Forward Looking Statements

This quarterly report contains forward-looking statements, which can be identified by the use of such words as estimate, project, believe, intend, anticipate, plan, seek, expect and similar expressions. These forward-looking statements include:

• statements of our goals, intentions and expectations;

• statements regarding our business plans and prospects and growth and operating strategies;

• statements regarding the asset quality of our loan and investment portfolios; and

• estimates of our risks and future costs and benefits.

By identifying these forward-looking statements for you in this manner, we are alerting you to the possibility that our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. Important factors that could cause our actual results and financial condition to differ from those indicated in the forward-looking statements include, among others, those discussed under "Risk Factors" in Part I, Item 1A of the Company's Annual Report on Form 10-K and Part II, Item 1A of this Report on Form 10-Q, as well as the following factors:

• significantly increased competition among depository and other financial institutions;

• inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;

• general economic conditions, either nationally or in our market areas, that are worse than expected;

• adverse changes in the securities markets;

• legislative or regulatory changes that adversely affect our business;

• our ability to enter new markets successfully and take advantage of growth opportunities, and the possible short-term dilutive effect of potential acquisitions or de novo branches, if any;

• changes in consumer spending, borrowing and savings habits;

• changes in accounting policies and practices, as may be adopted by the bank regulatory agencies and the Financial Accounting Standards Board; and

• changes in our organization, compensation and benefit plans.

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

Overview

The Company consummated its initial stock offering on April 3, 2007 with the sale of 15,870,000 shares of common stock. The Company also contributed 1,110,900 shares of the Company's outstanding common stock, and contributed $1.6 million in cash, to the ESSA Bank & Trust Foundation. Net proceeds of the offering were approximately $155.8 million prior to the contribution to the Foundation.

Comparison of Financial Condition at December 31, 2008 and September 30, 2008

Total Assets. Total assets increased by $39.2 million, or 4.0%, to $1,032.7 million at December 31, 2008 from $993.5 million at September 30, 2008. This increase was primarily due to increases in interest-bearing deposits with other institutions, certificates of deposit, investment securities available for sale and net loans receivable.

Interest-Bearing Deposits with Other Institutions. Interest-bearing deposits with other institutions increased $6.8 million, or 159.8%, to $11.0 million at December 31, 2008 from $4.2 million at September 30, 2008. The primary reason for the increase was an increase in the Company's interest-bearing demand deposit account at FHLBank Pittsburgh of $6.8 million. This increase was primarily the result of the Company's need to provide liquidity to fund its stock buyback program.

Certificates of Deposit. The Company invested an additional $2.9 million in certificates of deposit at other FDIC-insured financial institutions in November 2008, to replace maturities of other investment securities.

Investment Securities Available for Sale. Investment securities available for sale increased $15.1 million, or 7.4%, to $219.2 million at December 31, 2008 from $204.1 million at September 30, 2008. The increase was due primarily to an increase of $32.0 million in the Company's portfolio of mortgage-backed securities issued by United States government sponsored agencies or entities and was offset in part by a $16.7 million decrease in the Company's portfolio of United States government agency securities. The growth in the mortgage-backed securities portfolio was due to the reinvestment of the proceeds from United States government agency security maturities, in addition to the investment of approximately $20.0 million in mortgage-backed securities issued by United States government sponsored agencies or entities as part of a leverage strategy to take advantage of the steepening yield curve.

Net Loans. Net loans increased $11.5 million, or 1.6%, to $718.4 million at December 31, 2008 from $706.9 million at September 30, 2008. Loan growth was primarily attributed to growth in several product categories as a result of continued demand in our market area. During this period, residential loans outstanding increased by $13.5 million to $585.6 million, construction loans outstanding increased by $1.6 million to $9.8 million, home equity loans and lines of credit outstanding increased $71,000 to $47.6 million and other loans outstanding increased $28,000 to $3.1 million. These increases were partially offset by decreases in commercial real estate loans outstanding of $3.3 million to $66.2 million and commercial loans outstanding of $728,000 to $11.3 million.

Deposits. Deposits increased $3.3 million, or 0.9%, to $373.8 million at December 31, 2008 from $370.5 million at September 30, 2008. At December 31, 2008 compared to September 30, 2008 money market accounts increased $6.7 million to $81.5 million. This increase was offset in part during the same period by decreases in NOW accounts of $1.8 million to $53.9 million, non-interest bearing demand accounts of $939,000 to $23.9 million, savings and club accounts of $413,000 to $61.0 million and certificates of deposit of $321,000 to $153.4 million. Included in the certificates of deposit at December 31, 2008 was a decrease of $1.9 million in brokered certificates of deposit to $9.0 million. The decline in brokered certificates was the result of the Company's decision not to renew maturing certificates based on the cost of renewing those certificates compared to other available funding sources. The increase in money market deposits is primarily the result of increased deposits by a few large depositors.

Borrowed Funds. Borrowed funds increased by $41.7 million, or 11.3%, to $454.4 million at December 31, 2008, from $412.7 million at September 30, 2007. The increase in borrowed funds was primarily due to the need to fund additional loan growth and to purchase investment securities and certificates of deposit.

Stockholders' Equity. Stockholders' equity decreased by $6.0 million, or 3.0%, to $194.1 million at December 31, 2008 from $200.1 million at September 30, 2008. This decrease was primarily the result of a stock repurchase program the company began in June 2008. As of December 31, 2008, the Company had purchased 1,462,500 shares at an average price of $13.09 per share. Stock repurchases for the quarter ended December 31, 2008 totaled $8.7 million. This decrease was partially offset by increases in net income of $1.8 million, unrealized gains on available for sale securities, net of taxes of $843,000 and allocation of shares held by the Bank's ESOP of $324,000.

Average Balance Sheets for the Three Months Ended December 31, 2008 and 2007

The following tables set forth average balance sheets, average yields and costs,
and certain other information for the periods indicated. All average balances
are daily average balances, the yields set forth below include the effect of
deferred fees and discounts and premiums that are amortized or accreted to
interest income.



                                                                      For the Three Months Ended December 31,
                                                             2008                                             2007
                                                           Interest                                            Interest
                                             Average        Income/                                             Income/
                                             Balance        Expense      Yield/ Cost      Average Balance       Expense      Yield/ Cost
                                                                              (dollars in thousands)
Interest-earning assets:
Loans (1)                                  $   716,409     $  10,601            5.87 %   $         634,561     $   9,783            6.12 %
Investment securities
Taxable (2)                                     45,260           422            3.70 %              86,455         1,071            4.91 %
Exempt from federal income tax(2) (3)            6,927            83            7.20 %               7,349            83            6.79 %

Total investment securities                     52,187           505           4.16. %              93,804         1,154            5.06 %
Mortgage-backed securities                     162,296         2,031            4.96 %             129,428         1,631            5.00 %
Federal Home Loan Bank stock                    19,559           112            2.27 %              16,869           236            5.55 %
Other                                            9,166             7            0.30 %               6,822            85            4.94 %

Total interest-earning assets                  959,617        13,256            5.50 %             881,484        12,889            5.82 %
Allowance for loan losses                       (4,719 )                                            (4,258 )
Noninterest-earning assets                      47,476                                              42,869

Total assets                               $ 1,002,374                                   $         920,095


Interest-bearing liabilities:
NOW accounts                               $    53,203            10            0.07 %   $          54,355            12            0.09 %
Money market accounts                           76,392           473            2.46 %              43,976           403            3.64 %
Savings and club accounts                       60,710            63            0.41 %              62,406            72            0.46 %
Certificates of deposit                        158,463         1,425            3.57 %             191,295         2,202            4.57 %
Borrowed funds                                 423,389         4,291            4.02 %             329,999         4,001            4.81 %

Total interest-bearing liabilities             772,157         6,262            3.22 %             682,031         6,690            3.89 %
Non-interest bearing NOW accounts               23,766                                              23,617
Noninterest-bearing liabilities                  9,315                                               7,699

Total liabilities                              805,238                                             713,347
Equity                                         197,136                                             206,748

Total liabilities and equity               $ 1,002,374                                   $         920,095

Net interest income                                        $   6,994                                           $   6,199

Interest rate spread                                                            2.28 %                                              1.93 %
Net interest-earning assets                $   187,460                                   $         199,453

Net interest margin(4)                                                          2.89 %                                              2.79 %

Average interest-earning assets to
average interest-bearing liabilities                          124.28 %                                            129.24 %

(1) Non-accruing loans are included in the outstanding loan balances.

(2) Held to maturity securities are reported at amortized cost. Available for sale securities are reported at fair value.

(3) Yields on tax exempt securities have been calculated on a fully tax equivalent basis assuming a tax rate of 34%.

(4) Represents the difference between interest earned and interest paid, divided by average total interest earning assets.

Comparison of Operating Results for the Three Months Ended December 31, 2008 and December 31, 2007

Net Income. Net income increased $133,000, to $1.8 million for the three months ended December 31, 2008 compared to net income of $1.7 million for the comparable period in 2007. The net income of $1.8 million for the three months ending December 31, 2008 included a one time tax benefit of $317,000 related to the Company's other than temporary impairment (OTTI) charge taken in the previous fiscal year. The OTTI charge related to Fannie Mae perpetual preferred stock held in the Company's available for sale securities portfolio.

Net Interest Income. Net interest income increased $795,000 or 12.8%, to $7.0 million for the three months ended December 31, 2008 from $6.2 million for the comparable period in 2007. The increase was primarily attributable to an increase of 35 basis points in the Company's interest rate spread to 2.28% for the three months ended December 31, 2008, from 1.93% for the comparable period in 2007, which was offset in part by a decrease in average net earning assets of $12.0 million for the three months ended December 31, 2008 as compared to average net earning assets for the comparable period in 2007.

Interest Income. Interest income increased $367,000 or 2.9%, to $13.3 million for the three months ended December 31, 2008 from $12.9 million for the comparable 2007 period. The increase resulted primarily from a $78.1 million increase in average interest-earning assets, partially offset by a 32 basis point decrease in average yield on interest earning assets. The average yield on interest earning assets was 5.50% for the three months ended December 31, 2008, as compared to 5.82% for the comparable 2007 period. Loans increased on average $81.8 million between the two periods along with increases in the average balance of mortgage backed securities of $32.9 million. In addition, average Federal Home Loan Bank stock increased $2.7 million and average other interest earning assets increased $2.3 million. These increases were offset in part by a decrease in the average balances of investment securities of $41.6 million. The primary reason for the increase in mortgage backed securities was the partial reinvestment of borrowing proceeds, maturing certificates of deposit and investment securities into these assets. Average Federal Home Loan Bank stock increased as a result of the Bank's increase in borrowings from the FHLBank Pittsburgh. As a member of the Federal Home Loan Bank System, the Bank maintains an investment in the capital stock of the FHLBank Pittsburgh in an amount not less than 70 basis points of the outstanding unused FHLB borrowing capacity or 1/20 of its outstanding FHLB borrowings, whichever is greater, as calculated throughout the year. On December 23, 2008, the FHLBank Pittsburgh notified its members, including the Company, that it was suspending the payment of dividends on its capital stock and the repurchase of excess capital stock until further notice. The increase in average other interest earning assets was the result of an increase in the average balance of interest earning deposits held by the Company in its FHLBank Pittsburgh demand account.

Interest Expense. Interest expense decreased $428,000, to $6.3 million for the three months ended December 31, 2008 from $6.7 million for the comparable 2007 period. The decrease resulted from a 67 basis point decrease in the overall cost of interest bearing liabilities to 3.22% for the three months ended December 31, 2008 from 3.89% for the comparable 2007 period, partially offset by a $90.1 million increase in average interest-bearing liabilities. Average interest bearing deposits decreased $3.3 million which was offset by an increase in average borrowed funds of $93.4 million.

Provision for Loan Losses. In evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect a borrower's ability to repay, the estimated value of any underlying collateral, peer group information and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are subject to interpretation and revision as more information becomes available or as future events occur. After an evaluation of these factors, and after considering the growth in the Company's loan portfolio, management made a provision for loan losses of $375,000 for the three months ended December 31, 2008 as compared to $150,000 for the three months ended December 31, 2007. The allowance for loan losses was $4.8 million, or 0.67% of loans outstanding, at December 31, 2008, compared to $4.4 million, or 0.68% of loans outstanding at December 31, 2007.

Non-interest Income. Non-interest income decreased $138,000 or 9.4%, to $1.3 million from $1.5 million for the comparable period in 2007. The primary reasons for the decrease were declines in service fees on deposit accounts of $66,000, service charges and fees on loans of $31,000 and trust and investment fees of $37,000.

Non-interest Expense. Non-interest expense increased $735,000, or 14.6%, to $5.8 million for the three months ended December 31, 2008 from $5.0 million for the comparable period in 2007. The primary reasons for the increases were increases in compensation and employee benefits of $589,000, professional fees of $46,000 and advertising fees of $58,000. Compensation and employee benefits increased primarily as a result of an expense of $538,000 for the three months ended December 31, 2008, related to the Company's equity incentive plan. As previously announced, the Company's stockholders approved the ESSA Bancorp, Inc. 2007 Equity Incentive Plan at the 2008 Annual Meeting of Stockholders on May 8, 2008. Awards granted under the Equity Incentive Plan were made on May 23, 2008. Professional fees increased primarily as a result of increased regulatory fees associated with being a public company. Advertising fees increased due to production costs associated with the Company's annual report.

Income Taxes. Income tax expense decreased $437,000 to $347,000 for the three months ended December 31, 2008 from $783,000 for the comparable 2007 period. The decrease was primarily a result of a one-time tax benefit of $317,000 related to the Company's other than temporary impairment (OTTI) charge taken in the previous year. The OTTI charge related to Fannie Mae perpetual preferred stock held in the Company's available for sale portfolio. The effective tax rate was 15.9% for the three months ended December 31, 2008, compared to 31.6% for the 2007 period.

Non-Performing Assets

The following table provides information with respect to the Bank's
non-performing assets at the dates indicated. (Dollars in thousands)



                                                   December 31,       September 30,
                                                       2008               2008
  Non-performing assets:
  Non-accruing loans                               $       1,723     $         3,938
  Accruing loans past due 90 days or more                     -                   -

  Total non-performing loans                               1,723               3,938
  Real estate owned                                        2,150                  31

  Total non-performing assets                      $       3,873     $         3,969

  Ratio of non-performing loans to total loans              0.24 %              0.55 %

  Ratio of non-performing loans to total assets             0.17 %              0.40 %

  Ratio of non-performing assets to total assets            0.38 %              0.40 %

Loans are reviewed on a regular basis and are placed on non-accrual status when they become more than 90 days delinquent. When loans are placed on non-accrual status, unpaid accrued interest is fully reserved, and further income is recognized only to the extent received.

At September 30, 2008, $3.9 million (or less than 1.0% of our total loans) were non-performing loans. Three related commercial real estate development loans with a balance of $2.5 million made up the majority of non-performing loans at September 30, 2008. These loans, together with a commercial business relationship with a combined loan relationship of $201,000 were judged by management to be impaired. Specific loan loss allowances were allocated to these loans in the amounts of $457,000 and $77,000 for the commercial real estate and business loans, respectively. On October 30, 2008, the Company received a deed in lieu of foreclosure on the commercial real estate loans. The property is being actively marketed and additional losses may occur. At December 31, 2008 the commercial business relationship of $201,000 is still an impaired loan. The specific loan loss allowance allocated to these loans was $77,000 at December 31, 2008.

Liquidity and Capital Resources

We maintain liquid assets at levels we consider adequate to meet both our short-term and long-term liquidity needs. We adjust our liquidity levels to fund deposit outflows, repay our borrowings and to fund loan commitments. We also adjust liquidity as appropriate to meet asset and liability management objectives.

Our primary sources of liquidity are deposits, prepayment and repayment of loans and mortgage-backed securities, maturities of investment securities and other short-term investments, and earnings and funds provided from operations, as well as access to FHLBank advances and other borrowing sources. While scheduled principal repayments on loans and mortgage-backed securities are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by market interest rates, economic conditions, and rates offered by our competition. We set the interest rates on our deposits to maintain a desired level of total deposits.

A portion of our liquidity consists of cash and cash equivalents and borrowings, which are a product of our operating, investing and financing activities. At December 31, 2008, $19.5 million of our assets were invested in cash and cash equivalents. Our primary sources of cash are principal repayments on loans, proceeds from the maturities of investment securities, principal repayments of mortgage-backed securities and increases in deposit accounts. Short-term investment securities (maturing in one year or less) totaled $13.3 million at December 31, 2008. As of December 31, 2008, we had $409.4 million in borrowings outstanding from FHLBank Pittsburgh and $45.0 million in borrowings through repurchase agreements with other financial institutions. We have access to additional FHLBank advances of up to approximately $109.7 million.

At December 31, 2008, we had $55.4 million in loan commitments outstanding, which included, in part, $19.9 million in undisbursed construction loans, $23.5 million in unused home equity lines of credit, $6.5 million in commercial lines of credit and $1.4 million to originate primarily multi-family and nonresidential mortgage loans. Certificates of deposit due within one year of December 31, 2008 totaled $99.0 million, or 64.6 % of certificates of deposit. If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before December 31, 2009. We believe, however, based on past experience, that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

As reported in the Consolidated Statements of Cash Flows, our cash flows are classified for financial reporting purposes as operating, investing or financing cash flows. Net cash provided by operating activities was $2.5 million and $2.7 million for the three months ended December 31, 2008 and 2007, respectively. These amounts differ from our net income because of a variety of cash receipts and disbursements that did not affect net income for the respective periods. Net cash used in investing activities was $32.0 million and $18.0 million for the three months ended December 31, 2008 and 2007, respectively, principally reflecting our loan and investment security activities. Deposit and borrowing cash flows have comprised most of our financing activities which resulted in net cash provided of $36.3 million and $18.0 million for the three months ended December 31, 2008 and 2007, respectively.

Critical Accounting Policies

We consider accounting policies that require management to exercise significant judgment or discretion or make significant assumptions that have, or could have, a material impact on the carrying value of certain assets or on income, to be critical accounting policies. We consider the following to be our critical accounting policies:

Allowance for Loan Losses. The allowance for loan losses is the estimated amount considered necessary to cover credit losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses which is charged against income. In determining the allowance for loan losses, management makes significant estimates and has identified this policy as one of our most critical. The methodology for determining the allowance for loan losses is considered a critical accounting policy by management due to the high degree of judgment involved, the subjectivity of the assumptions utilized and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses.

As a substantial amount of our loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing loans and discounted cash flow valuations of properties are critical in determining the amount of the allowance required for specific loans. Assumptions for appraisals and discounted cash flow valuations are instrumental in determining the value of properties. Overly optimistic assumptions or negative changes to assumptions could significantly impact the valuation of a property securing a loan and the related allowance determined. The assumptions supporting such appraisals and discounted cash flow valuations are carefully reviewed by management to determine that the resulting values reasonably reflect amounts realizable on the related loans.

Management performs a quarterly evaluation of the adequacy of the allowance for loan losses. Consideration is given to a variety of factors in establishing this . . .