10-Q

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, 2005

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 Rule 12b-2 of the Exchange Act)    Yes  x    No  ¨

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

Number of shares of common stock outstanding as of October 31, 2005:

Common Stock, $0.01 par value	13,806,992 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, 2005 and December 31, 2004 (Unaudited)	1
	Consolidated Statements of Operations for the three and nine months ended September 30, 2005 and 2004 (Unaudited)	2
	Consolidated Statement of Changes in Stockholders’ Equity For the nine months ended September 30, 2005 (Unaudited)	3
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004 (Unaudited)	4
	Notes to Unaudited Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Results of Operations and Financial Condition	19
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	35
Item 4.	Controls and Procedures	35
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3.	Defaults Upon Senior Securities	36
Item 4.	Submission of Matters to a Vote of Security Holders	36
Item 5.	Other Information	36
Item 6.	Exhibits	36
	Signatures	37

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

ESB Financial Corporation and Subsidiaries

Consolidated Statements of Financial Condition

As of September 30, 2005 and December 31, 2004 (Unaudited)

(Dollar amounts in thousands)

	September 30, 2005			December 31, 2004
Assets
Cash on hand and in banks	$	9,502		$	6,100
Interest-earning deposits		11,905			7,470
Federal funds sold		2,460			4,133
Cash and cash equivalents		23,867			17,703
Securities available for sale; cost of $1.1 billion and $920.4 million		1,125,190			929,794
Loans receivable, net of allowance for loan losses of $4,612 and $3,940		518,501			343,524
Accrued interest receivable		9,241			7,843
Federal Home Loan Bank (FHLB) stock		37,175			31,607
Premises and equipment, net		11,509			9,592
Real estate acquired through foreclosure, net		1,175			1,303
Real estate held for investment		14,000			12,612
Goodwill		41,682			7,127
Intangible assets		4,319			500
Bank owned life insurance		26,280			25,586
Prepaid expenses and other assets		18,966			7,324
Total assets	$	1,831,905		$	1,394,515
Liabilities and Stockholders’ Equity
Liabilities:
Deposits	$	829,613		$	580,346
FHLB advances		702,343			601,242
Repurchase agreements		82,000			67,000
Other borrowings		18,641			19,320
Junior subordinated notes		51,351			15,211
Advance payments by borrowers for taxes and insurance		1,116			1,642
Accrued expenses and other liabilities		16,087			11,953
Total liabilities		1,701,151			1,296,714
Stockholders’ Equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued		—			—
Common stock, $.01 par value, 30,000,000 shares authorized;		138			109
13,807,318 and 10,930,281 shares issued;
13,318,539 and 10,682,556 shares outstanding
Additional paid-in capital		100,669			60,940
Treasury stock, at cost; 488,779 and 247,725 shares		(6,551	)		(3,394	)
Unearned Employee Stock Ownership Plan (ESOP) shares		(4,746	)		(5,518	)
Unvested shares held by Management Recognition Plan (MRP)		(254	)		(332	)
Retained earnings		44,594			40,408
Accumulated other comprehensive (loss) income, net		(3,096	)		5,588
Total stockholders’ equity		130,754			97,801
Total liabilities and stockholders’ equity	$	1,831,905		$	1,394,515

See accompanying notes to unaudited consolidated financial statements.

1

ESB Financial Corporation and Subsidiaries

Consolidated Statements of Operations

For the three and nine months ended September 30, 2005 and 2004 (Unaudited)

(Dollar amounts in thousands, except share data)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2005		2004		2005		2004
Interest income:
Loans receivable	$	7,696	$	5,060	$	21,459	$	15,220
Taxable securities available for sale		11,317		8,671		32,356		25,896
Tax free securities available for sale		1,438		1,282		4,171		3,702
FHLB stock		241		108		701		293
Deposits with banks and federal funds sold		68		22		150		51
Total interest income		20,760		15,143		58,837		45,162
Interest expense:
Deposits		4,564		2,732		12,248		8,101
Borrowed funds		7,808		6,110		21,236		17,632
Junior subordinated notes and guaranteed preferred beneficial interest in subordinated debt		797		200		2,129		637
Total interest expense		13,169		9,042		35,613		26,370
Net interest income		7,591		6,101		23,224		18,792
Provision for loan losses		67		57		69		298
Net interest income after provision for loan losses		7,524		6,044		23,155		18,494
Noninterest income:
Fees and service charges		945		551		2,466		1,750
Net gain on sale of loans		8		7		19		40
Increase of cash surrender value of bank owned life insurance		237		237		695		702
Net realized gain on sale of securities available for sale		129		—		129		943
Income from real estate joint ventures		339		642		1,038		1,472
Other		98		125		467		350
Total noninterest income		1,756		1,562		4,814		5,257
Noninterest expense:
Compensation and employee benefits		3,271		2,855		9,613		8,589
Premises and equipment		647		497		1,867		1,380
Federal deposit insurance premiums		27		21		81		67
Data processing		516		393		1,421		1,176
Amortization of intangible assets		238		43		620		129
Minority interest		118		267		380		585
Loss on early extinguishment of debt		—		—		—		844
Advertising		106		92		375		240
Other		927		633		2,900		2,154
Total noninterest expense		5,850		4,801		17,257		15,164
Income before provision for income taxes		3,430		2,805		10,712		8,587
Provision for income taxes		539		205		1,743		1,187
Net income	$	2,891	$	2,600	$	8,969	$	7,400
Net income per share
Basic	$	0.22	$	0.26	$	0.72	$	0.73
Diluted	$	0.22	$	0.25	$	0.70	$	0.70
Cash dividends declared per share	$	0.10	$	0.10	$	0.30	$	0.30
Weighted average shares outstanding		12,874,470		10,154,736		12,516,268		10,195,370
Weighted average shares and share equivalents outstanding		13,107,929		10,496,428		12,786,184		10,582,279

See accompanying notes to unaudited consolidated financial statements.

2

ESB Financial Corporation and Subsidiaries

Consolidated Statement of Changes in Stockholders’ Equity

For the nine months ended September 30, 2005 (Unaudited)

(Dollar amounts in thousands)

	Common stock		Additional paid-in capital		Treasury stock			Unearned ESOP shares			Unvested MRP shares			Retained earnings			Accumulated other comprehensive (loss) income, net of tax			Total stockholders’ equity
Balance at January 1, 2005	$	109	$	60,940	$	(3,394	)	$	(5,518	)	$	(332	)	$	40,408		$	5,588		$	97,801
Comprehensive results:
Net income		—		—		—			—			—			8,969			—			8,969
Other comprehensive loss, net																		(8,167	)		(8,167	)
Reclassification adjustment		—		—		—			—			—			—			(517	)		(517	)
Total comprehensive results		—		—		—			—			—			8,969			(8,684	)		285
Common stock issued as a result of the acquisition of PHSB Financial Corp.		29		39,473		—			—			—			—			—			39,502
Cash dividends at $0.30 per share		—		—		—			—			—			(3,874	)		—			(3,874	)
Purchase of treasury stock, at cost (326,196 shares)		—		—		(4,378	)		—			—			—			—			(4,378	)
Reissuance of treasury stock for stock option exercises		—		—		1,221			—			—			(909	)		—			312
Principal payments on ESOP debt		—		149		—			772			—			—			—			921
Effect of compensatory stock options				98																	98
Unvested shares in MRP				9								(9	)								—
Accrued compensation expense MRP		—		—		—			—			87			—			—			87
Balance at September 30, 2005	$	138	$	100,669	$	(6,551	)	$	(4,746	)	$	(254	)	$	44,594		$	(3,096	)	$	130,754

See accompanying notes to unaudited consolidated financial statements.

3

ESB Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows

For the nine months ended September 30, 2005 and 2004 (Unaudited)

(Dollar amounts in thousands)

	Nine months ended September 30,
	2005			2004
Operating activities:
Net income	$	8,969		$	7,400
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization for premises and equipment		902			427
Provision for loan losses		69			298
Amortization of premiums and accretion of discounts		2,878			2,477
Origination of loans available for sale		(1,319	)		(2,494	)
Proceeds from sale of loans available for sale		1,319			2,494
Gain on sale of securities available for sale		(129	)		(943	)
Amortization of intangible assets		653			183
Compensation expense on ESOP and MRP		997			1,028
(Increase) decrease in accrued interest receivable		(1,398	)		407
(Increase) decrease in prepaid expenses and other assets		(7,185	)		43
Increase (decrease) in accrued expenses and other liabilities		4,134			(717	)
Other		(1,187	)		(1,281	)
Net cash provided by operating activities		8,703			9,322
Investing activities:
Loan originations and purchases		(144,345	)		(120,964	)
Purchases of:
Securities available for sale		(351,766	)		(184,516	)
Interest Rate Cap Contracts		—			(215	)
FHLB stock		(5,568	)		(808	)
Fixed assets		(526	)		(689	)
Principal repayments of:
Loans receivable		114,403			101,160
Securities available for sale		164,786			168,774
Proceeds from the sale of:
Securities available for sale		119,772			9,601
REO		127			120
Acquisition of assets from PHSB
Loans		(145,929	)		—
Fixed assets		(3,762	)		—
Securities		(143,260	)		—
Goodwill and intangible asset		(39,026	)
Sales of Fixed Assets		1,459			—
(Increases) decreases to real estate held for investment		(1,388	)		704
Payment for purchase of PHSB		39,502			—
Net cash used in investing activities		(395,521	)		(26,833	)
Financing activities:
Net increase (decrease) in deposits		17,835			(27,605	)
Net deposits from PHSB		231,432			—
Acquisition of borrowings from PHSB		27,860			—
Proceeds from long-term borrowings		217,280			135,000
Repayments of long-term borrowings		(111,677	)		(86,055	)
Net (decrease) increase in short-term borrowings		(18,041	)		22,347
Issuance of preferred debt		36,083			—
Redemption of guaranteed preferred beneficial interest		—
in subordinated debt		—			(20,052	)
Proceeds received from exercise of stock options		312			394
Dividends paid		(3,750	)		(3,231	)
Payments to acquire treasury stock		(4,352	)		(2,464	)
Net cash provided by financing activities		392,982			18,334
Net increase in cash equivalents		6,164			823
Cash equivalents at beginning of period		17,703			15,330
Cash equivalents at end of period	$	23,867		$	16,153

4

ESB Financial Corporation and Subsidiaries

Consolidated Statements of Cash Flows, (Continued)

For the nine months ended September 30, 2005 and 2004 (Unaudited)

(Dollar amounts in thousands)

	Nine months September 30,
	2005			2004
Supplemental information:
Interest paid	$	36,727		$	25,147
Income taxes paid		1,574			1,398
Supplemental schedule of non-cash investing and financing activities:
Dividends declared but not paid		1,325			1,071
The Company purchased all of the common stock of PHSB for $39.5 million. In conjunction with the acquisition, the assets acquired and liabilities assumed were as follows:
Fair value of assets acquired		338,063			—
Stock issued for the purchase of PHSB common stock		(39,502	)		—
Cash paid for PHSB common stock		(40,238	)		—
Liabilities assumed		(292,878	)		—
		(34,555	)		—

See accompanying notes to unaudited consolidated financial statements.

5

ESB Financial Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

1. Summary of Significant Accounting Policies

Principles of Consolidation

ESB Financial Corporation (the Company) is a publicly traded Pennsylvania thrift holding company. The consolidated financial statements include the accounts of the Company and its direct and indirect wholly-owned subsidiaries, which are ESB Bank (ESB or the Bank), PennFirst Financial Services, Inc. (PFSI), THF, Inc. (THF), ESB Financial Services, Inc. (EFS) and AMSCO, Inc. (AMSCO). ESB is a Pennsylvania chartered Federal Deposit Insurance Corporation (FDIC) insured stock savings bank.

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

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

Basis of Presentation

The accompanying unaudited consolidated financial statements for the interim periods include all adjustments, consisting only of normal recurring accruals, which are necessary, in the opinion of management, to fairly reflect the Company’s financial position and results of operations. Additionally, these consolidated financial statements for the interim periods have been prepared in accordance with instructions for the Securities and Exchange Commission’s Form 10-Q and therefore do not include all information or footnotes necessary for a complete presentation of financial condition, results of operations and cash flows in conformity with U.S. generally accepted accounting principles. For further information, refer to the audited consolidated financial statements and footnotes thereto for the year ended December 31, 2004, as contained in the 2004 Annual Report to Stockholders.

The results of operations for the three and nine month periods ended September 30, 2005 is 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.

The accounting principles followed by the Company and the methods of applying these principles conform with U.S. generally accepted accounting principles and with general practice within the banking industry. In preparing the consolidated financial statements management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the Statement of Financial Condition date and revenues and expenses for the period. Actual results could differ significantly from those estimates.

Operating Segments

An operating segment is defined as a component of an enterprise that engages in business activities that generate revenue and incur expense, the operating results of which are reviewed by management. At September 30, 2005, the Company was doing business through 23 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 banking 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 No. 148 (FAS 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 at the time of grant. The disclosure provisions of FAS 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 Company did not have any non-vested stock options outstanding during the periods ended September 30, 2005 and September 30, 2004. There were no options issued during the nine months ended September 30, 2004. The Company issued 82,300 options with a weighted average exercise price of $12.20 and 18,610 options with a weighted average exercise price of $12.40 during the nine month period ended September 30, 2005. The following pro-forma information regarding compensation expense, net of tax, net income and earnings per share assumes the adoption of FAS 123 for stock options granted subsequent to December 31, 1994:

(Dollar amounts in thousands, except share data)	Nine Months Ended September 30, 2005			Nine Months Ended September 30, 2004
Net income, as reported	$	8,969		$	7,400
Compensation expense, under FAS 123, net of tax		(246	)		0
Pro forma net income	$	8,723		$	7,400
Basic net income per share, as reported	$	0.72		$	0.73
Pro forma basic net income per share	$	0.70		$	0.73
Diluted net income per share, as reported	$	0.70		$	0.70
Pro forma diluted net income per share	$	0.68		$	0.70

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.

Financial Instruments

Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133), as amended and interpreted, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. As required by SFAS 133, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.

7

For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized in earnings. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings) and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. The Company assesses the effectiveness of each hedging relationship by comparing the changes in fair value or cash flows of the derivative hedging instrument with the changes in fair value or cash flows of the designated hedged item or transaction. For derivatives not designated as hedges, changes in fair value are recognized in earnings.

The Company’s objective in using derivatives is to add stability to net interest income and to manage its exposure to interest rate movements or other identified risks. To accomplish this objective, the Company primarily uses interest rate caps as part of its cash flow hedging strategy. Interest rate caps designated as cash flow hedges involve the receipt of variable rate amounts over the life of the agreement if the LIBOR interest rate increases above a certain rate. The derivatives are being used to hedge the variable cash flows associated with $50.0 million of existing variable-rate debt.

In the event the Company terminates a derivative designated as a cash flow hedge, the treatment of the gain or loss on the derivative on the termination date depends on the probability of the hedged forecasted transactions occurring. If the forecasted transactions are probable of not occurring, the gain or loss on the termination of the derivative is recognized immediately in earnings. Otherwise, the gain or loss is reclassified out of other comprehensive income into earnings as the forecasted transactions occur.

If the hedged item in a cash flow hedge fails to occur or is probable of not occurring, cash flow hedge accounting is no longer applied to that hedging relationship and amounts classified in other comprehensive income are reclassified to earnings immediately. All future changes in the fair value of the derivative will be classified in earnings until the derivative matures or is re-designated in a new hedging relationship.

As of September 30, 2005, no derivatives were designated as fair value hedges. Additionally, the Company does not use derivatives for trading or speculative purposes and currently does not have any derivatives that are not designated as hedges.

At September 30, 2005, derivatives with a fair value of $362,000 were included in other assets. The change in net unrealized losses during the quarter and nine months ended September 30, 2005, of $163,000 and $89,000, respectively for derivatives designated as cash flow hedges is separately disclosed, net of tax, in other comprehensive income in Note 9. No hedge ineffectiveness on cash flow hedges was recognized during the three and nine months ended September 30, 2005.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. There was approximately $28,000 reclassified out of other comprehensive income into interest expense during the quarter ended September 30, 2005 and $53,000 during the nine months ended September 30, 2005. During the remainder of 2005, the Company estimates that approximately $37,000 will be reclassified from other comprehensive income to interest expense.

Recent Accounting and Regulatory Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (FAS No. 123R). FAS No. 123R revised FAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. FAS No. 123R will require compensation costs related to share-based payment transactions to be recognized in the financial statement (with limited exceptions). The amount of compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued. Compensation cost will be recognized over the period that an employee provides service in exchange for the award.

8

In April 2005, the Securities and Exchange Commission adopted a new rule that amends the compliance dates for FAS No. 123R. The Statement requires that compensation cost relating to share-based payment transactions be recognized in financial statements and that this cost be measured based on the fair value of the equity or liability instruments issued. FAS No. 123R covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. The Company will adopt FAS No. 123R on January 1, 2006 and is currently evaluating the impact the adoption of the standard will have on the Company’s results of operations.

In March 2005, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 107 (“SAB No. 107”), Share-Based Payment, providing guidance on option valuation methods, the accounting for income tax effects of share-based payment arrangements upon adoption of FAS No. 123R, and the disclosures in MD&A subsequent to the adoption. The Company will provide SAB No. 107 required disclosures upon adoption of FAS No. 123R on January 1, 2006 and is currently evaluating the impact the adoption of the standard will have on the Company’s financial condition, results of operations, and cash flows.

In December 2004, FASB issued FAS No. 153, Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No. 29. The guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions, is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. FAS No. 153 amends Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of FAS No. 153 are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Early application is permitted and companies must apply the standard prospectively. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

In June 2005, the FASB issued FAS No. 154, Accounting Changes and Errors Corrections, a replacement of APB Opinion No. 20 and FAS No. 3. The Statement applies to all voluntary changes in accounting principle, and changes the requirements for accounting for and reporting of a change in accounting principle. FAS No. 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impractical. APB Opinion No. 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. FAS No. 154 improves the financial reporting because its requirements enhance the consistency of financial reporting between periods. The provisions of FAS No. 154 are effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

2. Acquisition of PHSB

Effective February 11, 2005, the Company completed its acquisition of PHSB Financial Corporation (PHSB), a Pennsylvania corporation and bank holding company for Peoples Home Savings Bank. PHSB was primarily engaged in the business of attracting deposits from the general public and offering traditional mortgage loan products, commercial loans and consumer loans, which primarily consist of automobile loans. The merger created a resultant banking institution with increased presence in Lawrence and Beaver counties in western Pennsylvania. Each share of PHSB common stock was exchanged for either $27.00 in cash or 1.966 shares of Company common stock. The total merger consideration was paid 50% in Company common stock and 50% in cash. In exchange for all of the outstanding common stock of PHSB, the Company paid approximately $79.7 million in cash and issued approximately 2.9 million shares of Company common stock. The transaction was funded primarily through the issuance of $35.0 million of fixed rate trust preferred securities. The transaction was accounted for as a purchase transaction whereby

9

the identifiable tangible and intangible assets and liabilities of PHSB were recorded at their fair values as of the acquisition date. The amount of contractual obligations, severance or other plan payments, which were $4.4 million, were capitalized and included in the calculation of goodwill associated with the acquisition. The goodwill and core deposit intangible recorded in the transaction were approximately $32.5 million and $4.5 million, respectively. As prescribed under the purchase method of accounting, the results of operations of PHSB from the date of acquisition were included in the Company’s financial statements for the three and nine months ended September 30, 2005.

The following unaudited pro forma condensed combined financial information presents the results of operations of the Company had the merger taken place at January 1, 2004.

(Dollar amounts in thousands, except per share)	Nine Months Ended September 30,
	2005			2004
Interest Income	$	60,583		$	56,832
Interest Expense		36,660			33,456
Net Interest Income		23,923			23,376
Provision for loan losses		129			598
Net Interest Income after provision for loan losses		23,794			22,778
Non Interest Income		4,944			7,805
Non Interest Expense		27,976			31,260
Income before income taxes		762			(677	)
Income taxes benefit		(1,730	)		(1,332	)
Net income including restructuring charges.		2,492			655
Restructuring charges of $9,844, net of tax benefit of $2,958		6,886			6,886
Net income excluding restructuring charges	$	9,378		$	7,541
Net income per share including restructuring charges
Basic	$	0.16		$	0.05
Diluted	$	0.16		$	0.05
Net income per share excluding restructuring charges
Basic	$	0.61		$	0.58
Diluted	$	0.60		$	0.56

Merger and restructuring charges are recorded in the Consolidated Statement of Income, and include incremental costs to integrate PHSB with the Company’s operations. These charges represent costs associated with these one-time activities and do not represent ongoing costs of the fully integrated combined organization. These one-time charges, as shown in the table below, were expensed as incurred at PHSB prior to the acquisition.

(Dollar amounts in thousands)	Nine months ended September 30, 2005
Compensation and benefits	$	6,358
Depreciation expense		76
Professional fees		825
Early extinguishment of debt		2,333
Acceleration of contracts		252
	$	9,844

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In addition, as anticipated the merger has provided the combined company with financial benefits, including reduced operating expenses. The pro forma information, while helpful in illustrating the financial characteristics of the combined company under one set of assumptions, does not reflect the benefits of the cost savings or opportunities to earn additional revenue and, accordingly, does not attempt to predict or suggest future results. It also does not necessarily reflect what the historical results of the combined company would have been had our companies been combined during these periods.

3. Guaranteed Preferred Beneficial Interest in Subordinated Debt

On April 10, 2003, ESB Capital Trust II (Trust II), a statutory business trust established under Delaware law that is a subsidiary of the Company, issued $10.0 million variable rate preferred securities with a stated value and liquidation preference of $1,000 per share. The Company purchased $310,000 of common securities of Trust II. The preferred securities reset quarterly to equal the London Interbank Offer Rate Index (LIBOR) plus 3.25%. Trust II’s obligations under the preferred securities issued are fully and unconditionally guaranteed by the Company. The proceeds from the sale of the preferred securities and the common securities were utilized by the Trust II to invest in $10.3 million of variable rate subordinated debt of the Company. The subordinated debt is unsecured and ranks subordinate and junior in right of payment to all indebtedness, liabilities and obligations of the Company. The subordinated debt primarily represents the sole assets of the Trust II. 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 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 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 $150,000 and $195,000 at September 30, 2005 and December 31, 2004, respectively, and are amortized on a level yield basis.

On December 17, 2003, ESB Statutory Trust (Trust III), a statutory business trust established under Delaware law that is a subsidiary of the Company, issued $5.0 million variable rate preferred securities with a stated value and liquidation preference of $1,000 per share. The Company purchased $155,000 of common securities of Trust III. The preferred securities reset quarterly to equal the LIBOR plus 2.95%. Trust III’s obligations under the preferred securities issued are fully and unconditionally guaranteed by the Company. The proceeds from the sale of the preferred securities and the common securities were utilized by Trust III to invest in $5.2 million of variable rate subordinated debt of the Company. The subordinated debt is unsecured and ranks subordinate and junior in right of payment to all indebtedness, liabilities and obligations of the Company. The subordinated debt primarily represents the sole assets of Trust III. Interest on the preferred securities is cumulative and payable quarterly in arrears. The Company has the right to optionally redeem the subordinated debt prior to the maturity date of December 17, 2033, on or after December 17, 2008, at the 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 17, 2003, the Company may redeem in whole, but not in part, the subordinated debt at any time within 90 days following the occurrence of such event. Proceeds from any redemption of the subordinated debt would cause a mandatory redemption of the preferred securities and the common securities having an aggregate liquidation amount equal to the principal amount of the subordinated debt redeemed. Unamortized deferred debt issuance costs associated with the preferred securities amounted to $47,500 and $58,750 at September 30, 2005 and December 31, 2004, respectively, and are amortized on a level yield basis.

On February 10, 2005, ESB Capital Trust IV (Trust IV), a statutory business trust established under Delaware law that is a subsidiary of the Company, issued $35.0 million fixed rate preferred securities. The Company purchased $1.1 million of common securities of Trust IV. The preferred securities are fixed at a rate of 6.03% for six years and then are variable at three month LIBOR plus 1.82%. The preferred

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securities have a stated maturity of thirty years. Trust IV’s obligations under the preferred securities issued are fully and unconditionally guaranteed by the Company. The proceeds from the sale of the preferred securities and the common securities were utilized by Trust IV to invest in $36.1 million of fixed/variable rate subordinated debt of the Company. The subordinated debt is unsecured and ranks subordinate and junior in right of payment to all indebtedness, liabilities and obligations of the Company. The subordinated debt primarily represents the sole assets of Trust IV. Interest on the preferred securities is cumulative and payable quarterly in arrears. The Company has the right to optionally redeem the subordinated debt prior to the maturity date of February 10, 2035, on or after February 10, 2011, at the liquidation amount, plus accrued and unpaid distributions, if any, at the redemption date. Under the occurrence of certain events, specifically, a tax event, investment company event or capital treatment event as more fully defined in the Indenture dated February 10, 2005, the Company may redeem in whole, but not in part, the subordinated debt at any time within 90 days following the occurrence of such event. Proceeds from any redemption of the subordinated debt would cause a mandatory redemption of the preferred securities and the common securities having an aggregate liquidation amount equal to the principal amount of the subordinated debt redeemed. The Company did not have any deferred debt issuance costs associated with the preferred securities.

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
Available for sale:
As of September 30, 2005:
Trust preferred securities	$	500	$	—	$	(7	)	$	493
Municipal securities		116,236		5,921		(23	)		122,134
Equity securities		1,598		260		(31	)		1,827
Corporate bonds		85,208		653		(1,283	)		84,578
Mortgage-backed securities		925,447		2,171		(11,460	)		916,158
	$	1,128,989	$	9,005	$	(12,804	)	$	1,125,190
December 31, 2004:
Trust Preferred securities	$	500	$	—	$	(18	)	$	482
U.S. Government securities		5,986		487		—			6,473
Municipal securities		106,622		6,012		(193	)		112,441
Equity securities		973		352		—			1,325
Corporate bonds		99,290		1,948		(1,770	)		99,468
Mortgage-backed securities		707,072		6,287		(3,754	)		709,605
	$	920,443	$	15,086	$	(5,735	)	$	929,794

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The following table shows the Company’s investments gross unrealized losses and fair value aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2005:

As of September 30, 2005

	Less than 12 Months					12 Months or more					Total
(Dollar amounts in thousands)	# of Securities	Fair Value		Unrealized losses		# of Securities	Fair Value		Unrealized losses		# of Securities	Fair Value		Unrealized losses
Trust Preferred Securities	—	$	—	$	—	1	$	493	$	7	1	$	493	$	7
Municipal securities	1		881		2	4		2,501		21	5		3,382		23
Equity Securities	3		594		31	—		—		—	3		594		31
Corporate bonds	—		2,008		10			787		1,273	0		2,795		1,283
Mortgage-backed securities	123		494,557		5,090	73		587,807		6,370	196		1,082,364		11,460
	127	$	498,040	$	5,133	88	$	591,588	$	7,671	205	$	1,089,628	$	12,804

5. Loans Receivable

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

(Dollar amounts in thousands)	September 30, 2005			December 31, 2004
Loans Receivable
Mortgage loans:
Residential - single family	$	208,393		$	155,971
Residential - multi family		37,002			35,565
Commercial real estate		65,607			53,446
Construction		68,164			61,061
Subtotal mortgage loans		379,166			306,043
Other loans:
Consumer loans		138,398			58,066
Commercial business		20,574			8,271
Subtotal other loans		158,972			66,337
Total loans		538,138			372,380
Less:
Allowance for loan losses		4,612			3,940
Deferred loan fees and net discounts		(2,855	)		248
Loans in process		17,880			24,668
	$	518,501		$	343,524

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

(Dollar amounts in thousands)	Totals
Balance, January 1, 2005	$	3,940
Addition of PHSB allowance for loan losses		1,406
Provision for loan losses		69
Charge offs		(873	)
Recoveries		70
Balance, September 30, 2005	$	4,612

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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, 2005				December 31, 2004
Type of accounts	Amount		%		Amount		%
Noninterest-bearing deposits	$	54,697	6.6	%	$	23,563	4.1	%
NOW account deposits		84,414	10.2	%		58,553	10.1	%
Money Market deposits		57,825	7.0	%		49,332	8.5	%
Passbook account deposits		119,959	14.5	%		94,439	16.3	%
Time deposits		512,718	61.7	%		354,459	61.0	%
	$	829,613	100.0	%	$	580,346	100.0	%
Time deposits mature as follows:
Within one year	$	329,755	39.7	%	$	226,726	39.0	%
After one year through two years		100,034	12.0	%		64,381	11.1	%
After two years through three years		60,173	7.3	%		48,173	8.3	%
After three years through four years		10,406	1.2	%		4,667	0.8	%
After four years through five years		7,753	0.9	%		7,484	1.3	%
Thereafter		4,597	0.6	%		3,028	0.5	%
	$	512,718	61.7	%	$	354,459	61.0	%

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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, 2005				December 31, 2004
	Weighted average rate		Amount		Weighted average rate		Amount
FHLB advances:
Due within 12 months	3.95	%	$	248,827	3.63	%	$	256,718
Due beyond 12 months but within 2 years	3.64	%		199,068	3.77	%		136,491
Due beyond 2 years but within 3 years	3.93	%		203,711	3.47	%		147,732
Due beyond 3 years but within 4 years	4.28	%		20,680	3.35	%		60,060
Due beyond 4 years but within 5 years	6.61	%		10,000	8.39	%		180
Due beyond 5 years	4.80	%		20,057	1.00	%		61
			$	702,343			$	601,242
Repurchase agreements:
Due within 12 months	3.97	%	$	37,000	2.14	%	$	57,000
Due beyond 12 months but within 2 years	4.01	%		20,000	—			—
Due beyond 2 years but within 3 years	4.32	%		25,000
Due beyond 3 years but within 4 years	—			—	3.81	%		10,000
			$	82,000			$	67,000
Other borrowings:
ESOP borrowings
Due within 12 months	5.25	%	$	945	5.25	%	$	945
Due beyond 12 months but within 2 years	5.25	%		945	5.25	%		945
Due beyond 2 years but within 3 years	5.25	%		945	5.25	%		945
Due beyond 3 years but within 4 years	5.25	%		945	5.25	%		945
Due beyond 4 years but within 5 years	5.25	%		945	5.25	%		945
Due beyond 5 years	5.25	%		236	5.25	%		945
			$	4,961			$	5,670
Corporate borrowings
Due within 12 months	5.55	%	$	1,500	5.55	%	$	1,500
Due beyond 12 months but within 2 years	5.55	%		1,500	5.55	%		1,500
Due beyond 2 years but within 3 years	5.55	%		1,500	5.55	%		1,500
Due beyond 3 years but within 4 years	5.55	%		9,000	5.55	%		9,000
			$	13,500			$	13,500
Treasury tax and loan note payable	3.75	%	$	180	2.03	%	$	150

Included in the $702.3 million of FHLB advances at September 30, 2005 is approximately $55.5 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, 2005		Three Months Ended September 30, 2004
Net income	$	2,891	$	2,600
Weighted-average common shares outstanding		12,874		10,155
Basic earnings per share	$	0.22	$	0.26
Weighted-average common shares outstanding		12,874		10,155
Common stock equivalents due to effect of stock options		234		341
Total weighted-average common shares and equivalents		13,108		10,496
Diluted earnings per share	$	0.22	$	0.25
	Nine Months Ended September 30, 2005		Nine Months Ended September 30, 2004
Net income	$	8,969	$	7,400
Weighted-average common shares outstanding		12,516		10,195
Basic earnings per share	$	0.72	$	0.73
Weighted-average common shares outstanding		12,516		10,195
Common stock equivalents due to effect of stock options		270		387
Total weighted-average common shares and equivalents		12,786		10,582
Diluted earnings per share	$	0.70	$	0.70

The shares controlled by the Company’s Employee Stock Ownership Plan (ESOP) of 503,929 and 593,938 at September 30, 2005 and September 30, 2004, respectively, are not considered in the weighted average shares outstanding until the shares are committed for allocation to an employee’s individual account. Options to purchase 93,760 shares of common stock at a weighted average exercise price of $15.35, 90,220 at a weighted average exercise price of $14.50, 82,300 at a weighted average exercise price of $12.20 and 18,610 at a weighted average exercise price of $12.40 were outstanding as of September 30, 2005 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 in November 2013, November 2014 and June 2015. Options to purchase 94,510 shares of common stock at a weighted average exercise price of $15.35 per share were outstanding as of September 30, 2004 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 in November 2013.

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9. Comprehensive Income

In complying with Financial Accounting Standards 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 and derivatives that qualify as cashflow hedges. Other comprehensive income (loss) and related tax effects for the indicated periods, consists of:

(Dollar amounts in thousands)	Three Months Ended September 30, 2005			Three Months Ended September 30, 2004
Net Income:	$	2,891		$	2,600
Other Comprehensive income (loss) - net of tax
Fair value adjustment on securities available for sale, net of tax (benefit) expense of ($3,263) in 2005, $3,753 in 2004		(6,335	)		7,286
Securities gains reclassified into earnings, net of tax benefit of $266 in 2005		(517	)		—
Fair value adjustment on derivatives, net of tax benefit of $84 in 2005, $192 in 2004		(163	)		(374	)
Other Comprehensive income (loss)		(7,015	)		6,912
Comprehensive Income (loss)	$	(4,124	)	$	9,512
(Dollar amounts in thousands)	Nine Months Ended September 30, 2005			Nine Months Ended September 30, 2004
Net Income:	$	8,969		$	7,400
Other Comprehensive loss - net of tax
Fair value adjustment on securities available for sale, net of tax benefit of ($4,161) in 2005, ($707) in 2004		(8,078	)		(1,372	)
Securities gains reclassified into earnings, net of tax benefit of $266 in 2005 and $316 in 2004.		(517	)		(614	)
Fair value adjustment on derivatives, net of tax benefit of ($45) in 2005, ($322) in 2004		(89	)		(626	)
Other Comprehensive loss		(8,684	)		(2,612	)
Comprehensive loss	$	285		$	4,788

10. Retirement Plans

Supplemental Executive Retirement Plan and Directors’ Retirement Plan

The Company has adopted a Supplemental Executive Benefit Plan (SERP) in order to provide supplemental retirement and death benefits for certain key employees of the Company. Under the SERP, participants shall receive an annual retirement benefit following retirement at age 65 equal to 25% of the participant’s final average pay multiplied by a target retirement benefit percentage. Final average pay is based upon the participant’s last three year’s compensation and the target benefit percentage is equal to the fraction resulting from the participant’s years of credited service divided by 20, this targeted benefit percentage is capped at 100%. Benefits under the plan are payable in ten equal annual payments and a

17

lesser benefit is payable upon early retirement at age 55 with at least ten years of service. If a participant dies prior to retirement, the participant’s estate will receive a lump sum payment equal to the net present value of future benefit payments under the plan. At September 30, 2005, the participants in the plan had credited service under the SERP ranging from 14 to 27 years.

The Company and the Bank have adopted the ESB Financial Corporation Directors’ Retirement Plan and entered into director retirement agreements with each director of the Company and the Bank. The plan provides that any retiring director with a minimum of 5 or more years of service with the Company or the Bank and a minimum of 10 total years of service, including years of service with any bank acquired by the Company or the Bank, that remains in continuous service as a board member until age 75 will be entitled to receive an annual retirement benefit equal to his or her director’s fees earned during the last full calendar year prior to his or her retirement date, multiplied by a ratio, ranging from 25% to 50%, based on the director’s total years of service. The maximum ratio of 50% of fees requires 20 or more years of service and the minimum ratio of 25% of fees requires 10 years of service. Retirement benefits may also be payable under the plan if a director retires from service as a director prior to attaining age 75. Two retired directors are currently receiving monthly benefits under the plan.

The following table illustrates the components of the net periodic pension cost for the SERP and Directors Retirement Plan as of September 30, 2005:

(Dollar amounts in thousands)	SERP				SERP
	Three Months Ended September 30, 2005		Three Months Ended September 30, 2004		Nine Months Ended September 30, 2005		Nine Months Ended September 30, 2004
Components of net periodic pension cost
Service cost	$	11	$	10	$	33	$	30
Interest cost		19		17		57		51
Amortization of prior service cost		10		11		30		33
Net periodic pension cost	$	40	$	38	$	120	$	114
(Dollar amounts in thousands)	Directors’ Retirement Plan				Directors’ Retirement Plan
	Three Months Ended September 30, 2005		Three Months Ended September 30, 2004		Nine Months Ended September 30, 2005		Nine Months Ended September 30, 2004
Components of net periodic pension cost
Service cost	$	4	$	4	$	12	$	12
Interest cost		7		7		21		21
Amortization of prior service cost		15		15		45		40
Net periodic pension cost	$	26	$	26	$	78	$	73

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

The following discussion and analysis provides further detail to the financial condition and results of operations of the Company. The section should be read in conjunction with the notes and financial statements presented elsewhere in this report.

The Company’s critical accounting policies involving the significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of September 30, 2005 have remained unchanged from the disclosures presented in the ESB’s Annual Report on Form 10-K for the year ended December 31, 2004 under the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Forward-looking statements in this report relating to ESB’s plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The information contained in this report should be read in conjunction with ESB’s most recent annual report filed with the Securities and Exchange Commission on Form 10-K for the year ended December 31, 2004, which is available at the SEC’s website www.sec.gov or at ESB’s website, www.esbbank.com. Investors are cautioned that forward-looking statements, which are not historical fact, involve risks and uncertainties that could cause actual results to differ materially from those contemplated by such statements, including without limitation, the effect of changing regional and national economic conditions; changes in interest rates, spreads on earning assets and interest-bearing liabilities, and associated interest rate sensitivity; sources of liquidity available to the parent company and its related subsidiary operations; potential future credit losses and the credit risk of commercial, real estate, and consumer loan customers and their borrowing activities; actions of the Federal Reserve Board, Federal Deposit Insurance Corporation, the Securities and Exchange Commission, and other regulatory bodies; potential legislative and federal and state regulatory actions and reform; competitive conditions in the financial services industry; rapidly changing technology affecting financial services, and/or other external developments materially impacting ESB’s operational and financial performance. ESB does not assume any duty to update forward-looking statements.

OVERVIEW

ESB Financial Corporation (ESB or the Company) is a Pennsylvania Corporation and thrift holding company that provides a wide array of retail and commercial financial products and services to customers in Western Pennsylvania through its wholly-owned subsidiary ESB Bank, ( the Bank). ESB Bank currently operates 23 branches.

During the three months ended September 30, 2005, the Company had net income of $2.9 million, an increase of 11.2% when compared to net income of $2.6 million for the quarter ended September 30, 2004 and diluted earnings per share were $0.22 an 11.8% decrease over the same period in the prior year. During the nine month period ended September 30, 2005 the Company’s reported net income of $9.0 million an increase of 21.2% when compared to net income of $7.4 million for the nine months ended September 30, 2004, while diluted earnings per share were flat compared to the same period last year. The increase in net income and the decline in earnings per share for the third quarter of 2005, as compared to the 2004 quarter were primarily due to the acquisition of PHSB on February 11, 2005 and increased pressure on the Company’s net interest margin due to rising interest rates.

During the period ended September 30, 2005 short and mid-term interest rates rose between 100 and 130 basis points causing a flattening of the yield curve and subsequent downward pressure on net interest income. Although the Company was able to offset a portion of that decrease by successfully integrating Peoples Home Savings Bank (PHSB) into the Company, which was acquired on February 11, 2005, and achieving some cost savings by combining three of the PHSB branches into ESB and closing the Springdale office of ESB Bank, however the Company’s net income was negatively impacted.

The Company employs a strategy of purchasing cash-flowing fixed and variable rate mortgage-backed securities funded by wholesale borrowings, which are comprised of Federal Home Loan Bank (FHLB) advances and repurchase agreements. This is referred to as the Company’s wholesale strategy. The Company, as part of its interest rate risk strategy, continues to pursue the policy of locking in long-term advances during periods of low

19

interest rates. The Company has recently experienced some compression as the Federal Reserve continues to raise short term interest rates at a measured pace. The Federal Reserve has raised its fed funds rates 275 basis points since June 2004. Traditionally, as short term interest rates rise the cost of the Company’s wholesale borrowings rise accordingly and cause some compression to the Company’s net interest margin.

The wholesale strategy operates with a lower cost of operations, although with lower interest rate spreads and therefore at a lower margin than the retail operations of the Company. The Company has utilized this strategy since its initial public offering in 1990. The Company manages this strategy through its interest rate risk management on a macro level. This strategy historically produces wider margins during periods of lower short-term interest rates, reflected in a steep yield curve and can be susceptible to net interest margin strain in both rapidly rising rates and rapidly declining long-term rates, which can cause compression to the net interest margin.

Management continues to pursue methods of insulating this wholesale strategy from significant fluctuations in interest rates by: (1) incorporating a laddered maturity schedule of up to three to four years on the wholesale borrowings; (2) purchasing interest rate caps hedged against short term borrowings; (3) providing structure in the investment portfolio in the form of corporate bonds and municipal securities; (4) utilizing cash flows from fixed and adjustable rate mortgage-backed securities; and (5) the placing of the Company’s securities in the available for sale portfolio thereby creating the flexibility to change the composition of the portfolio through restructuring as management deems it necessary due to interest rate fluctuations. Management believes that this insulation affords it the ability to react to measured changes in interest rates and restructure the Company’s balance sheet accordingly. This strategy is continually evaluated by management on an ongoing basis.

RESULTS OF OPERATIONS

Earnings Summary. The Company recorded net income of $2.9 million for the three months ended September 30, 2005, as compared to net income of $2.6 million for the same period in the prior year. The $291,000, or 11.2%, increase in net income for the quarter ended September 30, 2005, as compared to the same period in the prior year was primarily attributable to increases in net interest income after provision for loan losses and non-interest income of $1.5 million and $194,000, respectively, partially offset by increases in non-interest expense and provision for income taxes of $1.0 million and $334,000, respectively.

The Company recorded net income of $9.0 million for the nine months ended September 30, 2005, as compared to net income of $7.4 million for the same period in the prior year. The $1.6 million, or 21.2%, increase in net income for the nine months ended September 30, 2005, as compared to the same period in the prior year was primarily attributable to an increase in net interest income after provision for loan losses of $4.7 million, partially offset by a decrease in non-interest income of $442,000 and increases in non-interest expense and provision for income taxes of $2.1 million and $556,000, respectively.

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

Net interest income increased $1.5 million, or 24.4%, to $7.6 million for the three months ended September 30, 2005, compared to $6.1 million for the same period in the prior year. This increase in net interest income can be attributed to an increase in interest income of $5.6 million, partially offset by an increase in interest expense of $4.1 million.

Net interest income increased $4.4 million, or 23.6%, to $23.2 million for the nine months ended September 30, 2005, compared to $18.5 million for the same period in the prior year. This increase in net interest income can be attributed to an increase in interest income of $13.7 million, partially offset by an increase in interest expense of $9.2 million.

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Interest income. Interest income increased $5.6 million, or 37.1%, for the three months ended September 30, 2005, compared to the same period in the prior year. This increase can primarily be attributed to increases in interest earned on loans receivable, securities available for sale and Federal Home Loan Bank stock of $2.6 million, $2.8 million and $133,000, respectively.

Interest earned on loans receivable increased $2.6 million, or 52.1%, for the three months ended September 30, 2005, compared to the same period in the prior year. This increase was primarily attributable to an increase in the average balance of loans outstanding of $174.5 million, or 51.2%, to $515.0 million for the three months ended September 30, 2005 compared to $340.6 million for the same period in the prior year. This increase was enhanced by a slight increase in the yield on the loans to 6.00% for the three months ended September 30, 2005 from 5.94% for the same period in the prior year. The increase in the average balance of loans outstanding is primarily attributable to the acquisition of PHSB in February 2005 in which the Company acquired approximately $146.0 million in loans receivable as well as increases in the indirect auto portfolio and mortgage lending portfolios since the acquisition.

Interest earned on securities increased $2.8 million, or 28.2%, for the three months ended September 30, 2005, compared to the same period in the prior year. This increase was primarily the result of an increase in the average balance of the securities portfolio of $212.5 million, or 23.3%, to $1.1 billion at September 30, 2005 from $912.8 million for the same period in the prior year, and to a lesser extent an increase in the tax equivalent yield on securities to 4.79% for the three months ended September 30, 2005 from 4.65% for the same period in the prior year. The increase in the average balance of securities between the periods was primarily related to the acquisition of $143.3 million of securities with the acquisition of PHSB in February 2005, as well as purchases of securities as part of the Company’s wholesale strategy.

Interest income increased $13.7 million, or 30.3%, for the nine months ended September 30, 2005, compared to the same period in the prior year. This increase can primarily be attributed to increases in interest earned on loans receivable, securities available for sale and FHLB stock of $6.2 million, $6.9 million and $408,000, respectively.

Interest earned on loans receivable increased $6.2 million, or 41.0%, for the nine months ended September 30, 2005, compared to the same period in the prior year. This increase was primarily attributable to an increase in the average balance of loans outstanding of $145.3 million, or 43.2%, to $481.9 million for the nine months ended September 30, 2005 compared to $336.6 million for the same period in the prior year. This increase was partially offset by a decline in the yield on the loans to 6.01% for the nine months ended September 30, 2005 from 6.03% for the same period in the prior year. The increase in the average balance of loans outstanding is primarily attributable to the acquisition of PHSB in February 2005 in which the Company acquired approximately $146.0 million in loans receivable as well as increases in the indirect auto and mortgage loan portfolio since the acquisition.

Interest earned on securities increased $6.9 million, or 23.4%, for the nine months ended September 30, 2005 compared to the same period in the prior year. This increase was primarily attributable to an increase in the average balance of securities outstanding of $167.2 million, or 18.4%, to $1.1 billion for the nine months ended September 30, 2005 compared to $910.2 million for the same period in the prior year and to a lesser extent an increase in the yield on the securities to 4.78% for the nine months ended September 30, 2005 from 4.61% for the same period in the prior year. The increase in the average balance of securities between the periods was primarily related to the acquisition of PHSB in February 2005.

These changes are reflected in the quarterly rate volume report presented below which depicts that the increases to the income from loans receivable and securities available for sale are the primary sources of the overall increase to net interest income.

Interest expense. Interest expense increased $4.1 million, or 45.6%, for the three months ended September 30, 2005, compared to the same period in the prior year. This increase in interest expense can be attributed to increases in interest incurred on deposits, borrowed funds and junior subordinated notes, related to trust preferred securities, of $1.8 million, $1.7 million and $597,000, respectively.

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Interest incurred on deposits increased $1.8 million, or 67.1%, for the three months ended September 30, 2005, compared to the same period in the prior year. This increase was primarily attributable to an increase in the average balance of interest-bearing deposits of $210.7 million, or 37.7%, to $770.2 million for the three months ended September 30, 2005, compared to $559.5 million for the same period in the prior year. This increase is primarily due to the acquisition of PHSB in February 2005 which increased the Company’s deposits by approximately $231.0 million. Additionally, the cost of interest-bearing deposits increased to 2.35% from 1.94% for the quarters ended September 30, 2005 and 2004, respectively. The Company manages its cost of interest bearing deposits by diligently monitoring the interest rates on its products as well as the rates being offered by its competition through weekly interest rate committee meetings and utilizing rate surveys and hence subsequently adjusting rates accordingly.

Interest incurred on borrowed funds, the largest component of the Company’s interest-bearing liabilities, increased $1.7 million, or 27.8%, for the three months ended September 30, 2005 compared to the same period in the prior year. This increase was primarily attributable to an increase in the average balance of borrowed funds of $124.2 million, or 18.5%, to $797.4 million for the three months ended September 30, 2005 compared to $673.2 million for the same period in the prior year and to a lesser extent an increase in the cost of funds funds to 3.83% from 3.55% for the quarters ended September 30, 2005 and 2004, respectively.

Interest expense increased $9.2 million, or 35.1%, for the nine months ended September 30, 2005, compared to the same period in the prior year. This increase in interest expense can be attributed to increases in interest incurred on deposits, borrowed funds and junior subordinated notes, related to trust preferred securities, of $4.1 million, $3.6 million and $1.5 million, respectively.

Interest incurred on deposits increased $4.1 million, or 51.1%, for the nine months ended September 30, 2005, compared to the same period in the prior year. This increase was primarily attributable to an increase in the average balance of interest-bearing deposits of $174.6 million, or 31.0%, to $737.8 million for the nine months ended September 30, 2005, compared to $563.3 million for the same period in the prior year. This increase is primarily due to the acquisition of PHSB in February 2005 which increased the Company’s deposits by approximately $231.0 million. Additionally, the cost of interest-bearing deposits increased to 2.22% from 1.92% for the nine months ended September 30, 2005 and 2004, respectively.

Interest incurred on borrowed funds, the largest component of the Company’s interest-bearing liabilities, increased $5.1 million, or 27.9%, for the nine months ended September 30, 2005 compared to the same period in the prior year. This increase was primarily attributable to an increase in the average balance of borrowed funds of $97.0 million, or 14.7%, to $758.6 million for the nine months ended September 30, 2005 compared to $661.7 million for the same period in the prior year and to a lesser extent to an increase in the cost of these funds to 3.69% from 3.50% for the nine months ended September 30, 2005 and 2004.

In addition to the wholesale strategy at the Bank, the Company manages its cost of borrowings through the use of debt associated with the issuance of trust preferred securities. In January 2004, the Company entered into a loan agreement with First Tennessee Bank, National Association to borrow $15.0 million at a fixed interest rate of 5.55% and a stated maturity of five years. The proceeds were used to redeem the remaining $20.3 million of the preferred securities of PennFirst Capital Trust I, which were at an interest rate of 8.625%. In February 2005, the Company issued $35.0 million fixed/floating rate preferred securities at a rate of 6.03% to fund the acquisition of PHSB. This caused the interest incurred on these borrowings to increase by $597,000 due primarily to an increase in the average balance of $36.2 million to $51.3 million for the three months ended September 30, 2005 compared to $15.2 million for the same period in the prior year and to a lesser extent to an increase in the cost of these funds to 6.10% for the quarter ended September 30, 2005 from 5.24% for the same period in the prior year. The interest incurred on these borrowings increased by $1.5 million due primarily to an increase in the average balance of $29.0 million to $45.3 million for the nine months ended September 30, 2005 compared to $16.3 million for the same period in the prior year, and to a lesser extent to an increase in the cost of these funds to 6.22% for the nine months ended September 30, 2005 from 5.22% for the same period in the prior year.

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

	Three months ended September 30,
	2005						2004
(Dollar amounts in thousands)	Average Balance		Interest		Yield / Rate		Average Balance		Interest		Yield / Rate
Interest-earning assets:
Taxable securities available for sale	$	955,762	$	10,750	4.50	%	$	759,332	$	8,369	4.41	%
Taxable corporate bonds available for sale		51,257		567	4.33	%		51,242		302	2.31	%
Tax-exempt securities available for sale		118,267		1,438	7.37	%(1)		102,261		1,282	7.60	%(1)
		1,125,286		12,755	4.79	%(1)		912,835		9,953	4.65	%(1)
Mortgage loans		355,233		5,296	5.96	%		267,772		4,096	6.12	%
Tax-exempt loans		8,957		106	6.03	%(1)		—		—	—
Other loans		150,826		2,294	7.13	%		72,785		964	5.27	%
		515,016		7,696	6.00	%(1)		340,557		5,060	5.94	%
Cash equivalents		17,899		68	1.51	%		11,464		22	0.76	%
FHLB stock		35,792		241	2.67	%		32,078		108	1.34	%
		53,691		309	2.28	%		43,542		130	1.19	%
Total interest-earning assets		1,693,993		20,760	5.08	%(1)		1,296,934		15,143	4.87	%(1)
Other noninterest-earning assets		133,999		—	—			80,652		—	—
Total assets	$	1,827,992	$	20,760	4.71	%(1)	$	1,377,586	$	15,143	4.58	%(1)
Interest-bearing liabilities:
Interest-bearing demand deposits	$	270,296	$	407	0.60	%	$	214,299	$	257	0.48	%
Time deposits		499,910		4,157	3.30	%		345,216		2,475	2.85	%
		770,206		4,564	2.35	%		559,515		2,732	1.94	%
FHLB advances		709,078		6,920	3.82	%		602,847		5,598	3.63	%
Repurchase Agreements		69,500		628	3.54	%		55,333		299	2.11	%
Other borrowings		18,852		260	5.40	%		15,054		213	5.54	%
		797,430		7,808	3.83	%		673,234		6,110	3.55	%
Preferred securities- fixed		36,083		567	6.15	%		—		—	—
Preferred securities- adjustable		15,258		230	5.98	%		15,183		200	5.24	%
Total interest-bearing liabilities		1,618,977		13,169	3.20	%		1,247,932		9,042	2.85	%
Noninterest-bearing demand deposits		54,868		—	—			24,414		—	—
Other noninterest-bearing liabilities		19,901		—	—			10,862		—	—
Total liabilities		1,693,746		13,169	3.06	%		1,283,208		9,042	2.77	%
Stockholders’ equity		134,246		—	—			94,378		—	—
Total liabilities and equity	$	1,827,992	$	13,169	2.83	%	$	1,377,586	$	9,042	2.58	%
Net interest income			$	7,591					$	6,101
Interest rate spread (difference between weighted average rate on interest-earning assets and interest-bearing liabilities)					1.88	%(1)					2.02	%(1)
Net interest margin (net interest income as a percentage of average interest-earning assets)					2.02	%(1)					2.13	%(1)

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

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	Nine months ended September 30,
	2005						2004
(Dollar amounts in thousands)	Average Balance		Interest		Yield / Rate		Average Balance		Interest		Yield / Rate
Interest-earning assets:
Taxable securities available for sale	$	912,450	$	30,856	4.51	%	$	759,992	$	25,090	4.40	%
Taxable corporate bonds available for sale		51,253		1,500	3.86	%		51,238		806	2.07	%
Tax-exempt securities available for sale		113,779		4,171	7.41	%(1)		99,006		3,702	7.55	%(1)
		1,077,482		36,527	4.78	%(1)		910,236		29,598	4.61	%(1)
Mortgage loans		336,105		15,029	5.96	%		265,184		12,120	6.09	%
Tax-exempt loans		13,259		475	6.01	%(1)		—		—	—
Other loans		132,559		5,955	7.26	%		71,414		3,100	5.78	%
		481,923		21,459	6.01	%(1)		336,598		15,220	6.03	%
Cash equivalents		17,952		150	1.12	%		10,772		51	0.63	%
FHLB stock		34,311		701	2.73	%		31,754		293	1.23	%
		52,263		851	2.17	%		42,526		344	1.08	%
Total interest-earning assets		1,611,668		58,837	5.07	%(1)		1,289,360		45,162	4.87	%(1)
Other noninterest-earning assets		124,882		—	—			81,901		—	—
Total assets	$	1,736,550	$	58,837	4.70	%(1)	$	1,371,261	$	45,162	4.58	%(1)
Interest-bearing liabilities:
Interest-bearing demand deposits	$	264,133	$	1,055	0.53	%	$	219,026	$	778	0.47	%
Time deposits		473,690		11,193	3.16	%		344,247		7,323	2.84	%
		737,823		12,248	2.22	%		563,273		8,101	1.92	%
FHLB advances		667,299		18,678	3.69	%		602,182		16,321	3.56	%
Repurchase Agreements		72,278		1,774	3.24	%		45,222		686	1.99	%
Other borrowings		19,069		784	5.42	%		14,273		625	5.75	%
		758,646		21,236	3.69	%		661,677		17,632	3.50	%
Preferred securities- fixed		30,069		1,396	6.12	%		1,114		69	8.26	%
Preferred securities- adjustable		15,239		733	6.43	%		15,164		568	5.00	%
Total interest-bearing liabilities		1,541,777		35,613	3.06	%		1,241,228		26,370	2.81	%
Noninterest-bearing demand deposits		48,160		—	—			23,683		—	—
Other noninterest-bearing liabilities		18,137		—	—			10,748		—	—
Total liabilities		1,608,074		35,613	2.94	%		1,275,659		26,370	2.73	%
Stockholders’ equity		128,476		—	—			95,602		—	—
Total liabilities and equity	$	1,736,550	$	35,613	2.72	%	$	1,371,261	$	26,370	2.54	%
Net interest income			$	23,224					$	18,792
Interest rate spread (difference between weighted average rate on interest-earning assets and interest-bearing liabilities)					2.01	%(1)					2.06	%(1)
Net interest margin (net interest income as a percentage of average interest-earning assets)					2.14	%(1)					2.16	%(1)

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

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Analysis of Changes in Net Interest Income. The following tables analyze the changes in interest income and interest expense, between the three and nine month periods ended September 30, 2005 and 2004 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.

(Dollar amounts in thousands)	Three months ended, September 30, 2005 versus 2004 Increase (decrease) due to
	Volume		Rate			Total
Interest income:
Securities	$	2,395	$	407		$	2,802
Loans		2,607		29			2,636
Cash equivalents		17		29			46
FHLB stock		14		119			133
Total interest-earning assets		5,033		584			5,617
Interest expense:
Deposits		1,169		663			1,832
FHLB advances		1,025		297			1,322
Repurchase agreements		91		238			329
Other borrowings		52		(5	)		47
Preferred securities		555		42			597
Total interest-bearing liabilities		2,892		1,235			4,127
Net interest income	$	2,141	$	(651	)	$	1,490

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(Dollar amounts in thousands)	Nine months ended September 30 2005 versus 2004 Increase (decrease) due to
	Volume		Rate			Total
Interest income:
Securities	$	5,626	$	1,303		$	6,929
Loans		6,474		(235	)		6,239
Cash equivalents		46		53			99
FHLB stock		25		383			408
Total interest-earning assets		12,171		1,504			13,675
Interest expense:
Deposits		2,769		1,378			4,147
FHLB advances		1,809		548			2,357
Repurchase agreements		535		553			1,088
Other borrowings		199		(40	)		159
Preferred securities		1,341		151			1,492
Total interest-bearing liabilities		6,653		2,590			9,243
Net interest income	$	5,518	$	(1,086	)	$	4,432

Provision for loan losses. The provision for loan losses increased $10,000 to $67,000 for the quarter ended September 30, 2005, compared to a provision for loan losses of $57,000 for the same period last year. The provision for loan losses decreased $229,000 to $69,000 for the nine months ended September 30, 2005, compared to a provision for loan losses of $298,000 for the same period last year. These provisions were part of the normal operations of the Company for the quarter and nine months ended September 30, 2005. In determining the appropriate level of allowance for loan losses, management considers historical loss experience, the financial condition of borrowers, economic conditions such as unemployment rates and personal bankruptcy filings, (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, 2005 amounted to $4.6 million, or 0.86% of the Company’s total loan portfolio, as compared to $3.9 million, or 1.06%, at December 31, 2004. The Company’s allowance for losses on loans as a percentage of non-performing loans was 111.8% and 165.2% at September 30, 2005 and December 31, 2004, respectively.

Non-interest income. Non-interest income increased $194,000, or 12.4%, for the three months ended September 30, 2005, compared to the same period in the prior year. This increase can be attributed to an increase in fees and service charges of $394,000 and net realized gain on sale of securities available for sale of $129,000, which was partially offset by decreases in income from real estate joint ventures and other income of $303,000 and $27,000, respectively.

Non-interest income decreased $443,000, or 8.4%, for the nine months ended September 30, 2005, compared to the same period in the prior year. This decrease can be attributed to decreases in net gain on sale of loans, net realized gain on sale of securities available for sale and income from real estate joint ventures of $21,000, $814,000 and $434,000, respectively, partially offset by increases in fees and service charges and other income of $716,000 and $117,000, respectively.

Fees and service charges increased $394,000, or 71.5%, for the three months ended September 30, 2005 compared to the same period in the prior year. These increases are primarily due to the merger with PHSB which expanded the number of savings accounts, NOW accounts and participation in our platinum overdraft program. These additional accounts resulted in NOW account and other savings accounts fees increasing by $191,000. The platinum overdraft program is a service provided by the Bank which enables customers limited ability to overdraft their checking accounts without the Bank returning the check. The increase in customers and accounts also resulted in increases to fees on loans, fees on debit cards, service fees on ATM machines and fees on visa loans of $74,000, 17,000, $69,000 and $29,000, respectively.

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Fees and service charges increased $716,000, or 40.1%, for the nine months ended September 30, 2005 compared to the same period in the prior year. This increase can primarily be attributable to increases to fees earned on savings and NOW accounts, fees on loans, fees on debit cards, service fees on ATM machines and fees on visa loans of $460,000, $182,000, $46,000, $131,000 and $67,000, respectively, as well as a decrease to amortization of loan servicing rights of $21,000. Partially offsetting these increases was a decrease to prepayment fees on loans of $217,000 which was recorded in 2004 with the early payoff of two commercial loans.

Net realized gain on sales of securities increased $129,000 for the quarter ended September 30, 2005, compared to $0 for the same period in the prior year. Net realized gain on sales of securities decreased $814,000 to $129,000 for the nine months ended September 30, 2005 from $943,000 for the same period in the prior year. During 2004, the proceeds from the sales of these securities were used as a part of the Company’s strategy to restructure a portion of its fixed rate debt to improve the net interest margin.

Income from real estate joint ventures decreased $303,000, or 47.2%, to $339,000 for the quarter ended September 30, 2005, compared to $642,000 for the same period in the prior year and $434,000, or 29.5%, to $1.0 million for the nine months ended September 30, 2005, compared to $1.5 million for the same period in the prior year. The Company has a 51% ownership in five real estate joint ventures. In two of the joint ventures the Company participates in developing the land as well as constructing and selling duplexes and quad homes and in another the Company will participate in the construction of single family houses. A description of the joint ventures entered into during the nine months ended September 30, 2005 can be found in the discussion of changes in financial condition and a more complete description of the existing projects can be found in the Company’s annual report on Form 10-K for the year ended December 31, 2004. During the three and nine month period ended September 30, 2005, the Company’s joint ventures experienced decreased sales and therefore decreased income over the same periods last year.

Non-interest expense. Non-interest expense increased $1.0 million, or 21.9%, to $5.9 million for the three months ended September 30, 2005 as compared to $4.8 million for the same period in the prior year. These increases can primarily be attributable to compensation and employee benefits, premises and equipment, data processing, amortization of intangible assets, advertising and other expenses of $416,000, $150,000, $123,000, $195,000, $14,000 and $294,000, respectively. These increases primarily resulted from acquiring the operations of PHSB in February 2005. The increases were partially offset by a decrease in minority interest related to the partner’s share of income from the joint ventures of $149,000.

Non-interest expense increased $2.1 million, or 13.8%, to $17.3 million for the nine months ended September 30, 2005 as compared to $15.2 million for the same period in the prior year. These increases can be attributable to increases in compensation and employee benefits, premises and equipment, data processing, amortization of intangible assets, advertising and other expenses of $1.0 million, $487,000, $245,000, $491,000, $135,000 and $746,000, respectively, partially offset by decreases to minority interest and loss on early extinguishment of debt of $205,000 and $844,000, respectively.

Compensation and employee benefits, which represent the largest component of the Company’s recurring non-interest expense, increased by $416,000, or 14.6%, for the three months ended September 30, 2005. The increase was primarily related to increases to compensation expense and related taxes between the periods due to the normal salary increases and the acquisition of PHSB in February 2005. The average number of full-time equivalent employees increased to 265 at September 30, 2005 compared to 215 at September 30, 2004.

Compensation and employee benefits increased by $1.0 million, or 11.9%, for the nine months ended September 30, 2005. The increase was primarily related to increases to compensation expense and related taxes between the periods due to normal salary increases and the acquisition of PHSB in February 2005.

Data processing expenses increased by $123,000, or 31.3%, to $516,000 for the quarter ended September 30, 2005 as compared to $393,000 for the same period in the prior year and by $245,000, or 20.8%, to $1.4 for the nine months ended September 30, 2005 as compared to $1.2 million for the same period in the prior year. These increases are primarily related to two items, the first being the implementation in the latter part of 2004 of new web-based services being offered to customers of the Bank, such as internet banking, bill pay and mortgage originations, as well as enhancements to applications utilized to manage the daily operations of the Company. The

27

implementation of these enhancements will provide the customer 24 hour access to their accounts and provide a competitive edge to the Company. Secondly, data processing costs increased due to the acquisition of PHSB in February 2005.

The Company did not incur any costs in 2005 for early extinguishment of debt. The loss on early extinguishment of debt was $844,000 for the nine months ended September 30, 2004. In 2004 this expense was incurred to write off the deferred debt issuance costs associated with the redemption of the remaining $20.3 million trust preferred debt of PennFirst Capital Trust I.

Premises and equipment increased $150,000, or 30.2%, to $647,000 for the quarter ended September 30, 2005 as compared to $497,000 for the same period in the prior year and $487,000, or 35.3%, to $1.9 million for the nine months ended September 30, 2005 as compared to $1.4 million for the same period in the prior year. These increases are primarily due to increases related to the acquisition of PHSB in February 2005.

Miscellaneous other expenses, which consist primarily of professional fees, forms, supplies, bank charges, postage, insurance expenses, organizational dues, ATM expenses and net carrying costs associated with real estate owned increased by $294,000, or 46.4%, to $927,000 for the quarter ended September 30, 2005 as compared to $633,000 for the same period in the prior year and by $746,000, or 34.7%, to $2.9 million for the nine months ended September 30, 2005 as compared to $2.2 million for the same period in the prior year. Included in this category are various increases related to the acquisition of PHSB in February 2005.

Provision for income taxes. The provision for income taxes increased $334,000, or 162.9%, to $539,000 for the three months ended September 30, 2005, compared to $205,000 for the same period in the prior year. This increase in provision for income taxes reflects an effective tax rate of 15.7% for the quarter ended September 30, 2005 as compared to 7.3% for the same period in the prior year. The provision for income taxes increased $556,000, or 46.8%, to $1.7 million for the nine months ended September 30, 2005, compared to $1.2 million for the same period in the prior year. This increase in provision for income taxes reflects an effective tax rate of 16.3% for the nine months ended September 30, 2005 as compared to 13.8% for the same period in the prior year. These lower provisions for the three and nine month periods ended September 30, 2004 are primarily attributable to tax benefits the Company realized as a result of amended tax returns that were filed on behalf of the Company in the third quarter of 2004. The decrease to the provision in 2004 lowered the Company’s effective tax rate to 7.1% from 17.7% for the quarter ended September 30, 2004 and to 13.8% from 17.2% for the nine months ended September 30, 2004. The increase to the provision for income taxes is also indicative of the increases to pre-tax income between the periods.

CHANGES IN FINANCIAL CONDITION

General. The Company’s total assets increased by $437.4 million, or 31.4%, to $1.8 billion at September 30, 2005, from $1.4 billion at December 31, 2004 primarily as a result of the acquisition of PHSB in February 2005. Cash and cash equivalents, securities available for sale, loans receivable, accrued interest receivable, FHLB Stock, premises and equipment, real estate held for investment, goodwill, intangible assets, prepaid expenses and other assets and bank owned life insurance (BOLI) increased by $6.2 million, $195.4 million, $175.0 million, $1.4 million, $5.6 million, $1.9 million, $1.4 million, $34.6 million, $3.8 million, $11.6 million and $694,000, respectively. Total liabilities increased $404.4 million, or 31.2%, to $1.7 billion at September 30, 2005, as compared to $1.3 billion as of December 31, 2004, and stockholders’ equity increased $33.0 million, or 33.7%, to $130.8 million at September 30, 2005 as compared to December 31, 2004. The increase in total liabilities was primarily the result of increases in deposits, borrowed funds, junior subordinated notes and accrued expenses and other liabilities of $249.3 million, $115.4 million, $36.1 million, and $4.1 million, respectively. The increase to stockholders’ equity was primarily the result of common stock (and the related paid-in capital) issued in connection with the acquisition of PHSB in the amount of $39.5 million, and retained earnings of $4.2 million, partially offset by a decrease in accumulated other comprehensive loss of $8.7 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 $6.2 million, or 34.8%, to $23.9 million at September 30, 2005 from $17.7 million at December 31, 2004. These accounts are typically

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increased by deposits from customers into saving and checking accounts, loan and security repayments and proceeds from borrowed funds. Decreases result from customer withdrawals, new loan originations, security purchases and repayments of borrowed funds.

Securities. The Company’s securities portfolio increased by $195.4 million, or 21.0%, to $1.1 billion at September 30, 2005 from $929.8 million at December 31, 2004. During the nine months ended September 30, 2005, the Company recorded purchases of available for sale securities of $351.8 million, consisting of purchases of mortgage-backed securities of $332.7 million, municipal bonds of $17.0 million and corporate bonds of $2.1 million. Offsetting the purchases of securities were sales of securities of $119.8 million and repayments and maturities of securities of $164.8 million during the nine months ended September 30, 2005. In addition, the securities portfolio decreased approximately $12.6 million due to decreases in market value. The change in market value is related to fair value adjustments that represent temporary fluctuations resulting from changes in market rates in relation to average yields in the available for sale portfolio. If securities are held to their respective maturity dates, no fair value gain or loss is realized.

During the nine months ended September 30, 2005, the Company acquired approximately $143.3 million in securities as a result of the acquisition of PHSB. As part of the purchase accounting of the transaction, management restructured approximately $70.0 million of those securities, with no resulting gain or loss, by purchasing fixed and adjustable rate mortgage backed securities and municipal bonds.

The Company performed an impairment analysis of the investment portfolio as of September 30, 2005. The Company concluded that currently there are no securities that are deemed to be other than temporarily impaired.

The Company’s investment strategy during the third quarter of 2005 was primarily focused on the purchasing of fixed rate securities as the ten year Treasury bond rate maintained an average of approximately 4.21% throughout the quarter. The Company continued to purchase a limited amount of adjustable rate bonds and municipal bonds which add structure to the portfolio in the event that rates decline. Throughout the nine month period ended September 30, 2005, the Company purchased primarily fixed rate securities as the ten year Treasury bond has maintained an average rate of approximately 4.22%.

The securities portfolio is primarily funded by the Company’s borrowings. In the third quarter of 2005, this wholesale leverage strategy accounted for approximately $1.2 million, on a tax equivalent basis, of the Company’s tax equivalent net interest income of $4.2 million. For the nine months ended September 30, 2005, the wholesale leverage strategy accounted for approximately $5.9 million, on a tax equivalent basis, of the Company’s tax equivalent net interest income of $13.1 million.

Loans receivable. The loans receivable category consists primarily of single family mortgage loans used to purchase or refinance personal residences located within the Company’s market area and commercial real estate loans used to finance properties that are used in the borrowers businesses or to finance investor-owned rental properties, and to a lesser extent commercial and consumer loans. Net loans receivable increased $175.0 million, or 50.9%, to $518.5 million at September 30, 2005 from $343.5 million at December 31, 2004. Included in this increase were increases in mortgage loans of $73.1 million, or 23.9%, and other loans of $92.6 million, or 139.6%, as well as a decrease in allowance for loan losses, deferred loan fees and loans in process of a combined $9.2 million, or 31.9%, during the nine months ended September 30, 2005. The increase to total loans receivable during the period was primarily due to the acquisition of PHSB resulting in an increase in the Company’s total loan portfolio of approximately $146.0 million. Approximately $55.2 million of the increase to other loans is related to the Company acquiring a new indirect auto loan portfolio in the PHSB acquisition; which has increased approximately $12.4 million since the acquisition of PHSB due to a favorable environment in the auto industry, an increased dealer base and efforts by the Company to expand this new line of business. The increase to loans receivable was partially offset by the maturity of approximately $18.0 million of loans to local school districts. School districts typically borrow these funds for a one year term and then re-borrow for their next fiscal year that begins in July. However due to regulation changes applicable to the school districts the Bank has only recovered approximately $4.0 million in maturities.

Loans held for sale. The Company did not have any loans held for sale at either the period ended September 30, 2005 or December 31, 2004

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Non-performing assets. Non-performing assets include non-accrual loans, real estate acquired through foreclosure (REO) and troubled debt restructuring (TDR). Non-performing assets amounted to $5.4 million, or 0.29%, of total assets at September 30, 2005 and $3.7 million, or 0.26%, of total assets at December 31, 2004. The increase is primarily due to an increase in non-performing loans partially offset by decreases in REO’s and TDR’s.

FHLB Stock. FHLB stock increased $5.6 million, or 17.6%, to $37.2 million at September 30, 2005 compared to $31.6 million at December 31, 2004. This increase is a result of increases in FHLB advances. The Bank is required to maintain an investment in capital stock of the FHLB of Pittsburgh in an amount not less than 5.0% of its outstanding notes payable to the FHLB of Pittsburgh.

Real Estate Held for Investment. The Company’s real estate held for investment increased by $1.4 million, or 11.0%, to $14.0 million during the nine months ended September 30, 2005. This increase is a result of the addition of two new joint ventures during 2005. The first new joint venture, Cobblestone Village, LP, consists of a 51% interest in a limited partnership with one of the local developers involved in the Company’s existing project Brandy One. Cobblestone Village, LP purchased approximately 33 acres in Adams Township, Butler County, PA, in June 2005 to develop the land into a 100-unit quadplex housing development. The second new joint venture, The Meadows at Hampton, LP consists of a 51% interest in an LP with a local developer. The Meadows at Hampton, LP purchased approximately 42 acres in Hampton Township, Allegheny County, PA, in June 2005 to develop the land into a 64 unit duplex housing project. ESB Bank is providing financing for these projects. A complete description of the existing projects can be found in the Company’s annual report on Form 10-K for the year ended December 31, 2004.

Premises and Equipment. The Company’s premises and equipment increased $1.9 million, or 20.0%, to $11.5 million at September 30, 2005 compared to $9.6 million at December 31, 2004. This increase is primarily due to the acquisition of the fixed assets of PHSB of approximately $3.8 million, partially offset by the subsequent sale of properties acquired in the acquisition of $2.1 million.

Goodwill and Intangible assets. Goodwill and intangible assets increased $38.4 million to $46.0 million at September 30, 2005 from $7.6 million at December 31, 2004. The increase primarily resulted from the recording of goodwill of $34.5 million and a core deposit intangible of $4.5 million as a result of the acquisition of PHSB in February 2005, partially offset by normal amortization of the core deposit intangible of PHSB and prior acquisitions of approximately $614,000. The core deposit intangible resulting from the acquisition of PHSB will be amortized on a sum of the year’s digit basis over the estimated useful life of ten years. Amortization is expected to total $719,000, $741,000, $657,000, $576,000, $494,000 and $1.3 million for the years 2005, 2006, 2007, 2008, 2009 and thereafter, respectively.

Prepaid Expenses and Other assets. Prepaid expenses and other assets increased $11.6 million to $19.0 million at September 30, 2005 from $7.3 million at December 31, 2004. The increase primarily resulted from the recording of an investment in tax credits and deferred tax asset from the acquisition of PHSB of $1.3 million and $3.0 million, respectively, as well as the investment in ESB Capital Trust IV of $1.1 million. ESB Capital Trust IV, a statutory business trust established under Delaware law that is a subsidiary of the Company, issued $35.0 million fixed rate preferred securities in conjunction with the financing of the acquisition of PHSB. In addition to the increases recorded due to the acquisition, the mark to market adjustment on the investment portfolio, in accordance with FAS 115, increased by $4.5 million.

Deposits. The Company considers various sources when evaluating funding needs, including but not limited to deposits, which are a significant source of funds. Deposits totaled $829.6 million, or 49.3%, of the Company’s total funding sources at September 30, 2005. Total deposits increased $249.3 million, or 42.9%, to $829.6 million at September 30, 2005 from $580.3 million at December 31, 2004. The increase in deposits is primarily related to the acquisition of PHSB which resulted in an increase to the Company’s deposits of approximately $231.0 million. Non-interest-bearing deposits increased $31.1 million while interest-bearing demand deposits and time deposits increased $59.9 million and $158.3 million, respectively, during the nine months ended September 30, 2005.

Borrowed funds. The Company utilizes short and long-term borrowings as another source of funding for asset growth and liquidity needs. These borrowings include FHLB advances, repurchase agreements, junior

30

subordinated notes and corporate debt. Borrowed funds increased $151.6 million, or 21.6%, to $854.3 million at September 30, 2005 from $702.8 million at December 31, 2004. FHLB advances increased $101.1 million, or 16.8%, repurchase agreements and other borrowings increased $14.3 million, or 16.6% and junior subordinated notes increased $36.1 million, or 237.5% during the nine months ended September 30, 2005. Borrowed funds and deposits are two of the primary sources of funds for the Company. The increase in FHLB advances is a result of the acquisition of PHSB in February 2005. The increase to junior subordinated notes resulted from the issuance of approximately $35.0 million of trust preferred securities in February 2005 to fund the acquisition of PHSB.

Stockholders’ equity. Total stockholders’ equity increased $32.9 million, or 33.7%, to $130.8 million at September 30, 2005, from $97.8 million at December 31, 2004. The increase to stockholders’ equity was primarily the result of common stock (and the related paid-in capital) issued in connection with the acquisition of PHSB in the amount of $39.6 million, increases to retained earnings of approximately $4.2 million, which was partially offset by a decrease in accumulated other comprehensive income (loss) of $8.7 million.

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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; (iii) increase the duration of the liability base of the Company by extending the maturities of savings deposits, borrowed funds and repurchase agreements; and (iv) the purchase of off-balance sheet interest rate caps which help to insulate the Bank’s interest rate risk position from increases in interest rates.

As of September 30, 2005, the implementation of these asset and liability initiatives resulted in the following: (i) $204.4 million, or 38.0%, of the Company’s total loan portfolio had adjustable interest rates or maturities of 12 months or less; (ii) $74.3 million, or 31.4%, of the Company’s portfolio of single-family residential mortgage loans (including residential construction loans) consisted of ARMs; (iii) $386.7 million, or 42.2%, of the Company’s portfolio of mortgage-backed securities were secured by ARMs; and (iv) the Company had $50.0 million in notional amount of interest rate caps.

The implementation of the foregoing asset and liability initiatives and strategies, combined with other external factors such as demand for the Company’s products and economic and interest rate environments in general, has resulted in the Company 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, 2005, the Company’s interest-earning assets maturing or repricing within one year totaled $558.0 million while the Company’s interest-bearing liabilities maturing or repricing within one-year totaled $773.9 million, providing a deficiency of interest-earning assets over interest-bearing liabilities of $215.9 million, or a negative 11.8%, of total assets. At September 30, 2005, the percentage of the Company’s assets to liabilities maturing or repricing within one year was 72.1%. 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

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

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

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

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

Economic Value of Equity (EVE). EVE is the net present value of the Company’s existing assets and liabilities. 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 or 200 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. This analysis was done assuming that the interest-earning asset and interest-bearing liability levels at September 30, 2005 remained constant. Included in the change of rates was the assumption that some interest-bearing liabilities would not reprice to the full extent of the changes in the treasury yield curve. Changes due to portfolio equity reflect the pure sensitivity of financial instruments given specific moves in rates due to the change in the treasury curve. 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, 2005 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, 2005 for the change in EVE:

	Increase				Decrease
	+100 BP		+200 BP		-100 BP		-200 BP
Net interest income - increase (decrease)	(0.40	)%	(0.97	)%	(3.16	)%	(6.12	)%
Return on average equity - increase (decrease)	(0.66	)%	(1.62	)%	(5.37	)%	(10.40	)%
Diluted earnings per share - increase (decrease)	(1.28	)%	(2.56	)%	(6.41	)%	(11.54	)%
EVE - increase (decrease)	(20.08	)%	(47.36	)%	1.80	%	(4.63	)%

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 December 31, 2004 remained constant. Included in the change of rates was the assumption that some interest-bearing liabilities would not reprice to the full extent of the changes in the treasury yield curve. Changes due to portfolio equity reflect the pure sensitivity of financial instruments given specific moves in rates due to the change in the treasury curve. 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, 2004 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, 2004 for the change in EVE:

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	Increase				Decrease
	+100 BP		+200 BP		-100 BP		-200 BP
Net interest income - increase (decrease)	(0.76	)%	(1.74	)%	(2.32	)%	N/A
Return on average equity - increase (decrease)	(1.21	)%	(2.79	)%	(3.87	)%	N/A
Diluted earnings per share - increase (decrease)	(1.16	)%	(2.84	)%	(3.99	)%	N/A
EVE - increase (decrease)	(26.90	)%	(56.62	)%	6.34	%	N/A

LIQUIDITY

The Company’s primary sources of funds generally have been deposits obtained through the offices of the Bank, borrowings from the FHLB, repurchase agreement borrowings and amortization and prepayments of outstanding loans and maturing investment securities.

Net cash provided by operating activities totaled $8.7 million during the nine months ended September 30, 2005. Net cash provided by operating activities was primarily comprised an increase in accrued expenses and other liabilities of $4.1 million and net income of $9.0 million.

Funds used in investing activities totaled $395.5 million during the nine months ended September 30, 2005. Primary uses of funds during the nine months ended September 30, 2005, included $293.0 million for the acquisition of assets from PHSB and $39.0 million of goodwill and intangible asset from the acquisition, $351.8 million for purchases securities available for sale, $144.3 million for loan originations and purchases, $5.6 million for the purchase of FHLB Stock and $1.4 million for investments in additional joint ventures. These uses were partially offset by proceeds from the sale of securities available for sale of $119.8 million, principal repayments of loans and securities available for sale of $279.2 million and payment for the purchase of PHSB of $39.5 million.

Funds provided by financing activities totaled $393.0 million for the nine months ended September 30, 2005. The primary sources of funds included a net increase in deposits of $249.3 million, of which $231.4 million were deposits acquired from PHSB, $245.1 million in proceeds from long-term borrowings and $36.1 million in proceeds from the issuance of trust preferred debt used to finance the acquisition of PHSB. These sources were partially offset by uses of $111.7 million for the repayment of long-term borrowings, $4.4 million for the acquisition of treasury stock, $18.0 million for the repayment of short term borrowings and $3.8 million for the payments of dividends. Management believes that it currently is maintaining adequate liquidity and continues to match funding sources with lending and investment opportunities.

During the nine months ended September 30, 2005, the Company incurred $217.3 million in long-term borrowings with a weighted average rate of 3.65% and the Company repaid $111.7 million of long-term borrowings with a weighted average rate of 3.11%.

The Company’s primary sources of funds are deposits, amortization, repayments and maturities of existing loans, mortgage-backed securities and investment securities, funds from operations, and funds obtained through FHLB advances and other borrowings. At September 30, 2005, the total approved loan commitments outstanding amounted to $21.4 million. At the same date, commitments under unused lines of credit and credit card lines amounted to $65.1 million and the unadvanced portion of construction loans approximated $16.9 million. Certificates of deposit scheduled to mature in one year or less at September 30, 2005 totaled $329.8 million.

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

On September 20, 2005, the Company’s Board of Directors declared a cash dividend of $0.10 per share payable October 25, 2005, to shareholders of record at the close of business on September 30, 2005. Dividends are subject to determination and declaration by the Board of Directors, which take into account the Company’s financial condition, statutory and regulatory restrictions, general economic conditions and other factors. There can be no assurance that dividends will in fact be paid on the Common Stock in future periods or that, if paid, such dividends will not be reduced or eliminated.

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Nonperforming assets consist of nonaccrual loans; real estate owned and troubled debt restructuring. A loan is placed on nonaccrual status when, in the judgment of management, the probability of collection of interest is deemed insufficient to warrant further accrual. When a loan is placed on nonaccrual status, previously accrued but uncollected interest is deducted from interest income. The Company does not accrue interest on loans past due 90 days or more.

The Company’s nonperforming assets at September 30, 2005 totaled approximately $5.4 million or 0.29% of total assets as compared to $3.7 million or 0.26% of total assets at December 31, 2004. The $1.7 million increase in nonperforming assets during the nine months ended September 30, 2005 was primarily attributable to an increase in nonperforming loans and repossessed vehicles of $1.9 million and $126,000, respectively partially offset by decreases in troubled debt restructuring and real estate owned of $217,000 and $128,000, respectively.

REGULATORY CAPITAL REQUIREMENTS

Current regulatory requirements specify that the Bank and similar institutions must maintain leverage capital equal to 4% of adjusted total assets and risk-based capital equal to 8% of risk-weighted assets. The Federal Deposit Insurance Corporation (FDIC) may require higher core capital ratios if warranted, and institutions are to maintain capital levels consistent with their risk exposures. The FDIC reserves the right to apply this higher standard to any insured financial institution when considering an institution’s capital adequacy. At September 30, 2005, ESB Bank was in compliance with all regulatory capital requirements with leverage and risk-based capital ratios of 7.3% and 15.6%, respectively.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Quantitative and qualitative disclosures about market risk are presented at December 31, 2004 in Item 7A of the Company’s Annual Report on Form 10-K, filed with the SEC on March 14, 2005. Management believes there have been no material changes in the Company’s market risk since December 31, 2004.

Item 4. Controls and Procedures

As of September 30, 2005, an evaluation was performed under the supervision and with the participation of the Company’s management, including the chief executive officer (CEO) and chief financial officer (CFO), on the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2005. There have been no significant changes in the Company’s internal controls over financial reporting or in other factors that could significantly affect internal controls during the quarter ended September 30, 2005.

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

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

The Company and its subsidiaries are involved in various legal proceedings occurring in the ordinary course of business. It is the opinion of management, after consultation with legal counsel, that these matters will not

35

materially affect the Company’s consolidated financial position or results of operations. In November 2005, the Company settled a lawsuit related to a lease dispute between a subsidiary of the Company and a tenant. The settlement, a portion of which was previously reserved by the Company, resulted in a pretax expense of approximately $73,000.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

(a) – (b) Not applicable

(c) The following table sets forth information with respect to purchases made by or on behalf of the Company of shares of common stock of the Company during the indicated periods.

Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1)
July 1-31, 2005	6,078	$	13.02	6,078	344,782
August 1-31, 2005	26,501		12.41	26,501	318,281
September 1-30, 2005	5,647		11.82	5,647	312,634
Totals	38,226	$	12.42	38,226	312,634

(1) On December 23, 2004, the Company announced its new program to repurchase up to 5% of the outstanding shares of common stock of the Company, or 533,708 shares. The program does not have an expiration date and all shares are purchased in the open market or by privately negotiated transactions, as in the opinion of management, market conditions warrant.

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

(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)

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Signatures

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

	ESB FINANCIAL CORPORATION
Date: November 9, 2005	By:	/s/ Charlotte A. Zuschlag
		Charlotte A. Zuschlag
		President and Chief Executive Officer
Date: November 9, 2005	By:	/s/ Charles P. Evanoski
		Charles P. Evanoski
		Group Senior Vice President and
		Chief Financial Officer

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EX-31.1

Exhibit 31.1

Certifications

Certification of Chief Executive Officer

I, Charlotte A. Zuschlag, certify that:

1. I have reviewed this quarterly report on Form 10-Q of ESB Financial Corporation (the “Registrant”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report;

4. The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by other within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5. The Registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant’s ability to record, process, summarize and report financial data and have identified for the Registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal controls.

Date: November 9, 2005	By:	/s/ Charlotte A. Zuschlag
		Charlotte A. Zuschlag
		President and Chief Executive Officer

EX-31.2

Exhibit 31.2

Certification of Chief Financial Officer

I, Charles P. Evanoski, certify that:

1. I have reviewed this quarterly report on Form 10-Q of ESB Financial Corporation (the “Registrant”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report;

4. The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by other within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5. The Registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent function):

a. all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant’s ability to record, process, summarize and report financial data and have identified for the Registrant’s auditors any material weaknesses in internal controls; and

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal controls;

Date: November 9, 2005	By:	/s/ Charles P. Evanoski
		Charles P. Evanoski
		Group Senior Vice President
		Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)

The undersigned executive officer of ESB Financial Corporation (the “Registrant”) hereby certifies that the Registrant’s Form 10-Q for the three and nine months ended September 30, 2005 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained therein fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

By:	/s/ Charlotte A. Zuschlag
	Charlotte A. Zuschlag
	President and Chief Executive Officer

Date: November 9, 2005

A signed original of this written statement required by Section 906 has been provided to ESB Financial Corporation and will be retained by ESB Financial Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

EXHIBIT 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)

The undersigned executive officer of ESB Financial Corporation (the “Registrant”) hereby certifies that the Registrant’s Form 10-Q for the three and nine months ended September 30, 2005 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained therein fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

By:	/s/ Charles P. Evanoski
	Charles P. Evanoski
	Group Senior Vice President and
	Chief Financial Officer

Date: November 9, 2005

A signed original of this written statement required by Section 906 has been provided to ESB Financial Corporation and will be retained by ESB Financial Corporation and furnished to the Securities and Exchange Commission or its staff upon request.