ESB FINANCIAL CORPORATION
2001 ANNUAL REPORT TO SHAREHOLDERS
TABLE OF CONTENTS
Consolidated Financial Highlights.............................................................1
Letter to Shareholders........................................................................3
Selected Consolidated Financial Data..........................................................6
Management's Discussion and Analysis of
Financial Condition and Results of Operations........................................7
Consolidated Financial Statements............................................................22
Notes to Consolidated Financial Statements...................................................27
Report of Independent Auditors...............................................................51
Stock and Dividend Information...............................................................52
Corporate Information........................................................................54
Board of Directors...........................................................................55
Corporate Officers, Advisory Board and Bank Officers.........................................56
Office Locations and Branch Managers.........................................................58
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
[ESBF LOGO] owned subsidiary bank, ESB Bank, F.S.B.
ESB Bank, F.S.B. is a federally
chartered, FDIC - insured stock savings
bank which conducts business through 17
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.
MISSION STATEMENT
The mission of ESB Financial
Corporation and its subsidiaries is to
effectively provide for the financial
service needs of our customers and
community while creating value for our
shareholders. Our mission will be
accomplished by growing in a profitable
and controlled manner; by identifying
and meeting the financial needs of our
customers; by offering quality products
and services that are competitively
priced and serviced by a knowledgeable,
attentive and friendly staff; and by
creating a positive work environment
that maximizes the alignment of
customer and employee objectives.
CONSOLIDATED FINANCIAL HIGHLIGHTS
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(Dollar amounts in thousands, except share data)
AS OF OR FOR THE
YEAR ENDED DECEMBER 31,
2001 2000 CHANGE
---------- ---------- ----------
Total assets $1,262,449 $1,200,150 5%
Loans receivable, net 527,485 512,228 3%
Securities available for sale 640,282 605,414 6%
Total deposits 592,052 508,913 16%
Borrowed funds, including subordinated debt 577,802 612,204 (6%)
Stockholders' equity 79,903 68,263 17%
Net interest income 19,877 19,366 3%
Net income 7,229 6,733 7%
Net income per share (diluted) $1.03 $0.97 6%
Net operating income per share (diluted)(1) $1.03 $0.92 12%
Net cash operating income per share (diluted)(2) $1.14 $1.02 12%
Cash dividends per share $0.38 $0.32 19%
Return on average assets 0.59% 0.59% -
Return on average stockholders' equity 9.49% 11.71% (19%)
Return on average stockholders' equity
excluding comprehensive income(3) 9.83% 9.76% 1%
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(1) Excludes the recovery associated with the Bennett Lease pools in the
year 2000, discussed on page 12.
(2) Excludes the recovery associated with the Bennett Lease pools in the
year 2000, as well as the expense associated with the amortization of
goodwill.
(3) Excludes the effect of the mark to market, net of tax, on the
securities available for sale portfolio, which comprises comprehensive
income.
1
CONSOLIDATED FINANCIAL HIGHLIGHTS (CONTINUED)
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[GRAPH]
EARNINGS PER SHARE GROWTH (DILLUTED)
1997 1998 1999 2000 2001
EPS $0.74 $0.82 $0.86 $0.97 $1.03
[GRAPH]
CASH DIVIDENDS PER SHARE
1997 1998 1999 2000 2001
Dividend $0.23 $0.27 $0.28 $0.32 $0.38
[GRAPH]
RETURN ON STOCKHOLDERS EQUITY
1997 1998 1999 2000 2001
Equity 8.64% 9.10% 9.93% 11.71% 9.49%
[GRAPH]
ASSET & LOAN GROWTH
(IN MILLIONS)
1997 1998 1999 2000 2001
Assets $911 $972 $1,032 $1,200 $1,262
Loans $337 $360 $394 $512 $527
2
LETTER TO SHAREHOLDERS
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TO OUR FELLOW SHAREHOLDERS:
[PHOTO]
CHARLOTTE A. ZUSCHLAG
President and Chief Executive Officer
I am pleased to present the 2001 Annual Report for ESB Financial Corporation
(the Company),which is the parent company of ESB Bank (the Bank) and other
complementary subsidiary and affiliated companies. The Company combines the
focused strategies and specialized activities of each of these businesses under
one umbrella to create additional shareholder value. While ESB Bank is our
"franchise" business, all of our companies and affiliates have contributed to
this year's record performance and vital accomplishments.
The year 2001 was an eventful and successful one for our Company. It was a year
of continued strong financial performance and one in which we attained many of
our strategic goals and operating objectives. The Company achieved this record
performance in the face of an extremely challenging economic environment,
financial market uncertainties, political unrest and ever-increasing competition
from banks and non-banks alike.
The most significant challenge of the year was managing our net interest margin
as the economy began to show signs of weakness and the Federal Reserve
repeatedly lowered interest rates in its attempt to thwart a recession. The
cumulative effect of the numerous and sustained interest rate decreases exerted
continuing pressure on the net interest margin and, consequently, on net income.
In the second quarter of 2001, management initiated significant restructuring
efforts on both the asset and liability side of the balance sheet that resulted
in a reduction to the Company's interest expense going forward and a prospective
improvement to future net interest income.
In addition, the general economic downturn placed an increased emphasis on
maintaining asset quality as corporate downsizing and personal and corporate
bankruptcy became increasingly more prevalent. Management has devoted and
continues to devote significant Company resources toward controlling asset
quality and minimizing loss exposure through prudent Board policies, sound
underwriting procedures, investment strategies and consistent monitoring of the
loan and investment portfolios. I am proud to report that the Company's asset
quality ratios compare favorably to its peer group and we are committed to
remain diligent in our efforts to maintain a strong asset quality position.
For the year 2001, your Company posted record earnings per diluted share of
$1.03 on net income of $7.2 million, as compared to $0.97 per diluted share on
net income of $6.7 million in 2000. This represents a 7.4% increase in earnings
over the previous year. Company assets grew to a record $1.3 billion in 2001, up
from $1.2 billion in 2000, making a 5.2% increase for the year. This increase in
assets can primarily be attributed to the merger of WSB Holding Company.
Management, the Board of Directors and I are also very pleased with the deposit
growth in 2001. The merger with WSB increased deposits by approximately $39.6
million, however, additional growth of approximately $43.5 million occurred
throughout the branch system in 2001. The overall result, was a very strong
16.3% increase in deposits as compared to December 31, 2000.
Since we converted to a publicly held company in 1990, we have declared and paid
a cash dividend to our shareholders for 47 consecutive quarters. Your Board of
Directors remains committed to returning value to the shareholders. During 2001,
the Company declared and paid a six for five stock split (20%). This represents
the tenth such stock split or stock dividend since our initial public offering
in 1990. The stock dividend paid along with maintaining the cash dividend
reflects a 16.8% yield to those original charter shareholders. As in previous
3
LETTER TO SHAREHOLDERS (CONTINUED)
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years, the Board of Directors approved a common stock repurchase program and,
for the year, the Company purchased approximately 146,084 shares with a market
value of $1.7 million.
In addition to managing the financial facets of the Bank, we were able to
successfully complete a number of operating and strategic objectives to more
effectively meet the needs of our customers and to continue to enhance the
long-term value of the Company for the benefit of our shareholders.
Some of the major initiatives and accomplishments for the year 2001 were the:
ACQUISITION OF WORKINGMENS BANK:
In October, the Company completed the acquisition and successful integration of
WSB Holding Company and its subsidiary Workingmens Bank, which had assets of
approximately $46.2 million and two offices located in Allegheny County. At the
time of the merger, the Bank consolidated its Federal Street office into the
former Workingmens office at 807 Middle Street thus maintaining an office
location on Pittsburgh's North Shore. This acquisition represents the fourth
acquisition since 1994 totaling approximately $400.0 million in asset growth and
the addition of 11 branch locations in Allegheny and Beaver counties. This
merger adds to the Bank's presence in the South Hills with the Baldwin location
and provides an expansion of products and services to the newly acquired
Workingmens customers.
CREATION OF PENNFIRST FINANCIAL ADVISORY SERVICES, INC. (PFAS):
In November, the Bank created PFAS, a wholly owned subsidiary, for the purpose
of engaging in securities brokerage activities and providing financial advisory
services. The retail sale of investment products will be conducted through PFAS'
non-affiliate third party arrangement with Raymond James Financial Services,
Inc., member NASD/SIPC. This partnership will afford our customers, employees
and associates access to expanded financial products and services such as
stocks, bonds, mutual funds, estate planning, tax and retirement planning, asset
management services and more. This strategic alliance is a progressive step in
the Bank's strategy to continue to create an expanded platform of products and
services for a more diversified earnings stream for long-term growth and
profitability.
ENHANCEMENT OF TECHNOLOGY:
The influence of technology is changing every facet of business and personal
life. While we are always investigating and evaluating new technology for cost
efficiency, productivity and the benefit to our customers, we will never forget
that banking is first and foremost a people and relationship business.
This year we initiated our website. Information concerning all our products,
services, locations, hours and career opportunities is now available to our
customers and the public with a click of the mouse. We are currently working
towards our goal of providing on-line banking through our web page and
anticipate completing the installation by the fourth quarter of 2002. Please
visit our website at www.esbbank.com.
In January we completed the installation of a "24 Hour Telephone Banking" voice
response unit. This system provides routine banking services "24/7", 24 hours a
day, seven days a week through a toll free telephone number. Although in service
for a little over a year, we currently average over 10,000 calls a month for
this free service.
During 2002, we will continue to evaluate our technology and explore new
alternatives in order to provide the best management information systems
possible and to better serve our customers.
BRANCH OFFICE EXPANSION:
In October, we completed the renovation of our Center Township office expanding
it from a limited service facility to an approximately 3,000 square foot full
service branch. This expansion now affords our customers six teller windows, a
24 hour drive up ATM, safety deposit boxes and several customer service offices
to conduct lending activity and to provide brokerage and financial advisory
services. The results of the expansion have been encouraging as evidenced by the
significant deposit gains during the fourth quarter of 2001.
4
LETTER TO SHAREHOLDERS (CONTINUED)
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On a personal note, it is with much sorrow that I report the death of Harry
Thaner, retired Chairman of the Board of Troy Hill Bancorp, Inc., and a member
of our advisory board, who passed away suddenly on January 7, 2002. Harry's
dedication, commitment and enthusiasm for the organization as well as his
friendship and ready smile will be greatly missed.
We were all shocked with the tragic and unimaginable series of events on
September 11, 2001 with the terrorist attacks in New York City, at the Pentagon
and on a commercial airline flight near Shanksville, Pennsylvania. While these
events will forever continue to weigh heavily on our hearts and in our minds, I
am truly proud of the way our employees, officers and directors responded to the
crisis in terms of their generosity and their genuine concern for the victims'
families and rescue personnel. We were privileged to support several of the
designated charitable organizations with donations in the amount of $29,665.
Various employee fundraisers and individual donations from employees, officers
and directors with matching Bank funds all contributed to this heartfelt effort.
Our thoughts and prayers go to the families and friends of the victims and to
our country, our leaders and our armed forces as our nation fights the battle
against terrorism.
ESB Bank is a full service community bank that offers "Quality Financial
Service." For A Quality Life." With the recent formation of PFAS and the
strategic alliance with Raymond James Financial Services, Inc., we now provide a
vast range of financial products and services to address our customers'
diversified financial needs. We invite all our shareholders to consider making
ESB Bank your primary financial service provider.
We thank you for your investment in ESB Financial Corporation and continue to
seek your support and suggestions on how we can provide the greatest value to
both our shareholders and to our customers. I can assure you that we are all
committed to the success of the Company through maximizing the return to our
shareholders and satisfaction to our customers. On behalf of all our dedicated
employees, officers and directors, we thank you for your vote of confidence by
your ownership in ESB Financial Corporation.
Sincerely,
/s/ Charlotte A. Zuschlag
Charlotte A. Zuschlag
President and Chief Executive Officer
5
SELECTED CONSOLIDATED FINANCIAL DATA
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(Dollar amounts in thousands, except share data)
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AS OF DECEMBER 31,
FINANCIAL CONDITION DATA 2001(1) 2000(1) 1999 1998 1997
- ------------------------
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Total assets $ 1,262,449 $ 1,200,150 $ 1,032,445 $ 972,438 $ 910,770
Securities 640,282 605,414 561,125 545,049 518,021
Loans receivable, net 527,485 512,228 393,929 360,280 336,757
Deposits 592,052 508,913 431,783 423,051 399,568
Borrowed funds, including subordinated debt 577,802 612,204 543,627 480,382 435,170
Stockholders' equity 79,903 68,263 49,882 61,083 68,509
Stockholders' equity per common share(2) $10.92 $9.47 $7.41 $8.79 $8.96
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FOR THE YEAR ENDED DECEMBER 31,
OPERATIONS DATA 2001 (1) 2000 (1) 1999 1998 1997
- ---------------
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Net interest income $ 19,877 $ 19,366 $ 16,263 $ 16,651 $ 16,665
Provision for (recovery of) loan losses 47 (55) 54 5 799
------------ ------------- ------------- ------------- ---------
Net interest income after provision for (recovery of)
loan losses 19,830 19,421 16,209 16,646 15,866
Noninterest income 4,797 2,893 3,056 1,939 1,075
Noninterest expense 15,391 14,338 12,427 11,067 9,510
------------ ------------- ------------- ------------- ---------
Net income before income taxes and extraordinary item 9,236 7,976 6,838 7,518 7,431
Provision for income taxes 1,524 1,243 1,077 1,517 1,984
------------ ------------- ------------- ------------- ---------
Income before extraordinary item 7,712 6,733 5,761 6,001 5,447
Extraordinary item, net of tax (483) - - - -
------------ ------------- ------------- ------------- ---------
Net income $ 7,229 $ 6,733 $ 5,761 $ 6,001 $ 5,447
============ ============= ============= ============= =========
Net income per common share after extraordinary item:(2)
Basic $1.06 $0.98 $0.88 $0.85 $0.78
Diluted $1.03 $0.97 $0.86 $0.82 $0.74
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AS OF OR FOR THE YEAR ENDED DECEMBER 31,
OTHER DATA 2001(1) 2000(1) 1999 1998 1997
- ----------
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PERFORMANCE RATIOS (FOR THE YEAR ENDED)
Return on average assets 0.59% 0.59% 0.57% 0.63% 0.68%
Return on average equity 9.49% 11.71% 9.93% 9.10% 8.64%
Return on average equity, excluding comprehensive income(3) 9.83% 9.76% 9.38% 9.33% 8.84%
Average equity to average assets 6.23% 5.03% 5.79% 6.93% 7.92%
Interest rate spread(4) 1.70% 1.85% 1.73% 1.71% 1.96%
Net interest margin (4) 1.91% 1.97% 1.96% 2.07% 2.34%
Efficiency ratio (4)(5) 58.58% 55.36% 54.34% 49.13% 45.56%
Noninterest expense to average assets(6) 1.32% 1.25% 1.24% 1.16% 1.20%
Dividend payout ratio(7) 35.53% 31.38% 31.86% 32.59% 31.80%
ASSET QUALITY RATIOS (AS OF YEAR END)
Non-performing loans to total loans 0.46% 0.49% 1.04% 1.31% 1.08%
Non-performing assets to total assets 0.32% 0.37% 0.43% 0.51% 0.45%
Allowance for loan losses to total loans 0.94% 0.92% 1.16% 1.26% 1.36%
Allowance for loan losses to non-performing loans 205.72% 188.96% 111.29% 96.67% 126.43%
CAPITAL RATIOS (AS OF YEAR END)
Stockholders' equity to assets 6.33% 5.69% 4.83% 6.28% 7.52%
Tangible stockholders' equity to tangible assets 5.73% 5.09% 4.25% 5.61% 6.76%
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(1) Selected consolidated financial data for 2001 and 2000 reflects
increases due to the mergers with WSB and SHS, respectively, as noted
on page 8.
(2) Stockholders' equity, basic net income and diluted net income, per
common share for the years ended December 31, 2000 to December 31, 1997
have been adjusted for the six-for-five stock split declared and paid
in the second quarter of 2001. Also, the years ended December 31, 1999
to December 31, 1997 have been adjusted for the 10% stock dividend
declared and paid in the second quarter of 2000. Also, the year ended
December 31, 1997 has been adjusted for the 10% stock dividend declared
and paid in the second quarter of 1998.
(3) Excludes the effect of the mark to market, net of tax, on the
securities available for sale portfolio, which comprises comprehensive
income.
(4) Interest income utilized in calculation is on a fully tax equivalent
basis.
(5) The efficiency ratio without the extraordinary item, noted on page 14,
would have been 55.79% for the year ended December 31, 2001.
(6) Noninterest expense to average assets excluding the extraordinary item
for the year 2001, noted on page 14, would have been 1.26%.
(7) Dividend payout ratio calculation utilizes diluted net income per share
for all periods.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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OVERVIEW
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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, 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 residential and commercial loan closing services and
title closing services.
ESB is a federally chartered, Federal Deposit Insurance Corporation (FDIC)
insured stock savings bank, which conducts business through 17 offices in
Allegheny, Beaver, Butler and Lawrence counties, Pennsylvania. ESB operates
three wholly-owned subsidiaries: (i) AMSCO, Inc., which engages in the
management of certain real estate development partnerships on behalf of the
Company, (ii) ESB Financial Services, Inc., a Delaware corporation and (iii)
PennFirst Financial Advisory Services, Inc., which entered into a strategic
alliance with Raymond James Financial Services, Inc., to make available a vast
array of nondeposit investment products and financial advisory services for
individuals and corporations served by ESB Bank.
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.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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SIGNIFICANT FINANCIAL EVENTS IN 2001
- ------------------------------------
MERGER OF WSB HOLDING COMPANY
On October 1, 2001, the Company completed its acquisition of WSB Holding Company
(WSB) and its subsidiary, Workingmens Bank, headquartered on the North Shore of
Pittsburgh. Workingmens had two community offices located in Allegheny County.
The acquisition was accounted for under the purchase method of accounting. Each
shareholder of WSB had the right to elect to receive either $17.10 in cash or
1.414 shares of Company common stock for each share of WSB common stock owned.
The total merger consideration was payable 51% in Company common stock and 49%
in cash. As a result of these elections, the consideration paid by the Company
in connection with the acquisition consisted of $3.3 million in cash and 216,000
shares of the Company's common stock.
At the acquisition date, the fair value of WSB's total consolidated assets was
$46.2 million, including loans receivable of $18.9 million and core deposit
intangible of $926,000. The fair value of total consolidated liabilities was
$40.6 million, including deposits of $39.6 million. Goodwill arising from this
transaction was $315,000.
STOCK SPLIT AND CASH DIVIDENDS
On April 17, 2001, the Board of Directors declared a six-for-five stock split to
stockholders of record on May 18, 2001 and payable on May 30, 2001. This stock
split, combined with the Company's maintaining the current quarterly cash
dividend of $0.10 per share, effectively increased the cash payout to
stockholders by 20%. All share and related price and dividend amounts discussed
herein have been adjusted to reflect this stock split where applicable.
SIGNIFICANT FINANCIAL EVENTS IN 2000
- ------------------------------------
MERGER OF SHS BANCORP, INC.
On February 10, 2000, the Company completed its acquisition of SHS Bancorp, Inc.
(SHS) and its subsidiary, Spring Hill Savings Bank, F.S.B., based in Pittsburgh,
Pennsylvania. Spring Hill was merged with and into ESB at the close of business
on May 5, 2000.
The acquisition was accounted for under the purchase method of accounting. Each
shareholder of SHS had the right to elect to receive either $17.80 in cash or
1.3 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. As a result of these elections, the consideration paid by the Company in
connection with the acquisition consisted of $6.4 million in cash and 599,000
shares of the Company's common stock. In addition, options to purchase shares of
SHS by SHS officers and directors were converted into options to acquire 43,000
shares of the Company's common stock.
At the acquisition date, the fair value of SHS' total consolidated assets was
$92.7 million, including loans receivable of $60.8 million. The fair value of
total consolidated liabilities was $79.1 million, including deposits of $67.1
million. Goodwill arising from this transaction was $2.1 million.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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DIVIDENDS
On April 18, 2000, the Board of Directors declared a 10% stock dividend to
stockholders of record on May 17, 2000 and payable on May 31, 2000. All share
and related price and dividend amounts discussed herein have been adjusted to
reflect this stock dividend where applicable. Also in 2000, the Board of
Directors approved a change to the Company's dividend policy by increasing the
quarterly cash dividend from $.09 per share (prior to the stock dividend in 2000
and the subsequent stock split in 2001) to $.10 per share.
CHANGES IN FINANCIAL CONDITION
- ------------------------------
GENERAL. The Company's total assets increased a net $62.3 million or 5.2% to
$1.3 billion at December 31, 2001 from $1.2 billion at December 31, 2000. This
increase was composed of a net increase in securities of $34.9 million, net
loans receivable of $15.3 million and bank owned life insurance of $5.9 million.
The increase in net loans receivable resulted primarily from the acquisition of
WSB.
The increase in the Company's total assets reflects a corresponding increase in
total liabilities of $50.7 million or 4.5% to $1.2 billion at December 31, 2001
from $1.1 billion at December 31, 2000 and an increase in total stockholders'
equity of $11.6 million or 17.1% to $79.9 million at December 31, 2001 from
$68.3 million at December 31, 2000. The increase in total liabilities was
primarily due to increases in deposits of $83.1 million, partially offset by a
decrease in borrowed funds of $34.4 million. The net increase in total
stockholders' equity can be attributed primarily to increases in accumulated
other comprehensive income of $5.0 million, retained earnings of $4.3 million
and, to a lesser extent, the $2.7 million issuance of the Company's common stock
to partially fund the WSB acquisition.
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 $2.2 million to $15.5 million at December 31, 2001
from $13.3 million at December 31, 2000. Deposits from customers into savings
and checking accounts, loan and security repayments and proceeds from borrowed
funds typically increase these accounts. Decreases result from customer
withdrawals, new loan originations, security purchases and repayments of
borrowed funds. The net increase between December 31, 2001 and December 31, 2000
can be attributed principally to increases in deposits and loan repayments.
SECURITIES. The Company's securities portfolio increased a net $34.9 million or
5.8% to $640.3 million at December 31, 2001 from $605.4 million at December 31,
2000. This net increase was the result of $222.0 million of purchases consisting
primarily of $166.2 million of mortgage-backed securities, $39.1 million of
corporate bonds and $16.4 million of municipal bonds, partially offset by $141.7
million of maturities and repayments of principal, and $70.9 million of
securities sold consisting primarily of $43.4 million of mortgage-backed
securities, $14.6 million of agency bonds, $9.6 million of municipal securities,
$2.0 million of equities, $1.4 million of corporate bonds and an increase in the
unrealized gain on securities available for sale of $7.6 million (before taxes)
during the year.
LOANS RECEIVABLE. Net loans receivable increased a net $15.3 million or 3.0% to
$527.5 million at December 31, 2001 from $512.2 million at December 31, 2000.
The increase in loans receivable can be attributed to the addition of WSB's
loans receivable as a result of the merger of approximately $18.9 million.
Mortgage loans increased $5.0 million or 1.1% while other loans increased $2.3
million or 2.9%. In addition to the increase in loans was a decrease to loans in
process of $7.2 million.
NON-PERFORMING ASSETS. Non-performing assets include non-accrual loans and real
estate acquired through foreclosure (REO). Non-performing assets decreased
$361,000 to $4.1 million or 0.32% of total assets at December 31, 2001 from $4.4
million or 0.37% of total assets at December 31, 2000. Non-performing assets
consisted of non-performing loans and REO of $2.5 million and $1.6 million,
respectively, at December 31, 2001 and non-performing loans and REO of $2.6
million and $1.8 million, respectively, at December 31, 2000.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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ACCRUED INTEREST RECEIVABLE. Accrued interest receivable remained stable at $8.2
million for the year 2001, which reflects an increase in the average interest
earning assets for the period and a corresponding decrease in the rate earned on
those assets.
FHLB STOCK. FHLB stock increased $2.0 million or 10.0% to $21.9 million at
December 31, 2001 from $19.9 million at December 31, 2000, primarily as a result
of the increase in FHLB advances.
PREMISES AND EQUIPMENT. Premises and equipment increased $1.0 million or 11.3%
to $10.0 million at December 31, 2001 from $9.0 million at December 31, 2000,
primarily as a result of the construction costs associated with the renovation
and expansion of the Center Township office and the acquisition of WSB.
PREPAID EXPENSES AND OTHER ASSETS. Prepaid expenses and other assets increased
$1.4 million or 10.0% to $15.0 million at December 31, 2001 from $13.6 million
at December 31, 2000. This net increase can primarily be attributed to increases
in investment in joint ventures of $2.2 million.
BANK OWNED LIFE INSURANCE. Bank owned life insurance (BOLI) is universal life
insurance, purchased by the Bank, on the lives of the Bank's employees. The
beneficial aspects of these universal life insurance policies are tax-free
earnings and a tax-free death benefit, which are realized by ESB as the owner of
the policies. The Company purchased the $15.0 million universal life insurance
policies on December 29, 1998. In 2001, the policy was increased by the addition
of WSB's BOLI of $1.3 million and an addition to the original policy of $3.5
million. The cash surrender value as of December 31, 2001 is $22.5 million.
DEPOSITS. Total deposits increased $83.1 million or 16.3% to $592.1 million at
December 31, 2001 from $508.9 million at December 31, 2000. Included in this
increase was the assumption of WSB's deposits associated with the merger of
approximately $39.6 million and internal deposit growth by the Company of
approximately $43.5 million. For the year, the Company's interest-bearing demand
deposits increased $22.8 million or 12.7%, time deposits increased $53.8 million
or 16.8% and noninterest-bearing deposits increased $6.5 million or 67.8%.
ADVANCE PAYMENTS BY BORROWERS FOR TAXES AND INSURANCE. Advance payments by
borrowers for taxes and insurance decreased $582,000 or 12.5% to $4.1 million at
December 31, 2001 from $4.6 million at December 31, 2000.
BORROWED FUNDS. Borrowed funds primarily include FHLB advances and repurchase
agreement borrowings. Borrowed funds decreased $34.4 million or 5.9% to $553.6
million at December 31, 2001 from $588.1 million at December 31, 2000. This
decrease was primarily the result of the Company utilizing deposits and loan
repayments to fund the increase in loans receivable and securities. FHLB
advances increased $37.2 million or 9.4% and repurchase agreements decreased
$71.6 million or 37.5%.
ACCRUED EXPENSES AND OTHER LIABILITIES. Accrued expenses and other liabilities
increased $2.5 million or 40.9% to $8.6 million at December 31, 2001 from $6.1
million at December 31, 2000. This increase can primarily be attributed to the
acquisition of WSB.
STOCKHOLDERS' EQUITY. Stockholders' equity increased by $11.6 million or 17.1%
to $79.9 million at December 31, 2001 from $68.3 million at December 31, 2000.
This increase was the result of increases in accumulated other comprehensive
income of $5.0 million, retained earnings of $4.3 million and, to a lesser
extent, the $2.7 million issuance of the Company's common stock to partially
fund the WSB acquisition.
10
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 $7.2 million, $6.7 million and $5.8
million in 2001, 2000 and 1999, 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%.
- -----------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) YEAR ENDED DECEMBER 31,
2001 2000
----------------------------------- --------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
- -----------------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
Taxable securities available for sale $ 459,812 $30,074 6.54% $ 459,316 $30,929 6.73%
Taxable adjustable corporate bonds AFS 57,015 2,959 5.12% 52,672 3,854 7.20%
Tax-exempt securities available for sale 89,270 7,200 8.07% 90,970 7,422 8.16%
Taxable securities held to maturity - - - - - -
Tax-exempt securities held to maturity - - - - - -
--------------------------------- ---------------------------------
606,097 40,233 6.64% 602,958 42,205 6.99%
--------------------------------- ---------------------------------
Mortgage loans 448,979 33,944 7.56% 402,599 31,220 7.75%
Other loans 81,452 6,272 7.70% 75,881 5,837 7.69%
--------------------------------- ---------------------------------
530,431 40,216 7.58% 478,480 37,057 7.74%
--------------------------------- ---------------------------------
Cash equivalents 9,055 274 3.03% 9,554 364 3.81%
FHLB stock 21,418 1,391 6.49% 19,224 1,359 7.07%
--------------------------------- ---------------------------------
30,473 1,665 5.46% 28,778 1,723 5.99%
--------------------------------- ---------------------------------
TOTAL INTEREST-EARNING ASSETS 1,167,001 82,114 7.03% 1,110,216 80,985 7.40%
Other noninterest-earning assets 54,688 - - 32,915 - -
--------------------------------- ---------------------------------
Total assets $1,221,689 $82,114 6.72% $1,143,131 $80,985 7.08%
================================= =================================
INTEREST-BEARING LIABILITIES:
Interest-bearing demand deposits $ 184,046 $ 3,861 2.10% $ 181,709 $ 4,472 2.46%
Time deposits 338,222 18,805 5.56% 302,660 17,357 5.73%
--------------------------------- ---------------------------------
522,268 22,666 4.34% 484,369 21,829 4.51%
FHLB advances 417,081 25,376 6.08% 334,987 21,468 6.41%
Repurchase agreements 157,283 9,522 6.05% 220,762 13,573 6.15%
Preferred securities 24,137 2,226 9.22% 24,093 2,226 9.24%
--------------------------------- ---------------------------------
TOTAL INTEREST-BEARING LIABILITIES 1,120,769 59,790 5.33% 1,064,211 59,096 5.55%
Noninterest-bearing demand deposits 15,799 - - 13,319 - -
Other noninterest-bearing liabilities 8,976 - - 8,114 - -
--------------------------------- ---------------------------------
Total liabilities 1,145,544 59,790 5.22% 1,085,644 59,096 5.44%
Stockholders' equity 76,145 - - 57,487 - -
--------------------------------- ---------------------------------
Total liabilities and equity $1,221,689 $59,790 4.89% $1,143,131 $59,096 5.17%
================================= =================================
NET INTEREST INCOME $22,324 $21,889
======= =======
INTEREST RATE SPREAD (difference between
weighted average rate on interest-earning
assets and interest-bearing liabilities) 1.70% 1.85%
==== ====
NET INTEREST MARGIN (net interest
income as a percentage of average
interest-earning assets) 1.91% 1.97%
==== ====
- ------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
(Dollar amounts in thousands) YEAR ENDED DECEMBER 31,
1999
----------------------------------
AVERAGE YIELD/
BALANCE INTEREST RATE
- -------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
Taxable securities available for sale $392,874 $25,103 6.39%
Taxable adjustable corporate bonds AFS 52,657 3,236 6.06%
Tax-exempt securities available for sale 92,952 7,633 8.21%
Taxable securities held to maturity 23,348 1,211 5.19%
Tax-exempt securities held to maturity 3,664 266 7.26%
-----------------------------------
565,495 37,449 6.61%
-----------------------------------
Mortgage loans 307,077 23,257 7.57%
Other loans 69,171 5,299 7.66%
-----------------------------------
376,248 28,556 7.59%
-----------------------------------
Cash equivalents 8,000 252 3.15%
FHLB stock 18,435 1,222 6.63%
-----------------------------------
26,435 1,474 5.58%
-----------------------------------
TOTAL INTEREST-EARNING ASSETS 968,178 67,479 6.97%
Other noninterest-earning assets 34,914 - -
-----------------------------------
Total assets $1,003,092 $67,479 6.72%
===================================
INTEREST-BEARING LIABILITIES:
Interest-bearing demand deposits $162,501 $3,877 2.39%
Time deposits 254,869 13,540 5.31%
-----------------------------------
417,370 17,417 4.17%
FHLB advances 319,011 19,516 6.12%
Repurchase agreements 166,012 9,370 5.64%
Preferred securities 24,049 2,226 9.26%
-----------------------------------
TOTAL INTEREST-BEARING LIABILITIES 926,442 48,529 5.24%
Noninterest-bearing demand deposits 11,339 - -
Other noninterest-bearing liabilities 7,276 - -
-----------------------------------
Total liabilities 945,057 48,529 5.14%
Stockholders' equity 58,035 - -
-----------------------------------
Total liabilities and equity $1,003,092 $48,529 4.84%
===================================
NET INTEREST INCOME $18,950
=======
INTEREST RATE SPREAD (difference between
weighted average rate on interest-earning
assets and interest-bearing liabilities) 1.73%
====
NET INTEREST MARGIN (net interest
income as a percentage of average
interest-earning assets) 1.96%
====
- -----------------------------------------------------------------------------------
11
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: (i) changes in
volume of interest-earning assets and interest-bearing liabilities and (ii)
changes in yield 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.
- ----------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) 2001 vs. 2000 2000 vs. 1999
Increase (decrease) due to Increase (decrease) due to
------------------------------------ ------------------------------------
Volume Rate Total Volume Rate Total
- ----------------------------------------------------------------------------------------------------------------------------
Interest income:
Securities $ 219 $ (2,191) $ (1,972) $ 2,557 $ 2,199 $ 4,756
Loans 3,953 (794) 3,159 7,907 594 8,501
Cash equivalents (18) (72) (90) 54 58 112
FHLB stock 148 (116) 32 54 83 137
---------- ---------- ----------- ---------- ---------- -----------
Total interest-earning assets 4,302 (3,173) 1,129 10,572 2,934 13,506
---------- ---------- ----------- ---------- ---------- -----------
Interest expense:
Deposits 1,665 (828) 837 2,945 1,467 4,412
FHLB advances 5,040 (1,132) 3,908 1,001 951 1,952
Repurchase agreements (3,846) (205) (4,051) 3,307 896 4,203
Subordinated debt 3 (3) - 4 (4) -
---------- ---------- ----------- ---------- ---------- -----------
Total interest-bearing liabilities 2,862 (2,168) 694 7,257 3,310 10,567
---------- ---------- ----------- ---------- ---------- -----------
Net interest income $ 1,440 $ (1,005) $ 435 $ 3,315 $ (376) $ 2,939
========== ========== =========== ========== ========== ===========
- ----------------------------------------------------------------------------------------------------------------------------
2001 RESULTS COMPARED TO 2000 RESULTS
GENERAL. The Company reported net income of $7.2 million, inclusive of an
extraordinary charge of $483,000, net of tax, and $6.7 million for 2001 and
2000, respectively. The $496,000 or 7.4% increase in net income between 2001 and
2000 can primarily be attributed to increases in interest income and noninterest
income of $1.2 million and $1.9 million, respectively, offset by increases in
interest expense and noninterest expense of $694,000 and $1.1 million,
respectively. The year ended December 31, 2000 included a one-time recovery of
$605,000 associated with the Company's Bennett lease pools which was received
from the Bankruptcy Trustee on certain previously reserved non-performing lease
loans. Without the recovery, net income would have been $6.4 million for the
year ended December 31, 2000 and would reflect an increase of $866,000 for the
year ended December 31, 2001, inclusive of the extraordinary charge.
NET INTEREST INCOME. Net interest income increased $511,000 or 2.6% to $19.9
million for 2001, compared to $19.4 million for 2000. This increase in net
interest income can be attributed to an increase in interest income of $1.2
million, offset by an increase in interest expense of $694,000.
INTEREST INCOME. Interest income increased $1.2 million or 1.5% to $79.7 million
for 2001, compared to $78.5 million for 2000. This increase in interest income
can be attributed to an increase in interest earned on loans receivable of $3.2
million, partially offset by a decrease in interest earned on securities of $1.9
million.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
Interest earned on loans receivable increased $3.2 million or 8.5% to $40.2
million for 2001, compared to $37.1 million for 2000. This increase was
primarily attributable to an increase in the average balance of loans
outstanding of $52.0 million or 10.9% to $530.4 million for 2001, compared to
$478.5 million for 2000. Partially offsetting this volume increase was a
decrease in the yield on loans to 7.58% for 2001, compared to 7.74% for 2000.
Interest earned on securities decreased $1.9 million or 4.8% to $37.8 million
for 2001, compared to $39.7 million for 2000. This decrease was primarily
attributable to a decrease in the tax equivalent yield on securities to 6.64%
for 2001, compared to 6.99% for 2000, offset slightly by an increase in the
average balances of $3.1 million for 2001 as compared to 2000.
Income from FHLB stock increased $32,000 or 2.4% to $1.4 million for 2001,
compared to $1.4 million for 2000. This nominal increase can be attributed to an
increase in the average balance of $2.2 million or 11.4% to $21.4 million for
2001, compared to $19.2 million for 2000. Offsetting this increase was a
decrease in the yield on FHLB stock to 6.49% for 2001, compared to 7.07% for
2000.
Interest earned on cash equivalents decreased $90,000 or 24.7% to $274,000 for
2001, compared to $364,000 for 2000 as the yield decreased to 3.03% for 2001,
compared to 3.81% for 2000. In addition to the decrease in yields, the average
balance decreased by $499,000 or 5.2%.
INTEREST EXPENSE. Interest expense increased $694,000 or 1.2% to $59.8 million
for 2001, compared to $59.1 million for 2000. This increase in interest expense
can be attributed to an increase in interest incurred on deposits of $837,000,
offset by a decrease in interest incurred on FHLB advances, repurchase
agreements and other borrowings of $143,000.
Interest incurred on deposits increased $837,000 or 3.8% to $22.7 million for
2001, compared to $21.8 million for 2000. This increase was primarily
attributable to an increase in the average balance of interest-bearing deposits
of $37.9 million or 7.8% to $522.3 million for 2001, compared to $484.4 million
for 2000, offset partially by a decrease in the cost of deposits to 4.34% in
2001 from 4.51% in 2000.
Interest incurred on FHLB advances and repurchase agreements decreased $143,000
or 0.4% to $34.9 million for 2001, compared to $35.0 million for 2000. This
decrease was primarily attributable to a decrease in the cost of these funds to
6.08% for 2001, compared to 6.31% for 2000. Partially offsetting the decrease in
the cost of funds was an increase in the average balance of FHLB advances and
repurchase agreements of $18.6 million or 3.3% to $574.4 million for 2001,
compared to $555.7 million for 2000.
Interest expense on subordinated debt remained stable at $2.2 million for 2001.
The average balance of the subordinated debt was consistent from year to year at
$24.1 million.
PROVISION FOR (RECOVERY OF) 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 increased $102,000 reflecting a provision for loan
losses of $47,000 for 2001, compared to a recovery of loan losses of $55,000 for
2000. The increase in the provision for loan losses between the periods is due
to a reflection of the $605,000 recovery recorded in January 2000 associated
with the Company's Bennett Lease pools which was received from the Bankruptcy
Trustee.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
As a result of the provision for and recovery of loan losses during 2001 and
2000 and the acquisition of WSB in 2001, the Company's allowance for loan losses
amounted to $5.1 million or 0.94% of the Company's total loan portfolio at
December 31, 2001, compared to $5.0 million or 0.92% at December 31, 2000. The
Company's allowance for loan losses as a percentage of non-performing loans at
December 31, 2001 and December 31, 2000 was 205.72 % and 188.96%, respectively.
At December 31, 2001, the Company had $859,000 in outstanding Bennett Funding
Group leases, compared to $876,000 at December 31, 2000. The total loan loss
reserves associated with these leases were $859,000 at December 31, 2001.
NONINTEREST INCOME. Noninterest income increased $1.9 million or 65.8% to $4.8
million for 2001, compared to $2.9 million for 2000. This increase can be
attributed to increases in net realized gain on sales of securities available
for sale, fees and service charges, the cash surrender value of the bank owned
life insurance and other noninterest income of $941,000, $542,000, $236,000 and
$185,000, respectively.
NONINTEREST EXPENSE. Noninterest expense increased $1.1 million or 7.3% to $15.4
million for 2001, compared to $14.3 million for 2000. This increase can be
primarily attributed to increases in compensation and employee benefits and
premises and equipment of $805,000 and $281,000, respectively.
Compensation and employee benefits expense increased $805,000 or 10.0% to $8.8
million for 2001, compared to $8.0 million for 2000. This increase can be
attributed to the addition of WSB's employees in connection with the acquisition
during the fourth quarter and normal salary increases between the years.
Premises and equipment expense increased $281,000 or 14.4% to $2.2 million for
2001, compared to $1.9 million for 2000. This increase can be attributed to the
acquisition of WSB and increases in depreciation and branch office expenses.
Federal insurance premiums expense increased $4,000 or 4.0% to $103,000 for
2001, compared to $99,000 for 2000. The increase can be attributed to the
acquisition of WSB.
Data processing expense decreased $12,000 or 2.1% to $568,000 for 2001, compared
to $580,000 for 2000. This decrease can be attributed to the one-time conversion
costs incurred in 2000 associated with the SHS conversion, offset partially by
conversion costs related to the WSB conversion.
Other expenses decreased $25,000 or 0.7% to $3.7 million for 2001, compared to
$3.7 million for 2000. This decrease can be attributed to a decrease in audit
and accounting expenses and consulting fees of $288,000, partially offset by
increases to REO, supplies, postage and telephone expenses of $92,000, $57,000,
$54,000 and $36,000, respectively. The increase in the telephone expense can be
attributed to the addition of the 24-hour voice response telephone banking
system.
PROVISION FOR INCOME TAXES. The provision for income taxes increased $281,000 or
22.6% to $1.5 million for 2001, compared to $1.2 million for 2000. This increase
was primarily the result of an increase in income before income taxes of $1.3
million or 15.8% to $9.2 million for 2001, compared to $8.0 million for 2000.
EXTRAORDINARY ITEM. During the year ended December 31, 2001, the Company
incurred an extraordinary charge of $483,000, net of tax. This extraordinary
item was the result of early prepayment penalties incurred in the prepayment of
$20.0 million of the Company's long-term debt that occurred during a combined
restructuring of the Company's assets and liabilities. The penalties that were
incurred on the prepayment of the long-term debt were offset by gains on the
sales of securities that were used in the restructuring. The overall
restructuring resulted in a reduction to the Company's interest expense for the
period and a prospective improvement to future net interest income.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
2000 RESULTS COMPARED TO 1999 RESULTS
GENERAL. The Company reported net income of $6.7 million and $5.8 million for
2000 and 1999, respectively. The $972,000 increase in net income between 2000
and 1999 can primarily be attributed to an increase in interest income of $13.7
million, offset by increases in interest expense and noninterest expense of
$10.6 million and $1.9 million, respectively.
NET INTEREST INCOME. Net interest income increased $3.1 million or 19.1% to
$19.4 million for 2000, compared to $16.3 million for 1999. This increase in net
interest income can be attributed to an increase in interest income of $13.7
million, offset by an increase in interest expense of $10.6 million.
INTEREST INCOME. Interest income increased $13.7 million or 21.1% to $78.5
million for 2000, compared to $64.8 million for 1999. This increase in interest
income can be attributed to increases in interest earned on securities, loans
receivable, cash equivalents and FHLB stock of $4.9 million, $8.5 million,
$112,000 and $137,000, respectively.
Interest earned on loans receivable increased $8.5 million or 29.8% to $37.1
million for 2000, compared to $28.6 million for 1999. This increase was
primarily attributable to an increase in the average balance of loans
outstanding of $102.2 million or 27.2% to $478.5 million for 2000 compared to
$376.2 million for 1999. In addition to this volume increase was an increase in
the yield on loans to 7.74% for 2000, compared to 7.59% for 1999.
Interest earned on securities increased $4.9 million to $39.7 million for 2000,
compared to $34.8 million for 1999. This increase was primarily attributable to
an increase in the tax equivalent yield on securities to 6.99% for 2000,
compared to 6.61% for 1999, and also to an increase in the average balances of
$37.5 million for 2000 as compared to 1999.
Income from FHLB stock increased $137,000 to $1.4 million for 2000, compared to
$1.2 million for 1999 as the yield increased to 7.07% for 2000, compared to
6.63% for 1999. In addition to the increase in yields, the average balance
increased by $789,000 or 4.3%.
Interest earned on cash equivalents increased $112,000 to $364,000 for 2000,
compared to $252,000 for 1999 as the yield increased to 3.81% for 2000, compared
to 3.15% for 1999. In addition to the increase in yields, the average balance
increased by $1.6 million or 19.4%.
INTEREST EXPENSE. Interest expense increased $10.6 million or 21.8% to $59.1
million for 2000, compared to $48.5 million for 1999. This increase in interest
expense can be attributed to increases in interest incurred on deposits, FHLB
advances and repurchase agreements and other borrowings of $4.4 million, $2.0
million and $4.2 million, respectively.
Interest incurred on deposits increased $4.4 million or 25.3% to $21.8 million
for 2000, compared to $17.4 million for 1999. This increase was primarily
attributable to an increase in the average balance of interest-bearing deposits
of $67.0 million or 16.1% to $484.4 million for 2000 compared to $417.4 million
for 1999, and, to a lesser extent, an increase in the cost of deposits to 4.51%
in 2000 from 4.17% in 1999.
Interest incurred on FHLB advances increased $2.0 million or 10.0% to $21.5
million for 2000, compared to $19.5 million for 1999. This increase was
primarily attributable to an increase in the average balance of FHLB advances of
$16.0 million or 5.0% to $335.0 million for 2000, compared to $319.0 million for
1999. Also contributing to the increase was an increase in the cost of these
funds to 6.41% for 2000, compared to 6.12% for 1999.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
Interest incurred on repurchase agreements increased $4.2 million or 44.9% to
$13.6 million for 2000, compared to $9.4 million for 1999. The increase was
primarily attributable to an increase in the average balance of repurchase
agreements of $54.8 million or 33.0% to $220.8 million for 2000, compared to
$166.0 million for 1999. The increase in the average balance was a result of the
Company's decision to enter into repurchase agreements during the period due to
their lower cost of funds. Also contributing to this increase in the interest
incurred on repurchase agreements was an increase in the cost of these funds to
6.15% in 2000, compared to 5.64% for 1999.
Interest expense on subordinated debt remained stable at $2.2 million for 2000.
(RECOVERY OF) 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 $109,000 reflecting a recovery of loan
losses of $55,000 for 2000, compared to a $54,000 provision for loan losses for
1999. The decrease in the provision for loan losses can be attributed to a
$605,000 recovery recorded in January associated with the Company's Bennett
Lease pools which was received from the Bankruptcy Trustee, offset by provisions
for loan losses of $550,000 recorded during the year.
As a result of the recovery of and provision for loan losses during 2000 and
1999, the Company's allowance for loan losses amounted to $5.0 million or .92%
of the Company's total loan portfolio at December 31, 2000, compared to $4.8
million or 1.16% at December 31, 1999. The Company's allowance for loan losses
as a percentage of non-performing loans at December 31, 2000 and December 31,
1999 was 188.96 % and 111.29%, respectively.
At December 31, 2000, the Company had $876,000 in outstanding Bennett Funding
Group leases, compared to $1.6 million at December 31, 1999. The total loan loss
reserves associated with these leases were $876,000 at December 31, 2000.
NONINTEREST INCOME. Noninterest income decreased $163,000 or 5.3% to $2.9
million for 2000, compared to $3.1 million for 1999. This decrease can be
attributed to increases in net realized losses on sales of securities available
for sale of $572,000, offset by increases in fees and service charges of
$162,000, the cash surrender value of the bank owned life insurance of $80,000
and other noninterest income of $167,000.
NONINTEREST EXPENSE. Noninterest expense increased $1.9 million or 15.4% to
$14.3 million for 2000, compared to $12.4 million for 1999. This increase can be
attributed to increases in compensation and employee benefits, premises and
equipment, data processing expense and other expenses of $1.3 million, $430,000,
$17,000 and $346,000, respectively, offset by a decrease in federal insurance
premiums of $151,000.
Compensation and employee benefits expense increased $1.3 million or 18.8% to
$8.0 million for 2000, compared to $6.8 million for 1999. This increase can be
attributed to the addition of SHS' employees in connection with the acquisition
and normal salary increases between the years.
Premises and equipment expense increased $430,000 or 28.4% to $1.9 million for
2000, compared to $1.5 million for 1999. This increase can be attributed to the
acquisition of SHS, and the depreciation expense relating to the main office
expansion.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
Federal insurance premiums expense decreased $151,000 or 60.4% to $99,000 for
2000, compared to $250,000 for 1999. The decrease can be attributed to a
decrease in the assessment rate charged by the FDIC.
Data processing expense increased $17,000 or 3.0% to $580,000 for 2000, compared
to $563,000 for 1999. This increase can be attributed to the acquisition of SHS.
Other expenses increased $346,000 or 10.3% to $3.7 million for 2000, compared to
$3.3 million for 1999. This increase can be attributed to the acquisition of SHS
including an increase in goodwill amortization expense of $127,000.
PROVISION FOR INCOME TAXES. The provision for income taxes increased $166,000 or
15.4% to $1.2 million for 2000, compared to $1.1 million for 1999. This increase
was primarily the result of an increase in income before income taxes of $1.1
million or 16.6% to $8.0 million for 2000, compared to $6.8 million for 1999.
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 and Chief Financial
Officer, Group Senior Vice President/Operations, Group Senior Vice
President/Lending and Group Senior Vice President/Administration. 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, (ii) an emphasis on the origination of single-family residential
adjustable-rate mortgages (ARMs), residential construction loans and commercial
real estate loans, which generally have adjustable or floating interest rates
and/or shorter maturities than traditional single-family residential loans, and
consumer loans, which generally have shorter terms and higher interest rates
than mortgage loans and (iii) increase the duration of the liability base of the
Company by extending the maturities of savings deposits, FHLB advances and
repurchase agreements.
As of December 31, 2001, the implementation of these asset and liability
initiatives resulted in the following: (i) $225.6 million or 41.2% of the
Company's total loan portfolio had adjustable interest rates or maturities of 12
months or less; (ii) $132.9 million or 37.0% of the Company's portfolio of
single-family residential mortgage loans (including residential construction
loans) consisted of ARMs and (iii) $145.1 million or 34.0% of the Company's
portfolio of mortgage-backed securities were secured by ARMs.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
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, 2001, the Company's interest-earning assets maturing or repricing
within one year totaled $464.2 million while the Company's interest-bearing
liabilities maturing or repricing within one-year totaled $554.1 million,
providing a deficiency of interest-earning assets over interest-bearing
liabilities of $89.9 million or a negative 7.1% of total assets. At December 31,
2001, the percentage of the Company's assets to liabilities maturing or
repricing within one year was 83.8%. 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.
The following table presents the amounts of interest-earning assets and
interest-bearing liabilities outstanding as of December 31, 2001 which are
expected to mature, prepay or reprice in each of the future time periods
presented:
- ------------------------------------------------------------------------------------------------------------------------------
(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
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $322,305 $141,858 $ 286,371 $179,341 $268,631 $ 1,198,506
Total interest-bearing liabilities 372,596 181,531 332,236 66,183 217,050 1,169,596
------------ ------------ ------------ ------------ ------------ --------------
Maturity or repricing gap during the period $(50,291) $(39,673) $ (45,865) $113,158 $ 51,581 $ 28,910
============ ============ ============ ============ ============ ==============
Cumulative gap $(50,291) $(89,964) $(135,829) $(22,671) $ 28,910
============ ============ ============ ============ ============
Ratio of gap during the period to total assets (3.98%) (3.14%) (3.63%) 8.96% 4.09%
============ ============ ============ ============ ============
Ratio of cumulative gap to total assets (3.98%) (7.13%) (10.76%) (1.80%) 2.29%
============ ============ ============ ============ ============
Total assets $ 1,262,449
==============
- ------------------------------------------------------------------------------------------------------------------------------
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
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
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.
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, 2001 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, 2001 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, 2001 for portfolio equity:
- ----------------------------------------------------------------------------------------------------------------------------
Increase Decrease
------------------------------ -------------------------
+100 +200 -100 -200
BP BP BP BP
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income - increase (decrease) 0.11% 0.44% (4.40%) (5.26%)
Return on average equity - increase (decrease) 0.35% 0.95% (7.29%) (8.76%)
Diluted earnings per share - increase (decrease) 0.31% 1.01% (7.75%) (9.30%)
Portfolio equity - increase (decrease) (12.55%) (29.64%) 4.82% 2.19%
- ----------------------------------------------------------------------------------------------------------------------------
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, 2000 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, 2000 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, 2000 for portfolio equity:
- ----------------------------------------------------------------------------------------------------------------------------
Increase Decrease
------------------------------ -------------------------
+100 +200 -100 -200
BP BP BP BP
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income - increase (decrease) 1.18% 1.40% (0.20%) (1.57%)
Return on average equity - increase (decrease) 2.18% 2.63% (0.54%) (3.08%)
Diluted earnings per share - increase (decrease) 2.34% 2.82% (0.40%) (3.06%)
Portfolio equity - increase (decrease) (18.05%) (36.39%) 8.46% 8.74%
- ----------------------------------------------------------------------------------------------------------------------------
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
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. For a discussion on issues that may affect the
liquidity of the Company, including outstanding commitments, contingent
liabilities, legal actions and off balance sheet items, please refer to notes 12
and 13 of the consolidated financial statements.
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,
2001, ESB was in compliance with all regulatory capital requirements with
tangible, core and risk-based capital ratios of 6.8%, 6.8% and 12.7%,
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 accounting principles generally
accepted in the United States 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 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 141 "Business Combinations" and No.
142 "Goodwill and Other Intangible Assets". SFAS No. 141, which replaces APB
opinion No. 16, requires all business combinations to be accounted for by the
purchase method and eliminates the pooling of interests method of accounting for
business combinations initiated after June 30, 2001. SFAS No. 141 will affect
how future business combinations undertaken are accounted for and disclosed in
the financial statements. The issuance of this statement had no effect on the
Company's results of operations, financial position or liquidity during 2001.
Under the requirements of SFAS No. 142, goodwill and indefinite lived intangible
assets will no longer be amortized but will be subject to annual impairment
tests. Goodwill is required to be tested for impairment between annual tests if
an event occurs or circumstances change that more-likely-than-not reduce the
fair value of
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
a reporting unit below its carrying value. An indefinite lived
intangible asset is required to be tested for impairment between the annual
tests if an event occurs or circumstances change indicating that the asset might
be impaired. The new amortization provisions apply to goodwill and intangible
assets acquired after June 30, 2001. Because of the different transition dates
for goodwill and intangible assets acquired on or before June 30, 2001 and those
acquired after that date, pre-existing goodwill and intangibles will be
amortized during the transition period until adoption, whereas new goodwill and
indefinite lived intangible assets acquired after June 30, 2001 will not. The
Company was required to adopt Statement 142 effective January 1, 2002. The
goodwill that was created from the acquisition of WSB was not amortized, in
accordance with the requirements of statement 142. In addition the Company has
determined that if statement 142 had been in effect in 2001, the result would
have been the elimination of the amortization of the pre-existing goodwill, or
an increase to net income of $742,000.
21
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except share data)
DECEMBER 31,
--------------------------------------
2001 2000
--------------- ----------------
ASSETS
------
Cash on hand and in banks $ 4,135 $ 4,428
Interest-earning deposits 9,489 8,262
Federal funds sold 1,855 636
Securities available for sale; cost of $636,815 and $609,552 640,282 605,414
Loans receivable, net of allowance for loan losses of $5,147 and $4,981 527,485 512,228
Accrued interest receivable 8,219 8,220
Federal Home Loan Bank (FHLB) stock 21,889 19,899
Premises and equipment, net 9,995 8,978
Real estate acquired through foreclosure, net 1,590 1,817
Prepaid expenses and other assets 14,986 13,627
Bank owned life insurance 22,524 16,641
--------------- ----------------
TOTAL ASSETS $ 1,262,449 $ 1,200,150
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES:
Deposits $ 592,052 $ 508,913
FHLB advances 434,003 396,817
Repurchase agreements 119,640 191,272
Guaranteed preferred beneficial interest in subordinated debt, net 24,159 24,115
Advance payments by borrowers for taxes and insurance 4,058 4,640
Accrued expenses and other liabilities 8,634 6,130
--------------- ----------------
TOTAL LIABILITIES 1,182,546 1,131,887
--------------- ----------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares authorized;
none issued - -
Common stock, $.01 par value, 10,000,000 shares authorized;
7,706,580 and 7,490,803 shares issued;
7,320,388 and 6,009,291 shares outstanding 77 75
Additional paid-in capital 57,906 73,669
Treasury stock, at cost; 386,192 and 1,481,512 shares (4,318) (21,915)
Unearned Employee Stock Ownership Plan (ESOP) shares (2,912) (3,456)
Unvested shares held by Management Recognition Plan (MRP) (255) (237)
Retained earnings 27,117 22,858
Accumulated other comprehensive income (loss), net 2,288 (2,731)
--------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 79,903 68,263
--------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,262,449 $ 1,200,150
=============== ================
See accompanying notes to consolidated financial statements.
22
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except share data)
YEAR ENDED DECEMBER 31,
----------------------------------
2001 2000 1999
-------- -------- --------
Interest income:
Loans receivable $ 40,216 $ 37,057 $ 28,556
Securities available for sale 37,786 39,682 33,376
Securities held to maturity - - 1,386
FHLB stock 1,391 1,359 1,222
Deposits with banks and federal funds sold 274 364 252
-------- -------- --------
TOTAL INTEREST INCOME 79,667 78,462 64,792
-------- -------- --------
INTEREST EXPENSE:
Deposits 22,666 21,829 17,417
FHLB advances and repurchase agreements 34,898 35,041 28,886
Guaranteed preferred beneficial interest in subordinated debt 2,226 2,226 2,226
-------- -------- --------
TOTAL INTEREST EXPENSE 59,790 59,096 48,529
-------- -------- --------
NET INTEREST INCOME 19,877 19,366 16,263
Provision for (recovery of ) loan losses 47 (55) 54
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR (RECOVERY OF ) LOAN LOSSES 19,830 19,421 16,209
-------- -------- --------
NONINTEREST INCOME:
Fees and service charges 2,041 1,499 1,337
Net realized gain (loss) on sale of securities available for sale 913 (28) 544
Increase of cash surrender value of bank owned life insurance 1,093 857 777
Other 750 565 398
-------- -------- --------
TOTAL NONINTEREST INCOME 4,797 2,893 3,056
-------- -------- --------
NONINTEREST EXPENSE:
Compensation and employee benefits 8,827 8,022 6,753
Premises and equipment 2,226 1,945 1,515
Federal deposit insurance premiums 103 99 250
Data processing 568 580 563
Other 3,667 3,692 3,346
-------- -------- --------
TOTAL NONINTEREST EXPENSE 15,391 14,338 12,427
-------- -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES AND EXTRAORDINARY ITEM 9,236 7,976 6,838
Provision for income taxes 1,524 1,243 1,077
-------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEM 7,712 6,733 5,761
Extraordinary item, net of tax of $249 (483) - -
-------- -------- --------
NET INCOME $ 7,229 $ 6,733 $ 5,761
======== ======== ========
BASIC INCOME PER COMMON SHARE:
Income before extraordinary item $ 1.13 $ 0.98 $ 0.88
Extraordinary item (0.07) - -
Net income $ 1.06 $ 0.98 $ 0.88
DILUTED INCOME PER COMMON SHARE:
Income before extraordinary item $ 1.10 $ 0.97 $ 0.86
Extraordinary item (0.07) - -
Net income $ 1.03 $ 0.97 $ 0.86
See accompanying notes to consolidated financial statements.
23
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except share data)
ADDITIONAL UNEARNED UNVESTED
COMMON PAID-IN TREASURY ESOP MRP
STOCK CAPITAL STOCK SHARES SHARES
-------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 $ 63 $ 59,448 $ (16,841) $ (2,681) $ (237)
Comprehensive results:
Net income - - - - -
Transfer securities from HTM to AFS, net - - - - -
Other comprehensive results, net - - - - -
Reclassification adjustment - - - - -
-------------------------------------------------------------------------
Total comprehensive results
Cash dividends at $0.28 per share - - - - -
Purchase of treasury stock, at
cost (199,162 shares) - - (2,839) - -
Reissuance of treasury stock
for stock option exercises - 145 466 - -
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)
Comprehensive results:
Net income - - - - -
Other comprehensive results, net - - - - -
Reclassification adjustment - - - - -
-------------------------------------------------------------------------
Total comprehensive results
Common stock issued as a result of
the acquisition of SHS 6 8,065 - (888) -
Cash dividends at $0.32 per share - - - - -
Common stock dividend of 10% 6 5,921 - - -
Payment of cash in lieu of fractional
shares for 10% stock dividend - (5) - - -
Purchase of treasury stock, at
cost (280,320 shares) - - (3,134) - -
Reissuance of treasury stock
for stock option exercises - 54 433 - -
Principal payments on ESOP debt - (52) - 606 -
Additional ESOP shares purchased - - - (98) -
-------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000 75 73,669 (21,915) (3,456) (237)
Comprehensive results:
Net income - - - - -
Other comprehensive results, net - - - - -
Reclassification adjustment - - - - -
-------------------------------------------------------------------------
Total comprehensive results
Common stock issued as a result of
the acquisition of WSB 2 2,666 - - -
Cash dividends at $0.38 per share - - - - -
Six-for-five stock split (18,595) 18,607 - -
Payment of cash in lieu of fractional
shares for six-for-five stock split - (6) - - -
Purchase of treasury stock, at
cost (146,084 shares) - - (1,667) - -
Reissuance of treasury stock
for stock option exercises - - 657 - -
Principal payments on ESOP debt - 122 - 588 -
Additional ESOP shares purchased - - - (44) -
Unvested shares granted by the MRP - 50 - - (50)
Accrued compensation expense MRP - - - - 32
-------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2001 $ 77 $ 57,906 $ (4,318) $ (2,912) $ (255)
=========================================================================
ACCUMULATED
OTHER
COMPREHENSIVE TOTAL
RETAINED INCOME (LOSS), STOCKHOLDERS'
EARNINGS NET OF TAX EQUITY
----------------------------------------------
BALANCE AT DECEMBER 31, 1998 $ 20,870 $ 461 $ 61,083
Comprehensive results:
Net income 5,761 - 5,761
Transfer securities from HTM to AFS, net - (138) (138)
Other comprehensive results, net - (11,718) (11,718)
Reclassification adjustment - (433) (433)
----------------------------------------------
Total comprehensive results 5,761 (12,289) (6,528)
Cash dividends at $0.28 per share (1,801) - (1,801)
Purchase of treasury stock, at
cost (199,162 shares) - - (2,839)
Reissuance of treasury stock
for stock option exercises (342) - 269
Principal payments on ESOP debt - - 562
Additional ESOP shares purchased - - (864)
----------------------------------------------
BALANCE AT DECEMBER 31, 1999 24,488 (11,828) 49,882
Comprehensive results:
Net income 6,733 - 6,733
Other comprehensive results, net - 9,060 9,060
Reclassification adjustment - 37 37
----------------------------------------------
Total comprehensive results 6,733 9,097 15,830
Common stock issued as a result of
the acquisition of SHS - - 7,183
Cash dividends at $0.32 per share (2,164) - (2,164)
Common stock dividend of 10% (5,927) - -
Payment of cash in lieu of fractional
shares for 10% stock dividend - - (5)
Purchase of treasury stock, at
cost (280,320 shares) - - (3,134)
Reissuance of treasury stock
for stock option exercises (272) - 215
Principal payments on ESOP debt - - 554
Additional ESOP shares purchased - - (98)
----------------------------------------------
BALANCE AT DECEMBER 31, 2000 22,858 (2,731) 68,263
Comprehensive results:
Net income 7,229 - 7,229
Other comprehensive results, net - 5,212 5,212
Reclassification adjustment - (193) (193)
----------------------------------------------
Total comprehensive results 7,229 5,019 12,248
Common stock issued as a result of -
the acquisition of WSB - - 2,668
Cash dividends at $0.38 per share (2,617) - (2,617)
Six-for-five stock split (12) - -
Payment of cash in lieu of fractional -
shares for six-for-five stock split - - (6)
Purchase of treasury stock, at
cost (146,084 shares) - - (1,667)
Reissuance of treasury stock -
for stock option exercises (341) - 316
Principal payments on ESOP debt - - 710
Additional ESOP shares purchased - - (44)
Unvested shares granted by the MRP -
Accrued compensation expense MRP - - 32
----------------------------------------------
BALANCE AT DECEMBER 31, 2001 $ 27,117 $ 2,288 $ 79,903
==============================================
See accompanying notes to consolidated financial statements
24
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
(Dollar amounts in thousands)
YEAR ENDED DECEMBER 31,
-------------------------------------------
2001 2000 1999
------------- ------------- -------------
Operating activities:
Net income $ 7,229 $ 6,733 $ 5,761
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING
ACTIVITIES:
Depreciation and amortization for premises and equipment 863 758 605
Provision for losses 55 94 63
Amortization of premiums and accretion of discounts (77) (556) 1,357
Origination of loans available for sale (26,916) (2,802) (9,562)
Proceeds from sale of loans available for sale 27,204 2,820 9,642
(Gain) loss on sale of securities available for sale (913) 28 (544)
Amortization of intangible assets 65 - -
Amortization of goodwill 742 732 603
Compensation expense on ESOP 710 554 562
Compensation expense on MRP 32 - -
Decrease (increase) in accrued interest receivable 131 (785) (79)
(Increase) decrease in prepaid expenses and other assets (2,745) 648 (502)
Increase (decrease) in accrued expenses and other liabilities 1,576 1,180 (937)
Other (1,982) (1,104) (581)
------------- ------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,974 8,300 6,388
------------- ------------- -------------
INVESTING ACTIVITIES:
Loan originations and purchases (155,565) (160,593) (146,981)
Purchases of securities available for sale (222,015) (127,961) (203,735)
Purchases of FHLB stock (1,790) (837) -
Additions to premises and equipment (1,064) (1,922) (1,303)
Purchase of bank owned life insurance (3,500) - -
Principal repayments of loans receivable 158,632 100,897 112,728
Principal repayments of securities available for sale 141,706 72,034 86,319
Principal repayments of securities held to maturity - - 8,324
Proceeds from the sale of securities available for sale 70,931 49,374 73,791
Proceeds from sale of REO 569 434 306
Payment for purchase of SHS, net of cash acquired - (3,082) -
Cash acquired from WSB, net of payment for purchase 3,211 - -
------------- ------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (8,885) (71,656) (70,551)
------------- ------------- -------------
FINANCING ACTIVITIES:
Net increase in deposits 43,525 9,698 8,732
Proceeds from long-term borrowings 89,522 228,474 148,485
Repayments of long-term borrowings (121,707) (210,649) (94,575)
Net (decrease) increase in short-term borrowings (2,261) 41,594 9,291
Proceeds received from exercise of stock options 316 215 269
Dividends paid (2,620) (2,179) (1,878)
Payments to acquire treasury stock (1,667) (3,134) (2,839)
Stock purchased by ESOP (44) (98) (864)
------------- ------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,064 63,921 66,621
------------- ------------- -------------
Net increase in cash equivalents 2,153 565 2,458
Cash equivalents at beginning of period 13,326 12,761 10,303
------------- ------------- -------------
Cash equivalents at end of period $ 15,479 $ 13,326 $ 12,761
============= ============= =============
Continued
25
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
- --------------------------------------------------------------------------------
(Dollar amounts in thousands)
YEAR ENDED DECEMBER 31,
-------------------------------------------
2001 2000 1999
------------- ------------- -------------
SUPPLEMENTAL INFORMATION:
Interest paid $ 59,670 $ 60,530 $ 48,505
Income taxes paid 767 2,461 1,544
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Transfers from loans receivable to real estate acquired
through foreclosure 310 2,050 333
Transfers of securities from held to maturity to available for sale - - 54,464
Dividends declared but not paid 732 601 461
Stock dividend paid - 5,927 -
The Company purchased all of the common stock of SHS for $14.5 million.
In conjunction with the acquisition, the assets acquired and
liabilities assumed were as follows:
Fair value of assets acquired $ - $ 91,550 $ -
Stock and stock options issued for the purchase of SHS
common stock - (8,071) -
Cash paid for SHS common stock - (6,448) -
Liabilities assumed - (79,116) -
------------- ------------- -------------
Goodwill recognized $ - $ (2,085) $ -
------------- ------------- -------------
The Company purchased all of the common stock of WSB for $6.0 million.
In conjunction with the acquisition, the assets acquired and
liabilities assumed were as follows:
Fair value of assets acquired $ 46,246 $ - $ -
Stock issued for the purchase of WSB common stock (2,668)
Cash paid for WSB common stock (3,311) - -
Liabilities assumed (40,582) - -
------------- ------------- -------------
Goodwill recognized $ (315) $ - $ -
------------- ------------- -------------
See accompanying notes to consolidated financial statements.
26
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), PennFirst
Financial Advisory Services, Inc. (PFAS), THF, Inc. (THF), AMSCO, Inc.
and ESB Financial Services, 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 accounting
principles generally accepted in the United States requires management to
make some 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 2000 and 1999 have been reclassified to conform with the
financial statement presentation for 2001. All share and related price
and dividend amounts presented herein have been restated to reflect prior
period stock dividends and stock splits.
OPERATING SEGMENTS
An operating segment is defined as a component of an enterprise that
engages in business activities that generate revenue and incur expense,
and the operating results of which are reviewed by management. ESB's
business activities are currently confined to one operating segment which
is community banking.
CASH EQUIVALENTS
Cash equivalents include cash on hand and in banks, interest-earning
deposits and federal funds sold. The Board of Governors of the Federal
Reserve System imposes certain reserve requirements on all depository
institutions. These reserves are maintained in the form of vault cash or
as a noninterest-bearing balance with the Federal Reserve Bank. Required
reserves averaged $1.9 million during the year 2001.
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.
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
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY (CONTINUED)
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.
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, 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 collectibility 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.
Impaired loans are identified and measured based on the present value of
expected future cash flows discounted at the loan's effective interest
rate, at the loan's observable market price or at the fair value of the
collateral if the loan is collateral dependent. If the recorded
investment in the loan exceeds the measure of fair value, a valuation
allowance is established as a component of the allowance for loan losses.
Impaired loans consist of non-homogeneous loans, which based on the
evaluation of current information and events, management has determined
that it is probable the Company will not be able to collect all amounts
due according to the contractual terms of the loan agreement. The Company
evaluates all commercial and commercial real estate loans which have been
classified for regulatory reporting purposes, including non-accrual and
restructured loans, in determining impaired loans.
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 reaching
various stages of delinquency depending upon the loan type.
28
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, management periodically
performs valuations 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 consisted of $7.2 million and $7.6 million at December 31, 2001
and 2000, respectively. Core deposit intangible was $863,000 and $0 at
December 31, 2001 and 2000, respectively. As discussed on page 20, the
Company adopted the provisions of FASB 141 and certain provisions of FASB
142 in 2001 in conjunction with the acquisition of WSB. The provisions of
FASB 142 eliminated the amortization of the goodwill associated with the
acquisition of WSB. With the full adoption of FASB 142 in January 2002,
the pre-existing goodwill will no longer be amortized but will be subject
to annual impairment tests. Intangible assets are reviewed for possible
impairment when events or changed circumstances may affect the underlying
basis of the asset. The core deposit intangible assets are amortized on a
sum of the years digit basis over the estimated benefit period, generally
up to ten years.
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 Company has adopted FASB 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
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FINANCIAL INSTRUMENTS (CONTINUED)
unrecognized firm commitment, an available for sale security, or a
foreign -currency denominated forecasted transaction. This statement was
in effect in 2001 for the Company. Management has evaluated the impact of
SFAS 133 and determined that it did not materially affect the Company's
financial position or results of operations.
The cost of these contracts are included in prepaid expenses and other
assets and are amortized on a straight line basis over the shorter of the
contractual life of the contract or the hedged instrument. Amortization
is recorded as an adjustment to the yield or the cost of the hedged
instrument. Realized gains and losses on the sale of a cap or floor
contract designated as a hedge are deferred and amortized over the life
of the hedged instrument as interest income or interest expense or,
recognized in operating results at the time of disposition of the hedged
instrument. Unrealized gains or losses of cap and floor contracts that
meet the criteria for hedge accounting are not recognized in operating
results but are included in the other comprehensive income calculation to
the extent that the hedged instrument is a security classified as
available for sale. Interest rate cap and floor contracts that do not
meet the criteria for hedge accounting are recorded at estimated fair
value with unrealized gains or losses included in operating results.
In the ordinary course of business, the Company has entered into
off-balance sheet financial instruments, consisting of commitments to
extend credit, commitments under line of credit lending arrangements and
letters of credit. Such financial instruments are recorded in the
financial statements when they are funded or related fees are received.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used in estimating fair values
of financial instruments.
CASH EQUIVALENTS - The carrying amounts of cash equivalents
approximate their fair values.
SECURITIES - Fair values for securities are based on quoted market
prices.
ACCRUED INTEREST RECEIVABLE AND PAYABLE - The carrying amounts of
accrued interest approximate their fair values.
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
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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, 2001 and 2000 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, 2001 and 2000 approximated the cash surrender value
of the policies at those dates.
NET INCOME PER SHARE
The following table summarizes the Company's net income per share for the
years ended December 31:
- ------------------------------------------------------------------------------------------------------------------------
(Amounts in thousands, except per share data)
- ------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
------- ------- -------
Net income $ 7,229 $ 6,733 $ 5,761
Weighted-average common shares outstanding 6,843 6,863 6,564
------- ------- -------
BASIC EARNINGS PER SHARE $ 1.06 $ 0.98 $ 0.88
======= ======= =======
Weighted-average common shares outstanding 6,843 6,863 6,564
Common stock equivalents due to effect of stock options 179 88 160
------- ------- -------
Total weighted-average common shares and equivalents 7,022 6,951 6,724
------- ------- -------
DILUTED EARNINGS PER SHARE $ 1.03 $ 0.97 $ 0.86
======= ======= =======
- ------------------------------------------------------------------------------------------------------------------------
Options to purchase 80,220 shares of common stock at $13.63 per share and
92,280 shares of common stock at $11.27 per share, were outstanding as of
December 31, 2001 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 December 31, 2011, respectively. Options to purchase 88,475
shares of common stock at $8.84 per share, 80,227 shares of common stock
at $13.63 per share, 101,842 shares of common stock at $10.61 per share
and 146,345 shares of common stock at $8.65 per share were outstanding as
of December 31, 2000 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, 2007, June 30, 2008, June 30, 2009 and June 30, 2010, respectively.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
2. SECURITIES
The following table summarizes the Company's securities as of December
31:
- ----------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) Amortized Unrealized Unrealized Fair
cost gains losses value
- ----------------------------------------------------------------------------------------------------------------------
AVAILABLE FOR SALE:
- -------------------
DECEMBER 31, 2001:
Trust Preferred securities $ 1,967 $ - $ (17) $ 1,950
U.S. Government securities 5,975 318 - 6,293
Municipal securities 87,648 964 (680) 87,932
Equity securities 2,360 144 (253) 2,251
Corporate Bonds 116,325 1,974 (3,839) 114,460
Mortgage-backed securities 422,540 5,447 (591) 427,396
------------ ----------- ------------ ------------
$ 636,815 $ 8,847 $ (5,380) $ 640,282
============ =========== ============ ============
DECEMBER 31, 2000:
Trust Preferred securities $ 2,000 $ - $ (287) $ 1,713
U.S. Government securities 19,983 175 (28) 20,130
Municipal securities 93,577 1,132 (844) 93,865
Equity securities 2,878 236 (580) 2,534
Corporate Bonds 77,931 771 (4,144) 74,558
Mortgage-backed securities 413,183 2,272 (2,841) 412,614
------------ ----------- ------------ ------------
$ 609,552 $ 4,586 $ (8,724) $ 605,414
============ =========== ============ ============
- ----------------------------------------------------------------------------------------------------------------------
The proceeds from the sale of securities as of December 31, 2001, 2000
and 1999 were $70.9 million, $49.4 million and $73.8 million,
respectively. Gross realized gains and gross realized losses on sales of
securities available for sale were $1.1 million and $204,000,
respectively in 2001, $428,000 and $456,000, respectively, in 2000 and
$820,000 and $276,000, respectively, in 1999.
At December 31, 2001 the book value of the Company's Daimler Chrysler
corporate bonds exceeded 10% of stockholders' equity. The book value and
market values were $8.2 million and $8.2 million, respectively. The issue
is 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, 2001, excluding equity securities which
have no maturity dates:
- --------------------------------------------------------------------------
(Dollar amounts in thousands) Available for sale
-----------------------------
Amortized Fair
cost value
- --------------------------------------------------------------------------
Due in one year or less $ 5,033 $ 5,044
Due from one year to five years 45,046 47,055
Due from five to ten years 36,966 38,021
Due after ten years 547,410 547,911
------------ ------------
$634,455 $638,031
============ ============
- --------------------------------------------------------------------------
32
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 $19.5 million and $20.7 million as of
December 31, 2001 and 2000, 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:
- --------------------------------------------------------------------------------
(Dollar amounts in thousands) 2001 2000
- --------------------------------------------------------------------------------
MORTGAGE LOANS:
Residential - single family $337,896 $334,201
Residential - multi family 29,154 26,998
Commercial real estate 48,869 48,633
Construction 50,426 51,523
-------- --------
466,345 461,355
OTHER LOANS:
Consumer loans 65,815 68,099
Commercial business 15,264 10,692
-------- --------
547,424 540,146
LESS:
Allowance for loan losses 5,147 4,981
Deferred loan fees and net discounts 483 1,380
Loans in process 14,309 21,557
-------- --------
$527,485 $512,228
======== ========
- --------------------------------------------------------------------------------
Non-performing loans, which include only non-accrual loans, were $2.5
million and $2.6 million at December 31, 2001 and 2000, 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:
- --------------------------------------------------------------------------------
(Dollar amounts in thousands) 2001 2000 1999
- --------------------------------------------------------------------------------
Interest income that would have been recorded $147 $272 $244
Interest income recognized 76 82 90
---- ---- ----
Interest income foregone $ 71 $190 $154
==== ==== ====
- --------------------------------------------------------------------------------
The Company is not committed to lend additional funds to debtors whose
loans are on non-accrual status.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
3. LOANS RECEIVABLE (CONTINUED)
The following is a summary of the changes in the allowance for loan
losses:
-----------------------------------------------------------------
(Dollar amounts in thousands)
Totals
-----------------------------------------------------------------
Balance, December 31, 1998 $ 4,815
Provision for loan losses 54
Charge offs (55)
Recoveries 9
-------
Balance, December 31, 1999 4,823
Allowance for loan losses of SHS 544
Recovery of loan losses (55)
Charge offs (409)
Recoveries 78
-------
Balance, December 31, 2000 4,981
Allowance for loan losses of WSB 154
Provision for loan losses 47
Charge offs (44)
Recoveries 9
-------
Balance, December 31, 2001 $ 5,147
=======
-----------------------------------------------------------------
The following table is a summary of the loans considered to be impaired
as of December 31:
---------------------------------------------------------------------------
(Dollar amounts in thousands) 2001 2000 1999
---------------------------------------------------------------------------
Impaired loans with an allocated allowance $1,062 $1,044 $3,294
Impaired loans without an allocated allowance - - -
------ ------ ------
Total impaired loans $1,062 $1,044 $3,294
====== ====== ======
Allocated allowance on impaired loans $1,002 $1,012 $1,828
Portion of impaired loans on non-accrual 1,062 1,044 3,294
Average impaired loans 1,016 1,582 3,442
Income recognized on impaired loans 4 3 48
---------------------------------------------------------------------------
SFAS No. 114 does not apply to large groups of smaller balance homogenous
loans that are collectively evaluated for impairment. The Company
collectively reviews all residential real estate and consumer loans for
impairment.
The Company conducts its business through 17 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 REGULATION
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.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
5. PREMISES AND EQUIPMENT
Premises and equipment at December 31 are summarized by major
classification as follows:
--------------------------------------------------------------------
(Dollar amounts in thousands) 2001 2000
--------------------------------------------------------------------
Land $ 1,075 $ 954
Buildings and improvements 10,413 8,767
Leasehold improvements 514 523
Furniture, fixtures and equipment 7,313 6,991
------- -------
19,315 17,235
Less accumulated depreciation and amortization 9,320 8,257
------- -------
$ 9,995 $ 8,978
======= =======
--------------------------------------------------------------------
Depreciation and amortization expense for the years December 31, 2001,
2000 and 1999 were $863,000, $758,000, and $605,000, 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 2010, have
approximate aggregate rentals of $137,582, $147,076, $153,020, $155,660,
$155,660 and $417,286 for the years ended December 31, 2002, 2003, 2004,
2005, 2006 and thereafter, respectively. Rent expense for the years ended
December 31, 2001, 2000 and 1999 was $148,000, $130,000 and $61,000,
respectively.
6. DEPOSITS
The following table summarizes the Company's deposits as of December 31:
------------------------------------------------------------------------------------
(Dollar amounts in thousands) 2001 2000
-------------------- ---------------------
Type of accounts Amount % Amount %
------------------------------------------------------------------------------------
Noninterest-bearing deposits $ 16,139 2.7% $ 9,620 1.9%
NOW account deposits 43,632 7.4% 41,549 8.2%
Money Market deposits 72,706 12.3% 65,467 12.8%
Passbook account deposits 85,765 14.5% 72,248 14.2%
Time deposits 373,810 63.1% 320,029 62.9%
-------- ------ -------- ------
$592,052 100.0% $508,913 100.0%
======== ====== ======== ======
Time deposits mature as follows:
Within one year $263,091 44.4% $177,471 34.9%
After one year through two years 80,348 13.6% 80,647 15.8%
After two years through three years 17,292 2.9% 48,210 9.5%
Thereafter 13,079 2.2% 13,701 2.7%
-------- ------ -------- ------
$373,810 63.1% $320,029 62.9%
======== ====== ======== ======
------------------------------------------------------------------------------------
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
6. DEPOSITS (CONTINUED)
The Company had a total of $105.6 million and $74.3 million in deposits
of $100,000 or more at December 31, 2001 and 2000, respectively.
Interest expense by type of deposit account for the year ended December
31 is as follows:
---------------------------------------------------------------
(Dollar amounts in thousands) 2001 2000 1999
---------------------------------------------------------------
NOW account deposits $ 156 $ 270 $ 151
Money Market deposits 2,222 2,569 2,342
Passbook account deposits 1,483 1,633 1,384
Time deposits 18,805 17,345 13,540
------- ------- -------
$22,666 $21,817 $17,417
======= ======= =======
---------------------------------------------------------------
Interest expense on advance payments by borrowers for taxes and
insurance, not included above, for the year ended December 31, 2000 was
$12,000.
7. BORROWED FUNDS
Borrowed funds, which include FHLB advances, repurchase agreements and
treasury tax and loan notes payable, as of December 31 are summarized as
follows:
---------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) 2001 2000
------------------------ -----------------------------
Weighted Weighted
average average
rate Amount rate Amount
---------------------------------------------------------------------------------------------------------------------
FHLB ADVANCES:
Due within 12 months 5.14% $ 171,051 6.00% $ 105,207
Due beyond 12 months but within 2 years 6.36% 157,699 6.65% 93,883
Due beyond 2 years but within 3 years 5.25% 77,055 6.62% 152,699
Due beyond 3 years but within 4 years 5.47% 23,885 6.48% 27,055
Due beyond 4 years but within 5 years 6.07% 1,816 6.42% 13,885
Due beyond 5 years 6.69% 2,309 6.66% 3,917
------------ ------------
433,815 396,646
TREASURY TAX AND LOAN NOTE PAYABLE 1.64% 188 6.25% 171
------------ ------------
$ 434,003 $ 396,817
============ ============
REPURCHASE AGREEMENTS:
Due within 12 months 5.19% $ 98,040 6.02% $ 95,632
Due beyond 12 months but within 2 years 6.96% 10,600 6.17% 74,040
Due beyond 2 years but within 3 years 7.30% 11,000 6.96% 10,600
Due beyond 3 years but within 4 years - 7.30% 11,000
------------ ------------
$ 119,640 $ 191,272
============ ============
---------------------------------------------------------------------------------------------------------------------
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
7. BORROWED FUNDS (CONTINUED)
Included in the $433.8 million of FHLB advances, is approximately $65.5
million of convertible select advances. These advances reset to the 3
month London Interbank Offer Rate Index (LIBOR) and have various spreads
and call dates. At the reset date if the 3 month LIBOR plus the spread is
lower than the contract rate on the advance, the advance will remain at
the contracted rate. The FHLB has the right to call any convertible
select advance on its call date or quarterly thereafter. Should the
advance be called, the Company has the right to pay off the advance
without penalty. It has historically been the Company's position to pay
off the advance and replace it with fixed-rate funding.
FHLB advances are secured by FHLB stock, qualifying residential mortgage
loans and mortgage-backed securities to the extent that the fair value of
such pledged collateral must be at least equal to the advances
outstanding. The fair value of qualifying mortgage loans pledged as
collateral against FHLB advances was $343.2 million at December 31, 2001.
The Company enters into sales of securities under agreements to
repurchase. Such repurchase agreements are treated as borrowed funds. The
dollar amount of the securities underlying the agreements remain in their
respective asset accounts.
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 exceeded the amortized cost of the
securities sold under agreements to repurchase. The market value of the
securities as of December 31, 2001 was $134.2 million with an amortized
cost of $132.3 million. The market value of the securities as of December
31, 2000 was $210.4 million with an amortized cost of $210.3 million. The
average maturity date of the mortgage backed securities sold under
agreements to repurchase, was greater than 90 days for the years ended
December 31, 2001 and 2000.
As of December 31, 2001 and 2000 the Company had repurchase agreements
outstanding with Morgan Stanley Dean Witter of $49.0 million and $ 134.7
million, respectively, and with Salomon Smith Barney of $70.6 million and
$56.6 million, respectively.
As of December 31, 2001, the Company had repurchase agreements with
Morgan Stanley Dean Witter with $2.8 million at risk with a weighted
average maturity of 8 months and with Salomon Smith Barney with $11.7
million at risk with a weighted average maturity of 10 months.
Borrowings under repurchase agreements averaged $157.3 million, $220.8
million and $166.0 million during 2001, 2000 and 1999, respectively. The
maximum amount outstanding at any month-end was $191.3 million, $235.5
million and $211.8 million during 2001, 2000 and 1999, respectively.
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) .
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
8. GUARANTEED PREFERRED BENEFICIAL INTEREST IN SUBORDINATED DEBT (CONTINUED)
with a stated value and liquidation preference of $10 per share. The
Trust's obligations under the Preferred Securities issued are fully and
unconditionally guaranteed by the Company
The proceeds from the sale of the Preferred Securities were utilized by
the Trust to invest in $25.3 million of 8.625% Junior Subordinated
Debentures (the Subordinated Debt) of the Company. The Subordinated Debt
is unsecured and ranks subordinate and junior in right of payment to all
indebtedness, liabilities and obligations of the Company. The
Subordinated Debt primarily represents the sole assets of the Trust.
Interest on the Preferred Securities is cumulative and payable quarterly
in arrears. The Company has the right to optionally redeem the
Subordinated Debt prior to the maturity date of December 31, 2027, on or
after December 31, 2002, at 100% of the stated liquidation amount, plus
accrued and unpaid distributions, if any, at the redemption date.
Under the occurrence of certain events, specifically, a tax event,
investment company event or capital treatment event as more fully defined
in the Indenture dated December 7, 1997, the Company may redeem in whole,
but not in part, the Subordinated Debt prior to December 31, 2027.
Proceeds from any redemption of the Subordinated Debt would cause a
mandatory redemption of the Preferred Securities and the common
securities having an aggregate liquidation amount equal to the principal
amount of the Subordinated Debt redeemed.
Unamortized deferred debt issuance costs associated with the Preferred
Securities amounted to $1.1 million and $1.2 million as of December 31,
2001 and 2000, 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:
-------------------------------------------------------------------------
(Dollar amounts in thousands) 2001 2000 1999
-------------------------------------------------------------------------
CURRENT EXPENSE:
Federal $ 1,298 $ 1,317 $ 1,326
State (42) 185 522
------- ------- -------
1,256 1,502 1,848
DEFERRED BENEFIT:
Federal 268 (259) (771)
------- ------- -------
268 (259) (771)
------- ------- -------
$ 1,524 $ 1,243 $ 1,077
======= ======= =======
-------------------------------------------------------------------------
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:
---------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) 2001 2000 1999
---------------------------------------------------------------------------------------------------------------------
Net (gain) loss on securities available for sale $ (2,586) $ (4,686) $ 6,330
Compensation expense for tax purposes in excess of
amounts recognized for financial statement purposes 45 54 145
------------ ------------ -------------
$ (2,541) $ (4,632) $ 6,475
============ ============ =============
---------------------------------------------------------------------------------------------------------------------
38
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:
----------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) 2001 2000
----------------------------------------------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Allowances for losses on loans and real estate owned $ 1,491 $ 1,330
Interest and fees on loans 36 43
General business credit 515 287
Minimum tax credit carry forward 1,161 975
Investment securities available for sale - 1,407
Other 128 132
--------- ---------
Gross deferred tax assets 3,331 4,174
DEFERRED TAX LIABILITIES:
Investment in securities available for sale 1,179 -
Accretion of discounts 558 131
Core deposit intangible 305 14
Other 338 186
--------- ---------
Gross deferred tax liabilities 2,380 331
Net deferred tax asset $ 951 $ 3,843
========= =========
----------------------------------------------------------------------------------------------------------------------
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 $514,953 will be available to reduce
future federal income tax through the year 2020. The alternative minimum
tax credit of $1,161,066 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:
-----------------------------------------------------------------------------------------------------------------------
2001 2000 1999
-----------------------------------------------------------------------------------------------------------------------
Tax at statutory rate 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
Tax free income, net of interest disallowance (18.0%) (20.2%) (25.0%)
State income taxes, net of Federal income tax benefit (0.3%) 1.5% 5.0%
Goodwill 2.7% 3.1% 3.0%
Other, net (1.9%) (2.8%) (1.2%)
------------ ------------ -------------
Reported rate 16.5% 15.6% 15.8%
============ ============ =============
-----------------------------------------------------------------------------------------------------------------------
39
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, 2000 (the most recent date for
which a tax return has been filed) include approximately $15.2 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 in stock of the Company. The Company contributed
$166,000, $163,000 and $140,000 to the plan during 2001, 2000 and 1999,
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 is 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 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 2001, 2000 and 1999 amounted to $135,000, $130,000 and
$86,000, 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. The Company currently accounts for its ESOP
under the guidance of SOP No. 93-6
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
EMPLOYEE STOCK OWNERSHIP PLAN (CONTINUED)
During 2001, 2000 and 1999, the Company recognized compensation expense
related to the ESOP of $710,000, $554,000 and $562,000, respectively.
As of December 31, 2001 and 2000 the ESOP held a total of 939,300 and
930,571 shares, respectively, of the Company's stock, and there were
302,984 and 362,518 unallocated shares, respectively, with a fair value
of $3.1 million and $3.0 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. Under APB
No. 25, because the exercise price of the Company's stock options
equals 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 2001, 2000 and 1999: risk-free interest rates of 4.6%; dividend
yields of 3.5%; volatility factors of the expected market price of the
Company's stock of 21.3%; and a weighted average life of the option of
nine 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:
-------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands, except share data) 2001 2000 1999
-------------------------------------------------------------------------------------------------------------------
Pro forma net income $ 7,082 $ 6,497 $ 5,503
Pro forma diluted net
income per share $1.00 $0.92 $0.80
-------------------------------------------------------------------------------------------------------------------
41
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:
-------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
------------------------ ------------------------ ---------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price/Share Options(1) Price/Share(1) Options(1) Price/Share(1)
--------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 760,725 $ 8.49 609,589 $ 8.36 555,437 $ 7.46
Granted 92,280 11.27 146,345 8.65 103,759 10.61
Converted - - 56,797 5.84 - -
Exercised (65,630) 5.41 (44,052) 3.67 (47,429) 2.62
Expired (120) 8.65 (7,954) 8.84 (2,178) 13.63
------------ ----------- ------------
Outstanding at end of year 787,255 8.96 760,725 8.49 609,589 8.36
============ =========== ============
Exercisable at end of year 738,455 $ 8.98 683,325 $ 8.48 609,589 $ 8.36
============ =========== ============
-------------------------------------------------------------------------------------------------------------------------
(1) Options and price/share data for the years ended December 31, 2000
and 1999 have been adjusted to reflect the stock split paid on May 30,
2001 and the stock dividend paid on May 31, 2000.
The weighted-average fair values of options granted during 2001, 2000
and 1999 utilizing the Black-Scholes Valuation Model were $2.41, $2.52
and $3.84, respectively.
The following table summarizes certain characteristics of issued stock
options as of December 31, 2001:
------------------------------------------------------------------------------------------------------
Average
Remaining
Options Exercise Contractual
Year Issued Outstanding Price Life (in years)
------------------------------------------------------------------------------------------------------
1992 1,393 $ 4.78 0.2
1994 31,013 7.17 2.5
1994 79,566 4.58 2.8
1995 48,909 8.18 3.5
1995 6,810 5.04 3.8
1996 68,345 8.14 4.5
1997 80,639 8.84 5.5
1997 54,225 5.83 5.8
1998 80,220 13.63 6.5
1999 101,836 10.61 7.5
2000 142,019 8.65 8.5
2001 92,280 11.27 10.0
--------------
787,255 $ 8.96 6.3
==============
------------------------------------------------------------------------------------------------------
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
MANAGEMENT RECOGNITION PLAN
In connection with the acquisition of Troy Hill Federal Savings Bank, 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, 2001, there were 29,104 shares held in the Management
Recognition Plan trust. During 2001, 2,600 shares were distributed, with
an associated compensation expense of $32,000. An additional 10,400
shares have been 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 (loss) on
securities available for sale. Other comprehensive income and related tax
effects for the years ended December 31 consists of:
---------------------------------------------------------------------------------------------------------------------------
(Amounts in thousands) 2001 2000 1999 (1)
---------------------------------------------------------------------------------------------------------------------------
Unrealized Reclassification Unrealized Reclassification Unrealized Reclassification
Gain Adjustment Gain Adjustment Loss (1) Adjustment
----------- ------------------ -------------- ----------------- ------------- -----------------
Before tax amount $ 7,897 $ (292) $ 13,727 $ 56 $ (18,092) $ (527)
Tax (expense) benefit (2,685) 99 (4,667) (19) 6,236 94
----------- ------------------ -------------- ----------------- ------------- -----------------
After tax amount $ 5,212 $ (193) $ 9,060 $ 37 $ (11,856) $ (433)
=========== ================== ============== ================= ============= =================
---------------------------------------------------------------------------------------------------------------------------
(1) Includes transfer of securities from held to maturity to available
for sale.
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.
43
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:
----------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) 2001 2000
-------------------------- --------------------------
Carrying Fair Carrying Fair
amount value amount value
----------------------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS:
Cash equivalents $ 15,479 $ 15,479 $ 13,326 $ 13,326
Securities available for sale 640,282 640,282 605,414 605,414
Loans receivable 527,485 533,748 512,228 517,153
Accrued interest receivable 8,219 8,219 8,220 8,220
FHLB stock 21,889 21,889 19,899 19,899
Interest rate contracts - - 1 2
Bank owned life insurance 22,524 22,524 16,641 16,641
FINANCIAL LIABILITIES:
Deposits 592,052 600,279 508,913 512,130
Borrowed funds 553,643 569,492 588,089 593,738
Guaranteed preferred beneficial interest
in subordinated debt, net 24,159 22,124 24,115 20,948
Accrued interest payable 4,002 4,002 4,198 4,198
----------------------------------------------------------------------------------------------------------------------
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:
----------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) 2001 2000
----------------------------------------------------------------------------------------------------------------------
Interest rate cap contracts $ - $ 10,000
Loans in process and commitments:
Fixed interest rate 10,988 14,502
Variable interest rate 28,672 16,779
Lines of credit:
Commercial 27,359 21,139
Consumer 16,187 13,865
Letters of credit:
Commercial - -
Standby 4,941 1,229
----------------------------------------------------------------------------------------------------------------------
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.
44
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, 2001 the Bank meets all capital adequacy
requirements to which it is subject.
As of December 31, 2001, 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 following table. There are no conditions or events
since that notification that have changed the categorization.
Tangible and core capital levels in the following table 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 minimum 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, 2001, of up to approximately $13.2 million of
retained earnings of $27.4 million at December 31, 2001, less any
dividends declared subsequent to December 31, 2001 plus net income
between January 1, 2002, and the date of any such dividend declaration.
For the years ended December 31, 2001 and 1999, the Bank declared
dividends to the Company of $6.0 million and $5.0 million, respectively.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
14. REGULATORY MATTERS AND INSURANCE OF ACCOUNTS (CONTINUED)
The following table sets forth certain information concerning regulatory
capital:
- ----------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands) TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES: ACTION PROVISIONS:
------------------------- ------------------------- ------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ----------------------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 2001:
Total Capital
(to Risk Weighted Assets) $ 87,374 13.41% $ 52,107 8.00% $ 65,133 10.00%
Core Capital
(to Adjusted Tangible Assets) $ 82,574 6.79% $ 48,640 4.00% $ 60,780 5.00%
Tangible Capital
(to Tangible Assets) $ 82,574 6.79% $ 18,240 1.50% N/A N/A
Tier I Capital
(to Risk Weighted Assets) $ 82,574 12.68% N/A N/A $ 39,080 6.00%
AS OF DECEMBER 31, 2000:
Total Capital
(to Risk Weighted Assets) $ 84,100 16.20% $ 41,531 8.00% $ 51,914 10.00%
Core Capital
(to Adjusted Tangible Assets) $ 79,480 6.83% $ 46,572 4.00% $ 58,215 5.00%
Tangible Capital
(to Tangible Assets) $ 79,480 6.83% $ 17,465 1.50% N/A N/A
Tier I Capital
(to Risk Weighted Assets) $ 79,480 15.31% N/A N/A $ 31,148 6.00%
- ----------------------------------------------------------------------------------------------------------------------------
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly earnings per share data may vary from annual earnings due to
rounding.
-------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands, except share data) First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------------------------------------------------------------------------------------------------------------------
2001:
-----
Interest income $ 20,432 $ 20,225 $ 19,601 $ 19,410
Interest expense 15,398 15,267 14,772 14,353
-------- -------- -------- --------
Net interest income 5,034 4,958 4,829 5,057
Provision for loan losses 6 33 5 3
-------- -------- -------- --------
Net interest income after provision for loan losses 5,028 4,925 4,824 5,054
Net realized gain (loss) on sale of securities available for sale 3 (25) 758 177
Other noninterest income 770 872 1,009 1,233
Noninterest expense 3,632 3,773 3,696 4,291
-------- -------- -------- --------
Net income before income taxes and extraordinary item 2,169 1,999 2,895 2,173
Provision for income taxes 343 282 548 351
-------- -------- -------- --------
Income before extraordinary item 1,826 1,717 2,347 1,822
Extraordinary item, net of tax - - (483) -
-------- -------- -------- --------
Net income $ 1,826 $ 1,717 $ 1,864 $ 1,822
======== ======== ======== ========
Diluted net income per share $ 0.26 $ 0.25 $ 0.27 $ 0.26
======== ======== ======== ========
2000:
-----
Interest income $ 18,388 $ 19,524 $ 19,945 $ 20,605
Interest expense 13,654 14,560 15,143 15,739
-------- -------- -------- --------
Net interest income 4,734 4,964 4,802 4,866
(Recovery of) provision for loan losses (452) 126 11 260
-------- -------- -------- --------
Net interest income after (recovery of) provision for loan losses 5,186 4,838 4,791 4,606
Net realized gain (loss) on sale of securities available for sale 4 - (37) 5
Other noninterest income 661 799 747 714
Noninterest expense 3,349 3,633 3,680 3,676
-------- -------- -------- --------
Net income before income taxes 2,502 2,004 1,821 1,649
Provision for income taxes 578 374 187 104
-------- -------- -------- --------
Net income $ 1,924 $ 1,630 $ 1,634 $ 1,545
======== ======== ======== ========
Diluted net income per share $ 0.28 $ 0.23 $ 0.23 $ 0.22
======== ======== ======== ========
---------------------------------------------------------------------------------------------------------------------
47
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:
------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF FINANCIAL CONDITION
(Dollar amounts in thousands) 2001 2000
------------------------------------------------------------------------------------------------
ASSETS:
Interest-earning deposits $ 891 $ 831
Equity in net assets of subsidiaries 133,710 122,434
Other assets 3,844 3,000
--------- ---------
Total assets $ 138,445 $ 126,265
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Subordinated debt, net $ 24,159 $ 24,115
Payable to subsidiaries 32,750 33,500
Accrued expenses and other liabilities 1,633 387
Stockholders' equity 79,903 68,263
--------- ---------
Total liabilities and stockholders' equity $ 138,445 $ 126,265
========= =========
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands) 2001 2000 1999
------------------------------------------------------------------------------------------------
INCOME:
Equity in undistributed net income of subsidiaries $ 8,192 $ 8,242 $ 6,894
Management fee income, from subsidiaries 3,522 3,486 2,612
Interest and other income 526 319 742
--------- --------- ---------
Total income 12,240 12,047 10,248
EXPENSE:
Interest expense, to subsidiary 3,875 4,609 3,957
Compensation and employee benefits 1,596 1,476 1,244
Other 285 238 115
--------- --------- ---------
Total expense 5,756 6,323 5,316
--------- --------- ---------
Income before benefit from income taxes 6,484 5,724 4,932
Benefit from income taxes (745) (1,009) (829)
--------- --------- ---------
NET INCOME $ 7,229 $ 6,733 $ 5,761
========= ========= =========
------------------------------------------------------------------------------------------------
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
16. ESB FINANCIAL CORPORATION - CONDENSED FINANCIAL STATEMENTS (PARENT
COMPANY ONLY) (CONTINUED)
--------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands) 2001 2000 1999
--------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 7,229 $ 6,733 $ 5,761
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Equity in undistributed net income of subsidiaries (8,192) (8,242) (1,894)
(Gain) loss on sale of securities available for sale (257) 37 (377)
Other, net 697 629 (783)
------- ------- -------
Net cash (used in) provided by operating activities (523) (843) 2,707
------- ------- -------
INVESTING ACTIVITIES:
Purchases of securities (244) (596) (1,437)
Principal repayments of securities - - 2,090
Proceeds from the sale of securities available for sale 1,749 1,670 1,022
Payment for purchase of SHS, net of cash acquired - (3,082) -
Cash acquired from WSB, net of payment for purchase 3,211 - -
------- ------- -------
Net cash provided by (used in) investing activities 4,716 (2,008) 1,675
------- ------- -------
FINANCING ACTIVITIES:
Increase in payable to subsidiaries (750) 6,465 895
Increase in subordinated debt, net 44 44 44
Proceeds received from exercise of stock options 316 215 269
Dividends paid (2,620) (2,179) (1,878)
Payments to acquire treasury stock (1,667) (3,134) (2,839)
Stock purchased by ESOP (44) (98) (864)
Principal repayment of ESOP loan 588 606 469
------- ------- -------
Net cash (used in) provided by financing activities (4,133) 1,919 (3,904)
------- ------- -------
Increase (decrease) in cash equivalents 60 (932) 478
Cash equivalents at beginning of period 831 1,763 1,285
------- ------- -------
Cash equivalents at end of period $ 891 $ 831 $ 1,763
======= ======= =======
--------------------------------------------------------------------------------------------------------------
17. ACQUISITION
WSB HOLDING COMPANY
On October 1, 2001, the Company completed its acquisition of WSB Holding
Company (WSB) and its subsidiary, Workingmens Bank, based in Pittsburgh,
Pennsylvania.
Under the terms of the merger agreement, WSB merged with and into the
Company. The consideration paid by the Company in connection with the
acquisition consisted of $3.3 million in cash and 216,000 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 Workingmens have been included in the Company's consolidated financial
statements from October 1, 2001. Goodwill arising from this transaction
was $315,000.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
18. EFFECT OF RECENT ACCOUNTING AND REGULATORY PRONOUNCEMENTS
In January of 2002, the Company will be required to adopt FASB No. 142,
as discussed on page 20. The Company has determined that if FASB No.
142 had been in effect in the years ended December 31, 2001, 2000 and
1999, the result would have been:
----------------------------------------------------------------------
(Dollar amounts in thousands,except share data)
----------------------------------------------------------------------
2001 2000 1999
--------- --------- ---------
Reported net income $ 7,229 $ 6,733 $ 5,761
Add back: Goodwill amortization 742 732 603
--------- --------- ---------
Adjusted net income $ 7,971 $ 7,465 $ 6,364
========= ========= =========
Basic earnings per share:
Reported earnings per share $ 1.06 $ 0.98 $ 0.88
Goodwill amortization 0.11 0.11 0.09
--------- --------- ---------
Adjusted earnings per share $ 1.17 $ 1.09 $ 0.97
========= ========= =========
Diluted earnings per share:
Reported earnings per share $ 1.03 $ 0.97 $ 0.86
Goodwill amortization 0.11 0.11 0.09
--------- --------- ---------
Adjusted earnings per share $ 1.14 $ 1.08 $ 0.95
========= ========= =========
----------------------------------------------------------------------
50
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
ESB FINANCIAL CORPORATION
We have audited the accompanying consolidated statements of financial condition
of ESB Financial Corporation and subsidiaries, as of December 31, 2001 and 2000
and the related consolidated statements of operations, changes in stockholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits. The consolidated
financial statements of ESB Financial Corporation and subsidiaries, as of
December 31, 1999 were audited by other auditors whose report dated January 20,
2000, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 2001 and 2000 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of ESB
Financial Corporation and subsidiaries as of December 31, 2001 and the
consolidated results of their operations and their cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States.
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
January 25, 2002
51
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:
LEGG MASON WOOD WALKER, INC. SANDLER O'NEILL & PARTNERS, LP [ESBF LOGO]
2 Oliver Plaza 919 Third Avenue, 6th Floor
Pittsburgh, PA 15222 New York, NY 10022
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
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 $10.35 and $10.77,
respectively, as of January 31, 2002.
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:
- ----------------------------------------------------------------------------
MARKET PRICE
HIGH LOW CLOSE
- ----------------------------------------------------------------------------
2001 QUARTER ENDED
December 31 $11.75 $10.30 $10.35
September 30 13.00 11.11 11.30
June 30 13.25 10.36 12.65
March 31 11.46 8.18 11.46
2000 QUARTER ENDED
December 31 $8.75 $7.60 $8.18
September 30 8.70 7.92 8.13
June 30 9.06 7.01 8.33
March 31 9.38 8.43 8.43
- ----------------------------------------------------------------------------
STOCK DIVIDENDS
The Company has declared the following stock dividends since its inception:
STOCK DIVIDEND
RECORD DATE PAYMENT DATE PERCENTAGE
- ----------- ------------ ----------
May 17, 2000 May 31, 2000 10%
May 15, 1998 May 29, 1998 10%
July 31, 1997 August 25, 1997 10%
52
STOCK AND DIVIDEND INFORMATION (CONTINUED)
- --------------------------------------------------------------------------------
CASH DIVIDENDS
The Company has paid regular quarterly cash dividends since its inception in
June 1990. During the past two years ended December 31, 2001, the Company
declared cash dividends with the following record and payment dates:
CASH DIVIDENDS
RECORD DATE PAYMENT DATE PER SHARE
- ----------- ------------ ---------
December 31, 2001 January 25, 2002 $0.100
September 28, 2001 October 25, 2001 $0.100
June 29, 2001 July 25, 2001 $0.100
March 30, 2001 April 25, 2001 $0.083
December 29, 2000 January 25, 2001 $0.083
September 29, 2000 October 25, 2000 $0.083
June 30, 2000 July 25, 2000 $0.083
March 31, 2000 April 25, 2000 $0.068
STOCK SPLITS
The Company has declared the following stock splits since its inception:
STOCK SPLIT
RECORD DATE PAYMENT DATE PERCENTAGE
- ----------- ------------ ----------
May 18, 2001 May 30, 2001 20%
December 31, 1994 January 25, 1995 20%
December 31, 1993 January 24, 1994 20%
May 12, 1993 June 7, 1993 20%
December 31, 1992 January 25, 1993 20%
June 30, 1992 July 25, 1992 20%
December 31, 1991 January 25, 1992 20%
NUMBER OF STOCKHOLDERS AND SHARES OUTSTANDING
As of December 31, 2001, there were 2,344 registered stockholders of record and
7,320,388 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.
REGISTRAR AND TRANSFER AGENT
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
53
CORPORATE INFORMATION
- --------------------------------------------------------------------------------
ANNUAL MEETING
The annual meeting of the Company's stockholders will be held at 4:00
p.m., on Wednesday, April 17, 2002, 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, Group
Senior Vice President of Operations and Corporate Secretary, ESB
Financial Corporation, 600 Lawrence Avenue, Ellwood City, PA 16117.
EQUAL EMPLOYMENT OPPORTUNITY
ESB Financial Corporation has adopted an affirmative action program to
assure equal opportunity for every employee and hires, trains, promotes,
compensates and makes all other employment decisions without regard to
race, color, religion, sex, age, national origin, disability or veteran
status.
CORPORATE HEADQUARTERS
ESB Financial Corporation
600 Lawrence Avenue
Ellwood City, PA 16117
Phone: (724) 758-5584
SUBSIDIARY COMPANIES
ESB Bank, F.S.B.
ESB Financial Services, Inc.
PennFirst Financial Advisory Services, Inc.
AMSCO, Inc.
ESB Bank Building Associates
McCormick Place Joint Venture
Madison Woods Joint Venture
McCormick Farms, LLC
The Links at Deer Run Associates, LLC
Brandy One, LLC
PennFirst Financial Services, Inc.
PennFirst Capital Trust I
THF, Inc d/b/a Elite Settlement Services
INDEPENDENT ACCOUNTANTS SPECIAL COUNSEL
Ernst & Young L.L.P. Elias, Matz, Tiernan & Herrick L.L.P.
One Oxford Centre 734 15th Street, NW
Pittsburgh, PA 15219 Washington, DC 20005
54
BOARD OF DIRECTORS
- --------------------------------------------------------------------------------
ESB FINANCIAL CORPORATION
-------------------------
WILLIAM B. SALSGIVER
Chairman of the Board
A Principal - Perry Homes
HERBERT S. SKUBA
Vice Chairman of the Board
Director, President & CEO - Ellwood City Hospital
CHARLOTTE A. ZUSCHLAG
President & Chief Executive Officer
GEORGE WILLIAM BLANK, JR.
President - George W. Blank Supply Company
LLOYD L. KILDOO
Owner & Funeral Director - Glenn-Kildoo Funeral Homes
CHARLES DELMAN
Retired Chairman, President & CEO - ESB Bancorp, Inc.
MARIO J. MANNA
Retired Tax Collector - Borough of Coraopolis
EDMUND C. SMITH
Retired Works Manager - ARMCO, Ambridge
EDWIN A. THANER, P.E.
President & Principal Engineer - E.A. Thaner & Associates
ESB BANK, F.S.B.
----------------
WILLIAM B. SALSGIVER
Chairman of the Board
A Principal - Perry Homes
HERBERT S. SKUBA
Vice Chairman of the Board
Director, President & CEO - Ellwood City Hospital
CHARLOTTE A. ZUSCHLAG
President & Chief Executive Officer
RAYMOND K. AIKEN
Retired President & COO - Lockhart Chemical Co
GEORGE WILLIAM BLANK, JR.
President - George W. Blank Supply Company
CHARLES DELMAN
Retired Chairman, President & CEO - ESB Bancorp, Inc.
GUY DILLE
Retired Financial Officer - Williams & Company, Inc.
LLOYD L. KILDOO
Owner & Funeral Director - Glenn-Kildoo Funeral Homes
MARIO J. MANNA
Retired Tax Collector - Borough of Coraopolis
EDWARD W. PRESKAR
Retired Director of Facilities- School District of Pittsburgh
EDMUND C. SMITH
Retired Works Manager - ARMCO, Ambridge
JOSEPH W. SNYDER
Senior Buyer - Equitable Resources, Inc.
EDWIN A. THANER, P.E.
President & Principal Engineer - E.A. Thaner & Associates
JEFREY F. WALL
Vice President/Operations - R.J. Rhodes Transit, Inc.
55
CORPORATE OFFICERS, ADVISORY BOARD AND BANK OFFICERS
- --------------------------------------------------------------------------------
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
Group Senior Vice President/Administration GROUP SENIOR VICE PRESIDENTS
----------------------------
CHARLES P. EVANOSKI Thomas F. Angotti
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 SENIOR VICE PRESIDENTS
Group Senior Vice President/Lending ----------------------
ROBERT J. COLALELLA Robert J. Colalella
Senior Vice President/Marketing, Facilities & CRA John W. Donaldson II
JOHN W. DONALDSON II Peter J. Greco
Senior Vice President/Lending Teresa Krukenberg
PETER J. GRECO Ronald E. Pompeani
Senior Vice President/Lending Marilyn Scripko
TERESA KRUKENBERG John T. Stunda
Senior Vice President/Operations
RONALD E. POMPEANI VICE PRESIDENTS
Senior Vice President/Lending ---------------
MARILYN SCRIPKO Deborah A. Allen
Senior Vice President/Lending Nancy A. Glitsch
JOHN T. STUNDA Paul F. Hoyson
Senior Vice President/Human Resources Lawrence C. Kerr
Mary Ann Leonardo
Ronald J. Mannarino
Sally A. Mannarino
Larry Mastrean
ESB BANK, F.S.B. ADVISORY BOARD Mark A. Platz
- ------------------------------- Bonita L. Wadding
CHARLES DELMAN Joanne C. Wienand
Retired Chairman, President & CEO - ESB Bancorp, Inc. Wayne G. Zerishnek
Pamela K. Zikeli
GIBSON E. BROCK
Retired Manager of Engineering - J & L Steel Corporation
ASSISTANT VICE PRESIDENTS
GEORGE C. DORSCH Robert A. Ackerman
Retired Engineer - Patricia M. Aumiller
Dept. of Transportation, Commonwealth of Pennsylvania Janet S. Barletta
Kathleen A. Bender
DR. ALLEN GASTFRIEND Charlotte M. Bolinger
Retired Dentist Frank R. Brzozowski
Thomas E. Campbell
CHARLES W. HERGENROEDER, III Amy E. Dicks
Partner - Hergenroeder, Rega, Sommer, L.L.C. Judy L. Diesing
Katina J. Eliou
WATSON F. MCGAUGHEY, JR. Joyce Erb
President - McGaughey Buses, Inc. John R. Fogg
Deborah S. Goehring
DONALD R. MILLER Margaret A. Haefele
Retired President - Miller & Sons Chevrolet Brian Hulme
Louise P. Massung
JOHN J. SYKA Christopher McCaw
Owner - John J. Syka Funeral Home, Inc. Beth A. McClymonds
Marianne L. Mills
WSB ADVISORY BOARD Ann R. Nelson
------------------ Deborah F. Pagley
CHARLES DELMAN Timothy S. Robinson
Retired Chairman, President & CEO - ESB Bancorp, Inc. Patricia Schramm
Joyce A. Stellitano
JOHANNA C. GUEHL Judy E. Sucola
Partner - Brabender Guehl Volynda Teets
Sara F. Vattimo
JOSEPH J. MANFRED Barbara Wetzel
Retired - Manfred Insurance Agency
STANFORD H. ROSENBERG ASSISTANT TREASURER
Professor - LaRoche College -------------------
Nancy J. Newton
JOHN P. MUELLER ASSISTANT SECRETARIES
Retired - Muellers Hardware ---------------------
Retired - Chairman of the Board, WSB Linda A. MacMurdo
Dana M. Martz
Robin Scheffler
THF, INC.
---------
Karen J. Myers - President
56
BOARD OF DIRECTORS AND EXECUTIVE AND SENIOR MANAGEMENT
- --------------------------------------------------------------------------------
[Photo of Board of Directors]
Board of Directors of ESB Bank, F.S.B. are, seated from left, William B.
Salsgiver, Charlotte A. Zuschlag, Charles Delman, Edmund C. Smith, Lloyd L.
Kildoo, and Herbert S. Skuba. Standing from the left are, Edwin A. Thaner,
Joseph W. Snyder, Jefrey F. Wall, Guy Dille, Mario J. Manna, Raymond K. Aiken,
George W. Blank, Jr. and Edward W. Preskar.
[Photo of Executive and Senior Management]
Executive and Senior Management of ESB Bank, F.S.B. are, seated from left,
Charlotte A. Zuschlag, Frank D. Martz, Charles P. Evanoski, Thomas F. Angotti,
Robert C. Hilliard and Todd F. Palkovich. Standing from the left are, Ronald E.
Pompeani, Teresa Krukenberg, John W. Donaldson II, John T. Stunda, Robert J.
Colalella, Marilyn Scripko and Peter J. Greco.
57
OFFICE LOCATIONS AND BRANCH MANAGERS
- --------------------------------------------------------------------------------
ALIQUIPPA - JANET BARLETTA
2301 Sheffield Road, Aliquippa, PA 15001
724.378.4436
AMBRIDGE - KATINA ELIOU
506 Merchant Street, Ambridge, PA 15003
724.266.5002
BALDWIN - PATRICIA SCHRAMM
5035 Curry Road - Pittsburgh, PA 15236
412.655.8670
BEECHVIEW - BARBARA WETZEL
1609 Broadway Avenue, Pittsburgh, PA 15216
412.344.7211
BRIGHTON HEIGHTS - JUDY SUCOLA
3619 California Avenue, Pittsburgh, PA 15212 [Map of Office Locations
412.761.4994 and Branch Managers]
CENTER TWP - JUDY DIESING
3531 Brodhead Road, Monaco, PA 15061
724.774.0332
CORAOPOLIS - LARRY MASTREAN
900 Fifth Avenue, Coraopolis, PA 15108
412.264.8862
ELLWOOD CITY - PAMELA ZIKELI
600 Lawrence Avenue, Ellwood City, PA 16117
724.758.5584
FOX CHAPEL - JOYCE STELLITANO
1060 Freeport Road, Pittsburgh, PA 15238
412.782.6500
FRANKLIN TWP - TOM CAMPBELL
1793 Mercer Road, Ellwood City, PA 16117
724.752.2500
NEW CASTLE - CHARLOTTE BOLINGER
Lawrence Village Plaza, Newcastle, PA 16101
724.654.7781
NORTH SHORE - JOYCE ERB
807 Middle St. - Pittsburgh, PA 15212
412.231.7297
SPRING HILL - MARIANNE MILLS
Itin & Rhine Streets, Pittsburgh, PA 15212
412.231.0819
SPRINGDALE - FRANK BRZOZOWSKI
849 Pittsburgh Street, Springdale, PA 15144
724.275.5879
TROY HILL - PEGGY HAEFELE
1706 Lowrie Street, Pittsburgh, PA 15212
412.231.8238
WEXFORD - DEBBIE ALLEN
101 Wexford-Bayne Road, Wexford, PA 15090
724.934.8989
ZELIENOPLE - DEBBIE GOEHRING
Northgate Plaza, Zelienople, PA 16063
724.452.6500
58
[Photo of Center Township Office]
November 12, 2001 marked the official ribbon cutting for the grand re-opening
of the Center Township Office. This office now offers the progressive line of
quality financial service products ESB Bank customers rely upon for all their
banking needs.
ESB FINANCIAL CORPORATION
600 Lawrence Avenue
Ellwood City, Pennsylvania 16117
Phone: (724) 758-5584