UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For Quarter Ended: September 30, 2003

Commission File Number: 0-19345

ESB FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

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

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

(724) 758-5584

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the Registrant is an accelerated filer ( as defined in Exchange Act Rule 12b-2) Yes ¨ No x

Number of shares of common stock outstanding as of September 30, 2003:

Common Stock, $0.01 par value	10,788,857 shares
(Class)	(Outstanding)

ESB FINANCIAL CORPORATION

TABLE OF CONTENTS

PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Statements of Financial Condition as of September 30, 2003 (Unaudited) and December 31, 2002	1
	Consolidated Statements of Operations for the three and nine months ended September 30, 2003 and 2002 (Unaudited)	2
	Consolidated Statement of Changes in Stockholders’ Equity For the nine months ended September 30, 2003 (Unaudited)	3
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and 2002 (Unaudited)	4
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	25
Item 4.	Controls and Procedures	26
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	26
Item 2.	Changes in Securities	26
Item 3.	Defaults Upon Senior Securities	26
Item 4.	Submission of Matters to a Vote of Security Holders	26
Item 5.	Other Information	26
Item 6.	Exhibits and Reports on Form 8-K	26
	Signatures	27

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

ESB Financial Corporation and Subsidiaries

Consolidated Statements of Financial Condition

As of September 30, 2003 (Unaudited) and December 31, 2002

(Dollar amounts in thousands)

	September 30, 2003			December 31, 2002
	(Unaudited)
Assets
Cash on hand and in banks	$	5,224		$	4,843
Interest-earning deposits		9,133			9,837
Federal funds sold		2,327			453
Securities available for sale; cost of $902,085 and $845,706		919,235			865,135
Loans receivable, net of allowance for loan losses of $3,916 and $4,237		320,539			339,324
Loans held for sale		339			1,568
Accrued interest receivable		7,102			8,405
Federal Home Loan Bank (FHLB) stock		30,945			29,887
Premises and equipment, net		9,435			9,290
Real estate acquired through foreclosure, net		1,198			1,092
Real estate held for investment		12,557			13,195
Goodwill		7,127			7,127
Intangible assets		813			1,342
Prepaid expenses and other assets		7,410			4,506
Bank owned life insurance		24,411			23,691
Total assets	$	1,357,795		$	1,319,695
Liabilities and Stockholders' Equity
Liabilities:
Deposits	$	605,376		$	589,826
FHLB advances		556,954			549,274
Repurchase agreements		57,000			45,600
Other borrowings		66			2,449
Guaranteed preferred beneficial interest in subordinated debt, net		29,176			24,203
Advance payments by borrowers for taxes and insurance		1,084			2,099
Accrued expenses and other liabilities		10,837			9,873
Total liabilities		1,260,493			1,223,324
Stockholders' Equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued		—			—
Common stock, $.01 par value, 30,000,000 shares authorized;         10,930,393 and 9,172,379 shares issued;         10,788,857 and 8,753,660 shares outstanding		109			92
Additional paid-in capital		59,997			58,297
Treasury stock, at cost; 141,536 and 418,719 shares		(2,012	)		(4,769	)
Unearned Employee Stock Ownership Plan (ESOP) shares		(6,751	)		(2,305	)
Unvested shares held by Management Recognition Plan (MRP)		(203	)		(225	)
Retained earnings		34,843			32,458
Accumulated other comprehensive income, net		11,319			12,823
Total stockholders' equity		97,302			96,371
Total liabilities and stockholders' equity	$	1,357,795		$	1,319,695

See accompanying notes to consolidated financial statements.

1

ESB Financial Corporation and Subsidiaries

Consolidated Statements of Operations

For the three and nine months ended September 30, 2003 and 2002 (Unaudited)

(Dollar amounts in thousands, except share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2003			2002			2003			2002
Interest income:
Loans receivable	$	5,223		$	6,087		$	16,492		$	24,013
Taxable securities available for sale		8,178			10,572			26,673			27,359
Tax free securities available for sale		1,075			1,191			3,351			3,504
FHLB stock		154			197			562			637
Deposits with banks and federal funds sold		18			35			61			100
Total interest income		14,648			18,082			47,139			55,613
Interest expense:
Deposits		3,087			4,480			10,213			14,125
Borrowed funds		6,095			7,709			19,612			23,334
Guaranteed preferred beneficial interest in subordinated debt		574			557			1,715			1,670
Total interest expense		9,756			12,746			31,540			39,129
Net interest income		4,892			5,336			15,599			16,484
(Recovery of) provision for loan losses		(237	)		(103	)		(267	)		(580	)
Net interest income after (recovery of) provision for loan losses		5,129			5,439			15,866			17,064
Noninterest income:
Fees and service charges		564			377			1,225			1,258
Net gain on sale of loans		153			37			425			671
Increase of cash surrender value of bank owned life insurance		230			293			719			890
Net realized gain on sale of securities available for sale		460			423			1,226			548
Income from real estate joint ventures		446			80			1,076			165
Other		155			41			443			421
Total noninterest income		2,008			1,251			5,114			3,953
Noninterest expense:
Compensation and employee benefits		2,812			2,404			8,309			7,160
Premises and equipment		433			99			1,321			1,258
Federal deposit insurance premiums		24			25			73			77
Data processing		358			627			1,022			1,003
Amortization of intangible assets		51			58			154			173
Other		816			709			2,624			3,165
Total noninterest expense		4,494			3,922			13,503			12,836
Income before income taxes		2,643			2,768			7,477			8,181
Provision for income taxes		478			498			1,278			1,452
Net income	$	2,165		$	2,270		$	6,199		$	6,729
Net income per share
Basic	$	0.21		$	0.22		$	0.61		$	0.66
Diluted	$	0.20		$	0.22		$	0.58		$	0.65
Dividends Declared per share	$	0.10		$	0.10		$	0.30		$	0.30

Net income per share for the quarter and nine months ended September 30, 2002 has been restated to reflect a six-for-five stock split paid May 15, 2003, to the stockholders of record at the close of business on May 1, 2003.

See accompanying notes to consolidated financial statements.

2

ESB Financial Corporation and Subsidiaries

Consolidated Statement of Changes in Stockholders’ Equity

For the nine months ended September 30, 2003 (Unaudited)

(Dollar amounts in thousands)

	Common stock		Additional paid-in capital			Treasury stock			Unearned ESOP shares			Unvested MRP shares			Retained earnings			Accumulated other comprehensive income, net of tax			Total stockholders' equity
Balance at December 31, 2002	$	92	$	58,297		$	(4,769	)	$	(2,305	)	$	(225	)	$	32,458		$	12,823		$	96,371
Comprehensive results:
Net income		—		—			—			—			—			6,199			—			6,199
Other comprehensive results, net		—		—			—			—			—			—			(394	)		(394	)
Reclassification adjustment		—		—			—			—			—			—			(1,110	)		(1,110	)
Total comprehensive results		—		—			—			—			—			6,199			(1,504	)		4,695
Cash dividends at $0.30 per share		—		—			—			—			—			(2,877	)		—			(2,877	)
Six-for-five stock split		17		—			—			—			—			(17	)		—			—
Payment of cash in lieu of fractional shares for six-for-five stock split		—		(10	)		—			—			—			—			—			(10	)
Purchase of treasury stock, at cost (192,959 shares)		—		—			(2,759	)		—			—			—			—			(2,759	)
Reissuance of treasury stock for stock option exercises		—		—			1,533			—			—			(920	)		—			613
Purchase of treasury stock for ESOP (342,465 shares)		—		1,017			3,983			(5,000	)		—			—			—			—
Principal payments on ESOP debt		—		411			—			554			—			—			—			965
Effect of compensatory stock options		—		282			—			—			—			—			—			282
Accrued compensation expense MRP		—		—			—			—			22			—			—			22
Balance at September 30, 2003	$	109	$	59,997		$	(2,012	)	$	(6,751	)	$	(203	)	$	34,843		$	11,319		$	97,302

See accompanying notes to consolidated financial statements.

3

ESB Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows

For the nine months ended September 30, 2003 and 2002 (Unaudited)

(Dollar amounts in thousands)

	Nine months ended September 30,
	2003			2002
Operating activities:
Net income	$	6,199		$	6,729
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization for premises and equipment		721			691
Recovery of loan losses		(267	)		(110	)
Amortization of premiums and accretion of discounts		3,573			1,011
Origination of loans available for sale		(33,267	)		(15,029	)
Proceeds from sale of loans available for sale		34,497			49,009
Gain on sale of securities available for sale		(1,226	)		(548	)
Amortization of intangible assets		529			173
Compensation expense on ESOP and MRP		997			611
Decrease in accrued interest receivable		1,303			210
Increase in prepaid expenses and other assets		(2,128	)		(4,278	)
Increase in accrued expenses and other liabilities		964			4,259
Other		3,054			(4,194	)
Net cash provided by operating activities		14,949			38,534
Investing activities:
Loan originations and purchases		(161,066	)		(114,560	)
Purchases of:
Securities available for sale		(412,881	)		(261,875	)
FHLB Stock		(1,058	)		(3,470	)
Fixed Assets		(874	)		(275	)
Principal repayments of:
Loans receivable		180,239			126,390
Securities available for sale		322,611			146,438
Proceeds from the sale of:
Securities available for sale		31,572			42,923
REO		126			47
Reductions (additions) to real estate held for investment		638			(7,069	)
Net cash used in investing activities		(40,693	)		(71,451	)
Financing activities:
Net increase in deposits		15,550			4,638
Proceeds from long-term borrowings		95,000			152,543
Repayments of long-term borrowings		(81,982	)		(104,935	)
Net increase (decrease) in short-term borrowings		3,679			(20,078	)
Proceeds received from exercise of stock options		613			443
Dividends paid		(2,806	)		(2,196	)
Proceeds from re-issuance, sale or (payments to acquire) treasury stock		2,241			(771	)
Stock purchased by ESOP		(5,000	)		—
Net cash provided by financing activities		27,295			29,644
Net increase (decrease) in cash equivalents		1,551			(3,273	)
Cash equivalents at beginning of period		15,133			15,479
Cash equivalents at end of period	$	16,684		$	12,206

4

ESB Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows, (Continued)

For the nine months ended September 30, 2003 and 2002 (Unaudited)

(Dollar amounts in thousands

	Nine months ended September 30,
	2003		2002
Supplemental information:
Interest paid	$	31,973	$	37,672
Income taxes paid		1,237		2,275
Supplemental schedule of non-cash investing and financing activities:
Dividends declared but not paid		1,079		781
Securitization of 1-4 family mortgage loans		—		135,310

See accompanying notes to consolidated financial statements.

5

ESB Financial Corporation and Subsidiaries

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, which are ESB Bank, F.S.B. (ESB or the Bank), PennFirst Financial Services, Inc., PennFirst Capital Trust I (the Trust), ESB Capital Trust II (the Trust II), THF, Inc., ESB Financial Services, Inc. (EFS) and AMSCO, Inc. (AMSCO).

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

The financial services operation that was previously under the Bank’s subsidiary, PennFirst Financial Advisory Services, Inc., has been moved to ESB Bank, effective September 23, 2003, and shall operate as a division of the Bank known as PennFirst Financial Advisory Services.

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

Basis of Presentation

The accompanying unaudited consolidated financial statements for the interim periods include all adjustments, consisting only of normal recurring accruals, which are necessary, in the opinion of management, to fairly reflect the Company’s financial position and results of operations. Additionally, these consolidated financial statements for the interim periods have been prepared in accordance with instructions for the Securities and Exchange Commission’s Form 10-Q and therefore do not include all information or footnotes necessary for a complete presentation of financial condition, results of operations and cash flows in conformity with generally accepted accounting principles. For further information, refer to the audited consolidated financial statements and footnotes thereto for the year ended December 31, 2002, as contained in the 2002 Annual Report to Stockholders.

The results of operations for the three and nine month periods ended September 30, 2003 are not necessarily indicative of the results that may be expected for the entire year. Certain amounts previously reported have been reclassified to conform to the current periods’ reporting format.

Operating Segments

An operating segment is defined as a component of an enterprise that engages in business activities that generate revenue and incur expense, the operating results of which are reviewed by management. At September 30, 2003, the Company was doing business through 17 full service banking branches, one loan production office and its various other subsidiaries. Loans and deposits are primarily generated from the areas where banking branches are located. The Company derives its income predominantly from interest on loans and securities and to a lesser extent, non-interest income. The Company’s principal expenses are interest paid on deposits and borrowed funds and normal operating costs. The Company’s operations are principally in the savings and loan industry. Consistent with internal reporting, the Company’s operations are reported in one operating segment, which is community banking.

6

Stock Based Compensation

The Company accounts for stock based compensation using the intrinsic value method in accordance with Accounting Principles Board (APB) Opinion 25, “Accounting for Stock Issued to Employees” and has adopted the disclosure provision of Financial Accounting Standards (FAS) No. 148, “Accounting for Stock Based Compensation-Transition and Disclosure.” 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. The disclosure provisions of FAS No. 148 require the presentation of net income and earnings per share assuming the reporting of compensation expense under FAS No. 123 “Accounting for Stock Based Compensation,” whereby the estimated fair value of the options is amortized to expense over the vesting period. 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 2003 and 2002: risk-free interest rates of 6.80%; dividend yields of 2.80%; volatility factors of the expected market price of the Company’s stock of 19.2%; a weighted average life of the option of 9.5 years. The following pro-forma information regarding compensation expense, net of tax, net income and earnings per share assumes the adoption of FAS No. 123 for stock options granted subsequent to December 31, 1994:

	Three Months Ended September 30,					Nine Months Ended September 30,
(Dollar amounts in thousands, except share data)	2003		2002			2003			2002
Net income, as reported	$	2,165	$	2,270		$	6,199		$	6,729
Compensation expense, under FAS 123, net of tax		0		(20	)		(40	)		(61	)
Pro forma net income	$	2,165	$	2,250		$	6,159		$	6,668
Basic net income per share, as reported	$	0.21	$	0.22		$	0.61		$	0.66
Pro forma basic net income per share	$	0.21	$	0.22		$	0.60		$	0.66
Diluted net income per share, as reported	$	0.20	$	0.22		$	0.58		$	0.65
Pro forma diluted net income per share	$	0.20	$	0.21		$	0.58		$	0.64

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.

Recent Accounting and Regulatory Pronouncements

In November 2002, the Financial Accounting Standards Board (FASB) issued Financial Interpretation (FIN) No. 45, “Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others.” FIN No. 45 requires a guarantor to make additional disclosures in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaking in issuing the guarantee. The initial recognition and measurement provisions of the interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, while the provisions of the disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of FIN No. 45 did not have a material impact on the Company’s financial condition, results of operations or cash flows.

7

In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities,” (VIEs) which addresses consolidation by business enterprises of variable interest entities. FIN No. 46 expands upon and strengthens existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. The Interpretation requires a variable interest entity to be consolidated by a company if that company is the “primary beneficiary” of that entity. The primary beneficiary is subject to a majority of the risk of loss from the VIEs activities, or is entitled to receive a majority of the VIE’s residual returns, or both. The consolidation requirements of FIN No. 46 apply immediately to VIEs created after January 31, 2003 and will apply to previously established entities in the fourth quarter of 2003. The Company has evaluated the prospective requirements of FIN No. 46 and does not believe it will have a significant impact on the Company’s financial position or results of operations.

The Company has determined that the provisions of FIN No. 46 may require deconsolidation of its subsidiary grantor trusts. In the event of deconsolidation, the grantor trusts would be deconsolidated and the junior subordinated debentures of the Company, owned by grantor trusts would, be disclosed. Deconsolidation of the trusts would not have a significant impact on the Company’s financial condition, results of operations or cash flows.

2. Subsequent Events

On October 21, 2003, the Company entered into an interest rate cap contract with Citibank. This cap contract has a notional amount that will be reported as an off-balance sheet item of $20 million, a strike rate of 5.00% and a maturity date of October 20, 2008. This transaction will be used as a cash-flow hedge and will be subject to FAS No. 133 as amended, “Accounting for Derivative Instruments and Hedging Activities.” The purpose of the interest rate cap is to protect the Company’s variable rate short term borrowings, which are tied to the 3-month LIBOR index, from the potential of an increase in short-term interest rates.

During the third quarter the Company announced the closing of its Brighton Heights Office effective December 31, 2003 due to slow growth in its market area. The assets of this office will be transferred to another branch location and the transition will have minimal effect on the operating results for the year ended December 31, 2003.

3. Guaranteed Preferred Beneficial Interest in Subordinated Debt

On December 9, 1997, the Trust, a statutory business trust established under Delaware law that is a subsidiary of the Company, issued $25.3 million, 8.625% Trust Preferred Securities (Preferred Securities) with a stated value and liquidation preference of $10 per share. The Company purchased $782,000 of common securities of the Trust. 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 and common securities were utilized by the Trust to invest in $26.1 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, in whole or in part, 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.

8

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.

During the second quarter of 2003, the Company redeemed $5.0 million (liquidation amount) of the Preferred Securities at a redemption price equal to the liquidation amount of $10.00, plus accrued and unpaid distributions thereon to April 17, 2003. The Company also redeemed $5.2 million principal amount of the Subordinated Debt on April 17, 2003. In connection with this redemption, the Company took a charge of approximately $189,000, net of tax, representing unamortized issuance costs on the Company’s 8.625% Trust Preferred Securities.

Unamortized deferred debt issuance costs associated with the Preferred Securities amounted to $854,000 and $1.1 million as of September 30, 2003 and December 31, 2002, respectively, and are amortized on a level-yield basis over the term of the Preferred Securities.

On April 10, 2003, the Trust II, a statutory business trust established under Delaware law that is a subsidiary of the Company, issued $10.0 million variable rate Preferred Securities with a stated value and liquidation preference of $1,000 per share. The Company purchased $310,000 of common securities of the Trust II. The Preferred Securities reset quarterly to equal the London Interbank Offer Rate Index (LIBOR) plus 3.25%. The Trust II’s obligations under the Preferred Securities issued are fully and unconditionally guaranteed by the Company.

The proceeds from the sale of the Preferred Securities and the common securities were utilized by the Trust II to invest in $10.3 million of variable rate Subordinated Debt of the Company. The Subordinated Debt is unsecured and ranks subordinate and junior in right of payment to all indebtedness, liabilities and obligations of the Company. The Subordinated Debt primarily represents the sole assets of the Trust II. Interest on the Preferred Securities is cumulative and payable quarterly in arrears. The Company has the right to optionally redeem the Subordinated Debt prior to the maturity date of April 24, 2033, on or after April 24, 2008, at the redemption price, plus accrued and unpaid distributions, if any, at the redemption date.

Under the occurrence of certain events, specifically, a tax event, investment company event or capital treatment event as more fully defined in the Indenture dated April 10, 2003, the Company may redeem in whole, but not in part, the Subordinated Debt at any time within 90 days following the occurrence of such event.

Proceeds from any redemption of the Subordinated Debt would cause a mandatory redemption of the Preferred Securities and the common securities having an aggregate liquidation amount equal to the principal amount of the Subordinated Debt redeemed.

Unamortized deferred debt issuance costs associated with the Preferred Securities amounted to $270,000 at September 30, 2003 and are amortized on a level yield basis.

9

4. Securities

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

(Dollar amounts in thousands)	Amortized cost		Unrealized gains		Unrealized losses			Fair value
September 30, 2003:
Trust Preferred securities	$	500	$	—	$	(83	)	$	417
U.S. Government securities		5,981		788		—			6,769
Municipal securities		86,775		5,175		(399	)		91,551
Equity securities		1,256		287		—			1,543
Corporate Bonds		112,097		5,672		(4,860	)		112,909
Mortgage-backed securities		695,476		11,214		(644	)		706,046
	$	902,085	$	23,136	$	(5,986	)	$	919,235
December 31, 2002:
Trust Preferred securities	$	1,467	$	21	$	(68	)	$	1,420
U.S. Government securities		5,978		818		—			6,796
Municipal securities		94,357		3,249		(62	)		97,544
Equity securities		1,313		100		(5	)		1,408
Corporate Bonds		112,187		4,754		(6,730	)		110,211
Mortgage-backed securities		630,404		17,400		(48	)		647,756
	$	845,706	$	26,342	$	(6,913	)	$	865,135

10

5. Loans Receivable

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

(Dollar amounts in thousands)	September 30, 2003		December 31, 2002
Loans Receivable
Mortgage loans:
Residential—single family	$	142,601	$	154,438
Residential—multi family		42,634		31,661
Commercial real estate		43,514		51,495
Construction		42,262		40,778
		271,011		278,372
Other loans:
Consumer		60,039		61,087
Commercial business		14,026		16,080
		345,076		355,539
Less:
Allowance for loan losses		3,916		4,237
Deferred loan fees and net discounts		153		88
Loans in process		20,468		11,890
	$	320,539	$	339,324
Loans Held for Sale
Mortgage loans:
Residential—single family	$	339	$	1,568

The following is a summary of the changes in the allowance for loan losses:

(Dollar amounts in thousands)	Totals
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
Recovery of loan losses		(410	)
Charge offs		(542	)
Recoveries		42
Balance, December 31, 2002		4,237
Recovery of loan losses		(267	)
Charge offs		(68	)
Recoveries		14
Balance, September 30, 2003	$	3,916

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6. Deposits

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

(Dollar amounts in thousands)	September 30, 2003				December 31, 2002
Type of accounts		Amount	%			Amount	%
Noninterest-bearing deposits	$	21,321	3.5	%	$	19,039	3.2	%
NOW account deposits		59,318	9.8	%		45,854	7.8	%
Money Market deposits		66,501	11.0	%		71,124	12.1	%
Passbook account deposits		100,893	16.7	%		93,271	15.8	%
Time deposits		357,343	59.0	%		360,538	61.1	%
	$	605,376	100.0	%	$	589,826	100.0	%
Time deposits mature as follows:
Within one year	$	187,010	30.9	%	$	221,325	37.5	%
After one year through two years		100,704	16.6	%		58,689	10.0	%
After two years through three years		45,831	7.6	%		46,871	7.9	%
After three years through four years		17,253	2.8	%		28,700	4.9	%
After four years through five years		5,177	0.9	%		3,499	0.6	%
Thereafter		1,368	0.2	%		1,454	0.2	%
	$	357,343	59.0	%	$	360,538	61.1	%

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7. Borrowed Funds

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

(Dollar amounts in thousands)	September 30, 2003				December 31, 2002
	Weighted average rate		Amount		Weighted average rate		Amount
FHLB advances:
Due within 12 months	3.22	%	$	201,045	4.44	%	$	187,949
Due beyond 12 months but within 2 years	5.03	%		87,468	4.37	%		102,055
Due beyond 2 years but within 3 years	4.21	%		104,654	5.03	%		73,885
Due beyond 3 years but within 4 years	4.39	%		61,980	4.94	%		61,715
Due beyond 4 years but within 5 years	3.93	%		71,060	4.11	%		67,859
Due beyond 5 years	5.41	%		30,747	5.40	%		55,811
			$	556,954			$	549,274
Repurchase agreements:
Due within 12 months	2.29	%	$	57,000	3.12	%	$	34,600
Due beyond 12 months but within 2 years	—			—	7.30	%		11,000
			$	57,000			$	45,600
Other borrowings:
ESOP borrowings
Due beyond 4 years but within 5 years	—		$	—	5.38	%	$	2,261
Treasury tax and loan note payable	0.85	%	$	66	1.09	%	$	188

Included in the $557.0 million of FHLB advances at September 30, 2003, is approximately $75.5 million of convertible select advances. These advances reset to the three month LIBOR index and have various spreads and call dates. At the reset date, if the three 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.

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8. Net Income Per Share

The following table summarizes the Company’s net income per share:

(Amounts, except earnings per share, in thousands)
	Three Months Ended September 30, 2003		Three Months Ended September 30, 2002
Net income	$	2,165	$	2,270
Weighted-average common shares outstanding		10,157		10,152
Basic earnings per share	$	0.21	$	0.22
Weighted-average common shares outstanding		10,157		10,152
Common stock equivalents due to effect of stock options		506		322
Total weighted-average common shares and equivalents		10,663		10,474
Diluted earnings per share	$	0.20	$	0.22
	Nine Months Ended September 30, 2003		Nine Months Ended September 30, 2002
Net income	$	6,199	$	6,729
Weighted-average common shares outstanding		10,181		10,127
Basic earnings per share	$	0.61	$	0.66
Weighted-average common shares outstanding		10,181		10,127
Common stock equivalents due to effect of stock options		520		287
Total weighted-average common shares and equivalents		10,701		10,414
Diluted earnings per share	$	0.58	$	0.65

Net Income per share for the quarter ended September 30, 2002 has been restated to reflect a six-for-five stock split paid May 15, 2003 to the stockholders of record at the close of business on May 1, 2003. The shares controlled by the ESOP of 685,653 and 436,298 at September 30, 2003 and September 30, 2002, respectively, are not considered in the weighted average shares outstanding until the shares are committed for allocation to an employee’s individual account. All of the outstanding options at September 30, 2003 were included in the computation of diluted earnings per share because the average market price of the common shares was greater than the options’ exercise prices.

Options to purchase 115,302 shares of common stock at $9.47 per share were outstanding as of September 30, 2002 but were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common shares. These options expire on June 16, 2008.

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9. Comprehensive Income

In complying with FAS No. 130, “Reporting Comprehensive Income,” the Company has developed the following table, which includes the tax effects of the components of other comprehensive income (loss). Other comprehensive income (loss) consists of net unrealized gain on securities available for sale. Other comprehensive gain (loss) and related tax effects for the nine months ended September 30, consists of:

(Dollar amounts in thousands)	2003						2002
	Unrealized Loss			Reclassification Adjustment			Unrealized Gain			Reclassification Adjustment
Before tax amount	$	(597	)	$	(1,682	)	$	18,433		$	(295	)
Tax (expense) benefit		203			572			(6,267	)		100
After tax amount	$	(394	)	$	(1,110	)	$	12,166		$	(195	)

For the nine months ended September 30, 2003, total comprehensive income was $4.7 million and for the nine months ended September 30, 2002, total comprehensive income was $18.7 million.

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

CHANGES IN FINANCIAL CONDITION

General. The Company’s total assets increased by $38.1 million, or 2.9%, to $1.4 billion at September 30, 2003 compared to $1.3 billion at December 31, 2002. This net increase was primarily the result of increases to cash and cash equivalents, securities, FHLB stock, prepaid expenses and other assets and bank owned life insurance (BOLI) of $1.6 million, $54.1 million, $1.1 million, $2.9 million and $720,000, respectively. Partially offsetting these increases were decreases in loans receivable, loans held for sale, accrued interest receivable, real estate held for investment and intangible assets of $18.8 million, $1.2 million, $1.3 million, $638,000 and $529,000, respectively. The increase in total assets reflects a corresponding increase in total liabilities of $37.2 million, or 3.0%, and an increase in stockholders’ equity of $931,000, or 1.0%. The increase in total liabilities was the result of increases in deposits, borrowed funds, guaranteed preferred beneficial interest in subordinated debt and accrued expenses and other liabilities of $15.6 million, $16.7 million, $5.0 million and $964,000, respectively. Partially offsetting these increases was a decrease in advance payments by borrowers for taxes and insurance of $1.0 million. The increase to stockholders’ equity was primarily the result of increases to additional paid in capital and retained earnings $1.7 million and $2.4 million, respectively, as well a decrease to treasury stock of $2.8 million. These increases were partially offset by an increase in unearned employee stock ownership plan of $4.4 million and a decrease in accumulated other comprehensive income of $1.5 million.

Cash on hand, Interest-earning deposits and Federal funds sold. Cash on hand, interest-earning deposits and federal funds sold represent cash equivalents. Cash equivalents increased a combined $1.6 million, or 10.3%, to $16.7 million at September 30, 2003 from $15.1 million at December 31, 2002.

Securities. The Company’s securities portfolio increased by $54.1 million, or 6.3%, to $919.2 million at September 30, 2003 from $865.1 million at December 31, 2002. During the nine months ended September 30, 2003, the Company recorded purchases of available for sale securities of $412.9 million, consisting of purchases of mortgage-backed securities of $394.0 million and municipal bonds of $18.9 million. Offsetting the purchases of securities during the nine months ended September 30, 2003 were sales of available for sale securities of $31.6 million, consisting of sales of municipal bonds of $10.1 million, mortgage-backed securities of $20.4 million and equity securities of $1.1 million and repayments and maturities of securities of $322.6 million. In addition, the securities portfolio decreased approximately $2.2 million due to decreases in the market value of the securities and decreased by $3.6 million due to amortization of premiums.

Loans receivable. Net loans receivable decreased $18.8 million, or 5.5%, to $320.5 million at September 30, 2003 from $339.3 million at December 31, 2002. Included in this decrease were decreases in mortgage loans of $7.4 million, or 2.6%, and other loans of $3.1 million, or 4.0%, as well as an increase in allowance for loan losses, deferred loan fees and loans in process of a combined $8.3 million, or 51.3%, during the nine months ended September 30, 2003. The decrease in net loans receivable between the periods can be attributed to increased loan refinancing that resulted from the historically low interest rate environment.

Loans held for sale. The loans held for sale decreased approximately $1.2 million, or 78.4%, to $339,000 at September 30, 2003 compared to $1.6 million at December 31, 2002. The Company originated approximately $33.3 million of loans held for sale during the nine months ended September 30, 2003. The Company sold approximately $34.5 million of loans held for sale with a resulting gain of $425,000, during the nine months ended September 30, 2003.

Non-performing assets. Non-performing assets include non-accrual loans and real estate acquired through foreclosure (REO). Non-performing assets amounted to $3.1 million, or 0.23%, and $3.6 million, or 0.28%, of total assets at September 30, 2003 and December 31, 2002, respectively. This decrease was primarily the result of a decrease in non-accrual loans during the period ended September 30, 2003 of $636,000, or 25.0%, partially offset by an increase in REO of $106,000, or 9.7%.

Real Estate Held for Investment. The Company’s real estate held for investment decreased by $638,000, or 4.8%, to $12.6 million at September 30, 2003, compared to $13.2 million at December 31, 2002.

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Intangible assets. Intangible assets decreased $529,000, or 39.4%, to $813,000 at September 30, 2003 from $1.3 million at December 31, 2002. The decrease primarily resulted from the normal amortization recognized on the mortgage servicing asset and the core deposit intangible of $478,000 and $149,000, respectively. Partially offsetting this amortization was a decrease in the impairment valuation on the mortgage servicing asset of $103,000 for the year to date ended September 30, 2003.

Deposits. Total deposits increased $15.5 million, or 2.6%, to $605.4 million at September 30, 2003 from $589.8 million at December 31, 2002. Non-interest bearing deposits and interest-bearing demand deposit accounts increased $2.3 million and $16.5 million, respectively, and time deposits decreased $3.2 million, during the nine months ended September 30, 2003.

Borrowed funds. Borrowed funds increased $16.7 million, or 2.8%, to $614.0 million at September 30, 2003 from $597.3 million at December 31, 2002. FHLB advances increased $7.7 million, or 1.4%, repurchase agreements increased $11.4 million, or 25.0%, and other borrowings decreased $2.4 million, or 97.3%, during the nine months ended September 30, 2003.

Stockholders’ equity. The increase to stockholders’ equity was the result of increases to additional paid in capital and retained earnings $1.7 million and $2.4 million, respectively, as well as decreases to unvested shares held by the management recognition plan and treasury stock of $22,000 and $2.8 million, respectively. These increases were partially offset by an increase in unearned employee stock ownership plan of $4.4 million and a decrease in accumulated other comprehensive income of $1.5 million.

RESULTS OF OPERATIONS

General. The Company recorded net income of $2.2 million and $6.2 million for the three and nine months ended September 30, 2003, respectively, as compared to net income of $2.3 million and $6.7 million, respectively, for the same periods in the prior year.

For the three months ended September 30, 2003, net income decreased $105,000, or 4.6%, as compared to the quarter ended September 30, 2002. The decrease can be attributable to a decrease in net interest income of $444,000 and an increase in non-interest expense of $572,000, partially offset by a recovery of loan losses of $134,000, an increase in non-interest income of $757,000 and a decrease to the recovery of income taxes of $20,000.

Net income decreased $530,000, or 7.9%, for the nine months ended September 30, 2003, as compared to the nine months ended September 30, 2002. This decrease was primarily attributed to decreases in net interest income of $885,000 and increases to the provision for loan losses and non-interest expense of $313,000 and $667,000, respectively. Partially offsetting this decrease was an increase to non-interest income of $1.2 million and a decrease to the provision for income taxes of $174,000.

Net interest income. Net interest income decreased $444,000, or 8.3%, to $4.9 million for the three months ended September 30, 2003, compared to $5.3 million for the same period in the prior year. This decrease in net interest income can be attributed to a decrease in interest income of $3.4 million, partially offset by a decrease in interest expense of $3.0 million.

Net interest income decreased $885,000, or 5.4%, to $15.6 million for the nine months ended September 30, 2003, compared to $16.5 million for the same period in the prior year. This decrease in net interest income can be attributed to a decrease in interest income of $8.5 million, partially offset by a decrease in interest expense of $7.6 million.

Interest income. Interest income decreased $3.4 million, or 19.0%, to $14.6 million for the three months ended September 30, 2003, compared to $18.1 million for the same period in the prior year. This decrease can primarily be attributed to decreases in interest earned on loans receivable and securities available for sale of $864,000 and $2.5 million, respectively.

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Interest earned on loans receivable decreased $864,000, or 14.2%, to $5.2 million for the three months ended September 30, 2003, compared to $6.1 million for the same period in the prior year. This decrease was primarily attributable to a decline in the yield on the loans to 6.35% for the three months ended September 30, 2003, from 7.16% for the same period in the prior year. In addition to the decline in the yield was a decrease in the average balance of loans outstanding of $11.4 million, or 3.4%, to $328.1 million for the three months ended September 30, 2003 compared to $339.5 million for the same period in the prior year.

Interest earned on securities decreased $2.5 million, or 21.3%, to $9.3 million for the three months ended September 30, 2003, compared to $11.8 million for the same period in the prior year. This decrease was primarily attributable to a decline in the tax equivalent yield on securities to 4.39% for the three months ended September 30, 2003 from 5.84% for the same period in the prior year. Partially offsetting this decline in yield was an increase in the average balance of the securities of $45.9 million, or 5.4%, to $892.6 million for the three months ended September 30, 2003 compared to $846.7 million for the same period in the prior year.

Interest income decreased $8.5 million, or 15.2%, to $47.1 million for the nine months ended September 30, 2003, compared to $55.6 million for the same period in the prior year. This decrease can primarily be attributed to decreases in interest earned on loans receivable and securities available for sale of $7.5 million and $839,000, respectively.

Interest earned on loans receivable decreased $7.5 million, or 31.3%, to $16.5 million for the nine months ended September 30, 2003, compared to $24.0 million for the same period in the prior year. This decrease was primarily attributable to a decrease in the average balance of loans outstanding of $110.2 million, or 24.8%, to $334.2 million for the nine months ended September 30, 2003, compared to $444.4 million for the same period in the prior year. The decrease in the average balance of loans outstanding between periods can be partially attributed to the loan sale and securitization of a portion of the Company’s 1-4 family residential mortgage loan portfolio that occurred in the second quarter of 2002. In addition to this decrease in average balance was a decrease in the yield on loans receivable to 6.58% for the nine months ended September 30, 2003, compared to 7.21% for the same period in the prior year.

Interest earned on securities decreased $839,000, or 2.7%, to $30.0 million for the nine months ended September 30, 2003, compared to $30.9 million for the same period in the prior year. This decrease was primarily attributable to a decline in the tax equivalent yield on securities to 4.81% for the nine months ended September 30, 2003 compared to 5.89% for the same period in the prior year. Partially offsetting the decline in tax equivalent yield was an increase in the average balance of securities of $141.4 million, or 19.1%, to $880.6 million for the nine months ended September 30, 2003, compared to $739.2 million for the same period in the prior year. The increase in the average balance of the Company’s securities portfolio between periods can be partially attributed to the securitization of a portion of the Company’s 1-4 family residential mortgage loan portfolio that occurred in the second quarter of 2002.

Interest expense. Interest expense decreased $3.0 million, or 23.5%, to $9.8 million for the three months ended September 30, 2003, compared to $12.7 million for the same period in the prior year. This decrease in interest expense can primarily be attributed to decreases in interest incurred on deposits as well as borrowed funds of $1.4 million and $1.6 million, respectively.

Interest incurred on deposits decreased $1.4 million, or 31.1%, to $3.1 million for the three months ended September 30, 2003, compared to $4.5 million for the same period in the prior year. This decrease was primarily attributable to a decline in the cost of interest-bearing deposits to 2.08% from 3.03% for the quarters ended September 30, 2003 and 2002, respectively. Partially offsetting this decline in cost was an increase in the average balance of interest-bearing deposits of $2.7 million, or 0.5%, to $588.9 million for the three months ended September 30, 2003, compared to $586.2 million for the same period in the prior year.

Interest incurred on borrowed funds decreased $1.6 million, or 20.9%, to $6.1 million for the three months ended September 30, 2003, compared to $7.7 million for the same period in the prior year. This decrease was primarily attributable to a decrease in the cost of these funds to 3.95% from 5.33% for the quarters ended September 30, 2003 and 2002, respectively. Partially offsetting the decrease in the cost of funds was an increase in the average

18

balance of borrowed funds of $37.6 million, or 6.6%, to $604.0 million for the three months ended September 30, 2003, compared to $566.4 million for the same period in the prior year.

Interest expense decreased $7.6 million, or 19.4%, to $31.5 million for the nine months ended September 30, 2003, compared to $39.1 million for the same period in the prior year. This decrease in interest expense can be attributed to decreases in interest incurred on deposits and borrowed funds of $3.9 million and $3.7 million, respectively.

Interest incurred on deposits decreased $3.9 million, or 27.7%, to $10.2 million for the nine months ended September 30, 2003, compared to $14.1 million for the same period in the prior year. This decrease was primarily attributable to a decrease in the cost of interest-bearing deposits to 2.36% for the nine months ended September 30, 2003 compared to 3.25% for the same period in the prior year. In addition to the decrease in the cost of interest-bearing deposits was a decline in the average balance of interest-bearing deposits of $1.1 million, or 0.2%, to $579.7 million for the nine months ended September 30, 2003, compared to $580.8 million for the same period in the prior year.

Interest incurred on borrowed funds decreased $3.7 million, or 16.0%, to $19.6 million for the nine months ended September 30, 2003, compared to $23.3 million for the same period in the prior year. This decrease was primarily attributable to a decrease in the cost of these funds to 4.27% for the nine months ended September 30, 2003, compared to 5.45% for the same period in the prior year. Partially offsetting the decrease in the cost of these funds, was an increase in the average balance of borrowed funds of $41.5 million, or 7.4%, to $606.3 million for the nine months ended September 30, 2003, compared to $564.7 million for the nine months ended September 30, 2002.

(Recovery of) provision for loan losses. The recovery of loan losses increased $134,000 reflecting a recovery of loan losses of $237,000 for the three months ended September 30, 2003 compared to a recovery of loan losses of $103,000 for the same period in the prior year. The recovery of loan losses decreased $313,000 reflecting a recovery of loan losses of $267,000 for the nine months ended September 30, 2003 compared to a recovery of loan losses of $580,000 for the same period in the prior year. The recovery of loan losses for the three and nine months ended September 30, 2003 reflects the reduction to loans receivable experienced by the Company due to the volume of repayments experienced in 2003, in addition to recoveries resulting from the normal operations of the Company. The recovery for the nine months ended September 30, 2002 includes a final recovery of $402,000 on the Company’s Bennett Lease pools, which was received from the bankruptcy trustee and a reduction to the provision for loan losses of approximately $150,000, which resulted from the whole loan sale and securitization of a portion of the Company’s 1-4 family residential mortgage loans. These recoveries were increased by other operating recoveries recorded in the second quarter of 2002 and partially offset by provisions recorded in the first and second quarters of 2002 resulting from the normal operations of the Company. In determining the appropriate level of allowance for loan losses, management considers historical loss experience, the financial condition of borrowers, economic conditions (particularly as they relate to markets where the Company originates loans), the status of non-performing assets, the estimated underlying value of the collateral and other factors related to the collectability of the loan portfolio. The Company’s total allowance for losses on loans at September 30, 2003 amounted to $3.9 million or, 1.13%, of the Company’s total loan portfolio as compared to $4.2 million or 1.19% at December 31, 2002. The Company’s allowance for losses on loans as a percentage of non-performing loans was 205.5% and 166.7% at September 30, 2003 and December 31, 2002, respectively. These ratios reflect the decrease for the period in the Company’s non-performing loans to $1.9 million at September 30, 2003 from $2.5 million at December 31, 2002.

Non-interest income. Non-interest income increased $757,000, or 60.5%, to $2.0 million for the three months ended September 30, 2003, compared to $1.3 million for the same period in the prior year. This increase can be attributed to increases in fees and service charges, net gain on the sale of loans, net realized gain on sale of securities available for sale, income from real estate joint ventures and other income of $187,000, $116,000, $37,000, $366,000 and $114,000, respectively. These increases were partially offset by a decrease in the cash surrender value of the BOLI of $63,000.

Non-interest income increased $1.2 million, or 29.4%, to $5.1 million for the nine months ended September 30, 2003, compared to $4.0 million for the same period in the prior year. This increase can be attributed to increases in

19

net realized gain on sale of securities available for sale, income from real estate joint ventures and other income of $678,000, $911,000 and $22,000, respectively. These increases were partially offset by decreases in fees and service charges, net gain on sale of loans and the cash surrender value of the BOLI of $33,000, $246,000 and $171,000, respectively, between periods.

Fees and service charges increased $187,000, or 49.6%, to $564,000 for the three months ended September 30, 2003 compared to $377,000 for the same period in the prior year. This increase can primarily be attributable to a recovery of the impairment valuation of $133,000 for the quarter ended September 30, 2003, compared to an impairment valuation of $61,000 for the quarter ended September 30, 2002. Partially offsetting this recovery was an increase to the amortization taken on the servicing asset of $22,000 for the quarter ended September 30, 2003 compared to September 30, 2002. Fees and service charges slightly decreased $33,000, or 2.6%, for the nine months ended September 30, 2002, as compared to the same period in the prior year.

Net gain on sale of loans increased $116,000, or 313.5%, for the three months ended September 30, 2003 compared to the same period in the prior year. Net gain on sale of loans decreased $246,000, or 36.7%, for the nine months ended September 30, 2003 as compared to the same period in the prior year. The nine months ended September 30, 2002 included a net gain of $510,000 in connection with the whole loan sale, $265,000 of which relates to servicing rights retained by the Company on the loans.

Net realized gain on sales of securities available for sale increased $37,000, or 8.7%, for the three months ended September 30, 2003 compared to the same period in the prior year and $678,000, or 123.7%, for the nine months ended September 30, 2003 as compared to the same period in the prior year. These gains were the result of the transactions completed in this historically low interest rate environment. The securities sold during this period were bonds that had a significant possibility of being called or experiencing increased principal repayments considering the current rate environment.

Income from real estate joint ventures increased $366,000 to $446,000 for the three months ended September 30, 2003, compared to $80,000 for the same period in the prior year. Income from real estate joint ventures increased $911,000 to $1.1 million for the nine months ended September 30, 2003 compared to $165,000 for the same period in the prior year. This increase can be attributed to the addition of three new joint ventures in 2002 in which the Company has a 51% ownership interest. These joint ventures began to provide income to the Bank in the later part of 2002.

Non-interest expense. Non-interest expense increased $572,000, or 14.6%, to $4.5 million for the three months ended September 30, 2003, from $3.9 million for the same period in the prior year. This increase was primarily the result of increases to compensation and employee benefits, premises and equipment and other non-interest expense of $408,000, $334,000 and $107,000, respectively, partially offset by a decrease to data processing expense of $269,000. Non-interest expense increased $667,000, or 5.2%, to $13.5 million for the nine months ended September 30, 2003, from $12.8 million for the same period in the prior year. This increase was primarily the result of increases in compensation and employee benefits, premises and equipment and data processing of $1.1 million, $63,000 and $19,000, respectively, partially offset by a decrease in other non-interest expense of $541,000. Other non-interest expense for the nine-months ended September 30, 2003 included a $470,000 write-down on a real estate property acquired through foreclosure.

Provision for income taxes. The provision for income taxes decreased $20,000, or 4.0%, to $478,000 for the three months ended September 30, 2003 and $174,000, or 12.0%, to $1.3 million for the nine months ended September 30, 2003 compared to $498,000 and $1.5 million, respectively, for the prior year periods. These decreases in the provision for income taxes are primarily attributable to the decreases to net income for the quarter and year to date as compared to the same periods in the prior year.

Average Balance Sheet and Yield/Rate Analysis. The following tables set forth, for periods indicated, information concerning the total dollar amounts of interest income from interest-earning assets and the resultant average yields, the total dollar amounts of interest expense on interest-bearing liabilities and the resultant average costs, net interest income, interest rate spread and the net interest margin earned on average interest-earning assets. For purposes of these tables, average balances are calculated using monthly averages and the average loan balances include non-accrual loans and exclude the allowance for loan losses, and interest income includes accretion of net

20

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%. Yields and rates have been calculated on an annualized basis utilizing monthly interest amounts.

(Dollar amounts in thousands)	Three months ended September 30,
	2003						2002
	Average Balance		Interest		Yield/ Rate		Average Balance		Interest		Yield/ Rate
Interest-earning assets:
Taxable securities available for sale	$	756,471	$	7,923	4.19	%	$	702,011	$	10,204	5.81	%
Taxable corporate bonds available for sale		51,227		256	1.96	%		53,239		368	2.70	%
Tax-exempt securities available for sale		84,871		1,629	7.68	%		91,453		1,805	7.89	%
		892,569		9,808	4.39	%		846,703		12,377	5.84	%
Mortgage loans		253,459		4,100	6.47	%		265,173		4,811	7.26	%
Other loans		74,683		1,122	5.96	%		74,349		1,276	6.81	%
		328,142		5,222	6.35	%		339,522		6,087	7.16	%
Cash equivalents		15,137		18	0.47	%		10,825		35	1.29	%
FHLB stock		30,593		153	1.98	%		24,180		197	3.26	%
		45,730		171	1.48	%		35,005		232	2.65	%
Total interest-earning assets		1,266,441		15,201	4.80	%		1,221,230		18,696	6.12	%
Other noninterest-earning assets		84,774		—	—			85,526		—	—
Total assets	$	1,351,215	$	15,201	4.50	%	$	1,306,756	$	18,696	5.72	%
Interest-bearing liabilities:
Interest-bearing demand deposits	$	223,230	$	374	0.66	%	$	215,839	$	682	1.25	%
Time deposits		365,659		2,712	2.94	%		370,312		3,798	4.07	%
		588,889		3,086	2.08	%		586,151		4,480	3.03	%
FHLB advances		563,190		5,808	4.04	%		476,486		6,483	5.32	%
Repurchase Agreements		40,333		280	2.72	%		87,620		1,197	5.35	%
Other borrowings		443		7	6.18	%		2,262		29	5.02	%
Preferred securities—fixed		19,442		447	9.20	%		24,186		557	9.21	%
Preferred securities—adjustable		9,723		127	5.18	%		—		—	—
Total interest-bearing liabilities		1,222,020		9,755	3.14	%		1,176,705		12,746	4.26	%
Noninterest-bearing demand deposits		25,057		—	—			22,023		—	—
Other noninterest-bearing liabilities		11,316		—	—			13,804		—	—
Total liabilities		1,258,393		9,755	3.05	%		1,212,532		12,746	4.13	%
Stockholders' equity		92,822		—	—			94,224		—	—
Total liabilities and equity	$	1,351,215	$	9,755	2.84	%	$	1,306,756	$	12,746	3.83	%
Net interest income			$	5,446					$	5,950
Interest rate spread (difference between weighted average rate on interest-earning assets and interest-bearing liabilities)					1.66	%					1.85	%
Net interest margin (net interest income as a percentage of average interest-earning assets)					1.77	%					2.01	%

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(Dollar amounts in thousands)	Nine months ended September 30,
	2003						2002
	Average Balance		Interest		Yield/ Rate		Average Balance		Interest		Yield/ Rate
Interest-earning assets:
Taxable securities available for sale	$	743,553	$	25,862	4.64	%	$	594,141	$	26,205	5.88	%
Taxable corporate bonds available for sale		51,224		811	2.09	%		55,244		1,154	2.75	%
Tax-exempt securities available for sale		85,843		5,077	7.89	%		89,812		5,309	7.88	%
		880,620		31,750	4.81	%		739,197		32,668	5.89	%
Mortgage loans		259,498		12,999	6.68	%		368,456		20,042	7.25	%
Other loans		74,711		3,493	6.25	%		75,924		3,970	6.99	%
		334,209		16,492	6.58	%		444,380		24,012	7.21	%
Cash equivalents		12,966		61	0.63	%		10,120		100	1.32	%
FHLB stock		30,328		562	2.48	%		23,546		637	3.61	%
		43,294		623	1.92	%		33,666		737	2.92	%
Total interest-earning assets		1,258,123		48,865	5.18	%		1,217,243		57,417	6.29	%
Other noninterest-earning assets		88,683		—	—			73,307		—	—
Total assets	$	1,346,806	$	48,865	4.84	%	$	1,290,550	$	57,417	5.93	%
Interest-bearing liabilities:
Interest-bearing demand deposits	$	215,860	$	1,333	0.83	%	$	211,104	$	2,305	1.46	%
Time deposits		363,863		8,880	3.26	%		369,710		11,819	4.27	%
		579,723		10,213	2.36	%		580,814		14,124	3.25	%
FHLB advances		566,585		18,633	4.34	%		462,662		19,184	5.47	%
Repurchase Agreements		38,022		913	3.17	%		101,189		4,120	5.37	%
Other borrowings		1,645		66	5.29	%		856		30	4.62	%
Preferred securities—fixed		21,293		1,469	9.20	%		24,175		1,670	9.21	%
Preferred securities—adjustable		5,938		246	5.54	%		—		—	—
Total interest-bearing liabilities		1,213,206		31,540	3.45	%		1,169,696		39,128	4.44	%
Noninterest-bearing demand deposits		24,450		—	—			21,095		—	—
Other noninterest-bearing liabilities		11,262		—	—			13,122		—	—
Total liabilities		1,248,918		31,540	3.35	%		1,203,913		39,128	4.31	%
Stockholders' equity		97,888		—	—			86,637		—	—
Total liabilities and equity	$	1,346,806	$	31,540	3.10	%	$	1,290,550	$	39,128	4.02	%
Net interest income			$	17,325					$	18,289
Interest rate spread (difference between weighted average rate on interest-earning assets and interest-bearing liabilities)					1.73	%					1.85	%
Net interest margin (net interest income as a percentage of average interest-earning assets)					1.86	%					2.03	%

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Analysis of Changes in Net Interest Income. The following tables analyze the changes in interest income and interest expense, between the three and nine month period ended September 30, 2003 and 2002, in terms of: (1) changes in volume of interest-earning assets and interest-bearing liabilities and (2) changes in yields and rates. The tables reflect the extent to which changes in the Company’s interest income and interest expense are attributable to changes in rate (change in rate multiplied by prior period volume), changes in volume (changes in volume multiplied by prior period rate) and changes attributable to the combined impact of volume/rate (change in rate multiplied by change in volume). The changes attributable to the combined impact of volume/rate are allocated on a consistent basis between the volume and rate variances. Changes in interest income on securities reflects the changes in interest income on a fully tax equivalent basis.

The table analyzing changes in interest income between the three months ended September 30, 2003 and 2002 is presented as follows:

(Dollar amounts in thousands)	Three months ended, September 30, 2003 versus 2002 Increase (decrease) due to
	Volume		Rate		Total
Interest income:
Securities	$   641		$(3,210	)	$(2,569	)
Loans	(199	)	(666	)	(865	)
Cash equivalents	11		(28	)	(17	)
FHLB stock	44		(88	)	(44	)
Total interest-earning assets	497		(3,992	)	(3,495	)
Interest expense:
Deposits	21		(1,415	)	(1,394	)
FHLB advances	1,057		(1,732	)	(675	)
Repurchase agreements	(480	)	(437	)	(917	)
Other borrowings	(27	)	5		(22	)
Preferred securities—fixed	(109	)	(1	)	(110	)
Preferred securities—adjustable	127		—		127
Total interest-bearing liabilities	589		(3,580	)	(2,991	)
Net interest income	$   (92	)	$   (412	)	$   (504	)

The table analyzing changes in interest income between the nine months ended September 30, 2003 and 2002 is presented as follows:

(Dollar amounts in thousands)	Nine months ended, September 30 2003 versus 2002 Increase (decrease) due to
	Volume			Rate			Total
Interest income:
Securities	$	5,664		$	(6,582	)	$	(918	)
Loans		(5,570	)		(1,950	)		(7,520	)
Cash equivalents		23			(62	)		(39	)
FHLB stock		156			(231	)		(75	)
Total interest-earning assets		273			(8,825	)		(8,552	)
Interest expense:
Deposits		(26	)		(3,885	)		(3,911	)
FHLB advances		3,845			(4,396	)		(551	)
Repurchase agreements		(1,935	)		(1,272	)		(3,207	)
Other borrowings		31			5			36
Preferred securities—fixed		(199	)		(2	)		(201	)
Preferred securities—adjustable		246			—			246
Total interest-bearing liabilities		1,962			(9,550	)		(7,588	)
Net interest income	$	(1,689	)	$	725		$	(964	)

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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 four outside directors, the President and Chief Executive Officer, Group Senior Vice President/Chief Financial Officer, Group Senior Vice President/Operations, Group Senior Vice President/Lending and Group Senior Vice President/Administration. This committee, which meets quarterly, generally monitors various asset and liability management policies and strategies which were implemented by the Company over the past few years. These strategies have included: (i) an emphasis on the investment in adjustable-rate and shorter duration mortgage-backed securities; (ii) an emphasis on the origination of single-family residential adjustable-rate mortgages (ARMs), residential construction loans and commercial real estate loans, which generally have adjustable or floating interest rates and/or shorter maturities than traditional single-family residential loans, and consumer loans, which generally have shorter terms and higher interest rates than mortgage loans and (iii) increase the duration of the liability base of the Company by extending the maturities of savings deposits, borrowed funds and repurchase agreements.

As of September 30, 2003, the implementation of these asset and liability initiatives resulted in the following: (i) $153.8 million, or 44.6%, of the Company’s total loan portfolio had adjustable interest rates or maturities of 12 months or less; (ii) $63.3 million, or 38.2%, of the Company’s portfolio of single-family residential mortgage loans (including residential construction loans) consisted of ARMs; and (iii) $355.2 million, or 50.3%, of the Company’s portfolio of mortgage-backed securities were secured by ARMs.

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 September 30, 2003, the Company’s interest-earning assets maturing or repricing within one year totaled $594.4 million while the Company’s interest-bearing liabilities maturing or repricing within one-year totaled $592.6 million, providing an excess of interest-earning assets over interest-bearing liabilities of $1.8 million, or a positive 0.1%, of total assets. At September 30, 2003, the percentage of the Company’s assets to liabilities maturing or repricing within one year was 100.3%. The Company does not presently anticipate that its one-year interest rate sensitivity gap will fluctuate beyond a range of a positive 5.0% of total assets to a negative 15.0% of total assets.

The one year interest rate sensitivity gap has been the most common industry standard used to measure an institution’s interest rate risk position. 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

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curve and different loan and mortgage-backed security prepayment and deposit decay assumptions under various interest rate scenarios.

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

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

Net interest income simulation. Given a 200 basis point parallel and gradual increase or decrease in market interest rates, net interest income may not change by more than 10% for a one-year period.

Portfolio equity simulation. Portfolio equity is the net present value of the Company’s existing assets and liabilities. Given a 200 basis point immediate and permanent increase or decrease in market interest rates, portfolio equity may not correspondingly decrease or increase by more than 50% of stockholders’ equity.

The following table presents the simulated impact of a 100 basis point or 200 basis point upward and a 100 basis point downward shift of market interest rates on net interest income, return on average equity, diluted earnings per share and the change in portfolio equity. The scenario for a decrease in interest rates of 200 basis points was considered not applicable due to the current interest rate environment. This analysis was done assuming that the interest-earning asset and interest-bearing liability levels at September 30, 2003 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 September 30, 2003 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 September 30, 2003 for portfolio equity:

	Increase				Decrease
	+100 BP		+200 BP		-100 BP		-200 BP
Net interest income—increase (decrease)	1.12	%	0.22	%	(3.62	%)	N/A
Return on average equity—increase (decrease)	2.36	%	0.64	%	(3.63	%)	N/A
Diluted earnings per share—increase (decrease)	2.56	%	0.75	%	(3.61	%)	N/A
Portfolio equity—increase (decrease)	1.31	%	(13.32	%)	(28.71	%)	N/A

The following table presents the simulated impact of a 100 basis point or 200 basis point upward or downward shift of market interest rates on net interest income, return on average equity, diluted earnings per share and the change in portfolio equity. This analysis was done assuming that the interest-earning asset and interest-bearing liability levels at December 31, 2002 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, 2002 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, 2002 for portfolio equity:

	Increase				Decrease
	+100 BP		+200 BP		-100 BP		-200 BP
Net interest income—increase (decrease)	3.03	%	2.61	%	(5.39	%)	(6.14	%)
Return on average equity—increase (decrease)	5.37	%	4.71	%	(9.65	%)	(11.07	%)
Diluted earnings per share—increase (decrease)	5.94	%	4.95	%	(9.90	%)	(10.89	%)
Portfolio equity—increase (decrease)	6.48	%	(0.88	%)	(15.41	%)	(34.33	%)

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LIQUIDITY

The Company’s primary sources of funds generally have been deposits obtained through the offices of the Bank, borrowings from the FHLB, repurchase agreement borrowings and amortization and prepayments of outstanding loans and maturing investment securities. During the nine months ended September 30, 2003, the Company used its sources of funds primarily to purchase securities and to a lesser extent, fund loan commitments. As of such date, the Company had outstanding loan commitments totaling $22.3 million, unused lines of credit totaling $23.7 million and $20.5 million of undisbursed loans in process.

At September 30, 2003, certificates of deposit amounted to $357.3 million, or 59.0%, of the Company’s total consolidated deposits, including $187.0 million, which were scheduled to mature by September 30, 2004. At the same date, the total amount of borrowed funds which were scheduled to mature by September 30, 2004 was $258.0 million. Management of the Company believes that it has adequate resources to fund all of its commitments, that all of its commitments will be funded by September 30, 2004 and that, based upon past experience and current pricing policies, it can adjust the rates of savings certificates to retain a substantial portion of its maturing certificates and also, to the extent deemed necessary, refinance the maturing FHLB advances and repurchase agreements.

REGULATORY CAPITAL REQUIREMENTS

Current regulatory requirements specify that the Bank and similar institutions must maintain tangible capital equal to 1.5% of adjusted total assets, core capital equal to 4% of adjusted total assets and risk-based capital equal to 8% of risk-weighted assets. The OTS may require higher core capital ratios if warranted, and institutions are to maintain capital levels consistent with their risk exposures. 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 September 30, 2003, the Bank was in compliance with all regulatory capital requirements with tangible, core and risk-based capital ratios of 6.81%, 6.81% and 15.54%, respectively.

CRITICAL ACCOUNTING ESTIMATES

The Company’s critical accounting estimates involving the more significant judgments and assumptions used in the preparation of the consolidated financial statements as of September 30, 2003, have remained unchanged from December 31, 2002. See the discussion in the Company’s annual report on Form 10-K for the year ended December 31, 2002.

SIGNIFICANT ACCOUNTING POLICIES

For a discussion on the Company’s significant accounting polices please refer to Note 1 of the financial statements.

The Management Discussion and Analysis section of this Form 10-Q 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.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Quantitative and qualitative disclosures about market risk are incorporated herein by reference from the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asset and Liability Management” of this report.

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Item 4. Controls and Procedures

Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures ( as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations and are operating in an effective manner.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934) occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 2. Changes in Securities

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:

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

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

32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)

32.2 Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)

(b) Form 8-K – The Company filed a Form 8-K dated July 18, 2003 to announce the results of operations for the quarter and six months ended June 30, 2003.

27

The Company filed a Form 8-K dated September 17, 2003 to report a quarterly cash dividend of $0.10 per share on the common stock, payable October 24, 2003 to the stockholders of record at the close of business on September 30, 2003.

Signatures

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

ESB FINANCIAL CORPORATION

Date: November 14, 2003	By:    /s/    Charlotte A. Zuschlag
	Charlotte A. Zuschlag President and Chief Executive Officer

Date: November 14, 2003	By:    /s/    Charles P. Evanoski
	Charles P. Evanoski Group Senior Vice President and Chief Financial Officer

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