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Presidents Message

August 22, 2003


I am pleased to inform you that ES&L Bancorp, Inc. posted another year of record earnings during the fiscal year ending June 30, 2003. Your Company's net income amounted to $2,468,640, representing a 1.12% return on average assets and a 14.14% return on average equity.

ES&L, and our mortgage banking subsidiaries, experienced unprecedented loan origination volumes this past year, which contributed significantly to our profitability. Combined loan closings, across all product lines and subsidiaries, totaled $161 million - leading to a 6.8% increase in total assets and 16.5% increase in our loan servicing portfolio. Attaining this level of growth would not have been possible without the dedication, flexibility, and creativity exhibited by all of our staff members.

Last year, at this time, I highlighted some major challenges facing our institution. Our primary concern - the struggling local economy - brought fears of rising delinquencies and loan losses. By dedicating resources to work with troubled borrowers, we have minimized the impact on our delinquency ratio and non-performing loans. We must continue to be diligent in monitoring our asset quality, as unemployment and a sluggish economy continue to trouble our region. However, we feel our Bank is in a strong position to weather the storm, as we continue to provide for the financial needs of our community.

Funding our growth was an additional challenge facing our Bank during the past year. Our desire to limit our Federal Home Loan Bank borrowings prompted us to develop and utilize alternative funding sources. Our growth in this fiscal year was achieved through retail and wholesale deposits, as total borrowings declined during the period.

Record profits, strong growth, and our success in overcoming the sizable challenges mentioned above, are reflective of our solid performance this past year. These results are even more satisfying considering two additional unexpected obstacles faced during our 2003 fiscal year:

Declining interest rates during the year led to a decreasing valuation of our mortgage servicing rights - the value placed on retaining the servicing component of loans sold in the secondary market. To account for the lower mortgage servicing values, we set aside $953,000 in additional impairment reserves during the year.
During the 4th quarter of our fiscal year, we identified a problem commercial real estate loan that resulted in a charge against our allowance for possible loan losses of $1.0 million. Despite this charge, the year end balance of our allowance for possible loan losses was $2,537,380, more than $480,000 greater than the beginning of the fiscal year.

Having ended a difficult - but successful - year, we now look to the future. Although our Corporation will continue to be aggressive and agile, we also plan on dedicating the time necessary to ensure that we are well positioned for the long-term. The following initiatives have been, or will be, explored in order to regroup, focus, and prepare for the future:

Our current staff has been stretched to full capacity due to the significant growth that has occurred at our institution. We must now expand our infrastructure, which will allow us to sustain our future growth and profitability.
Over the years we have entered into a variety of business lines, both at the Bank and subsidiary level. We will dedicate the time necessary to ensure that all product offerings contribute to our bottom line.
Where necessary, we will reposition and market our products and services to make them more attractive to the communities we serve.
The risks in our industry are substantial. By centralizing the risk management function, we will take an enterprise-wide view of all risks facing the Bank, in order to mitigate any potential impact on our institution.

Of course, our commitment to increasing customer satisfaction and shareholder value will continue to drive our actions. I'm proud to report the accomplishments detailed in this report and am confident that our employees and Directors will continue to meet the complex challenges of the future.

Thank you for your support.

William A. McKenzie
President & CEO

Consolidated Balance Sheet
  March 31, 2004
Cash and Cash Equivalents $2,472,432
Securities Available for Sale $182,833
Securities Held to Maturity -0-
Mortgage Loans Held for Sale $6,705,509
Loans Receivable $186,729,955
Less: Allowance for Possible Loan Losses     $(2,132,616)
Loans Receivable, Net $184,597,339
Federal Home Loan Bank Stock, at Cost $2,408,900
Foreclosed Real Estate - Real Estate Owned    $71,460
Investment in Joint Ventures $1,242,975
Property and Equipment, Net $2,764,096
Accrued Interest Receivable $818,268
Other Assets    $2,498,732
TOTAL ASSETS $211,063,111
Deposits $140,152,574
Advances - Federal Home Loan Bank $48,177,169
Other Borrowings    -0-
Accrued Interest Payable $168,227
Advances From Borrowers for Taxes & Insurance $2,366,747
Other Liabilities    $873,129
Total Liabilities $191,737,846
Minority Interest in Consolidated Subsidiary $35,868
Stockholders' Equity:  
Serial Preferred Stock, 280,000  
Shares Authorized, None Issued    -0-
Common Stock, $0.01 Par Value;  
1,667,988 Shares Authorized  
869,565 Shares Issued. $8,696
Additional Paid-In-Capital $2,754,507
Retained Earnings, Substantially Restricted $18,744,337
Net Unrealized Gain on Investments Held for Sale $14,029
Less: Treasury Stock (89,511 shares), at cost $(2,232,172)
Total Stockholders' Equity $19,289,397
Total Liabilities & Stockholders' Equity $211,063,111
Shares Outstanding 776,566

For more detailed financial information, please visit the FDIC website at or the Office of Thrift Supervision website at

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