("Exchange Act"), or any successor
thereto, whether or not any security of the Employer is registered under
Exchange Act; provided that, without limitation, such a change in control shall
be deemed to have occurred if (i) any "person" (as such term is used in Section
13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Employer representing 25% or more of the combined voting power
of the Employer's then outstanding securities; or (ii) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the Board of Directors of the Employer cease for any reason to constitute at
least a majority thereof unless the election, or the nomination for election by
stockholders, of each new director was approved by a vote of at least two-thirds
of the directors then still in office who were directors at the beginning of the
period.
(d) CODE. Code shall mean the Internal Revenue Code of 1986, as amended.
(e) DATE OF TERMINATION. "Date of Termination" shall mean (i) if the
Executive's employment is terminated for Cause or for Disability, the date
specified in the Notice of Termination, and (ii) if the Executive's employment
is terminated for any other reason, the date on which a Notice of Termination is
given or as specified in such Notice.
(f) DISABILITY. Termination by the Employer of the Executive's employment
based on "Disability" shall mean termination because of any physical or mental
impairment which qualifies the Executive for disability benefits under the
applicable long-term disability plan maintained by the Employers or any
subsidiary or, if no such plan applies, which would qualify the Executive for
disability benefits under the Federal Social Security System.
(g) GOOD REASON. Termination by the Executive of the Executive's
employment for "Good Reason" shall mean termination by the Executive based on:
(i) Without the Executive's express written consent, the
assignment by the Employer to the Executive of any duties which are
materially inconsistent with the Executive's positions, duties,
responsibilities and status with the Employer immediately prior to a
Change in Control of the Employer, or a material change in the
Executive's reporting responsibilities, titles or offices as an
employee and as in effect immediately prior to such a Change in
Control, or any removal of the Executive from or any failure to re-
elect the Executive to any of such responsibilities, titles or
offices, except in connection with the termination of the Executive's
employment for Cause, Disability or Retirement or as a result of the
Executive's death or by the Executive other than for Good Reason;
2
<PAGE>
(ii) Without the Executive's express written consent, a
reduction by the Employers in the Executive's base salary as in effect
on the date of the Change in Control of the Employer or as the same
may be increased from time to time thereafter or a reduction in the
package of fringe benefits provided to the Executive;
(iii) Any purported termination of the Executive's employment
for Cause, Disability or Retirement which is not effected pursuant to
a Notice of Termination satisfying the requirements of paragraph (i)
below; or
(iv) The failure by the Employer to obtain the assumption of and
agreement to perform this Agreement by any successor as contemplated
in Section 6 hereof.
(h) IRS. IRS shall mean the Internal Revenue Service.
(i) NOTICE OF TERMINATION. Any purported termination by the Employer for
Cause, Disability or Retirement or by the Executive for Good Reason shall be
communicated by written "Notice of Termination" to the other party hereto. For
purposes of this Agreement, a "Notice of Termination" shall mean a notice which
(i) indicates the specific termination provision in this Agreement relied upon,
(ii) sets forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated, (iii) specifies a Date of Termination, which shall be not less than
thirty (30) nor more than ninety (90) days after such Notice of Termination is
given, except in the case of the Employer's termination of Executive's
employment for Cause, and (iv) is given in the manner specified in Section 7
hereof.
(j) RETIREMENT. Termination by the Employer of the Executive's employment
based on "Retirement" shall mean voluntary termination by the Executive in
accordance with the Employers' retirement policies, including early retirement,
generally applicable to their salaried employees.
2. BENEFITS UPON TERMINATION. If the Executive's employment by the
Employers shall be terminated subsequent to a Change in Control of the Employer
by (i) the Employer other than for Cause, Retirement, or as a result of the
Executive's death, or (ii) the Executive for Good Reason, then the Employer
shall, subject to the provisions of Section 3 hereof, if applicable:
(a) pay to the Executive, in 18 equal monthly installments beginning with
the first business day of the month following the Date of Termination, a cash
amount equal to 1.5 times the Executive's Annual Compensation; and
(b) maintain and provide for a period ending at the earlier of (i)
eighteen (18) months after the Date of Termination or (ii) the date of the
Executive's full-time employment by another employer (provided that the
Executive is entitled under the terms of such employment to benefits
substantially similar to those described in this subparagraph (b)), at no cost
to the Executive, the Executive's continued participation in all group
insurance, life insurance, health and accident,
3
<PAGE>
disability and other employee benefit plans, programs and arrangements in which
the Executive was entitled to participate immediately prior to the Date of
Termination (other than retirement plans or stock compensation plans of the
Employers), provided that in the event that the Executive's participation in any
plan, program or arrangement as provided in this subparagraph (b) is barred, or
during such period any such plan, program or arrangement is discontinued or the
benefits thereunder are materially reduced, the Employers range to provide the
Executive with benefits substantially similar to those which the Executive was
entitled to receive under such plans, programs and arrangements immediately
prior to the Date of Termination.
3. LIMITATION OF BENEFITS UNDER CERTAIN CIRCUMSTANCES. If the payments
and benefits pursuant to Section 2 hereof, either alone or together with other
payments and benefits which Executive has the right to receive from the
Employers would constitute a "parachute payment" under Section 280G of the Code,
the payments and benefits pursuant to Section 2 hereof shall be reduced, in the
manner determined by the Executive, by the amount, if any, which is the minimum
necessary to result in no portion of the payments and benefits under Section 2
being non-deductible to either of the Employers pursuant to Section 280G of the
Code and subject to the excise tax imposed under Section 4999 of the Code. The
determination of any reduction in the payments and benefits to be made pursuant
to Section 2 shall be based upon the opinion of independent tax counsel selected
by the Employers' independent public accountants and paid for by the Employers.
Such counsel shall be reasonably acceptable to the Employers and the Executive;
shall promptly prepare the foregoing opinion, but in no event later than thirty
(30) days from the Date of Termination; and may use such actuaries as such
counsel deems necessary or advisable for the purpose. In the event that the
Employers and/or the Executive do not agree with the opinion of such counsel,
(i) the Employers shall pay to the Executive the maximum amount of payments and
benefits pursuant to Section 2, as selected by the Executive, which such opinion
indicates that there is a high probability that does not result in any of such
payments and benefits being non-deductible to the Employers and subject to the
imposition of the excise tax imposed under Section 4999 of the Code and (ii) the
Employers may request, and Executive shall have the right to demand that the
Employers request, a ruling from the IRS as to whether the disputed payments and
benefits pursuant to Section 2 hereof have such consequences. Any such request
for a ruling from the IRS shall be promptly prepared and filed by the Employers,
but in no event later than thirty (30) days from the date of the opinion of
counsel referred to above, and shall be subject to Executive's approval prior to
filing, which shall not be unreasonably withheld. The Employers and Executive
agree to be bound by any ruling received from the IRS and to make appropriate
payments to each other to reflect any such rulings, together with interest at
the applicable federal rate provided for in Section 7872(f)(2) of the Code.
Nothing contained herein shall result in a reduction of any payments or benefits
to which the Executive may be entitled upon termination of employment other than
pursuant to Section 2 hereof, or a reduction in the payments and benefits
specified in Section 2 below zero.
4. MITIGATION; EXCLUSIVITY OF BENEFITS.
(a) The Executive shall not be required to mitigate the amount of any
benefits hereunder by seeking other employment or otherwise, nor shall the
amount of any such benefits be reduced by
4
<PAGE>
any compensation earned by the Executive as a result of employment by another
employer after the Date of Termination or otherwise.
(b) The specific arrangements referred to herein are not intended to
exclude any other benefits which may be available to the Executive upon a
termination of employment with the Employers pursuant to employee benefit plans
of the Employers or otherwise.
5. WITHHOLDING. All payments required to be made by the Employers
hereunder to the Executive shall be subject to the withholding of such amounts,
if any, relating to tax and other payroll deductions as the Employers may
reasonably determine should be withheld pursuant to any applicable law or
regulation.
6. ASSIGNABILITY. The Employers may assign this Agreement and their rights
hereunder in whole, but not in part, to any corporation, bank or other entity
with or into which either of the Employers may hereafter merge or consolidate or
to which either of the Employers may transfer all or substantially all of their
respective assets, if in any such case said corporation, bank or other entity
shall by operation of law or expressly in writing assume all obligations of the
Employers hereunder as fully as if it had been originally made a party hereto,
but may not otherwise assign this Agreement or its rights hereunder. The
Executive may not assign or transfer this Agreement or any rights or obligations
hereunder.
7. NOTICE. For the purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by certified or
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth below:
To the Employers: ESB Financial Corporation and ESB Bank, F.S.B.
600 Lawrence Avenue
Ellwood City, Pennsylvania 16117
To the Executive: Mr. Charles P. Evanoski
2420 Woodland Drive
New Castle, Pennsylvania 16101
5
<PAGE>
8. AMENDMENT; WAIVER. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by the Executive and such officer or officers as may be
specifically designated by the Boards of Directors of the Employers to sign on
their behalf. No waiver by any party hereto at any time of any breach by any
other party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time.
9. GOVERNING LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the United States
where applicable and otherwise the substantive laws of the Commonwealth of
Pennsylvania.
10. NATURE OF EMPLOYMENT AND OBLIGATIONS.
(a) Nothing contained herein shall be deemed to create other than a
terminable at will employment relationship between the Employers and the
Executive, and the Employers may terminate the Executive's employment at any
time, subject to providing any payments specified herein in accordance with the
terms hereof.
(b) Nothing contained herein shall create or require the Employers to
create a trust of any kind to fund any benefits which may be payable hereunder,
and to the extent that the Executive acquires a right to receive benefits from
the Employers hereunder, such right shall be no greater than the right of any
unsecured general creditor of the Employers.
11. TERM OF AGREEMENT. This Agreement shall terminate three (3) years
after the date first above written; provided that on or prior to the first
anniversary of the date first above written and each anniversary thereafter, the
Boards of Directors of the Employers shall consider (with appropriate corporate
documentation thereof, and after taking into account all relevant factors,
including Executive's performance as an employee) renewal of the term of this
Agreement for an additional one (1) year, and the term of this Agreement shall
be so extended unless the Boards of Directors of the Employers do not approve
such renewal and provide written notice to the Executive, or the Executive gives
written notice to the Employers, thirty (30) days prior to the date of any such
anniversary, of such party's or parties' election not to extend the term beyond
its then scheduled expiration date; and provided further that, notwithstanding
the foregoing to the contrary, this Agreement shall be automatically extended
for an additional one (1) year upon a Change in Control of the Employer.
6
<PAGE>
12. HEADINGS. The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
13. VALIDITY. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
14. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
15. REGULATORY PROHIBITION. Notwithstanding any other provision of this
Agreement to the contrary, the obligations of the Employers hereunder shall be
suspended in the event that the FDIC prohibits or limits, by regulation or
order, any payment hereunder pursuant to Section 18(k) of the FDIA (12 U.S.C.
(S) 1828(k)).
16. REGULATORY ACTIONS. The following provisions shall be applicable to
the parties to the extent that they are required to be included in agreements
between a savings association and its employees pursuant to Section 563.39(b) of
the Regulations Applicable to All Savings Associations, 12 C.F.R. (S)563.39(b),
or any successor thereto, and shall be controlling in the event of a conflict
with any other provision of this Agreement.
(a) If Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the Employers' affairs pursuant to notice
served under Section 8(e)(3) or Section 8(g)(1) of the Federal Deposit Insurance
Act ("FDIA")(12 U.S.C. (S)(S)1818(e)(3) and 1818(g)(1)), the Employers'
obligations under this Agreement shall be suspended as of the date of service,
unless stayed by appropriate proceedings. If the charges in the notice are
dismissed, the Employers may, in their discretion: (i) pay Executive all or part
of the compensation withheld while its obligations under this Agreement were
suspended, and (ii) reinstate (in whole or in part) any of its obligations which
were suspended.
(b) If Executive is removed from office and/or permanently prohibited from
participating in the conduct of the Employers' affairs by an order issued under
Section 8(e)(4) or Section 8(g)(1) of the FDIA (12 U.S.C. (S)(S)1818(e)(4) and
(g)(1)), all obligations of the Employers under this Agreement shall terminate
as of the effective date of the order, but vested rights of the Executive and
the Employers as of the date of termination shall not be affected.
(c) If ESB Bank is in default, as defined in Section 3(x)(1) of the FDIA
(12 U.S.C. (S)1813(x)(1)), all obligations under this Agreement shall terminate
as of the date of default, but vested rights of the Executive and the Employers
as of the date of termination shall not be affected.
7
<PAGE>
(d) All obligations under this Agreement shall be terminated pursuant to 12
C.F.R. (S)563.39(b)(5) (except to the extent that it is determined that
continuation of the Agreement for the continued operation of the Employers is
necessary): (i) by the Director of the Office of Thrift Supervision ("OTS"), or
his/her designee, at the time the Federal Deposit Insurance Corporation ("FDIC")
or Resolution Trust Corporation enters into an agreement to provide assistance
to or on behalf of ESB bank under the authority contained in Section 13(c) of
the FDIA (12 U.S.C. (S)1823(c)); or (ii) by the Director of the OTS, or his/her
designee, at the time the Director or his/her designee approves a supervisory
merger to resolve problems related to operation of ESB Bank or when ESB bank is
determined by the Director of the OTS to be in an unsafe or unsound condition,
but vested rights of the Executive and the Employers as of the date of
termination shall not be affected.
IN WITNESS WHEREOF, this Agreement has been executed as of the date first
above written.
ESB FINANCIAL CORPORATION
By: /s/ Charlotte A. Zuschlag
-----------------------------------
Charlotte A. Zuschlag
President and Chief Executive Officer
ESB BANK, F.S.B.
By: /s/ Charlotte A. Zuschlag
-----------------------------------
Charlotte A. Zuschlag
President and Chief Executive Officer
By: /s/ Charles P. Evanoski
-----------------------------------
Charles P. Evanoski
8
<PAGE>
EXHIBIT 11
Statement Re: Computation of Net Income per Share of Common Stock
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
For the Year Ended December 31,
--------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME $ 6,001,000 $ 5,447,000 $ 2,830,000
============ ============ ============
Basic net income per share:
Weighted average number of shares
outstanding for the period 5,338,000 5,366,000 4,660,000
============ ============ ============
BASIC NET INCOME PER SHARE $ 1.12 $ 1.02 $ 0.61
============ ============ ============
Diluted net income per share:
Weighted average number of shares
outstanding during the period 5,338,000 5,366,000 4,660,000
Dilutive impact of unexercised
common stock options 231,000 186,000 133,000
------------ ------------ ------------
Weighted average number of shares
outstanding for the period 5,569,000 5,552,000 4,793,000
============ ============ ============
DILUTED NET INCOME PER SHARE $ 1.08 $ 0.98 $ 0.59
============ ============ ============
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT 13
[ESB LOGO]
ESB FINANCIAL
CORPORATION
COMMITMENT
1 9 9 8
A N N U A L
R E P O R T
<PAGE>
Table of Contents
Consolidated Financial Highlights...................................... 1
Letter to Stockholders................................................. 2
Selected Consolidated Financial Data................................... 4
Management's Discussion and Analysis of
Financial Condition and Results of Operations....................... 5
Consolidated Financial Statements...................................... 21
Notes to Consolidated Financial Statements............................. 26
Accountant's Report.................................................... 49
Stock and Dividend Information......................................... 50
Corporate Information.................................................. 52
Board of Directors..................................................... 53
Corporate Officers, Advisory Board and Bank Officers................... 54
Executive Officers and Senior Management............................... 55
Products and Services.................................................. 56
Office Locations....................................... Inside Back Cover
Company Profile
ESB Financial Corporation (Nasdaq: ESBF), a
publicly traded Pennsylvania corporation and thrift
holding company, provides a wide range of retail and
commercial financial products and services to customers
in western Pennsylvania through its wholly owned
subsidiary bank, ESB Bank, F.S.B.
ESB Bank, F.S.B. is a federally chartered,
FDIC-insured stock savings bank which conducts business
through eleven offices in Allegheny, Beaver, Butler and
Lawrence counties, Pennsylvania. To compliment retail
operations conducted through its bank offices, the
Company invests in U.S. Government, municipal and
mortgage-backed securities through its subsidiary savings
bank and through its investment subsidiary, PennFirst
Financial Services, Inc., a Delaware corporation.
Return on Average Assets
& Stockholders' Equity Deposit & Stockholders' Equity Growth
(excluding 1996 SAIF Assessment) (in millions)
[GRAPH] [GRAPH]
<PAGE>
Consolidated Financial Highlights
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except share data)
<TABLE>
<CAPTION>
As of or for the
year ended December 31,
1998 1997 Change
--------------- --------------- ------------
<S> <C> <C> <C>
Total assets $972,438 $910,770 7%
Loans receivable, net 360,280 336,757 7%
Total deposits 423,051 399,568 6%
Net interest income 16,651 16,665 0%
Net income 6,001 5,447 10%
Stockholders' equity 61,083 68,509 (11%)
Net income per share (diluted) (1) $1.08 $0.98 10%
Cash dividends per share (1) $0.35 $0.31 13%
Stockholders' equity per share (1) $11.60 $11.82 (2%)
Return on average assets 0.63% 0.68% (7%)
Return on average stockholders' equity 9.10% 8.64% 5%
</TABLE>
(1) Per share amounts for 1997 have been adjusted to reflect the 10% stock
dividend declared and paid in the second quarter of 1998.
Asset & Loan Growth Percentage of Nonperforming
(in millions) Assets to Total Assets
[GRAPH] [GRAPH]
================================================================================
ESB Financial Corporation 1 1998 Annual Report
<PAGE>
Letter to Stockholders
- --------------------------------------------------------------------------------
To Our Stockholders:
[PHOTO]
Charlotte A. Zuschlag
President and Chief Executive Officer
I welcome this opportunity to report to you about the significant changes and
growth your Company experienced in 1998. Changes and growth represent a
commitment to our shareholders and the communities our bank serves. In 1998,
stockholders approved a new name for the Company. Troy Hill Federal Savings
Bank was consolidated into ESB Bank, a new branch office was opened in Franklin
Township and construction was started on our new facility in Wexford. Company
earnings for the year were a record $1.08 per share and Company assets increased
to nearly $973.0 million.
Commitment to Identity
At the April 21, 1998 annual meeting, our stockholders approved a new name for
PennFirst Bancorp, Inc. On May 1, 1998, we officially became known as ESB
Financial Corporation and began trading on the NASDAQ market under the symbol
"ESBF." In our planning for the next millennium we perceived a geographic
limitation in the name "PennFirst Bancorp, Inc." and felt that our shareholders
and customers would recognize the name ESB Financial Corporation. In addition,
the holding company adopted the ESB Bank's logo as part of our commitment to
name recognition.
Commitment to Results
At the close of business in 1998, your Company posted record earnings per
diluted share of $1.08 as compared to $0.98 in 1997. This represents a 10%
increase over the previous year. Return on average equity increased to 9.10% in
1998 as compared to 8.64% in 1997. As I have mentioned in the past, management
is committed to controlling expenses and we measure our success against the
industry "Efficiency Ratio." I am proud to tell you that our "Efficiency Ratio"
for 1998 was 49.13% verses an industry benchmark of 60%.
Commitment to Continued Growth
The management team of your Company is committed to growing ESB Financial
Corporation in a prudent manner while maintaining the quality of our assets and
ensuring sufficient capital for future stockholder enhancements and strategic
corporate growth. Company assets grew to $972.4 million in 1998, up from $910.8
million in 1997 marking a 6.8% increase for the year. The increase in assets is
primarily attributable to our managed growth in residential and commercial
lending, consumer lending and investment securities as each asset grew 7.6%,
10.0%, and 5.2%, respectively in 1998. Strong residential mortgage demands
coupled with an aggressive consumer loan campaign directed to existing customers
contributed to a record $140.3 million in loan originations for 1998.
Commitment to Shareholder Value
ESB Financial Corporation has paid a cash dividend every quarter since we
converted to a publicly held company in 1990. As in previous years, the Board
of Directors approved a common stock repurchase program in 1998 and 639,565
shares of stock were repurchased at a weighted average cost of $17.21 per share.
Your Board of Directors remains committed to returning value to the
shareholders. In 1998, the Company declared and paid a 10% stock dividend, its
eighth such stock dividend or stock split since its initial public offering in
1990.
================================================================================
ESB Financial Corporation 2 1998 Annual Report
<PAGE>
Letter to Stockholders (continued)
- --------------------------------------------------------------------------------
Commitment to The Community
ESB Bank formally established a Community Reinvestment Act Department in 1997,
dedicated to our stated commitment of providing home ownership opportunities to
low- moderate income individuals and families and the revitalization of low-
moderate income neighborhoods in our lending area. In 1998, our CRA Department
granted loans, purchased investments and participated in distressed community
business-lending programs all in accordance with sound banking practices. I am
proud that our Bank is a major participant in the Federal Home Loan Bank of
Pittsburgh's "Home Buyers Equity Fund" grant program and that our CRA Department
was awarded a $275,000 "Affordable Housing Program" grant to assist low-
moderate income individuals in securing rehabilitated homes in Beaver County.
Commitment to The Future
From a banking standpoint, the "Year 2000" is rapidly approaching. ESB Bank
began planning for "Y2K" back in 1997. All hardware and software vendors and
service providers have been contacted to ensure that their products are capable
of the proper recognition of the "Year 2000." Shareholders and customers have
our assurance that ESB Financial Corporation will comply with all mandated
guidelines so that you will have full access to your records and accounts in the
new millennium. As part of our commitment to the future, ESB Bank has recently
undergone an advanced technological change by converting to a new data
processing system during February of this year. The new technology will enable
our Bank to offer new and more competitive products in the market place.
Commitment to Shareholders
While 1998 was a very positive and record setting year for the Company, I would
be remiss if I did not acknowledge the complete dedication and total commitment
to the successful operation of your Company consistently exhibited by the Board
of Directors, officers and employees. ESB Financial Corporation is committed to
providing "Quality Financial Service...For a Quality Life." This means a total
corporate commitment to enhancing shareholder value and providing superior
customer service. On behalf of all directors, officers and employees, I want to
thank you, our shareholders, for the support and confidence you have shown us
since 1990. Finally, I encourage any shareholder to contact me directly with
any comments or suggestions at any time.
Very truly yours,
/s/ Charlotte A. Zuschlag
Charlotte A. Zuschlag
President and Chief Executive Officer
================================================================================
ESB Financial Corporation 3 1998 Annual Report
<PAGE>
Selected Consolidated Financial Data
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except share data)
<TABLE>
<CAPTION>
----------------------------------------------------------------------
As of December 31,
Financial Condition Data 1998 1997 1996 1995 1994
- ------------------------ ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $972,438 $ 910,770 $ 698,735 $ 659,371 $ 637,916
Securities 545,049 518,021 444,329 442,783 440,813
Loans receivable, net 360,280 336,757 216,865 183,878 161,630
Deposits 423,051 399,568 332,889 338,494 333,825
Borrowed funds 480,382 435,170 309,195 259,472 246,437
Stockholders' equity 61,083 68,509 51,543 54,926 52,407
Stockholders' equity per common share (1) $11.60 $11.82 $10.92 $11.38 $9.95
<CAPTION>
-----------------------------------------------------------------------
For the year ended December 31,
Operations Data 1998 1997 1996(2) 1995 1994
- --------------- -----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 63,791 $ 55,011 $ 46,891 $ 44,357 $ 34,873
Interest expense 47,140 38,346 32,629 30,219 22,159
--------- -------- -------- -------- --------
Net interest income 16,651 16,665 14,262 14,138 12,714
Provision for loan losses 5 799 873 13 41
--------- -------- -------- -------- --------
Net interest income after
provision for loan losses 16,646 15,866 13,389 14,125 12,673
Noninterest income 1,939 1,075 679 772 1,011
Noninterest expense 11,067 9,510 10,535 8,962 7,364
--------- -------- -------- -------- --------
Income before income taxes 7,518 7,431 3,533 5,935 6,320
Provision for income taxes 1,517 1,984 703 1,967 2,461
--------- -------- -------- -------- --------
Net income $ 6,001 $ 5,447 $ 2,830 $ 3,968 $ 3,859
========= ======== ======== ======== ========
Basic net income per common share (1) $1.12 $1.02 $0.61 $0.81 $0.78
Diluted net income per common share (1) $1.08 $0.98 $0.59 $0.77 $0.75
<CAPTION>
---------------------------------------------------------------------
As of or for the year ended December 31,
Other Data 1998 1997 1996(2) 1995 1994
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Performance Ratios (for the year ended)
Return on average assets 0.63% 0.68% 0.41% 0.61% 0.68%
Return on average equity 9.10% 8.64% 5.47% 7.44% 7.68%
Average equity to average assets 6.93% 7.92% 7.50% 8.24% 8.79%
Interest rate spread (3) 1.70% 1.95% 1.98% 1.93% 1.96%
Net interest margin (3) 2.06% 2.34% 2.33% 2.33% 2.29%
Efficiency ratio (3) 49.13% 45.56% 47.98% 55.40% 52.72%
Noninterest expense to average assets 1.16% 1.20% 2.71% 1.39% 1.29%
Dividend payout ratio (4) 32.59% 31.80% 120.00% 38.80% 34.90%
Asset Quality Ratios (as of year end)
Non-performing loans to total loans 1.31% 1.08% 1.80% 0.42% 1.31%
Non-performing assets to total assets 0.51% 0.45% 0.59% 0.13% 0.40%
Allowance for loan losses to total loans 1.26% 1.36% 1.46% 1.29% 1.43%
Allowance for loan losses to non-performing loans 96.67% 126.43% 81.02% 309.26% 109.08%
Capital Ratios (as of year end)
Stockholders' equity to assets 6.28% 7.52% 7.38% 8.33% 8.22%
Tangible stockholders' equity to tangible assets 5.61% 6.76% 6.78% 7.65% 7.42%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Stockholders' equity per common share, basic net income per common share
and diluted net income per common share for the years ended December 31,
1997 through December 31, 1994 have been adjusted for the 10% stock
dividend declared and paid in the second quarter of 1998.
(2) Exclusive of the $2.2 million ($1.3 million net of applicable income tax
benefits) one-time special Savings Association Insurance Fund assessment,
net income, noninterest expense, return on average assets, return on
average equity and noninterest expense to average assets would have been
$4.2 million, $8.3 million, 0.61%, 8.08% and 1.21%, respectively, for the
year ended December 31, 1996.
(3) Interest income utilized in calculation is on a fully tax equivalent basis.
(4) Dividend payout ratio calculation utilizes diluted net income per share for
all periods, and includes special cash dividend of $0.41 per share in 1996.
================================================================================
ESB Financial Corporation 4 1998 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
Overview
- --------
ESB Financial Corporation (the Company) is a Pennsylvania corporation and thrift
holding company that provides a wide range of retail and commercial financial
products and services to customers in western Pennsylvania through its wholly-
owned subsidiary bank, ESB Bank, F.S.B. (ESB or the Bank). The Company is also
the parent company of PennFirst Financial Services, Inc., a Delaware corporation
engaged in the management of certain investment activities on behalf of the
Company, PennFirst Capital Trust I, a Delaware statutory business trust
established during 1997 to facilitate the issuance of trust preferred securities
to the public by the Company and THF, Inc., a Pennsylvania corporation
established to provide loan closing services and issue title insurance.
ESB is a federally chartered, Federal Deposit Insurance Corporation (FDIC)
insured stock savings bank which conducts business through eleven offices in
Allegheny, Beaver, Butler and Lawrence counties, Pennsylvania. ESB operates a
wholly-owned subsidiary, AMSCO, Inc., which engages in the management of certain
real estate development partnerships on behalf of the Company.
ESB is a financial intermediary whose principal business consists of attracting
deposits from the general public and investing such deposits in real estate
loans secured by liens on residential and commercial properties, consumer loans,
commercial business loans, securities and interest-earning deposits.
The Company and ESB are subject to examination and comprehensive regulation by
the Office of Thrift Supervision (OTS), the chartering authority of ESB, and the
FDIC, the administrator of the Savings Association Insurance Fund (SAIF). ESB
is a member of the Federal Home Loan Bank (FHLB) of Pittsburgh, which is one of
the twelve regional banks comprising the FHLB System. ESB is further subject to
regulations of the Board of Governors of the Federal Reserve System which
governs the reserves required to be maintained against deposits and certain
other matters.
This Management Discussion and Analysis section of the Annual Report contains
certain forward-looking statements (as defined in the Private Securities
Litigation Reform Act of 1995). These forward-looking statements may involve
significant risks and uncertainties. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, actual
results may differ materially from the results in these forward-looking
statements.
================================================================================
ESB Financial Corporation 5 1998 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
- --------------------------------------------------------------------------------
Significant Financial Events in 1998
- ------------------------------------
Merger of Troy Hill Federal Savings Bank with and into ESB Bank
On June 11, 1998, Troy Hill Federal Savings Bank (Troy Hill) was merged with and
into ESB Bank, with ESB Bank as the surviving institution.
Stock Dividend
On April 17, 1998, the Board of Directors declared a 10% stock dividend to
stockholders of record on May 15, 1998 and payable on May 29, 1998. All share
and related price and dividend amounts discussed herein have been adjusted to
reflect this stock dividend.
Opening of the Franklin Township Branch
On September 8, 1998, the Company opened its newly constructed full service,
branch office located in Franklin Township, Beaver County, adjacent to the
Franklin Township shopping plaza where the branch office was previously located.
The branch was constructed and is being carried on the books at $501,000.
Additionally, the branch will be depreciated over 39 years.
Significant Financial Events in 1997
- ------------------------------------
Acquisition of Troy Hill Federal Savings Bank
On April 3, 1997, the Company completed its acquisition of Troy Hill Federal
Savings Bank. The acquisition was accounted for under the purchase method of
accounting. Under the terms of the merger agreement, Troy Hill Bancorp, Inc.
(THBC), the holding company for Troy Hill, merged with and into the Company.
Consideration paid by the Company in connection with the acquisition consisted
of $9.3 million in cash and 1,071,000 shares of the Company's common stock. In
addition, options to purchase shares of THBC were converted into options to
acquire 115,000 shares of the Company's common stock.
At the acquisition date, the fair value of Troy Hill's total assets was $109.3
million, including loans receivable of $90.0 million, and the fair value of
total liabilities was $89.4 million, including deposits of $53.8 million.
Goodwill arising from the transaction was $3.5 million. The estimated useful
beneficial life for the straight-line amortization of the goodwill is expected
to be 15 years.
Stock Dividend
On July 15, 1997, the Board of Directors declared a 10% stock dividend to
stockholders of record on July 31, 1997 and payable on August 25, 1997. All
share and related price and dividend amounts discussed herein have been adjusted
to reflect this stock dividend.
Trust Preferred Security Offering
On December 9, 1997, the Company successfully completed a $25.3 million
(2,530,000 shares) offering of trust preferred securities. The securities carry
an interest rate of 8.625%, mature in 30 years, but are callable after five
years or upon certain specific tax law or regulatory changes, and represent
undivided beneficial interests in PennFirst Capital Trust I. The proceeds from
this public offering were used to purchase junior subordinated debentures issued
by the Company. The proceeds from the sale of the debentures qualify as
regulatory capital for the Company. The Company contributed a portion of the
proceeds of the offering to its subsidiary bank as additional capital. This
contributed capital and the remaining proceeds will support future growth of the
Company.
================================================================================
ESB Financial Corporation 6 1998 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
- --------------------------------------------------------------------------------
Changes in Financial Condition
- ------------------------------
General. The Company's total assets increased a net $61.7 million or 6.8% to
$972.4 million at December 31, 1998 from $910.8 million at December 31, 1997.
This increase was primarily due to a net increase in securities of $27.0
million, loans receivable of $23.5 million, FHLB stock of $609,000, premises and
equipment of $2.9 million, other assets of $1.3 million, and bank owned life
insurance of $15.0 million, offset by a decrease in cash and cash equivalents of
$8.6 million.
The increase in the Company's total assets reflects a corresponding increase in
total liabilities of $69.1 million or 8.2% to $911.4 million at December 31,
1998 from $842.3 million at December 31, 1997 and a decrease in total
stockholders' equity of $7.4 million or 10.8% to $61.1 million at December 31,
1998 from $68.5 million at December 31, 1997. The increase in total liabilities
was primarily due to increases in deposits of $23.5 million, borrowed funds of
$45.3 million, other liabilities of $526,000, offset by a decrease in advance
payments by borrowers for taxes and insurance of $127,000, and subordinated debt
of $119,000. The net decrease in total stockholders' equity can be attributed
primarily to the Company's two stock repurchase programs initiated during 1998,
offset by net income net of dividends paid.
Cash on hand, Interest-earning deposits and Federal funds sold. Cash on hand,
interest-earning deposits and federal funds sold represent cash equivalents
which decreased a combined $8.6 million to $10.3 million at December 31, 1998
from $18.9 million at December 31, 1997. These accounts are typically increased
by deposits from customers into savings 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. The net decrease between December 31, 1998 and December 31,
1997 can be attributed principally to funds received from the issuance of trust
preferred securities in December 1997 and subsequently used to fund increases in
the loan portfolio and to fund security purchases.
Securities. The Company's securities portfolios increased a net $27.0 million
or 5.2% to $545.0 million at December 31, 1998 from $518.0 million at December
31, 1997. This net increase was the result of $287.0 million of purchases
consisting primarily of $67.2 million of corporate bonds, $161.6 million of
mortgage-backed securities, $56.1 million of municipal securities, $2.1 million
of equities and an increase in the unrealized gain on securities available for
sale of $2.7 million (before taxes) during the year, partially offset by $146.5
million of maturities and repayments of principal and $109.2 million of
securities sold consisting primarily of $11.3 million of corporate bonds, $3.5
million of U.S. government securities, $82.9 million of mortgage-backed
securities, $10.5 million of municipal securities and $1.0 million of equity
securities during the year.
Loans receivable. Net loans receivable increased a net $23.5 million or 7.0% to
$360.3 million at December 31, 1998 from $336.8 million at December 31, 1997.
The increase in loans receivable can be attributed to internal growth within the
Company's loan portfolios. Mortgage loans increased $16.9 million or 5.8% and
other loans increased $11.0 million or 18.4%. Partially offsetting the net
increase in loans receivable was a nominal increase in the Company's allowance
for loan losses of $8,000 and $4.3 million and $62,000 increases in loans in
process and deferred loan fees, respectively.
Non-performing assets. Non-performing assets include non-accrual loans and real
estate acquired through foreclosure (REO). Non-performing assets increased
$912,000 to $5.0 million or 0.51% of total assets at December 31, 1998 from $4.1
million or 0.45% of total assets at December 31, 1997. Non-performing assets
consisted of non-performing loans and REO of $5.0 million and $21,000,
respectively, at December 31, 1998 and non-performing loans and REO of $3.8
million and $288,000, respectively, at December 31, 1997.
Accrued interest receivable. Accrued interest receivable increased $717,000 or
11.8% to $6.8 million at December 31, 1998 from $6.1 million at December 31,
1997, due primarily to the increase in average interest-earning assets between
years.
================================================================================
ESB Financial Corporation 7 1998 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
- --------------------------------------------------------------------------------
FHLB stock. FHLB stock increased $609,000 or 3.4% to $18.4 million at December
31, 1998 from $17.8 million at December 31, 1997.
Premises and equipment. Premises and equipment increased $2.9 million or 86.6%
to $6.2 million at December 31, 1998 from $3.3 million at December 31, 1997,
primarily as a result of the new Franklin Township branch and the construction
of the new Wexford branch.
Prepaid expenses and other assets. Prepaid expenses and other assets increased
$822,000 or 8.6% to $10.4 million at December 31, 1998 from $9.5 million at
December 31, 1997. This net increase can primarily be attributed to the $1.0
million investment in Boston Capital Tax Limited Partnership, which is a low
income housing project the Bank invested in and, as a benefit, will receive tax
credits over the next ten years.
Bank owned life insurance. Bank owned life insurance is universal life
insurance, purchased by the Bank, on the lives of thirty-five employees. The
beneficial aspects of these universal life insurance policies are tax-free
growth and a tax-free death benefit which are realized by ESB as the owner of
the policies. The Company purchased the $15.0 million universal life insurance
policies on December 29, 1998. The cash surrender value as of December 31, 1998
is $15.0 million.
Deposits. Total deposits increased $23.5 million or 5.9% to $423.1 million at
December 31, 1998 from $399.6 million at December 31, 1997. For the year, in
total, interest-bearing demand deposits increased $6.0 million or 4.0%, time
deposits increased $16.2 million or 6.6% and noninterest-bearing deposits
increased $1.3 million or 28.4%.
Advance payments by borrowers for taxes and insurance. Advance payments by
borrowers for taxes and insurance decreased $127,000 or 3.9% to $3.2 million at
December 31, 1998 from $3.3 million at December 31, 1997.
Borrowed funds. Borrowed funds include primarily FHLB advances and reverse
repurchase agreement borrowings. Borrowed funds increased $45.3 million or
11.0% to $456.4 million at December 31, 1998 from $411.0 million at December 31,
1997. FHLB advances decreased $49.1 million or 13.8% and reverse repurchase
agreement and other borrowings increased $94.4 million or 168.7%.
Accrued expenses and other liabilities. Accrued expenses and other liabilities
increased $526,000 or 12.4% to $4.8 million at December 31, 1998 from $4.2
million at December 31, 1997.
Stockholders' equity. Stockholders' equity decreased by $7.4 million or 10.8%
to $61.1 million at December 31, 1998 from $68.5 million at December 31, 1997.
This decrease was primarily the result of dividends declared of $1.9 million,
net treasury stock purchase of $11.0 million and a $130,000 increase in unearned
employee stock plan shares, partially offset by net income of $6.0 million and a
decrease in the unrealized gain on securities available for sale, net of income
taxes, of $1.7 million.
================================================================================
ESB Financial Corporation 8 1998 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
- --------------------------------------------------------------------------------
Changes in Results of Operations
- --------------------------------
General. The Company reported net income of $6.0 million, $5.4 million and $2.8
million in 1998, 1997 and 1996, respectively.
Average Balance Sheet and Yield/Rate Analysis. The following table sets forth,
for 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
this table, average loan balances include non-accrual loans and exclude the
allowance for loan losses, and interest income includes accretion of net
deferred loan fees. Interest and yields on tax-exempt securities (tax-exempt
for federal income tax purposes) are shown on a fully tax equivalent basis.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) Year ended December 31,
1998 1997 1996
--------------------------- -------------------------- ------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
- ------------------------
Taxable securities available for sale $388,208 $25,379 6.54% $307,504 $20,935 6.81% $298,057 $20,377 6.84%
Tax-exempt securities available for sale 84,077 6,855 8.15% 51,464 4,410 8.57% 49,564 4,334 8.74%
Taxable securities held to maturity 70,311 4,101 5.83% 90,824 5,464 6.02% 104,352 6,200 5.94%
Tax-exempt securities held to maturity 8,156 673 8.25% 863 67 7.76% 591 49 8.29%
-------- ------- ------ -------- ------- ------ ------- ------- -----
550,752 37,008 6.72% 450,655 30,876 6.85% 452,564 30,960 6.84%
-------- ------- ------ -------- ------- ------ ------- ------- -----
Mortgage loans 288,279 22,452 7.79% 245,552 19,493 7.94% 151,107 12,221 8.09%
Other loans 66,821 5,400 8.08% 58,380 4,738 8.12% 52,272 4,115 7.87%
-------- ------- ------ -------- ------- ------ ------- ------- -----
355,100 27,852 7.84% 303,932 24,231 7.97% 203,379 16,336 8.03%
-------- ------- ------ -------- ------- ------ ------- ------- -----
Cash equivalents 8,341 298 3.57% 7,149 374 5.23% 4,701 184 3.91%
FHLB stock 18,329 1,191 6.50% 16,612 1,053 6.34% 14,214 901 6.34%
-------- ------- ------ -------- ------- ------ ------- ------- -----
26,670 1,489 5.58% 23,761 1,427 6.01% 18,915 1,085 5.74%
-------- ------- ------ -------- ------- ------ ------- ------- -----
Total interest-earning assets 932,522 66,349 7.12% 778,348 56,534 7.26% 674,858 48,381 7.17%
Other noninterest-earning assets 19,494 - - 16,913 - - 14,466 - -
-------- ------- ------ -------- ------- ------ ------- ------- -----
Total assets $952,016 $66,349 6.97% $795,261 $56,534 7.11% $689,324 $48,381 7.02%
======== ======= ====== ======== ======= ====== ======== ======= =====
Interest-bearing liabilities:
- -----------------------------
Interest-bearing demand deposits $152,175 $ 3,905 2.57% $151,909 $ 3,922 2.58% $142,753 $ 4,083 2.86%
Time deposits 251,111 13,735 5.47% 224,428 12,707 5.66% 188,682 10,345 5.48%
-------- ------- ------ -------- ------- ------ -------- ------- -----
403,286 17,640 4.37% 376,337 16,629 4.42% 331,435 14,428 4.35%
FHLB advances 328,935 20,771 6.31% 327,683 20,624 6.29% 282,750 17,409 6.16%
Reverse repo's & other borrowings 113,696 6,508 5.72% 16,297 955 5.86% 14,171 792 5.59%
Preferred securities 24,030 2,221 9.24% 1,543 138 8.91% - - -
-------- ------- ------ -------- ------- ------ -------- ------- -----
Total interest-bearing liabilities 869,947 47,140 5.42% 721,860 38,346 5.31% 628,356 32,629 5.19%
Noninterest-bearing demand deposits 8,988 - - 4,665 - - 3,855 - -
Other noninterest-bearing liabilities 7,103 - - 5,717 - - 5,401 - -
-------- ------- ------ -------- ------- ------ -------- ------- -----
Total liabilities 886,038 47,140 5.32% 732,242 38,346 5.24% 637,612 32,629 5.12%
Stockholders' equity 65,978 - - 63,019 - - 51,712 - -
-------- ------- ------ -------- ------- ------ -------- ------- -----
Total liabilities and equity $952,016 $47,140 4.95% $795,261 $38,346 4.82% $689,324 $32,629 4.73%
======== ======= ====== ======== ======= ====== ======== ======= =====
Net interest income $19,209 $18,188 $15,752
======= ======= =======
Interest rate spread (difference between
weighted average rate on interest-earning
assets and interest-bearing liabilities) 1.70% 1.95% 1.98%
====== ===== =====
Net interest margin (net interest
income as a percentage of average
interest-earning assets) 2.06% 2.34% 2.33%
====== ===== =====
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
================================================================================
ESB Financial Corporation 9 1998 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
- --------------------------------------------------------------------------------
Analysis of Changes in Net Interest Income. The following table analyzes the
changes in interest income and interest expense 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 year volume), changes in volume
(changes in volume multiplied by prior year 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.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
(In thousands) 1998 vs. 1997 1997 vs. 1996
Increase (decrease) due to Increase (decrease) due to
------------------------------------ ------------------------------------
Volume Rate Total Volume Rate Total
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
Interest income:
Securities $ 6,737 $ (605) $ 6,132 $ (131) $ 47 $ (84)
Loans 4,019 (398) 3,621 8,017 (122) 7,895
Cash equivalents 56 (132) (76) 115 75 190
FHLB stock 111 27 138 152 - 152
---------- ---------- ----------- ---------- ---------- -----------
Total interest-earning assets 10,923 (1,108) 9,815 8,153 - 8,153
---------- ---------- ----------- ---------- ---------- -----------
Interest expense:
Deposits 1,180 (169) 1,011 1,981 220 2,201
FHLB advances 79 68 147 2,820 395 3,215
Reverse repurchases & other borrowings 5,576 (23) 5,553 123 40 163
Subordinated debt 2,078 5 2,083 138 - 138
---------- ---------- ----------- ---------- ---------- -----------
Total interest-bearing
liabilities 8,913 (119) 8,794 5,062 655 5,717
---------- ---------- ----------- ---------- ---------- -----------
Net interest income $ 2,010 $ (989) $ 1,021 $ 3,091 $ (655) $ 2,436
========== ========== =========== ========== ========== ===========
</TABLE>
1998 Results Compared to 1997 Results
General. The Company reported net income of $6.0 million and $5.4 million for
1998 and 1997, respectively. The $554,000 increase in net income between 1998
and 1997, can primarily be attributed to an increase in interest income of $8.8
million, noninterest income of $864,000, a decrease in the provision for loan
losses of $794,000, and a decrease in the provision for income taxes of
$467,000. Partially offsetting these favorable variances was a $8.8 million
increase in interest expense and a $1.6 million increase in noninterest expense.
Net interest income. Tax equivalent net interest income increased $1.0 million
or 5.6% to $19.2 million for 1998, compared to $18.2 million for 1997. This
increase in net interest income can be attributed to an increase in interest
income of $9.8 million, offset by an increase in interest expense of $8.8
million.
Interest income. On a tax equivalent basis, interest income increased $9.8
million or 17.4% to $66.3 million for 1998, compared to $56.5 million for 1997.
This increase in interest income can be attributed to increases in interest
earned on securities, loans receivable and FHLB stock of $6.1 million, $3.6
million and $138,000, respectively, partially offset by a decrease in interest
earned on cash equivalents of $76,000.
Interest earned on securities increased $6.1 million to $37.0 million for 1998,
compared to $30.9 million for 1997 as average balances increased $100.1 million.
Partially offsetting this volume increase was a slight decline in the yield on
securities to 6.72% for 1998 compared to 6.85% for 1997.
================================================================================
ESB Financial Corporation 10 1998 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
- --------------------------------------------------------------------------------
Interest earned on loans receivable increased $3.6 million or 14.9% to $27.9
million for 1998, compared to $24.2 million for 1997. This increase was
primarily attributable to an increase in the average balance of loans
outstanding of $51.2 million or 16.8% to $355.1 million for 1998 compared to
$303.9 million for 1997. Partially offsetting this volume increase, was a
slight decline in the yield on loans to 7.84% for 1998, compared to 7.97% for
1997.
Interest earned on cash equivalents decreased $76,000 to $298,000 for 1998,
compared to $374,000 for 1997 as the average balance increased $1.2 million or
16.7% and the yield decreased to 3.56% for 1998, compared to 5.23% for 1997.
Income from FHLB stock increased $138,000 to $1.2 million for 1998, compared to
$1.1 million for 1997 as the average balance increased $1.7 million or 10.3%.
Interest expense. Interest expense increased $8.8 million or 22.9% to $47.1
million for 1998, compared to $38.3 million for 1997. This increase in interest
expense can be attributed to increases in interest incurred on deposits, FHLB
advances, reverse repurchases and other borrowings and subordinated debt of $1.0
million, $147,000, $5.6 million and $2.1 million, respectively.
Interest incurred on deposits increased $1.0 million or 6.1% to $17.6 million
for 1998, compared to $16.6 million for 1997. This increase was primarily
attributable to an increase in the average balance of interest-bearing deposits
of $26.9 million or 7.2% to $403.3 million for 1998, compared to $376.3 million
for 1997, partially offset by a decrease in the cost of deposits to 4.37% for
1998, compared to 4.42% for 1997.
Interest incurred on FHLB advances increased $147,000 or 0.7% to $20.8 million
for 1998, compared to $20.6 million for 1997. This increase was primarily
attributable to an increase in the average balance of FHLB advances of $1.3
million or 0.4% to $328.9 million for 1998, compared to $327.7 million for 1997.
Also contributing to the increase in interest incurred on FHLB advances was an
increase in the cost of these funds to 6.32% for 1998, compared to 6.29% for
1997.
Interest incurred on reverse repurchases and other borrowings increased $5.6
million to $6.5 million for 1998, compared to $955,000 for 1997. The increase
was primarily attributable to an increase in the average balance of reverse
repurchases and other borrowings of $97.4 million or 597.6% to $113.7 million
for 1998, compared to $16.3 million for 1997. The increase in the average
balance was a result of the Company's decision to purchase reverse repurchase
agreements during the period due to their lower cost of funds. Partially
offsetting this increase in average balances was a decrease in the cost of these
funds to 5.72% for 1998, compared to 5.86% for 1997.
Interest expense on subordinated debt increased $2.1 million to $2.2 million for
1998, compared to $138,000 for 1997. The average balance of the subordinated
debt increased $22.5 million to $24.0 million for 1998, compared to $1.5 million
for 1997. Also contributing to the increase in interest incurred on
subordinated debt was an increase in the cost of the debt to 9.24% for 1998,
compared to 8.91% for 1997. Additionally, the interest expense on the
subordinated debt was realized for the entire year in 1998 as compared to
realizing less than a month's worth of interest expense during 1997.
Provision for loan losses. The Company records provisions for loan losses to
bring the total allowance for loan losses to a level deemed adequate to cover
embedded losses in the loan portfolio. 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 collectibility of the loan portfolio.
================================================================================
ESB Financial Corporation 11 1998 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
- --------------------------------------------------------------------------------
The provision for loan losses decreased $794,000 or 99.4% to $5,000 for 1998,
compared to $799,000 for 1997. The decrease in the provision for loan losses
can be attributable to the provision recorded in 1997 for the Bennett Funding
Group non-performing lease agreements in order to bring the total loan loss
reserve associated with the leases to approximately $1.8 million at December 31,
1997. See "-1997 Results Compared to 1996 Results."
At December 31, 1998, the Company had $1.9 million in outstanding Bennett
Funding Group leases, compared to $2.3 million at December 31, 1997. The total
loan loss reserves associated with these leases was approximately $1.8 million
at December 31, 1998.
As a result of the provision for loan losses realized during 1998 and 1997, the
Company's allowance for loan losses amounted to $4.8 million or 1.26% of the
Company's total loan portfolio at December 31, 1998, compared to $4.8 million or
1.36% at December 31, 1997. The Company's allowance for loan losses as a
percentage of non-performing loans at December 31, 1998 and 1997 was 96.7% and
126.4%, respectively.
Noninterest income. Noninterest income increased $864,000 or 80.4% to $1.9
million for 1998, compared to $1.1 million for 1997. This increase can be
attributed to an increase in fees and service charges of $451,000, an increase
in net gains realized on sales of securities available for sale of $368,000 and
an increase in other noninterest income of $45,000. The increase in fees and
service charges of $451,000 can primarily be attributable to increases in late
charges on mortgage loans, fees from sale of mortgage loans, servicing fees on
NOW accounts and servicing fees on MAC accounts of $49,000, $58,000, $40,000 and
$88,000, respectively.
Noninterest expense. Noninterest expense increased $1.6 million or 16.4% to
$11.1 million for 1998, compared to $9.5 million for 1997. This increase can be
attributed to increases in compensation and employee benefits, premises and
equipment, federal insurance premiums and other expenses of $811,000, $51,000,
$48,000 and $690,000, respectively. Partially offsetting the overall increase
in noninterest expense was a decrease in data processing expense of $43,000.
Compensation and employee benefits expense increased $811,000 or 15.2% to $6.2
million for 1998, compared to $5.3 million for 1997. This increase can be
attributed to additional staffing needs of the Company and normal salary
increases between the years.
Premises and occupancy expense increased $51,000 or 4.9% to $1.1 million for
1998, compared to $1.0 million for 1997. This increase can be attributed to
the depreciation expense related to the new Franklin Township branch office
which was opened in September of 1998, offset by a reduction in depreciation
expense related to certain assets becoming fully depreciated near the end of
1997 and the beginning of 1998.
Federal insurance premiums expense increased $48,000 or 24.4% to $245,000 for
1998, compared to $197,000 for 1997. The increase can be attributed to the
increase in deposits of $23.5 million or 5.9% to $423.1 million for 1998,
compared to $399.6 million for 1997.
Data processing expense decreased $43,000 or 8.1% to $485,000 for 1998, compared
to $528,000 for 1997. This decrease can be attributed to the one-time
conversion costs incurred in 1997 associated with the Troy Hill conversion.
Other expenses increased $690,000 or 28.8% to $3.1 million for 1998, compared to
$2.4 million for 1997. This increase can primarily be attributed to a
prepayment fee incurred on a FHLB advance of $227,000, and increases in supplies
expense, audit and accounting expenses and NOW account expense of $84,000,
$81,000 and $68,000, respectively.
================================================================================
ESB Financial Corporation 12 1998 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
- --------------------------------------------------------------------------------
Provision for income taxes. The provision for income taxes decreased $467,000
or 23.5% to $1.5 million for 1998, compared to $2.0 million for 1997. This
decrease was primarily the result of an increase in tax-free investments of
$45.3 million or 84.1% to $99.0 million for 1998, compared to $54.7 million for
1997.
1997 Results Compared to 1996 Results
General. The Company reported net income of $5.4 million and $2.8 million for
1997 and 1996, respectively. The $2.6 million increase in net income between
1997 and 1996, can primarily be attributed to an increase in operating results
associated with the acquisition of Troy Hill, including a $2.4 million increase
in net interest income and a $396,000 increase in noninterest income. Partially
offsetting these favorable variances was a $1.2 million increase in noninterest
expense and a $444,000 increase in the provision for income taxes, exclusive of
the 1996 SAIF charge and related tax benefit.
Net interest income. Tax equivalent net interest income increased $2.4 million
or 15.5% to $18.2 million for 1997, compared to $15.8 million for 1996. This
increase in net interest income can be attributed to an increase in interest
income of $8.2 million, partially offset by an increase in interest expense of
$5.7 million.
Interest income. Interest income increased $8.2 million or 16.9% to $56.5
million for 1997, compared to $48.4 million for 1996. This increase in interest
income can be attributed to increases in interest earned on loans receivable,
cash equivalents and FHLB stock of $7.9 million, $190,000 and $152,000,
respectively, partially offset by a decrease in interest earned on securities of
$84,000.
Interest earned on securities decreased only $84,000 to $30.9 million for 1997,
compared to $31.0 million for 1996 as average balances and rates remained
relatively consistent between the two years.
Interest earned on loans receivable increased $7.9 million or 48.3% to $24.2
million for 1997, compared to $16.3 million for 1996. This increase was
primarily attributable to an increase in the average balance of loans
outstanding of $100.6 million or 49.4% to $303.9 million for 1997 compared to
$203.4 million for 1996. Partially offsetting this volume increase, was a
slight decline in the yield on loans to 7.97% for 1997, compared to 8.03% for
1996.
Interest earned on cash equivalents increased $190,000 to $374,000 for 1997,
compared to $184,000 for 1996 as the average balance increased $2.4 million or
52.1% and the yield increased to 5.23% for 1997, compared to 3.91% for 1996.
Income from FHLB stock increased $152,000 to $1.1 million for 1997, compared to
$901,000 for 1996 as the average balance increased $2.4 million or 16.9%.
Interest expense. Interest expense increased $5.7 million or 17.5% to $38.3
million for 1997, compared to $32.6 million for 1996. This increase in interest
expense can be attributed to increases in interest incurred on deposits, FHLB
advances, reverse repurchases and other borrowings and subordinated debt of $2.2
million, $3.2 million, $163,000 and $138,000, respectively.
Interest incurred on deposits increased $2.2 million or 15.3% to $16.6 million
for 1997, compared to $14.4 million for 1996. This increase was primarily
attributable to an increase in the average balance of interest-bearing deposits
of $44.9 million or 13.5% to $376.3 million for 1997, compared to $331.4 million
for 1996. Also contributing to the increase in interest incurred on interest-
bearing deposits was an increase in the cost of deposits to 4.42% for 1997,
compared to 4.35% for 1996.
================================================================================
ESB Financial Corporation 13 1998 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
- --------------------------------------------------------------------------------
Interest incurred on FHLB advances increased $3.2 million or 18.5% to $20.6
million for 1997, compared to $17.4 million for 1996. This increase was
primarily attributable to an increase in the average balance of FHLB advances of
$44.9 million or 15.9% to $327.7 million for 1997, compared to $282.8 million
for 1996. Also contributing to the increase in interest incurred on FHLB
advances was an increase in the cost of these funds to 6.29% for 1997, compared
to 6.16% for 1996.
Interest incurred on reverse repurchases and other borrowings increased $163,000
to $955,000 for 1997, compared to $792,000 for 1996, associated with increases
in average balance and cost between the two years.
Interest expense on subordinated debt of $138,000 for 1997 was related to the
$25.3 million ($24.1 million net of deferred issuance costs) trust preferred
stock offering that was completed in December 1997.
Provision for loan losses. The Company records provisions for loan losses to
bring the total allowance for loan losses to a level deemed adequate to cover
embedded losses in the loan portfolio. 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 collectibility of the loan portfolio.
The provision for loan losses decreased $74,000 or 8.5% to $799,000 for 1997,
compared to $873,000 for 1996. In both years, the majority of the provision for
loan losses recorded by the Company related to the previously disclosed concerns
related to thirteen non-performing lease agreements between the Company and
Bennett Funding Group and affiliates of Syracuse, NY. The lease agreements were
purchased by the Company and are secured by commercial equipment leases located
in various parts of the country. On March 29, 1996, it was reported that
Bennett Funding Group was the target of a civil complaint filed by the
Securities and Exchange Commission (SEC) and further reported on April 1, 1996
that Bennett Funding Group filed a Chapter 11 bankruptcy petition and was
halting payments on the lease agreements.
As a result of the foregoing, during the quarter ended March 31, 1996, the
Company placed all $3.6 million of the lease agreements on non-accrual status
and established a reserve of approximately $900,000 for potential losses related
to such lease agreements. During the quarter ended June 30, 1997, as a result
of questions concerning the ultimate collectibility of certain lease agreements
and concerns with respect to the Company's security interest in the collateral
securing certain of the lease agreements, the Company provided an additional
$600,000 in loan loss reserves. While the Company has insurance with a private
carrier with respect to a portion of the Bennett Funding Group lease agreements,
because of payments made or expected to be made on certain insured leases, the
Company does not anticipate that it will recover any significant amount of funds
under its insurance policy.
On October 15, 1997, the U.S. Bankruptcy Court for the Northern District of New
York ordered the Bankruptcy Trustee for Bennett Funding Group to pay over to the
Company within 30 days thereof an aggregate of approximately $1.3 million, which
represents principal payments, excluding interest accrued thereon and certain
setoffs on ten of the thirteen lease agreements. Such payments would reduce the
outstanding balance of the lease agreements to approximately $2.3 million. The
Court further ordered the Bankruptcy Trustee to turn over to the Company on a
monthly basis payments collected on such leases. The Bankruptcy Trustee has
since appealed the Order of the Bankruptcy Court. However, in November 1997,
the Company received a payment in the amount of $1.3 million from the Trustee
and applied this payment to the outstanding principal balance of the leases.
Consequently, at December 31, 1997, the Company had $2.3 million in outstanding
Bennett Funding Group leases, compared to $3.6 million at December 31, 1996.
The total loan loss reserves associated with these leases was approximately $1.8
million at December 31, 1997.
================================================================================
ESB Financial Corporation 14 1998 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
- --------------------------------------------------------------------------------
As a result of the provision for loan losses realized during 1997 and 1996, the
Company's allowance for loan losses amounted to $4.8 million or 1.36% of the
Company's total loan portfolio at December 31, 1997, compared to $3.3 million or
1.46% at December 31, 1996. The Company's allowance for loan losses as a
percentage of non-performing loans at December 31, 1997 and 1996 was 126.4% and
81.0%, respectively.
Noninterest income. Noninterest income increased $396,000 or 58.3% to $1.1
million for 1997, compared to $679,000 for 1996. This increase can primarily be
attributed to an increase in fees and service charges of $351,000 and an
increase in net gains realized on sales of securities available for sale of
$44,000. The increase in fees and services charges can be attributed to the
acquisition of Troy Hill and the growth of loans and deposits exclusive of the
acquisition.
Noninterest expense. Noninterest expense, exclusive of the one-time SAIF
assessment of $2.2 million incurred in 1996, increased $1.2 million or 14.0% to
$9.5 million for 1997, compared to $8.3 million for 1996. This increase can be
attributed to increases in compensation and employee benefits, premises and
equipment, data processing and other expenses of $1.1 million, $59,000, $165,000
and $470,000, respectively. Partially offsetting the overall increase in
noninterest expense was a decrease in federal insurance premium expense of
$577,000 in connection with lower deposit premium rates charged subsequent to
the SAIF recapitalization.
Compensation and employee benefits expense increased $1.1 million or 24.5% to
$5.4 million for 1997, compared to $4.3 million for 1996. This increase can be
attributed to the addition of Troy Hill's employees in connection with the
acquisition and normal salary increases between the years.
Premises and occupancy expense increased $59,000 or 6.1% to $1.0 million for
1997, compared to $974,000 for 1996. This increase can be attributed to the
acquisition of Troy Hill, partially offset by a reduction in depreciation
expense related to certain assets becoming fully depreciated near the end of
1996 and the beginning of 1997.
Data processing expense increased $165,000 or 45.5% to $528,000 for 1997,
compared to $363,000 for 1996. This increase can be attributed to the
acquisition of Troy Hill, including system conversion costs of approximately
$80,000.
Other expenses increased $470,000 or 24.3% to $2.4 million for 1997, compared to
$1.9 million for 1996. This increase can be attributed to the acquisition of
Troy Hill, including an increase in goodwill amortization expense of $177,000.
Provision for income taxes. The provision for income taxes, exclusive of
consideration of the SAIF assessment, increased $433,000 or 27.9% to $2.0
million for 1997, compared to $1.6 million for 1996. This increase was
primarily the result of an increase in pre-tax income of $1.7 million between
the two years.
================================================================================
ESB Financial Corporation 15 1998 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
- --------------------------------------------------------------------------------
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 have decreased 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 two outside directors, the President and
Chief Executive Officer, Senior Vice President and Chief Financial Officer,
Senior Vice President of Operations and the Senior Vice President of Lending of
the Company. This committee, which meets at least quarterly, generally monitors
various asset and liability management policies and strategies which were
implemented by the Company over the past few years. These strategies have
included: (i) an emphasis on the investment in adjustable-rate and shorter
duration mortgage-backed securities and (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 and (iii) the
purchase of off-balance sheet interest rate caps which help to insulate the
Bank's interest rate risk position from increases in interest rates.
As of December 31, 1998, the implementation of these asset and liability
initiatives resulted in the following: (i) $170.2 million or 44.7% of the
Company's total loan portfolio had adjustable interest rates or maturities of 12
months or less; (ii) $114.8 million or 44.9% of the Company's portfolio of
single-family residential mortgage loans (including residential construction
loans) consisted of ARMs and (iii) $95.7 million or 25.5% of the Company's
portfolio of mortgage-backed securities (including mortgage-backed securities
available for sale) were secured by ARMs and (iv) the Company had $120.0 million
in notional amount of interest rate caps.
Interest Rate Sensitivity Gap Analysis
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 being able to maintain a one-year interest rate
sensitivity gap ranging between a positive 5.0% of total assets to a negative
15.0% 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 December 31, 1998, the
Company's interest-earning assets maturing or repricing within one year totaled
$389.2 million while the Company's interest-bearing liabilities maturing or
repricing within one-year totaled $388.2 million, providing an excess of
interest-earning assets over interest-bearing liabilities of $1.0 million or a
positive 0.1% of total assets. At December 31, 1998, the percentage of the
Company's assets to liabilities maturing or repricing within one year was
100.3%. The Company does not presently anticipate that its one-year interest
rate sensitivity gap will fluctuate beyond a range of a positive 5.0% of total
assets to a negative 15.0% of total assets.
================================================================================
ESB Financial Corporation 16 1998 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
- --------------------------------------------------------------------------------
The following table presents the amounts of interest-earning assets and
interest-bearing liabilities outstanding as of December 31, 1998 which are
expected to mature, prepay or reprice in each of the future time periods
presented:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) Due in Due within Due within Due within Due in
six months six months one to three to over
or less to one year three years five years five years Total
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $289,464 $ 99,741 $ 212,143 $ 103,120 $223,280 $927,748
Total interest-bearing liabilities 294,136 94,057 339,482 89,826 81,318 898,819
------------ ------------ ------------ ------------ ------------ ------------
Maturity or repricing gap during the period $ (4,672) $ 5,684 $(127,339) $ 13,294 $141,962 $ 28,929
============ ============ ============ ============ ============ ============
Cumulative gap $ (4,672) $ 1,012 $(126,327) $(113,033) $ 28,929
============ ============ ============ ============ ============
Ratio of gap during the period to total assets (0.48%) 0.58% (13.09%) 1.37% 14.60%
============ ============ ============ ============ ============
Ratio of cumulative gap to total assets (0.48%) 0.10% (12.99%) (11.62%) 2.97%
============ ============ ============ ============ ============
Total assets $972,438
============
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
Interest Rate Sensitivity Simulation Analysis
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 net portfolio equity
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, net interest income may not
change by more than 10% for a one-year period.
Portfolio equity simulation. Portfolio equity is the net present value of
the Company's existing assets and liabilities. Given a 200 basis point
immediate and permanent increase or decrease in market interest rates,
portfolio equity may not correspondingly decrease or increase by more than
50% of stockholders' equity.
================================================================================
ESB Financial Corporation 17 1998 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
- --------------------------------------------------------------------------------
Interest Rate Sensitivity Simulation Analysis (continued)
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
portfolio equity. This analysis was done assuming that the interest-earning
asset and interest-bearing liability levels at December 31, 1998 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, 1998 levels for net interest income, return on average equity and diluted
searnings 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, 1998 for portfolio equity:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
Increase Decrease
---------------------------------------------------
+100 +200 -100 -200
BP BP BP BP
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income - increase (decrease) 4.52% 6.83% (2.03%) (4.31%)
Return on average equity - increase (decrease) 7.62% 19.98% (3.46%) (7.39%)
Diluted earnings per share - increase (decrease) 7.69% 12.50% (3.85%) (7.69%)
Portfolio equity - increase (decrease) (12.05%) (26.99%) 11.04% 20.88%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
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
portfolio equity. This analysis was done assuming that the interest-earning
asset and interest-bearing liability levels at December 31, 1997 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, 1997 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, 1997 for portfolio equity:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Increase Decrease
---------------------------------------------------
+100 +200 -100 -200
BP BP BP BP
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income - increase (decrease) 0.92% 2.67% (0.17%) (0.76%)
Return on average equity - increase (decrease) 3.84% 4.29% (0.56%) (1.92%)
Diluted earnings per share - increase (decrease) 2.56% 5.13% - (1.71%)
Portfolio equity - increase (decrease) (13.34%) (28.88%) 10.25% 16.13%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Liquidity and Capital Resources
- -------------------------------
The Company's primary sources of funds are deposits, advances from the FHLB,
loan and security repayments and funds provided by operations. While payments
of principal and interest on loans and other investments are relatively
predictable sources of funds, deposit flows are much less predictable since they
are greatly influenced by the level of interest rates, the state of the economy,
competition and industry conditions.
================================================================================
ESB Financial Corporation 18 1998 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
- --------------------------------------------------------------------------------
Liquidity and Capital Resources (continued)
- -------------------------------------------
ESB is required by the OTS to maintain minimum levels of liquidity to ensure
their ability to meet demands for customer withdrawals and the repayment of
short-term borrowings. The liquidity requirement is calculated as a percentage
of deposits and short-term borrowings, as defined by the OTS, and currently must
be maintained at amounts not less than 4.0%.
The Banks' liquidity ratio fluctuates depending primarily upon deposit flows but
have been consistently maintained at levels in excess of the required
percentage. At December 31, 1998 the liquidity ratio was in compliance with
regulatory requirements at 19.4%. The sources of liquidity and capital
resources discussed above are believed by management to be sufficient to fund
outstanding loan commitments and meet other obligations.
Current regulatory requirements specify that ESB and similar institutions must
maintain tangible capital equal to 1.5% of adjusted totals assets, core capital
equal to 3.0% of adjusted total assets and risk-based capital equal to 8.0% of
risk-weighted assets. The Office of the Comptroller of the Currency and the
FDIC have adopted more stringent core capital requirements which require that
the most highly rated banks have a minimum core capital ratio of 3.0%, with an
additional 100 to 200 basis point cushion required for all other banks as
established by the regulator on a case-by-case basis. Both the FDIC and the OTS
reserve the right to apply this higher standard to any insured financial
institution when considering an institution's capital adequacy. At December 31,
1998, ESB was in compliance with all regulatory capital requirements with
tangible, core and risk-based capital ratios of 6.9%, 6.9% and 17.6%,
respectively.
Impact of Inflation and Changing Prices
- ---------------------------------------
The consolidated financial statements of the Company and related notes presented
herein have been prepared in accordance with generally accepted accounting
principles which require the measurement of financial condition and operating
results in terms of historical dollars, without considering changes in the
relative purchasing power of money over time due to inflation.
Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the
prices of goods and services since such prices are affected by inflation to a
larger degree than interest rates. In the current interest rate environment,
liquidity and the maturity structure of the Company's assets and liabilities are
critical to the maintenance of acceptable performance levels.
Recent Accounting and Regulatory Pronouncements
- -----------------------------------------------
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires an entity
to recognize all derivatives as either assets or liabilities in the statement of
financial position and measure the instruments at their fair value. A
derivative may be designated as a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment, a
hedge of the exposure to a variable cash flows of a forecasted transaction, or a
hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. This statement is
effective for fiscal years beginning June 15, 1999. The Company has not
determined the impact of the adoption of the standard at this time.
================================================================================
ESB Financial Corporation 19 1998 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
- --------------------------------------------------------------------------------
Year 2000
- ---------
The Year 2000 ("Y2K") issue exists because in the past many computer programs
were developed to recognize only the last two digits of a year (e.g. "98" for
"1998"). Without updating or replacing existing systems it is possible that
certain computer programs will recognize the year 2000 as 1900 because they will
key on the digits "00". The Company is aware of the issues associated with the
programming code in certain existing computer systems as the year 2000
approaches. The Y2K problem is pervasive and complex as many computer
operations may be affected in some way by the rollover of the two-digit year
value to 00. The issue is whether computer systems will properly recognize date
sensitive information when the year changes to 2000. Systems that do not
properly recognize such date could generate erroneous data or cause a system
failure.
The Securities and Exchange Commission ("SEC"), the Federal Financial
Institution's Examination Council ("FFIEC") and other federal banking regulators
have issued guidelines to assure that insured depository institutions
appropriately address Y2K issues, which primarily center on the ability of
computer systems to recognize the year 2000. The FFIEC has established that the
Y2K management process should consist of five phases (Awareness, Assessment,
Renovation, Validation and Implementation) and has established a timeline for
the completion of each phase.
The Company outsources substantially all of its data processing needs and it is
to a large extent dependent upon vendor cooperation for systems used in its day-
to-day business. The Company is working closely with its vendors to ensure that
Y2K issues will not adversely affect its operational and financial systems.
The Company has developed a Year 2000 Action Plan ("Plan") within the FFIEC
guidelines that addresses all systems, hardware and data processing applications
provided by third-party vendors and internal programs. The Awareness and
Assessment phases are completed and related to the understanding of the Y2K
problem, the establishment of a Y2K Steering Committee to oversee the overall
strategies and Plan, and identifying all hardware, software, networks,
processing platforms, vendor interdependencies and budget needs that are
affected by the Y2K date change. The Renovation phase entails assessing the
need for hardware and software upgrades, system replacements, and other
associated changes. The Company has completed the Renovation phase. The
Validation and Implementation phases entail determining the Y2K status of the
Company's mission-critical vendors through testing and certification. Testing
has been completed on a substantial number of these vendors and indications at
this time are that all of the Company's major vendors will be Year 2000
compliant. It is anticipated that the Validation and Implementation phases will
be completed by June 30, 1999. The Company is formulating contingency plans for
its major functions in the event the Company experiences system interruptions or
failures due to Y2K problems that are beyond the Company's control.
The Company has completed a conversion of its third party provided legacy
computer system to another third party provided client server, relational
database system. The decision to change third-party providers centered on
technology issues and was not based on year 2000 issues. The new system will be
tested and verified compliant within the timeframe of its Plan.
Management has budgeted approximately $65,000 for the year 1999 to cover various
Year 2000 costs. The 1999 budget covers costs such as testing the Company's
largest third-party provider's data processing system, possible renovation of
other third-party provided systems, and customer awareness communications.
Direct and indirect costs associated with Year 2000 issues have not had a
significant impact on the Company's consolidated financial statements to date
and management does not anticipate that any such future costs will be of a
material nature. However, if renovations, modifications and conversions are not
completed on a timely basis where required, the year 2000 problem could result
in additional expenses or business disruption that may have a material impact on
the operations of the Company.
================================================================================
ESB Financial Corporation 20 1998 Annual Report
<PAGE>
Consolidated Statements of Financial Condition
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1998 1997
------------- -------------
Assets
------
<S> <C> <C>
Cash on hand and in banks $ 3,140 $ 3,108
Interest-earning deposits 6,534 3,795
Federal funds sold 629 12,044
Securities available for sale; cost of $480,537 and $423,350 481,234 426,662
Securities held to maturity; market value of $64,033 and $90,585 63,815 91,359
Loans receivable, net 360,280 336,757
Accrued interest receivable 6,792 6,075
Federal Home Loan Bank (FHLB) stock 18,435 17,826
Premises and equipment, net 6,193 3,319
Real estate acquired through foreclosure, net 21 288
Prepaid expenses and other assets 10,359 9,537
Bank owned life insurance 15,006 -
------------- -------------
Total assets $972,438 $910,770
============= =============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits $423,051 $399,568
Borrowed funds 456,355 411,024
Guaranteed preferred beneficial interest in subordinated debt, net 24,027 24,146
Advance payments by borrowers for taxes and insurance 3,171 3,298
Accrued expenses and other liabilities 4,751 4,225
------------- -------------
Total liabilities 911,355 842,261
------------- -------------
Stockholders' Equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized;
none issued - -
Common stock, $.01 par value, 10,000,000 shares authorized;
6,337,755 and 5,819,808 shares issued;
5,265,886 and 5,270,553 shares outstanding 63 58
Additional paid-in capital 59,448 48,646
Treasury stock, at cost; 1,071,869 and 549,255 shares (16,841) (7,363)
Unearned Employee Stock Ownership Plan (ESOP) shares (2,681) (2,551)
Unvested shares held by Management Recognition Plan (MRP) (237) (237)
Retained earnings, substantially restricted 20,870 27,747
Accumulated other comprehensive income, net 461 2,209
------------- -------------
Total stockholders' equity 61,083 68,509
------------- -------------
Total liabilities and stockholders' equity $972,438 $910,770
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
================================================================================
ESB Financial Corporation 21 1998 Annual Report
<PAGE>
Consolidated Statements of Financial Condition
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except share data)
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------
1998 1997 1996
----------- ------------ ------------
<S> <C> <C> <C>
Interest income:
Loans receivable $27,852 $24,231 $16,336
Securities available for sale 29,903 23,845 23,238
Securities held to maturity 4,547 5,508 6,232
FHLB stock 1,191 1,053 901
Deposits with banks and federal funds sold 298 374 184
----------- ------------ ------------
Total interest income 63,791 55,011 46,891
----------- ------------ ------------
Interest expense:
Deposits 17,640 16,629 14,428
Borrowed funds 27,279 21,579 18,201
Guaranteed preferred beneficial interest in
subordinated debt 2,221 138 -
----------- ------------ ------------
Total interest expense 47,140 38,346 32,629
----------- ------------ ------------
Net interest income 16,651 16,665 14,262
Provision for loan losses 5 799 873
----------- ------------ ------------
Net interest income after provision for loan losses 16,646 15,866 13,389
----------- ------------ ------------
Noninterest income:
Fees and service charges 1,465 1,014 663
Net realized gain (loss) on sales of securities
available for sale 377 9 (35)
Other 97 52 51
----------- ------------ ------------
Total noninterest income 1,939 1,075 679
----------- ------------ ------------
Noninterest expense:
Compensation and employee benefits 6,161 5,350 4,296
Premises and equipment 1,088 1,037 974
Federal deposit insurance premiums 245 197 2,970
Data processing 485 528 363
Other 3,088 2,398 1,932
----------- ------------ ------------
Total noninterest expense 11,067 9,510 10,535
----------- ------------ ------------
Net income before provision for income taxes 7,518 7,431 3,533
Provision for income taxes 1,517 1,984 703
----------- ------------ ------------
Net income $ 6,001 $ 5,447 $ 2,830
=========== ============ ============
Net income per share:
Basic $1.12 $1.02 $0.61
=========== ============ ============
Diluted $1.08 $0.98 $0.59
=========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
================================================================================
ESB Financial Corporation 22 1998 Annual Report
<PAGE>
Consolidated Statements of Changes in Stockholders' Equity
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except share data)
<TABLE>
<CAPTION>
Accumulated
other
Additional Unearned Unvested comprehensive Total
Common paid-in Treasury ESOP MRP Retained income, net of stockholders'
stock capital stock Shares Shares earnings tax equity
------ ---------- --------- -------- -------- -------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 44 $ 26,045 $ (4,883) $ (1,205) $ - $ 33,706 $ 1,219 $ 54,926
Comprehensive results:
Net income for 1996 - - - - - 2,830 - 2,830
Other comprehensive results
net of tax - - - - - - (1,083) (1,083)
---- -------- --------- -------- ----- -------- ------- --------
Total comprehensive results 2,830 (1,083) 1,747
Cash dividends at $0.71 per share - - - - - (3,307) - (3,307)
Purchase of treasury stock, at
cost (232,979 shares) - - (2,983) - - - - (2,983)
Reissuance of treasury stock
for stock option exercises - 409 1,910 - - (1,239) - 1,080
Principal payments on ESOP debt - 11 - 215 - - - 226
Additional ESOP shares purchased - - - (146) - - - (146)
---- -------- --------- -------- ----- -------- ------- --------
Balance at December 31, 1996 44 26,465 (5,956) (1,136) - 31,990 136 51,543
Comprehensive results:
Net income for 1997 - - - - - 5,447 - 5,447
Other comprehensive results
net of tax - - - - - - 2,073 2,073
---- -------- --------- -------- ----- -------- ------- --------
Total comprehensive results 5,447 2,073 7,520
Common stock issued as a result
of the acquisition of Troy Hill
Bancorp, Inc. (THBC) 9 14,164 - (1,278) (237) - - 12,658
Cash dividends at $0.31 per share - - - - - (1,672) - (1,672)
Common stock dividends of 10% 5 7,869 - - - (7,874) - -
Payment of cash in lieu of
fractional shares for 10% stock
dividend - (13) - - - - - (13)
Purchase of treasury stock, at
cost (107,805 shares) - - (1,678) - - - - (1,678)
Reissuance of treasury stock
for stock option exercises - - 271 - - (144) - 127
Principal payments on ESOP debt - 161 - 363 - - - 524
Additional ESOP shares purchased - - - (500) - - - (500)
---- -------- --------- -------- ----- -------- ------- --------
Balance at December 31, 1997 58 48,646 (7,363) (2,551) (237) 27,747 2,209 68,509
Comprehensive results:
Net income for 1998 - - - - - 6,001 - 6,001
Other comprehensive results, net - - - - - - (1,616) (1,616)
Reclassification adjustment - - - - - - (132) (132)
---- -------- --------- -------- ----- -------- ------- --------
Total comprehensive results 6,001 (1,748) 4,253
Cash dividends at $0.35 per share - - - - - (1,861) - (1,861)
Common stock dividend of 10% 5 10,224 - - - (10,229) - -
Payment of cash in lieu of
fractional shares of 10% stock
dividend - (15) - - - - - (15)
Purchase of treasury stock, at
cost (639,565 shares) - - (10,971) - - - - (10,971)
Reissuance of treasury stock
for stock option exercises - 367 1,493 - - (788) - 1,072
Principal payments on ESOP debt - 226 - 459 - - - 685
Additional ESOP shares purchased - - - (589) - - - (589)
---- -------- --------- -------- ----- -------- ------- --------
Balance at December 31, 1998 $ 63 $ 59,448 $ (16,841) $ (2,681) $(237) $ 20,870 $ 461 $ 61,083
==== ======== ========= ======== ===== ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
================================================================================
ESB Financial Corporation 23 1998 Annual Report
<PAGE>
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except share data)
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Operating activities:
Net income $ 6,001 $ 5,447 $ 2,830
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization for premises and equipment 364 324 402
Provision for losses 6 857 881
Amortization of premiums and accretion of discounts 2,106 709 930
Origination of loans available for sale (13,409) (3,940) (268)
Proceeds from sale of loans available for sale 11,266 3,726 274
(Gain) loss on sale of securities available for sale (377) (9) 35
Amortization of intangible assets 603 543 367
Decrease (increase) in accrued interest receivable (717) 52 (906)
Decrease (increase) in prepaid expenses and other assets (493) 703 (1,238)
(Decrease) increase in accrued expenses and other liabilities 526 (398) (403)
Other 84 (145) 99
-------------- -------------- --------------
Net cash provided by operating activities 5,960 7,869 3,003
-------------- -------------- --------------
Investing activities:
Loan originations and purchases (140,377) (113,179) (89,236)
Purchases of securities available for sale (285,965) (209,803) (165,518)
Purchases of securities held to maturity (993) (12,933) (8,489)
Purchases of FHLB stock (609) (581) (2,680)
Additions to premises and equipment (3,238) (296) (301)
Purchase of bank owned life insurance (15,006) - -
Principal repayments of loans receivable 118,792 82,973 55,481
Principal repayments of securities available for sale 118,356 64,429 59,445
Principal repayments of securities held to maturity 28,172 17,402 23,789
Proceeds from the sale of securities available for sale 109,221 76,527 86,465
Proceeds from sale of REO 318 255 56
Payment for purchase of THBC, net of cash acquired - (2,734) -
-------------- -------------- --------------
Net cash used in investing activities (71,329) (97,940) (40,988)
-------------- -------------- --------------
Financing activities:
Net increase (decrease) in deposits 23,483 12,896 (5,605)
Net increase in borrowed funds 45,331 67,995 49,723
Proceeds from issuance of subordinated debt - 25,300 -
Costs associated with subordinated debt (119) (1,154) -
Proceeds received from exercise of stock options 1,072 127 671
Dividends paid (1,941) (1,615) (3,400)
Payments to acquire treasury stock (10,971) (1,678) (2,983)
Stock purchased by ESOP (589) (500) (146)
Principal repayments of ESOP loan 459 363 215
-------------- -------------- --------------
Net cash provided by financing activities 56,725 101,734 38,475
-------------- -------------- --------------
Net increase (decrease) in cash equivalents (8,644) 11,663 490
Cash equivalents at beginning of period 18,947 7,284 6,794
-------------- -------------- --------------
Cash equivalents at end of period $ 10,303 $ 18,947 $ 7,284
============== ============== ==============
</TABLE>
Continued
================================================================================
ESB Financial Corporation 24 1998 Annual Report
<PAGE>
Consolidated Statements of Cash Flows (continued)
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except share data)
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Supplemental information:
Interest paid $ 45,133 $ 38,024 $ 32,684
Income taxes paid 1,733 1,589 1,089
Non-cash transactions:
Transfers from loans receivable to real estate acquired
through foreclosure 53 201 55
Dividends declared but not paid 474 474 343
Stock dividend paid 10,229 7,874 -
Supplemental schedule of non-cash investing and financing activities:
The Company purchased all of the common stock of THBC for $23.5
million. In conjunction with the acquisition, the assets acquired an
liabilities assumed were as follows:
Fair value of assets acquired - $109,296 -
Stock and stock options issued for the purchase of THBC
common stock - (14,173) -
Cash paid for THBC common stock - (9,270) -
Liabilities assumed - (89,393) -
============== ============== ==============
Excess liabilities assumed over assets acquired - $ (3,540) -
============== ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
================================================================================
ESB Financial Corporation 25 1998 Annual Report
<PAGE>
Notes to 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, ESB Bank, F.S.B. (ESB or the Bank), PennFirst Financial
Services, Inc., PennFirst Capital Trust I (the Trust), THF, Inc. (THF) and
AMSCO, Inc. ESB is a federally chartered Federal Deposit Insurance
Corporation (FDIC) insured stock savings bank. All significant intercompany
transactions and balances have been eliminated in consolidation.
On April 3, 1997, the Company completed its acquisition of Troy Hill Bancorp,
Inc., and on June 11, 1998, merged Troy Hill Federal Savings Bank with and
into ESB Bank.
Basis of Presentation
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
Certain amounts previously reported for 1997 and 1996 have been reclassified
to conform with the financial statement presentation for 1998. All share and
related price and dividend amounts presented herein have been restated to
reflect prior period stock dividends, stock splits and the 1998 10% stock
dividend.
Cash Equivalents
Cash equivalents include cash on hand and in banks, interest-earning deposits
and federal funds sold.
Securities Available for Sale and Held to Maturity
Securities include investments primarily in bonds and notes and are
classified as either available for sale or held to maturity at the time of
purchase based on management's intent. Such intent includes consideration of
the interest rate environment, prepayment risk, credit risk, maturity and
repricing characteristics, liquidity considerations, investment and
asset/liability management policies and other pertinent factors. The
appropriateness of the classification is reassessed at each reporting date.
Securities for which the Company has the positive intent and ability to hold
to maturity are classified as held to maturity and are reported at cost,
adjusted for premiums and discounts.
Available for sale securities consist of securities that are not classified
as held to maturity. Unrealized holding gains and losses, net of applicable
income taxes, on available for sale securities are reported as a separate
component of stockholders' equity until realized. Gains and losses on the
sale of securities are determined using the specific identification method
and are included in operations in the period sold.
Declines in the fair value of securities below their cost that are other than
temporary result in the security being written down to fair value on an
individual basis. Any related write-downs are included in operations as
realized losses. Yields and carrying values for certain mortgage-backed
securities are subject to normal interest rate and prepayment risks.
Premiums and discounts on securities are recognized in interest income using
the interest method over the period to maturity.
================================================================================
ESB Financial Corporation 26 1998 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies (continued)
Loans Receivable
Loans receivable for which management has the intent and the Company has the
ability to hold for the foreseeable future or until maturity or payoff are
reported at their outstanding unpaid principal balances reduced by any
charge-offs and net of any deferred fees or costs on loans originated or
unamortized premiums or discounts on loans purchased and the allowance for
loan losses.
Interest income on loans is accrued and credited to operations as earned.
Interest income is not accrued for loans delinquent 90 days or greater.
Interest on impaired loans is discontinued when, in management's opinion, the
borrower may be unable to meet contractual payments. When interest accrual
is discontinued, all unpaid accrued interest is reversed. Interest income is
subsequently recognized only to the extent cash payments are received.
Discounts and premiums on purchased loans are recognized in interest income
using the interest method over the remaining period to contractual maturity,
adjusted for prepayments. Loan origination fees and certain direct
origination costs are capitalized and recognized as an adjustment to the
yield of the related loan over the loan's period to maturity. Loans
originated and intended for sale are carried at the lower of cost or
estimated market value in the aggregate.
The allowance for loan losses is increased by charges to operations through
the provision for loan losses and decreased by charge-offs, net of
recoveries. Management's periodic evaluation of the adequacy of the
allowance is based on the Company's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying
collateral, current economic conditions and other factors as deemed
appropriate.
The allowance for loan losses is subjective and may be adjusted in the future
depending on economic conditions and other factors. The regulatory examiners
may require the Company to recognize adjustments to the allowance based upon
their judgments about information available to them at the time of their
examinations. Loans are charged off when there has been permanent impairment
of the related carrying values.
Real Estate Acquired Through Foreclosure
Real estate properties acquired through foreclosure are initially recorded at
the lower of cost or fair value at the date of foreclosure, establishing a
new cost basis. After foreclosure, valuations are periodically performed by
management and the real estate is carried at the lower of cost or fair value
less estimated costs to sell. Revenue and expenses from operations of the
properties, gains and losses on sales and additions to the valuation
allowance are included in operating results.
Premises and Equipment
Land is carried at cost. Premises, furniture and equipment, and leasehold
improvements are carried at cost less accumulated depreciation or
amortization. Depreciation is calculated on a straight-line basis over the
estimated useful lives of the related assets, which are twenty-five to fifty
years for buildings and three to ten years for furniture and equipment.
Amortization of leasehold improvements is computed using the straight-line
method over the term of the related lease.
================================================================================
ESB Financial Corporation 27 1998 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies (continued)
Intangible Assets
Goodwill and core deposit intangible assets combined were $6.9 million and
$7.5 million as of December 31, 1998 and 1997, respectively, and are
amortized on a straight-line basis over the estimated benefit period,
generally up to fifteen years. Intangible assets are reviewed for possible
impairment when events or changed circumstances may affect the underlying
basis of the asset.
Income Taxes
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws
or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes.
Financial Instruments
The Company purchases interest rate cap and floor contracts to manage its
sensitivity to interest rate risk. These contracts may be designated as a
hedge against certain on-balance sheet financial instruments if a high
correlation exists between the contracts and the hedged instrument. High
correlation is achieved based on the results of a mathematical correlation
analysis or if the characteristics of the hedging instrument are structurally
similar to the instrument being hedged. Hedge correlation of cap or floor
contracts to a hedged instrument is reviewed periodically.
The cost of these contracts are included in prepaid expenses and other assets
and are amortized on a straight line basis over the shorter of the
contractual life of the contract or the hedged instrument. Amortization is
recorded as an adjustment to the yield or the cost of the hedged instrument.
Realized gains and losses on the sale of a cap or floor contract designated
as a hedge are deferred and amortized over the life of the hedged instrument
as interest income or interest expense or, recognized in operating results at
the time of disposition of the hedged instrument. Unrealized gains or losses
of cap and floor contracts that meet the criteria for hedge accounting are
not recognized in operating results but are included in the other
comprehensive income calculation to the extent that the hedged instrument is
a security classified as available for sale. Interest rate cap and floor
contracts that do not meet the criteria for hedge accounting are recorded at
estimated fair value with unrealized gains or losses included in operating
results.
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.
Fair Value of Financial Instruments
The following methods and assumptions were used in estimating fair values of
financial instruments.
Cash equivalents -- The carrying amounts of cash equivalents approximate
their fair values.
Securities -- Fair values for securities are based on quoted market
prices.
Accrued interest receivable and payable -- The carrying amounts of
accrued interest approximate their fair values.
================================================================================
ESB Financial Corporation 28 1998 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies (continued)
Fair Value of Financial Instruments (continued)
Loans receivable -- For variable-rate loans that reprice frequently and
have no significant change in credit risk, fair values are based on
carrying values. Fair values for certain residential mortgage and
consumer loans are based on quoted market prices of similar loans sold in
conjunction with securitization transactions, adjusted for differences in
loan characteristics. Fair values of commercial real estate and
commercial business 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.
FHLB stock -- FHLB stock is restricted for trading purposes, and thus,
the carrying value approximates fair value.
Deposits -- The fair values disclosed for demand deposits are, by
definition, equal to the amount payable on demand at the reporting date.
Fair values for certificates of deposit are estimated using a discounted
cash flow calculation that applies current market interest rates to a
schedule of aggregated expected monthly maturities.
Borrowed funds and Subordinated debt -- For variable rate borrowings,
fair values are based on carrying values. For fixed rate borrowings, fair
values are based on the discounted value of contractual cash flows and on
the Company's current incremental borrowing rates for similar types of
borrowing arrangements.
Loan commitments -- The fair value of loan commitments at December 31,
1998 and 1997 approximated the carrying value of those commitments at
those dates.
Interest rate contracts -- Estimated fair values of interest rate
contracts are based on quoted market prices, dealer quotes and prices
obtained from independent pricing services.
Bank owned life insurance (BOLI) -- The fair value of BOLI at December
31, 1998 approximated the cash surrender value of the policies at that
date.
Net Income Per Share
Net income per share is calculated by dividing net operating results for the
period by the weighted average number of common shares and equivalents
outstanding during the period. Net income per share and weighted average
shares and equivalents outstanding for all periods reported have been
restated to reflect stock dividends and splits. For purposes of computing
basic net income per share for 1998, 1997 and 1996, the weighted average
shares outstanding were 5,338,393, 5,365,751 and 4,659,905, respectively.
For purposes of computing diluted net income per share for 1998, 1997 and
1996, the weighted average shares and equivalents outstanding were 5,569,298,
5,551,611 and 4,793,276, respectively. For all periods, the difference
between average basic and average diluted shares represented the dilutive
impact of stock options.
Options to purchase 63,735 shares of common stock at $18.00 per share were
outstanding as of December 31, 1998 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. The options expire on
June 30, 2008.
================================================================================
ESB Financial Corporation 29 1998 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
2. Securities
The following table summarizes the Company's securities as of December 31:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
(In thousands) Amortized Unrealized Unrealized Fair
cost gains losses value
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
- -------------------
December 31, 1998:
Trust Preferred securities $ 3,275 $ 54 $ (29) $ 3,300
Municipal securities 99,035 2,258 (195) 101,098
Equity securities 2,101 348 (157) 2,292
Corporate Bonds 52,649 - (2,329) 50,320
Mortgage-backed securities 323,477 1,637 (890) 324,224
------------ ----------- ------------ ------------
$ 480,537 $ 4,297 $ (3,600) $ 481,234
============ =========== ============ ============
December 31, 1997:
U.S. Government securities $ 4,015 $ 39 $ - $ 4,054
Municipal securities 53,782 1,864 (4) 55,642
Equity securities 1,265 29 - 1,294
Mortgage-backed securities 364,288 2,204 (820) 365,672
------------ ----------- ------------ ------------
$ 423,350 $ 4,136 $ (824) $ 426,662
============ =========== ============ ============
Held to maturity:
- -----------------
December 31, 1998:
U.S. Government securities $ 4,986 $ 41 $ - $ 5,027
Municipal securities 7,994 210 - 8,204
Mortgage-backed securities 50,835 105 (138) 50,802
------------ ----------- ------------ ------------
$ 63,815 $ 356 $ (138) $ 64,033
============ =========== ============ ============
December 31, 1997:
U.S. Government securities $ 15,479 $ 57 $ (58) $ 15,478
Municipal securities 7,536 96 (1) 7,631
Mortgage-backed securities 68,344 26 (894) 67,476
------------ ----------- ------------ ------------
$ 91,359 $ 179 $ (953) $ 90,585
============ =========== ============ ============
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Gross realized gains and gross realized losses on sales of securities
available for sale were $923,000 and $546,000, respectively, in 1998,
$910,000 and $901,000, respectively, in 1997 and $724,000 and $759,000,
respectively, in 1996.
At December 31, 1998 the Company had the following Corporate Bonds in which
the book value exceeded 10% of stockholders' equity: Bank America Capital
III and PNC Capital Trust Corp., respectively, with book values and market
values of $6.6 million and $7.4 million, respectively, and $6.3 million and
$7.0 million, respectively. Both issues are classified as investment grade
debt by a national rating service.
================================================================================
ESB Financial Corporation 30 1998 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
2. Securities (continued)
The following table summarizes scheduled maturities of the Company's
securities as of December 31, 1998, excluding equity securities which have no
maturity dates:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
(In thousands) Available for sale Held to maturity
---------------------------- -----------------------------
Amortized Fair Amortized Fair
cost value cost value
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 6,265 $ 6,351 $ 2,993 $ 3,030
Due from one year to five years 23,790 24,687 19,416 19,327
Due from five to ten years 14,145 14,440 31,347 31,371
Due after ten years 434,236 433,464 10,059 10,305
------------ ----------- ------------ ------------
$ 478,436 $ 478,942 $ 63,815 $ 64,033
============ =========== ============ ============
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
Securities, with carrying values of $6.1 million and $7.7 million as of
December 31, 1998 and 1997, respectively, were pledged to secure public
deposits and for other purposes required or permitted by law.
3. Loans Receivable
The following table summarizes the Company's loans receivable as of
December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
(In thousands) 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage loans:
Residential - single family $ 225,054 $ 222,994
Residential - multi family 11,206 8,685
Commercial real estate 32,300 31,489
Construction 41,215 29,710
------------- -------------
309,775 292,878
Other loans:
Consumer loans 56,897 51,718
Commercial business 14,216 8,359
------------- -------------
380,888 352,955
Less:
Allowance for loan losses 4,815 4,807
Deferred loan fees and net discounts 785 723
Loans in process 15,008 10,668
------------- -------------
$ 360,280 $ 336,757
============= =============
- --------------------------------------------------------------------------------------------
</TABLE>
Non-performing loans, which included only non-accrual loans, were $5.0
million and $3.8 million at December 31, 1998 and 1997, respectively.
================================================================================
ESB Financial Corporation 31 1998 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
3. Loans Receivable (continued)
For non-performing loans, the interest income that would have been recorded
under the original terms of such loans and the interest income actually
recognized for the years ended December 31 are summarized below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income that would have been recorded $ 1,028 $ 705 $ 312
Interest income recognized 688 347 80
---------- ---------- ----------
Interest income foregone $ 340 $ 358 $ 232
========== ========== ==========
- ------------------------------------------------------------------------------------------------------
</TABLE>
The Company is not committed to lend additional funds to debtors whose loans
are on non-accrual status.
The following is a summary of the changes in the allowance for loan losses:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
(In thousands)
Totals
- ----------------------------------------------------------------------
<S> <C>
Balance, December 31, 1995 $ 2,471
Provision for losses 873
Charge offs (52)
Recoveries 17
----------
Balance, December 31, 1996 3,309
Allowance for loan losses of Troy Hill 866
Provision for losses 799
Charge offs (245)
Recoveries 78
----------
Balance, December 31, 1997 4,807
Provision for losses 5
Charge offs (18)
Recoveries 21
----------
Balance, December 31, 1998 $ 4,815
==========
- ----------------------------------------------------------------------
</TABLE>
At December 31, 1998 and 1997, the recorded investment in loans considered to
be impaired under SFAS No. 114 was $3.7 million and $2.7 million,
respectively, against which $2.0 million and $1.9 million, respectively, of
the allowance for loan losses was allocated.
During 1998, 1997 and 1996, impaired loans averaged $3.7 million, $3.9
million and $2.8 million, respectively. The Company recognized interest
income of $81,000, on a cash basis, on impaired loans during 1998 with no
significant interest income on impaired loans recognized during 1997.
Interest income of $83,000 was recognized, on a cash basis, on impaired loans
during 1996.
The Company conducts its business through eleven offices in Allegheny,
Beaver, Butler and Lawrence counties, Pennsylvania and primarily lends in
this geographical area. Management does not believe it has significant
concentrations of credit risk to any one group of borrowers given its
underwriting and collateral requirements.
================================================================================
ESB Financial Corporation 32 1998 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
4. Investment Required by Law
The Company's subsidiary bank is a member of the Federal Home Loan Bank
(FHLB) System. As a member, the Bank maintains an investment in the capital
stock of the FHLB of Pittsburgh, at cost, in an amount not less than 1.0% of
the unpaid principal balances of residential mortgage loans, 0.3% of total
assets or 5.0% of outstanding advances, if any, due to the FHLB, whichever is
greater, as calculated periodically by the FHLB. Purchases and sales of FHLB
stock are made directly with the FHLB at par.
5. Premises and Equipment
Premises and equipment at December 31 are summarized by major classification
as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(In thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Land $ 1,192 $ 1,192
Buildings and improvements 6,112 4,173
Leasehold improvements 391 391
Furniture, fixtures and equipment 4,567 3,714
---------- ----------
12,262 9,470
Less accumulated depreciation and amortization 6,069 6,151
---------- ----------
$ 6,193 $ 3,319
========== ==========
- --------------------------------------------------------------------------------
</TABLE>
Depreciation and amortization expense for the years December 31, 1998, 1997
and 1996 were $364,000, $324,000 and $402,000, respectively.
The Company is obligated under non-cancelable long term operating lease
agreements for certain branch offices. These lease agreements, each having
renewal options and none expiring later than 2007, have approximate aggregate
rentals of $68,400, $65,760, $65,760, $65,960, $68,160 and $87,220 for the
years ended December 31, 1999, 2000, 2001, 2002, 2003 and thereafter,
respectively. Rent expense for the years ended December 31, 1998, 1997 and
1996 was $98,000, $92,000 and $73,000, respectively.
================================================================================
ESB Financial Corporation 33 1998 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
6. Deposits
The following table summarizes the Company's deposits as of December 31:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) 1998 1997
---------------------------------------- ----------------------------------------
Weighted Weighted
average average
Type of accounts rate Amount % rate Amount %
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing deposits - $ 6,002 1.4% - $ 4,675 1.2%
Interest-bearing demand deposits 2.34% 156,994 37.1% 2.47% 150,994 37.8%
Time deposits 5.54% 260,055 61.5% 5.81% 243,899 61.0%
------------ ------------ ------------ ------------
4.27% $ 423,051 100.0% 4.48% $ 399,568 100.0%
============ ============ ============ ============
Time deposits mature as follows:
Within one year $ 145,231 34.3% $ 145,953 36.5%
After one year through two years 72,845 17.2% 46,005 11.5%
After two years through three years 18,438 4.4% 33,059 8.3%
Thereafter 23,541 5.6% 18,882 4.7%
------------ ------------ ------------ ------------
$ 260,055 61.5% $ 243,899 61.0%
============ ============ ============ ============
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company had a total of $57.9 million and $43.3 million in deposits of
$100,000 or more at December 31, 1998 and 1997, respectively.
Interest expense by type of deposit account for the year ended December 31 is
as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
(In thousands ) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest-bearing demand deposits $ 3,905 $ 3,934 $ 4,101
Time deposits 13,735 12,684 10,309
------------ ------------ ------------
$ 17,640 $ 16,618 $ 14,410
============ ============ ============
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Interest expense on advance payments by borrowers for taxes and insurance,
not included above, for the years ended December 31, 1997 and 1996 was
$11,000 and $18,000, respectively. There was no expense incurred in 1998
because the Company ceased paying interest on advance payments by borrowers
for taxes and insurance.
================================================================================
ESB Financial Corporation 34 1998 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
7. Borrowed Funds
Borrowed funds, which include FHLB advances, reverse repurchase agreements
and treasury tax and loan notes payable, as of December 31 are summarized as
follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) 1998 1997
------------------------ ------------------------
Weighted Weighted
average average
rate Amount rate Amount
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FHLB advances:
Due within 12 months 5.99% $ 98,595 5.59% $175,272
Due beyond 12 months but within 5 years 6.04% 206,660 6.42% 179,065
Due beyond 5 years but within 10 years 7.79% 440 7.79% 440
Due beyond 10 years 6.01% 270 5.93% 274
------------ ------------
305,965 355,051
Reverse repurchase agreements:
Due within 90 days 5.29% $ 44,860 5.90% $ 13,400
Due beyond 90 days but within 5 years 5.59% 105,500 5.86% 42,400
------------ ------------
150,360 55,800
Treasury tax and loan note payable 30 173
------------ ------------
$456,355 $411,024
============ ============
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
FHLB advances are secured by FHLB stock, qualifying residential mortgage
loans and mortgage-backed securities to the extent that the fair market value
of such pledged collateral must be at least equal to the advances
outstanding.
The Company enters into sales of securities under agreements to repurchase.
Such reverse repurchase agreements are treated as borrowed funds. The dollar
amount of the securities underlying the agreements remain in their respective
asset accounts.
Reverse repurchase agreements 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 exceeds the carrying value of the
securities sold under agreements to repurchase. The market value of these
securities as of December 31, 1998 and 1997 was $167.2 million and $64.4
million, respectively. The carrying value of these securities as of December
31, 1998 and 1997 was $166.8 million and $64.3 million, respectively.
Borrowings under reverse repurchase agreements averaged $113.7 million, $16.0
million and $14.1 million during 1998, 1997 and 1996, respectively. The
maximum amount outstanding at any month-end was $150.4 million, $55.8 million
and $15.8 million during 1998, 1997 and 1996, respectively.
================================================================================
ESB Financial Corporation 35 1998 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
7. Borrowed Funds (continued)
The following table sets forth the securities collateralizing the reverse
repurchase agreements and their respective maturities:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
(amounts in thousands) Mortgage-backed
Securities
- ---------------------------------------------------------------------------------------
<S> <C>
Maturing:
Overnight $ -
Up to 30 days -
30 to 90 days -
Over 90 days 166,834
Demand -
------------
$ 166,834
============
- ---------------------------------------------------------------------------------------
</TABLE>
The Company, through ESB, has an agreement with the Federal Reserve Bank of
Cleveland whereby ESB is an authorized treasury tax loan depository. Under
the terms of the note agreement, funds deposited to the Company's treasury
tax and loan account (limited to $150,000 per deposit) accrue interest at a
rate of 0.25% below the overnight federal funds rate.
8. Guaranteed Preferred Beneficial Interest in Subordinated Debt
On December 9, 1997, the Trust, a statutory business trust established under
Delaware law that is a subsidiary of the Company, issued $25.3 million,
8.625% Trust Preferred Securities (Preferred Securities) with a stated value
and liquidation preference of $10 per share. The Trust's obligations under
the Preferred Securities issued are fully and unconditionally guaranteed by
the Company.
The proceeds from the sale of the Preferred Securities were utilized by the
Trust to invest in $25.3 million of 8.625% Junior Subordinated Debentures
(the 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. 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 31, 2027, on or after December 31, 2002, at 100% of the
stated 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 December 7, 1997, the Company may redeem in whole, but not in
part, the Subordinated Debt prior to December 31, 2027.
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.
Unamortized deferred debt issuance costs associated with the Preferred
Securities amounted to $1.3 million and $1.2 million as of December 31, 1998
and 1997, respectively, and are amortized on a level-yield basis over the
term of the Preferred Securities.
================================================================================
ESB Financial Corporation 36 1998 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
9. Income Taxes
The provision for income taxes for the years ended December 31 is comprised
of the following:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 1,363 $ 1,435 $ 1,030
State 446 416 171
----------- ----------- -----------
1,809 1,851 1,201
Deferred:
Federal (292) 133 (498)
----------- ----------- -----------
(292) 133 (498)
----------- ----------- -----------
$ 1,517 $ 1,984 $ 703
=========== =========== ===========
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
In addition to income taxes applicable to income before taxes in the
consolidated statements of operations, the following income tax amounts were
recorded to stockholders' equity during the years ended December 31:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss (gain) on securities
available for sale $ 901 $ (1,068) $ 559
Compensation expense for tax purposes
in excess of amounts recognized for
financial statement purposes 367 - 409
=========== =========== ===========
$ 1,268 $ (1,068) $ 968
=========== =========== ===========
- ----------------------------------------------------------------------------------------------------------
</TABLE>
The tax effects of temporary differences between the financial reporting
basis and income tax basis of assets and liabilities that are included in the
net deferred tax asset as of December 31 relate to the following:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
(In thousands) 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowances for losses on loans and real estate owned $ 989 $ 741
Interest and fees on loans 88 125
Reserve for uncollected interest 35 31
Premises and equipment 66 77
Minimum tax credit carry forward 101 -
----------- -----------
Gross deferred tax assets 1,279 974
Deferred tax liabilities:
Investment securities available for sale 237 1,138
Other 168 155
----------- -----------
Gross deferred tax liabilities 405 1,293
----------- -----------
Net deferred tax (liability) asset $ 874 $ (319)
=========== ===========
- ----------------------------------------------------------------------------------------------------------
</TABLE>
The Company determined that it was not required to establish a valuation
allowance for deferred tax assets in accordance with SFAS No. 109 since it is
more likely than not that the deferred tax asset will be realized through
carry-back to taxable income in prior years, future reversals of existing
taxable temporary differences, and, to a lesser extent, future taxable
income.
================================================================================
ESB Financial Corporation 37 1998 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
9. Income Taxes (continued)
A reconciliation between the provision for income taxes and the amount
computed by multiplying operating results before income taxes by the
statutory federal income tax rate of 34% for the years ended December 31
is as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax at statutory rate 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
Tax free interest, net of interest disallowance (17.8%) (11.1%) (23.1%)
State income taxes, net of Federal income tax benefit 4.0% 3.7% 3.2%
Goodwill 2.7% 2.2% 3.4%
Other, net (2.7%) (2.1%) 2.4%
----------- ----------- -----------
Reported rate 20.2% 26.7% 19.9%
=========== =========== ===========
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company and its subsidiaries file a consolidated federal income tax
return. Prior to 1996, the Bank was permitted under the Internal Revenue
Code to deduct an annual addition to a reserve for bad debts in determining
taxable income, subject to certain limitations. Subsequent to 1995, the
Bank's bad debt deduction is based on actual net charge-offs. Bad debt
deductions for income tax purposes are included in taxable income of later
years only if the Bank's base year bad debt reserve is used subsequently for
purposes other than to absorb bad debt losses. Because the Bank does not
intend to use the reserve for purposes other than to absorb losses, no
deferred income taxes have been provided prior to 1987. Retained earnings at
December 31, 1997 (the most recent date for which a tax return has been
filed) include approximately $13.9 million representing such bad debt
deductions for which no deferred income taxes have been provided.
10. Employee Benefit Plans
Retirement Savings Plan
The Company has a defined contribution employee retirement plan for the
benefit of substantially all employees. The plan provides for regular
employer payments that match each participating employee's contribution to
their individual tax-deferred retirement account. Employees can contribute
up to 15% of their compensation to the plan, and the Company matches 100%
of the first 1% and 50% of the remaining 2% through 6% of employee
contributions. The Company contributed $126,000, $110,000 and $102,000 to
the plan during 1998, 1997 and 1996, respectively.
Employee Stock Ownership Plan
The Company has a tax qualified Employee Stock Ownership Plan (ESOP) for the
benefit of its employees. All employees who complete one year of service are
eligible to participate in the ESOP.
Participants become 100% vested in their accounts in the ESOP after five
years of service or, if earlier, upon death, disability or attainment of
normal retirement age.
================================================================================
ESB Financial Corporation 38 1998 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
10. Employee Benefit Plans (continued)
The purchase of shares of the Company's stock by the ESOP are funded by
loans from the Company. Unreleased ESOP shares collateralize the loans
payable to the Company, and the cost of these shares is recorded as a
contra-equity account in stockholders' equity of the Company. The ESOP's
loans payable to the Company bear a weighted-average interest rate of 8.0%
and mature within the next two to 15 years. Shares are released as debt
payments are made by the ESOP to the Company. The ESOP's sources of
repayment of the loans can include dividends, if any, on the unallocated
stock held by the ESOP and discretionary contributions from the Company to
the ESOP and earnings thereon. Dividends received on unallocated ESOP shares
during 1998, 1997 and 1996 amounted to $93,000, $53,000 and $81,000,
respectively.
In November 1993, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) No. 93-6, "Employers' Accounting for
Employee Stock Ownership Plans", which prescribes comprehensive accounting
guidance for ESOPs. The major requirements of SOP No. 93-6 provide, among
other provisions, that compensation is recognized under the shares released
method and compensation expense is equal to the fair value of the shares
committed to be released and unallocated ESOP shares are excluded from
outstanding shares for purposes of computing EPS. The Company adopted SOP
No. 93-6 on January 1, 1994 for shares acquired by the ESOP after that date.
As of December 31, 1998 there was a total of 79,000 shares in the ESOP
accounted for under accounting guidance provided prior to the issuance of
SOP No. 93-6, including 6,000 unallocated shares. Compensation expense on
the release of these pre-SOP No. 93-6 shares is recognized upon release
based on the original cost of these shares when they were purchased by the
ESOP. Unallocated pre-SOP 93-6 shares are included in outstanding shares for
purposes of computing EPS.
During 1998, 1997 and 1996, the Company recognized compensation expense
related to the ESOP of $685,000, $458,000 and $228,000, respectively.
As of December 31, 1998 and 1997 the ESOP held a total of 556,105 and
548,120 shares, respectively, of the Company's stock, and there were 225,679
and 236,833 unallocated shares, respectively, with a value of $3.7 million
and $4.1 million, respectively.
Stock Option Plans
The Company maintains Stock Option Plans (Option Plans) which provide for
the grant of stock options to directors, officers and other key employees.
The Option Plans provide for the grant of both incentive stock options and
compensatory stock options. Granted stock options are granted at an exercise
price equal to the market price at the date of grant, typically vest within
six months of the date of grant and have a maximum term of ten years.
The Company has elected to follow the Accounting Principles Board (APB) No.
25, "Accounting for Stock Issued to Employees", and related interpretations
in accounting for its employee stock options because, as discussed below,
the alternative fair value accounting provided under SFAS No. 123,
"Accounting for Stock-Based Compensation", requires use of option valuation
models that were not developed for use in valuing employee stock options.
Under APB No. 25, because the exercise price of the Company's stock options
equal the market price of the underlying stock on the date of grant, no
compensation expense is recognized. Pro forma information regarding net
income and net income per share is required by SFAS No. 123, and has been
determined as if the Company had accounted for stock options under the fair
value method of that statement. The fair value of these options was
estimated at the date of grant using the Black-Scholes Option Pricing Model
with the following weighted-average assumptions for 1998, 1997 and 1996:
risk-free interest rates of 6.8%; dividend yields of 2.8%; volatility
factors of the expected market price of the Company's stock of 19.0%; and a
weighted average life of the option of seven years.
================================================================================
ESB Financial Corporation 39 1998 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
10. Employee Benefit Plans (continued)
The Black-Scholes Valuation Model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input
of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those of traded options and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its stock options.
For the purpose of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the option's vesting period. The
Company's pro forma results including consideration of this amortized
expense are as follows for the years ended December 31:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
(Dollar amounts in thousands, except share data) 1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pro forma net income $ 5,782 $ 5,249 $ 2,708
Pro forma diluted net
income per share $ 1.03 $ 0.94 $ 0.56
- -------------------------------------------------------------------------------------
</TABLE>
Stock option activities under the Option Plans for the years ended December
31 are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------- ----------------------------- -----------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options (1) Price/Share (1) Options (1) Price/Share (1) Options (1) Price/Share (1)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 475,321 $ 7.80 296,028 $ 7.28 415,558 $ 5.30
Granted 63,735 18.00 78,650 11.67 57,960 10.75
Converted - - 126,101 6.07 - -
Exercised (118,169) 5.98 (24,975) 5.08 (177,490) 3.77
Expired - - (483) 10.77 - -
------------ ------------ ------------
Outstanding at end of year 420,887 9.85 475,321 7.80 296,028 7.28
============ ============ ============
Exercisable at end of year 420,887 $ 9.85 475,321 $ 7.80 296,028 $ 7.28
============ ============ ============
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Options and price/share have been adjusted to reflect the 10% stock
dividend paid May 29, 1998, with the exception of options granted in 1998 and
35,399 exercised shares which occurred after the 10% stock dividend.
The weighted-average fair values of options granted during 1998, 1997 and
1996 utilizing the Black-Scholes Valuation Model were $5.21, $4.21 and $3.51,
respectively.
================================================================================
ESB Financial Corporation 40 1998 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
10. Employee Benefit Plans (continued)
The following table summarizes certain characteristics of issued stock
options as of December 31, 1998:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Average
Options Exercise Contractual
Plan Year Outstanding Price Life (in years)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1990 48,150 $ 3.17 1.5
1990 16,060 18.00 9.5
1992 24,431 6.30 3.3
1992 485 18.00 9.5
1994 36,101 9.46 5.5
1995 44,651 10.80 6.5
1996 53,241 10.75 7.5
1997 77,172 6.05 6.0
1997 5,162 6.66 6.0
1997 68,244 11.67 8.5
1997 47,190 18.00 9.5
------------
420,887 $ 9.85 6.5
============ ============ ============
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Management Recognition Plan
In connection with the acquisition of Troy Hill, the Company acquired shares
of stock held in trust for potential future distribution to management and
key employees for compensation purposes. As of December 31, 1998, there were
21,619 shares held in the Management Recognition Plan trust, and no shares
have been distributed or identified for distribution.
11. Other Comprehensive Income (Loss)
In complying with FAS No. 130, "Reporting Comprehensive Income", the Company
has developed the following table which includes the tax effects of the
components of other comprehensive income (loss). Other comprehensive income
(loss) consists of net unrealized gain on securities available for sale.
Other comprehensive income and related tax effects for the years ended
December 31 consists of:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
(in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Unrealized Reclassification
Gains(Loss) Adjustment
------------- ------------------
Before tax amount $ (2,466) $ (183) $ 3,141 $ (1,642)
Tax (expense) benefit 850 51 (1,068) 559
------------ ---------- ------------ ------------
After tax amount $ (1,616) $ (132) $ 2,073 $ (1,083)
============ ========== ============ ============
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
12. Commitments and Contingencies
In the ordinary course of business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. In addition, the Company is
involved in certain claims and legal actions arising in the ordinary course
of business. The outcome of these claims and actions are not presently
determinable; however, in the opinion of the Company's management, after
consulting legal counsel, the ultimate disposition of these matters will not
have a material adverse effect on the consolidated financial statements.
================================================================================
ESB Financial Corporation 41 1998 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
13. Financial Instruments
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:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
(In thousands) 1998 1997
-------------------------- -------------------------
Carrying Fair Carrying Fair
amount value amount amount
<S> <C> <C> <C> <C>
Financial assets:
Cash equivalents $ 10,303 $ 10,303 $ 18,947 $ 18,947
Securities available for sale 481,234 481,234 426,662 426,662
Securities held to maturity 63,815 64,033 91,359 90,585
Loans receivable 360,280 365,499 336,757 342,862
Accrued interest receivable 6,792 6,792 6,075 6,075
FHLB stock 18,435 18,435 17,826 17,826
Interest rate contracts 554 60 878 408
Bank owned life insurance 15,006 15,006 - -
Financial liabilities:
Deposits 423,051 427,186 399,568 401,909
Borrowed funds 456,355 460,765 411,024 413,045
Guaranteed preferred beneficial interest
in subordinated debt, net 24,027 23,100 24,146 25,300
Accrued interest payable 2,654 2,654 2,005 2,005
</TABLE>
The following table presents the notional amount of the Company's off-balance
sheet financial instruments as of December 31:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
(In thousands) 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Security purchase commitments $ - $ 14,470
Interest rate cap contracts 120,000 110,000
Loans in process and commitments:
Fixed interest rate 14,653 7,170
Variable interest rate 14,889 16,797
Lines of credit:
Commercial 15,345 8,898
Consumer 11,244 13,296
Letters of credit:
Commercial 24 158
Standby - 75
</TABLE>
Commitments to extend credit involve, to a varying degree, elements of credit
and interest rate risk in excess of amounts recognized in the consolidated
statement of financial condition. The Company's exposure to credit loss in
the event of non-performance by the other party for commitments to extend
credit is represented by the contractual amount of these commitments, less
any collateral value obtained. The Company uses the same credit policies in
making commitments as for on-balance sheet instruments. The Company's
distribution of commitments to extend credit approximates the distribution of
loans receivable outstanding.
================================================================================
ESB Financial Corporation 42 1998 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
14. Regulatory Matters and Insurance of Accounts
The Company's subsidiary bank, ESB, is subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements could result in certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Company's consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Bank must meet specific capital guidelines
that involve quantitative measures of assets, liabilities and certain off-
balance sheet items as calculated under regulatory accounting practices. The
capital amounts and their related classification for the Bank is also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
requires the Bank to maintain minimum amounts and ratios (set forth in the
table below) of tangible capital (as defined in the regulations), core (Tier
I) capital (as defined) and risk-based capital (as defined). As of December
31, 1998 the Bank meets all capital adequacy requirements to which it is
subject.
As of December 31, 1998, the most recent notification from the OTS
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as adequately capitalized, the
Bank must maintain minimum tangible, core, and risk-based capital ratios as
set forth in the table below. There are no conditions or events since that
notification that have changed the categorization.
Tangible and core capital levels in the table represented on page 44 are
presented as a percentage of total adjusted assets (as defined in the
regulations); risk based capital levels are shown as a percentage of risk-
weighted assets (as defined).
The minimal required regulatory capital percentages to be well capitalized
under prompt corrective action provisions is 5%, 6% and 10% for core, tier I
and risk-based capital ratios, respectively.
The FDIC through the Savings Association Insurance Fund insures deposits of
account holders up to $100,000 per insured depositor. To provide for this
insurance, the Bank must pay an annual premium.
Retained earnings of the Company are substantially restricted in connection
with regulations related to the insurance of deposit accounts, which require
the Company to maintain statutory reserves in retained earnings.
Additionally, these regulations limit the amount of cash dividends the Bank
may pay the Company.
================================================================================
ESB Financial Corporation 43 1998 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
14. Regulatory Matters and Insurance of Accounts (continued)
The following table sets forth certain information concerning regulatory
capital as of December 31:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
------------------ -------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital
(to risk Weighted Assets) $ 68,906 17.58% $ 31,360 8.00% $ 39,200 10.00%
Core Capital
(to Adjusted Tangible Assets) $ 64,096 6.90% $ 37,142 4.00% $ 46,428 5.00%
Tangible Capital
(to Tangible Assets) $ 64,096 6.90% $ 13,928 1.50% N/A
Tier I Capital
(to Risk Weighted Assets) $ 64,096 16.35% N/A $ 23,520 6.00%
ESB Bank
As of December 31, 1997:
Total Capital
(to risk Weighted Assets) $ 50,354 21.39% $ 18,836 8.00% $ 23,545 10.00%
Core Capital
(to Adjusted Tangible Assets) $ 47,397 6.32% $ 30,003 4.00% $ 37,503 5.00%
Tangible Capital
(to Tangible Assets) $ 47,397 6.32% $ 11,251 1.50% N/A
Tier I Capital
(to Risk Weighted Assets) $ 47,397 20.13% N/A $ 14,127 6.00%
Troy Hill
As of December 31, 1997:
Total Capital
(to risk Weighted Assets) $ 12,076 15.69% $ 6,157 8.00% $ 7,697 10.00%
Core Capital
(to Adjusted Tangible Assets) $ 11,352 9.97% $ 9,111 4.00% $ 5,694 5.00%
Tangible Capital
(to Tangible Assets) $ 11,352 9.97% $ 1,708 1.50% N/A
Tier I Capital
(to Risk Weighted Assets) $ 11,352 14.75% N/A $ 4,618 6.00%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
================================================================================
ESB Financial Corporation 44 1998 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
15. Quarterly Financial Data (unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands, except share data) First Second Third Fourth
Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998:
- -----
Interest income $ 15,752 $ 15,973 $ 16,077 $ 15,989
Interest expense 11,362 11,777 12,002 11,999
------------ ----------- ------------ ------------
Net interest income 4,390 4,196 4,075 3,990
Provision for loan losses - - 5 -
------------ ----------- ------------ ------------
Net interest income after provision for loan losses 4,390 4,196 4,070 3,990
Noninterest income 319 482 662 476
Noninterest expense 2,654 2,658 3,001 2,754
------------ ----------- ------------ ------------
Net income before income taxes 2,055 2,020 1,731 1,712
Provision for income taxes 505 471 234 307
------------ ----------- ------------ ------------
Net income $ 1,550 $ 1,549 $ 1,497 $ 1,405
============ =========== ============ ============
Diluted net income per share $ 0.27 $ 0.27 $ 0.27 $ 0.27
============ =========== ============ ============
1997:
- -----
Interest income $ 11,942 $ 14,229 $ 14,249 $ 14,591
Interest expense 8,335 9,775 9,930 10,306
------------ ----------- ------------ ------------
Net interest income 3,607 4,454 4,319 4,285
Provision for loan losses 200 600 (4) 3
------------ ----------- ------------ ------------
Net interest income after provision for loan losses 3,407 3,854 4,323 4,282
Noninterest income 182 245 352 296
Noninterest expense 2,033 2,312 2,542 2,623
------------ ----------- ------------ ------------
Net income before income taxes 1,556 1,787 2,133 1,955
Provision for income taxes 411 333 701 539
------------ ----------- ------------ ------------
Net income $ 1,145 $ 1,454 $ 1,432 $ 1,416
============ =========== ============ ============
Diluted net income per share $ 0.25 $ 0.25 $ 0.25 $ 0.25
============ =========== ============ ============
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Quarterly earnings per share data may vary from annual earnings due to rounding.
================================================================================
ESB Financial Corporation 45 1998 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
16. ESB Financial Corporation--Condensed Financial Statements (Parent Company
Only)
Following are condensed financial statements for the parent company as of
and for the years ended December 31:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Condensed Statements of Financial Condition
(In thousands) 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Interest-earning deposits $ 1,285 $ 451
Equity in net assets of subsidiaries 107,835 93,025
Other assets 2,187 1,221
----------- ------------
Total assets $ 111,307 $ 94,697
=========== ============
Liabilities and stockholders' equity:
Subordinated debt, net $ 24,027 $ 24,146
Payable to subsidiaries 26,140 1,450
Accrued expenses and other liabilities 57 592
Stockholders' equity 61,083 68,509
----------- ------------
Total liabilities and stockholders' equity $ 111,307 $ 94,697
=========== ============
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Condensed Statements of Operations
(In thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Equity in net income of subsidiaries $ 6,367 $ 5,453 $ 3,405
Management fee income 2,792 1,812 576
Interest income 1,491 278 170
------------ ----------- ------------
Total income 10,650 7,543 4,151
Expense:
Interest expense 3,615 1,408 878
Compensation and employee benefits 1,212 794 756
Other 101 101 46
------------ ----------- ------------
Total expense 4,928 2,303 1,680
------------ ----------- ------------
Net income before (benefit from) income taxes 5,722 5,240 2,471
Benefit from income taxes (279) (207) (359)
------------ ----------- ------------
Net income $ 6,001 $ 5,447 $ 2,830
============ =========== ============
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
================================================================================
ESB Financial Corporation 46 1998 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
16. ESB Financial Corporation--Condensed Financial Statements (Parent Company
Only) (continued)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Condensed Statements of Cash Flows
(In thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 6,001 $ 5,447 $ 2,830
Adjustments to reconcile net income to net cash (used in)
operating activities:
Equity in net income of subsidiaries (6,367) (5,453) (3,405)
(Gain) on securities available for sale (56) - -
Other, net (1,373) (1,668) (39)
------------ ----------- ------------
Net cash (used in) operating activities (1,795) (1,674) (614)
------------ ----------- ------------
Investing activities:
Purchases of securities (15,484) (2,549) -
Principal repayments and maturities of securities 2,865 1,271 554
Proceeds from the sale of securities available for sale 2,647 490 -
Payment for purchase of THBC, net of cash acquired - (2,734) -
------------ ----------- ------------
Net cash (used in) provided by investing activities (9,972) (3,522) 554
------------ ----------- ------------
Financing activities:
Increase (decrease) in payable to subsidiaries 24,690 (15,700) 5,650
(Decrease) Increase in subordinated debt, net (119) 24,146 -
Proceeds received from exercise of stock options 1,072 127 671
Dividends paid (1,941) (1,615) (3,400)
Payments to acquire treasury stock (10,971) (1,678) (2,983)
Stock purchased by ESOP (589) (500) (146)
Principal repayment of ESOP loan 459 363 215
------------ ----------- ------------
Net cash provided by financing activities 12,601 5,143 7
------------ ----------- ------------
Increase (decrease) in cash equivalents 834 (53) (53)
Cash equivalents at beginning of period 451 504 557
------------ ----------- ------------
Cash equivalents at end of period $ 1,285 $ 451 $ 504
============ =========== ============
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
17. Acquisition of Troy Hill Bancorp, Inc.
On April 3, 1997, the Company completed its acquisition of Troy Hill based
in Pittsburgh, Pennsylvania. Troy Hill was a community savings bank that
offered financial products and services through two branch offices in
Allegheny County, Pennsylvania.
Under terms of the merger agreement, Troy Hill Bancorp, Inc. (THBC), the
holding company for Troy Hill, merged with and into the Company. The
consideration paid by the Company in connection with the acquisition
consisted of $9.3 million in cash and 1,701,000 shares of the Company's
common stock. In addition, options to purchase shares of THBC were converted
into options to acquire 115,000 shares of the Company's common stock. The
acquisition was accounted for under the purchase method of accounting and,
accordingly, the results of operations of Troy Hill have been included in
the Company's consolidated financial statements from April 3, 1997. Goodwill
arising from this transaction was $3.5 million. The estimated useful life
for the straight-line amortization of the goodwill is expected to be 15
years.
================================================================================
ESB Financial Corporation 47 1998 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
17. Acquisition of Troy Hill Bancorp, Inc. (continued)
The following unaudited pro forma financial information presents the
combined results of operations of the Company and Troy Hill as if the
acquisition had occurred as of the beginning of 1997 and 1996, after giving
effect for certain adjustments, including primarily amortization of goodwill
and certain conversion costs and the related income tax effects.
The unaudited condensed pro forma combined statement of operations
information is intended for informational purposes only and is not
necessarily indicative of the future results of operations of the Company,
or results of operations that would have actually occurred had the
acquisition been in effect for the periods presented. The unaudited
condensed pro forma combined statements of operations for the years ended
December 31, are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands, except share data) 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income $ 57,048 $ 54,183
Interest expense 39,434 36,161
----------- -----------
Net interest income 17,614 18,022
Provision for loan losses 799 1,093
----------- -----------
Net interest income after provision for loan losses 16,815 16,929
Noninterest income 1,155 927
Noninterest expense 10,067 13,157
----------- -----------
Net income before income taxes 7,903 4,699
Provision for income taxes 2,211 1,177
----------- -----------
Net income $ 5,692 $ 3,522
=========== ===========
Diluted net income per share $ 1.13 $ 0.81
=========== ===========
- -----------------------------------------------------------------------------------------------------------
</TABLE>
================================================================================
ESB Financial Corporation 48 1998 Annual Report
<PAGE>
Accountant's Report
- --------------------------------------------------------------------------------
To the Board of Directors and Stockholders
ESB Financial Corporation
Ellwood City, Pennsylvania
We have audited the accompanying consolidated statements of financial condition
of ESB Financial Corporation and subsidiaries, formerly PennFirst Bancorp, Inc.,
as of December 31, 1998 and 1997 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ESB Financial
Corporation and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Pittsburgh, Pennsylvania
January 20, 1999
================================================================================
ESB Financial Corporation 49 1998 Annual Report
<PAGE>
Stock and Dividend Information
- --------------------------------------------------------------------------------
Listings and Markets
ESB Financial Corporation common stock is traded on the Nasdaq National Stock
Market under the symbol "ESBF". The listed market makers for the Company's
common stock include:
<TABLE>
<S> <C> <C>
Legg Mason Wood Walker, Inc. Herzog, Heine, Geduld, Inc. Rodgers Brothers, Inc.
2 Oliver Plaza 26 Broadway 7 Wood Street, 7th Floor
Pittsburgh, PA 15222 New York, NY 10004 Pittsburgh, PA 15222
Telephone: (412) 261-7300 Telephone: (212) 908-4000 Telephone: (412) 281-1940
Ryan Beck & Co., Inc. Sandler O'Neill & Partners, LP Tucker Anthony, Inc.
220 Livingston Orange Avenue Two World Trade Center 1 Beacon Street
Livingston, NJ 07039 New York, NY 10048 Boston, MA 02108
Telephone: (800) 223-8969 Telephone: (800) 635-6851 Telephone: (888) 655-4135
</TABLE>
PennFirst Capital Trust I, 8.625% cumulative trust preferred securities are
traded on the Nasdaq National Stock Market under the symbol "ESBFP".
Stock Price Information
The bid and ask price of the Company's common stock were $16.00 and $16.50,
respectively, as of January 29, 1999.
The following table sets forth the high and low sale market prices of the
Company's common stock as of and during the quarterly periods presented:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Market Price
High Low Close
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998 Quarter Ended
December 31 $17.00 $15.06 $16.19
September 30 19.38 15.50 17.00
June 30 20.00 17.44 18.31
March 31 18.19 16.81 17.44
1997 Quarter Ended
December 31 $17.50 $14.77 $17.50
September 30 17.73 13.02 16.02
June 30 13.13 11.16 13.13
March 31 11.98 11.16 11.36
- -----------------------------------------------------------------------------------------------
</TABLE>
Stock Dividends
The Company has declared the following stock dividends since its inception:
<TABLE>
<CAPTION>
Stock Dividend
Record Date Payment Date Percentage
----------- ------------ --------------
<S> <C> <C>
May 15, 1998 May 29, 1998 10%
July 31, 1997 August 25, 1997 10%
</TABLE>
================================================================================
ESB Financial Corporation 50 1998 Annual Report
<PAGE>
- --------------------------------------------------------------------------------
Cash Dividends
The Company has paid regular quarterly cash dividends since its inception in
June 1990. During the past two years ended December 31, 1998, the Company
declared cash dividends with the following record and payment dates:
<TABLE>
<CAPTION>
Cash Dividends
Record Date Payment Date per Share
----------- ------------ --------------
<S> <C> <C>
December 31, 1998 January 25, 1999 $0.090
September 30, 1998 October 23, 1998 $0.090
June 30, 1998 July 24, 1998 $0.090
March 31, 1998 April 24, 1998 $0.082
December 31, 1997 January 23, 1998 $0.082
September 30, 1997 October 24, 1997 $0.082
June 30, 1997 July 25, 1997 $0.074
March 31, 1997 April 25, 1997 $0.074
</TABLE>
Stock Splits
The Company has declared the following stock splits since its inception:
<TABLE>
<CAPTION>
Stock Split
Record Date Payment Date Percentage
----------- ------------ -----------
<S> <C> <C>
December 31, 1994 January 25, 1995 20%
December 31, 1993 January 24, 1994 20%
May 12, 1993 June 7, 1993 20%
December 31, 1992 January 25, 1993 20%
June 30, 1992 July 25, 1992 20%
December 31, 1991 January 25, 1992 20%
</TABLE>
Number of Stockholders and Shares Outstanding
As of December 31, 1998, there were 1,880 stockholders of record and 5,265,886
shares of common stock entitled to vote, receive dividends and considered
outstanding for financial reporting purposes. The number of stockholders of
record does not include the number of persons or entities who hold their stock
in nominee or "street" name.
Dividend Reinvestment Plan
Common stockholders may have Company dividends reinvested to purchase additional
shares. Participants may also make optional cash purchases of common stock
through this plan and pay no brokerage commissions or fees. To obtain a plan
prospectus and authorization card call (800) 368-5948.
================================================================================
ESB Financial Corporation 51 1998 Annual Report
<PAGE>
Corporate Information
- --------------------------------------------------------------------------------
Corporate Headquarters
ESB Financial Corporation
600 Lawrence Avenue
Ellwood City, PA 16117
Phone: (724) 758-5584
Subsidiary Companies
ESB Bank, F.S.B.
AMSCO, Inc.
ESB Bank Building Associates
McCormick Place Joint Venture
Madison Woods Joint Venture
PennFirst Financial Services, Inc.
PennFirst Capital Trust I
THF, Inc.
Annual Meeting
The annual meeting of the Company's stockholders will be held at 4:00 p.m.,
on Tuesday, April 20, 1999, at the Connoquenessing Country Club, Route 65,
Ellwood City, PA 16117.
Stockholder and Investor Information
Copies of annual reports, quarterly reports and related stockholder
literature are available upon written request without charge to stockholders.
Requests should be addressed to Frank D. Martz, Senior Vice President of
Operations and Corporate Secretary, ESB Financial Corporation, 600 Lawrence
Avenue, Ellwood City, PA 16117.
Independent Accountants
KPMG LLP
One Mellon Bank Center
Pittsburgh, PA 15219
Special Counsel
Elias, Matz, Tiernan & Herrick LLP
734 15th Street, NW
Washington, DC 20005
Registrar and Transfer Agent
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
================================================================================
ESB Financial Corporation 52 1998 Annual Report
<PAGE>
Board of Directors
- --------------------------------------------------------------------------------
ESB FINANCIAL CORPORATION
-------------------------
<TABLE>
<S> <C>
William B. Salsgiver Charles Delman
Chairman of the Board Retired Chairman, President & CEO - ESB Bancorp, Inc.
A Principal - Perry Homes
Herbert S. Skuba Lloyd L. Kildoo
Vice Chairman of the Board Owner & Funeral Director - Glenn-Kildoo Funeral Homes
Director, President & CEO - Ellwood City Hospital
Charlotte A. Zuschlag Edmund C. Smith
President & Chief Executive Officer - ESB Bank Retired - Works Manager ARMCO, Ambridge
George William Blank, Jr. Edwin A. Thaner, P.E.
President - George W. Blank Supply Company President & Principal Engineer - E.A. Thaner & Associates
</TABLE>
ESB BANK, F.S.B.
----------------
<TABLE>
<S> <C>
William B. Salsgiver Lloyd L. Kildoo
Chairman of the Board Owner & Funeral Director - Glenn-Kildoo Funeral Homes
A Principal - Perry Homes
Herbert S. Skuba Mario J. Manna
Vice Chairman of the Board Retired Tax Collector - Borough of Coraopolis
Director, President & CEO - Ellwood City Hospital
Charlotte A. Zuschlag Edmund C. Smith
President & Chief Executive Officer - ESB Bank Retired - Works Manager ARMCO, Ambridge
Raymond K. Aiken Joseph W. Snyder
President & COO - Lockhart Chemical Co Senior Buyer - Equitable Resources, Inc.
George William Blank, Jr. Edwin A. Thaner, P.E.
President - George W. Blank Supply Company President & Principal Engineer - E.A. Thaner & Associates
Charles Delman Jefrey F. Wall
Retired Chairman, President & CEO - ESB Bancorp, Inc. Business Manager - Beginning With Books
</TABLE>
[PHOTO]
Directors of ESB Bank, F.S.B. are, front row, from left, William B. Salsgiver,
Charlotte A. Zuschlag, Charles Delman and Herbert S. Skuba. Back row, from left,
George William Blank, Jr., Mario J. Manna, Lloyd L. Kildoo, Joseph W. Snyder,
Edwin A. Thaner, P.E., Edmund C. Smith, Jefrey F. Wall and Raymond K. Aiken.
================================================================================
ESB Financial Corporation 53 1998 Annual Report
<PAGE>
Corporate Officers, Advisory Board and Bank Officers
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ESB FINANCIAL CORPORATION ESB BANK, F.S.B.
- ------------------------- ----------------
William B. Salsgiver William B. Salsgiver
Chairman of the Board Chairman of the Board
Charlotte A. Zuschlag Charlotte A. Zuschlag
President & Chief Executive Officer President & Chief Executive Officer
Charles P. Evanoski
Senior Vice President, Chief Financial Officer & Treasurer
Robert C. Hilliard, CPA Senior Vice Presidents
Senior Vice President of Audit & Compliance ----------------------
Frank D. Martz Robert J. Colalella
Senior Vice President of Operations & Corporate Secretary Charles P. Evanoski
Todd F. Palkovich Robert C. Hilliard, CPA
Senior Vice President of Lending Teresa Krukenberg
John T. Stunda Frank D. Martz
Senior Vice President of Human Resources Todd F. Palkovich
Robert J. Colalella John T. Stunda
Vice President, Community Relations & Marketing
John W. Donaldson II Vice Presidents
Vice President, Lending ---------------
Peter J. Greco Ruth A. Ambrose
Vice President, Lending John W. Donaldson II
Teresa Krukenberg Nancy A. Glitsch
Vice President, Operations Peter J. Greco
Marilyn Scripko Lawrence C. Kerr
Vice President, Lending Ronald J. Mannarino
Sally A. Mannarino
Marilyn R. Maple
ESB BANK, F.S.B. ADVISORY BOARD Mark A. Platz
- ------------------------------- Ronald E. Pompeani
Charles Delman Marilyn Scripko
Retired Chairman, President & CEO - ESB Bancorp, Inc. Wayne G. Zerishnek
Harry B. Thaner
Retired - Chairman of the Board, Troy Hill Federal Savings Bank Assistant Vice Presidents
-------------------------
Gibson E. Brock Deborah A. Allen
Retired - Manager of Engineering, J & L Steel Corporation Patricia M. Aumiller
Janet S. Barletta
Dr. Allen Gastfriend Kathleen A. Bender
Retired - Dentist Charlotte M. Bolinger
Thomas E. Campbell
Watson F. McGaughey, Jr. Amy E. Dicks
President - McGaughey Buses Inc. Ronald E. Dickson
Katina J. Eliou
Donald R. Miller Deborah S. Goehring
Retired - President, Miller & Sons Chevrolet Margaret A. Haefele
Mary Ann Leonardo
John J. Syka Beth A. McClymonds
Owner - John Syka Funeral Home Larry Mastrean
Ann R. Nelson
Joyce A. Stellitano
Bonita L. Wadding
Harry R. Wargo
Pamela K. Zikeli
</TABLE>
================================================================================
ESB Financial Corporation 54 1998 Annual Report
<PAGE>
- --------------------------------------------------------------------------------
ESB Financial Corporation Executive Officers and Senior Management
[PHOTO]
Seated, from left, Charlotte A. Zuschlag, Charles P. Evanoski and Robert C.
Hilliard, CPA. Standing, from left, Robert J. Colalella, Frank D. Martz, Teresa
Krukenberg, John T. Stunda, Todd F. Palkovich, Marilyn Scripko, John W.
Donaldson, II, and Peter J. Greco.
Franklin Township Office
Grand Opening--September 8, 1998
[PHOTO]
================================================================================
ESB Financial Corporation 55 1998 Annual Report
<PAGE>
Products and Services
- --------------------------------------------------------------------------------
QUALITY FINANCIAL SERVICE...
Deposit Products and Services:
. Checking and NOW Accounts
. Statement and Passbook Savings Accounts
. Certificates of Deposit
. Money Market Savings Accounts
. Direct Deposit of Retirement Checks and Automated Payment
. Holiday Savings Accounts
. Vacation Club Accounts
. Individual Retirement Accounts
Lending Products and Services:
. Conventional Fixed and Adjustable Rate Mortgage Loans
. Construction / Permanent Residential Loans
. Neighborhood Development Loans
. Commercial Real Estate Loans
. Commercial Business Loans
. Commercial Lines of Credit
. Letters of Credit
. Consumer Lending:
- Automobile Loans
- Home Equity Loans
- Home Improvement Loans
- Personal Loans
- Share Loans
. Education Loans
Conveniences and Other Services:
. Drive-up Windows
. ATM and Debit Cards- 24 Hour Teller Machines
. Safety Deposit Boxes
. Travelers' Checks
. Money Orders
. Night Depository
. Master Card and VISA
. Saturday Hours
. Wire Transfers
. Notary Services
FOR A QUALITY LIFE/TM/
[LOGOS]
================================================================================
ESB Financial Corporation 56 1998 Annual Report
<PAGE>
Office Locations
- --------------------------------------------------------------------------------
ESB BANK, F.S.B.
- ---------------- [MAP]
Ellwood City
600 Lawrence Avenue
Ellwood City, PA 16117
(724) 758-5584
Aliquippa
2301 Sheffield Road
Aliquippa, PA 15001
(724) 378-4436
Ambridge
506 Merchant Street
Ambridge, PA 15003
(724) 266-5002
Center Township
1207 Brodhead Road
Monaca, PA 15061
(724) 774-0332
Coraopolis
900 Fifth Avenue
Coraopolis, PA 15108
(412) 264-8862
Fox Chapel
1060 Freeport Road
Pittsburgh, PA 15238
(412) 782-6500
Franklin Township
1793 Mercer Road
Ellwood City, PA 16117
(724) 752-2500
New Castle
Route 65
New Castle, PA 16101
(724) 654-7781
Troy Hill
1706 Lowrie Street
Pittsburgh, PA 15212
(412) 231-8238
Wexford
101 Wexford Bayne Road
Wexford, PA 15090
(724) 934-8989
Zelienople
Route 19
Zelienople, PA 16063
(724) 452-6500
<PAGE>
ESB FINANCIAL CORPORATION
600 Lawrence Avenue
Ellwood City, Pennsylvania 16117
Phone: (724) 758-5584
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
-------------------------------
The Board of Directors
ESB Financial Corporation:
We consent to incorporation by reference in the Registration Statements (Form S-
8 Nos. 33-43001, 33-49234, 333-27613, and 333-31379) of ESB Financial
Corporation, formerly PennFirst Bancorp, Inc., of our report dated January 20,
1999, relating to the consolidated statements of financial condition of ESB
Financial Corporation and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the years in the three-year period ended December 31, 1998, which
report is incorporated by reference in the December 31, 1998, annual report on
Form 10-K of ESB Financial Corporation.
/s/ KPMG LLP
Pittsburgh, Pennsylvania
March 24, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE 1998 ANNUAL REPORT
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,140
<INT-BEARING-DEPOSITS> 6,534
<FED-FUNDS-SOLD> 629
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 481,234
<INVESTMENTS-CARRYING> 63,815
<INVESTMENTS-MARKET> 64,033
<LOANS> 360,280
<ALLOWANCE> 4,815
<TOTAL-ASSETS> 972,438
<DEPOSITS> 423,051
<SHORT-TERM> 143,455
<LIABILITIES-OTHER> 4,751
<LONG-TERM> 312,900
0
0
<COMMON> 63
<OTHER-SE> 61,020
<TOTAL-LIABILITIES-AND-EQUITY> 972,438
<INTEREST-LOAN> 27,852
<INTEREST-INVEST> 34,450
<INTEREST-OTHER> 1,489
<INTEREST-TOTAL> 63,791
<INTEREST-DEPOSIT> 17,640
<INTEREST-EXPENSE> 47,140
<INTEREST-INCOME-NET> 16,651
<LOAN-LOSSES> 5
<SECURITIES-GAINS> 377
<EXPENSE-OTHER> 11,067
<INCOME-PRETAX> 7,518
<INCOME-PRE-EXTRAORDINARY> 7,518
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,001
<EPS-PRIMARY> 1.12
<EPS-DILUTED> 1.08
<YIELD-ACTUAL> 7.12
<LOANS-NON> 4,981
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,807
<CHARGE-OFFS> 18
<RECOVERIES> 22
<ALLOWANCE-CLOSE> 4,815
<ALLOWANCE-DOMESTIC> 4,815
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
