<PAGE>
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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, 1999
[ ] 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
ESB FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Pennsylvania 25-1659846
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
600 Lawrence Avenue, Ellwood City, PA 16117
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(Address of principal executive offices) (Zip Code)
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
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(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
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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 6, 2000, the aggregate value of the 5,003,778 shares of Common Stock
of the Registrant outstanding on such date, which excludes 655,984 shares held
by all directors and officers of the Registrant as a group, was approximately
$60.3 million. This amount is based on the closing sales price of $12.06 per
share of the Registrant's Common Stock on March 6, 2000.
Number of shares of Common Stock outstanding as of March 6, 2000: 5,659,762
DOCUMENTS INCORPORATED BY REFERENCE
<TABLE>
<CAPTION>
Documents Where Incorporated
<S> <C>
1. Portions of the 1999 Annual Report to Stockholders. Part II
2. Portions of Proxy Statement for the April 18, 2000 Annual Meeting of Stockholders. Part III
</TABLE>
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<PAGE>
ESB FINANCIAL CORPORATION
TABLE OF CONTENTS
<TABLE>
PART I
------
<S> <C>
Item 1. Business......................................................... 1
Item 2. Properties....................................................... 26
Item 3. Legal Proceedings................................................ 27
Item 4. Submission of Matters to a Vote of Security Holders.............. 27
PART II
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Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters...................................... 28
Item 6. Selected Financial Data.......................................... 28
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 28
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk...................................................... 28
Item 8. Financial Statements and Supplementary Data...................... 28
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............................. 28
PART III
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Item 10. Directors and Executive Officers of the Registrant.............. 29
Item 11. Executive Compensation.......................................... 29
Item 12. Security Ownership of Certain Beneficial Owners
and Management.................................................. 29
Item 13. Certain Relationships and Related Transactions.................. 29
PART IV
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Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K..................................................... 30
Signatures ................................................................ 31
</TABLE>
<PAGE>
PART I
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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, 1999, the Company had consolidated total assets of $1.03
billion and stockholders' equity of $49.9 million. For the year ended December
31, 1999, the Company realized consolidated net income and diluted net income
per share of $5.8 million and $1.13, respectively.
ESB is a federally chartered, Federal Deposit Insurance Corporation (FDIC)
insured stock savings bank which conducts business through 16 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, primarily advances from the
Federal Home Loan Bank (FHLB) of Pittsburgh and reverse repurchase agreements to
fund the Company's investing activities. 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.
Recent Developments
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On July 21, 1999, the Company entered into an Agreement and Plan of
Reorganization with SHS Bancorp, Inc. ("SHS"), parent company of Spring Hill
Savings Bank, F.S.B., pursuant to which SHS was to merge with and into the
Company, with the Company as the surviving corporation. Under the terms of the
agreement, each shareholder of SHS had the right to elect to receive either
$17.80 in cash or 1.30 shares of the Company common stock for each share of SHS
common stock owned. The total merger consideration was payable 60% in Company
common stock and 40% in cash. The Company consummated the transaction on
February 10, 2000.
At December 31, 1999, SHS had total consolidated assets of $90.9 million, total
consolidated liabilities of $79.1 million, including total consolidated deposits
of $67.0 million and consolidated stockholders' equity of $11.8 million.
1
<PAGE>
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.
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 16
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, 1999, the Company's net loans receivable amounted to
$393.9 million or 38.2% of the Company's total assets. Loans secured by real
estate amounted to $347.1 million or 83.6% of total loans receivable. Consumer
loans and commercial business loans amounted to $59.4 million or 14.3% and $8.9
million or 2.1%, 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.
2
<PAGE>
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) 1999 1998 1997 1996 1995
----------------- ----------------- ----------------- ----------------- -----------------
Dollar Dollar Dollar Dollar Dollar
Amount % Amount % Amount % Amount % Amount %
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential - single family $249,966 60.2% $225,054 59.1% $222,994 63.2% $126,854 55.9% $105,551 55.3%
Residential - multi family 15,035 3.6% 11,206 2.9% 8,685 2.5% 3,516 1.5% 4,015 2.1%
Commercial 39,171 9.4% 32,300 8.5% 31,489 8.9% 20,473 9.0% 16,650 8.7%
Construction 42,935 10.4% 41,215 10.8% 29,710 8.4% 20,942 9.2% 13,495 7.1%
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total real estate loans 347,107 83.6% 309,775 81.3% 292,878 83.0% 171,785 75.6% 139,711 73.2%
Other loans:
Consumer loans 59,351 14.3% 56,897 14.9% 51,718 13.6% 45,486 20.0% 41,322 21.6%
Commercial business loans 8,884 2.1% 14,216 3.8% 8,359 2.4% 9,656 4.4% 9,950 5.2%
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total other loans 68,235 16.4% 71,113 18.7% 60,077 17.0% 55,142 24.4% 51,272 26.8%
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans receivable 415,342 100.0% 380,888 100.0% 352,955 100.0% 226,927 100.0% 190,983 100.0%
===== ===== ===== ===== =====
Less:
Allowance for loan losses 4,823 4,815 4,807 3,309 2,471
Net deferred fees/discounts 858 785 723 380 467
Loans in process 15,732 15,008 10,668 6,373 4,167
-------- -------- -------- -------- --------
Net loans receivable $393,929 $360,280 $336,757 $216,865 $183,878
======== ======== ======== ======== ========
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</TABLE>
The following table sets forth the scheduled contractual principal repayments of
loans in the Company's portfolio at December 31, 1999. Demand loans having no
stated schedule of repayment and no stated maturity are reported as due within
one year:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
(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 $ 12,709 $ 54,420 $ 57,427 $ 222,551 $ 347,107
Consumer loans 22,872 21,027 11,522 3,930 59,351
Commercial business loans 5,356 3,436 92 - 8,884
---------- ---------- ---------- ---------- ----------
$ 40,937 $ 78,883 $ 69,041 $ 226,481 $ 415,342
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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, 1999:
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(In thousands) Fixed Adjustable
rates rates
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Real estate loans $ 205,474 $ 128,924
Consumer loans 33,636 2,843
Commercial business loans 1,515 2,013
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$ 240,625 $ 133,780
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Fixed and adjustable rate loans represented $258.3 million or 62.2% and $157.0
million or 37.8%, respectively, of the Company's total loan portfolio as of
December 31, 1999.
3
<PAGE>
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. 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 direct
customer contact and through referrals by real estate agents, attorneys and
builders. 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 directly by the
Company.
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 up 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.
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, 1999, $8.0 million
or 1.9% 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, 1999 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 management
and investment objectives. Any loan held in the available for sale portfolio, is
subject to a takedown commitment from an investor.
4
<PAGE>
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>
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(In thousands) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loans receivable at beginning of period $ 360,280 $ 336,757 $ 216,865
Loans associated with acquisition of Troy Hill - - 90,037
Originations:
Single family residential real estate 80,986 73,836 66,807
Multi-family residential and commercial real estate 30,321 24,423 5,266
Construction 9,690 12,660 11,472
Consumer 27,463 31,627 24,528
Commercial business 4,580 11,240 9,046
---------- ---------- ---------
153,040 153,786 117,119
Purchases 3,503 - -
Repayments on loans (112,754) (118,792) (82,973)
Sales (9,642) (11,266) (3,726)
Transfers to real estate acquired through foreclosure (333) (53) (201)
Other changes (165) (152) (364)
---------- ---------- ---------
Net loans receivable at end of period $ 393,929 $ 360,280 $ 336,757
========== ========== =========
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</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. All loans in excess of an individual's
designated limits are referred to an officer with the requisite authority or the
Officers' Loan Committee of the Bank. The President and Chief Executive Officer
of the Company has approved 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 Committee have
individual lending authorities that range from $10,000 to the FHLMC maximum
conforming loan amount. The Officers' Loan Committee which consists of the
President and Chief Executive Officer, Group Senior Vice President of Lending,
Senior Vice President - Community Reinvestment Officer, Senior Vice President -
Manager Commercial Real Estate Lending, Senior Vice President - Consumer
Lending, Senior Vice President - Residential Lending Manager, Vice President -
Loan Servicing Manager and Vice President - Commercial Lending is 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.
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.
5
<PAGE>
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, 1999, ESB was permitted to lend
approximately $10.4 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 $5.0 million.
As of December 31, 1999, the Company had one lending relationship 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, 1999, $250.0 million or 60.2% 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 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 financial 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. When one-year ARMs are originated, the customers are
qualified at the second year cap rate or 2% higher than the initial note rate,
which ever is higher.
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,
1999 the Company had $42.9 million or 10.4% of the total loan portfolio
outstanding in construction loans. Generally, the loan-to-value ratio for
construction loans does not exceed 80%, provided that
6
<PAGE>
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, 1999, builder lines-of-credit were
extended to 14 builders with $5.6 million outstanding under lines approved in
the aggregate amount of $14.7 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, 1999, the Company had $54.2 million, or 13.0% 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.
Consumer Lending. As of December 31, 1999, the Company's consumer loan portfolio
totaled $59.4 million or 14.3% 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, 1999, 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, 1999, $40.2 million or 67.7% of the Company's consumer loan
portfolio was made up of home equity loans.
7
<PAGE>
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, 1999,
commercial business loans amounted to $8.9 million or 2.1% 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. As of December 31,
1999, the Company had $2.4 million in loans serviced for third-party investors.
Loans purchased are generally serviced by the company which originated the
loans. Those companies 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
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, 1999, the Company's non-performing assets, which include
non-accrual loans, loans delinquent due to maturity, troubled debt restructuring
and REO, amounted to $4.4 million or 0.43% 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
8
<PAGE>
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.
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, 1999, the
Company's classified and criticized assets amounted to $10.9 million with $4.9
million classified as substandard, $1.6 million classified as doubtful, $223,000
classified as loss and $4.2 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) 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Real estate loans $ 2,461 $ 2,943 $ 1,416 $ 285 $ 599
Consumer and commercial business 1,873 2,038 2,386 3,799 200
--------- -------- -------- ------- -------
Total non-accrual loans 4,334 4,981 3,802 4,084 799
--------- -------- -------- ------- -------
Total as a percentage of total assets 0.42% 0.51% 0.42% 0.58% 0.12%
--------- -------- -------- ------- -------
Real estate acquired through foreclosure 71 21 288 37 52
--------- -------- -------- ------- -------
Total as a percentage of total assets 0.01% 0.00% 0.03% 0.01% 0.01%
--------- -------- -------- ------- -------
Total non-performing assets $ 4,405 $ 5,002 $ 4,090 $ 4,121 $ 851
========= ======== ======== ======= =======
Total non-performing assets
as a percentage of total assets 0.43% 0.51% 0.45% 0.59% 0.13%
========= ======== ======== ======= =======
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
As of December 31, 1999, non-accrual consumer and commercial business loans
included $1.6 million in non-performing Bennett Funding Group ("BFG") lease
loans. 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 BFG was the target of a civil complaint filed by
the SEC and further reported on April 1, 1996, that BFG 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. In addition to the security interest in the
leases a portion of these lease agreements were also insured against payment
losses. Subsequent to the bankruptcy filing, a Bankruptcy Trustee was appointed
by the U.S. Bankruptcy Court for the Northern District of New York to oversee
the reorganization of BFG. As part of this reorganization process, the Trustee
has challenged the claims of all involved banks with respect to their security
interests. This challenge has been the subject of ongoing litigation.
On October 15, 1997, the U.S. Bankruptcy Court for the Northern District of New
York ordered the Bankruptcy Trustee for BFG to pay over to the Company within 30
days thereof an aggregate of approximately $1.3 million, which represented
principal payments, excluding interest accrued thereon and certain setoffs on
ten of the thirteen lease agreements. Such payments reduced the outstanding
balance of the lease agreements to approximately $2.3 million. The Bankruptcy
Trustee filed and appeal to 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
9
<PAGE>
and applied this payment to the outstanding principal balance of the leases.
Additionally, the court further ordered the Bankruptcy Trustee to turn over to
the Company on a monthly basis, payments collected on such leases.
In June, 1999 the Company received approximately $245,000 in judgement of its
claims against the insurance carrier. Together with the aforementioned receipt
of monthly lease payments collected by the Trustee beginning in December, 1997,
this further reduced the outstanding balance to approximately $1.6 million.
On November 16, 1999, the U.S. Bankruptcy Court for the Northern District of New
York ordered the Bankruptcy Trustee for BFG to pay over to the Company an
aggregate of approximately $605,000, which represents principal payments,
excluding interest accrued thereon and certain setoffs on two of the thirteen
lease agreements. Such payments together with the aforementioned receipt of
monthly lease payments collected by the Trustee, reduced the outstanding balance
of the lease agreements to approximately $1.0 million. The court also ordered
the Bankruptcy Trustee to turn over to the Company on a monthly basis, payments
collected on these two lease agreements. The Bankruptcy Trustee filed an appeal
to the Order of the Bankruptcy Court. However, in January 2000, the Company
received a payment in the amount of $605,000 from the Trustee and applied this
payment to the outstanding principal balance of the leases. Also see BFG
discussed in the "Management's Discussion and Analysis of Financial Condition
and Results of Operations" section on page 12 and 14 of the Company's 1999
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 in
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 each month to determine the appropriateness
of its allowance for losses. Management believes that the Company's allowance
for losses as of December 31, 1999 of $4.8 million is appropriate 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) 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 4,815 $ 4,807 $ 3,309 $ 2,471 $ 2,475
Allowance for loan losses of acquired companies - - 866 - -
Provision for loan losses 54 5 799 873 13
Charge-offs:
Real estate loans (1) - (120) (3) (25)
Consumer and commercial business loans (54) (18) (125) (49) (22)
--------- ---------- -------- -------- --------
(55) (18) (245) (52) (47)
Recoveries 9 21 78 17 30
-------- -------- -------- -------- --------
Balance at end of period $ 4,823 $ 4,815 $ 4,807 $ 3,309 $ 2,471
======== ======== ======== ======== ========
Ratio of net charge-offs to average loans outstanding 0.01% N/A 0.05% 0.02% 0.01%
======== ======== ======== ======== ========
Ratio of allowance to total loans at end of period 1.16% 1.26% 1.36% 1.46% 1.29%
======== ======== ======== ======== ========
Balance at end of period applicable to:
Real estate loans $ 2,370 $ 2,147 $ 2,283 $ 1,733 $ 1,803
Consumer and commercial business loans 2,453 2,668 2,524 1,576 668
-------- -------- -------- -------- --------
Balance at end of period $ 4,823 $ 4,815 $ 4,807 $ 3,309 $ 2,471
======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
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 $4.7 million as of December 31, 1999.
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 and federal funds.
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.
On June 30, 1999, the Company reclassified its held to maturity portfolio to the
available for sale portfolio. See also "Notes to Consolidated Financial
Statements" section on page 27 of the Company's 1999 Annual Report to
Stockholders attached hereto as Exhibit 13.
The following table summarizes the Company's investment securities as of:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
(In thousands) Amortized Unrealized Unrealized Fair
cost gains losses value
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
- ------------------
December 31, 1999:
Trust Preferred securities $ 3,274 $ - $ (443) $ 2,831
U.S. Government securities 22,980 - (641) 22,339
Municipal securities 89,597 741 (4,871) 85,467
Equity securities 2,682 75 (450) 2,307
Corporate Bonds 52,664 - (1,351) 51,313
--------- ------- -------- ---------
$ 171,197 $ 816 $ (7,756) $ 164,257
========= ======= ======== =========
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
--------- ------- -------- ---------
$ 157,060 $ 2,660 $ (2,710) $ 157,010
========= ======= ======== =========
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
========= ======= ======== =========
- --------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
The following table summarizes the Company's mortgage-backed securities as of:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
(In thousands) Amortized Unrealized Unrealized Fair
cost gains losses value
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
- ------------------
December 31, 1999:
GNMA $ 226,075 $ 253 $ (7,840) $ 218,488
FNMA 50,283 159 (659) 49,783
FHLMC 36,326 81 (559) 35,848
Collateralized mortgage obligations 95,165 173 (2,589) 92,749
--------- ------- -------- ---------
$ 407,849 $ 666 $(11,647) $ 396,868
========= ======= ======== =========
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
========= ======= ======== =========
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
========= ======= ======== =========
- --------------------------------------------------------------------------------------------------------------
</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) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Mortgage-backed securities at the beginning of period $ 375,059 $ 434,016 $ 337,560
Mortgage-backed securities acquired in connection with
acquisition of Troy Hill - - 2,335
Purchases 183,313 161,573 200,311
Sales (55,084) (83,123) (35,269)
Repayments (93,432) (134,693) (71,042)
Net premium amortization (1,261) (1,994) (922)
Change in unrealized gain (loss) on mortgage-backed
securities available for sale (11,711) (720) 1,043
--------- --------- ---------
Mortgage-backed securities at the end of period $ 396,884 $ 375,059 $ 434,016
========= ========= =========
Weighted average yield at the end of the period 6.72% 6.23% 6.84%
========= ========= =========
- -------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
The following table shows the contractual maturities of the Company's investment
and mortgage-backed securities portfolio as of December 31, 1999, excluding
equity securities which have no maturity dates.
- --------------------------------------------------------------------
(In thousands) Available for sale
-----------------------------
Amortized Fair
cost value
- --------------------------------------------------------------------
Due in one year or less $ 18,113 $ 18,177
Due from one year to five years 22,425 22,805
Due from five to ten years 47,609 46,374
Due after ten years 488,217 471,462
--------- ---------
$ 576,364 $ 558,818
========= =========
- --------------------------------------------------------------------
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) 1999 1998 1997
--------------------- --------------------- ---------------------
Amount % Amount % Amount %
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing deposits $ 8,094 1.9% $ 6,002 1.4% $ 4,675 1.2%
Interest-bearing demand deposits 166,448 38.5% 156,994 37.1% 150,994 37.8%
Time deposits 257,241 59.6% 260,055 61.5% 243,899 61.0%
--------- ----- --------- ----- --------- -----
$ 431,783 100.0% $ 423,051 100.0% $ 399,568 100.0%
========= ===== ========= ===== ========= =====
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company had a total of $62.0 million, $51.9 million and $43.3 million in
deposits of $100,000 or more as of December 31, 1999, 1998 and 1997,
respectively.
13
<PAGE>
The following table sets forth, by various rate categories, the amount of time
deposits outstanding as of December 31, 1999 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% $ 37,260 $ 3,920 $ 13 $ - $ 41,193
4.50% to 6.49% 135,226 36,461 15,186 19,837 206,710
6.50% to 8.49% 6,458 328 14 2,538 9,338
---------- --------- -------- --------- ----------
$ 178,944 $ 40,709 $ 15,213 $ 22,375 $ 257,241
========== ========= ======== ========= ==========
- --------------------------------------------------------------------------------------------------------------------------
</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 1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
2.50% to 4.49% $ 41,193 $ 41,664 $ 11,376
4.50% to 6.49% 206,710 206,871 211,695
6.50% to 8.49% 9,338 10,321 18,658
8.50% to 10.49% - 1,194 2,067
10.50% to 12.49% - 5 103
--------- --------- ---------
$ 257,241 $ 260,055 $ 243,899
========= ========= =========
- ------------------------------------------------------------------------------
</TABLE>
As of December 31, 1999, 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 $ 2,770
More than three through six months 3,331
More than six through twelve months 1,238
More than twelve months 2,642
--------
$ 9,981
========
- --------------------------------------------------------------------------------
</TABLE>
The following table sets forth the net deposit flows during the year ended
December 31:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
(In thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase (decrease) before interest credited and acquisition $ (8,706) $ 5,683 $ (3,829)
Deposits assumed in connection with acquisition of Troy Hill - - 53,783
Interest credited 17,438 17,800 16,725
-------- -------- ---------
Net deposit increase $ 8,732 $ 23,483 $ 66,679
======== ======== =========
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Borrowings. While deposits are the preferred 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, 1999 the Company had
outstanding advances with the FHLB of $317.5 million. See also "Regulation -
Regulation of the Bank - Federal Home Loan Bank System".
14
<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 independent third party brokerage
firms who arranged the transaction.
The following table sets forth the Company's borrowing as of December 31:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
(In thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FHLB advances $ 317,467 $ 305,965 $ 355,051
Reverse repurchase agreements 201,920 150,360 55,800
Treasury tax and loan note payable 169 30 173
--------- --------- ---------
$ 519,556 $ 456,355 $ 411,024
========= ========= =========
- ---------------------------------------------------------------------------------------------------
</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) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding for the year $ 158,817 $ 109,956 $ 161,421
Maximum amount outstanding at any month end
during the year 200,595 121,473 183,335
Balance outstanding at year end 179,044 98,600 150,439
Weighted average interest rate during the year 6.08% 5.98% 6.02%
Weighted average interest rate at year end 6.17% 5.99% 5.91%
Reverse repurchase agreements:
Average balance outstanding for the year $ 58,343 $ 56,950 $ 17,943
Maximum amount outstanding at any month end
during the year 65,880 77,960 55,800
Balance outstanding at year end 65,880 77,960 55,800
Weighted average interest rate during the year 5.29% 5.48% 5.82%
Weighted average interest rate at year end 5.64% 5.39% 5.87%
Treasury tax and loan note:
Average balance outstanding for the year $ 124 $ 112 $ 116
Maximum amount outstanding at any month end
during the year 169 169 167
Balance outstanding at year end 169 30 167
Weighted average interest rate during the year 4.89% 5.33% 5.39%
Weighted average interest rate at year end 5.20% 4.63% 5.42%
Total short term borrowings:
Average balance outstanding for the year $ 217,284 $ 167,018 $ 179,480
Maximum amount outstanding at any month end
during the year 266,644 199,602 239,302
Balance outstanding at year end 245,093 176,590 206,406
Weighted average interest rate during the year 5.87% 5.81% 6.00%
Weighted average interest rate at year end 6.03% 5.72% 5.90%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
15
<PAGE>
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, 1999, ESB was authorized under the current regulations to have a
maximum investment of $19.9 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 $671,000 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, 1999
AMSCO had total assets, consisting primarily of investments in three joint
ventures, of $2.2 million.
The first joint venture, ESB Bank Building Associates, consists of a 99%
interest in a partnership with a businessman in Wexford, PA which owns a
commercial office building partially utilized as a branch office and loan
production office for ESB. ESB provided financing for the project. On January
19, 1999, the Company opened its newly constructed full service, branch office
located in Wexford, Allegheny County, a quarter mile north of the former branch
location. The office space is leased from ESB Bank Building Associates. As of
December 31, 1999, AMSCO had a $515,000 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 selling the
lots for single family residential construction. ESB is providing financing for
the project. As of December 31, 1999, 3 of the 12 lots remain unsold. On that
date, AMSCO had a $25,000 investment in McCormick Place.
The third joint venture, Madison Woods, consists of a 40% interest in a
partnership with the same two local developers involved in McCormick Place.
Madison Woods purchased approximately 57 acres of undeveloped land in Moon
Township, Allegheny County, PA beginning in October 1998 and developed the land
into a 56 lot
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subdivision for the purpose of selling the lots for single family residential
construction. ESB is providing financing for the project. As of December 31,
1999, 54 of the 56 lots remain unsold. On that date, AMSCO had a $80,000
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. Certain federal
banking laws have been recently amended. See "Regulation-Regulation of the
Company-Financial Modernization."
Regulation of the Company
- -------------------------
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 controls only one subsidiary
savings association on or before May 4, 1999. 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".
When a savings and loan holding company acquires control of a second savings
association and holds it as a separate institution, the holding company becomes
a multiple savings and loan holding company. As a general rule, multiple savings
and loan holding companies are subject to restrictions on their activities that
are not imposed on a savings and loan holding company controlling only one
institution. They could not commence or continue any business activity other
than: (i) those permitted for a bank holding company under section 4(c) of the
Bank Holding Company Act (unless the Director of the OTS by regulation prohibits
or limits such 4(c) activities); (ii) furnishing or performing management
services for a subsidiary savings association; (iii) conducting an insurance
agency or escrow business; (iv) holding, managing, or liquidating assets owned
by or acquired from a subsidiary savings association; (v) holding or managing
properties used or occupied by a subsidiary savings association; (vi) acting as
trustee under deeds of trust; or (vii) those activities authorized by regulation
as of March 5, 1987 to be engaged in by multiple savings and loan holding
companies.
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."
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Limitations on Transactions with Affiliates. Transactions between savings
associations and any affiliate are governed by Section 11 of the HOLA and
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, Section 11 of the HOLA prohibits a savings association from (i)
making a loan or other extension of credit to an affiliate, except for any
affiliate which engages only in certain activities which are permissible for
bank holding companies, or (ii) purchasing or investing 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, 1999, 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).
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
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<PAGE>
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.
Financial Modernization. Under the Gramm-Leach-Bliley Act enacted into law on
November 12, 1999, no company may acquire control of a savings and loan holding
company after May 4, 1999, unless the company is engaged only in activities
traditionally permitted to a multiple savings and loan holding company or newly
permitted to a financial holding company under section 4(k) of the Bank Holding
Company Act. Existing savings and loan holding companies and those formed
pursuant to an application filed with the OTS before May 4, 1999, may engage in
any activity including non-financial or commercial activities provided such
companies control only one savings and loan association that meets the Qualified
Thrift Lender test. Corporate reorganizations are permitted, but the transfer of
grandfathered unitary thrift holding company status through acquisition is not
permitted.
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
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<PAGE>
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.
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 paid 6.5 basis points to fund the FICO, while
BIF member institutions paid 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.
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, 1999, ESB's liquidity ratio was in compliance with regulatory
requirements at 18.1%. 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. A savings institution is also required to maintain tangible capital in
an amount at least equal to 1.5% of its adjusted total assets.
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. (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
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<PAGE>
Corrective Action"). 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.
As of December 31, 1999, ESB was in compliance with all regulatory capital
requirements with tangible, core and risk-based capital ratios of 6.5%, 6.5% and
16.9%, respectively.
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.
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 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
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<PAGE>
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, 1999, 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, 1999, 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, 1999, ESB
had an $18.4 million investment in the stock of the FHLB of Pittsburgh, and was
in compliance with this requirement.
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,
1999, the Company had $317.5 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
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<PAGE>
adverse effect on the value of FHLB stock in the future. For the year ended
December 31, 1999, 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, 1999, 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
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.
23
<PAGE>
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, 1998 (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 Bank's 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. As of December 31, 1999, the Company has a minimum tax credit carry
forward of $647,000.
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 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.
24
<PAGE>
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 1996, 1997 and 1998 are open under the statute of
limitations and subject to review by the Internal Revenue Service.
Personnel
- ---------
As of December 31, 1999, the Company had 134 full-time and 51 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.
25
<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, 1999:
PROP
<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 -- $ 973,000 24.1%
600 - 612 Lawrence Avenue, Ellwood City, PA 16117
ESB Branch Offices:
- ------------------
Aliquippa Office Owned -- $ 116,000 10.0%
2301 Sheffield Road, Aliquippa, PA 15001
Ambridge Office Owned -- $ 86,000 13.0%
506 Merchant Street, Ambridge, PA 15003
Center Township Office Owned -- $ 173,000 2.7%
1207 Brodhead Road, Monaca, PA 15061
Coraopolis Office Owned -- $ 63,000 3.1%
900 Fifth Avenue, Coraopolis, PA 15108
Fox Chapel Office Owned -- $ 266,000 8.9%
1060 Freeport Road, Pittsburgh, PA 15238
Franklin Township Office Owned -- $ 571,000 6.1%
Mercer Road and Mecklem Lane, Ellwood City, PA 16117
Springdale Office Owned -- $ 285,000 0.0%
849 Pittsburgh Street, Springdale, PA 15144
New Castle Office Leased 04/30/04 $ 44,000 13.0%
Route 65, New Castle, PA 16101
Troy Hill Office Owned -- $ 439,000 11.1%
1706 Lowrie Street, Pittsburgh, PA 15212
Wexford Office Leased 01/18/04 $ 1 2.6%
101 Wexford Bayne Road, Wexford, PA 15090
Zelienople Office Leased 11/30/07 $ 15,600 5.4%
Route 19, Zelienople, PA 16063
Other Properties:
- ----------------
Drive-through Facility Owned -- $ 58,000 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 -- $ 54,000 NA
Route 30, Clinton, PA 15026
Wexford Property Owned -- $ 1,349,000 NA
101 Wexford Bayne Road, Wexford, PA 15090
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
26
<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.
27
<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 51 and 52 of the Company's
1999 Annual Report to Stockholders attached hereto as Exhibit 13 (1999 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 1999
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 1999 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 15 to 18 of the
Company's 1999 Annual Report.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The information required herein is incorporated by reference from pages 21 to 50
of the Company's 1999 Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- -------------------------------------------------------------------------
Financial Disclosure
- --------------------
None.
28
<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 6 to 11 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 19 of the Company's Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The information required herein is incorporated by reference from pages 2 to 5
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.
29
<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):
Accountants' Report
Consolidated Statements of Financial Condition as of December 31, 1999
and 1998
Consolidated Statements of Operations for the years ended December 31,
1999, 1998 and 1997
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997
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) (6)
10(b) Employee Stock Ownership Plan (2) (6)
10(c) Management Development and Recognition Plan and Trust
Agreement (2) (6)
10(d) Employment Agreement with Charlotte A. Zuschlag (2) (6)
10(e) 1992 Stock Incentive Plan (3) (6)
10(f) 1997 Stock Option Plan (4) (6)
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) (6)
10(h) Employment Agreement between the Company and Charlotte
A. Zuschlag (6)
10(i) Employment Agreement between the Bank and Charlotte A.
Zuschlag (6)
11 Statement RE Computation of Per Share Earnings
13 1999 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) Incorporated by reference from the Annual Report on
Form 10-K filed by the Company with the SEC on March
30, 1999.
(6) Management contract or compensatory plan or
arrangement.
(b) The Company filed a Form 8-K dated December 21, 1999, to
report the declaration of a cash dividend of $0.09 per
common share payable on January 25, 2000 to stockholders of
record at the close of business on December 31, 1999.
(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 1999 Annual
Report which are required to be included herein.
30
<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 30, 2000 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 30, 2000
----------------------------
Charlotte A. Zuschlag
President and Chief Executive
Officer, Director (Principal
Executive Officer)
By: /s/ Charles P. Evanoski Date: March 30, 2000
----------------------------
Charles P. Evanoski
Group Senior Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
By: /s/ William B. Salsgiver Date: March 30, 2000
----------------------------
William B. Salsgiver
Chairman of the Board of
Directors
By: /s/ Herbert S. Skuba Date: March 30, 2000
----------------------------
Herbert S. Skuba
Vice Chairman of the Board of
Directors
By: /s/ George William Blank, Jr. Date: March 30, 2000
----------------------------
George William Blank, Jr.
Director
By: /s/ Charles Delman Date: March 30, 2000
----------------------------
Charles Delman
Director
By: /s/ Lloyd L. Kildoo Date: March 30, 2000
----------------------------
Lloyd L. Kildoo
Director
By: /s/ Edmund C. Smith Date: March 30, 2000
----------------------------
Edmund C. Smith
Director
By: /s/ Edwin A. Thaner Date: March 30, 2000
----------------------------
Edwin A. Thaner
Director
31
<PAGE>
EXHIBIT 10.h
AGREEMENT
AGREEMENT, dated this 16th day of November 1999, between ESB Financial
Corporation (the "Corporation"), a Pennsylvania corporation, and Charlotte A.
Zuschlag (the "Executive").
WITNESSETH
WHEREAS, the Executive is presently an officer of the Corporation and ESB
Bank, F.S.B. (the "Bank") (together, the "Employers");
WHEREAS, the Employers desire to be ensured of the Executive's continued
active participation in the business of the Employers, and the Bank currently
has an agreement with the Executive dated June 13, 1990, which is being
superseded by this Agreement;
WHEREAS, in accordance with Office of Thrift Supervision ("OTS") Regulatory
Bulletin 27a, the Corporation and the Bank desire to enter into separate
agreements with the Executive with respect to her employment by each 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 by the Corporation in the event that her
employment with the Corporation is terminated under specified circumstances;
NOW THEREFORE, in consideration of the mutual agreements herein contained,
and upon the other terms and conditions hereinafter provided, 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) Average Annual Compensation. The Executive's "Average Annual
Compensation" for purposes of this Agreement shall be deemed to mean the average
level of compensation paid to the Executive by the Employers or any subsidiary
thereof during the most recent five taxable years preceding the Date of
Termination and included in the Executive's gross income for tax purposes and
any income earned and deferred by the Executive pursuant to any plan or
arrangement of the Employers.
(b) Base Salary. "Base Salary" shall have the meaning set forth in Section
3(a) hereof.
(c) Cause. Termination 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 or material breach of any provision of this Agreement.
<PAGE>
2
(d) Change in Control of the Corporation. "Change in Control of the
Corporation" 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 the Corporation is registered
under the 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 Sections 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 Corporation representing 25% or more of the
combined voting power of the Corporation'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 Corporation 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.
(e) Code. "Code" shall mean the Internal Revenue Code of 1986, as amended.
(f) 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.
(g) Disability. Termination by the Corporation 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.
(h) Good Reason. Termination by the Executive of the Executive's
employment for "Good Reason" shall mean termination by the Executive following a
Change in Control of the Corporation based on:
(i) Without the Executive's express written consent, the failure to
elect or to re-elect or to appoint or to re-appoint the
Executive to the offices of President and Chief Executive
Officer of the Employers or a material adverse change made by
the Employers in the Executive's functions, duties or
responsibilities as President and Chief Executive Officer of
the Employers;
(ii) Without the Executive's express written consent, a reduction by
either of the Employers in the Executive's Base Salary as the
same may be increased from time to time or, except to the
extent permitted by Section 3(b) hereof, a
<PAGE>
3
reduction in the package of fringe benefits provided to the
Executive, taken as a whole;
(iii) The principal executive office of either of the Employers is
relocated outside of the Ellwood City, Pennsylvania area or,
without the Executive's express written consent, either of the
Employers require the Executive to be based anywhere other than
an area in which the Employers' principal executive office is
located, except for required travel on business of the
Employers to an extent substantially consistent with the
Executive's present business travel obligations;
(iv) 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 (j) below; or
(v) The failure by the Corporation to obtain the assumption of and
agreement to perform this Agreement by any successor as
contemplated in Section 9 hereof.
(i) IRS. IRS shall mean the Internal Revenue Service.
(j) Notice of Termination. Any purported termination of the Executive's
employment by the Corporation for any reason, including without limitation for
Cause, Disability or Retirement, or by the Executive for any reason, including
without limitation 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 dated 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 the 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 Corporation's termination of the Executive's employment for
Cause, which shall be effective immediately; and (iv) is given in the manner
specified in Section 10 hereof.
(k) Retirement. "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. Term of Employment.
(a) The Corporation hereby employs the Executive as President and Chief
Executive Officer and the Executive hereby accepts said employment and agrees to
render such services to the Corporation on the terms and conditions set forth in
this Agreement. The term of employment under
<PAGE>
4
this Agreement shall be for three years, commencing on the date of this
Agreement and, upon approval of the Board of Directors of the Corporation, shall
extend for an additional year on each annual anniversary of the date of this
Agreement such that at any time the remaining term of this Agreement shall be
from two to three years. Prior to the first annual anniversary of the date of
this Agreement and each annual anniversary thereafter, the Board of Directors of
the Corporation shall consider and review (with appropriate corporate
documentation thereof, and after taking into account all relevant factors,
including the Executive's performance hereunder) an extension of the term of
this Agreement, and the term shall continue to extend each year if the Board of
Directors approves such extension unless the Executive gives written notice to
the Employers of the Executive's election not to extend the term, with such
written notice to be given not less than thirty (30) days prior to any such
anniversary date. If the Board of Directors elects not to extend the term, it
shall give written notice of such decision to the Executive not less than thirty
(30) days prior to any such anniversary date. If any party gives timely notice
that the term will not be extended as of any annual anniversary date, then this
Agreement shall terminate at the conclusion of its remaining term. References
herein to the term of this Agreement shall refer both to the initial term and
successive terms.
(b) During the term of this Agreement, the Executive shall perform such
executive services for the Corporation as may be consistent with her titles and
from time to time assigned to her by the Corporation's Board of Directors.
3. Compensation and Benefits.
(a) The Employers shall compensate and pay the Executive for her services
during the term of this Agreement at a minimum base salary of $284,000 per year
("Base Salary"), which may be increased from time to time in such amounts as may
be determined by the Boards of Directors of the Employers and may not be
decreased without the Executive's express written consent. In addition to her
Base Salary, the Executive shall be entitled to receive during the term of this
Agreement such bonus payments as may be determined by the Boards of Directors of
the Employers.
(b) During the term of this Agreement, the Executive shall be entitled to
participate in and receive the benefits of any pension or other retirement
benefit plan, profit sharing, stock option, employee stock ownership, or other
plans, benefits and privileges given to employees and executives of the
Employers, to the extent commensurate with her then duties and responsibilities,
as fixed by the Boards of Directors of the Employers. The Corporation shall not
make any changes in such plans, benefits or privileges which would adversely
affect the Executive's rights or benefits thereunder, unless such change occurs
pursuant to a program applicable to all executive officers of the Corporation
and does not result in a proportionately greater adverse change in the rights of
or benefits to the Executive as compared with any other executive officer of the
Corporation. Nothing paid to the Executive under any plan or arrangement
presently in effect or made available in the future shall be deemed to be in
lieu of the salary payable to the Executive pursuant to Section 3(a) hereof.
<PAGE>
5
(c) During the term of this Agreement, the Executive shall be entitled to
paid annual vacation in accordance with the policies as established from time to
time by the Boards of Directors of the Employers, which shall in no event be
less than five weeks per annum. The Executive shall not be entitled to receive
any additional compensation from the Employers for failure to take a vacation,
nor shall the Executive be able to accumulate unused vacation time from one year
to the next, except to the extent authorized by the Boards of Directors of the
Employers.
(d) During the term of this Agreement, in keeping with past practices, the
Employers shall continue to provide the Executive with the automobile she
presently drives. The Employers shall be responsible and shall pay for all costs
of insurance coverage, repairs, maintenance and other incidental expenses,
including license, fuel and oil.
(e) In the event the Executive's employment is terminated by the
Corporation for any reason other than Cause, the Employers shall provide
continued life, medical, dental and disability coverage substantially identical
to the coverage maintained by the Employers for the Executive immediately prior
to her termination. Such coverage shall cease upon the expiration of the
remaining term of this Agreement.
(f) In the event of the Executive's death during the term of this
Agreement, her spouse, estate, legal representative or named beneficiaries (as
directed by the Executive in writing) shall be paid on a monthly basis the
Executive's annual compensation from the Employers at the rate in effect at the
time of the Executive's death for the remainder of the term of this Agreement,
as well as the benefits specified in Section 3(e) hereof. In the event
Executive is terminated due to Disability during the term of this Agreement, the
Executive shall be paid on a monthly basis (i) the Executive's annual
compensation from the Employers at the rate in effect at the time of termination
due to Disability for the remainder of the term of this Agreement, as well as
the benefits specified in Section 3(e) hereof, and (ii) upon the expiration of
the term of this Agreement, two-thirds (66.67%) of the Executive's Base Salary
at the time of termination due to Disability until the Executive reaches the
normal retirement age of 65; provided however, there shall be deducted from the
amounts paid the Executive pursuant to this Section 3(f), any amounts actually
paid to the Executive pursuant to any disability insurance or similar plan or
program which the Employers have instituted or may institute on behalf of the
Executive or its employees for the purpose of compensating employees in the
event of disability, the Social Security Act, the Workers Compensation or
Occupational Disease Act or any state disability benefit law.
(g) The Executive's compensation, benefits and expenses shall be paid by
the Corporation and the Bank in the same proportion as the time and services
actually expended by the Executive on behalf of each respective Employer.
4. Expenses. The Employers shall reimburse the Executive or otherwise
provide for or pay for all reasonable expenses incurred by the Executive in
furtherance of or in connection with
<PAGE>
6
the business of the Employers, including, but not by way of limitation,
automobile expenses described in Section 3(d) hereof, and traveling expenses,
and all reasonable entertainment expenses (whether incurred at the Executive's
residence, while traveling or otherwise), subject to such reasonable
documentation and other limitations as may be established by the Boards of
Directors of the Employers. If such expenses are paid in the first instance by
the Executive, the Employers shall reimburse the Executive therefor.
5. Termination.
(a) The Corporation shall have the right, at any time upon prior Notice of
Termination, to terminate the Executive's employment hereunder for any reason,
including without limitation termination for Cause, Disability or Retirement,
and the Executive shall have the right, upon prior Notice of Termination, to
terminate her employment hereunder for any reason.
(b) In the event that (i) the Executive's employment is terminated by the
Corporation for Cause or (ii) the Executive terminates her employment hereunder
other than for Disability, Retirement, death or Good Reason, the Executive shall
have no right pursuant to this Agreement to compensation or other benefits for
any period after the applicable Date of Termination.
(c) In the event that the Executive's employment is terminated as a result
of Disability, Retirement or the Executive's death during the term of this
Agreement, the Executive shall have no right pursuant to this Agreement to
compensation or other benefits for any period after the applicable Date of
Termination, except as provided for in Sections 3(e) and 3(f) hereof.
(d) In the event that (i) the Executive's employment is terminated by the
Corporation for other than Cause, Disability, Retirement or the Executive's
death or (ii) such employment is terminated by the Executive (a) due to a
material breach of this Agreement by the Corporation, which breach has not been
cured within fifteen (15) days after a written notice of non-compliance has been
given by the Executive to the Employers, or (b) for Good Reason, then the
Corporation shall
(A) pay to the Executive, in either thirty-six (36) equal monthly
installments beginning with the first business day of the month following
the Date of Termination or in a lump sum within five business days of the
Date of Termination (at the Executive's election), a cash severance amount
equal to three (3) times that portion of the Executive's Average Annual
Compensation paid by the Corporation, and
(B) maintain and provide for a period ending at the earlier of (i)
the expiration of the remaining term of employment pursuant hereto prior to
the Notice 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
<PAGE>
7
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, disability and other employee benefit
plans, programs and arrangements offered by the Corporation in which the
Executive was entitled to participate immediately prior to the Date of
Termination (other than stock option and restricted stock 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
Corporation shall arrange 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.
6. Payment of Additional Benefits under Certain Circumstances.
(a) If the payments and benefits pursuant to Section 5 hereof, either
alone or together with other payments and benefits which the Executive has the
right to receive from the Employers (including, without limitation, the payments
and benefits which the Executive would have the right to receive from the Bank
pursuant to Section 5 of the Agreement between the Bank and the Executive dated
as of the date hereof ("Bank Agreement"), before giving effect to any reduction
in such amounts pursuant to Section 6 of the Bank Agreement), would constitute a
"parachute payment" as defined in Section 280G(b)(2) of the Code (the "Initial
Parachute Payment," which includes the amounts paid pursuant to clause (A)
below), then the Corporation shall pay to the Executive, in thirty-six (36)
equal monthly installments beginning with the first business day of the month
following the Date of Termination or in a lump sum within five business days of
the Date of Termination (at the Executive's election), a cash amount equal to
the sum of the following:
(A) the amount by which the payments and benefits that would have
otherwise been paid by the Bank to the Executive pursuant to Section 5 of
the Bank Agreement are reduced by the provisions of Section 6 of the Bank
Agreement;
(B) twenty (20) percent (or such other percentage equal to the tax
rate imposed by Section 4999 of the Code) of the amount by which the
Initial Parachute Payment exceeds the Executive's "base amount" from the
Employers, as defined in Section 280G(b)(3) of the Code, with the
difference between the Initial Parachute Payment and the Executive's base
amount being hereinafter referred to as the "Initial Excess Parachute
Payment";
(C) such additional amount (tax allowance) as may be necessary to
compensate the Executive for the payment by the Executive of state and
federal income and excise taxes on the payment provided under clause (B)
above and on any payments under this clause (C).
<PAGE>
8
In computing such tax allowance, the payment to be made under clause (B)
above shall be multiplied by the "gross up percentage" ("GUP"). The GUP
shall be determined as follows:
Tax Rate
GUP = _______________
1- Tax Rate
The Tax Rate for purposes of computing the GUP shall be the highest
marginal federal and state income and employment-related tax rate,
including any applicable excise tax rate, applicable to the Executive in
the year in which the payment under clause (B) above is made.
(b) Notwithstanding the foregoing, if it shall subsequently be determined
in a final judicial determination or a final administrative settlement to which
the Executive is a party that the actual excess parachute payment as defined in
Section 280G(b)(1) of the Code is different from the Initial Excess Parachute
Payment (such different amount being hereafter referred to as the "Determinative
Excess Parachute Payment"), then the Corporation's independent tax counsel or
accountants shall determine the amount (the "Adjustment Amount") which either
the Executive must pay to the Corporation or the Corporation must pay to the
Executive in order to put the Executive (or the Corporation, as the case may be)
in the same position the Executive (or the Corporation, as the case may be)
would have been if the Initial Excess Parachute Payment had been equal to the
Determinative Excess Parachute Payment. In determining the Adjustment Amount,
the independent tax counsel or accountants shall take into account any and all
taxes (including any penalties and interest) paid by or for the Executive or
refunded to the Executive or for the Executive's benefit. As soon as
practicable after the Adjustment Amount has been so determined, the Corporation
shall pay the Adjustment Amount to the Executive or the Executive shall repay
the Adjustment Amount to the Corporation, as the case may be.
(c) In each calendar year that the Executive receives payments of benefits
under this Section 6, the Executive shall report on her state and federal income
tax returns such information as is consistent with the determination made by the
independent tax counsel or accountants of the Corporation as described above.
The Corporation shall indemnify and hold the Executive harmless from any and all
losses, costs and expenses (including without limitation, reasonable attorneys'
fees, interest, fines and penalties) which the Executive incurs as a result of
so reporting such information. The Executive shall promptly notify the
Corporation in writing whenever the Executive receives notice of the institution
of a judicial or administrative proceeding, formal or informal, in which the
federal tax treatment under Section 4999 of the Code of any amount paid or
payable under this Section 6 is being reviewed or is in dispute. The
Corporation shall assume control at its expense over all legal and accounting
matters pertaining to such federal tax treatment (except to the extent necessary
or appropriate for the Executive to resolve any such proceeding with respect to
any matter unrelated to amounts paid or payable pursuant to this Section 6) and
the Executive shall cooperate fully with the Corporation in any such proceeding.
The Executive shall not enter into any
<PAGE>
9
compromise or settlement or otherwise prejudice any rights the Corporation may
have in connection therewith without the prior consent of the Corporation.
7. 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 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.
8. Withholding. All payments required to be made by the Corporation
hereunder to the Executive shall be subject to the withholding of such amounts,
if any, relating to tax and other payroll deductions as the Corporation may
reasonably determine should be withheld pursuant to any applicable law or
regulation.
9. Assignability. The Corporation may assign this Agreement and its
rights and obligations hereunder in whole, but not in part, to any corporation,
bank or other entity with or into which the Corporation may hereafter merge or
consolidate or to which the Corporation may transfer all or substantially all of
its 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
Corporation hereunder as fully as if it had been originally made a party hereto,
but may not otherwise assign this Agreement or its rights and obligations
hereunder. The Executive may not assign or transfer this Agreement or any
rights or obligations hereunder.
10. 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 Corporation: Secretary
ESB Financial Corporation
600 Lawrence Avenue
Ellwood City, Pennsylvania 16117
To the Bank: Secretary
ESB Bank, F.S.B.
600 Lawrence Avenue
Ellwood City, Pennsylvania 16117
<PAGE>
10
To the Executive: Charlotte A. Zuschlag
4237 Haut Brion Court
Allison Park, Pennsylvania 15101
11. 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 Board of Directors of the Corporation to sign on
its 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.
12. 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 by the substantive laws of the Commonwealth of
Pennsylvania.
13. Nature of Obligations. Nothing contained herein shall create or
require the Corporation 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 Corporation hereunder, such right shall be no
greater than the right of any unsecured general creditor of the Corporation.
14. 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.
15. 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.
16. 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.
17. Entire Agreement. This Agreement embodies the entire agreement
between the Corporation and the Executive with respect to the matters agreed to
herein. All prior agreements between the Corporation and the Executive with
respect to the matters agreed to herein, including without limitation the
Agreement between the Employers and the Executive dated June 13, 1990, are
hereby superseded and shall have no force or effect. Notwithstanding the
foregoing, nothing contained in this Agreement shall affect the agreement of
even date being entered into between the Bank and the Executive.
<PAGE>
11
IN WITNESS WHEREOF, this Agreement has been executed as of the date first
above written.
Attest: ESB FINANCIAL CORPORATION
/s/ Frank D. Martz By: /s/ William B. Salsgiver
- ------------------------------- -----------------------------------
Frank D. Martz William B. Salsgiver
Senior Vice President and Secretary Chairman of the Board of Directors
EXECUTIVE
By: /s/ Charlotte A. Zuschlag
-----------------------------------
Charlotte A. Zuschlag
<PAGE>
EXHIBIT 10.i
AGREEMENT
AGREEMENT, dated this 16th day of November 1999, between ESB Bank, F.S.B.
(the "Bank"), a federally chartered savings bank, and Charlotte A. Zuschlag (the
"Executive").
WITNESSETH
WHEREAS, the Executive is presently an officer of ESB Financial Corporation
(the "Corporation") and the Bank (together, the "Employers");
WHEREAS, the Employers desire to be ensured of the Executive's continued
active participation in the business of the Employers, and the Bank currently
has an agreement with the Executive dated June 13, 1990, which is being
superseded by this Agreement;
WHEREAS, in accordance with Office of Thrift Supervision ("OTS") Regulatory
Bulletin 27a, the Corporation and the Bank desire to enter into separate
agreements with the Executive with respect to her employment by each 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 by the Bank in the event that her employment
with the Bank is terminated under specified circumstances;
NOW THEREFORE, in consideration of the mutual agreements herein contained,
and upon the other terms and conditions hereinafter provided, 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) Average Annual Compensation. The Executive's "Average Annual
Compensation" for purposes of this Agreement shall be deemed to mean the average
level of compensation paid to the Executive by the Employers or any subsidiary
thereof during the most recent five taxable years preceding the Date of
Termination and included in the Executive's gross income for tax purposes and
any income earned and deferred by the Executive pursuant to any plan or
arrangement of the Employers.
(b) Base Salary. "Base Salary" shall have the meaning set forth in Section
3(a) hereof.
(c) Cause. Termination of the Executive's employment for "Cause" shall
mean termination because of personal dishonesty, incompetence, willful
misconduct, breach of fiduciary
<PAGE>
2
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 or material breach of any
provision of this Agreement.
(d) Change in Control of the Corporation. "Change in Control of the
Corporation" 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 the Corporation is registered
under the 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 Sections 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 Corporation representing 25% or more of the
combined voting power of the Corporation'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 Corporation 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.
(e) Code. "Code" shall mean the Internal Revenue Code of 1986, as amended.
(f) 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.
(g) Disability. Termination by the Bank 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.
(h) Good Reason. Termination by the Executive of the Executive's
employment for "Good Reason" shall mean termination by the Executive following a
Change in Control of the Corporation based on:
(i) Without the Executive's express written consent, the failure to
elect or to re-elect or to appoint or to re-appoint the
Executive to the offices of President and Chief Executive
Officer of the Employers or a material adverse change made by
the Employers in the Executive's functions, duties or
responsibilities as President and Chief Executive Officer of
the Employers;
<PAGE>
3
(ii) Without the Executive's express written consent, a reduction by
either of the Employers in the Executive's Base Salary as the
same may be increased from time to time or, except to the
extent permitted by Section 3(b) hereof, a reduction in the
package of fringe benefits provided to the Executive, taken as
a whole;
(iii) The principal executive office of either of the Employers is
relocated outside of the Ellwood City, Pennsylvania area or,
without the Executive's express written consent, either of the
Employers require the Executive to be based anywhere other than
an area in which the Employers' principal executive office is
located, except for required travel on business of the
Employers to an extent substantially consistent with the
Executive's present business travel obligations;
(iv) 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 (j) below; or
(v) The failure by the Bank to obtain the assumption of and
agreement to perform this Agreement by any successor as
contemplated in Section 9 hereof.
(i) IRS. IRS shall mean the Internal Revenue Service.
(j) Notice of Termination. Any purported termination of the Executive's
employment by the Bank for any reason, including without limitation for Cause,
Disability or Retirement, or by the Executive for any reason, including without
limitation 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 dated 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 Bank's termination of Executive's employment for Cause, which
shall be effective immediately; and (iv) is given in the manner specified in
Section 10 hereof.
(k) Retirement. "Retirement" shall mean voluntary termination by the
Executive in accordance with the Employers' retirement policies, including early
retirement, generally applicable to their salaried employees.
<PAGE>
4
2. Term of Employment.
(a) The Bank hereby employs the Executive as President and Chief Executive
Officer and the Executive hereby accepts said employment and agrees to render
such services to the Bank on the terms and conditions set forth in this
Agreement. The term of employment under this Agreement shall be for three
years, commencing on the date of this Agreement and, upon approval of the Board
of Directors of the Bank, shall extend for an additional year on each annual
anniversary of the date of this Agreement such that at any time the remaining
term of this Agreement shall be from two to three years. Prior to the first
annual anniversary of the date of this Agreement and each annual anniversary
thereafter, the Board of Directors of the Bank shall consider and review (with
appropriate corporate documentation thereof, and after taking into account all
relevant factors, including the Executive's performance hereunder) an extension
of the term of this Agreement, and the term shall continue to extend each year
if the Board of Directors approves such extension unless the Executive gives
written notice to the Employers of the Executive's election not to extend the
term, with such written notice to be given not less than thirty (30) days prior
to any such anniversary date. If the Board of Directors elects not to extend the
term, it shall give written notice of such decision to the Executive not less
than thirty (30) days prior to any such anniversary date. If any party gives
timely notice that the term will not be extended as of any annual anniversary
date, then this Agreement shall terminate at the conclusion of its remaining
term. References herein to the term of this Agreement shall refer both to the
initial term and successive terms.
(b) During the term of this Agreement, the Executive shall perform such
executive services for the Bank as may be consistent with her titles and from
time to time assigned to her by the Bank's Board of Directors.
3. Compensation and Benefits.
(a) The Employers shall compensate and pay the Executive for her services
during the term of this Agreement at a minimum base salary of $284,000 per year
("Base Salary"), which may be increased from time to time in such amounts as may
be determined by the Boards of Directors of the Employers and may not be
decreased without the Executive's express written consent. In addition to her
Base Salary, the Executive shall be entitled to receive during the term of this
Agreement such bonus payments as may be determined by the Boards of Directors of
the Employers.
(b) During the term of this Agreement, the Executive shall be entitled to
participate in and receive the benefits of any pension or other retirement
benefit plan, profit sharing, stock option, employee stock ownership, or other
plans, benefits and privileges given to employees and executives of the
Employers, to the extent commensurate with her then duties and responsibilities,
as fixed by the Boards of Directors of the Employers. The Bank shall not make
any changes in such plans, benefits or privileges which would adversely affect
the Executive's rights or benefits thereunder, unless such change occurs
pursuant to a program applicable to all executive officers of the Bank and
<PAGE>
5
does not result in a proportionately greater adverse change in the rights of or
benefits to the Executive as compared with any other executive officer of the
Bank. Nothing paid to the Executive under any plan or arrangement presently in
effect or made available in the future shall be deemed to be in lieu of the
salary payable to the Executive pursuant to Section 3(a) hereof.
(c) During the term of this Agreement, the Executive shall be entitled to
paid annual vacation in accordance with the policies as established from time to
time by the Boards of Directors of the Employers, which shall in no event be
less than five weeks per annum. The Executive shall not be entitled to receive
any additional compensation from the Employers for failure to take a vacation,
nor shall the Executive be able to accumulate unused vacation time from one year
to the next, except to the extent authorized by the Boards of Directors of the
Employers.
(d) During the term of this Agreement, in keeping with past practices, the
Employers shall continue to provide the Executive with the automobile she
presently drives. The Employers shall be responsible and shall pay for all costs
of insurance coverage, repairs, maintenance and other incidental expenses,
including license, fuel and oil.
(e) In the event the Executive's employment is terminated by the Bank for
any reason other than Cause, the Employers shall provide continued life,
medical, dental and disability coverage substantially identical to the coverage
maintained by the Employers for the Executive immediately prior to her
termination. Such coverage shall cease upon the expiration of the remaining
term of this Agreement.
(f) In the event of the Executive's death during the term of this
Agreement, her spouse, estate, legal representative or named beneficiaries (as
directed by the Executive in writing) shall be paid on a monthly basis the
Executive's annual compensation from the Employers at the rate in effect at the
time of the Executive's death for the remainder of the term of this Agreement,
as well as the benefits specified in Section 3(e) hereof. In the event
Executive is terminated due to Disability during the term of this Agreement, the
Executive shall be paid on a monthly basis (i) the Executive's annual
compensation from the Employers at the rate in effect at the time of termination
due to Disability for the remainder of the term of this Agreement, as well as
the benefits specified in Section 3(e) hereof, and (ii) upon the expiration of
the term of this Agreement, two-thirds (66.67%) of the Executive's Base Salary
at the time of termination due to Disability until the Executive reaches the
normal retirement age of 65; provided however, there shall be deducted from the
amounts paid the Executive pursuant to this Section 3(f), any amounts actually
paid to the Executive pursuant to any disability insurance or similar plan or
program which the Employers have instituted or may institute on behalf of the
Executive or its employees for the purpose of compensating employees in the
event of disability, the Social Security Act, the Workers Compensation or
Occupational Disease Act, or any state disability benefit law.
<PAGE>
6
(g) The Executive's compensation, benefits and expenses shall be paid by
the Corporation and the Bank in the same proportion as the time and services
actually expended by the Executive on behalf of each respective Employer.
4. Expenses. The Employers shall reimburse the Executive or otherwise
provide for or pay for all reasonable expenses incurred by the Executive in
furtherance of or in connection with the business of the Employers, including,
but not by way of limitation, automobile expenses described in Section 3(d)
hereof, and traveling expenses, and all reasonable entertainment expenses
(whether incurred at the Executive's residence, while traveling or otherwise),
subject to such reasonable documentation and other limitations as may be
established by the Boards of Directors of the Employers. If such expenses are
paid in the first instance by the Executive, the Employers shall reimburse the
Executive therefor.
5. Termination.
(a) The Bank shall have the right, at any time upon prior Notice of
Termination, to terminate the Executive's employment hereunder for any reason,
including without limitation termination for Cause, Disability or Retirement,
and the Executive shall have the right, upon prior Notice of Termination, to
terminate her employment hereunder for any reason.
(b) In the event that (i) the Executive's employment is terminated by the
Bank for Cause or (ii) the Executive terminates her employment hereunder other
than for Disability, Retirement, death or Good Reason, the Executive shall have
no right pursuant to this Agreement to compensation or other benefits for any
period after the applicable Date of Termination.
(c) In the event that the Executive's employment is terminated as a result
of Disability, Retirement or the Executive's death during the term of this
Agreement, the Executive shall have no right pursuant to this Agreement to
compensation or other benefits for any period after the applicable Date of
Termination, except as provided for in Sections 3(e) and 3(f) hereof.
(d) In the event that (i) the Executive's employment is terminated by the
Bank for other than Cause, Disability, Retirement or the Executive's death or
(ii) such employment is terminated by the Executive (a) due to a material breach
of this Agreement by the Bank, which breach has not been cured within fifteen
(15) days after a written notice of non-compliance has been given by the
Executive to the Employers, or (b) for Good Reason, then the Bank shall, subject
to the provisions of Section 6 hereof, if applicable
(A) pay to the Executive, in either thirty-six (36) equal monthly
installments beginning with the first business day of the month following
the Date of Termination or in a lump sum within five business days of the
Date of Termination (at the Executive's
<PAGE>
7
election), a cash severance amount equal to three (3) times that portion of
the Executive's Average Annual Compensation paid by the Bank, and
(B) maintain and provide for a period ending at the earlier of (i)
the expiration of the remaining term of employment pursuant hereto prior to
the Notice 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, disability and other employee benefit plans, programs
and arrangements offered by the Bank in which the Executive was entitled to
participate immediately prior to the Date of Termination (other than stock
option and restricted stock 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 Bank shall arrange 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.
6. Limitation of Benefits under Certain Circumstances. If the payments
and benefits pursuant to Section 5 hereof, either alone or together with other
payments and benefits which the Executive has the right to receive from the
Bank, would constitute a "parachute payment" under Section 280G of the Code, the
payments and benefits payable by the Bank pursuant to Section 5 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
payable by the Bank under Section 5 being non-deductible to the Bank pursuant to
Section 280G of the Code and subject to the excise tax imposed under Section
4999 of the Code. The parties hereto agree that the payments and benefits
payable pursuant to this Agreement to the Executive upon termination shall be
limited to three times the Executive's Average Annual Compensation in accordance
with OTS Regulatory Bulletin 27a. The determination of any reduction in the
payments and benefits to be made pursuant to Section 5 shall be based upon the
opinion of independent tax counsel selected by the Bank's independent public
accountants and paid by the Bank. Such counsel shall be reasonably acceptable
to the Bank 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.
Nothing contained herein shall result in a reduction of any payments or benefits
to which the Executive may be entitled upon termination of employment under any
circumstances other than as specified in this Section 6, or a reduction in the
payments and benefits specified in Section 5 below zero.
<PAGE>
8
7. 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 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.
8. Withholding. All payments required to be made by the Bank hereunder
to the Executive shall be subject to the withholding of such amounts, if any,
relating to tax and other payroll deductions as the Bank may reasonably
determine should be withheld pursuant to any applicable law or regulation.
9. Assignability. The Bank may assign this Agreement and its rights and
obligations hereunder in whole, but not in part, to any corporation, bank or
other entity with or into which the Bank may hereafter merge or consolidate or
to which the Bank may transfer all or substantially all of its 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 Bank hereunder as fully as if
it had been originally made a party hereto, but may not otherwise assign this
Agreement or its rights and obligations hereunder. The Executive may not assign
or transfer this Agreement or any rights or obligations hereunder.
10. 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 Bank: Secretary
ESB Bank, F.S.B.
600 Lawrence Avenue
Ellwood City, Pennsylvania 16117
To the Corporation: Secretary
ESB Financial Corporation
600 Lawrence Avenue
Ellwood City, Pennsylvania 16117
<PAGE>
9
To the Executive: Charlotte A. Zuschlag
237 Haut Brion Court
Allison Park, Pennsylvania 15101
11. 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 Board of Directors of the Bank to sign on its
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.
12. 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 by the substantive laws of the Commonwealth of
Pennsylvania.
13. Nature of Obligations. Nothing contained herein shall create or
require the Bank 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 Bank hereunder, such right shall be no greater than
the right of any unsecured general creditor of the Bank.
14. 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.
15. 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.
16. 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.
17. Regulatory Actions. The following provisions shall be applicable to
the parties to the extent that they are required to be included in employment
agreements between a savings bank 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, including without
limitation Section 5 hereof.
(a) If the Executive is suspended from office and/or temporarily
prohibited from participating in the conduct of the Bank's affairs pursuant to
notice served under Section 8(e)(3) or
<PAGE>
10
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 Bank's 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 Bank may, in its
discretion: (i) pay the 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 the Executive is removed from office and/or permanently prohibited
from participating in the conduct of the Bank's 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 Bank under this Agreement shall terminate as of
the effective date of the order, but vested rights of the Executive and the Bank
as of the date of termination shall not be affected.
(c) If the 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 Bank as of
the date of termination shall not be affected.
(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 Bank is
necessary): (i) by the Director of the 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 the 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 the Bank or when the 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.
18. Regulatory Prohibition. Notwithstanding any other provision of this
Agreement to the contrary, any payments made to the Executive pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their compliance
with Section 18(k) of the FDIA (12 U.S.C. (S)1828(k)) and any regulations
promulgated thereunder.
19. Entire Agreement. This Agreement embodies the entire agreement
between the Bank and the Executive with respect to the matters agreed to herein.
All prior agreements between the Bank and the Executive with respect to the
matters agreed to herein, including without limitation the Agreement between the
Bank and the Executive dated June 13, 1990, are hereby superseded and shall have
no force or effect. Notwithstanding the foregoing, nothing contained in this
Agreement shall affect the agreement of even date being entered into between the
Corporation and the Executive.
<PAGE>
11
IN WITNESS WHEREOF, this Agreement has been executed as of the date first
above written.
Attest: ESB BANK, F.S.B.
/s/ Frank D. Martz By: /s/ William B. Salsgiver
- ---------------------------- -----------------------------------
Frank D. Martz William B. Salsgiver
Senior Vice President and Secretary Chairman of the Board of Directors
EXECUTIVE
By: /s/ Charlotte A. Zuschlag
-----------------------------------
Charlotte A. Zuschlag
<PAGE>
EXHIBIT 11
Statement Re: Computation of Net Income per Share of Common Stock
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31,
--------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 5,761,000 $ 6,001,000 $ 5,447,000
Weighted average common shares outstanding 4,973,000 5,338,000 5,366,000
-------------- -------------- ---------------
Basic earnings per share $ 1.16 $ 1.12 $ 1.02
============== ============== ===============
Weighted average common shares outstanding 4,973,000 5,338,000 5,366,000
Common stock equivalents due to
effect of stock options 121,000 231,000 186,000
-------------- -------------- ---------------
Weighted average common shares
and equivalents 5,094,000 5,569,000 5,552,000
Diluted earnings per share $ 1.13 $ 1.08 $ 0.98
============== ============== ===============
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit 13
1999
ESB FINANCIAL CORPORATION
ANNUAL REPORT
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
<S> <C>
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
Accountants' Report.......................................... 50
Stock and Dividend Information............................... 51
Corporate Information........................................ 53
Board of Directors........................................... 54
Corporate Officers, Advisory Board and Bank Officers......... 55
Office Locations Opened in 1999.............................. 56
Office Locations............................................. Inside Back Cover
</TABLE>
Company Profile
ESB Financial Corporation (Nasdaq: ESBF), a publicly traded
financial services 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.
[LOGO]
ESB Bank, F.S.B. is a federally chartered, FDIC-insured
stock savings bank which conducts business through 16
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 Stockholders' Equity
(excluding 1996 SAIF Assessment)
[GRAPH APPEARS HERE]
<TABLE>
<S> <C>
1995 7.44%
1996 8.08%
1997 8.64%
1998 9.10%
1999 9.93%
</TABLE>
Earnings Per Share Growth (diluted)
Achieved 10% Growth Rate Over Periods
(excluding 1996 SAIF Assessment)
[GRAPH APPEARS HERE]
<TABLE>
<S> <C>
1995 $0.77
1996 $0.88
1997 $0.98
1998 $1.08
1999 $1.13
</TABLE>
<PAGE>
Consolidated Financial Highlights
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except share data)
<TABLE>
<CAPTION>
As of or for the
year ended December 31,
1999 1998 Change
---------- ---------- ----------
<S> <C> <C> <C>
Total assets $1,032,445 $ 972,438 6%
Loans receivable, net 393,929 360,280 9%
Total deposits 431,783 423,051 2%
Net interest income 16,263 16,651 (2%)
Net income 5,761 6,001 (4%)
Stockholders' equity 49,882 61,083 (18%)
Treasury stock, at cost (19,214) (16,841) 14%
Net income per share (diluted) $ 1.13 $ 1.08 5%
Cash dividends per share $ 0.36 $ 0.35 3%
Return on average assets 0.57% 0.63% (10%)
Return on average stockholders' equity 9.93% 9.10% 9%
</TABLE>
Asset & Loan Growth
(in millions)
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
ASSETS LOANS
<S> <C> <C>
1995 $ 650 $184
1996 $ 699 $217
1997 $ 911 $337
1998 $ 972 $360
1999 $1,032 $394
</TABLE>
Percentage of Nonperforming
Assets to Total Assets
[GRAPH APPEARS HERE]
1995 1996 1997 1998 1999
0.13% 0.59% 0.45% 0.51% 0.43%
- --------------------------------------------------------------------------------
ESB Financial Corporation 1 1999 Annual Report
<PAGE>
Letter to Stockholders
- --------------------------------------------------------------------------------
To Our Stockholders:
"Why should I invest my money in ESB Financial Corporation?" As President and
Chief Executive Officer of the Company, I submit to you reflections on the
challenges we faced in 1999 and the opportunities we embrace in 2000 as an
answer to this very important and relevant question. Each year new challenges
emerge and are confronted with great resolve. The year 1999 was no different.
I am pleased to report to you that we met the challenges and competition of the
banking industry and recorded our best earnings per share ever. We addressed
the challenges and uncertainties of "Y2K" head-on and we met the challenge of
growth by opening two new offices.
Opportunities were seized as we signed a definitive agreement to acquire SHS
Bancorp, Inc. and acquired more real estate on Lawrence Avenue to expand our
corporate headquarters. We converted to a "state of the art" data processing
system to provide more alternatives and greater flexibility to service our
customer's diversified banking requirements.
[PHOTO]
Charlotte A. Zuschlag
President and Chief Executive Officer
CHALLENGES
ESB Financial Corporation is committed to enhance shareholder value through a
philosophy of safety and soundness, customer service and satisfaction, and a
well-defined strategic growth plan. With these tenets in mind, I am pleased to
report that earnings per diluted share in 1999 increased to $1.13 compared to
$1.08 in 1998. Return on average equity again increased in 1999 to 9.93% as
compared to 9.10% in 1998. Company assets in 1999 rose to $1.03 billion as
compared to $972.4 million in 1998, representing an increase of 6.2%. Asset
growth in 1999 is reflected in the residential loan portfolio and in investment
securities. A continued strong residential lending market combined with
competitive products and responsive service resulted in total loan originations
of $147.0 in 1999, representing a 4.7% net increase over 1998. Since 1990, when
we converted to a public company, we have declared and paid a cash dividend to
our shareholders each and every quarter. Again in 1999, the Board of Directors
approved a common stock repurchase program and during the year 199,162 shares
were repurchased at a weighted average cost of $14.26 per share.
During 1999 the Company successfully concluded a multiphase plan for achieving
"Y2K" readiness and was fully operational for the year 2000. We worked very hard
to ensure that our systems -from automated teller machines to the clocks that
opened the vault doors - functioned properly on January 1, 2000. ESB Bank not
only had our own systems tested, but those of our service providers, business
partners, commercial customers and the other financial institution professionals
with whom we do business. We did not overlook one of the most critical
components of our operations and that was the trust and confidence of our
customers. We hope to continue our good relationship with our customers and make
a smooth transition to the new century.
To say that we are a community bank is one thing, to demonstrate it by example
is another. ESB Bank demonstrated that in 1999 by opening two new community
offices. The Wexford office was opened in January and the Springdale office was
opened in December. The office in Wexford is conveniently located near the
- --------------------------------------------------------------------------------
ESB Financial Corporation 2 1999 Annual Report
<PAGE>
Letter to Stockholders (continued)
- --------------------------------------------------------------------------------
intersection of Routes 910 and 19, and the 12,800 square foot office complex
includes our Wexford branch, the Loan Processing Center and THF, Inc., our
wholly owned title insurance agency. Our Springdale branch is on the main
street of town and has a very traditional bank lobby with polished wood and
brass counters and glass teller windows. We look forward to a long and mutually
beneficial relationship with these communities.
OPPORTUNITIES
In July, we signed a definitive merger agreement to acquire SHS Bancorp, Inc.,
headquartered on the North Shore of Pittsburgh. Spring Hill Savings Bank, FSB,
the wholly owned subsidiary of SHS Bancorp had four offices, all in Allegheny
County. This merger, which was completed on February 10, 2000, increased our
branch office network to 16 community offices in Lawrence, Allegheny, Beaver and
Butler counties and provided us with a presence in four additional Allegheny
County neighborhoods in which we will emphasize the type of community banking
that is the cornerstone of ESB Bank. I remain very confident that this merger
will be accretive to ESB Financial Corporation shareholders within the first
year.
What a tremendous feeling it is to say "we're out of space!" In order to
accommodate internal growth and expansion attributable to our recent mergers, we
found it necessary to acquire additional real estate on Lawrence Avenue.
Demolition of the existing storefront at 610 Lawrence Avenue began on January
10, 2000 and our expanded facility is slated for occupancy by July 2000. In
addition to the new office space, we began renovating the former "Moose
Building" as well. This will increase our corporate headquarters to nearly
61,000 square feet.
ESB Financial Corporation is committed to providing you quality financial
service for a quality life. As part of this commitment, we announced in January
that ESB Financial Corporation and FISERV, Inc., formed a strategic partnership
for data processing and information management systems for ESB Bank. FISERV,
Inc. is a leading computer service corporation dedicated exclusively to data
processing for financial institutions. As your full service community bank, ESB
Bank must respond to the ever-changing technological environment. Your
individual account, the one constant in this environment, is the basis of every
financial transaction. We firmly believe that this new partnership with FISERV
will provide ESB Bank with the most advanced technological customer service in
the banking industry.
In closing, I would especially like to thank the Board of Directors, Executive
and Senior Management and the nearly 210 other employees for their unselfish and
untiring dedication to this Company. The challenges and opportunities I outlined
to you would not have been possible without this group, a group that I consider
to be the most valuable asset of the Company.
The confidence, trust, and support that you demonstrated throughout 1999 is very
much appreciated. ESB Financial Corporation looks forward to the opportunities
that 2000 and beyond present. We are committed to delivering "Quality Financial
Service...For a Quality Life". I ask and encourage your comments and suggestions
at any time.
Respectfully yours,
/s/ Charlotte A. Zuschlag
Charlotte A. Zuschlag
President and Chief Executive Officer
- --------------------------------------------------------------------------------
ESB Financial Corporation 3 1999 Annual Report
<PAGE>
Selected Consolidated Financial Data
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except share data)
<TABLE>
<CAPTION>
-----------------------------------------------------------------
As of December 31,
Financial Condition Data 1999 1998 1997 1996 1995
- ------------------------ -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $ 1,032,445 $ 972,438 $ 910,770 $ 698,735 $ 659,371
Securities 561,125 545,049 518,021 444,329 442,783
Loans receivable, net 393,929 360,280 336,757 216,865 183,878
Deposits 431,783 423,051 399,568 332,889 338,494
Borrowed funds 543,627 480,382 435,170 309,195 259,472
Stockholders' equity 49,882 61,083 68,509 51,543 54,926
Stockholders' equity per common share (1) $ 9.78 $ 11.60 $ 11.82 $ 10.92 $ 11.38
-----------------------------------------------------------------
For the year ended December 31,
Operations Data 1999 1998 1997 1996(2) 1995
- --------------- -----------------------------------------------------------------
Interest income $ 64,792 $ 63,791 $ 55,011 $ 46,891 $ 44,357
Interest expense 48,529 47,140 38,346 32,629 30,219
-------------- ----------- ----------- ----------- --------------
Net interest income 16,263 16,651 16,665 14,262 14,138
Provision for loan losses 54 5 799 873 13
-------------- ----------- ----------- ----------- --------------
Net interest income after provision for loan losses 16,209 16,646 15,866 13,389 14,125
Noninterest income 3,056 1,939 1,075 679 772
Noninterest expense 12,427 11,067 9,510 10,535 8,962
-------------- ----------- ----------- ----------- --------------
Income before income taxes 6,838 7,518 7,431 3,533 5,935
Provision for income taxes 1,077 1,517 1,984 703 1,967
-------------- ----------- ----------- ----------- --------------
Net income $ 5,761 $ 6,001 $ 5,447 $ 2,830 $ 3,968
============== =========== =========== =========== ==============
Basic net income per common share (1) $ 1.16 $ 1.12 $ 1.02 $ 0.61 $ 0.81
Diluted net income per common share (1) $ 1.13 $ 1.08 $ 0.98 $ 0.59 $ 0.77
-----------------------------------------------------------------
As of or for the year ended December 31,
Other Data 1999 1998 1997 1996(2) 1995
- ---------- -----------------------------------------------------------------
Performance Ratios (for the year ended)
Return on average assets 0.57% 0.63% 0.68% 0.41% 0.61%
Return on average equity 9.93% 9.10% 8.64% 5.47% 7.44%
Average equity to average assets 5.79% 6.93% 7.92% 7.50% 8.24%
Interest rate spread (3) 1.77% 1.70% 1.95% 1.98% 1.93%
Net interest margin (3) 1.97% 2.06% 2.34% 2.33% 2.33%
Efficiency ratio (3) 54.34% 49.13% 45.56% 47.98% 55.40%
Noninterest expense to average assets 1.24% 1.16% 1.20% 2.71% 1.39%
Dividend payout ratio (4) 31.86% 32.59% 31.80% 120.00% 38.80%
Asset Quality Ratios (as of year end)
Non-performing loans to total loans 1.04% 1.31% 1.08% 1.80% 0.42%
Non-performing assets to total assets 0.43% 0.51% 0.45% 0.59% 0.13%
Allowance for loan losses to total loans 1.16% 1.26% 1.36% 1.46% 1.29%
Allowance for loan losses to non-performing loans 111.29% 96.67% 126.43% 81.02% 309.26%
Capital Ratios (as of year end)
Stockholders' equity to assets 4.83% 6.28% 7.52% 7.38% 8.33%
Tangible stockholders' equity to tangible assets 4.25% 5.61% 6.76% 6.78% 7.65%
- ---------------------------------------------------------------------------------------------------------------------------
</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, 1995 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 1999 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 16 offices (including
the Spring Hill Savings Bank, F.S.B. offices acquired as of February 10, 2000)
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 1999 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
- --------------------------------------------------------------------------------
Significant Financial Events in 1999
- ------------------------------------
Data Processing Conversion
On February 13, 1999, the Company completed a conversion of its third party
provided legacy computer system to another third party provided relational
database system. The decision to change third-party providers centered on
technology issues. The capitalized costs of $1.4 million associated with the
conversion are being depreciated over seven years.
Agreement and Plan of Reorganization
On July 21, 1999, the Company entered into an Agreement and Plan of
Reorganization with SHS Bancorp, Inc. ("SHS"), parent company of Spring Hill
Savings Bank, F.S.B., pursuant to which SHS shall be merged with and into the
Company, with the Company as the surviving corporation.
Under the terms of the agreement, each shareholder of SHS had the right to elect
to receive either $17.80 in cash or 1.30 shares of Company common stock for each
share of SHS common stock owned. The total merger consideration was payable 60%
in Company common stock and 40% in cash. The Company consummated the transaction
on February 10, 2000.
At December 31, 1999, SHS had total consolidated assets of $90.9 million, total
consolidated liabilities of $79.1 million, including total consolidated deposits
of $67.0 million and consolidated stockholders' equity of $11.8 million.
Opening of the Wexford and Springdale Branches
On January 19, 1999, the Company opened its newly constructed full service,
branch office located in Wexford, Allegheny County, a quarter mile north of the
former branch location. The office space is leased from ESB Bank Building
Associates, a joint venture of AMSCO, Inc., ESB's wholly owned subsidiary.
On December 6, 1999, the Company opened a full service, branch office located in
Springdale, Allegheny County. The building, a former branch office of another
financial institution, was purchased on January 15, 1999.
Significant Financial Events in 1998
- ------------------------------------
Merger of Troy Hill Federal Savings Bank with and into ESB
On June 11, 1998, Troy Hill Federal Savings Bank (Troy Hill) was merged with and
into ESB, with ESB 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 where applicable.
- --------------------------------------------------------------------------------
ESB Financial Corporation 6 1999 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
- --------------------------------------------------------------------------------
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.
Changes in Financial Condition
- ------------------------------
General. The Company's total assets increased a net $60.0 million or 6.2% to
$1.03 billion at December 31, 1999 from $972.4 million at December 31, 1998.
This increase was primarily due to a net increase in cash and cash equivalents
of $2.5 million, securities of $16.1 million, loans receivable of $33.6 million,
premises and equipment of $687,000, other assets of $6.2 million, and bank owned
life insurance of $778,000.
The increase in the Company's total assets reflects a corresponding increase in
total liabilities of $71.2 million or 7.8% to $982.6 million at December 31,
1999 from $911.4 million at December 31, 1998 and a decrease in total
stockholders' equity of $11.2 million or 18.3% to $49.9 million at December 31,
1999 from $61.1 million at December 31, 1998. The increase in total liabilities
was primarily due to increases in deposits of $8.7 million, borrowed funds of
$63.2 million, guaranteed preferred beneficial interest in subordinated debt of
$44,000, advance payments by borrowers for taxes and insurance of $168,000,
offset by a decrease in other liabilities of $937,000. The net decrease in total
stockholders' equity can be attributed primarily to a decrease in accumulated
other comprehensive income of $12.3 million, an increase in treasury stock of
$2.4 million and an increase in unearned Employee Stock Ownership Plan ("ESOP")
shares of $395,000, offset by increases in additional paid-in-capital of
$238,000 and retained earnings of $3.6 million.
Cash on hand, Interest-earning deposits and Federal funds sold. Cash on hand,
interest-earning deposits and federal funds sold represent cash equivalents
which increased a combined $2.5 million to $12.8 million at December 31, 1999
from $10.3 million at December 31, 1998. 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 increase between December 31, 1999 and December 31, 1998
can be attributed principally to increases in deposits and borrowed funds.
Securities. The Company's securities portfolio increased a net $16.1 million or
2.9% to $561.1 million at December 31, 1999 from $545.0 million at December 31,
1998. This net increase was the result of $203.7 million of purchases consisting
primarily of $202.3 million of mortgage-backed securities and $1.4 million of
equities, partially offset by $94.6 million of maturities and repayments of
principal, and $73.8 million of securities sold consisting primarily of $55.5
million of mortgage-backed securities, $17.7 million of municipal securities,
$646,000 of equity securities and an increase in the unrealized loss on
securities available for sale of $12.3 million (before taxes) during the year.
On June 30, 1999, the Company reclassified its held to maturity (HTM) portfolio
to the available for sale (AFS) portfolio. The transfer of securities from the
HTM portfolio has provided the Company with greater flexibility to restructure
the portfolio as needed, in order to attain the maximum overall yield on the
investment portfolio while maintaining acceptable levels of interest rate risk.
Loans receivable. Net loans receivable increased a net $33.6 million or 9.3% to
$393.9 million at December 31, 1999 from $360.3 million at December 31, 1998.
The increase in loans receivable can be attributed to internal growth within the
Company's mortgage loan portfolio. Mortgage loans increased $37.3 million or
12.1% while other loans decreased $2.9 million or 4.0%. Partially offsetting the
net increase in loans receivable was a nominal increase in the Company's
allowance for loan losses of $8,000, and $724,000 and $73,000 of increases in
loans in process and deferred loan fees, respectively.
- --------------------------------------------------------------------------------
ESB Financial Corporation 7 1999 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
- --------------------------------------------------------------------------------
Non-performing assets. Non-performing assets include non-accrual loans and real
estate acquired through foreclosure (REO). Non-performing assets decreased
$597,000 to $4.4 million or 0.43% of total assets at December 31, 1999 from $5.0
million or 0.51% of total assets at December 31, 1998. Non-performing assets
consisted of non-performing loans and REO of $4.3 million and $71,000,
respectively, at December 31, 1999 and non-performing loans and REO of $5.0
million and $21,000, respectively, at December 31, 1998.
Accrued interest receivable. Accrued interest receivable increased $79,000 or
1.2% to $6.9 million at December 31, 1999 from $6.8 million at December 31,
1998, due primarily to the increase in average interest-earning assets between
years.
FHLB stock. FHLB stock remained at $18.4 million at December 31, 1999, compared
to December 31, 1998.
Premises and equipment. Premises and equipment increased $687,000 or 11.1% to
$6.9 million at December 31, 1999 from $6.2 million at December 31, 1998,
primarily as a result of the third party provided relational database system and
the new Wexford and Springdale branch offices.
Prepaid expenses and other assets. Prepaid expenses and other assets increased
$6.2 million or 60.1% to $16.6 million at December 31, 1999 from $10.4 million
at December 31, 1998. This net increase can primarily be attributed to an
increase in deferred tax assets of $6.1 million associated with the Company's
Statement of Financial Accounting Standards (SFAS) No. 115 mark to market
adjustments of the available for sale securities portfolio.
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, 1999
is $15.8 million.
Deposits. Total deposits increased $8.7 million or 2.1% to $431.8 million at
December 31, 1999 from $423.1 million at December 31, 1998. For the year, in
total, interest-bearing demand deposits increased $9.5 million or 6.0%, time
deposits decreased $2.8 million or 1.1% and noninterest-bearing deposits
increased $2.1 million or 34.9%.
Advance payments by borrowers for taxes and insurance. Advance payments by
borrowers for taxes and insurance increased $168,000 or 5.3% to $3.3 million at
December 31, 1999 from $3.2 million at December 31, 1998.
Borrowed funds. Borrowed funds include primarily FHLB advances and reverse
repurchase agreement borrowings. Borrowed funds increased $63.2 million or
13.8% to $519.6 million at December 31, 1999 from $456.4 million at December 31,
1998. This increase was primarily the result of the Company utilizing reverse
repurchase agreement borrowings and FHLB advances to fund the increase in loans
receivable and securities. FHLB advances increased $11.5 million or 3.8% and
reverse repurchase agreement and other borrowings increased $51.6 million or
34.3%.
Accrued expenses and other liabilities. Accrued expenses and other liabilities
decreased $937,000 or 19.7% to $3.8 million at December 31, 1999 from $4.8
million at December 31, 1998.
Stockholders' equity. Stockholders' equity decreased by $11.2 million or 18.3%
to $49.9 million at December 31, 1999 from $61.1 million at December 31, 1998.
This decrease was primarily the result of dividends declared of $1.8 million,
net treasury stock purchases of $2.4 million, a $395,000 increase in unearned
ESOP shares and an unrealized loss on securities available for sale of $12.3
million, partially offset by net income of $5.8 million.
- --------------------------------------------------------------------------------
ESB Financial Corporation 8 1999 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 $5.8 million, $6.0 million and $5.4
million in 1999, 1998 and 1997, respectively.
Average Balance Sheet and Yield/Rate Analysis. The following table sets forth,
for the periods indicated, information concerning the total dollar amounts of
interest income from interest-earning assets and the resultant average yields,
the total dollar amounts of interest expense on interest-bearing liabilities and
the resultant average costs, net interest income, interest rate spread and the
net interest margin earned on average interest-earning assets. For purposes of
this table, average balances are calculated using monthly averages and the
average loan balances include non-accrual loans and exclude the allowance for
loan losses, and interest income includes accretion of net deferred loan fees.
Interest and yields on tax-exempt securities (tax-exempt for federal income tax
purposes) are shown on a fully tax equivalent basis utilizing a federal tax rate
of 34%.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) Year ended December 31,
1999 1998
------------------------------------- -------------------------------------
Average Yield / Average Yield /
Balance Interest Rate Balance Interest Rate
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
- ------------------------
Taxable securities available for sale $ 440,546 $ 28,339 6.43% $ 388,208 $ 25,379 6.54%
Tax-exempt securities available for sale 92,860 7,633 8.22% 84,077 6,855 8.15%
Taxable securities held to maturity 23,348 1,211 5.19% 70,311 4,101 5.83%
Tax-exempt securities held to maturity 3,664 266 7.26% 8,156 673 8.25%
------------- ------------ --------- -------------- ----------- ---------
560,418 37,449 6.68% 550,752 37,008 6.72%
------------- ------------ --------- -------------- ----------- ---------
Mortgage loans 307,077 23,257 7.57% 288,279 22,452 7.79%
Other loans 69,171 5,299 7.66% 66,821 5,400 8.08%
------------- ------------ --------- -------------- ----------- ---------
376,248 28,556 7.59% 355,100 27,852 7.84%
------------- ------------ --------- -------------- ----------- ---------
Cash equivalents 8,000 252 3.15% 8,341 298 3.57%
FHLB stock 18,435 1,222 6.63% 18,329 1,191 6.50%
------------- ------------ --------- -------------- ----------- ---------
26,435 1,474 5.58% 26,670 1,489 5.58%
------------- ------------ --------- -------------- ----------- ---------
Total interest-earning assets 963,101 67,479 7.01% 932,522 66,349 7.12%
Other noninterest-earning assets 39,991 - - 19,494 - -
------------- ------------ --------- -------------- ----------- ---------
Total assets $ 1,003,092 $ 67,479 6.73% $ 952,016 $ 66,349 6.97%
============= ============ ========= ============== =========== =========
Interest-bearing liabilities:
- -----------------------------
Interest-bearing demand deposits $ 162,501 $ 3,877 2.39% $ 152,175 $ 3,905 2.57%
Time deposits 254,869 13,540 5.31% 251,111 13,735 5.47%
------------- ------------ --------- -------------- ----------- ---------
417,370 17,417 4.17% 403,286 17,640 4.37%
FHLB advances 319,011 19,516 6.12% 328,935 20,771 6.31%
Reverse repo's & other borrowings 166,012 9,370 5.64% 113,696 6,508 5.72%
Preferred securities 24,049 2,226 9.26% 24,030 2,221 9.24%
------------- ------------ --------- -------------- ----------- ---------
Total interest-bearing liabilities 926,442 48,529 5.24% 869,947 47,140 5.42%
Noninterest-bearing demand deposits 11,339 - - 8,988 - -
Other noninterest-bearing liabilities 7,276 - - 7,103 - -
------------- ------------ --------- -------------- ----------- ---------
Total liabilities 945,057 48,529 5.14% 886,038 47,140 5.32%
Stockholders' equity 58,035 - - 65,978 - -
------------- ------------ --------- -------------- ----------- ---------
Total liabilities and equity $ 1,003,092 $ 48,529 4.84% $ 952,016 $ 47,140 4.95%
============= ============ ========= ============== =========== =========
Net interest income $ 18,950 $ 19,209
============ ===========
Interest rate spread (difference between
weighted average rate on interest-earning
assets and interest-bearing liabilities) 1.77% 1.70%
========= =========
Net interest margin (net interest
income as a percentage of average
interest-earning assets) 1.97% 2.06%
========= =========
<CAPTION>
- -------------------------------------------------------------------------------------
(Dollar amounts in thousands)
1997
-------------------------------------
Average Yield /
Balance Interest Rate
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest-earning assets:
- ------------------------
Taxable securities available for sale $ 307,504 $ 20,935 6.81%
Tax-exempt securities available for sale 51,464 4,410 8.57%
Taxable securities held to maturity 90,824 5,464 6.02%
Tax-exempt securities held to maturity 863 67 7.76%
------------- ------------ ---------
450,655 30,876 6.85%
------------- ------------ ---------
Mortgage loans 245,552 19,493 7.94%
Other loans 58,380 4,738 8.12%
------------- ------------ ---------
303,932 24,231 7.97%
------------- ------------ ---------
Cash equivalents 7,149 374 5.23%
FHLB stock 16,612 1,053 6.34%
------------- ------------ ---------
23,761 1,427 6.01%
------------- ------------ ---------
Total interest-earning assets 778,348 56,534 7.26%
Other noninterest-earning assets 16,913 - -
------------- ------------ ---------
Total assets $ 795,261 $ 56,534 7.11%
============= ============ =========
Interest-bearing liabilities:
- -----------------------------
Interest-bearing demand deposits $ 151,909 $ 3,922 2.58%
Time deposits 224,428 12,707 5.66%
------------- ------------ ---------
376,337 16,629 4.42%
FHLB advances 327,683 20,624 6.29%
Reverse repo's & other borrowings 16,297 955 5.86%
Preferred securities 1,543 138 8.91%
------------- ------------ ---------
Total interest-bearing liabilities 721,860 38,346 5.31%
Noninterest-bearing demand deposits 4,665 - -
Other noninterest-bearing liabilities 5,717 - -
------------- ------------ ---------
Total liabilities 732,242 38,346 5.24%
Stockholders' equity 63,019 - -
------------- ------------ ---------
Total liabilities and equity $ 795,261 $ 38,346 4.82%
============= ============ =========
Net interest income $ 18,188
============
Interest rate spread (difference between
weighted average rate on interest-earning
assets and interest-bearing liabilities) 1.95%
=========
Net interest margin (net interest
income as a percentage of average
interest-earning assets) 2.34%
=========
- -------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
ESB Financial Corporation 9 1999 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) 1999 vs. 1998 1998 vs. 1997
Increase (decrease) due to Increase (decrease) due to
--------------------------------- --------------------------------
Volume Rate Total Volume Rate Total
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Securities $ 647 $ (206) $ 441 $ 6,737 $ (605) $ 6,132
Loans 1,624 (920) 704 4,019 (398) 3,621
Cash equivalents (12) (34) (46) 56 (132) (76)
FHLB stock 7 24 31 111 27 138
---------- ----------- ---------- ---------- ----------- ---------
Total interest-earning assets 2,266 (1,136) 1,130 10,923 (1,108) 9,815
---------- ----------- ---------- ---------- ----------- ---------
Interest expense:
Deposits 604 (827) (223) 1,180 (169) 1,011
FHLB advances (617) (638) (1,255) 79 68 147
Reverse repurchases & other borrowings 2,954 (92) 2,862 5,576 (23) 5,553
Subordinated debt 2 3 5 2,078 5 2,083
---------- ----------- ---------- ---------- ----------- ---------
Total interest-bearing liabilities 2,943 (1,554) 1,389 8,913 (119) 8,794
---------- ----------- ---------- ---------- ----------- ---------
Net interest income $ (677) $ 418 $ (259) $ 2,010 $ (989) $ 1,021
========== =========== ========== ========== =========== =========
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
1999 Results Compared to 1998 Results
General. The Company reported net income of $5.8 million and $6.0 million for
1999 and 1998, respectively. The $240,000 decrease in net income between 1999
and 1998 can primarily be attributed to an increase in interest expense of $1.4
million, provision for loan losses of $49,000, and noninterest expense of $1.4
million, offset by increases in interest income of $1.0 million and noninterest
income of $1.1 million and a decrease in the provision for income taxes of
$440,000.
Net interest income. Tax equivalent net interest income decreased $259,000 or
1.3% to $19.0 million for 1999, compared to $19.2 million for 1998. This
decrease in net interest income can be attributed to an increase in interest
expense of $1.4 million, offset by an increase in interest income of $1.1
million.
Interest income. On a tax equivalent basis, interest income increased $1.1
million or 1.7% to $67.5 million for 1999, compared to $66.3 million for 1998.
This increase in interest income can be attributed to increases in interest
earned on securities, loans receivable and FHLB stock of $441,000, $704,000 and
$31,000, respectively, partially offset by a decrease in interest earned on cash
equivalents of $46,000.
Interest earned on securities increased $441,000 to $37.4 million for 1999,
compared to $37.0 million for 1998 as average balances increased $9.7 million.
Partially offsetting this volume increase was a slight decline in the yield on
securities to 6.68% for 1999 compared to 6.72% for 1998.
- --------------------------------------------------------------------------------
ESB Financial Corporation 10 1999 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
- --------------------------------------------------------------------------------
Interest earned on loans receivable increased $704,000 or 2.5% to $28.6 million
for 1999, compared to $27.9 million for 1998. This increase was primarily
attributable to an increase in the average balance of loans outstanding of $21.1
million or 6.0% to $376.2 million for 1999 compared to $355.1 million for 1998.
Partially offsetting this volume increase was a decline in the yield on loans to
7.59% for 1999, compared to 7.84% for 1998.
Interest earned on cash equivalents decreased $46,000 to $252,000 for 1999,
compared to $298,000 for 1998 as the average balance decreased $341,000 or 4.1%
and the yield decreased to 3.15% for 1999, compared to 3.57% for 1998.
Income from FHLB stock increased $31,000 to $1.2 million for 1999, compared to
1998 as the yield increased to 6.63% for 1999, compared to 6.50% for 1998.
Interest expense. Interest expense increased $1.4 million or 2.9% to $48.5
million for 1999, compared to $47.1 million for 1998. This increase in interest
expense can be attributed to increases in interest incurred on reverse
repurchases and other borrowings, and subordinated debt of $2.9 million and
$5,000, respectively, partially offset by decreases in interest incurred on
deposits and FHLB advances of $223,000 and $1.3 million, respectively.
Interest incurred on deposits decreased $223,000 or 1.3% to $17.4 million for
1999, compared to $17.6 million for 1998. This decrease was primarily
attributable to a decrease in the cost of deposits to 4.17% for 1999, compared
to 4.37% for 1998, partially offset by an increase in the average balance of
interest-bearing deposits of $14.1 million or 3.5% to $417.4 million for 1999,
compared to $403.3 million for 1998.
Interest incurred on FHLB advances decreased $1.3 million or 6.0% to $19.5
million for 1999, compared to $20.8 million for 1998. This decrease was
primarily attributable to a decrease in the average balance of FHLB advances of
$9.9 million or 3.0% to $319.0 million for 1999, compared to $328.9 million for
1998. Also contributing to the decrease in interest incurred on FHLB advances
was a decrease in the cost of these funds to 6.12% for 1999, compared to 6.31%
for 1998.
Interest incurred on reverse repurchases and other borrowings increased $2.9
million to $9.4 million for 1999, compared to $6.5 million for 1998. The
increase was primarily attributable to an increase in the average balance of
reverse repurchases and other borrowings of $52.3 million or 46.0% to $166.0
million for 1999, compared to $113.7 million for 1998. The increase in the
average balance was a result of the Company's decision to enter into reverse
repurchase agreements during the period due to their lower cost of funds.
Partially offsetting this increase in the average balance was a decrease in the
cost of these funds to 5.64% for 1999, compared to 5.72% for 1998.
Interest expense on subordinated debt increased $5,000 to $2.2 million for 1999,
compared to 1998. The average balance of the subordinated debt increased
$19,000 to $24.0 million for 1999, compared to 1998. Also contributing to the
increase in interest incurred on subordinated debt was an increase due to
amortization of the deferred debt issuance cost in 1999, compared to 1998.
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 1999 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
- --------------------------------------------------------------------------------
The provision for loan losses increased $49,000 to $54,000 for 1999, compared to
$5,000 for 1998. The increase in the provision for loan losses can be
attributed to a slight increase in the Company's reserve percentage for loans
classified as substandard.
As a result of the provision for loan losses recorded during 1999 and 1998, the
Company's allowance for loan losses amounted to $4.8 million or 1.16% of the
Company's total loan portfolio at December 31, 1999, compared to $4.8 million or
1.26% at December 31, 1998. The Company's allowance for loan losses as a
percentage of non-performing loans at December 31, 1999 and 1998 was 111.3% and
96.7%, respectively.
At December 31, 1999, the Company had $1.6 million in outstanding Bennett
Funding Group leases, compared to $1.9 million at December 31, 1998. The total
loan loss reserves associated with these leases was $1.6 million at December 31,
1999.
Noninterest income. Noninterest income increased $1.1 million or 57.6% to $3.1
million for 1999, compared to $1.9 million for 1998. This increase can be
attributed to increases in net realized gains on sales of securities available
for sale of $167,000, the cash surrender value of the bank owned life insurance
of $771,000 and other noninterest income of $307,000, offset by a decrease in
fees and service charges of $128,000. The decrease in fees and service charges
of $128,000 can primarily be attributable to decreases in late charges and
service fees on loans and servicing fees on NOW accounts of $85,000 and $46,000,
respectively.
Noninterest expense. Noninterest expense increased $1.4 million or 12.3% to
$12.4 million for 1999, compared to $11.1 million for 1998. This increase can
be attributed to increases in compensation and employee benefits, premises and
equipment, federal insurance premiums, data processing expense and other
expenses of $592,000, $427,000, $5,000, $78,000 and $258,000, respectively.
Compensation and employee benefits expense increased $592,000 or 9.6% to $6.8
million for 1999, compared to $6.2 million for 1998. This increase can be
attributed to additional staffing needs of the Company and normal salary
increases between the years.
Premises and occupancy expense increased $427,000 or 39.2% to $1.5 million for
1999, compared to $1.1 million for 1998. This increase can be attributed to the
depreciation expense related to the new Wexford building opened in January of
1999 and a full twelve months of 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 1998 and the beginning of 1999.
Federal insurance premiums expense increased $5,000 or 2.0% to $250,000 for
1999, compared to $245,000 for 1998. The increase can be attributed to the
increase in deposits of $8.7 million or 2.1% to $431.8 million for 1999,
compared to $423.1 million for 1998.
Data processing expense increased $78,000 or 16.1% to $563,000 for 1999,
compared to $485,000 for 1998. This increase can be attributed to the costs
associated with the Company's new third party provided relational database
system.
Other expenses increased $258,000 or 8.4% to $3.3 million for 1999, compared to
$3.1 million for 1998. This increase can primarily be attributed to a write-
down of real estate held for future development of $205,000 and an increase in
organizational dues and subscriptions of $45,000.
Provision for income taxes. The provision for income taxes decreased $440,000
or 29.0% to $1.1 million for 1999, compared to $1.5 million for 1998. This
decrease was primarily the result of a decrease in income before income taxes of
$680,000 or 9.0% to $6.8 million for 1999, compared to $7.5 million for 1998.
- --------------------------------------------------------------------------------
ESB Financial Corporation 12 1999 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
- --------------------------------------------------------------------------------
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.
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
- --------------------------------------------------------------------------------
ESB Financial Corporation 13 1999 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
- --------------------------------------------------------------------------------
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 enter into 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 due to amortization of the deferred debt
issuance cost in 1998, compared to 1997. Additionally, the interest expense on
the subordinated debt was incurred for the entire year in 1998 as compared to
incurring 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.
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.
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,
- --------------------------------------------------------------------------------
ESB Financial Corporation 14 1999 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
- --------------------------------------------------------------------------------
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.
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 income from tax-free
investments of $45.3 million or 84.1% to $99.0 million for 1998, compared to
$54.7 million for 1997.
Asset and Liability Management
- ------------------------------
The primary objective of the Company's asset and liability management function
is to maximize the Company's net interest income while simultaneously
maintaining an acceptable level of interest rate risk given the Company's
operating environment, capital and liquidity requirements, performance
objectives and overall business focus. The principal determinant of the
exposure of the Company's earnings to interest rate risk is the timing
difference between the repricing or maturity of interest-earning assets and the
repricing or maturity of its interest-bearing liabilities. The Company's asset
and liability management policies are designed to decrease interest rate
sensitivity primarily by shortening the maturities of interest-earning assets
while at the same time extending the maturities of interest-bearing liabilities.
The Board of Directors of the Company continues to believe in strong
asset/liability management in order to insulate the Company from material and
prolonged increases in interest rates. As a result of this policy, the Company
emphasizes a larger, more diversified portfolio of residential mortgage loans in
the form of mortgage-backed securities. Mortgage-backed securities generally
increase the quality of the Company's assets by virtue of the insurance or
guarantees that back them, are more liquid than individual mortgage loans and
may be used to collateralize borrowings or other obligations of the Company.
The Company's Board of Directors has established an Asset and Liability
Management Committee consisting of two outside directors, the President and
Chief Executive Officer, Group Senior Vice President/Chief Financial
- --------------------------------------------------------------------------------
ESB Financial Corporation 15 1999 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
- --------------------------------------------------------------------------------
Officer, Group Senior Vice President/Operations and the Group Senior Vice
President/Lending 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, (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 and (iv) increase
the duration of the liability base of the Company by extending the maturities of
savings deposits, borrowed funds and reverse repurchase agreements.
As of December 31, 1999, the implementation of these asset and liability
initiatives resulted in the following: (i) $180.4 million or 43.4% of the
Company's total loan portfolio had adjustable interest rates or maturities of 12
months or less; (ii) $126.4 million or 44.0% of the Company's portfolio of
single-family residential mortgage loans (including residential construction
loans) consisted of ARMs and (iii) $87.0 million or 21.9% of the Company's
portfolio of mortgage-backed securities were secured by ARMs and (iv) the
Company had $100.0 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, 1999, the
Company's interest-earning assets maturing or repricing within one year totaled
$374.1 million while the Company's interest-bearing liabilities maturing or
repricing within one-year totaled $489.4 million, providing a deficiency of
interest-earning assets over interest-bearing liabilities of $115.3 million or a
negative 11.2% of total assets. At December 31, 1999, the percentage of the
Company's assets to liabilities maturing or repricing within one year was 76.4%.
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 1999 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, 1999 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 $263,626 $ 110,425 $ 197,967 $ 123,528 $ 302,293 $ 997,839
Total interest-bearing liabilities 301,088 188,282 308,616 66,579 102,830 967,395
-------- --------- --------- --------- ---------- ----------
Maturity or repricing gap during the period $(37,462) $ (77,857) $(110,649) $ 56,949 $ 199,463 $ 30,444
======== ========= ========= ========= ========== ==========
Cumulative gap $(37,462) $(115,319) $(225,968) $(169,019) $ 30,444
======== ========= ========= ========= ==========
Ratio of gap during the period to total assets (3.63%) (7.54%) (10.72%) 5.52% 19.32%
======== ========= ========= ========= ==========
Ratio of cumulative gap to total assets (3.63%) (11.17%) (21.89%) (16.37%) 2.95%
======== ========= ========= ========= ==========
Total assets $1,032,445
==========
- ----------------------------------------------------------------------------------------------------------------------------------
</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 1999 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (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, 1999 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, 1999 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, 1999 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) (1.85%) (2.52%) 0.66% 1.09%
Return on average equity - increase (decrease) (3.21%) (4.40%) 1.10% 1.83%
Diluted earnings per share - increase (decrease) (3.34%) (4.61%) 1.11% 1.83%
Portfolio equity - increase (decrease) (18.75%) (38.13%) 16.63% 29.63%
- ------------------------------------------------------------------------------------------------------------
</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, 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
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, 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>
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 1999 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
- --------------------------------------------------------------------------------
ESB is required by the OTS to maintain minimum levels of liquidity to ensure its
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, 1999 the liquidity ratio was in compliance with
regulatory requirements at 18.1%. 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 total assets, core capital
equal to 4.0% 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 5.0%, 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,
1999, ESB was in compliance with all regulatory capital requirements with
tangible, core and risk-based capital ratios of 6.5%, 6.5% and 16.9%,
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 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 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 was to be effective for fiscal years beginning June
15, 1999. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133 - an
- --------------------------------------------------------------------------------
ESB Financial Corporation 19 1999 Annual Report
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
- --------------------------------------------------------------------------------
amendment of FASB Statement No. 133", which delays the effective date of SFAS
No. 133 to the first quarter of fiscal years beginning after June 15, 2000.
Year 2000
- ---------
Year 2000 issues result from the inability of many computer programs or
computerized equipment to accurately calculate, store or use data for the year
2000 or later. These potential shortcomings could result in a system failure or
miscalculations causing disruptions of operation, including among other things,
a temporary inability to process transactions, track important customer
information, provide convenient access to this information, or engage in normal
business operations. While lingering concern exists about certain dates during
Year 2000, the most significant date, January 1, 2000, has passed without
incident. As a result of its diligent efforts, the Company is pleased to report
no interruptions of business or financial losses resulting from Year 2000
Issues.
During 1999 the Company expensed $39,000 which was associated with year 2000.
The costs incurred in 1999 related to testing the Company's largest third-party
provider's data processing system 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.
The above Year 2000 readiness disclosures are made for the sole purpose of
communicating or disclosing information aimed at correcting and/or avoiding Year
2000 failures. These statements are made with the intention to comply fully
with the Year 2000 Information and Readiness Disclosure Act as signed into law
October 19, 1998. All statements made herein shall be construed within the
confines of that Act.
- --------------------------------------------------------------------------------
ESB Financial Corporation 20 1999 Annual Report
<PAGE>
Consolidated Statement of Financial Condition
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
----------------------------
1999 1998
-------------- -------------
<S> <C> <C>
Assets
------
Cash on hand and in banks $ 6,712 $ 3,140
Interest-earning deposits 5,780 6,534
Federal funds sold 269 629
Securities available for sale; cost of $579,046 and $480,537 561,125 481,234
Securities held to maturity; market value of $64,033 - 63,815
Loans receivable, net of allowance for loan losses of $4,823 and $4,815 393,929 360,280
Accrued interest receivable 6,871 6,792
Federal Home Loan Bank (FHLB) stock 18,435 18,435
Premises and equipment, net 6,880 6,193
Real estate acquired through foreclosure, net 71 21
Prepaid expenses and other assets 16,589 10,359
Bank owned life insurance 15,784 15,006
-------------- -------------
Total assets $ 1,032,445 $ 972,438
============== =============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits $ 431,783 $ 423,051
Borrowed funds 317,636 305,995
Reverse repurchase agreements 201,920 150,360
Guaranteed preferred beneficial interest in subordinated debt, net 24,071 24,027
Advance payments by borrowers for taxes and insurance 3,339 3,171
Accrued expenses and other liabilities 3,814 4,751
-------------- -------------
Total liabilities 982,563 911,355
-------------- -------------
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 6,337,755 shares issued;
5,102,655 and 5,265,886 shares outstanding 63 63
Additional paid-in capital 59,686 59,448
Treasury stock, at cost; 1,235,100 and 1,071,869 shares (19,214) (16,841)
Unearned Employee Stock Ownership Plan (ESOP) shares (3,076) (2,681)
Unvested shares held by Management Recognition Plan (MRP) (237) (237)
Retained earnings, substantially restricted 24,488 20,870
Accumulated other comprehensive income (loss), net (11,828) 461
-------------- -------------
Total stockholders' equity 49,882 61,083
-------------- -------------
Total liabilities and stockholders' equity $ 1,032,445 $ 972,438
============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
ESB Financial Corporation 21 1999 Annual Report
<PAGE>
Consolidated Statements of Operations
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except share data)
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Interest income:
Loans receivable $28,556 $27,852 $24,231
Securities available for sale 33,376 29,903 23,845
Securities held to maturity 1,386 4,547 5,508
FHLB stock 1,222 1,191 1,053
Deposits with banks and federal funds sold 252 298 374
-------- -------- --------
Total interest income 64,792 63,791 55,011
-------- -------- --------
Interest expense:
Deposits 17,417 17,640 16,629
Borrowed funds and reverse repurchase agreements 28,886 27,279 21,579
Guaranteed preferred beneficial interest in subordinated debt 2,226 2,221 138
-------- -------- --------
Total interest expense 48,529 47,140 38,346
-------- -------- --------
Net interest income 16,263 16,651 16,665
Provision for loan losses 54 5 799
-------- -------- --------
Net interest income after provision for loan losses 16,209 16,646 15,866
-------- -------- --------
Noninterest income:
Fees and service charges 1,337 1,465 1,014
Net realized gain on sale of securities available for sale 544 377 9
Increase of cash surrender value of bank owned life insurance 777 6 -
Other 398 91 52
-------- -------- --------
Total noninterest income 3,056 1,939 1,075
-------- -------- --------
Noninterest expense:
Compensation and employee benefits 6,753 6,161 5,350
Premises and equipment 1,515 1,088 1,037
Federal deposit insurance premiums 250 245 197
Data processing 563 485 528
Other 3,346 3,088 2,398
-------- -------- --------
Total noninterest expense 12,427 11,067 9,510
-------- -------- --------
Income before provision for income taxes 6,838 7,518 7,431
Provision for income taxes 1,077 1,517 1,984
-------- -------- --------
Net income $ 5,761 $ 6,001 $ 5,447
======== ======== ========
Net income per share:
Basic $ 1.16 $ 1.12 $ 1.02
======== ======== ========
Diluted $ 1.13 $ 1.08 $ 0.98
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
ESB Financial Corporation 22 1999 Annual Report
<PAGE>
Consolidated Statements of Changes in Stockholders' Equity
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except share data)
<TABLE>
<CAPTION>
Additional Unearned Unvested
Common paid-in Treasury ESOP MRP Retained
stock capital stock shares shares earnings
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 $ 44 $ 26,465 $ (5,956) $ (1,136) $ - $ 31,990
Comprehensive results:
Net income for 1997 - - - - - 5,447
Other comprehensive results
net of tax - - - - - -
------------- ----------- ------------ ------------ ------------ -----------
Total comprehensive results 5,447
Common stock issued as a result of
the acquisition of Troy Hill
Bancorp, Inc. (THBC) 9 14,164 - (1,278) (237) -
Cash dividends at $0.31 per share - - - - - (1,672)
Common stock dividend of 10% 5 7,869 - - - (7,874)
Payment of cash in lieu of fractional
shares for 10% stock dividend - (13) - - - -
Purchase of treasury stock, at
cost (107,805 shares) - - (1,678) - - -
Reissuance of treasury stock
for stock option exercises - - 271 - - (144)
Principal payments on ESOP debt - 161 - 363 - -
Additional ESOP shares purchased - - - (500) - -
------------- ----------- ------------ ------------ ------------ -----------
Balance at December 31, 1997 58 48,646 (7,363) (2,551) (237) 27,747
Comprehensive results:
Net income for 1998 - - - - - 6,001
Other comprehensive results, net - - - - - -
Reclassification adjustment - - - - - -
------------- ----------- ------------ ------------ ------------ -----------
Total comprehensive results 6,001
Cash dividends at $0.35 per share - - - - - (1,861)
Common stock dividend of 10% 5 10,224 - - - (10,229)
Payment of cash in lieu of fractional
shares for 10% stock dividend - (15) - - - -
Purchase of treasury stock, at
cost (639,565 shares) - - (10,971) - - -
Reissuance of treasury stock
for stock option exercises - 367 1,493 - - (788)
Principal payments on ESOP debt - 226 - 459 - -
Additional ESOP shares purchased - - - (589) - -
------------- ----------- ------------ ------------ ------------ -----------
Balance at December 31, 1998 63 59,448 (16,841) (2,681) (237) 20,870
Comprehensive results:
Net income for 1999 - - - - - 5,761
Transfer of securities from held to
maturity to available for sale, net - - - - - -
Other comprehensive results, net - - - - - -
Reclassification adjustment - - - - - -
------------- ----------- ------------ ------------ ------------ -----------
Total comprehensive results 5,761
Cash dividends at $0.36 per share - - - - - (1,801)
Purchase of treasury stock, at
cost (199,162 shares) - - (2,839) - - -
Reissuance of treasury stock
for stock option exercises - 145 466 - - (342)
Principal payments on ESOP debt - 93 - 469 - -
Additional ESOP shares purchased - - - (864) - -
------------- ----------- ------------ ------------ ------------ -----------
Balance at December 31, 1999 $ 63 $ 59,686 $ (19,214) $ (3,076) $ (237) $ 24,488
============= =========== ============ ============ ============ ===========
<CAPTION>
Accumulated
other
comprehensive Total
income (loss), stockholders'
net of tax equity
-------------- --------------
<S> <C> <C>
Balance at December 31, 1996 $ 136 $ 51,543
Comprehensive results:
Net income for 1997 - 5,447
Other comprehensive results
net of tax 2,073 2,073
-------------- --------------
Total comprehensive results 2,073 7,520
Common stock issued as a result of
the acquisition of Troy Hill
Bancorp, Inc. (THBC) - 12,658
Cash dividends at $0.31 per share - (1,672)
Common stock dividend of 10% - -
Payment of cash in lieu of fractional
shares for 10% stock dividend - (13)
Purchase of treasury stock, at
cost (107,805 shares) - (1,678)
Reissuance of treasury stock
for stock option exercises - 127
Principal payments on ESOP debt - 524
Additional ESOP shares purchased - (500)
-------------- --------------
Balance at December 31, 1997 2,209 68,509
Comprehensive results:
Net income for 1998 - 6,001
Other comprehensive results, net (1,616) (1,616)
Reclassification adjustment (132) (132)
-------------- --------------
Total comprehensive results (1,748) 4,253
Cash dividends at $0.35 per share - (1,861)
Common stock dividend of 10% - -
Payment of cash in lieu of fractional
shares for 10% stock dividend - (15)
Purchase of treasury stock, at
cost (639,565 shares) - (10,971)
Reissuance of treasury stock
for stock option exercises - 1,072
Principal payments on ESOP debt - 685
Additional ESOP shares purchased - (589)
-------------- --------------
Balance at December 31, 1998 461 61,083
Comprehensive results:
Net income for 1999 - 5,761
Transfer of securities from held to
maturity to available for sale, net (138) (138)
Other comprehensive results, net (11,718) (11,718)
Reclassification adjustment (433) (433)
-------------- --------------
Total comprehensive results (12,289) (6,528)
Cash dividends at $0.36 per share - (1,801)
Purchase of treasury stock, at
cost (199,162 shares) - (2,839)
Reissuance of treasury stock
for stock option exercises - 269
Principal payments on ESOP debt - 562
Additional ESOP shares purchased - (864)
-------------- --------------
Balance at December 31, 1999 $ (11,828) $ 49,882
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
ESB Financial Corporation 23 1999 Annual Report
<PAGE>
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except share data)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------
1999 1998 1997
----------- ---------- ------------
<S> <C> <C> <C>
Operating activities:
Net income $ 5,761 $ 6,001 $ 5,447
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization for premises and equipment 607 364 324
Provision for losses 63 6 857
Amortization of premiums and accretion of discounts 1,331 2,106 709
Origination of loans available for sale (9,562) (13,409) (3,940)
Proceeds from sale of loans available for sale 9,642 11,266 3,726
Net gain on sale of securities available for sale (544) (377) (9)
Amortization of intangible assets 603 603 543
Compensation expense on ESOP 562 685 524
(Increase) decrease in accrued interest receivable (79) (717) 52
(Increase) decrease in prepaid expenses and other assets (502) (493) 703
(Decrease) increase in accrued expenses and other liabilities (937) 526 (398)
Other (581) (142) (306)
----------- ---------- ------------
Net cash provided by operating activities 6,364 6,419 8,232
----------- ---------- ------------
Investing activities:
Loan originations and purchases (146,981) (140,377) (113,179)
Purchases of securities available for sale (203,735) (285,965) (209,803)
Purchases of securities held to maturity - (993) (12,933)
Purchases of FHLB stock - (609) (581)
Additions to premises and equipment (1,305) (3,238) (296)
Purchase of bank owned life insurance - (15,006) -
Principal repayments of loans receivable 112,754 118,792 82,973
Principal repayments of securities available for sale 86,319 118,356 64,429
Principal repayments of securities held to maturity 8,324 28,172 17,402
Proceeds from the sale of securities available for sale 73,791 109,221 76,527
Proceeds from sale of REO 306 318 255
Payment for purchase of THBC, net of cash acquired - - (2,734)
----------- ---------- ------------
Net cash used in investing activities (70,527) (71,329) (97,940)
----------- ---------- ------------
Financing activities:
Net increase in deposits 8,732 23,483 12,896
Proceeds from long-term borrowings 148,485 172,107 205,323
Repayments of long-term borrowings (94,575) (129,439) (158,385)
Net increase in short-term borrowings 9,291 2,663 21,057
Proceeds from issuance of subordinated debt - - 25,300
Costs associated with subordinated debt - (119) (1,154)
Proceeds received from exercise of stock options 269 1,072 127
Dividends paid (1,878) (1,941) (1,615)
Payments to acquire treasury stock (2,839) (10,971) (1,678)
Stock purchased by ESOP (864) (589) (500)
----------- ---------- ------------
Net cash provided by financing activities 66,621 56,266 101,371
----------- ---------- ------------
Net increase (decrease) in cash equivalents 2,458 (8,644) 11,663
Cash equivalents at beginning of period 10,303 18,947 7,284
----------- ---------- ------------
Cash equivalents at end of period $ 12,761 $ 10,303 $ 18,947
=========== ========== ============
</TABLE>
Continued
- --------------------------------------------------------------------------------
ESB Financial Corporation 24 1999 Annual Report
<PAGE>
Consolidated Statements of Cash Flows (continued)
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except share data)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------
1999 1998 1997
------------ ---------- -----------
<S> <C> <C> <C>
Supplemental information:
Interest paid $ 48,505 $ 45,133 $ 38,024
Income taxes paid 1,544 1,733 1,589
Supplemental schedule of non-cash investing and financing activities:
Transfers from loans receivable to real estate acquired
through foreclosure 333 53 201
Transfers of securities from held to maturity to available for sale 54,464 - -
Dividends declared but not paid 461 474 474
Stock dividend paid - 10,229 7,874
The Company purchased all of the common stock of THBC for $23.5
million. In conjunction with the acquisition, the assets acquired and
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 1999 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.
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 1998 and 1997 have been reclassified
to conform with the financial statement presentation for 1999. All share and
related price and dividend amounts presented herein have been restated to
reflect prior period stock dividends and stock splits.
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.
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 accumulated
other comprehensive income 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 1999 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies (continued)
Securities Available for Sale and Held to Maturity (continued)
On June 30, 1999, the Company reclassified its held to maturity (HTM)
portfolio to the available for sale (AFS) portfolio. As of the
reclassification, the Company had $54.5 million of amortized cost in
securities classified as HTM of which $42.5 million were fixed rate mortgage-
backed securities (MBS), $8.0 million were municipal bonds and $4.0 million
were U.S. Government and agency bond securities. When the securities were
transferred to the AFS portfolio the following unrealized gains/losses were
recorded: the fixed rate MBS had a related unrealized loss of $534,000, the
municipal bonds had a related unrealized gain of $327,000 and the U.S.
Government and agency bond securities had a related unrealized loss of $2,000
for a net unrealized loss of $209,000. The tax benefit associated with the
unrealized loss was $71,000.
The transfer of securities from the HTM portfolio has provided the Company
with greater flexibility to restructure the portfolio as needed, in order to
attain the maximum overall yield on the investment portfolio while
maintaining acceptable levels of interest rate risk.
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 receipts
on nonaccrual and impaired loans are recognized as interest revenue or
applied to principal when management believes the ultimate collectability of
principal is in doubt.
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 appropriateness 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 upon delinquency depending upon the loan
type.
- --------------------------------------------------------------------------------
ESB Financial Corporation 27 1999 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies (continued)
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.
Intangible Assets
Goodwill and core deposit intangible assets combined were $6.3 million and
$6.9 million as of December 31, 1999 and 1998, 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.
- --------------------------------------------------------------------------------
ESB Financial Corporation 28 1999 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies (continued)
Financial Instruments (continued)
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.
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,
----------------
1999 and 1998 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,
--------------------------------
1999 approximated the cash surrender value of the policies at that date.
- --------------------------------------------------------------------------------
ESB Financial Corporation 29 1999 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies (continued)
Net Income Per Share
The following table summarizes the Company's net income per share for the
years ended December 31:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
(amounts, except earnings per share, in thousands)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 9 9 9 1 9 9 8 1 9 9 7
---------- ---------- ----------
Net income $ 5,761 $ 6,001 $ 5,447
Weighted-average common shares outstanding 4,973 5,338 5,366
---------- ---------- ----------
Basic earnings per share $ 1.16 $ 1.12 $ 1.02
========== ========== ==========
Weighted-average common shares outstanding 4,973 5,338 5,366
Common stock equivalents due to effect of stock options 121 231 186
---------- ---------- ----------
Total weighted-average common shares and equivalents 5,094 5,569 5,552
Diluted earnings per share $ 1.13 $ 1.08 $ 0.98
========== ========== ==========
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Options to purchase 62,085 shares of common stock at $18.00 per share and
78,605 shares of common stock at $14.00 per share were outstanding as of
December 31, 1999 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 and June 30, 2009, respectively. 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 excluded from the computation of diluted earnings
per share for 1998 expire on June 30, 2008.
- --------------------------------------------------------------------------------
ESB Financial Corporation 30 1999 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, 1999:
Trust Preferred securities $ 3,274 $ - $ (443) $ 2,831
U.S. Government securities 22,980 - (641) 22,339
Municipal securities 89,597 741 (4,871) 85,467
Equity securities 2,682 75 (450) 2,307
Corporate Bonds 52,664 - (1,351) 51,313
Mortgage-backed securities 407,849 666 (11,647) 396,868
----------- ----------- ----------- -----------
$ 579,046 $ 1,482 $ (19,403) $ 561,125
=========== =========== =========== ===========
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
=========== =========== =========== ===========
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
=========== =========== =========== ===========
-----------------------------------------------------------------------------------------
</TABLE>
The proceeds from the sale of securities as of December 31, 1999, 1998 and
1997 were $73.8 million, $109.2 million and $76.5 million, respectively.
Gross realized gains and gross realized losses on sales of securities
available for sale were $820,000 and $276,000, respectively, in 1999,
$923,000 and $546,000, respectively, in 1998 and $910,000 and $901,000,
respectively, in 1997.
At December 31, 1999 the Company had the following Corporate Bonds in which
the book value exceeded 10% of stockholders' equity: Bank America Capital
III, Huntington Capital Trust, Sun Trust Capital III and PNC Capital Trust
Corp., respectively, with book values and market values of $6.6 million,
$5.0 million, $5.0 million and $7.4 million, respectively, and $6.3
million, $4.8 million, $4.9 million and $7.2 million, respectively. All
four issues are classified as investment grade debt by a national rating
service.
The following table summarizes scheduled maturities of the Company's
securities as of December 31, 1999, excluding equity securities which have
no maturity dates:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
(In thousands) Available for Sale
--------------------
Amortized Fair
cost value
-----------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 18,113 $ 18,177
Due from one year to five years 22,425 22,805
Due from five to ten years 47,609 46,374
Due after ten years 488,217 471,462
---------- ----------
$ 576,364 $ 558,818
========== ==========
-----------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
ESB Financial Corporation 31 1999 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
2. Securities (continued)
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 $18.6 million and $6.1 million as of
December 31, 1999 and 1998, 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) 1999 1998
-----------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage loans:
Residential - single family $ 249,966 $ 225,054
Residential - multi family 15,035 11,206
Commercial real estate 39,171 32,300
Construction 42,935 41,215
------------- ------------
347,107 309,775
Other loans:
Consumer loans 59,351 56,897
Commercial business 8,884 14,216
------------- ------------
415,342 380,888
Less:
Allowance for loan losses 4,823 4,815
Deferred loan fees and net discounts 858 785
Loans in process 15,732 15,008
------------- ------------
$ 393,929 $ 360,280
============= ============
-----------------------------------------------------------------------------------------
</TABLE>
Non-performing loans, which included only non-accrual loans, were $4.3
million and $5.0 million at December 31, 1999 and 1998, respectively.
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) 1999 1998 1997
-----------------------------------------------------------------------------------------
<S> <C> <C>
Interest income that would have been recorded $ 244 $ 1,028 $ 705
Interest income recognized 90 688 347
------------- ------------- ------------
Interest income foregone $ 154 $ 340 $ 358
============= ============= ============
-----------------------------------------------------------------------------------------
</TABLE>
The Company is not committed to lend additional funds to debtors whose
loans are on non-accrual status.
- --------------------------------------------------------------------------------
ESB Financial Corporation 32 1999 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
3. Loans Receivable (continued)
The following is a summary of the changes in the allowance for loan losses:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
(In thousands)
Totals
---------------------------------------------------------------------------
<S> <C>
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
Provision for losses 54
Charge offs (55)
Recoveries 9
------------
Balance, December 31, 1999 $ 4,823
============
---------------------------------------------------------------------------
</TABLE>
At December 31, 1999 and 1998, the recorded investment in loans considered
to be impaired under SFAS No. 114 was $3.3 million and $3.7 million,
respectively, against which $1.8 million and $2.0 million, respectively, of
the allowance for loan losses was allocated.
During 1999, 1998 and 1997, impaired loans averaged $3.4 million, $3.7
million and $3.9 million, respectively. The Company recognized no
significant interest income on impaired loans during 1999 with interest
income of $81,000, on a cash basis, on impaired loans during 1998, and no
significant interest income on impaired loans recognized during 1997. SFAS
No. 114 does not apply to large groups of smaller balance homogenous loans
that are collectively evaluated for impairment. The Company collectively
reviews for impairment all residential real estate and consumer loans.
The Company conducts its business through 16 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.
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.
- --------------------------------------------------------------------------------
ESB Financial Corporation 33 1999 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
5. Premises and Equipment
Premises and equipment at December 31 are summarized by major
classification as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
(In thousands) 1999 1998
-----------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 1,124 $ 1,192
Buildings and improvements 6,338 6,112
Leasehold improvements 629 391
Furniture, fixtures and equipment 5,465 4,567
------------ ------------
13,556 12,262
Less accumulated depreciation and amortization 6,676 6,069
------------ ------------
$ 6,880 $ 6,193
============ ============
-----------------------------------------------------------------------------------------
</TABLE>
Depreciation and amortization expense for the years December 31, 1999, 1998
and 1997 were $607,000, $364,000 and $324,000, 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 2009, have approximate
aggregate rentals of $65,760, $65,760, $65,960, $68,160, $73,440 and
$304,180 for the years ended December 31, 2000, 2001, 2002, 2003, 2004 and
thereafter, respectively. Rent expense for the years ended December 31,
1999, 1998 and 1997 was $61,000, $98,000 and $92,000, respectively.
6. Deposits
The following table summarizes the Company's deposits as of December 31:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) 1999 1998
------------------------------ ------------------------------
Weighted Weighted
average average
Type of accounts rate Amount % rate Amount %
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing deposits - $ 8,094 1.9% - $ 6,002 1.4%
Interest-bearing demand deposits 2.47% 166,448 38.5% 2.34% 156,994 37.1%
Time deposits 5.37% 257,241 59.6% 5.54% 260,055 61.5%
----------- ------- ----------- -------
4.23% $ 431,783 100.0% 4.27% $ 423,051 100.0%
=========== ======= =========== =======
Time deposits mature as follows:
Within one year $ 178,944 41.4% $ 145,231 34.3%
After one year through two years 40,709 9.4% 72,845 17.2%
After two years through three years 15,213 3.5% 18,438 4.4%
Thereafter 22,375 5.2% 23,541 5.6%
----------- ------- ----------- -------
$ 257,241 59.6% $ 260,055 61.5%
=========== ======= =========== =======
------------------------------------------------------------------------------------------------------
</TABLE>
The Company had a total of $62.0 million and $51.9 million in deposits of
$100,000 or more at December 31, 1999 and 1998, respectively.
- --------------------------------------------------------------------------------
ESB Financial Corporation 34 1999 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- -------------------------------------------------------------------------------
6. Deposits (continued)
Interest expense by type of deposit account for the year ended December 31
is as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
(In thousands) 1999 1998 1997
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest-bearing demand deposits $ 3,877 $ 3,905 $ 3,934
Time deposits 13,540 13,735 12,684
--------- --------- ---------
$ 17,417 $ 17,640 $ 16,618
========= ========= =========
----------------------------------------------------------------------------------------
</TABLE>
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) 1999 1998
------------------------- ---------------------------
Weighted Weighted
average average
rate Amount rate Amount
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FHLB advances:
Due within 12 months 6.17% $ 179,044 5.99% $ 98,595
Due beyond 12 months but within 2 years 5.46% 48,707 6.46% 112,294
Due beyond 2 years but within 3 years 6.09% 53,435 5.37% 38,707
Due beyond 3 years but within 4 years 5.89% 35,655 5.76% 30,119
Due beyond 4 years but within 5 years 8.31% 55 5.56% 25,540
Due beyond 5 years 7.05% 571 7.11% 710
---------- ----------
317,467 305,965
Treasury tax and loan note payable 5.20% 169 4.63% 30
---------- ----------
$ 317,636 $ 305,995
========== ==========
Reverse repurchase agreements:
Due within 12 months 5.64% $ 65,880 5.39% $ 77,960
Due beyond 12 months but within 2 years 5.82% 72,000 5.43% 32,400
Due beyond 2 years but within 3 years 6.05% 64,040 5.66% 10,000
Due beyond 3 years but within 4 years - 5.82% 30,000
Due beyond 4 years but within 5 years - -
Due beyond 5 years - -
---------- ----------
$ 201,920 $ 150,360
========== ==========
--------------------------------------------------------------------------------------------------------------------
</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.
- --------------------------------------------------------------------------------
ESB Financial Corporation 35 1999 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
7. Borrowed Funds (continued)
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 was below the amortized cost of the
securities sold under agreements to repurchase. The market value of the
securities as of December 31, 1999 was $216.8 million with an amortized
cost of $223.7 million. As of December 31, 1998 the market value exceeded
the amortized cost of the securities sold under agreements to repurchase.
The market value of those securities was $167.2 million with an amortized
cost of $166.8 million.
As of December 31, 1999, the Company had reverse repurchase agreements with
Morgan Stanley Dean Witter with $11.1 million at risk with a weighted
average maturity of 17 months.
Borrowings under reverse repurchase agreements averaged $166.0 million,
$113.7 million and $16.0 million during 1999, 1998 and 1997, respectively.
The maximum amount outstanding at any month-end was $211.8 million, $150.4
million and $55.8 million during 1999, 1998 and 1997, respectively.
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 216,833
Demand -
---------
$ 216,833
=========
----------------------------------------------------------------------------
</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.
- --------------------------------------------------------------------------------
ESB Financial Corporation 36 1999 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
8. Guaranteed Preferred Beneficial Interest in Subordinated Debt (continued)
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 $1.2 million and $1.3 million as of December 31,
1999 and 1998, respectively, and are amortized on a level-yield basis over
the term of the Preferred Securities.
9. Income Taxes
The provision for income taxes for the years ended December 31 is comprised
of the following:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
(In thousands) 1999 1998 1997
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current expense:
Federal $ 1,324 $ 1,363 $ 1,435
State 524 446 416
-------- -------- --------
1,848 1,809 1,851
Deferred expense (benefit):
Federal (771) (292) 133
-------- -------- --------
(771) (292) 133
-------- -------- --------
$ 1,077 $ 1,517 $ 1,984
======== ======== ========
------------------------------------------------------------------------------------------------------
</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) 1999 1998 1997
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss (gain) on securities
available for sale $ 6,330 $ 901 $ (1,068)
Compensation expense for tax purposes
in excess of amounts recognized for
financial statement purposes 145 367 -
-------- -------- ---------
$ 6,475 $ 1,268 $ (1,068)
======== ======== =========
------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
ESB Financial Corporation 37 1999 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
9. Income Taxes (continued)
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) 1999 1998
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowances for losses on loans and real estate owned $ 1,117 $ 989
Interest and fees on loans 53 88
Reserve for uncollected interest 95 35
Premises and equipment 84 66
General business credit 97 -
Minimum tax credit carry forward 647 101
Investment securities available for sale 6,093 -
-------- --------
Gross deferred tax assets 8,186 1,279
Deferred tax liabilities:
Investment securities available for sale - 237
Other 211 168
-------- --------
Gross deferred tax liabilities 211 405
-------- --------
Net deferred tax asset $ 7,975 $ 874
======== ========
-----------------------------------------------------------------------------------------------------
</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.
The general business credit of $97,000 will be available to reduce future
federal income tax through the year 2020. The alternative minimum tax
credit of $647,000 is available to reduce future regular income taxes over
an indefinite period.
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>
----------------------------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax at statutory rate 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
Tax free income, net of interest disallowance (25.0%) (17.8%) (11.1%)
State income taxes, net of Federal income tax benefit 5.0% 4.0% 3.7%
Goodwill 3.0% 2.7% 2.2%
Other, net (1.2%) (2.7%) (2.1%)
----- ----- -----
Reported rate 15.8% 20.2% 26.7%
===== ===== =====
----------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
ESB Financial Corporation 38 1999 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
9. Income Taxes (continued)
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, 1998 (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 $146,000, $126,000 and $110,000 to
the plan during 1999, 1998 and 1997, 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.
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 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
1999, 1998 and 1997 amounted to $86,000, $93,000 and $53,000, 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.
- --------------------------------------------------------------------------------
ESB Financial Corporation 39 1999 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
10. Employee Benefit Plans (continued)
Employee Stock Ownership Plan (continued)
As of December 31, 1999 there was a total of 79,480 shares in the ESOP
accounted for under accounting guidance provided prior to the issuance of
SOP No. 93-6, including 384 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 1999, 1998 and 1997, the Company recognized compensation expense
related to the ESOP of $561,000, $685,000 and $458,000, respectively.
As of December 31, 1999 and 1998 the ESOP held a total of 607,510 and
556,105 shares, respectively, of the Company's stock, and there were
245,928 and 225,679 unallocated shares, respectively, with a value of $2.9
million and $3.7 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 1999, 1998 and 1997:
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 19.8%; and a
weighted average life of the option of seven years.
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) 1999 1998 1997
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Pro forma net income $ 5,547 $ 5,782 $ 5,249
Pro forma diluted net
income per share $ 1.07 $ 1.03 $ 0.94
--------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
ESB Financial Corporation 40 1999 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
10. Employee Benefit Plans (continued)
Stock Option Plans (continued)
Stock option activities under the Option Plans for the years ended December
31 are as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------ ---------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price/Share Options (1) Price/Share (1) Options (1) Price/Share (1)
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 420,887 $ 9.85 475,321 $ 7.80 296,028 $ 7.28
Granted 78,605 14.00 63,735 18.00 78,650 11.67
Converted - - - - 126,101 6.07
Exercised (35,931) 3.45 (118,169) 5.98 (24,975) 5.08
Expired (1,650) 18.00 - - (483) 10.77
-------- -------- --------
Outstanding at end of year 461,911 11.03 420,887 9.85 475,321 7.80
======== ======== ========
Exercisable at end of year 461,911 $ 11.03 420,887 $ 9.85 475,321 $ 7.80
======== ======== ========
---------------------------------------------------------------------------------------------------------------------------
</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 1999, 1998 and
1997 utilizing the Black-Scholes Valuation Model were $4.12, $5.21 and
$4.21, respectively.
The following table summarizes certain characteristics of issued stock
options as of December 31, 1999:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
Average
Remaining
Options Exercise Contractual
Plan Year Outstanding Price Life (in years)
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
1990 15,485 $ 3.17 0.5
1990 16,060 18.00 8.5
1990 26,705 14.00 9.5
1992 21,165 6.30 2.3
1992 485 18.00 8.5
1994 36,101 9.46 4.5
1995 44,651 10.80 5.5
1996 53,241 10.75 6.5
1997 77,172 6.05 5.0
1997 5,162 6.66 5.0
1997 68,244 11.67 7.5
1997 51,900 14.00 9.5
1997 45,540 18.00 8.5
--------
461,911 $ 11.03 6.5
======== ======= ======
-----------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
ESB Financial Corporation 41 1999 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
10. Employee Benefit Plans (continued)
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,
1999, there were 22,405 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) 1999 1998 1997
------------------------------------------------------------------------------------------------------------------------
Unrealized Reclassification Unrealized Reclassification Unrealized
Loss (1) Adjustment Loss Adjustment Gain
------------- ---------------- ----------- ------------------ -----------
<S> <C> <C> <C> <C> <C>
Before tax amount $ (18,092) $ (527) $ (2,466) $ (183) $ 3,141
Tax (expense) benefit 6,236 94 850 51 (1,068)
----------- -------- ---------- --------- ---------
After tax amount $ (11,856) $ (433) $ (1,616) $ (132) $ 2,073
=========== ======== ========== ========= =========
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes transfer of securities from held to maturity to available for
sale. See footnote 1, page 27.
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 42 1999 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) 1999 1998
----------------------- -----------------------
Carrying Fair Carrying Fair
amount value amount value
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash equivalents $ 12,761 $ 12,761 $ 10,303 $ 10,303
Securities available for sale 561,125 561,125 481,234 481,234
Securities held to maturity - - 63,815 64,033
Loans receivable 393,929 393,152 360,280 365,499
Accrued interest receivable 6,871 6,871 6,792 6,792
FHLB stock 18,435 18,435 18,435 18,435
Interest rate contracts 139 69 554 60
Bank owned life insurance 15,784 15,784 15,006 15,006
Financial liabilities:
Deposits 431,783 433,137 423,051 427,186
Borrowed funds 519,556 514,808 305,995 460,765
Guaranteed preferred beneficial interest
in subordinated debt, net 24,071 21,971 24,027 23,100
Accrued interest payable 2,678 2,678 2,654 2,654
---------------------------------------------------------------------------------------------------------
</TABLE>
The following table presents the notional amount of the Company's interest
rate cap contracts and the contractual amount of the Company's other off-
balance sheet financial instruments as of December 31:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
(In thousands) 1999 1998
-----------------------------------------------------------------------------------------
<S> <C> <C>
Interest rate cap contracts $100,000 $120,000
Loans in process and commitments:
Fixed interest rate 10,775 14,653
Variable interest rate 21,235 14,889
Lines of credit:
Commercial 10,886 15,345
Consumer 11,975 11,244
Letters of credit:
Commercial - 24
Standby 185 -
-----------------------------------------------------------------------------------------
</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 43 1999 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, 1999 the Bank meets all capital adequacy requirements to which
it is subject.
As of December 31, 1999, 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 well capitalized, the Bank
must maintain minimum tangible, core, and risk-based capital ratios as set
forth in the table represented on page 45. 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 45 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.
OTS regulations govern capital distributions by savings institutions, 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 institution to make capital
distributions. A savings institution must file an application for OTS
approval of the capital distribution if either (1) the total capital
distributions for the applicable calendar year exceed the sum of the
institution's net income for that year to date plus the institution's
retained net income (which takes into account capital distributions
declared) for the preceding two years, (2) the institution would not be at
least adequately capitalized following the distribution, (3) the
distribution would violate any applicable statute, regulation, agreement or
OTS-imposed condition, or (4) the institution is not eligible for expedited
treatment of its filings. If an application is not required to be filed,
savings institutions which are a subsidiary of a holding company (as well
as certain other institutions) must still file a notice with the OTS at
least 30 days before the board of directors declares a dividend or approves
a capital distribution. The Bank can declare dividends (subject only to the
aforementioned notice requirement) subsequent to December 31, 1999, of up
to approximately $5.9 million of retained earnings of $21.2 million at
December 31, 1999, less any dividends declared subsequent to December 31,
1999 plus net income between January 1, 2000, and the date of any such
dividend declaration. The Bank declared dividends to the Company of $5.0
million, $0 and $0, for the years ended December 31, 1999, 1998 and 1997,
respectively.
- --------------------------------------------------------------------------------
ESB Financial Corporation 44 1999 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:
<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, 1999:
Total Capital
(to Risk Weighted Assets) $69,500 16.92% $32,865 8.00% $41,081 10.00%
Core Capital
(to Adjusted Tangible Assets) $64,695 6.47% $40,015 4.00% $50,019 5.00%
Tangible Capital
(to Tangible Assets) $64,695 6.47% $15,006 1.50% N/A
Tier I Capital
(to Risk Weighted Assets) $64,695 15.75% N/A $24,649 6.00%
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%
---------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
ESB Financial Corporation 45 1999 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>
1999:
-----
Interest income $ 15,431 $ 15,914 $ 16,444 $ 17,003
Interest expense 11,616 11,861 12,267 12,785
--------- --------- -------- ---------
Net interest income 3,815 4,053 4,177 4,218
Provision for loan losses 3 3 3 45
--------- --------- -------- ---------
Net interest income after provision for loan losses 3,812 4,050 4,174 4,173
Noninterest income 737 857 625 837
Noninterest expense 2,972 2,978 3,090 3,387
--------- --------- -------- ---------
Net income before income taxes 1,577 1,929 1,709 1,623
Provision for income taxes 222 375 288 192
--------- --------- -------- ---------
Net income $ 1,355 $ 1,554 $ 1,421 $ 1,431
========= ========= ======== =========
Diluted net income per share $0.26 $0.30 $0.28 $0.29
========= ========= ======== =========
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
========= ========= ======== =========
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Quarterly earnings per share data may vary from annual earnings due to
rounding.
- -------------------------------------------------------------------------------
ESB Financial Corporation 46 1999 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) 1999 1998
----------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Interest-earning deposits $ 1,763 $ 1,285
Equity in net assets of subsidiaries 97,226 107,835
Other assets 2,172 2,187
---------- ----------
Total assets $ 101,161 $ 111,307
========== ==========
Liabilities and stockholders' equity:
Subordinated debt, net $ 24,071 $ 24,027
Payable to subsidiaries 27,035 26,140
Accrued expenses and other liabilities 173 57
Stockholders' equity 49,882 61,083
---------- ----------
Total liabilities and stockholders' equity $ 101,161 $ 111,307
========== ==========
----------------------------------------------------------------------------------------------
<CAPTION>
----------------------------------------------------------------------------------------------
Condensed Statements of Operations
(In thousands) 1999 1998 1997
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Equity in undistributed net income of subsidiaries $ 1,894 $ 6,367 $ 5,453
Dividend income from subsidiaries 5,000 - -
Management fee income 2,612 2,792 1,812
Interest and other income 742 1,491 278
--------- ---------- ----------
Total income 10,248 10,650 7,543
Expense:
Interest expense 3,957 3,615 1,408
Compensation and employee benefits 1,244 1,212 794
Other 115 101 101
--------- ---------- ----------
Total expense 5,316 4,928 2,303
--------- ---------- ----------
Income before benefit from income taxes 4,932 5,722 5,240
Benefit from income taxes (829) (279) (207)
--------- ---------- ----------
Net income $ 5,761 $ 6,001 $ 5,447
========= ========== ==========
- ---------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
ESB Financial Corporation 47 1999 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) 1999 1998 1997
-------------------------------------------------------------------------------------------------------------------
Operating activities:
<S> <C> <C> <C>
Net income $ 5,761 $ 6,001 $ 5,447
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Equity in undistributed net income of subsidiaries (1,894) (6,367) (5,453)
Net gain on sale of securities available for sale (377) (56) -
Other, net (783) (1,373) (1,668)
--------- ---------- ----------
Net cash provided by (used in) operating activities 2,707 (1,795) (1,674)
--------- ---------- ----------
Investing activities:
Purchases of securities (1,437) (15,484) (2,549)
Principal repayments of securities 2,090 2,865 1,271
Proceeds from the sale of securities available for sale 1,022 2,647 490
Payment for purchase of THBC, net of cash acquired - - (2,734)
--------- ---------- ----------
Net cash provided by (used in) provided by investing activities 1,675 (9,972) (3,522)
--------- ---------- ----------
Financing activities:
Increase (decrease) in payable to subsidiaries 895 24,690 (15,700)
Increase (decrease) in subordinated debt, net 44 (119) 24,146
Proceeds received from exercise of stock options 269 1,072 127
Dividends paid (1,878) (1,941) (1,615)
Payments to acquire treasury stock (2,839) (10,971) (1,678)
Stock purchased by ESOP (864) (589) (500)
Principal repayment of ESOP loan 469 459 363
--------- ---------- ----------
Net cash (used in) provided by financing activities (3,904) 12,601 5,143
--------- ---------- ----------
Increase (decrease) in cash equivalents 478 834 (53)
Cash equivalents at beginning of period 1,285 451 504
--------- ---------- ----------
Cash equivalents at end of period $ 1,763 $ 1,285 $ 451
========= ========== ==========
-------------------------------------------------------------------------------------------------------------------
</TABLE>
17. Acquisition
Troy Hill Bancorp, Inc.
On April 3, 1997, the Company completed its acquisition of Troy Hill
Bancorp, Inc. (THBC) based in Pittsburgh, Pennsylvania, and on June 11,
1998, merged Troy Hill Federal Savings Bank (Troy Hill) with and into ESB.
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, 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
- --------------------------------------------------------------------------------
ESB Financial Corporation 48 1999 Annual Report
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
17. Acquisition (continued)
Troy Hill Bancorp, Inc. (continued)
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.
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, 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 period presented. The unaudited
condensed pro forma combined statements of operations for the year ended
December 31, is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
(Dollar amounts in thousands, except share data) 1997
- ------------------------------------------------------------------------------------
<S> <C>
Interest income $ 57,048
Interest expense 39,434
--------
Net interest income 17,614
Provision for loan losses 799
--------
Net interest income after provision for loan losses 16,815
Noninterest income 1,155
Noninterest expense 10,067
--------
Net income before income taxes 7,903
Provision for income taxes 2,211
--------
Net income $ 5,692
========
Diluted net income per share $ 1.13
========
- ------------------------------------------------------------------------------------
</TABLE>
18. Subsequent Event (unaudited) - Acquisition of SHS Bancorp, Inc.
On July 21, 1999, the Company entered into an Agreement and Plan of
Reorganization with SHS Bancorp, Inc. ("SHS"), parent company of Spring
Hill Savings Bank, F.S.B., pursuant to which SHS was to merge with and into
the Company, with the Company as the surviving corporation. Under the terms
of the agreement, each shareholder of SHS had the right to elect to receive
$17.80 in cash or 1.30 shares of the Company (subject to adjustment) for
each share of SHS. The final form of consideration was subject to
adjustment so that at least but no more than 40% of the total outstanding
SHS shares were to be exchanged for cash. The Company consummated the
transaction on February 10, 2000. The total purchase price of the
acquisition was $14.6 million. At December 31, 1999, SHS had total
consolidated assets of $90.9 million, total consolidated liabilities of
$79.1 million, including total consolidated deposits of $67.0 million and
consolidated stockholders' equity of $11.8 million.
- --------------------------------------------------------------------------------
ESB Financial Corporation 49 1999 Annual Report
<PAGE>
Accountants' 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, as of December 31, 1999 and 1998
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,
1999. 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, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Pittsburgh, Pennsylvania
January 20, 2000
- --------------------------------------------------------------------------------
ESB Financial Corporation 50 1999 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:
[ESBF LOGO]
<TABLE>
<S> <C>
Legg Mason Wood Walker, Inc. Sandler O'Neill & Partners, LP
2 Oliver Plaza Two World Trade Center
Pittsburgh, PA 15222 New York, NY 10048
Telephone: (412) 261-7300 Telephone: (800) 635-6851
Ryan Beck & Co., Inc. Tucker Anthony, Inc.
220 Livingston Orange Avenue 1 Beacon Street
Livingston, NJ 07039 Boston, MA 02108
Telephone: (800) 223-8969 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 $11.88 and $12.25,
respectively, as of January 31, 2000.
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>
1999 Quarter Ended
December 31 $13.38 $11.06 $11.88
September 30 14.42 13.00 13.13
June 30 15.50 13.13 13.13
March 31 17.00 15.25 15.25
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
- ---------------------------------------------------------------------------------------------
</TABLE>
Stock Dividends
The Company has declared the following stock dividends since its inception:
Stock Dividend
Record Date Payment Date Percentage
----------- ------------ ----------
May 15, 1998 May 29, 1998 10%
July 31, 1997 August 25, 1997 10%
- --------------------------------------------------------------------------------
ESB Financial Corporation 51 1999 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, 1999, the Company
declared cash dividends with the following record and payment dates:
Cash Dividends
Record Date Payment Date per Share
----------- ------------ ---------
December 31, 1999 January 25, 2000 $0.090
September 30, 1999 October 25, 1999 $0.090
June 30, 1999 July 23, 1999 $0.090
March 31, 1999 April 23, 1999 $0.090
December 31, 1998 January 25, 1999 $0.090
September 30, 1998 October 25, 1998 $0.090
June 30, 1998 July 23, 1998 $0.090
March 31, 1998 April 23, 1998 $0.082
Stock Splits
The Company has declared the following stock splits since its inception:
Record Date Payment Date Percentage
----------- ------------ ----------
December 31, 1994 January 25, 1995 20%
December 31, 1993 January 24, 1994 20%
May 12, 1995 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%
Number of Stockholders and Shares Outstanding
As of December 31, 1999, there were 1,847 registered stockholders of record and
5,102,655 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 the reinvestment plan and pay no brokerage commissions or fees. To
obtain a plan prospectus and authorization card call (800) 368-5948.
- --------------------------------------------------------------------------------
ESB Financial Corporation 52 1999 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. d/b/a Elite Settlement Services
Annual Meeting
The annual meeting of the Company's stockholders will be held at 4:00 p.m.,
on Tuesday, April 18, 2000, 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 53 1999 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 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
ESB BANK, F.S.B.
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 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. Vice President/Operations - R.J. Rhodes Transit, Inc.
</TABLE>
[BOARD OF DIRECTORS 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 54 1999 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
Thomas F. Angotti (1)
Group Senior Vice President/Administration
Charles P. Evanoski Group Senior Vice Presidents
----------------------------
Group Senior Vice President, Chief Financial Officer & Treasurer Charles P. Evanoski
Robert C. Hilliard, CPA Robert C. Hilliard, CPA
Group Senior Vice President/Audit, Compliance & Loan Review Frank D. Martz
Frank D. Martz Todd F. Palkovich
Group Senior Vice President/Operations & Corporate Secretary
Todd F. Palkovich
Group Senior Vice President/Lending Senior Vice Presidents
----------------------
Robert J. Colalella Robert J. Colalella
Senior Vice President/Community Relations & Marketing John W. Donaldson II
John W. Donaldson II Peter J. Greco
Senior Vice President/Lending Teresa Krukenberg
Peter J. Greco Marilyn Scripko
Senior Vice President/Lending John T. Stunda
Teresa Krukenberg
Senior Vice President/Operations
Marilyn Scripko Vice Presidents
---------------
Senior Vice President/Lending Deborah A. Allen
John T. Stunda Ruth A. Ambrose
Senior Vice President/Human Resources Nancy A. Glitsch
Lawrence C. Kerr
Ronald J. Mannarino
ESB BANK, F.S.B. ADVISORY BOARD Sally A. Mannarino
- -------------------------------
Charles Delman Marilyn R. Maple
Retired Chairman, President & CEO - ESB Bancorp, Inc. Larry Mastrean
Mark A. Platz
Harry B. Thaner Ronald E. Pompeani
Retired Chairman of the Board - Troy Hill Bancorp, Inc. Wayne G. Zerishnek
Pamela K. Zikeli
Gibson E. Brock
Retired Manager of Engineering - J & L Steel Corporation
Assistant Vice Presidents
-------------------------
Dr. Allen Gastfriend Patricia M. Aumiller
Retired Dentist Janet S. Barletta
Kathleen A. Bender
Watson F. McGaughey, Jr. Charlotte M. Bolinger
President - McGaughey Buses, Inc. Frank Brzozowski
Thomas E. Campbell
Donald R. Miller Amy E. Dicks
Retired President - Miller & Sons Chevrolet Ronald E. Dickson
Katina J. Eliou
John J. Syka Deborah S. Goehring
Owner - John J. Syka Funeral Home, Inc. Margaret A. Haefele
Brian Hulme
Mary Ann Leonardo
Beth A. McClymonds
Ann R. Nelson
THF, Inc. Joyce A. Stellitano
--------- Bonita I. Wadding
Karen F. Myers - President
Assistant Secretaries
---------------------
Linda MacMurdo
Dana Martz
Robin Scheffler
</TABLE>
(1) Effective February 10, 2000, upon acquisition of SHS Bancorp, Inc.
- --------------------------------------------------------------------------------
ESB Financial Corporation 55 1999 Annual Report
<PAGE>
- --------------------------------------------------------------------------------
Office Locations Opened in 1999
Wexford Office
Grand Opening - January 19, 1999
[Photo of Wexford Office]
Springdale Office
Grand Opening - December 6, 1999
[Photo of Springdale Office]
- --------------------------------------------------------------------------------
ESB Financial Corporation 56 1999 Annual Report
<PAGE>
Office Locations
- --------------------------------------------------------------------------------
[MAP OF BANK LOCATIONS]
ESB BANK, F.S.B.
- ----------------
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
Beechview
1609 Broadway Avenue
Pittsburgh, PA 15216
(412) 344-7211
Brighton Heights
3619 California Avenue
Pittsburgh, PA 15212
(412) 761-4994
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
North Shore
One North Shore Center, Suite 120
Pittsburgh, PA 15212
(412) 231-0809
<TABLE>
<S> <C> <C> <C> <C>
Spring Hill Springdale Troy Hill Wexford Zelienople
Itin and Rhine Streets 849 Pittsburgh Street 1706 Lowrie Street 101 Wexford Bayne Road Route 19
Pittsburgh, PA 15212 Springdale, PA 15144 Pittsburgh, PA 15212 Wexford, PA 15090 Zelienople, PA 16063
(412) 231-0819 (724) 275-5879 (412) 231-8238 (724) 934-8989 (724) 452-6500
</TABLE>
<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, 333-95725, 333-31464 and 333-31379) of ESB
Financial Corporation, of our report dated January 20, 2000, relating to the
consolidated statements of financial condition of ESB Financial Corporation and
subsidiaries as of December 31, 1999 and 1998, 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, 1999, which report is incorporated
by reference in the December 31, 1999, annual report on Form 10-K of ESB
Financial Corporation.
/s/ KPMG LLP
Pittsburgh, Pennsylvania
March 30, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 1999
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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 6,712
<INT-BEARING-DEPOSITS> 5,780
<FED-FUNDS-SOLD> 269
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 561,125
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 393,929
<ALLOWANCE> 4,823
<TOTAL-ASSETS> 1,032,445
<DEPOSITS> 431,783
<SHORT-TERM> 244,924
<LIABILITIES-OTHER> 3,814
<LONG-TERM> 274,632
0
0
<COMMON> 63
<OTHER-SE> 49,819
<TOTAL-LIABILITIES-AND-EQUITY> 1,032,445
<INTEREST-LOAN> 28,556
<INTEREST-INVEST> 34,762
<INTEREST-OTHER> 1,474
<INTEREST-TOTAL> 64,792
<INTEREST-DEPOSIT> 17,417
<INTEREST-EXPENSE> 48,529
<INTEREST-INCOME-NET> 16,263
<LOAN-LOSSES> 54
<SECURITIES-GAINS> 544
<EXPENSE-OTHER> 12,427
<INCOME-PRETAX> 6,838
<INCOME-PRE-EXTRAORDINARY> 6,838
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,761
<EPS-BASIC> 1.16
<EPS-DILUTED> 1.13
<YIELD-ACTUAL> 7.01
<LOANS-NON> 4,334
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,815
<CHARGE-OFFS> 55
<RECOVERIES> 9
<ALLOWANCE-CLOSE> 4,823
<ALLOWANCE-DOMESTIC> 4,823
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
