<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
Annual report pursuant to Section 13 of the
Securities Exchange Act of 1934, as amended
For the fiscal year ended DECEMBER 31, 1996
Commission File No.: 1-14154
GA FINANCIAL, INC.
(exact name of registrant as specified in its charter)
DELAWARE 25-1780835
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
4750 CLAIRTON BOULEVARD, PITTSBURGH, PENNSYLVANIA 15236
(Address of principal executive offices)
Registrant's telephone number, including area code: (412) 882-9946
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of class)
Securities registered pursuant to Section 12(g) of the Act: NONE
THE AMERICAN STOCK EXCHANGE
(Name of exchange on which registered)
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, i.e., persons other than the directors and executive officers of
the registrant, was $132,808,304, based upon the last sales price as listed on
The American Stock Exchange for March 4, 1997.
The number of shares of Common Stock outstanding as of March 4, 1997 is:
8,455,000.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED DECEMBER
31, 1996, ARE INCORPORATED BY REFERENCE INTO PART II OF THIS FORM 10-K.
PORTIONS OF THE PROXY STATEMENT FOR THE 1997 ANNUAL MEETING OF SHAREHOLDERS
ARE INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-K.
<PAGE>
INDEX
PAGE
PART I
Item 1. Business........................................... 1
Additional Item. Executive Officers of the Registrant......... 42
Item 2. Properties......................................... 43
Item 3. Legal Proceedings.................................. 44
Item 4. Submission of Matters to a Vote of Security Holders 44
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................ 44
Item 6. Selected Financial Data............................ 44
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 45
Item 8. Financial Statements and Supplementary Data........ 45
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............. 45
PART III
Item 10. Directors and Executive Officers of the
Registrant........................................ 45
Item 11. Executive Compensation............................ 45
Item 12. Security Ownership of Certain Beneficial Owners
and Management.................................... 45
Item 13. Certain Relationships and Related Transactions.... 45
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K......................................... 46
SIGNATURES
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ITEM 1. BUSINESS.
- -----------------
GENERAL
GA Financial, Inc. (the "Company") was incorporated under Delaware law in
December 1995. The Company completed its initial public offering of 8,900,000
shares of common stock on March 26, 1996 in connection with the conversion of
Great American Federal Savings and Loan Association (the "Association") from the
mutual to stock form of ownership. The Association is a federally chartered
savings and loan association and is wholly-owned by the Company. The Company is
a savings and loan holding company and is subject to regulation by the Office of
Thrift Supervision ("OTS"), the Federal Deposit Insurance Corporation ("FDIC")
and the Securities and Exchange Commission ("SEC"). Currently, other than
investing in various securities, the Company does not directly transact any
material business other than through the Association. Accordingly, the
discussion herein addresses the operations of the Company as they are conducted
through the Association. At December 31, 1996, the Company had total assets of
$634.0 million, total deposits of $449.6 million and total stockholders' equity
of $122.4 million.
The Association was originally chartered in 1914. The Association's
principal business is to operate a customer oriented savings and loan
association. The Association attracts retail deposits from the general public
in its primary market area and invests those funds primarily in fixed-rate one-
to four-family owner-occupied mortgage loans, consumer loans and investment,
mortgage-backed and mortgage-related securities. To a lesser extent, the
Association invests in construction and development loans, multi-family loans
and commercial real estate loans. The Association's revenues are derived
principally from interest on mortgage loans and interest and dividends on
investment, mortgage-backed and mortgage-related securities and, to a much
lesser extent, short-term investments and other fees and services charges. The
Association's primary source of funds is retail deposits.
The Company's and Association's executive offices are located at 4750
Clairton Boulevard, Pittsburgh, Pennsylvania 15236. The telephone number is
(412) 882-9946.
MARKET AREA AND COMPETITION
The Association has been, and continues to be, a community-oriented savings
institution offering a variety of financial services to meet the needs of the
communities which it serves. Its primary market area is the areas surrounding
its branch offices while its lending activities include areas throughout
Allegheny, Beaver, Butler, Washington and Westmoreland Counties, Pennsylvania.
In addition to its principal office in Whitehall, the Association operates
twelve other retail offices, all of which are located in the southern and
eastern suburbs of the Pittsburgh greater metropolitan area in Allegheny and
Westmoreland Counties. These communities are composed mostly of stable,
residential neighborhoods of predominantly one- and two-family residences. Some
of the areas in which the Association maintains a branch office have become
depressed in recent years due to the general downturn in the local economy.
This has resulted in significant decreases in total deposits in the
Association's branch offices located in those areas. Accordingly, the
Association has opened new branch offices in other areas of the greater
Pittsburgh metropolitan area which have experienced growth.
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The greater Pittsburgh metropolitan area has been in the process of
restructuring over the past decade. Once centered on heavy manufacturing,
primarily steel, its economic base is now more diverse, including technology,
health and business services. Several "Fortune 500" industrial firms are
headquartered in the greater Pittsburgh area, including USX Corp., Westinghouse
Electric Corp. and Aluminum Company of America. The largest employers in
Pittsburgh, by the number of local employees, include Westinghouse, USAir, the
University of Pittsburgh, PNC Corp., Mellon Bank Corp., USX Corp., and a number
of healthcare firms, facilities and providers. Seven colleges and universities
are located in the greater Pittsburgh metropolitan area.
LENDING ACTIVITIES
Loan Portfolio Composition. The Association's loan portfolio primarily
consists of first mortgage loans secured by one- to four-family residences and
consumer loans (consisting of home equity loans and education loans) and, to a
much lesser extent, multi-family loans, residential construction and development
loans, commercial real estate loans and other loans. At December 31, 1996, the
Association had total loans outstanding of $234.9 million, of which $178.2
million were one- to four-family residential mortgage loans, or 75.9% of the
Association's total loans. At such date, the remainder of the Association's
loan portfolio consisted of $37.6 million of consumer loans, or 16.0% of total
loans; $6.7 million of multi-family residential loans, or 2.9% of total loans;
$3.5 million of construction and development loans, or 1.5% of total loans; $5.1
million of commercial real estate loans, or 2.1% of total loans; and $3.8
million of other loans, or 1.6% of total loans. At that same date, 2.3% of the
Association's mortgage loans had adjustable interest rates. Due, in part, to
the decline in the local economy and a corresponding decline in demand for
mortgage loans secured by one- to four-family residential properties located in
the Association's market area, the Association's one- to four-family mortgage
loan portfolio has decreased from $150.6 million, or 35.3% of total assets, at
December 31, 1990 to $178.2 million, or 28.1% of total assets, at December 31,
1996. The Association has attempted to offset the decline in demand for one- to
four-family mortgage loans secured by properties located in the Association's
market area by purchasing such loans secured by properties outside of its
primary market area and during the year ended December 31, 1996, the Association
purchased $71.2 million of such loans primarily secured by properties located in
Pennsylvania, Ohio, Delaware and New York. Additionally, the Association
intends to expand the number of entities from which it purchases such loans and
the geographic areas in which the properties securing such loans are located, to
include areas of Maryland, Virginia, North Carolina, South Carolina and the
District of Columbia.
The types of loans that the Association may originate are subject to
federal and state laws and regulations. Interest rates charged by the
Association on loans are affected by the demand for such loans and the supply of
money available for lending purposes and the rates offered by competitors.
These factors are, in turn, affected by, among other things, economic
conditions, monetary policies of the federal government, including the Federal
Reserve Board, and legislative tax policies.
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The following table sets forth the composition of the Association's loan
portfolio in dollar amounts and as a percentage of the portfolio at the dates
indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------------------------------------
1996 1995 1994 1993
--------------------- --------------------- --------------------- --------------------
PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- ------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to four-family........ $178,234 75.89% $122,509 66.79% $105,419 67.15% $103,190 67.48%
Multi-family.............. 6,727 2.87 7,208 3.93 8,259 5.26 8,364 5.47
Commercial................ 5,053 2.15 3,290 1.79 2,043 1.30 2,604 1.70
Construction and
development........... 3,545 1.51 5,891 3.21 4,830 3.08 8,177 5.35
Consumer loans:
Home equity............... 22,153 9.43 20,151 10.99 17,808 11.34 16,518 10.80
Education................. 15,383 6.55 20,766 11.32 14,680 9.35 10,151 6.64
Other:
Unsecured personal loans.. 1,534 0.65 1,250 0.68 1,298 0.83 1,376 0.90
Loans on savings accounts. 2,062 0.88 2,159 1.18 2,419 1.54 2,176 1.42
Other loans............... 164 0.07 199 0.11 230 0.15 368 0.24
-------- ------ -------- ------ -------- ------ -------- ------
Total loans.......... 234,855 100.00% 183,423 100.00% 156,986 100.00% 152,924 100.00%
-------- ====== -------- ====== -------- ====== -------- ======
Less:
Undisbursed loan funds.... (684) (1,363) (1,825) (5,380)
Unamortized discounts, net -- -- -- --
Deferred loan fees........ (1,381) (963) (738) (675)
Allowance for loan losses. (1,031) (822) (850) (846)
-------- -------- -------- --------
Total loans, net..... $231,759 $180,275 $153,573 $146,023
======== ======== ======== ========
<CAPTION>
AT DECEMBER 31,
1992
-----------------------
PERCENT
AMOUNT OF TOTAL
--------- ---------
<S> <C> <C>
Mortgage loans:
One- to four-family........ $124,714 73.52%
Multi-family............... 9,855 5.81
Commercial................. 2,601 1.53
Construction and
development............ 8,128
Consumer loans:
Home equity................ 13,853 8.17
Education.................. 6,378 3.76
Other:
Unsecured personal loans... 1,406 0.83
Loans on savings accounts.. 2,280 1.34
Other loans................ 419 0.25
-------- ------
Total loans........... 169,634 100.00%
-------- ======
Less:
Undisbursed loan funds..... (4,526)
Unamortized discounts, net. --
Deferred loan fees......... (857)
Allowance for loan losses.. (750)
--------
Total loans, net...... $163,501
========
</TABLE>
3
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Loan Maturity. The following table shows the remaining contractual
maturity of the Association's loans at December 31, 1996. At December 31, 1996,
all of the Association's loans were categorized as held for investment. The
table does not include the effect of future principal prepayments. Principal
prepayments and scheduled principal amortization on loans totalled $21.8
million, $26.9 million and $31.2 million for the years ended December 31, 1996,
1995, and 1994, respectively.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
--------------------------------------------------------------------------
ONE- TO CONSTRUCTION TOTAL
FOUR- MULTI- AND LOANS
FAMILY FAMILY COMMERCIAL DEVELOPMENT CONSUMER OTHER RECEIVABLE
---------- ------- ---------- ------------ --------- ----- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
One year or less...................... $ 198 $ 656 $ 22 $1,423 $ 82 $2,066 $ 4,447
-------- ------ ------ ------ ------- ------ --------
After one year:
More than one year to three years.... 760 283 54 730 37 77 1,941
More than three years to five years.. 2,114 300 13 -- 19,621 1,617 23,665
More than five years to 10 years..... 12,069 654 2,607 -- 16,686 -- 32,016
More than 10 years to 20 years....... 35,451 4,834 535 385 1,110 -- 42,315
More than 20 years................... 127,642 -- 1,822 1,007 -- -- 130,471
-------- ------ ------ ------ ------- ------ --------
Total due after December 31, 1997.... 178,036 6,071 5,031 2,122 37,454 1,694 230,408
-------- ------ ------ ------ ------- ------ --------
Total amount due..................... $178,234 $6,727 $5,053 $3,545 $37,536 $3,760 $234,855
======== ====== ====== ====== ======= ====== ========
Less:
Undisbursed loan funds.......................................................................... (684)
Deferred loan fees, net......................................................................... (1,381)
Allowance for loan
losses...................................................................................... (1,031)
--------
Total loans, net................................................................................... $231,759
========
</TABLE>
4
<PAGE>
The following table sets forth at December 31, 1996 the dollar amount of
loans contractually due after December 31, 1997, and whether such loans have
fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER DECEMBER 31, 1997
-----------------------------
FIXED ADJUSTABLE TOTAL
------- ------------ -------
(IN THOUSANDS)
Mortgage loans:
<S> <C> <C> <C>
One- to four-family................... $174,004 $4,032 $178,036
Multi-family.......................... 6,071 -- 6,071
Construction and development.......... 2,122 -- 2,122
Commercial............................ 4,946 85 5,031
Consumer loans:
Home equity........................... 20,670 1,401 22,071
Education............................. 15,383 -- 15,383
Other Loans:
Unsecured personal loans.............. 741 789 1,530
Loans on savings accounts............. -- -- --
Other loans........................... 164 -- 164
-------- ------ --------
Total loans receivable.................. $224,101 $6,307 $230,408
======== ====== ========
</TABLE>
Origination, Sale, Servicing and Purchase of Loans. The Association's
mortgage origination lending activities are conducted by loan personnel at its
twelve full service branch offices. Although the Association offers both
adjustable-rate and fixed-rate mortgage loans, the substantial majority of the
Association's loan originations have been fixed-rate mortgage loans. The
Association's ability to originate loans is dependent upon the relative customer
demand for fixed-rate or adjustable-rate mortgage loans, which is affected by
the current and expected future level of interest rates. The Association has
not emphasized the origination of adjustable-rate mortgage loans due to the
relatively low demand for such loans in the Association's primary market area
and aggressive pricing by competitors offering such loans. While the
Association generally retains for its portfolio all of the mortgage loans that
it originates, the Association may, in the future, sell mortgage loans that it
originates depending on market conditions and the financial condition of the
Association. At December 31, 1996, there were no mortgage loans categorized as
held for sale. Due to the low demand for mortgage loans secured by properties in
its primary market area, the Association has recently emphasized the purchase of
single-family owner-occupied mortgage loans which are primarily secured by
properties located outside of the Association's primary market area, such as
other regions of Pennsylvania and Ohio and New York. In addition, in response
to the low demand for one- to four-family mortgage loans in its primary market
area, the Association has also emphasized the origination of consumer loans
consisting of home equity loans and education loans. The Association intends to
continue purchasing single-family owner-occupied loans to supplement reduced
loan demand as needed, and is attempting to increase the number of entities from
which it purchases such loans and expand the geographic areas in which the
properties securing such loans are located, including regions of Virginia,
Maryland, North Carolina, South Carolina and the District of Columbia. In
addition, beginning in the first quarter of 1996, the Association began to offer
credit card loans. Loans purchased by the Association generally must meet the
same underwriting criteria as loans originated by the Association. Loans
purchased by the Association are generally funded by the Association, closed in
the name of the correspondent financial institution and immediately assigned to
the
5
<PAGE>
Association, and are generally purchased by the Association on a servicing
released basis. At December 31, 1996, the Association had $113.3 million of
loans serviced by others which were serviced by approximately 30 third-party
loan servicers. At such date, $53.3 million of purchased loans, or 47.0% of
such loans, were purchased from one mortgage lender affiliated with a
residential development company.
The following table sets forth the Association's loan originations,
purchases, sales and principal repayments for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
--------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Gross loans(1):
Beginning balance............... $183,423 $156,986 $152,924
Loans originated:
Mortgage loans:
One- to four-family........... 5,004 2,159 5,084
Multi-family.................. 181 -- 550
Commercial.................... 600 2,680 1,922
Construction and development.. 1,976 2,625 7,802
Consumer loans:
Home equity................... 11,256 10,660 9,781
Education..................... 8,680 9,318 5,559
Other:
Unsecured personal loans...... 780 661 713
Loans on savings accounts..... 1,235 1,063 1,361
-------- -------- --------
Total loans originated....... 29,712 29,166 32,772
Loans purchased(2).............. 71,156 24,250 2,448
-------- -------- --------
Total........................ 284,291 210,402 188,144
Less:
Principal repayments............ (37,186) (26,899) (31,158)
Sales of loans.................. (12,232) -- --
Transfer to REO................. (18) (80) -
-------- -------- --------
Total loans................... 234,855 183,423 156,986
Loans held for sale............. (15,383) -- -
-------- -------- --------
Ending balance.................. $219,472 $183,423 $156,986
======== ======== ========
</TABLE>
____________________
(1) Gross loans include receivables held for investment and loans held for sale.
(2) All such loans are secured by single-family properties.
6
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One- to Four-Family Residential Mortgage Lending. The Association offers
residential mortgage loans primarily secured by owner-occupied one- to four-
family residences. Loan originations are generally obtained from existing or
past customers, members of the local communities served, or referrals from local
real estate agents, attorneys and builders. The Association primarily
originates fixed-rate loans, but also offers adjustable-rate mortgage ("ARM")
loans. At December 31, 1996, one- to four-family mortgage loans totalled $178.2
million, or 75.9% of total loans. Of the Association's mortgage loans secured
by one- to four-family residences, $174.2 million, or 97.7%, were fixed-rate
loans.
The Association originates most mortgage loans for its own portfolio.
Originated mortgage loans are secured by properties located within the
Association's primary market area of Allegheny, Beaver, Butler, Washington and
Westmoreland Counties, Pennsylvania. However, due to the low level of one-to
four-family mortgage loan demand in the Association's primary market area, the
Association's one- to four-family mortgage loan portfolio has decreased 19.3%
from $150.6 million, or 35.3% of total assets and 76.2% of total loans, at
December 31, 1990 to $178.2 million, or 28.1% of total assets and 75.9% of total
loans, at December 31, 1996.
The Association also presently offers one year ARM loans. One-year ARM
loans have interest rates that adjust annually based on a spread of 275 basis
points above the weekly average yield of the one year CMT Index, subject to a
limitation on interest rate increases and decreases of 2.0% per year, a lifetime
ceiling on interest rate increases of 6.0% above the origination rate, and a
floor on interest rate decreases of 4.0% below the origination rate. The
Association offers these loans with conversion features whereby the loan may be
converted to a fixed-rate loan one time during the first five years of the loan.
The Association's ARM loans are offered with terms of up to 30 years.
The volume and types of ARM loans originated by the Association have been
affected by such market factors as the level of interest rates, competition,
consumer preferences and the availability of funds. In recent years, demand for
ARM loans has been weak due to the low interest rate environment and consumer
preference for fixed-rate loans. In addition, management's strategy has been to
emphasize fixed-rate loans. Therefore, the Association has not offered
competitive interest rates on its ARM loans.
The Association has not sold one- to four-family mortgage loans in the
secondary market. Mortgage loans that are originated by the Association are
underwritten in conformity with FNMA secondary market requirements. The
Association has been approved by the FNMA to sell mortgage loans in the
secondary market, and may sell loans to FNMA in the future.
Generally, with the exception of its community loan programs, the
Association's maximum loan-to-value ("LTV") ratio on one- to four-family
mortgage loans is 90%. However, loans with LTV ratios in excess of 80%
generally require the borrower to obtain private mortgage insurance ("PMI").
The Association's one- to four-family residential mortgage loans do not provide
for negative amortization. Mortgage loans in the Association's portfolio
generally include due-on-sales clauses, which provide the Association with the
contractual right to demand the loan immediately due and payable in the event
the borrower transfers ownership of the property that is subject to the
mortgage. The maximum one- to four-family loan amount is $325,000, unless
otherwise approved by the Board.
In an effort to provide financing for low and moderate income home buyers,
the Association participates in various Community Loan Programs. These programs
offer single-family residential mortgage loans to residents of the CRA
delineated lending areas. These loans are offered with terms of
7
<PAGE>
up to 30 years. Such loans must be secured by a single-family owner-occupied
unit. These loans are originated using modified underwriting guidelines with
reduced down payments and loan fees. Such loans are originated in amounts up to
97% of the lower of the property's appraised value or the sale price. Private
mortgage insurance is normally required. Because the Association typically
charges a lower rate of interest, lower mortgage origination fees and a discount
on closing costs on its Community Loan Programs, the Association expects to
achieve a lower rate of return on such loans, as compared to other residential
mortgage loans. During 1996 the Association originated 23 community loans
totalling $1.1 million.
The Association offers full-time employees of the Association, other than
executive officers and directors, who satisfy certain criteria and the general
underwriting standards of the Association fixed and adjustable-rate mortgage
loans with interest rates which are currently 25 to 125 basis points below the
rates offered to the Association's other customers, the Employee Mortgage Rate
("EMR"). The EMR is limited for the purchase, construction or refinance of an
employee's single-family owner-occupied primary residence. When the LTV ratio
does not exceed 80% (75% in the case of refinance loans), the EMR is generally
no less than the Association's overall cost of funds rounded up to the next
quarter percentage point, with a minimum EMR of 6.25%; where the LTV ratio
exceeds 80% but is not greater than 90%, the EMR shall be no less than the
Association's overall cost of funds plus an additional one percent, rounded to
the next quarter percentage point, with a minimum of 7.25%. Additionally, loan
origination fees are waived for all EMR loans. The EMR normally ceases upon
termination of employment or if the property no longer is the employee's primary
residence. Upon termination of the EMR, the interest rate reverts to the
contract rate in effect at the time that the loan was extended. All other terms
and conditions contained in the original mortgage and note continue to remain in
effect. As of December 31, 1996, the Association had $3.1 million of total EMR
loans, or 13.11% of total loans.
Construction and Development Lending. The Association originates three
types of construction and development loans for the construction and development
of one- to four-family properties: (1) acquisition and development loans to
qualified builders; (2) loans and lines of credit to qualified builders; and (3)
construction/permanent financing for other individuals. At December 31, 1996,
the Association had $3.5 million of construction and development loans which
constituted 1.5% of the Association's total loan portfolio.
The Association originates loans for the acquisition and development of
one- to four-family properties located in its primary market area. The
Association's acquisition and development loans primarily have been made to
finance the construction of single-family, owner-occupied residential
properties. These loans are offered with adjustable-rates and maturities of
four years or less. Acquisition and development mortgage loans are originated
with maximum LTV ratios of 65% for the acquisition of the raw land and 75% for
the development of the property. Generally, the maximum loan amount for the
acquisition of the land is $150,000 and the maximum loan amount for construction
and development is $500,000. Proceeds of such loans are dispersed as phases of
the construction are completed. Generally, if the borrower is a corporation,
partnership or other business entity, personal guarantees by the principal
borrowers are required. However, personal guarantees may not be required on such
loans depending on the creditworthiness of the borrower and amount of the
downpayment.
The Association also offers loans and lines of credit to qualified builders
for the construction of single-family detached residences located in the
Association's primary market area, except that the lines of credit are limited
to properties located in the counties of Allegheny and Westmoreland,
Pennsylvania.
8
<PAGE>
Such loans and lines of credit are only available to certain local contractors
on the Association's approved list of contractors, require that the Association
be in a first lien position and limit each loan and line of credit to the
construction of one single-family residence. Such builder's loans are
originated with a maximum LTV ratio of 80%. The maximum borrowing limit for
such lines of credit is the lesser of $150,000 or 80% of the proposed selling
price of the property as completed. Upon the completion and sale of the
property, the outstanding balance of such loan or line of credit is required to
be repaid. Prior to that time, the borrower is required to remit monthly
payments of interest only. The Association generally requires personal and/or
corporate guarantees on such loans and lines of credit.
The Association also originates construction/permanent loans to individual
borrowers for the construction of single-family owner-occupied residential
properties. The Association's underwriting standards and procedures for
residential construction/permanent financing are similar to those applicable for
one- to four-family residential mortgage lending. Proceeds of these loans are
dispersed as phases of the construction are completed. All such loans are
converted to a one- to four-family mortgage loan upon completion of the
construction.
Construction and development financing is generally considered to involve a
higher degree of credit risk than long-term financing on improved, owner-
occupied real estate. Risk of loss on a construction loan is dependent largely
upon the accuracy of the initial estimate of the property's value at completion
of construction or development and market demand for similar properties.
Moreover, because of the uncertainties inherent in estimating construction
costs, delays resulting from labor problems, material shortages or weather
conditions and other unpredictable contingencies, it is relatively difficult to
evaluate accurately the total funds required and to establish the related LTV
ratio. If the estimate of value proves to be inaccurate, the Association may be
confronted with a project, if not completed, having a value which is
insufficient to assure full repayment.
Multi-Family Lending. The Association originates multi-family mortgage
loans generally secured by five to one hundred unit apartment buildings located
in the Association's primary market area. Pursuant to the Association's current
underwriting policies, a multi-family mortgage loan may only be made in an
amount up to 80% of the appraised value of the underlying property. In
addition, the Association generally requires a debt service ratio of 120%.
Properties securing these loans are appraised by an independent appraiser and
title insurance is required on all such loans. At December 31, 1996, multi-
family loans totalled $6.7 million, or 2.9% of the Association's total loan
portfolio.
The Association also has, from time to time, purchased loan participations
in multi-family real estate loans, most of which are located outside of its
primary market area. Loan participation interests are subject to the same
underwriting criteria as loans originated by the Association. At December 31,
1996, the Association had $991,000 in multi-family real estate loan
participation interests, or 14.8% of multi-family loans and .4% of total loans.
When determining whether to originate a multi-family loan, the Association
considers many factors including: the net operating income of the mortgaged
premises before debt service and depreciation; the debt service ratio (the ratio
of net earnings to debt service); and the ratio of loan amount to appraised
value. When evaluating the qualifications of the borrower for a multi-family
loan, the Association considers the financial resources and income level of the
borrower, the borrower's experience in owning or managing similar property, and
the Association's lending experience with the borrower. The Association's
underwriting policies require that the borrower be able to demonstrate strong
management
9
<PAGE>
skills and the ability to maintain the property from current rental income. In
addition, the borrower is required to present evidence of the ability to repay
the mortgage and a history of making mortgage payments on a timely basis. In
making its assessment of the creditworthiness of the borrower, the Association
generally reviews the financial statements, employment and credit history of the
borrower, as well as other related documentation.
Loans secured by apartment buildings and other multi-family residential
properties are generally larger and involve a greater degree of risk than one-
to four-family residential mortgage loans. Because payments on loans secured by
multi-family properties are often dependent on successful operation or
management of the properties, repayment of such loans may be subject to a
greater extent to adverse conditions in the real estate market or the economy.
The Association seeks to minimize these risks through its underwriting policies,
which require such loans to be qualified at origination on the basis of the
property's income and debt coverage ratio.
Commercial Real Estate Lending. The Association also offers commercial
real estate loans that are secured by properties generally used for business
purposes such as small office buildings, retail facilities, shopping centers,
motels and hotels and industrial properties located in the Association's primary
market area. Due to low demand and the absence of a significant number of
properties which meet the Association's underwriting criteria, the Association
has made very few commercial real estate loans in the past ten years. The
Association's underwriting standards and procedures are similar to those
applicable to multi-family loans, whereby the Association considers the net
operating income of the property and the borrower's expertise, credit history
and profitability. Generally, all commercial real estate loans made to
corporations, partnerships and other business entities require personal
guarantees by the principal borrowers. On an exception basis, the Association
may not require a personal guarantee on such loans depending on the
creditworthiness of the borrowers and the amount of the downpayment. The
Association's commercial real estate loan portfolio at December 31, 1996 was
$5.1 million, or 2.1% of total loans. The Association, from time to time,
purchases loan participations in commercial real estate loans located outside of
its primary market area. Loan participation interests are subject to the same
underwriting criteria as loans originated by the Association. At December 31,
1996, the Association had $1.6 million in commercial real estate loan
participation interests, or 31.3% of commercial real estate loans and .7% of
total loans.
Loans secured by commercial real estate properties, like multi-family
loans, are generally larger and involve a greater degree of risk than one- to
four-family residential mortgage loans. Because payments on loans secured by
commercial real estate properties are often dependent on successful operation or
management of the properties, repayment of such loans may be subject to a great
extent of the then prevailing conditions in the real estate market or the
economy. The Association seeks to minimize these risks through its underwriting
standards.
Consumer Lending. The Association also offers both secured and unsecured
consumer loans. Consumer loans consist of home equity lines of credit and
installment loans and education loans. At December 31, 1996, the Association's
consumer loans amounted to $37.6 million, or 16.0% of the Association's total
loan portfolio. Home equity loans are generally only available to the residents
of Allegheny, Beaver, Butler, Washington and Westmoreland Counties,
Pennsylvania.
The Association's home equity lines of credit are offered as revolving
lines of credit with interest rates that range from 1.5% to 3.0% above the prime
rate of interest as published by the Wall Street
10
<PAGE>
Journal and adjust monthly but which are capped at 17.99%. The Association's
home equity installment loans are offered on a fixed-rate basis only with terms
of one to ten years. Both types of home equity loans are offered in minimum
amounts of $5,000 to a maximum amount of the lesser of $100,000 or 80% of the
appraised value of the property, except that certain "Class B" home equity
installment loans are offered to a maximum amount of 90% of the appraised value
of the property, with an overall maximum of $100,000. A "Class B" home equity
installment loan is one in which the borrower uses the equity in his or her
existing residence to finance the acquisition of improved land and the
construction of a new primary residence. At December 31, 1996, home equity
loans totalled $22.2 million, or 59.0% of consumer loans and 9.4% of the
Association's total loans.
With respect to education lending, the Association participates in the
United States Department of Education (the "DOE") Title IV loan programs
commonly referred to as the Federal Family of Education Loan Programs ("FFELP").
The loans in this program that the Association participates in include the
Federal Subsidized Stafford Loan, the Federal Un-Subsidized Stafford Loan and
the Federal Parent Loan to Undergraduate Students (PLUS) Loan. All FFELP loans
that were disbursed prior to October 1, 1993 are 100% guaranteed as to principal
and interest by the full faith of the United States Government if serviced
properly. Loans disbursed after October 1, 1993 are guaranteed to at least 98%
of principal plus eligible interest by the full faith of the United States
Government if serviced properly. Under certain circumstances loans guaranteed
at the 98% level will be insured to the 100% level.
Education loans held by the Association are administrated and guaranteed by
one of two agencies: the Pennsylvania Higher Education Assistance Agency
("PHEAA") or the United States Student Aid Funds ("USA Funds"). Federal
regulations as established by DOE apply to both agencies equally. The
Association underwrites, operates and administrates participation in the FFELP
under the policies and procedures outlined in the PHEAA guidelines for Loan
Guaranty Programs and USA Funds policies and procedures program manuals, for
loans guaranteed by each respective agency. At December 31, 1996, education
loans totalled $15.4 million, or 41.0% of consumer loans and 6.6% of the
Association's total loans. The Association has decided to sell educational
loans when those loans reach repayment status.
Other Lending. The Association also originates other types of loans
primarily consisting of unsecured personal lines of credit and installment
loans, loans on savings accounts and foreign aid loans. These loans have a
maximum borrowing limitation of $5,000 for unsecured personal loans and 90% of
the account value for loans on savings accounts. Unsecured personal loans
require a debt ratio (the ratio of debt service to net earnings) of 33%.
Secured personal lines of credit and installment loans are generally secured by
certificates of deposit and passbook savings accounts. At December 31, 1996,
personal loans totalled $3.8 million, or 1.6% of total loans of which $2.1
million were secured by savings accounts.
Since 1993, the Association has been an agent for a third party which has
issued a credit card in the name of the Association. In November 1995, the Board
of Directors approved the Association's offering of credit card loans,
terminated its contract with the third party and the Association began offering
credit card loans to its customers on a limited basis in its own name and
underwriting such loans to its portfolio in the first quarter of 1996.
At December 31, 1996, the Association also had one outstanding foreign aid
loan in its portfolio to the country of Ecuador which was a performing loan,
guaranteed by the United States government and had an outstanding principal
balance of $164,000.
11
<PAGE>
Loan Approval Procedures and Authority. The Board of Directors
establishes the lending policies and loan approval limits of the Association.
In connection with one- to four-family mortgage loans and construction/permanent
financing, the Board of Directors has authorized the following persons to
approve loans up to the amounts indicated: loans in amounts up to $325,000 must
be approved by the Vice President and Assistant Vice President of Lending, or
any other officer of the Association assigned by the President; mortgage loans
in excess of $325,000 must be approved by the Board of Directors. Builders'
construction loans and lines of credit require approval by the Assistant Vice
President of Lending and the Vice President of Lending, or the President of the
Association, or any officer of the Association assigned by the President. All
acquisition and development loans, multi-family loans and commercial real estate
loans require the approval of the Board of Directors.
With respect to consumer and other loans, the Board has authorized the
following persons to approve loans up to the amounts indicated: home equity
loans require the approval of the Vice President of Lending or any officer of
the Association assigned by the President, except that "Class B" home equity
loans must be approved by the Assistant Vice President of Consumer Lending and
the Vice President of Lending or any officer of the Association assigned by the
President; all unsecured personal loans in amounts up to $20,000 must be
approved by the Assistant Vice President of Consumer Lending or the Vice
President of Lending or any officer of the Association assigned by the
President; secured personal loans in excess of $20,000 require the approval of
the Assistant Vice President of Consumer Lending, and the Vice President of
Lending or any officer of the Association assigned by the President. Pursuant
to OTS regulations, loans to one borrower cannot, subject to certain exceptions,
exceed 15% of the Association's unimpaired capital and surplus. At December 31,
1996, the loans to one borrower limitation was $18.4 million.
Loan Servicing. The Association generally services mortgage loans in its
own portfolio but relies upon third party loan servicers for the servicing of
purchased loans as such loans are purchased on a servicing released basis. Loan
servicing includes collecting and remitting loan payments, accounting for
principal and interest, making inspections as required of mortgage premises,
contacting delinquent mortgagors, supervising foreclosures and property
dispositions in the event of unremedied defaults, making certain insurance and
tax payments on behalf of the borrowers and generally administering the loans.
The Association currently does not purchase servicing rights related to mortgage
loans originated by other institutions. To date, the substantial majority of
loans purchased by the Association has been purchased on a servicing released
basis. At December 31, 1996, the Association had $113.3 million of loans
serviced by others and $121.6 million of loans serviced by the Association.
Delinquencies and Classified Assets. The Board of Directors performs a
monthly review of all delinquent loans ninety days or more past due with
principal balances of $100,000 or more and reviews a summary of the aggregate
level of non-performing loans 90 days or more past due. In addition, management
reviews on an ongoing basis all loans 30 or more days delinquent. The
procedures taken by the Association with respect to delinquencies vary depending
on the nature of the loan and period of delinquency. In the case of real estate
loans, the Association takes legal action and will commence foreclosure
proceedings against any real property that secures the loan. If a foreclosure
action is instituted and the loan is not brought current, paid in full, or
refinanced before the foreclosure sale, the real property securing the loan is
generally sold at foreclosure.
12
<PAGE>
Federal regulations and the Association's Classification of Assets Policy
require that the Association utilize an internal asset classification system as
a means of reporting problem and potential problem assets. The Association has
incorporated the OTS internal asset classifications as part of its credit
monitoring system. The Association currently classifies problem and potential
problem assets as "Substandard," "Doubtful" or "Loss" assets. An asset is
considered "Substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "Doubtful" have all of the weaknesses
inherent in those classified "Substandard" with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "Loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets which do not
currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are required to be designated "Special Mention."
When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, it is required to establish a general
valuation allowance for loan losses in an amount deemed prudent by management.
The general valuation allowance, which is a regulatory term, represents a loss
allowance which has been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, has not been
allocated to particular problem assets. When an insured institution classifies
one or more assets, or portions thereof, as "Loss," it is required either to
establish a specific allowance for losses equal to 100% of the amount of the
asset so classified or to charge off such amount.
A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS which can order the establishment of additional general or specific loss
allowances. The OTS, in conjunction with the other federal banking agencies,
recently adopted an interagency policy statement on the allowance for loan and
lease losses. The policy statement provides guidance for financial institutions
on both the responsibilities of management for the assessment and establishment
of adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation guidelines. Generally, the policy
statement recommends that institutions have effective systems and controls to
identify, monitor and address asset quality problems; that management has
analyzed all significant factors that affect the collectibility of the portfolio
in a reasonable manner; and that management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement.
As a result of the declines in local and regional real estate market value and
the significant losses experienced by many financial institutions, there has
been a greater level of scrutiny by regulatory authorities of the loan
portfolios of financial institutions undertaken as part of the examination of
institutions by the OTS and the FDIC. While the Association believes that it
has established an adequate allowance for loan losses, there can be no assurance
that regulators, in reviewing the Association's loan portfolio, will not request
the Association to materially increase at that time its allowance for loan
losses, thereby negatively affecting the Association's financial condition and
earnings at that time. Although management believes that adequate specific and
general loan loss allowances have been established, actual losses are dependent
upon future events and, as such, further additions to the level of specific and
general loan loss allowances may become necessary.
13
<PAGE>
The Association's Mortgage Servicing Department reviews the Association's
loans on a monthly basis and provides delinquency reports to the President. The
Association's Asset Classification Committee meets on a quarterly basis and
classifies assets in accordance with the management guidelines described above.
Real Estate Owned is classified as Substandard. At December 31, 1996, the
Association had $163,000 of assets classified as Special Mention, $799,000 of
assets classified as Substandard, $67,000 of assets classified as Doubtful and
no assets classified as Loss.
The Association generally requires appraisals on an annual basis on
foreclosed properties and at other times as deemed necessary by management. The
Association also conducts external inspections on commercial real estate
properties, foreclosed properties and other properties as deemed necessary. At
December 31, 1996, the Association had no foreclosed real estate in its
portfolio.
14
<PAGE>
The following table sets forth delinquencies in the Association's loan
portfolio as of the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996 AT DECEMBER 31, 1995
-------------------------------------------- -----------------------------------------------
30-89 DAYS 90 DAYS OR MORE 30-89 DAYS 90 DAYS OR MORE
------------------ ----------------------- ---------------------- -----------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
----------- ---------- --------- ---------- ---------- ---------- ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family......... 60 $1,175 38 $ 537 67 $ 909 49 $ 727
Multi-family................ -- -- 1 97 -- -- 1 8
Commercial.................. -- -- -- -- -- -- -- --
Consumer:
Home equity................. 6 59 6 73 7 75 5 116
Education................... 17 41 8 163 142 309 129 593
Other loans:
Unsecured personal loans.... 14 23 11 26 5 12 9 16
--- ------ --- ------ -------- --------- -------- ------
Total........................ 97 $1,298 64 $ 896 221 $1,305 193 $1,460
=== ====== === ====== ======== ========= ======== ======
Delinquent loans to total
gross loans................. 0.55% 0.38% 0.71% 0.80%
<CAPTION>
AT DECEMBER 31, 1994
-------------------------------------------
30-89 DAYS 90 DAYS OR MORE
------------------- --------------------
PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS
--------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage loans:
One- to four-family......... 71 $1,247 41 $ 753
Multi-family................ -- -- -- --
Commercial.................. -- -- -- --
Consumer loans:
Home equity................. 4 129 7 125
Education................... 72 191 63 329
Other loans:
Unsecured personal loans.... 8 26 13 31
--- ------ --- ------
Total........................ 155 $1,593 124 $1,238
=== ====== === ======
Delinquent loans to total
gross loans.............. 1.01% 0.79%
</TABLE>
15
<PAGE>
NON-PERFORMING ASSETS. General. The following table sets forth
information regarding non-accrual loans and real estate owned ("REO"). At
December 31, 1996, the Association had no REO properties. It is the policy of
the Association to cease accruing interest on loans 90 days or more past due and
charge off all accrued interest upon foreclosure or deed in lieu of foreclosure.
For the years ended December 31, 1996, 1995, 1994, 1993 and 1992, the amount of
additional interest income that would have been recognized on non-accrual loans
if such loans had continued to perform in accordance with their contractual
terms was $37,000, $59,000, $48,000, $55,000 and $100,000, respectively.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------
1996 1995 1994 1993 1992
-------- -------- ------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Mortgage loans:
One- to four-family.................. $ 537 $ 727 $ 753 $ 854 $1,367
Multi-family......................... 97 8 -- -- --
Construction and development......... -- -- -- -- --
Commercial........................... -- -- -- 237 467
Consumer loans:
Home equity.......................... 73 116 125 35 --
Education............................ 163 593 329 171 507
Other loans:
Unsecured personal loans............. 26 16 31 14 9
------- ------ ------ ------ ------
Total non-accrual loans............. 896 1,460 1,238 1,311 2,350
Real estate owned, net(3)................ -- -- 17 17 755
------- ------ ------ ------ ------
Total non-performing assets.......... $ 896 $1,460 $1,255 $1,328 $3,105
======= ====== ====== ====== ======
Allowance for loan losses
as a percent of gross loans
receivable(1)........................... 0.44% 0.45% 0.55% 0.58% 0.46%
Allowance for loan losses
as a percent of total
non-performing loans(2)................. 115.07% 56.30% 67.73% 63.70% 24.19%
Non-performing loans as a
percent of gross loans
receivable(1)(2)........................ 0.38% 0.81% 0.81% 0.90% 1.89%
Non-performing assets as
a percent of total assets(2)............ 0.14% 0.28% 0.27% 0.27% 0.65%
</TABLE>
- ---------------------
(1) Gross loans includes loans receivable held for investment and loans
receivable held for sale, less undisbursed loan funds and deferred loan
fees.
(2) Non-performing assets consist of non-performing loans and REO.
(3) REO balances are shown net of related loss allowances.
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in its loan portfolio and the general economy. The allowance for
loan losses is maintained at an amount management considers adequate to cover
estimated losses in loans receivable which are deemed probable and estimable
based on information currently known to management. The Board of Directors'
Asset Classification Committee reviews and approves the loan loss reserve on a
quarterly basis. The allowance is based upon a number of factors, including
current regional and national economic conditions, actual loss experience and
industry trends.
16
<PAGE>
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Association's allowance for loan
losses. Such agencies may require the Association to make additional provisions
for estimated loan losses based upon judgments different from those of
management. As of December 31, 1996, the Association's allowance for loan
losses was 0.44% of total loans as compared to 0.45% as of December 31, 1995.
The Association had non-accrual loans of $896,000 and $1.5 million at December
31, 1996 and December 31, 1995, respectively. The Association will continue to
monitor and modify its allowances for loan losses as conditions dictate. While
management believes the Association's allowance for loan losses is sufficient to
cover losses inherent in its loan portfolio at this time, no assurances can be
given that the Association's level of allowance for loan losses will be
sufficient to cover future loan losses incurred by the Association or that
future adjustments to the allowance for loan losses will not be necessary if
economic and other conditions differ substantially from the economic and other
conditions used by management to determine the current level of the allowance
for loan losses.
The following table sets forth activity in the Association's allowance for
loan losses for the periods indicated.
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994 1993 1992
-------- ------- ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period... $ 822 $ 850 $ 846 $ 751 $ 830
Provision for loan losses........ 210 -- -- 180 426
Charge-offs:
Mortgage loans:
One -to-four-family............ -- 8 31 20 39
Multi-family................... -- -- -- -- 38
Commercial..................... -- -- -- 45 --
Consumer loans:
Education...................... 5 5 -- 215 431
Other loans..................... 15 22 8 11 --
------ ----- ----- ----- -----
Total..................... 20 35 39 291 508
Recoveries....................... 19 7 43 206 3
------ ----- ----- ----- -----
Net (charge-offs) recoveries..... (1) (28) 4 (85) (505)
------ ----- ----- ----- -----
Balance at end of period......... $1,031 $ 822 $ 850 $ 846 $ 751
====== ===== ===== ===== =====
Ratio of net charge-offs during
the period to average loans
outstanding during the period.. 0.00% 0.02% 0.00% 0.06% 0.29%
====== ===== ===== ===== =====
</TABLE>
17
<PAGE>
The following tables set forth the Association's percent of allowance for
loan losses to total allowance for loan losses and the percent of loans to total
loans in each of the categories listed at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------------------------------------------
1996 1995 1994
----------------------------------- ---------------------------------- -----------------------------
PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS
PERCENT OF IN EACH PERCENT OF IN EACH PERCENT OF IN EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
--------- ---------- ----------- -------- ----------- ----------- ------ ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family....... $ 706 68.48% 75.89% $429 52.19% 66.79% $324 38.12% 67.15%
Multi-family.............. 117 11.35 2.87 103 12.53 3.93 107 12.59 5.26
Commercial................ 15 1.45 2.15 16 1.95 1.79 171 20.12 1.30
Construction and
development.............. 27 2.62 1.51 45 5.47 3.21 27 3.18 3.08
Consumer loans:
Home equity............... 145 14.06 9.43 118 14.35 10.99 151 17.76 11.34
Education................. -- -- 6.55 89 10.83 11.32 49 5.76 9.35
Other loans:
Unsecured personal loans.. 21 2.04 0.65 22 2.68 0.68 21 2.47 0.83
Loans on savings accounts. -- -- 0.88 -- -- 1.18 -- -- 1.54
Other loans............... -- -- 0.07 -- -- 0.11 -- -- 0.15
------ ------ ------ ---- ------ ------ ---- ------ ------
Total valuation allowance. $1,031 100.00% 100.00% $822 100.00% 100.00% $850 100.00% 100.00%
====== ====== ====== ==== ====== ====== ==== ====== ======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------------------------------
1993 1992
--------------------------------------------- ------------------------------------------
PERCENT PERCENT
OF LOANS OF LOANS
PERCENT OF IN EACH PERCENT OF IN EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
-------- ------------ ----------- -------- ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family........ $ 513 60.63% 67.48% $399 53.12% 73.52%
Multi-family............... 105 12.41 5.47 120 15.98 5.81
Commercial................. 35 4.14 1.70 47 6.26 1.53
Construction and
development............... 77 9.10 5.35 81 10.79 4.79
Consumer loans:
Home equity................ 85 10.05 10.80 67 8.92 8.17
Education.................. 18 2.13 6.64 29 3.86 3.76
Other loans:
Unsecured personal loans... 13 1.54 0.90 8 1.07 0.83
Loans on savings accounts.. 00 00 1.42 -- -- 1.34
Other loans................ -- -- 0.24 -- -- 0.25
------ --------- -------- ------ --------- --------
Total valuation allowance. $ 846 100.00% 100.00% $751 100.00% 100.00%
====== ========= ======== ====== ========= ========
</TABLE>
18
<PAGE>
Real Estate Owned. At December 31, 1996, the Association had no REO
properties. When the Association acquires property through foreclosure or deed
in lieu of foreclosure, it is initially recorded at the lower of the recorded
investment in the corresponding loan or the fair value of the related assets at
the date of foreclosure, less costs to sell. Thereafter, if there is a further
deterioration in value, the Association provides for a specific valuation
allowance and charges operations for the diminution in value. It is the policy
of the Association to have obtained an appraisal on all real estate subject to
foreclosure proceedings prior to the time of foreclosure. It is the
Association's policy to require appraisals on a periodic basis on foreclosed
properties and conduct inspections on foreclosed properties.
INVESTMENT ACTIVITIES
The Company can invest in common and preferred stocks, limited partnerships
and anything the Association is permitted to invest in. Anything other than
that requires Board of Directors approval. Federally-chartered savings
institutions have the authority to invest in various types of liquid assets,
including United States Treasury obligations, securities of various federal
agencies, certificates of deposit of insured banks and savings institutions,
bankers' acceptances, repurchase agreements and federal funds. Subject to
various restrictions, federally-chartered savings institutions may also invest
their assets in commercial paper, investment-grade corporate debt securities and
mutual funds whose assets conform to the investments that a federally-chartered
savings institution is otherwise authorized to make directly. Additionally, the
Association must maintain minimum levels of investments that qualify as liquid
assets under OTS regulations. Historically, the Association has maintained
liquid assets above the minimum OTS requirements and at a level considered to be
adequate to meet its normal daily activities.
The investment policy of the Association, as approved by the Board of
Directors, generally requires management to maintain adequate liquidity,
generate a favorable return on investments without incurring undue interest rate
and credit risk as a complement to the Association's lending activities. The
Association's current investment policy provides that the Association may invest
in the following types of securities: U.S. Government and federal government-
sponsored agency debt securities, short-term money market instruments, mutual
funds which primarily invest in mortgage-backed securities and which also
qualify as liquid assets under the OTS regulations, federal funds and U.S.
government sponsored agency issued mortgage-backed and mortgage-related
securities, investment grade corporate debt obligations and other investments as
authorized by the OTS and as may be approved by the Board of Directors. At
December 31, 1996, the Association's investment securities generally consisted
of government-sponsored agency debt securities (primarily issued by FHLB, FNMA
and FHLMC), U.S. Treasuries, investment grade corporate debt securities,
commercial paper and mutual fund securities. At such date its mortgage-backed
securities portfolio generally consisted of fixed- and adjustable-rate mortgage-
backed securities issued by the FNMA, GNMA and FHLMC and its mortgage-related
securities portfolio consisted of fixed- and adjustable-rate CMOs backed by FNMA
and FHLMC.
The Board of Directors monitors and ratifies the investment decisions of
the Association's officers which have been authorized to manage the investment
portfolio (the President, Treasurer, Chief Financial Officer and Chief Lending
Officer). On at least a quarterly basis, the Asset/Liability Management
Committee also reviews the Association's securities portfolio and, in connection
therewith, reviews the market value of each security held. The Association's
current investment policy generally limits investment securities (consisting of
agency and corporate debt obligations and commercial paper) to 25% of total
assets and limits the weighted average life of such portfolio to twenty years
or less. The Association's policies also provide that investments in any one
CMO, Real Estate Mortgage Investment
19
<PAGE>
Conduit ("REMIC") and other asset-backed obligation may not, in the aggregate,
exceed 5% of total assets and limits the weighted average life of such
investments to less than seven years. The Association's policies also limit the
aggregate investment in such securities to 20% of total assets.
The OTS "Statement of Policy on Securities Activities," set forth in Thrift
Bulletin 52 ("Bulletin"), requires depository institutions to establish prudent
policies and strategies for securities transactions, describes securities
trading and sales practices that are unsuitable when conducted in an investment
portfolio and sets forth certain factors that must be considered when evaluating
whether the reporting of an institution's investments is consistent with its
intent and ability to hold such investments. The Bulletin also establishes a
framework for identifying when certain mortgage derivative products are "high-
risk" mortgage securities that must be reported in a "trading" or "held for
sale" account. The Association believes that it currently holds and reports its
securities and loans in a manner consistent with the Bulletin. Prior to the
purchase of any security, the Association subjects the security to a stress test
in accordance with OTS guidelines to determine if the securities will be
classified as a "high risk" security, and all of the Association's investment,
mortgage-backed and mortgage-related securities are tested thereafter on a
quarterly basis.
As required by SFAS 115, the Association has established an investment
portfolio of securities that may be categorized as held to maturity, available
for sale or held for trading. The Association does not currently maintain a
portfolio of securities categorized as held for trading. On December 15, 1995,
the Association transferred all of its securities included in the held to
maturity portfolio which, at the date of transfer, had a carrying value and fair
value of $230.0 million and $230.6 million, respectively, to its available for
sale portfolio. Subsequent to such transfer, the Association sold $82.1
million of securities classified as available-for-sale (consisting of $48.6
million of short-term U.S. agency debt securities, $12.5 million of corporate
debt securities and commercial paper, and $21.0 million of CMOs) for an
aggregate loss of $1.7 million in connection with management's restructuring of
its securities portfolio to increase its yield on such portfolio. The
Association utilized the proceeds to purchase $79.6 million of securities,
consisting of $73.6 million of mortgage backed securities and $6 million of U.S.
agency debt securities.
Mortgage-Backed Securities. At December 31, 1996, the Association had
$172.2 million in mortgage-backed securities, or 27.2% of total assets, which
generally consisted of mortgage-backed securities guaranteed by GNMA or insured
by either FNMA or FHLMC. Mortgage-backed securities generally yield less than
the mortgage loans that underlie such securities because of the cost of payment
guaranties or credit enhancement that result in nominal credit risk. In
addition, mortgage-backed securities are more liquid than individual mortgage
loans and may be used to collateralize obligations of the Association. In
general, mortgage-backed securities issued or guaranteed by FNMA and FHLMC and
certain AA-rate and AAA-rated mortgage-backed pass through securities are
weighted at no more than 20% for risk-based capital purposes, and mortgage-
backed securities issued or guaranteed by GNMA are weighted at 0% for risk-based
capital purposes, compared to an assigned risk weighing of 50% to 100% for whole
residential mortgage loans. These types of securities allow the Association to
optimize regulatory capital to a greater extent than non-securitized whole
loans. See "Regulation and Supervision - Federal Savings Institution
Regulation - Capital Requirements" for a discussion of the OTS risk-based
capital requirement.
While mortgage-backed securities carry a reduced credit risk as compared to
whole mortgage loans, such securities remain subject to the risk that a
fluctuating interest rate environment, along with other factors such as the
geographic distribution of the underlying mortgage loans, may alter the
prepayment rate
20
<PAGE>
of such mortgage loan and so affect both the prepayment speed, and value, of
such securities. Specifically, investments in mortgage-backed and CMOs,
discussed below, involve risks that in a declining interest rate environment
actual prepayments may exceed prepayments estimated over the life of the
security which, in turn, may result in a loss of any premiums paid for such
instrument thereby reducing the net yield on such securities. Conversely, if
interest rates increase, the market value of such securities may be adversely
affected.
Mortgage-Related Securities. At December 31, 1996, the Association had
$72.3 million of mortgage-related securities, or 11.4% of total assets,
consisting of CMOs issued by FHLMC and FNMA. CMOs are a type of debt security
issued by a special purpose entity that aggregates pools of underlying fixed-
and adjustable-rate mortgages or mortgage-backed securities and create different
classes of CMO securities with different maturities and, in some cases,
amortization schedules as well as residual interest with each such class
possessing different risk characteristics. The cash flows from the underlying
collateral is generally divided into "tranches" or "classes" whereby such
tranches have descending priorities with respect to the distribution of
principal repayments from the underlying mortgages or mortgage-backed
securities. In contrast to mortgage-backed securities in which cash flow is
received (and, accordingly, prepayment risk is shared) pro rata by all
securities holders, the cash flows from the mortgages or mortgage-backed
securities underlying CMOs are segmented and paid in accordance with a
predetermined priority to investors holding various tranches of such securities
or obligations. Accordingly, CMOs attempt to moderate the reinvestment risk
associated with conventional mortgage-backed securities when prepayments of the
mortgages underlying such securities prepay faster than anticipated. CMOs are
issued by special purpose entities formed by government-sponsored agencies, such
as FNMA or FHLMC, and private issuers, however, the Association generally only
invests in CMOs issued by government-sponsored agencies which are collateralized
by mortgage-backed securities.
While CMOs issued by government sponsored agencies involve reduced credit
risk, they involve prepayment risk (i.e., the risk that actual prepayments of
the mortgage loans or mortgage backed securities underlying the CMOs will be
greater than estimated prepayments over the life of the security upon which the
price of the security CMO is based). In the event actual prepayments exceed
estimated prepayments, it may require adjustments to the amortization of any
premium or accretion of any discount relating to such instruments thereby
reducing the net yield on such securities. There is also reinvestment risk
associated with CMOs if the cash flows from such securities are at rate greater
than the estimated cash flow or in the event such securities are redeemed by the
issuer. In addition, the market value of such securities may be adversely
affected by changes in interest rates.
Corporate Debt Obligations. At December 31, 1996, the Association had
$17.4 million of corporate debt obligations, or 2.7% of total assets. The
Association's investments in corporate debt obligations, as of December 31,
1996, generally consisted of short term debt obligations issued by large and
medium sized U.S. and multinational corporate issuers. The Association's
policies require all corporate debt obligations purchased by the Association to
be denominated in dollars and be rated in one of the four highest categories by
a nationally recognized rating agency and the average maturity of such
securities may not exceed six years.
Investments in corporate debt obligations and commercial paper involve
credit risk as they are not insured or guaranteed by the U.S. government or any
agency thereof, generally not secured by collateral and generally rely upon
future income from the operations of the issuer for repayment of principal and
interest.
21
<PAGE>
GNMA Forward Commitments. As part of its investment activities, the
Association also enters into forward commitment contracts with securities
brokers to purchase mortgage-backed securities issued by GNMA typically up to
six months in advance of the purchase date. The Association generally enters
into two forms of GNMA forward commitment contracts, one which requires the
Association to purchase a fixed amount of securities and one which requires the
Association to purchase $2 million of such securities on a firm commitment basis
at a one percent discount and, at the option of the seller, $4 million more of
the same securities. These forward commitment contracts may be sold in the open
market. The Association's policies limit the aggregate amount of GNMA forward
commitments in which the Association may engage at any one time to 15% of the
Association's assets and limits the maximum amount of such commitments with any
one broker to $20 million. The Association utilizes these GNMA forward
commitment contracts in periods when it believes the interest rates on the
underlying securities are appropriate for the Association's interest rate risk
management. For budgeting purposes, the Association reserves funding to cover
all outstanding commitments for the maximum amount of securities which it may
have to purchase but, in accordance with GAAP, records such purchase at the time
of the actual purchase. Accordingly, the GNMA forward commitment contracts are
reflected as off-balance sheet commitments. As of December 31, 1996, the
Association had outstanding forward commitment contracts to purchase up to $14
million of GNMA mortgage-backed securities which had interest rates ranging from
7.0% to 8.0% and were to be purchased between one to eight months in the future.
The Association's GNMA forward commitment contract activity involves a
degree of interest rate risk in that if market interest rates increase from the
time of the commitment to the time of purchase, the Association will generally
be required to purchase below market rate instruments or will generally incur a
loss if it chooses to purchase and resell such securities. In an attempt to
minimize the interest rate risk associated with this activity, the Association
may "pair off" such forward commitment contracts with forward sale contracts
whereby the Association commits to sell similar securities on the same date with
the same yield. During the fiscal years ended December 31, 1996, 1995 and 1994,
the Association had net gains from such activity of $54,000, $207,000 and
$143,000, respectively.
U.S. Government Securities. At December 31, 1996 the Company had $14.9
million of U.S. Treasury Securities, or 2.4% of total assets. Also, at December
31, 1996, the Company had $48.4 million of U.S. Government agency securities, or
7.65% of total assets. All government securities are issued directly by the
U.S. government, either through the Treasury Department or through one of the
many federal agencies created by Congress. U.S. Treasury Securities are issued
by the Treasury Department and are backed by the full faith and credit of the
U.S. government.
Marketable Equity Securities. At December 31, 1996 the Company had $29.7
million of marketable equity securities, or 4.7% of total assets. This included
$16.6 million of adjustable rate mortgage mutual funds, which are backed by
FNMA, GNMA or FHLMC. This remaining amount was invested in money market mutual
funds, preferred stock and bank equities.
22
<PAGE>
The following table sets forth the composition of the Association's
investment, mortgage-backed and mortgage-related securities portfolio in dollar
amounts and in percentages of the respective portfolios at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------
1996 1995 1994
--------------------- ----------------------- -------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
---------- --------- -------- ----------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
Marketable equity securities(1)............... $ 29,730 8.17% $ 22,659 9.45% $ 20,187 6.82%
U.S. Government Agency debt................... 48,499 13.34 20,013 8.35 56,000 18.89
Municipal Obligations......................... 8,889 2.44 1,503 .62 -- --
Corporate obligations......................... 17,298 4.76 26,671 11.12 47,575 16.05
U.S. Treasury................................. 15,037 4.13 -- -- -- --
--------- ------- -------- ------- -------- ------
Total investment securities................. 119,453 32.84 70,846 29.54 123,762 41.76
--------- ------- -------- ------- -------- ------
Mortgage-backed and mortgage
related securities:
FHLMC......................................... 23,107 6.35 29,101 12.13 3,596 1.21
FNMA.......................................... 20,092 5.52 4,713 1.97 2,354 0.79
GNMA.......................................... 127,732 35.11 84,162 35.09 83,802 28.28
CMOs.......................................... 72,303 19.87 50,716 21.15 83,463 28.16
--------- ------- -------- ------- -------- ------
Total mortgage-backed and
mortgage-related securities............. 243,234 66.85 168,692 70.34 173,215 58.44
--------- ------- -------- ------- -------- ------
Plus:
Unamortized premium (discount)................ 1,142 0.31 301 0.13 (599) (0.20)
--------- ------- -------- ------- -------- ------
Total securities, net....................... 363,829 100.00 239,839 100.00 296,378 100.00
--------- ------- -------- ------- -------- ------
Less:
Securities available for sale:
Marketable equity securities................. (29,730) (8.17) (22,659) (9.44) (20,187) (6.81)
U.S. Government Agency debt.................. (48,420) (13.32) (20,083) (8.38) -- --
Municipal Obligations........................ 8,894 2.44 1,500 .63 -- --
Corporate Obligations........................ (17,354) (4.77) (26,818) (11.18) -- --
FNMA......................................... (20,527) (5.64) (4,712) (1.96) -- --
FHLMC........................................ (23,522) (6.47) (29,637) (12.36) -- --
GNMA......................................... (128,178) (35.23) (83,798) (34.94) (44,662) (15.07)
CMOs......................................... (72,255) 19.86 (50,632) (21.11) (4,446) (1.50)
U.S. Treasury................................ (14,949) (4.11) -- -- -- --
--------- ------- -------- ------- -------- ------
Total available for sale.................... 363,829 (100.00) 239,839 (100.00) (69,295) (23.38)
--------- ------- -------- ------- -------- ------
Total securities held to maturity(2).......... $ -- --% $ -- --% $227,083 76.62%
========= ======= ======== ======= ======== ======
</TABLE>
- ------------------------
(1) At December 31, 1996, marketable equity securities consisted of 26.4 million
of mutual funds backed by adjustable-rate mortgage-backed securities,
corporate debt, corporate bonds, or government bonds; $2.2 million of FHLMC
stock,$41,000 of Student Loan Market Association stock, $420,000 of FNMA
stock and $661,000 of bank equities.
(2) On December 15, 1995, the Association transferred all of its securities
categorized as held to maturity to its available for sale portfolio. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -Impact of New Accounting Standards."
23
<PAGE>
The following table sets forth the Association's investment, mortgage-
backed and mortgage-related securities activities for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance.................................. $239,839 $296,378 $314,962
Investment securities purchased - held 9,965
to maturity(1)................................... -- 52,404
Investment securities purchased -
available for sale(1)............................ 115,072 9,502 1,411
Mortgage-backed and mortgage-related securities
purchased - held to maturity(1).................. -- 9,040 48,656
Mortgage-backed and mortgage-related securities
purchased - available for sale(1)................ 145,461 6,012 36,988
Securities purchased, not settled(3).............. 5,830 41,953
Less:
Sale of investment securities -
available for sale(1).......................... (43,439) (13,488) (22,255)
Sale of mortgage-backed and mortgage-related
securities available for sale(1)............... (45,310) (29,324) --
Securities sold, not settled(3)................... -- (73,062) --
Investment maturities............................ (28,930) (55,691) (66,830)
Principal repayments............................. (20,761) (9,429) (21,822)
Realized gain (loss) on sale of investments,
mortgage-backed and mortgage-related securities.. 630 (1,292) (101)
Amortization of (premium) discount................ (14) (410) (1,969)
Change in net unrealized gain (loss)
on available for sale............................ (4,549) 7,246 (2,627)
-------- -------- --------
Ending balance(2).................................. $363,829 $239,839 $296,378
======== ======== ========
</TABLE>
- ---------------
(1) SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities"
was adopted by the Association on January 1, 1994.
(2) Certain noncash transactions are included in the investment activity.
(3) The Association conducted sale and purchase activity of securities which had
not yet settled as of the period end.
24
<PAGE>
The following table sets forth certain information regarding the carrying
and market values of the Association's short-term investments (consisting of
federal funds sold and interest-bearing demand deposits) and investment,
mortgage-backed and mortgage-related securities at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------
1996 1995 1994
-------------------- --------------------- -------------------
CARRYING MARKET CARRYING MARKET CARRYING MARKET
VALUE VALUE VALUE VALUE VALUE VALUE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Short-term investments............... $ 17,542 $ 17,542 $ 4,669 $ 4,669 $ 474 $ 474
-------- -------- -------- -------- -------- --------
Investment securities(1):
Held to maturity:
Marketable equity securities....... -- -- -- -- -- --
U.S. Government Agency debt........ -- -- -- -- 56,056 51,712
Corporate obligations.............. -- -- -- -- 48,248 47,701
U.S. Treasury...................... -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total held to maturity(3)......... $ -- $ -- $ -- $ -- $104,304 $ 99,413
-------- -------- -------- -------- -------- --------
Available for sale:(3)
Corporate obligations.............. 17,354 17,354 26,818 26,818 -- --
U.S. Treasury...................... 14,949 14,949 -- -- -- --
U.S. government and
agency obligations................ 48,420 48,420 20,083 20,083 -- --
Municipal obligations.............. 8,894 8,894 1,500 1,500 -- --
Marketable equity securities(2).... 29,730 29,730 22,659 22,659 20,187 20,187
Total available for sale.......... 119,347 119,347 71,060 71,060 20,187 20,187
-------- -------- -------- -------- -------- --------
Total investment securities.......... $119,347 $119,347 $ 71,060 $ 71,060 $124,491 $119,600
-------- -------- -------- -------- -------- --------
Mortgage-backed and
mortgage-related securities(1):
Held to maturity:
FNMA............................... -- -- -- -- $ 2,354 $ 2,354
GNMA............................... -- -- -- -- 38,113 38,601
FHLMC.............................. -- -- -- -- 3,562 3,569
CMOs............................... -- -- -- -- 78,750 73,676
-------- -------- -------- -------- -------- --------
Total held to maturity............ -- -- -- -- 122,779 118,200
-------- -------- -------- -------- -------- --------
Available for sale:(3)
FHLMC.............................. 23,522 23,522 29,637 29,637 -- --
GNMA............................... 128,178 128,178 83,798 83,798 44,662 44,662
FNMA............................... 20,527 20,527 4,712 4,712 -- --
CMOs............................... 72,255 72,255 50,632 50,632 4,446 4,446
-------- -------- -------- -------- -------- --------
Total available for sale.......... 244,482 244,482 168,779 168,779 49,108 49,108
-------- -------- -------- -------- -------- --------
Total mortgage-backed and
mortgage-related securities...... $244,482 $244,482 $168,779 $168,779 $171,887 $167,308
-------- -------- -------- -------- -------- --------
Total short-term investments,
investment securities, mortgage-
backed and mortgage-related
securities........................ $381,371 $381,371 $244,508 $244,508 $296,852 $287,382
======== ======== ======== ======== ======== ========
- --------------------
</TABLE>
(1) SFAS 115, "Accounting for Certain Investments on Debt and Equity
Securities," was adopted by the Association on January 1, 1994.
(2) At December 31, 1996, marketable equity securities consisted of $26.4
million of mutual funds backed by adjustable-rate mortgage-backed
securities, corporate debt, corporate bonds or government bonds; $2.2
million of FHLMC stock, $41,000 of Student Loan Market Association stock,
$420,000 of FNMA Stock and $661,000 of bank equities.
(3) On December 15, 1995, the Association transferred all of its securities
categorized as held to maturity to its available for sale portfolio. See
"Impact of New Accounting Standards."
25
<PAGE>
The table below sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of the Association's
short-term investments (consisting of federal funds sold and interest-bearing
demand deposits), investment securities and mortgage-backed and mortgage related
securities as of December 31, 1996.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
--------------------------------------------------------------------------------------------
MORE THAN ONE MORE THAN FIVE MORE THAN TEN
ONE YEAR OR LESS YEAR TO FIVE YEARS YEARS TO TEN YEARS YEARS
-------------------- ---------------------- -------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
---------- --------- ------- --------- ------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Short-term investments................. $17,542 5.42% $ -- --% $ -- --% $ -- --%
Investment securities:
Available for Sale:
U.S. Government agency securities.... 15,000 6.85 18,624 6.51 1,994 7.48 12,802 7.87
Municipal obligations................ -- -- 3,310 4.00 4,681 5.22 903 5.40
U.S. Treasury Securities............. 6,002 5.85 8,947 6.17 -- -- -- --
Corporate obligations................ 14,512 6.68 2,842 6.33 -- -- -- --
Marketable equity securities......... 29,069 6.47 -- -- -- -- -- --
Common Stock......................... 661 -- -- -- -- -- -- --
Total investment securities.......... 65,244 6.48 33,723 6.16 6,675 5.90 13,705 7.71
------- ---- ------- ---- ------ ---- -------- ----
Mortgage-backed and
mortgage-related securities:
Available for Sale:
GNMA................................. -- -- -- -- -- -- 128,178 7.88
FNMA................................. -- -- 1,842 6.47 2,364 7.03 16,321 7.08
FHLMC................................ -- -- 16,884 6.85 375 7.52 6,263 7.52
CMOs................................. -- -- 3,281 6.92 -- -- 68,974 6.22
Total mortgage-backed and mortgage-
related securities.................. -- --% 22,007 6.83% 2,739 7.10% 219,736 7.29%
------- ---- ------- ---- ------ ---- -------- ----
Total short-term investments,
investment securities, mortgage-
backed securities and mortgage-related
securities............................ $82,786 $55,730 $9,414 $233,441
======= ======= ====== ========
<CAPTION>
AT DECEMBER 31, 1996
----------------------
TOTAL
----------------------
WEIGHTED
CARRYING AVERAGE
VALUE YIELD
--------- ----------
<S> <C> <C>
Short-term investments................. $17,542 5.42%
Investment securities:
Available for Sale:
U.S. Government agency securities.... 48,420 7.02
Municipal obligations................ 8,894 4.78
U.S. Treasury Securities............. 14,949 6.04
Corporate obligations................ 17,354 6.62
Marketable equity securities......... 29,069 6.47
Common Stock......................... 661 --
Total investment securities.......... 119,347 6.50
-------- ----
Mortgage-backed and
mortgage-related securities:
Available for Sale:
GNMA................................. 128,178 7.88
FNMA................................. 20,527 7.02
FHLMC................................ 23,522 7.04
CMOs................................. 72,255 6.25
Total mortgage-backed and mortgage-
related securities.................. 244,482 6.25
-------- ----
Total short-term investments,
investment securities, mortgage-
backed securities and mortgage-related
securities............................ $381,371
========
</TABLE>
26
<PAGE>
SOURCES OF FUNDS
General. Deposits, loan repayments and prepayments, proceeds from sales of
loans, principal and interest payments on investment and mortgage-backed and
mortgage-related securities, cash flows generated from operations and FHLB
advances are the primary sources of the Association's funds for use in lending,
investing and for other general purposes.
Deposits. The Association offers a variety of deposit accounts with a
range of interest rates and terms. The Association's deposits consist of
savings, NOW accounts, checking accounts, money market accounts and certificate
accounts. For the year ended December 31, 1996, core deposits represented 50.3%
total average deposits. The flow of deposits is influenced significantly by
general and regional economic conditions, changes in money market rates,
prevailing interest rates and competition. The Association's deposits are
obtained predominantly from the areas in which its branch offices are located.
To attract and retain deposits, the Association relies primarily on pricing its
deposit products at a competitive rate providing customer service and its long-
standing relationships with customers; however, market interest rates and rates
offered by competing financial institutions significantly affect the
Association's ability to attract and retain deposits. In recent years, the
Association has generally paid a rate of interest paid on its deposit product
that is higher than competing institutions operating in the Association's market
area. The Association uses traditional means of advertising its deposit
products, including radio and print media and generally does not solicit
deposits from outside its market area. Certificate accounts in excess of
$100,000 are not actively solicited by the Association and the Association does
not currently use brokers to obtain deposits. During the year ended December 31,
1996, the Association's balance of passbook accounts decreased by $5.7 million,
or 3.5%, and its balance of certificates of deposits increased by $25.3 million,
or 12.6%. The decline in passbook accounts and increase in certificates of
deposit resulted from the Association's raising of the rate paid on certificates
accounts in late 1995 and early 1996 which caused depositors to transfer funds
from passbook accounts to certificates of deposit.
At December 31, 1996, certificate accounts with maturities of one year or
less totalled $121.5 million, or 27.0% of total deposits. While the Association
believes that, based on the Association's historical deposit outflow activity,
the substantial majority of such accounts will remain with the Association, if a
material amount of such accounts were not renewed it could have a material
adverse impact on the liquidity and cash flows of the Association and may result
in increased interest expense in the event the Association paid higher rates to
attract and retain deposit accounts or increased its utilization of higher cost
borrowings to fund its liquidity needs.
The following table presents the deposit activity of the Association for
the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------
1996 1995 1994
---------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net deposits (withdrawals)..................... $ 8,551 $(13,864) $(28,172)
Interest credited on deposit accounts.......... 16,145 15,972 14,258
------- -------- --------
Total increase (decrease) in deposit accounts.. $24,696 $ 2,108 $(13,914)
======= ======== ========
</TABLE>
27
<PAGE>
At December 31, 1996, the Association had $11.7 million in certificate
accounts in amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
WEIGHTED
MATURITY PERIOD AMOUNT AVERAGE RATE
- --------------------------- --------- ------------
(DOLLARS
IN
THOUSANDS)
<S> <C> <C>
Three months or less...... $ 2,215 4.84%
Over 3 through 6 months... 1,994 4.94%
Over 6 through 12 months.. 1,608 5.39%
Over 12 months............ 5,920 6.09%
-------
Total..................... $11,737
=======
</TABLE>
28
<PAGE>
The following table sets forth the distribution of the Association's
average deposit accounts for the periods indicated and the weighted average
nominal interest rates on each category of deposits presented. Averages for the
periods presented utilize average month-end balances.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------
1996 1995 1994
-------------------------------- -------------------------------- ------------------------------
PERCENT PERCENT PERCENT
OF TOTAL WEIGHTED OF TOTAL WEIGHTED OF TOTAL WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE DEPOSITS COST BALANCE DEPOSITS COST BALANCE DEPOSITS COST
--------- ---------- --------- ------- -------- --------- ------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Money market savings accounts.. $ 16,397 3.86% 2.50% $ 18,496 4.38% 2.51% $ 22,721 5.24% 2.50%
Passbook accounts.............. 162,636 38.34 3.01 170,151 40.30 3.00 199,779 46.09 3.00
NOW accounts................... 24,475 5.77 2.03 23,414 5.54 1.98 22,822 5.27 2.20
Non-interest-bearing accounts.. 19,288 4.55 -- 16,311 3.86 -- 14,134 3.26 --
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total........................ 222,796 52.52 2.60 228,372 54.08 2.64 259,456 59.86 2.72
-------- ------ ---- -------- ------ ---- -------- ------ ----
Certificate accounts:
Less than six months.......... 622 0.15 3.62 738 0.18 3.88 744 0.17 2.81
Over six through 12 months.... 89,627 21.13 4.97 92.260 21.85 5.21 80,309 18.53 3.58
Over 12 through 24 months..... 16,377 3.86 6.12 7,573 1.79 5.20 5,395 1.24 3.70
Over 24 months................ 52,501 12.37 5.90 52,241 12.37 5.75 48,109 11.10 5.70
IRA/KEOGH..................... 42,272 9,97 5.50 41,073 9.73 5.44 39,439 9.10 4.47
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total certificate accounts... 201,399 47.48 5.40 193,885 45.92 5.39 173,996 40.14 4.35
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total average deposits...... $424,195 100.00% 3.93% $422,257 100.00% 3.90% $433,452 100.00% 3.38%
======== ====== ==== ======== ====== ==== ======== ====== ====
</TABLE>
29
<PAGE>
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at December 31, 1996.
<TABLE>
<CAPTION>
PERIOD TO MATURITY FROM DECEMBER 31, 1996 AT DECEMBER 31,
------------------------------------------------ ----------------------------
LESS THAN ONE TO TWO TO OVER
ONE YEAR TWO YEARS THREE YEARS THREE YEARS 1996 1995 1994
----------- --------- ----------- ----------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts:
0 to 2.99%............ $ --- $ --- $ --- $ --- $ $ $ 45
3.00 to 3.99%.......... 1,317 5 --- --- 1,322 5,771 56,411
4.00 to 4.99%.......... 86,393 1,221 54 --- 87,668 56,479 48,584
5.00 to 5.99%.......... 26,028 19,623 12,410 10,416 68,477 82,580 46,210
6.00 to 6.99%.......... 7,306 30,490 8,653 4,655 51,103 39,846 17,140
7.00 to 7.99%.......... 389 819 4,029 11,172 16,410 15,160 10,392
8.00 to 8.99%.......... 69 25 2 1,022 1,118 992 1,487
Over 9.00%............. --- --- --- --- --- --- ---
-------- ------- ------- ------- -------- -------- --------
Total................ $121,502 $52,183 $25,148 $27,265 $226,098 $200,828 $180,269
======== ======= ======= ======= ======== ======== ========
</TABLE>
30
<PAGE>
Borrowings. The Association utilizes advances from the FHLB as an
alternative to retail deposits to fund its operations and may do so in the
future as part of its operating strategy. The Association generally only
utilizes FHLB borrowings as a source of liquidity. These FHLB advances are
collateralized primarily by certain of the Association's mortgage loans and
mortgage-backed securities and secondarily by the Association's investment in
capital stock of the FHLB. FHLB advances are made pursuant to several different
credit programs, each of which has its own interest rate and range of
maturities. The maximum amount that the FHLB will advance to member
institutions, including the Association, fluctuates from time to time in
accordance with the policies of the OTS and the FHLB. At December 31, 1996,
the Association had $37.5 million in short-term and $9.0 million in long-term
outstanding advances from the FHLB.
The following table sets forth certain information regarding the
Association's short-term borrowed funds at or for the periods ended on the dates
indicated:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR
ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
---------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding............ $ 8,204 $ 125 $1,053
======= ===== ======
Maximum amount outstanding at
any month-end during the period..... 37,525 -- 6,500
======= ===== ======
Balance outstanding at end of period... 37,525 -- --
======= ===== ======
Weighted average interest rate
during the period................... 5.48% 6.39% 4.60%
======= ===== ======
Weighted average interest rate at end
of period............................. 5.56% --% --%
======= ===== ======
</TABLE>
At December 31, 1996, the Association also maintained securities sold under
agreements to purchase of $5.0 million. Securities sold under agreements to
repurchase are collateralized by mortgage-backed securities. The $5.0 million
is comprised of one commitment with a scheduled maturity of August 26, 1999 at
an interest rate of 6.25%.
SUBSIDIARY ACTIVITIES
Great American Financial Services, Inc. is a wholly-owned subsidiary of the
Association, which currently does not conduct any activities.
31
<PAGE>
PERSONNEL
As of December 31, 1996, the Association had 161 authorized full-time
employee positions and 51 authorized part-time employee positions. The
employees are not represented by a collective bargaining unit and the
Association considers its relationship with its employees to be good.
REGULATION AND SUPERVISION
GENERAL
The Company, as a savings and loan holding company, is required to file
certain reports with, and otherwise comply with the rules and regulations of the
Office of Thrift Supervision ("OTS") under the Home Owners' Loan Act, as amended
(the "HOLA"). In addition, the activities of savings institutions, such as the
Association, are governed by the HOLA and the Federal Deposit Insurance Act
("FDI Act").
The Association is subject to extensive regulation, examination and
supervision by the OTS, as its primary federal regulator, and the FDIC, as the
deposit insurer. The Association is a member of the Federal Home Loan Bank
("FHLB") System and its deposit accounts are insured up to applicable limits by
the Savings Association Insurance Fund ("SAIF") managed by the FDIC. The
Association must file reports with the OTS and the FDIC concerning its
activities and financial condition in addition to obtaining regulatory approvals
prior to entering into certain transactions such as mergers with, or
acquisitions of, other savings institutions. The OTS and/or the FDIC conduct
periodic examinations to test the Association's safety and soundness and
compliance with various regulatory requirements. This regulation and
supervision establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily for the protection of the
insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in such regulatory
requirements and policies, whether by the OTS, the FDIC or the Congress, could
have a material adverse impact on the Company, the Association and their
operations. Certain of the regulatory requirements applicable to the
Association and to the Company are referred to below or elsewhere herein. The
description of statutory provisions and regulations applicable to savings
institutions and their holding companies set forth in this Form 10-K does not
purport to be a complete description of such statutes and regulations and their
effects on the Association and the Company.
HOLDING COMPANY REGULATION
The Company is a nondiversified unitary savings and loan holding company
within the meaning of the HOLA. As a unitary savings and loan holding company,
the Company generally is not restricted under existing laws as to the types of
business activities in which it may engage, provided that the Association
continues to be a qualified thrift lender ("QTL"). See "Federal Savings
Institution Regulation - QTL Test." Upon any non-supervisory acquisition by the
Company of another savings institution or savings bank that meets the QTL test
and is deemed to be a savings institution by the OTS, the Company would become a
multiple savings and loan holding company (if the acquired institution is held
as a separate subsidiary) and would be subject to extensive limitations on the
types of business activities in which it could engage. The HOLA limits the
activities of a multiple savings and loan holding company
32
<PAGE>
and its non-insured institution subsidiaries primarily to activities permissible
for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act
("BHC Act"), subject to the prior approval of the OTS, and certain activities
authorized by OTS regulation.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution or holding company thereof,
without prior written approval of the OTS; acquiring or retaining, with certain
exceptions, more than 5% of a nonsubsidiary company engaged in activities other
than those permitted by the HOLA; or acquiring or retaining control of a
depository institution that is not insured by the FDIC. In evaluating
applications by holding companies to acquire savings institutions, the OTS must
consider the financial and managerial resources and future prospects of the
company and institution involved, the effect of the acquisition on the risk to
the insurance funds, the convenience and needs of the community and competitive
factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions. The
states vary in the extent to which they permit interstate savings and loan
holding company acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, HOLA does prescribe such restrictions on subsidiary
savings institutions as described below. The Association must notify the OTS 30
days before declaring any dividend to the Company. In addition, the financial
impact of a holding company on its subsidiary institution is a matter that is
evaluated by the OTS and the agency has authority to order cessation of
activities or divestiture of subsidiaries deemed to pose a threat to the safety
and soundness of the institution.
FEDERAL SAVINGS INSTITUTION REGULATION
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 3% leverage (core) capital ratio and an 8% risk-based capital ratio.
In addition, the prompt corrective action standards discussed below also
establish, in effect, a minimum 2% tangible capital standard, a 4% leverage
(core) capital ratio (3% for institutions receiving the highest rating on the
CAMEL financial institution rating system), and, together with the risk-based
capital standard itself, a 4% Tier I risk-based capital standard. Core capital
is defined as common stockholders' equity (including retained earnings), certain
noncumulative perpetual preferred stock and related surplus, and minority
interests in equity accounts of consolidated subsidiaries less intangibles other
than certain purchased mortgage servicing rights and credit card relationships.
The OTS regulations also require that, in meeting the tangible, leverage (core)
and risk-based capital standards, institutions must generally deduct investments
in and loans to subsidiaries engaged in activities not permissible for a
national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier I (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of 4% and 8%, respectively.
In determining the amount of risk-weighted assets, all assets, including certain
33
<PAGE>
off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%,
as assigned by the OTS capital regulation based on the risks OTS believes are
inherent in the type of asset. The components of Tier I (core) capital are
equivalent to those discussed earlier. The components of supplementary capital
currently include cumulative preferred stock, long-term perpetual preferred
stock, mandatory convertible securities, subordinated debt and intermediate
preferred stock and the allowance for loan and lease losses limited to a maximum
of 1.25% of risk-weighted assets. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.
The OTS regulatory capital requirements also incorporate an interest rate
risk component. Savings institutions with "above normal" interest rate risk
exposure are subject to a deduction from total capital for purposes of
calculating their risk-based capital requirements. A savings institution's
interest rate risk is measured by the decline in the net portfolio value of its
assets (i.e., the difference between incoming and outgoing discounted cash flows
from assets, liabilities and off-balance sheet contracts) that would result from
a hypothetical 200 basis point increase or decrease in market interest rates
divided by the estimated economic value of the institution's assets. In
calculating its total capital under the risk-based capital rule, a savings
institution whose measured interest rate risk exposure exceeds 2% must deduct an
amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
institution's assets. The Director of the OTS may waive or defer a savings
institution's interest rate risk component on a case-by-case basis. A savings
institution with assets of less than $300 million and risk-based capital ratios
in excess of 12% is not subject to the interest rate risk component, unless the
OTS determines otherwise. For the present time, the OTS has deferred
implementation of the interest rate risk component. At December 31, 1996, the
Association met each of its capital requirements, in each case on a fully
phased-in basis and it is anticipated that the Association will not be subject
to the interest rate risk component.
The following table presents the Association's capital position at December
31, 1996 relative to regulatory requirements.
<TABLE>
<CAPTION>
CAPITAL
EXCESS ---------------------
ACTUAL REQUIRED (DEFICIENCY) ACTUAL REQUIRED
CAPITAL CAPITAL AMOUNT PERCENT PERCENT
--------- -------- ------------ ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Tangible......... $92,148 $ 9,061 $83,087 15.26% 1.50%
Core (Leverage).. 92,148 18,121 74,027 15.26% 3.00%
Risk-based....... 93,179 16,913 76,266 44.08% 8.00%
</TABLE>
34
<PAGE>
Prompt Corrective Regulatory Action. Under the OTS prompt corrective
action regulations, the OTS is required to take certain supervisory actions
against undercapitalized institutions, the severity of which depends upon the
institution's degree of undercapitalization. Generally, a savings institution
is considered "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of Tier I (core) capital to risk-weighted
assets is at least 6%, its ratio of core capital to total assets is at least 5%,
and it is not subject to any order or directive by the OTS to meet a specific
capital level. A savings institution generally is considered "adequately
capitalized" if its ratio of total capital to risk-weighted assets is at least
8%, its ratio of Tier I (core) capital to risk-weighted assets is at least 4%,
and its ratio of core capital to total assets is at least 4% (3% if the
institution receives the highest CAMEL rating). A savings institution that has
a ratio of total capital to risk weighted assets of less than 8%, a ratio of
Tier I (core) capital to risk-weighted assets of less than 4% or a ratio of core
capital to total assets of less than 4% (3% or less for institutions with the
highest examination rating) is considered to be "undercapitalized." A savings
institution that has a total risk-based capital ratio less than 6%, a Tier 1
capital ratio of less than 3% or a leverage ratio that is less than 3% is
considered to be "significantly undercapitalized" and a savings institution that
has a tangible capital to assets ratio equal to or less than 2% is deemed to be
"critically undercapitalized." Subject to a narrow exception, the banking
regulator is required to appoint a receiver or conservator for an institution
that is "critically undercapitalized." The regulation also provides that a
capital restoration plan must be filed with the OTS within 45 days of the date a
savings institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." Compliance
with the plan must be guaranteed by any parent holding company. In addition,
numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
Insurance of Deposit Accounts. Deposits of the Association are presently
insured by the SAIF. Both the SAIF and the Bank Insurance Fund ("BIF"), (the
deposit insurance fund that covers most commercial bank deposits), are
statutorily required to be recapitalized to a 1.25% of insured reserve deposits
ratio. Until recently, members of the SAIF and BIF were paying average deposit
insurance premiums of between 24 and 25 basis points. The BIF met the required
reserve in 1995, whereas the SAIF was not expected to meet or exceed the
required level until 2002 at the earliest. This situation was primarily due to
the statutory requirement that SAIF members make payments on bonds issued in the
late 1980s by the Financing Corporation ("FICO") to recapitalize the predecessor
to the SAIF.
In view of the BIF's achieving the 1.25% ratio, the FDIC ultimately adopted
a new assessment rate schedule of from 0 to 27 basis points under which 92% of
BIF members paid an annual premium of only $2,000. With respect to SAIF member
institutions, the FDIC adopted a final rule retaining the previously existing
assessment rate schedule applicable to SAIF member institutions of 23 to 31
basis points. As long as the premium differential continued, it may have had
adverse consequences for SAIF members, including reduced earnings and an
impaired ability to raise funds in the capital markets. In addition, SAIF
members, such as the Association were placed at a substantial competitive
disadvantage to BIF members with respect to pricing of loans and deposits and
the ability to achieve lower operating costs.
35
<PAGE>
On September 30, 1996, the President signed into law the Deposit Insurance
Funds Act of 1996 (the "Funds Act") which, among other things, imposed a special
one-time assessment on SAIF member institutions, including the Association, to
recapitalize the SAIF. As required by the Funds Act, the FDIC imposed a special
assessment of 65.7 basis points on SAIF assessable deposits held as of March 31,
1995, payable November 27, 1996 (the "SAIF Special Assessment"). The SAIF
Special Assessment was recognized by the Association as an expense in the
quarter ended September 30, 1996 and is generally tax deductible. The SAIF
Special Assessment recorded by the Association amounted to $2.8 million on a
pre-tax basis and $1.7 million on an after-tax basis.
The Funds Act also spreads the obligations for payment of the FICO bonds
across all SAIF and BIF members. Beginning on January 1, 1997, BIF deposits
will be assessed for FICO payment of 1.3 basis points, while SAIF deposits will
pay 6.48 basis points. Full pro rata sharing of the FICO payments between BIF
and SAIF members will occur on the earlier of January 1, 2000 or the date the
BIF and SAIF are merged. The Funds Act specifies that the BIF and SAIF will be
merged on January 1, 1999, provided no savings associations remain as of that
time.
As a result of the Funds Act, the FDIC recently voted to effectively lower
SAIF assessments to 0 to 27 basis points as of January 1, 1997, a range
comparable to that of BIF members. SAIF members will also continue to make the
FICO payments described above. The FDIC also lowered the SAIF assessment
schedule for the fourth quarter of 1996 to 18 to 27 basis points. Management
cannot predict the level of FDIC insurance assessments on an on-going basis,
whether the savings association charter will be eliminated or whether the BIF
and SAIF will eventually be merged.
The Association's assessment rate for fiscal 1996 was 23 basis points and
the premium paid for this period was $969,000. A significant increase in SAIF
insurance premiums would likely have an adverse effect on the operating expenses
and results of operations of the Association.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Association does not know of any practice, condition
or violation that might lead to termination of deposit insurance.
Thrift Rechartering Legislation. The Funds Act provides that the BIF and
SAIF will merge on January 1, 1999 if there are no more savings associations as
of that date. That legislation also requires that the Department of Treasury
submit a report to Congress by March 31, 1997 that makes recommendations
regarding a common financial institutions charter, including whether the
separate charters for thrifts and banks should be abolished. Various proposals
to eliminate the federal thrift charter, create a uniform financial institutions
charter and abolish the OTS have been introduced in Congress. The bills would
require federal savings institutions to convert to a national bank or some type
of state charter by a specified date (January 1, 1998 in one bill, June 30, 1998
in the other) or they would automatically become national banks. Converted
federal thrifts would generally be required to conform their activities to those
permitted for the charter selected and divestiture of nonconforming assets would
be required over a two year period, subject to two possible one year extensions.
State chartered thrifts would become subject to the same federal regulation as
applies to state commercial banks. Holding companies for savings institutions
would become subject to the same regulation as holding companies that control
commercial banks, with a limited grandfather provision for unitary savings and
loan holding company
36
<PAGE>
activities. The Bank is unable to predict whether such legislation would be
enacted, the extent to which the legislation would restrict or disrupt its
operations or whether the BIF and SAIF funds will eventually merge.
Loans to One Borrower. Under the HOLA, savings institutions are generally
subject to the limits on loans to one borrower applicable to national banks.
Generally, savings institutions may not make a loan or extend credit to a single
or related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if such loan is secured by readily-marketable collateral, which is
defined to include certain financial instruments and bullion. At December 31,
1996, the Association's limit on loans to one borrower was $18.4 million. At
December 31, 1996, the Association's largest aggregate outstanding balance of
loans to one borrower was $2.7 million.
QTL Test. The HOLA requires savings institutions to meet a QTL test.
Under the QTL test, a savings and loan association is required to maintain at
least 65% of its "portfolio assets" (total assets less: (i) specified liquid
assets up to 20% of total assets; (ii) intangibles, including goodwill; and
(iii) the value of property used to conduct business) in certain "qualified
thrift investments" (primarily residential mortgages and related investments,
including certain mortgage-backed securities) in at least 9 months out of each
12 month period.
A savings institution that fails the QTL test is subject to certain
operating restrictions and may be required to convert to a bank charter. As of
December 31, 1996, the Association maintained 96.5% of its portfolio assets in
qualified thrift investments and, therefore, met the QTL test.
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in capital requirements before and after a proposed capital
distribution ("Tier 1 Bank") and has not been advised by the OTS that it is in
need of more than normal supervision, could, after prior notice but without
obtaining approval of the OTS, make capital distributions during a calendar year
equal to the greater of (i) 100% of its net earnings to date during the calendar
year plus the amount that would reduce by one-half its "surplus capital ratio"
(the excess capital over its fully phased-in capital requirements) at the
beginning of the calendar year or (ii) 75% of its net income for the previous
four quarters. Any additional capital distributions would require prior
regulatory approval. In the event the Association's capital fell below its
regulatory requirements or the OTS notified it that it was in need of more than
normal supervision, the Association's ability to make capital distributions
could be restricted. In addition, the OTS could prohibit a proposed capital
distribution by any institution, which would otherwise be permitted by the
regulation, if the OTS determines that such distribution would constitute an
unsafe or unsound practice. In December 1994, the OTS proposed amendments to
its capital distribution regulation that would generally authorize the payment
of capital distributions without OTS approval provided that the payment does not
cause the institution to be undercapitalized within the meaning of the prompt
corrective action regulation. However, institutions in a holding company
structure would still have a prior notice requirement. At December 31, 1996,
the Association was a Tier 1 Bank.
37
<PAGE>
Liquidity. The Association is required to maintain an average daily
balance of specified liquid assets equal to a monthly average of not less than a
specified percentage of its net withdrawable deposit accounts plus short-term
borrowings. This liquidity requirement is currently 5% but may be changed from
time to time by the OTS to any amount within the range of 4% to 10% depending
upon economic conditions and the savings flows of member institutions. OTS
regulations also require each member savings institution to maintain an average
daily balance of short-term liquid assets at a specified percentage (currently
1%) of the total of its net withdrawable deposit accounts and borrowings payable
in one year or less. Monetary penalties may be imposed for failure to meet
these liquidity requirements. The Association's liquidity and short-term
liquidity ratios for December 31, 1996 were 25.3% and 8.7% respectively, which
exceeded the applicable requirements. The Association has never been subject to
monetary penalties for failure to meet its liquidity requirements.
Assessments. Savings institutions are required to pay assessments to the
OTS to fund the agency's operations. The general assessments, paid on a semi-
annual basis, are computed upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the Association's latest
quarterly thrift financial report. The assessments paid by the Association for
the fiscal year ended December 31, 1996 totalled $119,000.
Branching. OTS regulations permit nationwide branching by federally
chartered savings institutions to the extent allowed by federal statute. This
permits federal savings institutions to establish interstate networks and to
geographically diversify their loan portfolios and lines of business. The OTS
authority preempts any state law purporting to regulate branching by federal
savings institutions.
Transactions with Related Parties. The Association's authority to engage
in transactions with related parties or "affiliates" (e.g.., any company that
controls or is under common control with an institution, including the Company
and its non-savings institution subsidiaries) is limited by Sections 23A and 23B
of the Federal Reserve Act ("FRA"). Section 23A limits the aggregate amount of
covered transactions with any individual affiliate to 10% of the capital and
surplus of the savings institution. The aggregate amount of covered
transactions with all affiliates is limited to 20% of the savings institution's
capital and surplus. Certain transactions with affiliates are required to be
secured by collateral in an amount and of a type described in Section 23A and
the purchase of low quality assets from affiliates is generally prohibited.
Section 23B generally provides that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the institution as those prevailing at the time for comparable
transactions with non-affiliated companies. In addition, savings institutions
are prohibited from lending to any affiliate that is engaged in activities that
are not permissible for bank holding companies and no savings institution may
purchase the securities of any affiliate other than a subsidiary.
The Association's authority to extend credit to executive officers,
directors and 10% shareholders ("insiders"), as well as entities such persons
control, is governed by Sections 22(g) and 22(h) of the FRA and Regulation O
thereunder. Among other things, such loans are required to be made on terms
substantially the same as those offered to unaffiliated individuals and to not
involve more than the normal risk of repayment. Recent legislation created an
exception for loans made pursuant to a benefit or compensation program that is
widely available to all employees of the institution and does not give
preference to insiders over other employees. Regulation O also places
individual and aggregate limits on the amount of loans the Association may make
to insiders based, in part, on the Association's capital position and requires
certain board approval procedures to be followed.
38
<PAGE>
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring actions
against the institution and all institution-affiliated parties, including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors to institution of receivership, conservatorship or termination of
deposit insurance. Civil penalties cover a wide range of violations and can
amount to $25,000 per day, or even $1 million per day in especially egregious
cases. Under the FDI Act, the FDIC has the authority to recommend to the
Director of the OTS enforcement action to be taken with respect to a particular
savings institution. If action is not taken by the Director, the FDIC has
authority to take such action under certain circumstances. Federal law also
establishes criminal penalties for certain violations.
Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") and a final rule to implement safety and soundness standards
required under the FDI Act. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired. The
standards set forth in the Guidelines address internal controls and information
systems; internal audit system; credit underwriting; loan documentation;
interest rate risk exposure; asset growth; asset quality; earnings and
compensation, fees and benefits. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
Guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard, as required by the FDI
Act. The final rule establishes deadlines for the submission and review of such
safety and soundness compliance plans when such plans are required.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). During fiscal 1996, the Federal
Reserve Board regulations generally required that reserves be maintained against
aggregate transaction accounts as follows: for accounts aggregating $52.0
million or less (subject to adjustment by the Federal Reserve Board) the reserve
requirement is 3%; and for accounts aggregating greater than $52.0 million, the
reserve requirement is $1.6 million plus 10% (subject to adjustment by the
Federal Reserve Board between 8% and 14%) against that portion of total
transaction accounts in excess of $52.0 million. The first $4.3 million of
otherwise reservable balances (subject to adjustments by the Federal Reserve
Board) were exempted from the reserve requirements. The Association is in
compliance with the foregoing requirements. The balances maintained to meet the
reserve requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements imposed by the OTS.
39
<PAGE>
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
General. The Company and the Association report their income on a
consolidated basis and the accrual method of accounting, and are subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Association's reserve for bad debts
discussed below. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Association or the Company. The Association has not been
audited by the IRS since 1988, which covered the tax years up to 1987. For its
1996 taxable year, the Association is subject to a maximum federal income tax
rate of 34%.
Bad Debt Reserves. For fiscal years beginning prior to December 31, 1995,
thrift institutions which qualified under certain definitional tests and other
conditions of the Internal Revenue Code of 1986 (the "Code") were permitted to
use certain favorable provisions to calculate their deductions from taxable
income for annual additions to their bad debt reserve. A reserve could be
established for bad debts on qualifying real property loans (generally secured
by interests in real property improved or to be improved) under (i) the
Percentage of Taxable Income Method (the "PTI Method") or (ii) the Experience
Method. The reserve for nonqualifying loans was computed using the Experience
Method.
The Small Business Job Protection Act of 1996 (the "1996 Act"), which was
enacted on August 20, 1996, requires savings institutions to recapture (i.e.,
take into income) certain portions of their accumulated bad debt reserves. The
1996 Act repeals the reserve method of accounting for bad debts effective for
tax years beginning after 1995. Thrift institutions that would be treated as
small banks are allowed to utilize the Experience Method applicable to such
institutions, while thrift institutions that are treated as large banks (those
generally exceeding $500 million in assets) are required to use only the
specific charge-off method. Thus, the PTI Method of accounting for bad debts is
no longer available for any financial institution.
A thrift institution required to change its method of computing reserves
for bad debts will treat such change as a change in method of accounting,
initiated by the taxpayer, and having been made with the consent of the IRS.
Any Section 481(a) adjustment required to be taken into income with respect to
such change generally will be taken into income ratably over a six-taxable year
period, beginning with the first taxable year beginning after 1995, subject to
the residential loan requirement.
Under the residential loan requirement provision, the recapture required by
the 1996 Act will be suspended for each of two successive taxable years,
beginning with the Association's current taxable year, in which the Association
originates a minimum of certain residential loans based upon the average of the
principal amounts of such loans made by the Association during its six taxable
years preceding its current taxable year.
Under the 1996 Act, for its current and future taxable years, the
Association is not permitted to make additions to its tax bad debt reserves. In
addition, the Association is required to recapture (i.e., take into income) over
a six year period the excess of the balance of its tax bad debt reserves as of
December 31, 1995 other than its supplemental reserve for losses on loans, if
any over the balance of such reserves as of December 31, 1987 (or a lesser
amount since the Association's loan portfolio decreased since December 31,
1987). As a result of such recapture, the Association will not incur any
additional tax
40
<PAGE>
liability. As of December 31, 1996, the Association had deferred tax
liabilities of $765,000 recorded for the tax bad debt reserve. The Association
has a two year exemption to pay this liability and then will pay the $765,000
over the next four years.
Distributions. Under the 1996 Act, if the Association makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Association's unrecaptured tax bad debt reserves (including
the balance of its reserves as of December 31, 1987) to the extent thereof, and
then from the Association's supplemental reserve for losses on loans, to the
extent thereof, and an amount based on the amount distributed (but not in excess
of the amount of such reserves) will be included in the Association's income.
Non-dividend distributions include distributions in excess of the Association's
current and accumulated earnings and profits, as calculated for federal income
tax purposes, distributions in redemption of stock, and distributions in partial
or complete liquidation. Dividends paid out of the Association's current or
accumulated earnings and profits will not be so included in the Association's
income.
The amount of additional taxable income triggered by a non-dividend is an
amount that, when reduced by the tax attributable to the income, is equal to the
amount of the distribution. Thus, if the Association makes a non-dividend
distribution to the Company, approximately one and one-half times the amount of
such distribution (but not in excess of the amount of such reserves) would be
includable in income for federal income tax purposes, assuming a 35% federal
corporate income tax rate. The Association does not intend to pay dividends
that would result in a recapture of any portion of its bad debt reserves.
SAIF Recapitalization Assessment. The Funds Act levied a 65.7-cent fee on
every $100 of thrift deposits held on March 31, 1995. For financial statement
purposes, this assessment was reported as an expense for the quarter ended
September 30, 1996. The Funds Act includes a provision which states that the
amount of any special assessment paid to capitalize SAIF under this legislation
is deductible under Section 162 of the Code in the year of payment.
Corporate Alternative Minimum Tax. The Internal Revenue Code of 1986, as
amended (the "Code") imposes a tax on alternative minimum taxable income
("AMTI") at a rate of 20%. The excess of the bad debt reserve deduction using
the percentage of taxable income method over the deduction that would have been
allowable under the experience method is treated as a preference item for
purposes of computing the AMTI. Only 90% of AMTI can be offset by net operating
loss carryovers of which the Association currently has none. AMTI is increased
by an amount equal to 75% of the amount by which the Association's adjusted
current earnings exceeds its AMTI (determined without regard to this preference
and prior to reduction for net operating losses). In addition, for taxable
years beginning after December 31, 1986 and before January 1, 1996, an
environmental tax of .12% of the excess of AMTI (with certain modifications)
over $2.0 million is imposed on corporations, including the Association, whether
or not an Alternative Minimum Tax ("AMT") is paid. The Association does not
expect to be subject to the AMT, but may be subject to the environmental tax
liability.
Dividends Received Deduction and Other Matters. The Company may exclude
from its income 100% of dividends received from the Association as a member of
the same affiliated group of corporations. The corporate dividends received
deduction is generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Association will not file a
consolidated tax return, except that if the Company or the Association own more
than 20% of the stock of a corporation distributing a dividend then 80% of any
dividends may be deducted.
41
<PAGE>
STATE AND LOCAL TAXATION
Commonwealth of Pennsylvania. The Association is subject to the Mutual
Thrift Institutions Tax of the Commonwealth of Pennsylvania based on the
Association's financial net income determined in accordance with generally
accepted accounting principles with certain adjustments. The tax rate under the
Mutual Thrift Institutions Tax is 11.5%. Interest on state and federal
obligations is excluded from net income. An allocable portion of net interest
expense incurred to carry the obligations is disallowed as a deduction. Three
year carryforwards of losses are allowed.
The Company is subject to the Corporate Net Income Tax and the Capital
Stock Tax of the Commonwealth of Pennsylvania.
Delaware Taxation. As a Delaware holding company not earning income in
Delaware, the Company is exempt from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
IMPACT OF NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128").
SFAS 128 specifies the computation, presentation, and disclosure requirements
for earnings per share and is substantially similar to the standard recently
issued by the International Accounting Standards Committee titled "International
Accounting Standards, Earnings Per Share" ("IAS 33"). The impact of SFAS 128
has not yet been determined by the Company.
ADDITIONAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT.
- -----------------------------------------------------
The following table sets forth certain information regarding the executive
officers of the Company and the Association who are not also directors.
<TABLE>
<CAPTION>
NAME AGE AT 12/31/96 POSITION
- -------------------- ----------------------- ---------------------------------------------------
<S> <C> <C>
Lawrence A. Michael 47 Secretary of the Company and Vice
President and Secretary of the Association
Raymond G. Suchta 48 Chief Financial Officer and Treasurer of the
Company and Vice President and Chief Financial
Officer of the Association
Aaron T. Flaitz, Jr. 46 Vice President and Assistant Secretary of
the Association
Norman A. Litterini 55 Vice President - Lending of the Association
Wayne A. Callen 47 Vice President - Data Processing of the
Association
Eugene G. Hreha 59 Vice President - Marketing of the
Association
Judith A. Stoeckle 56 Vice President - Systems Coordinator of the
Association
</TABLE>
42
<PAGE>
ITEM 2. PROPERTIES.
- -------------------
The Association conducts its business through an administrative and full
service office located in the Borough of Whitehall and twelve other full service
branch offices, all of which are located in the greater Pittsburgh metropolitan
area. Management believes that the Association's current facilities are
adequate to meet the present and immediately foreseeable needs of the
Association and the Company.
<TABLE>
<CAPTION>
NET BOOK VALUE
ORIGINAL OF PROPERTY OR TOTAL
YEAR LEASEHOLD DEPOSITS
LEASED LEASED DATE OF IMPROVEMENTS AT AT
OR OR LEASE DECEMBER 31, DECEMBER 31,
LOCATION OWNED ACQUIRED EXPIRATION 1996 1996
- ------------------------- --------- -------- ---------- ---------------- ------------
EXECUTIVE/HOME OFFICE: (In thousands)
<S> <C> <C> <C> <C> <C>
Whitehall
4750 Clairton Boulevard
Whitehall, PA 15236......... Owned 1983 - $2,487,397 $ 33,940
BRANCH OFFICES:
Homestead
300 East Eighth Avenue
Homestead, PA 15120......... Owned 1945 - 30,000 87,384
McKeesport
225 Fifth Avenue
McKeesport, PA 15134........ Owned 1966 - 225,547 86,083
Clairton
608 Miller Avenue
Clairton, PA 15025.......... Owned 1959 - 51,321 26,800
Forest Hills
2210 Ardmore Boulevard
Forest Hills, PA 15221...... Owned 1974 - 245,317 59,920
Norwin Hills
8775 Norwin Avenue
North Huntingdon, PA 15642.. Leased 1991 2006 4,539 10,105
Elizabeth
548 Rock Run Road
Elizabeth Township, PA
15018........................ Owned 1978 - 225,145 32,147
Munhall
4600 Main Street
Munhall, PA 15120........... Owned 1982 - 503,303 81,711
Caste Village
Baptist & Grove Roads
Whitehall, PA 15236......... Leased 1991 2005 17,202 8,536
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
NET BOOK VALUE
ORIGINAL OF PROPERTY OR TOTAL
YEAR LEASEHOLD DEPOSITS
LEASED LEASED DATE OF IMPROVEMENTS AT AT
OR OR LEASE DECEMBER 31, DECEMBER 31,
LOCATION OWNED ACQUIRED EXPIRATION 1996 1996
- ------------------------- --------- -------- ---------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
White Oak
1527 Lincoln Way
White Oak, PA 15131......... Owned 1993 - 195,105 21,991
Belle Vernon
100 Sara Way
Belle Vernon, PA 15012....... Leased 1996 1999 232,580 942
North Fayette
250 Summit Park Drive
Pittsburgh, PA 15275......... Leased 1996 1999 98,840 7
West Mifflin
2251 Century Drive
West Mifflin, PA 15122...... Leased 1996 2000 98,840 --
---------- --------
Total........................
$4,415,136 $449,566
========== ========
</TABLE>
ITEM 3. LEGAL PROCEEDINGS.
- ---------------------------
The Association is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings, in the aggregate, are believed by management to be
immaterial to the Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- -------------------------------------------------------------
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
- -------------------------------------------------------------------------------
Information relating to the market for Registrant's common equity and
related stockholder matters appears under "Stock Inforrmation" and "Stock Price"
on the inside front cover of the Registrant's 1996 Annual Report to Stockholders
and is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
- ---------------------------------
The above-captioned information appears under "Selected Consolidated
Financial and Other Data" in the Registrant's 1996 Annual Report to Stockholders
on page 4 and is incorporated herein by reference.
44
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -------------------------------------------------------------------------
RESULTS OF OPERATIONS.
---------------------
The above-captioned information appears under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Registrant's
1996 Annual Report to Stockholders on pages 5 through 18 and is incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- -----------------------------------------------------
The Consolidated Financial Statements of GA Financial, Inc. and its
subsidiary, together with the report thereon by Coopers & Lybrand L.L.P. appears
in the Registrant's 1996 Annual Report to Stockholders on pages 19 through 47
and are incorporated herein by reference.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE.
--------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- ------------------------------------------------------------
The information relating to Directors and Executive Officers of the
Registrant is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 30, 1997,
at pages 5 and 6.
ITEM 11. EXECUTIVE COMPENSATION.
- --------------------------------
The information relating to directors' compensation and executives'
compensation is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 30, 1997,
at pages 7 and 8 and pages 12 through 19 (excluding the Executive Compensation
Committee Report and Stock Performance Graph).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- ------------------------------------------------------------------------
The information relating to security ownership of certain beneficial owners
and management is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 30, 1997,
at pages 3, 6 and 7.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- --------------------------------------------------------
The information relating to certain relationships and related transactions
is incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on April 30, 1997, at pages 19 and 20.
45
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
- --------------------------------------------------------------------------
(a) The following documents are filed as a part of this report:
(1) Consolidated Financial Statements of the Company are incorporated by
reference to the following indicated pages of the 1996 Annual Report to
Stockholders.
PAGE
Report of Independent Accountants................................... 19
Consolidated Statements of Financial Condition for the years ended
December 31, 1996 and 1995........................................ 20
Consolidated Statements of Income for the
Years Ended December 31, 1996, 1995 and 1994...................... 21
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1996, 1995 and 1994...................... 22
Consolidated Statements of Shareholders' Equity
for the Years Ended December 31, 1996, 1995 and 1994.............. 23
Notes to Consolidated Financial Statements for the
Years Ended December 31, 1996, 1995 and 1994...................... 24-47
46
<PAGE>
The remaining information appearing in the 1996 Annual Report to Stockholders
is not deemed to be filed as part of this report, except as expressly provided
herein.
(2) All schedules are omitted because they are not required or applicable, or
the required information is shown in the consolidated financial statements
or the notes thereto.
(3) Exhibits
(a) The following exhibits are filed as part of this report.
3.1 Certificate of Incorporation of GA Financial, Inc.*
3.2 Bylaws of GA Financial, Inc.*
4.0 Stock Certificate of GA Financial, Inc.*
10.1 GA Financial Inc. 1996 Stock-Based Incentive Plan **
10.2 Form of Great American Federal Savings and Loan Association
Employee Stock Ownership Plan*
10.3 Form of Employment Agreement between Great American Federal
Savings and Loan Association and John G. Micenko*
10.4 Form of Employment Agreement between GA Financial, Inc. and
John M. Kish and John G. Micenko*
10.5 Form of Change in Control Agreement between Great American Federal
Savings and Loan Association and Andrew R. Getsy, Aaron T. Flaitz,
Jr., Norman A. Litterini, Wayne A. Callen, Eugene G. Hreha and
Judith A. Stoeckle*
10.6 Form of Change in Control Agreement between GA Financial, Inc. and
Lawrence A. Michael and Raymond G. Suchta*
10.7 Form of Great American Federal Savings and Loan Association
Employee Severance Compensation Plan*
13.0 Portions of the 1996 Annual Report to Stockholders (filed
herewith)
21.0 Subsidiary information is incorporated herein by reference to
"Part I - Subsidiaries"
27.0 Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K
None.
__________________________________
* Incorporated herein by reference into this document from the
Exhibits to Form S-1, Registration Statement, filed on December 21,
1995, as amended, Registration No. 33-80715.
** Incorporated herein by reference into this document from the Proxy
Statement for the Special Meeting of Shareholders filed on August
30, 1996.
47
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
GA FINANCIAL, INC.
By: /s/ John M. Kish
---------------------------------
John M. Kish
Chairman of the Board and
Chief Executive Officer
Date: March 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
Name Title Date
- ---- ----- ----
/s/ John M. Kish Chairman of the Board and March 28, 1997
- ---------------------- Chief Executive Officer
John M. Kish (principal executive officer)
/s/ John G. Micenko President and Director
- ----------------------
John G. Micenko
/s/ Raymond G. Suchta Chief Financial Officer March 28, 1997
- ---------------------- and Treasurer
Raymond G. Suchta (principal accounting and
financial officer)
/s/ William G. Boyer Director March 28, 1997
- ----------------------
William G. Boyer
/s/ Thomas E. Bugel Director March 28, 1997
- ----------------------
Thomas E. Bugel
/s/ Darrek J. Hess Director March 28, 1997
- ----------------------
Darrell J. Hess
/s/ Thomas M. Stanton Director March 28, 1997
- ----------------------
Thomas M. Stanton
/s/ David R. Wasik Director March 28, 1997
- ----------------------
David R. Wasik
<PAGE>
Exhibit 13
PORTIONS OF GA FINANCIAL 1996 ANNUAL REPORT
GA Financial, Inc. is a $634 million unitary savings and loan holding company
headquartered in Pittsburgh, Pennsylvania. Through its principal subsidiary,
Great American Federal Savings and Loan Association, the Company operates 13
banking offices in the greater Pittsburgh metropolitan area. Founded in 1914,
the Association is a federally-chartered FDIC-insured stock savings institution.
................................................................................
CORPORATE HEADQUARTERS
GA FINANCIAL, INC.
4750 Clairton Boulevard, Pittsburgh, Pennsylvania 15236-2187
(412) 882-9946 . (412) 882-8580 FAX
ANNUAL MEETING
The annual meeting of shareholders will be held at 10:00 a.m., on Wednesday,
April 30, 1997 at The Bradley House, 5239 Brownsville Road, Pittsburgh, PA
15236. Shareholders are encouraged to attend.
ANNUAL REPORT ON FORM 10-K
A copy of GA Financial, Inc.'s annual report on Form 10-K without exhibits is
available without charge to shareholders upon written request. Requests should
be sent to Mr. Raymond G. Suchta, Chief Financial Officer and Treasurer.
STOCK TRANSFER/REGISTRAR
Questions regarding the transfer of stock, lost certificates, address changes,
account consolidation and cash dividends should be addressed to Registrar and
Transfer Company, 10 Commerce Drive, Cranford, New Jersey 07016 (800) 866-1340.
Allow three weeks for a reply.
INQUIRIES
Security analysts, retail brokers and shareholders seeking financial information
should contact Mr. Raymond G. Suchta, Chief Financial Officer and Treasurer.
Requests for written materials can be forwarded to the attention of Ms. Susan
Morris, Investor Relations Department.
DIVIDEND REINVESTMENT PLAN
GA Financial, Inc. maintains a Dividend Reinvestment/Cash Purchase Plan for
registered holders of its common stock. A brochure describing the Plan and an
application to participate may be obtained by contacting Ms. Susan Morris,
Investor Relations Department.
STOCK INFORMATION
GA Financial, Inc. is traded on the American Stock Exchange under the ticker
symbol "GAF." As of March 4, 1997, GA Financial, Inc. had 8,455,000 shares of
common stock outstanding and approximately 1,905 shareholders of record.
<TABLE>
<CAPTION>
----------------------------------------------
STOCK PRICE QUARTER HIGH LOW CASH DIVIDEND
----------------------------------------------
<S> <C> <C> <C> <C>
The following table illustrates
GA Financial, Inc.'s high and QI* 11-3/4 11 --
low closing stock price on the QII 11-1/2 10-5/8 --
American Stock Exchange and QIII 13-3/8 10-1/4 $0.05
the cash dividend per share QIV 15-5/8 12-5/4 $0.08
paid during 1996: ----------------------------------------------
*GA Financial common stock began trading
on March 26, 1996.
</TABLE>
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
Dollar amounts in thousands, except share data
<TABLE>
<CAPTION>
AT DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets $634,048 $521,398 $467,655 $486,278 $477,133
Investment securities available for sale 119,347 71,060 20,187 -- --
Investment securities held to maturity -- -- 104,304 204,757 171,799
Mortgage-related securities available for sale 244,482 168,779 49,108 -- --
Mortgage-backed and mortgage-related
securities held to maturity -- -- 122,779 110,205 111,457
Loans held for sale 15,383 -- -- -- 3,331
Loans receivable, net 216,376 180,275 153,573 146,023 163,501
Borrowed funds 51,525 -- -- -- --
Total equity/2/ $122,404 $ 48,230 $ 40,892 $ 39,196 $ 33,884
SELECTED OPERATING DATA:
Interest income $ 40,350 $ 32,833 $ 30,403 $ 32,593 $ 36,321
Interest expense 17,545 16,543 14,769 15,494 20,170
- -------------------------------------------------------------------------------------------------------------------
Net interest income before provision
for loan losses 22,805 16,290 15,634 17,099 16,151
Provision for loan losses 210 -- -- 180 426
- -------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 22,595 16,290 15,634 16,919 15,725
Other income 3,460 422 1,502 4,122 3,783
Non-interest expense 16,972 12,280 11,982 11,896 11,098
- -------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes and
cumulative effect of change in accounting method 9,083 4,432 5,154 9,145 8,410
Provision for income taxes 3,481 1,612 1,894 3,519 3,142
Cumulative effect of change in acounting method -- -- -- 314 --
- -------------------------------------------------------------------------------------------------------------------
Net income $ 5,602 $ 2,820 $ 3,260 $ 5,312 $ 5,268
===================================================================================================================
SELECTED FINANCIAL RATIOS AND OTHER DATA:
PERFORMANCE RATIOS:
Return on average assets 1.00% 0.59% 0.67% 1.09% 1.12%
Return on average equity 5.21 6.27 8.00 14.36 16.59
Average equity to average assets 19.22 9.49 8.38 7.61 6.75
Equity to total assets at end of period 19.31 9.25 8.74 8.06 7.10
Average interest rate spread 3.27 3.08 2.98 3.35 3.20
Net-interest margin 4.20 3.54 3.33 3.64 3.56
Average interest-earning assets to average
interest-bearing liabilities 129.07 112.88 111.16 109.12 108.05
Non-interest expense to average assets 2.54/1/ 2.59 2.47 2.45 2.36
Efficiency ratio 58.35 68.21 69.92 56.54 56.89
Cash dividends paid per share 0.18 -- -- -- --
Dividend payout ratio 18.84 -- -- -- --
REGULATORY CAPITAL RATIOS:
Tangible capital 19.13 8.77 9.01 8.05 7.10
Core capital 19.13 8.77 9.01 8.05 7.10
Risk-based capital 55.88 18.64 23.36 17.09 15.48
ASSET QUALITY RATIOS:
Non-performing loans as a percent
of gross loans receivable 0.38 0.81 0.81 0.90 1.89
Non-performing assets as a percent of total assets 0.14 0.28 0.27 0.27 0.65
Allowance for loan losses as a percent
of gross loans receivable 0.44 0.45 0.55 0.58 0.46
Allowance for loan losses as a percent
of non-performing loans 115% 56.30% 67.73% 63.70% 24.19%
NUMBER OF FULL-SERVICE CUSTOMER FACILITIES 13 10 10 10 9
</TABLE>
/1/Excludes one-time SAIF assessment of $2.8 million.
/2/The Company completed its conversion to stock company on March 25, 1996.
4 GA Financial, Inc. Annual Report 1996
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
- -------
GA Financial, Inc. (the "Company") was incorporated on December 14, 1995, and is
the holding company for Great American Federal Savings and Loan Association (the
"Association"). On March 25, 1996 the Association completed its conversion from
a federally chartered mutual savings and loan association to a stock form of
ownership, while simultaneously, the Company issued 8,900,000 shares of common
stock, utilizing a portion of the net proceeds to acquire all of the outstanding
stock of the Association. Currently, other than investing in various
securities, the Company does not directly transact any material business other
than through the Association. Accordingly, the discussion herein addresses the
operations of the Company as they are conducted through the Association.
The Company conducts business primarily through its ownership of the
Association which operates its administrative/branch office in Whitehall,
Pennsylvania and nine other branch offices in Allegheny County and two offices
in Westmoreland County, both of which are located in southwestern Pennsylvania.
The Company's primary business is attracting retail deposits from the general
public and investing those deposits and other borrowed funds in loans, mortgage
related securities, U.S. government and federal agency securities and other
investments. The Company's revenues are derived principally from interest on
mortgage loans, mortgage-related securities and to a lesser extent, interest and
dividends on its investment portfolio. The Company also generates non-interest
income from service fees and from the sales of data processing services from its
data processing division. The Company's primary sources of funds are retail
deposits, principal and interest repayments on loans, mortgage-related
securities and investments, Federal Home Loan Bank of Pittsburgh (FHLB) advances
and sales of loans and investments.
The Company's results of operations are dependent primarily on net interest
income, which is the difference between the interest income earned on interest-
earning assets and the interest expense incurred on interest-bearing
liabilities. Non-interest income is the result of service fees, sales of data
processing services and gains on the sale of loans and investments. The
Company's operating expenses consists primarily of employee compensation,
occupancy expenses, federal deposit insurance premiums, data processing expenses
and other general and administrative expenses. The Company's results of
operations are also significantly affected by general economic and competitive
conditions, particularly changes in market interest rates, government policies
and actions of regulatory agencies. The Company had no operations prior to March
25, 1996 and accordingly, the results of operations and other data discussed
below occurring prior to that date reflect only those of the Association and its
subsidiaries.
MANAGEMENT OF INTEREST RATE RISK
- --------------------------------
The principal objective of the Company's interest rate risk management function
is to evaluate the interest rate risk included in certain balance sheet
accounts, determine the level of risk appropriate given the Company's business
strategy, operating environment, capital and liquidity requirements and
performance objectives, and manage the risk consistent with the Board of
Directors approved guidelines. Through such management, the Company seeks to
reduce the vulnerability of its operations to changes in interest rates. The
Company monitors its interest rate risk as such risk relates to its operating
strategies. The Company's Board of Directors has established an Asset/Liability
Management committee, which is responsible for reviewing its asset/liability
policies and interest rate risk position, and which meets on a quarterly basis.
The Asset/Liability Management committee reviews trends in interest rates, the
financial position of the Company, the Company's actual performance to budgeted
performance, the Company's interest rate position as measured by changes in its
net income and net portfolio value under certain interest rate scenarios and the
projected impact of such interest rate scenarios on its earnings and capital.
The extent of the movement of interest rates is an uncertainty that could have a
negative impact on the earnings of the Company.
In recent years, the Company has utilized the following strategies to
manage interest rate risk: (1) purchasing adjustable interest rate mortgage-
backed and mortgage-related securities; (2) investing in short-term fixed
GA Financial, Inc. Annual Report 1996 5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
rate corporate and government agency bonds or in such types of bonds with
adjustable interest rates, and; (3) attempting to reduce the overall interest
rate sensitivity of liabilities by emphasizing longer term deposits. The Company
has not emphasized the origination of adjustable-rate mortgages due to customer
preference for fixed-rate loans in its primary market area and competitive
pricing of such loans by other lenders in its market area. The Company has
attempted to address the lack of demand for adjustable-rate mortgage loans by
emphasizing the purchase of adjustable-rate mortgage-related securities. To
manage the interest rate risk of the Company, the Board of Directors has also
established parameters relating to the types of securities in which the Company
may invest and parameters relating to the types of deposits which may be offered
by the Company and rates which may be paid on such deposits. The primary tool
utilized by the Company for its interest rate risk management is a modeling
program which estimates the effect various market interest rate scenarios will
have on the Company's net portfolio value, interest income, net income and
capital position. Such interest rate scenarios range from an increase in market
interest rate of 400 basis points to a decrease in market interest rates of 400
basis points. In recent years the Company has attempted to shorten the
maturities of its interest-earning assets by increasing its investment in
shorter-term investments and adjustable-rate mortgage-related securities in
order to better position the Company for an increase in market rates.
NET PORTFOLIO VALUE
- -------------------
The Company's interest rate sensitivity is monitored by management through the
use of a model which internally generates estimates of the change in the
Company's net portfolio value ("NPV") over a range of interest rate scenarios.
NPV is the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The NPV ratio, under any interest rate scenario,
is defined as the NPV in that scenario divided by the market value of assets in
that same scenario. The Office of Thrift Supervision (OTS) also produces a
similar analysis using its own model, based on data submitted on the Company's
quarterly Thrift Financial Reports, the results of which may vary from the
Company's internal model primarily due to differences in assumptions utilized
between the Company's internal model and the OTS model, including estimated loan
and securities prepayment rates, reinvestment rates, and deposit decay rates.
Management of the Company believes the assumptions utilized do not materially
differ from those utilized by OTS and more closely approximate the historical
experience of the Company. The Company's NPV analysis assumes that all fixed-
rate mortgage loans and securities will amortize according to the amortization
rates experienced by the Company over the last 33 quarters, consumer loans will
amortize over 43 months, demand deposits will decay in two months, money market
accounts will decay at a rate of 40% per year for two years and 20% in the third
year, and passbook accounts will decay at a rate of 10% per year. Using these
assumptions, during periods of rising interest rates the value of the monetary
assets and liabilities decreases. Conversely, during periods of falling
interest rates the value of monetary assets and liabilities increases. It
should be noted, however, that rising or falling interest rates will have an
impact on the prepayments of mortgage loans and the prepayments of principal
from mortgage-backed or mortgage-related securities and that these changes in
prepayments will affect the Company's disposition to changes in interest rates.
The amount of change in value of specific assets and liabilities in a rising
interest rate environment may not be necessarily the same as the amount of
change experienced in a falling interest rate environment. The following table
indicated the Company's NPV as of December 31, 1996, as calculated by the
Company, and indicates the structure of the Company's assets and liabilities
would result in a decline in the Company's NPV in a rising interest rate
environment. Specifically, the table indicates that, as of December 31, 1996,
the Company's NPV was $143.5 million (or 23% of the market value of total
assets) and that, based upon the assumptions utilized by the Company, an
immediate increase in market interest rates of 400 basis points would result in
a $39.0 million, or 27% decrease in the Company's NPV and an immediate decrease
in market rates of 400 basis points would result in a $47.0 million, or 33%
increase in NPV.
6 GA Financial, Inc. Annual Report 1996
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
(Dollars in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CHANGE IN INTEREST NPV AS A % OF PORTFOLIO
RATES IN BASIS POINTS NET PORTFOLIO VALUE VALUE OF ASSETS
(RATE SHOCK) AMOUNT $ CHANGE % CHANGE NPV RATIO % CHANGE
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
+400 bp $104,143 ($39,388) -27% 18.5% -18%
+300 bp 112,115 (31,416) -22% 19.4% -14%
+200 bp 122,352 (21,179) -15% 20.5% -9%
+100 bp 129,895 (13,636) -10% 21.2% -6%
Static 143,531 0 0% 22.6% 0%
-100 bp 154,051 10,520 7% 23.5% 4%
-200 bp 164,893 21,362 15% 24.4% 8%
-300 bp 176,854 33,323 23% 25.3% 12%
-400 bp 190,716 47,185 33% 26.4% 17%
</TABLE>
Certain shortcomings are inherent in the methodology used in the above
interest risk measurements. Modeling changes in the NPV require the making of
certain assumptions which may or may not reflect the manner in which actual
yields and costs respond to changes in market interest rates. In this regard,
the NPV model presented assumes that the composition of the Company's interest
rate sensitive assets and liabilities existing at the beginning of a period
remains constant over the period being measured and also assumes that a
particular change in interest rates is reflected uniformly across the yield
curve regardless of the duration to maturity or repricing of specific assets and
liabilities. Accordingly, although the NPV measurements and net interest income
models provide an indication of the Company's interest rate risk exposure at a
particular point in time, such measurements are not intended to and do not
provide a precise forecast of the effect of changes in market interest rates on
the Company's net interest income and will differ from actual results.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1996 AND DECEMBER 31, 1995
- ----------------------------------------------------------------------------
The Company's total assets of $634.0 million at December 31, 1996 are reflective
of an increase of $112.7 million or 21.6% compared to total assets at December
31, 1995. Changes in the components of assets are discussed herein.
Cash and cash equivalents increased $7.1 million or 41.5% to $24.3 million
at December 31, 1996 from December 31, 1995 due to the purchase of savings
deposits in December, 1996. The increase in assets primarily reflects an
increase in investment and mortgage-related securities and purchased loans which
were primarily funded with net conversion proceeds of $86.4 million and deposit
purchases of $25.4 million.
Investment securities were $119.3 million at December 31, 1996, an increase
of $48.3 million or 68.0% over the balance at December 31, 1995. This was
primarily a result of an increase in government securities. There were no
security sales made but not yet settled at December 31, 1996. At December 31,
1995 $73.1 million of securities were purchased but not yet settled. All of
those transactions were settled in January, 1996.
Mortgage-related securities totaled $244.5 million at December 31, 1996, an
increase of $75.7 million or 44.9% over balances at December 31, 1995 due to
purchases of these types of securities. Proceeds from the stock conversion,
deposit purchases and borrowings provided the funds used to purchase securities.
(See Note 4.)
Net loans receivable at December 31, 1996 were $216.4 million, an increase
of $36.1 million or 20.0% compared to net loan balances at December 31, 1995 due
to origination of mortgage loans and purchases of mortgage loans. Mortgage loan
purchases of $71.2 million were made in 1996 as opposed to $24.2 million in
1995, to offset low mortgage demand in the Company's primary lending areas.
GA Financial, Inc. Annual Report 1996 7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
The following table presents details of the Company's loan portfolio:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) DECEMBER 31, 1996 DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Mortgages:
Residential and multi-family $184,961 $129,717
Commercial 5,053 3,290
Construction and development 3,545 5,891
Consumer loans:
Home equity 22,153 20,151
Education loans, not held for sale -- 20,766
Other:
Loans on savings accounts 2,062 2,159
Unsecured personal loans and other 1,698 1,449
- --------------------------------------------------------------------------------
Total $219,472 $183,423
Less:
Undisbursed mortgage loans 684 1,363
Deferred loan fees 1,381 963
Allowance for losses 1,031 822
- --------------------------------------------------------------------------------
Net loans $216,376 $180,275
- --------------------------------------------------------------------------------
</TABLE>
NON-PERFORMING LOANS. Non-performing loans (all loans 90 days or more overdue)
were $896,000 and $1.5 million at December 31, 1996 and December 31, 1995,
respectively, which represented .38% and .81% of the Company's total loans,
respectively. As a percentage of total assets, the Company's total non-
performing assets amounted to .14% at December 31, 1996 and .28% at December 31,
1995. The foregone interest income on non-performing loans was $37,000 in 1996
and $59,000 in 1995.
Education loans available for sale at December 31, 1996 totaled $15.4
million, a 100% increase from December 31, 1995 when no education loans were
classified as available for sale. The Company has decided to sell education
loans when those loans reach repayment status.
Due to the increase in the Company's assets and as a result of borrowings,
the Company was eligible to own more Federal Home Loan Bank stock. At December
31, 1996 the Company owned $2.3 million of FHLB stock, an increase of $444,000
or 23.6% from December 31, 1995.
Accrued interest receivable at December 31, 1996 was $4.3 million, an
increase of $2.0 million or 92.1% compared to December 31, 1995. This increase
is the result of the increase in loans and investment balances.
The net change in all other assets (net property and equipment, and prepaid
expenses) was 9.0% or an increase of $627,000 to $7.6 million at December 31,
1996. This increase was due primarily to the premium paid for branch deposits.
Non-interest bearing deposits were $19.7 million at December 31, 1996, an
increase of $2.2 million or 12.7% over balances at December 31, 1995. Interest
bearing deposits at December 31, 1996 were $429.9 million, an increase of $22.5
million or 5.5% compared to December 31, 1995. This increase was due to the
purchase of deposits of $25.4 million from First Home Savings and Loan
Association. This transaction closed on December 6, 1996. The Company paid a
premium of 5% for the deposits and is amortizing the premium over seven years,
using the straight line method, which is in accordance with generally accepted
accounting principles.
8 GA Financial, Inc. Annual Report 1996
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
Borrowed funds at December 31, 1996 totaled $51.3 million, a 100% increase
from December 31, 1995. These funds bear interest at various rates and mature at
various dates. Proceeds from these borrowings were used to purchase investment
securities and mortgage-related securities.
The following schedule presents details of the Company's outstanding debt
at December 31, 1996.
<TABLE>
<CAPTION>
WEIGHTED
(DOLLARS IN THOUSANDS) AMOUNT AVERAGE RATE
- ----------------------------------------------------
<S> <C> <C>
1997 $37,525 5.56%
1999 5,000 6.25
2000 5,000 6.44
2001 4,000 6.10
- ----------------------------------------------------
Total $51,325 5.75%
</TABLE>
At December 31, 1996 the Company recorded purchases of securities that had
not yet settled of $5.8 million. This was a decrease of $36.1 million or
(86.1%). All securities purchased but not settled at December 31, 1996 were
settled in January, 1997.
All other liabilities (escrowed funds, accounts payable and accrued
interest payable) totaled $4.7 million, a decrease of $1.6 million, or (25.6%),
from the balances recorded at December 31, 1995. This reduction was due
primarily to a reduction in deferred income taxes.
Total shareholders' equity increased $74.2 million or 154% to $122.4
million at December 31, 1996. Of that increase, $5.6 million was net income for
the year ended December 31, 1996. Other increases to shareholders' equity
included net proceeds from the stock conversion totaling $86.4 million,
allocated ESOP shares totaling $622,000 and allocated stock compensation awards
totaling $133,000. Reductions to shareholders' equity included purchases of
treasury stock of $6.8 million, purchases of stock compensation plan shares of
$737,000 and the payment of cash dividends of $1.1 million. Unrealized gains net
of deferred taxes on the securities available for sale portfolio decreased from
$3.0 million at December 31, 1995 to $88,000 at December 31, 1996, a decrease of
$2.9 million or (97.0%) due primarily to a decline in market prices of
investments available for sale.
AVERAGE BALANCE SHEET. The following table sets forth certain information
relating to the Company's average balance sheet and reflects the average yield
on assets and average cost of liabilities for the periods indicated. Such yields
and costs are derived by dividing income or expense by the average balance of
assets or liabilities, respectively, for the periods presented. Average balances
are daily averages during the periods.
GA Financial, Inc. Annual Report 1996 9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
Dollar amounts in thousands, except share data
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DEC. 31, 1996 YEAR ENDED DEC. 31, 1995 YEAR ENDED DEC. 31, 1994
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Interest-earning deposits
short-term investments $ 13,124 $ 810 0.22% $ 7,518 $ 471 6.26% $ 5,098 $ 327 0.41%
Investment securities, net/1/ 106,622 6,819 6.40 127,915 6,799 5.32 176,729 8,687 4.92
Loans receivable, net/1//2/ 214,317 18,025 8.41 166,414 14,000 8.41 146,469 12,037 8.22
Mortgage-related
securities, net/1/ 206,377 14,551 7.05 157,060 11,440 7.28 139,718 9,246 6.62
FHLB stock 2,237 139 6.21 1,839 123 6.69 1,722 106 6.16
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets 542,677 40,350 7.44% 460,746 32,833 7.13% 469,736 30,403 6.47%
Non-interest earning assets 17,077 -- -- 13,556 -- -- 16,205 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 559,754 -- -- $ 474,302 -- -- $ 485,941 -- --
====================================================================================================================================
Liabilities and equity:
Interest-earning liabilities:
Money market savings
accounts $ 16,397 $ 410 2.50% $ 18,496 $ 465 2.51% $ 22,721 $ 568 2.50%
Passbook accounts 162,636 4,893 3.01 170,151 5,104 3.00 199,779 6,000 3.00
NOW accounts 24,475 496 2.03 23,414 464 1.98 22,822 503 2.20
Certificate accounts 201,399 10,880 5.40 193,885 10,460 5.39 173,996 7,565 4.35
Total 404,907 16,679 4.12 405,946 16,493 4.06 419,318 14,636 3.49
Borrowings 13,518 823 6.09 125 8 6.39 1,098 91 4.75
Other 2,038 43 2.11 2,187 42 1.92 2,162 42 1.94
Total interest-bearing
liabilities 420,463 17,545 4.17 408,258 16,543 4.05 422,578 14,769 3.49
Non-interest bearing
liabilities 31,747 -- -- 21,121 -- -- 22,624 -- --
Equity 107,544 -- -- 44,923 -- -- 40,739 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities
and equity $ 559,754 -- -- $ 474,302 -- -- $ 485,941 -- --
====================================================================================================================================
Net earning assets $ 122,214 -- -- $ 52,488 -- -- $ 47,158 -- --
Net interest income -- $ 22,805 -- -- $ 16,290 -- -- $ 15,634 --
Net interest rate spread/3/ -- -- 3.27% -- -- 3.08% -- -- 2.98%
Net interest margin/4/ -- -- 4.20% -- -- 3.54% -- -- 3.33%
Ratio of interest-earning
assets to interest-bearing
liabilities -- -- 129.07% -- -- 112.88% -- -- 111.16%
</TABLE>
/1/ Includes related assets available for sale and unamortized discounts and
premiums
/2/ Amount is net of deferred loan fees, undisbursed loan funds, discounts and
premiums and estimated loan loss allowances and includes loans held for sale
and non-performing loans.
/3/ Net interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities
/4/ Net interest margin represents net interest income divided by interest-
earning assets
10 GA Financial, Inc. Annual Report 1996
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
COMPARISON OF THE CONSOLIDATED RESULTS OF OPERATION FOR THE YEARS ENDED
- -----------------------------------------------------------------------
DECEMBER 31, 1996 AND 1995
- --------------------------
NET INCOME. Net income for the year ended December 31, 1996 was $5.6 million, an
increase of $2.8 million or 99% from net income recorded for the year ended
December 31, 1995. Changes in the components of net income are discussed herein.
INTEREST INCOME. Interest income totaled $40.4 million for the year ended
December 31, 1996, an increase of $7.5 million or 22.9% over the amount recorded
in 1995. The average balances of interest-earning assets for 1996 was $542.7
million, an increase of $81.9 million or 17.8%, compared to the average balance
of interest-earning assets at December 31, 1995. Total weighted average yield on
interest-earning assets for 1996 was 7.44% as compared to 7.13% for 1995.
Interest on loans for the year ended December 31, 1996 was $18.0 million at a
weighted average yield of 8.41%, an increase of $4.0 million or 28.8%, compared
to $14.0 million at a weighted average yield of 8.41% for 1995. This increase
was the result of an increase in the average balances of loans. The Company
purchased $71.2 million in mortgage loans during 1996 versus $24.2 million in
1995. The yield on loans was the same for 1996 and 1995. Interest on mortgage-
related securities for 1996 was $14.6 million at an average weighted yield of
7.05%. This was an increase of $3.1 million or 27.2% compared to interest income
on mortgage-related securities during 1995 of $11.4 million at a weighted
average yield of 7.28%. The increase was due to an increase in the balances of
the securities since a portion of the conversion proceeds were used to purchase
securities. The average yield on these securities fell from 1995 to 1996.
Interest income on investment securities for 1996 was $6.8 million at an average
yield of 6.40%. This was an increase of $20,000 or .3%. The increase was due to
an increase in the net yield on the portfolio as the average balances fell $21.3
million or (16.6%) from 1995 to 1996. Interest income on interest earning
deposit accounts was $816,000 at an average yield of 6.22% for 1996, an increase
of $345,000 or 73.2% compared to the $471,000 at an average yield of 6.26%
recorded for 1995. The increase was due to an increase in the average balances
on hand during the year. The average yield decreased during the year.
INTEREST EXPENSE. Interest expense for the year ended December 31, 1996 was
$17.5 million at an average cost of funds of 4.17%, an increase of $1.0 million
or 6.1%, compared to the interest expense of $16.5 million at an average cost of
funds of 4.05% for the year ended December 31, 1995. Average balances of
interest-bearing liabilities was $420.5 million for 1996 compared to $408.2
million for 1995. Interest expense on money-market deposits for 1996 was
$410,000 at an average cost of 2.50% compared to interest expense of $465,000 at
an average cost of 2.51% recorded on these deposits for 1995. The decrease in
interest expense was due to a reduction in balances of these accounts. Average
balances of money market accounts for 1996 was $16.4 million compared to average
balances of $18.5 million for 1995. The cost of funds for these deposits was
substantially the same for each year. Interest expense on passbook accounts for
1996 was $4.9 million at an average cost of 3.01%, a decrease of $211,000 or
(4%) compared to interest expense on passbook accounts of $5.1 million at an
average cost of 3% for 1995. Average balances on these types of deposits fell to
$162.6 million for 1996 from $170.2 million for 1995, a decrease of $7.5 million
or (4.4%). For certificates of deposit interest expense was $10.9 million at an
average cost of 5.40% for 1996, an increase of $420,000 or 4.0% compared to
interest expense of $10.5 million at an average cost of 5.39% recorded for 1995.
Average balances in certificates of deposit increased to $201.4 million for 1996
from $193.9 million for 1995, an increase of $7.5 million or 3.9%. Average cost
of funds for these deposits was 5.40% for 1996 as compared to an average cost of
5.39% for 1995. Interest on checking accounts for 1996 was $496,000 at an
average cost of 2.03%, an increase of $32,000 or 6.9%, compared to the interest
expense of $464,000 at an average cost of 1.98% recorded for 1995. The increase
in interest expense on checking accounts was due to an increase in the average
balances of these types of accounts. Average balances for checking accounts was
$24.5 million for 1996, an increase of $1.1 million or 4.5% compared to average
balances of $23.4 million for 1995. Average cost of funds for checking accounts
was approximately the same for both years. There was no significant change in
interest expense paid on escrow accounts from 1995 to 1996. Interest expense on
borrowed funds for 1996 was $823,000 at an average cost of 6.09% on average
balances of $13.4 million, compared to $8,000 or an average cost of borrowings
for 1995 of 6.39%. The increase in interest expense was due to an increase of
GA Financial, Inc. Annual Report 1996 11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
$13.3 million in the average balances of borrowings or greater than 100%
compared to average balances of borrowings of $125,000 for 1995. The Company
increased the use of borrowed funds significantly during 1996 to fund the
purchase of securities.
RATE/VOLUME ANALYSIS. The following table presents the extent to which changes
in interest rates and changes in the volume of interest-earning assets and
interest-bearing liabilities have affected the Company's interest income and
interest expense during the period indicated. Information is provided with
respect to: (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume), and; (iii) the net change. The changes
attributable to the combined impact of volume and rate have been allocated to
changes due to rate.
<TABLE>
<CAPTION>
YEAR ENDED DEC. 31, 1996
COMPARED TO THE
YEAR ENDED DEC. 31, 1995
- ------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) VOLUME RATE NET CHANGE
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Interest-earning assets:
Interest-earning deposits and
short-term investments $ 351 $ (6) $ 345
Investments securities, net (1,132) 1,152 20
Loans receivable, net 4,030 (5) 4,025
Mortgage-related securities 3,592 (481) 3,111
FHLB stock 27 (11) 16
- ------------------------------------------------------------------------
Total interest-earning assets 6,868 649 7,517
========================================================================
Interest-bearing liabilities:
Money market savings accounts (53) (2) (55)
Passbook savings accounts (225) 14 (211)
NOW accounts 21 11 32
Certificate accounts 405 15 420
Borrowings 861 (46) 815
Other (3) 4 1
- ------------------------------------------------------------------------
Total interest-bearing liabilities 1,006 (4) 1,002
- ------------------------------------------------------------------------
Net change in net interest income $ 5,862 $ 653 $ 6,515
========================================================================
</TABLE>
NET INTEREST INCOME. Net interest income after the loan loss provision for 1996
was $22.6 million, an increase of $6.3 million or 39% compared to net interest
income of $16.3 million recorded for 1995.
PROVISION FOR LOAN LOSSES. The Company made no provision for loan losses for
1995. The loan loss reserve for the year ended December 31, 1995 was deemed
adequate. During 1996 the Company provided $210,000 to the loan loss provision
due to the increase in the residential mortgage loan portfolio. The allowance
for loan losses is maintained at an amount management considers adequate to
cover estimated losses on loans receivable which are deemed probable and
estimable based on information currently known to management. While management
believes the Association's allowance for loan losses is sufficient to cover
losses inherent in its loan portfolio at this time, no assurances can be given
that the Company's level of allowance for loan losses will be sufficient to
cover future loan losses incurred by the Company, or that future adjustments to
the allowance for loan losses will not be necessary if economic and other
conditions differ substantially from the
12 GA Financial, Inc. Annual Report 1996
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
economic and other conditions analyzed by management to determine the current
level of the allowance for loan losses. The following table sets forth the
breakdown of the allowance for loan losses for the year ended December 31, 1996:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) AT DECEMBER 31, 1996 AT DECEMBER 31, 1995
- ----------------------------------------------------------------------------------------------------------------
PERCENT PERCENT
OF LOANS OF LOANS
PERCENT OF IN EACH PERCENT OF IN EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family $ 706 68.48% 75.89% $429 52.19% 66.79%
Multi-family 117 11.35 2.87 103 12.53 3.93
Commercial 15 1.45 2.15 16 1.95 1.79
Construction and development 27 2.62 1.51 45 5.47 3.21
Consumer loans:
Home equity 145 14.06 9.43 118 14.35 10.99
Education -- -- 6.55 89 10.83 11.32
Other loans:
Unsecured personal loans 21 2.04 0.65 22 2.68 0.68
Loans on savings accounts -- -- 0.88 -- -- 1.18
Other loans -- -- 0.07 -- -- 0.11
- ----------------------------------------------------------------------------------------------------------------
Total valuation allowance $ 1,031 100.00% 100.00% $822 100.00% 100.00%
================================================================================================================
</TABLE>
NON-INTEREST INCOME. Non-interest income consists of service fees, gains
(losses) on the sale of loans and investments, fees from the sale of data
processing services and other miscellaneous items. For the year ended December
31, 1996 non-interest income totaled $3.5 million, an increase of $3.0 million
OR greater than 100%, compared to the $422,000 recorded for the same period in
1995. Service fees for 1996 totaled $897,000 an increase of $96,000, or an
increase of 12.0%, compared to the $801,000 recorded for 1995. For 1996 gains on
the sales of securities was $630,000 an increase of $1.9 million or greater than
100% compared to the loss of $1.3 million recorded for 1995. During 1995 the
Company realigned its securities portfolio and incurred losses of $1.7 million.
No such realignment occurred during 1996. The Company sold education loans at a
gain of $311,000 during 1996. No such sales took place during 1995. During 1996
the Company experienced a one-time gain of $769,000 which resulted from the
restructuring of its defined benefit pension plan. Income from the sale of data
processing services totaled $809,000 in 1996. This was an increase of $11,000 or
1.4% over the $798,000 recorded in 1995. Other non-interest income for 1996
totaled $44,000, a decrease of $70,000 or (61.4%) from the $114,000 recorded in
1995.
NON-INTEREST EXPENSE. Total non-interest expense for the year ended December 31,
1996 was $17.0 million, an increase of $4.7 million over the $12.3 million
recorded for 1995. Compensation and benefit costs for 1996 were $6.7 million, an
increase of $578,000 or 9.0% from the $6.1 million recorded for 1995. The
company raised salaries approximately 3% during 1996, incurred additional
increases as a result of the opening of two branch offices and experienced
increases in benefit costs due to the ESOP and stock awards. Occupancy costs for
1996 were $1.6 million, an increase of $19,000 or 1.2% over the $1.5 million
recorded for 1995. Federal deposit insurance premiums for 1996 were $3.7
million, an increase of $2.7 million or greater than 100% over the $970,000
recorded for 1995. This increase was the result of the one-time special
assessment of $2.8 million levied by the FDIC. This recapitalization was
authorized by legislation passed in September, 1996. Future deposit insurance
premiums will be significantly lower because of this one-time assessment. The
approximate future annual cost is estimated at $288,000. Excluding a non-
recurring charge to recapitalize the
GA Financial, Inc. Annual Report 1996 13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
Savings Association Insurance Fund, net income would have been $7.4 million or
$0.92 per share. Data processing expenses for 1996 were $1.5 million, a decrease
of $23,000 or (1.5%) from the $1.5 million recorded during 1995. The Company
operates its own in-house data processing center which also provides data
processing services to other financial institutions. As a result of the stock
conversion the Company is now subject to stock taxes levied by the states of
Pennsylvania and Delaware. These taxes totaled $795,000 for 1996. No such taxes
were due in 1995 when the Company operated as a mutual savings and loan
association. Other non-interest expenses for 1996 were $2.7 million, an increase
of $611,000 or 28.9% over the $2.1 million recorded for 1995, due primarily to
marketing costs, legal and professional fees and other expenses. Operations as a
public company has influenced the increases in these costs.
INCOME TAX EXPENSE. Income taxes of $3.5 million were accrued for the year ended
December 31, 1996. This is an effective tax rate of 38%. Income taxes of $1.6
million were recorded in 1995, an effective tax rate of 36%. The Company is no
longer permitted to use the percentage of income bad debt deduction when filing
federal income tax returns. The mandated use of writing off as bad debts only
those actually incurred has raised the Company's effective tax rate. The repeal
of the special thrift bad debt deduction was signed into law under the Small
Business Job Protection Act of 1996.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's primary sources of funds are deposits, principal and interest
payments on loans and mortgage-related securities, proceeds from maturing
investment securities, advances from the Federal Home Loan Bank of Pittsburgh
(FHLB), and other borrowed funds. While scheduled maturities of investments and
amortizations of loans are predictable sources of funds, deposit flows and
prepayments on mortgage loans and mortgage-related securities are greatly
influenced by general interest rates, economic conditions and competition. The
Association is required to maintain an average daily balance of liquid assets
and short-term borrowings as defined by the OTS regulations. The liquidity and
short-term liquidity for the month of December, 1996 were 25.32% and 8.68%
respectively. The high level of liquidity was influenced by the purchase of
deposits from First Home Savings and Loan Association in December, 1996. The
higher than required levels of liquidity are used to better manage interest rate
risk.
At December 31, 1996 the Association had commitments to originate loans of
$24.4 million and to purchase mortgage-related securities of $14.0 million.
At December 31, 1996, the Association had exceeded each of the OTS' capital
requirements for tangible, core, and risk-based capital. The OTS requires the
Association to maintain a minimum regulatory tangible capital of at least 1.50%
of total assets, a minimum 3.0% core capital ratio (expressed as a percentage of
tangible assets) and a minimum risk-based capital of 8.0% (expressed as a
percentage of risk-weighted assets, which includes off-balance sheet items) as
defined by the OTS. The Company is not required by the OTS to maintain minimum
levels of capital for regulatory purposes.
14 GA Financial, Inc. Annual Report 1996
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
COMPARISON OF THE CONSOLIDATED RESULTS OF OPERATION FOR THE YEARS ENDED
- -----------------------------------------------------------------------
DECEMBER 31, 1995 AND 1994
- --------------------------
NET INCOME. Net income for the year ended December 31, 1995 was $2.8 million, a
decrease of $440,000 or 13.5%, from net income recorded for the year ended
December 31, 1994. Details of the changes in the components of net income are
discussed herein.
INTEREST INCOME. Interest income totaled $32.8 million for the year ended
December 31, 1995, an increase of $2.4 million or 8.0%, over the amount recorded
in 1994. The average balances of interest-earning assets for 1995 was $460.7
million, a decrease of $9.0 million or (1.9%), compared to the average balances
of interest-earning assets of $469.7 million at December 31, 1994. Total
weighted average yield on interest-earning assets for 1995 was 7.13% as compared
to 6.47% for 1994. Interest on loans for the year ended December 31, 1995 was
$14.0 million at an average yield of 8.41%, an increase of $2.0 million or
16.3%, compared to $12.0 million at 8.22%. This increase was the result of an
increase in the average balances of loans and an increase in the average yield
on those loans. Interest on mortgage-related securities for 1995 was $11.4
million at an average yield of 7.28%. This was an increase of $2.2 million or
23.7% compared to interest income on mortgage-related securities recorded during
1994 of $9.2 million at 6.62%. The increase was due to an increase in the
balances of the securities and increases in the yields on these securities.
Interest income on investment securities for 1995 was $6.8 million at a yield of
5.32%. This was a decrease of $1.9 million or (21.7%) from 1994. The decrease
was due to a decrease in the average balances of investment securities of $48.8
million or (27.6%). The yield on investment securities increased from 4.92% in
1994 to 5.32% in 1995. Interest income on interest earning deposit accounts was
$471,000 at a yield of 6.26% for 1995, an increase of $144,000 or 44%, compared
to the $327,000 at 6.41% recorded for 1994. The increase was due to an increase
in the average balances on hand during the year. The average yield decreased
during the year.
INTEREST EXPENSE. Interest expense for the year ended December 31, 1995 was
$16.5 million at a cost of funds of 4.05%, an increase of $1.8 million or 12%,,
compared to the interest expense of $14.8 million at a cost of funds of 3.49%
for the year ended December 31, 1994. Average balances of interest-bearing
liabilities were $408.2 million for compared to $422.6 million for 1994.
Interest expense on money-market deposits for 1995 was $465,000 at a rate of
2.51% compared to interest expense of $568,000 at a cost of 2.50% recorded on
these deposits for 1994. The decrease in interest expense was due to a reduction
in balances of these accounts. Average balances of money market accounts for
1995 was $18.5 million compared to average balances of $22.7 million for 1994.
Balances in these types of accounts have been falling steadily for the past
several years. The cost of funds for these deposits was substantially the same
for each year. Interest expense on passbook accounts for 1995 was $5.1 million
at a cost of 3.0%, a decrease of $896,000 or (14.9%), compared to interest
expense on passbook accounts of $6.0 million at 3% for 1994. Average balances on
these types of deposits fell to $170.2 million for 1995 from $199.8 million for
1994, a decrease of $29.6 million or (14.8%). For certificates of deposit,
interest expense was $10.5 million at a cost of 5.39% for 1995, an increases of
$2.9 million or 38.3% compared to interest expense of $7.6 million at a cost of
4.35% recorded for 1994. Average balances in certificates of deposit increased
to $193.9 million for 1995 from $174.0 million for 1994, an increase of $19.9
million or 11%. Cost of funds for these deposits was 5.39% for 1995 compared to
4.35% for 1994. Interest on checking accounts for 1995 was $464,000 at a cost of
1.98%, a decrease of $39,000 or (7.8%), compared to the interest expense of
$503,000 at a cost of 2.20% recorded for 1994. Although average balances in
checking accounts increased from 1994 to 1995, the rate paid on these types of
accounts was reduced resulting in the reduced interest expense for 1995. Average
balances for checking accounts was $23.4 million for 1995, an increase of
$592,000 or 2.6%, compared to average balances of $22.8 million for 1994. There
was no significant change in interest expense paid on escrow accounts from 1994
to 1995. Interest expense on borrowed funds for 1995 was $8,000 at a cost of
6.39% on average balances of $48,000. This was a decrease of $83,000 or (91.2%)
compared to interest expense of $91,000 on average balances of $1.1 million in
1994. Rates on borrowed funds were 6.39% in 1995 and 4.75% in 1994. The Company
did not use borrowed funds to a great extent in 1994 or 1995.
GA Financial, Inc. Annual Report 1996 15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
RATE/VOLUME ANALYSIS. The following table presents the extent to which changes
in interest rates and changes in the volume of interest-earning assets and
interest-bearing liabilities have affected the Company's interest income and
interest expense during the period indicated. Information is provided with
respect to: (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume), and; (iii) the net change. The changes
attributable to the combined impact of volume and rate have been allocated to
changes due to rate.
<TABLE>
<CAPTION>
YEAR ENDED DEC. 31, 1995
COMPARED TO THE
YEAR ENDED DEC. 31, 1994
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) VOLUME RATE NET CHANGE
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest-earning assets:
Interest-earning deposits and
short-term investments $ 155 $ (11) $ 144
Investments securities, net (2,399) 511 (1,888)
Loans receivable, net 1,639 324 1,963
Mortgage-backed securities 1,148 1,046 2,194
FHLB stock 7 10 17
- --------------------------------------------------------------------------------
Total interest-earning assets 550 1,880 2,430
- --------------------------------------------------------------------------------
Interest-bearing liabilities:
Money market savings accounts (106) 3 (103)
Passbook savings accounts (890) (6) (896)
NOW accounts 13 (52) (39)
Certificate accounts 865 2,030 2,895
Borrowings (50) (33) (83)
Other -- -- --
- --------------------------------------------------------------------------------
Total interest-bearing liabilities (168) 1,942 1,774
- --------------------------------------------------------------------------------
Net change in net interest income $ 718 ($62) $ 656
================================================================================
</TABLE>
NET INTEREST INCOME. Net interest income after the loan loss provision for 1995
was $16.3 million, an increase of $656,000 or 4.2%, compared to net interest
income of $15.6 million recorded for 1994.
16 GA Financial, Inc. Annual Report 1996
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
PROVISION FOR LOAN LOSSES. The Company made no provision for loan losses for
1995 or 1994. The loan loss reserve for both years ended December 31 was deemed
adequate. The following table sets forth the changes in the allowance for loan
losses for the year ended December 31, 1995 and 1994.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) AT DECEMBER 31, 1995 AT DECEMBER 31, 1994
- --------------------------------------------------------------------------------------------------------
PERCENT PERCENT
OF LOANS OF LOANS
PERCENT OF IN EACH PERCENT OF IN EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family $429 52.19% 66.79% $324 38.12% 67.15%
Multi-family 103 12.53 3.93 107 12.59 5.26
Commercial 16 1.95 1.79 171 20.12 1.30
Construction and development 45 5.47 3.21 27 3.18 3.08
Consumer loans:
Home equity 118 14.35 10.99 151 17.76 11.34
Education 89 10.83 11.32 49 5.76 9.35
Other loans:
Unsecured personal loans 22 2.68 0.68 21 2.47 0.83
Loans on savings accounts -- -- 1.18 -- -- 1.54
Other loans -- -- 0.11 -- -- 0.15
- -------------------------------------------------------------------------------------------------------
Total valuation allowance $822 100.00% 100.00% $850 100.00% 100.00%
=======================================================================================================
</TABLE>
NON-INTEREST INCOME. Non-interest income consists of service fees, gains
(losses) on the sale of loans and securities, fees from data processing services
sold and other miscellaneous items. For the year ended December 31, 1995 non-
interest income totaled $422,000, a decrease of $1.1 million or 71.9%, compared
to the $1.5 million recorded for 1994. Service fees for 1995 totaled $801,000, a
decrease of $5,000 or (.6%), compared to the $806,000 recorded for 1994. For
1995, losses on the sale of investments were $1.3 million, an increase of $1.2
million or greater than 100% compared to the loss of $102,000 recorded for 1994.
During 1995 the Company realigned its investment portfolio and incurred losses
of $1.7 million. Income from the sale of data processing services totaled
$798,000 in 1995, an increase of $43,000 or 5.7%, compared to the $755,000
recorded in 1994. Other non-interest income for 1995 totaled $114,000, an
increase of $71,000 or greater than 100% from the $43,000 recorded in 1994.
NON-INTEREST EXPENSE. Total non-interest expense for the year ended December 31,
1995 was $12.3 million, an increase of $298,000 or 2.5% over the $12.0 million
recorded for 1994. Compensation and benefit costs for 1995 were $6.1 million, an
increase of $303,000 or 5%, from the $5.8 million recorded for 1994. The
increases are the results of normal increases in salaries, payroll taxes and
benefit costs. Occupancy costs for 1995 were $1.5 million, an increase of
$95,000 or 6.6%, over the $1.5 million recorded for 1994. Federal deposit
insurance premiums for 1995 were $970,000, a decrease of $31,000 or (3.1%), over
the $1.0 million recorded for 1994. The Company paid premiums at the same rate
during 1994 and 1995. The reduction in premium expense is the result of lower
insured deposit balances in 1995 compared to 1994. Data processing expenses for
1995 were $1.5 million, a decrease of $53,000 or (3.4%), from the $1.6 million
recorded during 1994. The Company operates its own in-house data processing
center which also provides data processing services to other financial
institutions. Other non-interest expenses for 1995 were $2.1 million, a decrease
of $16,000 or (0.8)%, over the $2.1 million recorded for 1994. These expenses
include marketing costs, legal and professional fees, and other expenses.
GA Financial, Inc. Annual Report 1996 17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
INCOME TAX EXPENSE. Income taxes of $1.6 million were accrued for the year ended
December 31, 1995. This is an effective tax rate of 36%. Income taxes of $1.9
million were recorded in 1994, an effective tax rate of 37%.
NEW ACCOUNTING PRONOUNCEMENTS. (See Note 15.)
IMPACT OF INFLATION AND CHANGING PRICES. The Consolidated Financial Statements
of the Company and Notes thereto, presented elsewhere herein, have been prepared
in accordance with generally accepted accounting principles ("GAAP"), which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time due to inflation. The impact of inflation is reflected
in the increased cost of the Company's operations. Unlike most industrial
companies, nearly all the assets and liabilities of the Company are monetary in
nature. As a result, interest rates have a greater impact on the Company's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the direction or to the same extent as the price of
goods and services.
FORWARD DEVELOPMENTS. The Board of Directors declared a dividend of $.08 per
share to shareholders of record on February 10, 1997, payable on February 21,
1997. The Board of Directors intends on paying quarterly dividends in 1997.
The Company's data processing division, DataOne Financial Services, provided
data processing services to the Association and two other financial institutions
in 1996. One of these institutions notified DataOne that it would not renew its
contract when it expired in December 1996. The revenue from this institution in
1996 was $292,000. DataOne is attempting to replace this company with new
clients.
The trustee for the Company's recognition and retention plan completed the
purchase of the Plan's 356,000 shares in February, 1997. There were 50,000
shares purchased as of December 31, 1996.
The Company has filed an application to the OTS, dated February 19, 1997, to
repurchase up to 10% of the outstanding stock of the Company.
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT. In addition to
historical information, this Annual Report may include certain forward looking
statements based on current management expectations. The Company's actual
results could differ materially from those management expectations. Factors that
could cause future results to vary from current management expectations include,
but are not limited to, general economic conditions, legislative and regulatory
changes, monetary and fiscal policies of the federal government, changes in tax
policies, rates and regulations of federal, state and local tax authorities,
changes in interest rates, deposit flows, the cost of funds, demand for loan
products, demand for financial services, competition, changes in the quality or
composition of the Company's loan and investment portfolios, changes in
accounting principles, policies or guidelines, and other economic, competitive,
governmental and technological factors affecting the Company's operations,
markets, products, services and prices. Further description of the risks and
uncertainties to the business are included in detail in Item 1, "Business" of
the Company's 1996 Form 10-K.
18 GA Financial, Inc. Annual Report 1996
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
of GA Financial, Inc.
We have audited the accompanying consolidated statements of financial
condition of GA Financial, Inc., as of December 31, 1996 and 1995, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
GA Financial, Inc., as of December 31, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, GA
Financial, Inc., changed its method of accounting for investment securities in
1994 and accounting for loan impairment in 1995.
/s/ Coopers & Lybrand LLP
Pittsburgh, Pennsylvania
January 28, 1997,
except as to the information
presented in Note 19, for which
the date is February 19, 1997
GA Financial, Inc. Annual Report 1996 19
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
FOR THE YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995
Dollar amounts in thousands, except share data
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
DEC. 31, 1996 DEC. 31, 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash (including interest-bearing demand
deposits of $15,592 in 1996 and $9,215 in 1995) $ 22,349 $ 16,870
Federal funds sold 1,950 300
Available for sale securities, at fair value
(Note 4):
Investment securities 119,347 71,060
Mortgage-related securities 244,482 168,779
Loans receivable, net (Note 5) 216,376 180,275
Education loans held for sale (Note 5) 15,383 --
Accrued interest receivable 4,252 2,214
Federal Home Loan Bank stock (Note 3) 2,326 1,882
Office, property and equipment (Note 6) 5,644 5,683
Securities sold, not settled (Note 4) -- 73,062
Prepaid expenses and other assets 1,939 1,273
- --------------------------------------------------------------------------------
Total Assets $634,048 $521,398
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Noninterest-bearing demand deposits $ 19,685 $ 17,464
Savings accounts (Note 7) 429,881 407,406
Borrowed funds (Note 3) 51,525 --
Advances from borrowers for taxes and insurance 1,780 1,920
Accrued interest payable 699 521
Securities purchased, not settled (Note 4) 5,830 41,953
Other liabilities 2,244 3,904
- --------------------------------------------------------------------------------
Total Liabilities 511,644 473,168
Commitments and contingencies (Notes 9 and 12)
Shareholders' Equity:
Preferred stock, (.01 par value); 1,000,000
shares authorized; 0 shares outstanding -- --
Common stock, (.01 par value); 23,000,000
shares authorized; 8,900,000 shares issued 89 --
Additional paid-in capital 86,316 --
Treasury stock, at cost (445,000 shares) (6,768) --
Unearned employee stock ownership plan (ESOP)
shares (6,612) --
Unearned recognition and retention plan (RRP)
shares (523) --
Net unrealized holding gains on securities
(Notes 4 and 8) 88 2,954
Retained earnings (Notes 2 and 11) 49,814 45,276
- --------------------------------------------------------------------------------
Total Shareholders' Equity 122,404 48,230
Total Liabilities and Shareholders' Equity $634,048 $521,398
================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
20 GA Financial, Inc. Annual Report 1996
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
- -------------------------------------------------------------------------------- Dollar amounts
1996 1995 1994 in thousands,
- -------------------------------------------------------------------------------- except share data
<S> <C> <C> <C>
Interest income:
Loans, including fees $18,025 $14,000 $12,037
Mortgage-related securities 14,551 11,440 9,394
Investment securities:
Taxable interest 4,627 5,420 7,016
Taxable dividend 2,112 1,490 1,629
Nontaxable interest 219 12 --
Interest on bank deposits 816 471 327
- --------------------------------------------------------------------------------
Total interest income 40,350 32,833 30,403
================================================================================
Interest expense:
Savings deposits (Note 7) 16,679 16,493 14,636
Interest on borrowings 823 8 91
Other 43 42 42
- --------------------------------------------------------------------------------
Total interest expense 17,545 16,543 14,769
- --------------------------------------------------------------------------------
Net interest income before provision for
losses on loans 22,805 16,290 15,634
Provision for losses on loans (Note 5) 210 -- --
- --------------------------------------------------------------------------------
Net interest income after provision for
losses on loans 22,595 16,290 15,634
- --------------------------------------------------------------------------------
Non-interest income:
Service fees 897 801 806
Net gain (loss) on sales of securities
(Notes 4 and 9) 630 (1,291) (102)
Gain on sale of education loans 311 -- --
Gain on settlement/curtailment of
pension (Note 10) 769 -- --
Data processing service fees 809 798 755
Other 44 114 43
- --------------------------------------------------------------------------------
Total other income 3,460 422 1,502
- --------------------------------------------------------------------------------
Non-interest expense:
Compensation and employee benefits 6,711 6,133 5,830
Occupancy and equipment 1,564 1,545 1,450
Deposit insurance premiums (Note 13) 3,682 970 1,001
Data processing service expenses 1,501 1,524 1,577
Capital stock taxes 795 -- --
Other 2,719 2,108 2,124
- --------------------------------------------------------------------------------
Total non-interest expense 16,972 12,280 11,982
- --------------------------------------------------------------------------------
Income before provision for income taxes 9,083 4,432 5,154
Provision for income taxes (Note 8) 3,481 1,612 1,894
- --------------------------------------------------------------------------------
Net income $ 5,602 $ 2,820 $ 3,260
================================================================================
Earnings per share (Note 16) $ .69 -- --
================================================================================
Average shares outstanding 8,154,125 -- --
================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
GA Financial, Inc. Annual Report 1996 21
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
Dollar amounts in thousands YEARS ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 5,602 $ 2,820 $ 3,260
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for losses on loans and real estate owned 210 -- --
Depreciation and amortization on office, property and equipment 865 882 928
Net premium (discount) amortization (accretion) on securities (14) 410 1,969
Amortization of net deferred loan fees (220) (164) (168)
Amortization of intangibles 15 -- --
Gain on settlement/curtailment of pension plan (769) -- --
Net realized (gain) loss on sales of securities (630) 1,292 102
Net realized (gain) on sale of education loans (311) -- --
Net realized (gain) on sale of REO (7) (26) --
Allocation of ESOP plan shares 622 -- --
Allocation of recognition and retention plan shares 133 -- --
Deferred income tax provision 120 11 21
(Increase) decrease in accrued interest receivable (2,038) 1,160 858
Decrease (increase) in prepaid expenses and other assets 615 (5) (105)
Increase in accrued interest payable 178 143 63
- -------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,371 6,523 6,928
- -------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of available for sale securities 161,811 42,812 22,255
Repayments and maturities of available for sale securities 49,691 8,667 2,906
Repayments, calls and maturities of held to maturity securities -- 56,453 85,746
Purchases of available for sale securities (302,458) (15,514) (38,399)
Purchases of held to maturity securities -- (61,444) (58,621)
Proceeds from sale of education loans 12,545 -- --
Premium paid for deposits (1,296) -- --
Purchases of loans (71,156) (24,250) (2,448)
Net decrease (increase) in loans 7,430 (2,288) (4,934)
Purchases of office, property and equipment, net (826) (600) (532)
Net proceeds from sale of REO 25 64 --
(Purchase) redemption of Federal Home Loan Bank stock (444) (259) 597
- -------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (144,678) 3,641 6,570
- -------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net decrease in demand and savings deposits (574) (18,451) (20,870)
Net increase in certificates of deposit 25,270 20,559 6,954
Payments of borrowed funds (539,624) -- --
Proceeds from borrowed funds 591,149 -- --
Dividends paid (1,064) -- --
Net increase (decrease) in advances from borrowers for
taxes and insurance and other liabilities 718 (344) (5,602)
Proceeds from sale of common stock, net of issuance costs 86,372 -- --
Purchase of unearned employee stock ownership plan shares (7,120) -- --
Purchase of treasury stock (6,768) -- --
Purchase of recognition and retention plan shares (737) -- --
Payments made under capital lease obligations (186) (187) (171)
- -------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 147,436 1,577 (19,689)
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 7,129 11,741 (6,191)
- -------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 17,170 5,429 11,620
- -------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 24,299 $ 17,170 $ 5,429
=======================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
22 GA Financial, Inc. Annual Report 1996
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
Dollar amounts
and numbers
of common
stock shares
in thousands
<TABLE>
<CAPTION>
NET
NUMBER UNREALIZED TOTAL
COMMON ADDITIONAL UNEARNED UNEARNED HOLDING SHARE-
STOCK COMMON PAID TREASURY ESOP PLAN RRP PLAN GAINS RETAINED HOLDERS'
SHARES STOCK IN CAPITAL STOCK SHARES SHARES (LOSSES) EARNINGS EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 -- $ -- $ -- $ -- $ -- $ -- $ -- $39,196 $39,196
Adjustment to beginning
balance for change in
accounting principle
net of tax -- -- -- -- -- -- 1,236 -- 1,236
Net income -- -- -- -- -- -- -- 3,260 3,260
Change in net unrealized
holding gains (losses) on
securities, net of tax -- -- -- -- -- -- (2,800) -- (2,800)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 -- -- -- -- -- (1,564) 42,456 40,892
Net income -- -- -- -- -- -- -- 2,820 2,820
Change in net unrealized
holding gains (losses) on
securities, net of tax -- -- -- -- -- -- 4,518 -- 4,518
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 -- -- -- -- -- -- 2,954 45,276 48,230
Net income -- -- -- -- -- -- -- 5,602 5,602
Change in net unrealized
holding gains (losses) on
securities, net of tax -- -- -- -- -- -- (2,866) -- (2,866)
Stock issued 8,900 89 86,283 -- -- -- -- -- 86,372
Employee stock ownership
plan purchased (712) -- -- -- (7,120) -- -- -- (7,120)
Treasury stock purchased (445) -- -- (6,768) -- -- -- -- (6,768)
Recognition and retention
plan purchased (50) -- (81) -- -- (656) -- -- (737)
Cash dividends -- -- -- -- -- -- -- (1,064) (1,064)
Shares allocated employee
stock ownership plan 51 -- 114 -- 508 -- -- -- 622
Shares allocated recognition
and retention plan 50 -- -- -- -- 133 -- -- 133
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 7,794 $89 $86,316 ($6,768) ($6,612) ($523) $ 88 $49,814 $122,404
===================================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
GA Financial, Inc. Annual Report 1996 23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
The significant accounting policies followed by GA Financial, Inc. (the
"Company") and subsidiary (the "Association") are as follows:
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of GA
Financial, Inc. and its subsidiary, Great American Federal Savings and Loan
Association, and the Association's wholly owned subsidiary, Great American
Financial Services, Inc. at December 31, 1996. The consolidated financial
statements at December 31, 1995 include only the accounts of the Company and the
Association. Intercompany accounts and transactions have been eliminated in
consolidation.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of income and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks, including interest-bearing demand deposits, and
federal funds sold. Generally, federal funds are sold for one-day periods.
INVESTMENT SECURITIES AND MORTGAGE-RELATED SECURITIES
Effective January 1, 1994, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 115 "Accounting for Certain Investments in Debt and Equity
Securities." The statement required classification of securities into three
categories: held to maturity, trading securities, and available for sale. The
Company may classify securities as held to maturity when it has both the ability
and positive intent to hold the securities to maturity. Pursuant to SFAS No.
115, securities available for sale are recorded at estimated fair value, with
aggregate unrealized holding gains and losses reported, net of income tax, as a
separate component of equity. Securities held to maturity are stated at cost
adjusted for amortization of premium and accretion of discount, computed on the
interest method. The Company did not have any trading securities at December 31,
1996 or 1995. The fair value of securities is based on quoted market prices or
bid quotations received from security dealers. Gains and losses are recognized
by the specific identification method.
On a periodic basis, management evaluates each security where amortized cost
exceeds fair value. If the decline is judged to be other than temporary, the
cost of the security is written down to estimated realizable value with the
writedown included in net securities gains.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is based on management's evaluation of losses in
the current loan portfolio, which includes an assessment of economic conditions,
changes in the nature of the loan portfolio, loan loss experience and other
relevant factors. While management uses the best information available to make
such evaluations, future adjustments to the allowance may be necessary if
economic conditions differ substantially from the assumptions used in making the
evaluations. Additions are made to the allowance through periodic provisions
charged to net income and recovery of principal and interest on loans previously
charged-off. Losses of principal are charged directly to the allowance when a
loss actually occurs or when a determination is made that a loss is probable.
Effective January 1, 1995, the Company adopted Financial Accounting Standards
Board (FASB) Statement 114, "Accounting by Creditors for Impairment of a Loan"
and Statement 118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures" an amendment of Statement 114. Statement 114
addresses the accounting by creditors for impairment of loans by specifying how
reserves for credit losses
24 GA Financial, Inc. Annual Report 1996
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
related to certain loans should be measured. Statement 118 rescinds Statement
114 rules to permit a creditor to use existing methods for recognizing interest
income on impaired loans and eliminated the income recognition provisions of
Statement 114. Statement 114 amends FASB Statement 5 "Accounting For
Contingencies" to clarify that a creditor should evaluate the collectibility of
both contractual interest and principal when assessing the need for an overall
allowance for loan losses. The statement requires that impaired loans for which
foreclosure is probable continue to be accounted for as loans. The Company did
not have any loans classified as in-substance foreclosure at December 31, 1994,
thus no additional loss provisions or changes to the overall allowance for loan
losses were required by adopting this statement.
Within the context of Statement 114 for loan losses, a loan is considered to
be impaired when, based upon current information and events, it is probable that
the Company will be unable to collect all amounts due for principal and interest
according to the contracted terms of the loan agreement. Impairment is measured
based on the present value of expected future cash flows discounted at a loan's
effective interest rate, or as a practical expedient, the observable market
price or, if the loan is collateral dependent, the fair value of the underlying
collateral. When the measurement of an impaired loan is less than the recorded
investment in the loan, the impairment is recorded in a specific valuation
allowance through a charge to provision for loan losses. This specific valuation
allowance is periodically adjusted for significant changes in the amount or
timing of expected future cash flows, observable market price or fair value of
the collateral. The valuation allowance, or allowance for impaired loan losses,
is part of the total allowance for loan losses. Upon disposition of an impaired
loan, any related allowance is reversed through a charge to the impaired
allowance for loan losses. Cash payments received on impaired loans are recorded
as a direct reduction of the recorded investment in the loan. When the recorded
investment has been fully collected, receipts are recorded as recoveries to the
loan loss allowance until the previously charged-off interest is fully
recovered. Subsequent amounts collected are recognized as interest income.
Impaired loans are not returned to accruing status until all amounts due, both
principal and interest, are current and a sustained payment history has been
demonstrated. At December 31, 1996 or 1995, the Company did not have any
recorded investment in loans for which impairment has been recognized in
accordance with Statement 114 and 118. Since the Company had no loans considered
impaired under Statement 114 during the years ended December 31, 1996 or 1995,
there were no recorded investments during these periods. As a result, there was
no interest income recognized on impaired loans during the years ended December
31, 1996 or 1995.
Generally, management considers all major nonaccrual loans and certain
renegotiated debt, when it exists, for impairment. The minimum period without
payment that typically can occur before a loan is considered for impairment is
ninety days. Statement 114 does not apply to large groups of smaller balance
homogeneous loans that are collectively evaluated for impairment. The Company
collectively reviews for impairment consumer, residential and commercial real
estate and commercial loans under $200 thousand.
LOANS
Interest income is recognized on a level yield basis. Loan origination fees,
net of certain direct origination costs, are deferred and recognized over the
contractual life of the related loan as a yield adjustment using the interest
method. The accrual of interest is discontinued, when in management's judgment,
it is determined that the collectibility of interest, but not necessarily
principal, is doubtful. Interest receipts on such nonaccrual loans are fully
applied to principal. A nonaccrual loan is not returned to accruing status
until all amounts due, both principal and interest, are current and a sustained
payment history has been demonstrated. Loans held for sale are education loans,
which are recorded at the lower of cost or estimated fair market value.
OFFICE, PROPERTY AND EQUIPMENT
Office property and equipment is stated at cost less accumulated depreciation.
Depreciation is computed on the straight-line method based on the estimated
useful lives of the assets. Estimated useful lives range from 20 to 50 years
for buildings, 10 years for site improvements and 3 to 5 years for furniture,
fixtures and equipment. Maintenance and repairs are charged to expense as
incurred. Expenditures for renovations and major improvements are capitalized
and depreciated over their estimated useful lives.
GA Financial, Inc. Annual Report 1996 25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INTANGIBLE ASSETS
Premiums paid for branch deposits are allocated to core deposit intangibles and
are recorded in other assets. Core deposit intangibles are amortized on a
straight-line basis over seven years. Core deposit intangibles amounted to $1.3
million in 1996. Management will evaluate annually the carrying value and
remaining amortization period of intangible assets for possible impairment.
Adjustments will be recorded when the purchased branch deposits decay at an
earlier period than the amortization period.
FORECLOSED ASSETS
Foreclosed assets consist of property acquired in settlement of real estate loan
indebtedness. Such assets are carried at the lower of cost or market value less
estimated costs to sell. Net costs to maintain the foreclosed assets and
subsequent gains and losses attributable to their disposal are included in other
expense.
TREASURY STOCK
The purchase of the Company's stock is recorded at cost. If reissue occurs, the
treasury stock account will be reduced by the cost of such stock on the average
cost basis, with any excess proceeds being credited to additional paid-in
capital.
INCOME TAXES
On August 20, 1996, President Clinton signed into law the Small Business Job
Protection Act of 1996 which included the repeal of the special thrift bad debt
provisions. Although the percentage of taxable income method bad debt deduction
will no longer be available to the Company, the tax requirement to invest in
certain qualifying types of investments and loans has been eliminated, thus
providing greater freedom to the Company in structuring its balance sheet to
maximize returns. These tax related changes had no significant impact on the
Company's 1996 financial position or results of operations.
The Company has not provided deferred income taxes for the Company's tax
return reserve for bad debts that arose in tax years beginning before September
30, 1988 because it is not expected that this difference will reverse in the
foreseeable future. The cumulative net amount of temporary differences related
to the reserve for bad debts for which deferred taxes have not been provided was
approximately $13.3 million at December 31, 1996. If the Company does not meet
the remaining income tax requirements of IRC section 593, as amended by The
Small Business Job Protection Act of 1996, the Company could incur a tax
liability for the previously deducted tax return loan losses in the year in
which such requirements are not met. This potential liability for which no
deferred income taxes have been provided was approximately $4.5 million as of
December 31, 1996.
DERIVATIVE FINANCIAL INSTRUMENTS
Gains and losses on unconditional forward commitments (Note 9) to purchase GNMAs
are deferred and incorporated in the carrying amount of the securities
purchased.
RECLASSIFICATIONS
For comparative purposes, reclassifications have been made to certain amounts
previously reported to conform with the current period presentation in the
consolidated financial statements.
26 GA Financial, Inc. Annual Report 1996
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. THE CONVERSION AND THE SUBSCRIPTION AND COMMUNITY OFFERINGS
- --------------------------------------------------------------------------------
On March 22, 1996, the members of the Association approved a Plan of Conversion
to convert the Association from a federally chartered mutual savings and loan
association to a federally chartered capital stock savings association, with the
concurrent sale of all of the newly-converted Association's outstanding capital
stock to the Company, and the sale of the Company's common stock to the public.
The Company, on March 25, 1996, sold 8,900,000 shares of common stock at $10.00
per share to depositors, directors, officers and certain employees of the
Company and to certain other eligible subscribers. The net proceeds from the
sale of the common stock, after conversion expenses of $2.6 million were $86.4
million. The Company purchased all of the capital stock of the Company in
exchange for 50% of the net proceeds, or $43.3 million and utilized $7.1 million
to fund the Employee Stock Ownership Plans' (the "ESOP") purchase of conversion
stock.
Funds retained by the Company in excess of the ESOP loan were initially
invested in Treasury securities and other short term investments. The Company
and the Association used such funds to expand operations through the addition of
branch offices and the acquisition of branch deposits of other financial
institutions.
At the time of Conversion, the Association established a liquidation account
in an amount equal to its capital as of December 31, 1995. The liquidation
account will be maintained for the benefit of eligible account holders who
continue to maintain their accounts at the Association after the Conversion. The
liquidation account will be reduced annually to the extent that eligible account
holders have reduced their qualifying deposits as of each anniversary date.
Subsequent increases will not restore an eligible account holder's interest in
the liquidation account. In the event of a complete liquidation, each eligible
account holder will be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying balances
for accounts then held. Dividends cannot be paid from retained earnings
allocated to the liquidation account. The liquidation account amounts to $45.3
million.
The Office of Thrift Supervision ("OTS") imposes limitations upon all capital
distributions by savings institutions, including cash dividends. An institution
that exceeds all fully phased-in capital requirements before and after a
proposed capital distribution and has not been notified by the OTS that it is in
need of more than normal supervision could, after prior notice but without the
approval of the OTS, make capital distributions during a calendar year up to the
higher of (i) 100% of its net income to date during the calendar year plus the
amount that would reduce by one-half its "surplus capital ratio" (the excess
capital over its fully phased-in capital requirements) at the beginning of the
calendar year, or (ii) 75% of its net income over the most recent four-quarter
period. Any additional capital distributions would require prior regulatory
approval. As of December 31, 1996, the Association exceeded all fully phased-in
capital requirements and had not been notified by the OTS that it is in need of
more than normal supervision.
NOTE 3. FEDERAL HOME LOAN BANK STOCK AND ADVANCES AND OTHER BORROWINGS
- --------------------------------------------------------------------------------
The Association is a member of the Federal Home Loan Bank system. As a member,
the Association is required to maintain an investment in the capital stock of
the Federal Home Loan Bank of Pittsburgh (FHLB), which is carried at cost. The
required investment is based on 1% of its outstanding home loans, to the FHLB,
as calculated at December 31 of each year.
At December 31, 1996, the Association has a $25.1 million line of credit
available with the FHLB. Advances under the available line bear interest at
7.23% and are payable on demand. Pursuant to collateral agreements with the
FHLB, advances are collateralized by FHLB stock and qualifying first mortgage
loans held by the Association. There were no advances outstanding under the line
of credit at December 31, 1996 and 1995. There were no advances under the line
of credit for the year ended December 31, 1996. Interest expense incurred for
periodic advances under the line of credit amounted to $8,000 and $91,000 in
1995 and 1994, respectively.
GA Financial, Inc. Annual Report 1996 27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Association also can take short-term and long-term advances with the
FHLB. FHLB of Pittsburgh advances by year of maturity at December 31, 1996 are
summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
(DOLLARS IN THOUSANDS) AMOUNT AVERAGE RATE
- -------------------------------------------------------------
<S> <C> <C>
1997 $37,525 5.56%
2000 5,000 6.44
2001 4,000 6.10
- -------------------------------------------------------------
Total $46,525 5.70%
=============================================================
</TABLE>
Advances from the FHLB are collateralized by qualifying securities and loans.
Qualifying collateral includes U.S. Treasury, government agency and mortgage-
backed securities and real estate loans based upon the amount of outstanding
advances. These advances are subject to restrictions or penalties related to
prepayments.
At December 31, 1996 the Company also maintains securities sold under
agreements to repurchase. Securities sold under agreement to repurchase at
December 31, 1996 are summarized as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) AMOUNT RATE
- -------------------------------------------------------------
<S> <C> <C>
Securities sold under
agreements to repurchase $5,000 6.25%
=============================================================
</TABLE>
Securities sold under agreements to repurchase are collateralized by investment
securities with an amortized cost and fair value of $5.8 million at December 31,
1996. The $5 million is comprised of one commitment with a scheduled maturity
of August 26, 1999. The security underlying the agreement is not under the
Company's control. During the year ended December 31, 1995, there were no
securities sold under agreements to repurchase.
NOTE 4. INVESTMENT SECURITIES AND MORTGAGE-RELATED SECURITIES
- --------------------------------------------------------------------------------
On December 15, 1995, the Association transferred all its securities included in
the held to maturity portfolio, at the date of transfer, with a carrying value
and fair value of $230.0 million and $230.6 million, respectively, to the
available for sale portfolio. This reallocation of the Association's investment
portfolio was done in accordance with the FASB special report, "A Guide to
Implementation of Statement No. 115 on Accounting for Certain Investments in
Debt and Equity Securities." This special report allowed a one-time transfer of
securities from the held-to-maturity category to other categories during the
period November 15, 1995 through December 31, 1995. The transfer of securities
from the held-to-maturity category to the available for sale category resulted
in an increase to equity, net of tax, of approximately $435,000 at the date of
transfer.
At December 31, 1996, there were $5.8 million of securities purchased which
did not settle until January, 1997 and accordingly, have been reflected as
"Securities purchased, not settled" in the accompanying consolidated statements
of financial condition. The settlement date for $73.1 million of securities sold
in December, 1995 did not occur until subsequent to December 31, 1995, and have
been reflected as "Securities sold, not settled" in the accompanying
consolidated statements of financial condition. At December 31, 1995, $42.0
million of securities purchased did not settle until subsequent to December 31,
1995.
The amortized cost and estimated fair value of investment securities and
mortgage-related securities at December 31, 1996 are as follows:
28 GA Financial, Inc. Annual Report 1996
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------Dollar amounts
DECEMBER 31, 1996 in thousands,
- -------------------------------------------------------------------------------------------------except share data
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
AVAILABLE FOR SALE SECURITIES: COST GAINS LOSSES FAIR VALUE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury $ 14,912 $ 037 $ -- $ 14,949
Mortgage-backed certificates 171,611 2,536 (1,920) 172,227
Marketable equity securities 28,654 1,263 (187) 29,730
U.S. government agency debt 48,646 92 (318) 48,420
Municipal obligations 8,865 58 (29) 8,894
Corporate obligations 17,294 61 (1) 17,354
Collateralized mortgage obligations 73,706 250 (1,701) 72,255
- -------------------------------------------------------------------------------------------------
Total $363,688 $4,297 ($4,156) $363,829
=================================================================================================
</TABLE>
The amortized cost and estimated fair value of investment securities and
mortgage-related securities at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
DECEMBER 31, 1995
- -------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
AVAILABLE FOR SALE SECURITIES: COST GAINS LOSSES FAIR VALUE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed certificates $113,825 $4,322 $ -- $118,147
Marketable equity securities 21,804 1,076 (221) 22,659
U.S. government agency debt 21,496 99 (12) 21,583
Corporate obligations 26,565 320 (67) 26,818
Collateralized mortgage obligations 51,460 219 (1,047) 50,632
- -------------------------------------------------------------------------------------------------
Total $235,150 $6,036 ($1,347) $239,839
=================================================================================================
</TABLE>
The amortized cost and estimated fair value of available for sale securities
at December 31, 1996, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or to prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
DECEMBER 31, 1996
- -------------------------------------------------------------------------------------------------
AMORTIZED
AVAILABLE FOR SALE SECURITIES: COST FAIR VALUE
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 35,637 $ 35,514
Due after one year through five years 55,838 55,730
Due after five years through ten years 9,394 9,414
Due after ten years 234,165 233,441
- -------------------------------------------------------------------------------------------------
Total $335,034 $334,099
- -------------------------------------------------------------------------------------------------
Marketable equity securities 28,654 29,730
- -------------------------------------------------------------------------------------------------
Total $363,688 $363,829
=================================================================================================
</TABLE>
GA Financial, Inc. Annual Report 1996 29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Proceeds from sales of available for sale securities for the year ended
December 31, 1996 were approximately $88.7 million. Gross gains of approximately
$716,000 were realized on those sales and gross losses of approximately $140,000
were realized for the year ended December 31, 1996.
Proceeds from sales of available for sale securities for the year ended
December 31, 1995 were approximately $115.9 million of which $73.1 million were
not received until subsequent to December 31, 1995. Gross gains of approximately
$163,000 were realized on those sales and gross losses of approximately $1.7
million were realized for the year ended December 31, 1995.
Proceeds from sales of available for sale securities for the year ended
December 31, 1994 were approximately $22.3 million. Gross gains of approximately
$930,000 and gross losses of approximately $1.2 million were realized on those
sales. There were no sales of held to maturity securities in 1994.
The Company's holdings of mortgage-backed certificates and collateralized
mortgage obligations consist primarily of GNMA, FNMA and FHLMC pass-through
certificates which are backed by the full faith and credit of the United States
government or its agencies.
NOTE 5. LOANS RECEIVABLE
................................................................................
Loans receivable at December 31, 1996 and 1995 consist of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(Dollars in thousands) December 31, 1996 December 31, 1995
<S> <C> <C>
Mortgages:
Residential and multi-family $184,961 $129,717
Commercial 5,053 3,290
Construction and development 3,545 5,891
Consumer loans:
Home equity 22,153 20,151
Educational loans 15,383 20,766
Other:
Loans on savings accounts 2,062 2,159
Unsecured personal loans and other 1,698 1,449
- --------------------------------------------------------------------------------
Total 234,855 183,423
Less:
Undisbursed mortgage loans 684 1,363
Deferred loan fees 1,381 963
Allowance for losses 1,031 822
- --------------------------------------------------------------------------------
Net loans $231,759 $180,275
================================================================================
</TABLE>
The Company purchased approximately $71.2 million and $24.2 million in 1996
and 1995, respectively, of residential mortgage loans collateralized by single-
family properties located outside its primary market area, such as other regions
of Pennsylvania, Ohio and New York. The sellers have retained the servicing
rights on these purchases.
In the ordinary course of business, the Company has transactions, including
loans, with the Company's principal officers and directors and their related
interests. Related party loans outstanding were approximately $943,000 and
$504,000 at December 31, 1996 and 1995, respectively.
30 GA Financial, Inc. Annual Report 1996
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a summary of activity in the allowance for loan losses:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
(Dollars in Thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 822 $ 850 $ 846
Provision charged to operations 210 -- --
Loan charge-offs (20) (35) (39)
Loan recoveries 19 7 43
- --------------------------------------------------------------------------------
Balance, end of year $1,031 $ 822 $ 850
================================================================================
</TABLE>
At December 31, 1996 and 1995, the Company had approximately $900,000 and
$1.5 million, respectively, in loans which were 90 days or more past due and
were not accruing interest.
The Company did not have any recorded investment in loans for which
impairment has been recognized in accordance with Statement No. 114 at
December 31, 1996 or 1995.
NOTE 6. OFFICE, PROPERTY AND EQUIPMENT
................................................................................
Office, property and equipment at December 31, 1996 and 1995 consist of the
following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(Dollars in Thousands) December 31, 1996 December 31, 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Office buildings $ 7,750 $ 7,292
Equipment 9,467 9,172
Land and land improvements 995 995
- --------------------------------------------------------------------------------
Sub-total 18,212 17,459
Less: accumulated depreciation and
amortization 12,568 11,776
- --------------------------------------------------------------------------------
Net office, property and equipment $ 5,644 $ 5,683
================================================================================
</TABLE>
The Company recognized depreciation and amortization expense of approximately
$865,000, $882,000 and $928,000 for the years ended December 31, 1996, 1995, and
1994, respectively.
GA Financial, Inc. Annual Report 1996 31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. NON-INTEREST BEARING DEMAND DEPOSITS AND SAVINGS ACCOUNTS
................................................................................
Non-interest bearing demand deposits and savings accounts are summarized as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) DECEMBER 31, 1996 DECEMBER 31, 1995
- -------------------------------------------------------------------------------------------
AVERAGE AVERAGE
RATE AMOUNT PERCENT RATE AMOUNT PERCENT
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing
accounts $ 19,685 4.38% $ 17,464 4.11%
- -------------------------------------------------------------------------------------------
Interest bearing accounts:
Non-certificate accounts:
NOW/Super NOW accts. 2.05% 27,652 6.15 2.05% 24,560 5.78
Money market 2.25% 17,093 3.80 2.25% 17,253 4.06
Passbook savings 3.00% 159,038 35.38 3.00% 164,765 38.78
- -------------------------------------------------------------------------------------------
Total non-certificate
accounts 203,783 45.33 206,578 48.62
- -------------------------------------------------------------------------------------------
Certificates of deposit:
0% to 4.00% 3.54% 1,322 0.29 3.71% 5,771 1.36
4.00% to 4.99% 4.64% 87,668 19.50 4.51% 56,479 13.29
5.00% to 5.99% 5.47% 68,477 15.23 5.40% 82,580 19.44
6.00% and above 6.92% 68,631 15.27 6.67% 55,998 13.18
- -------------------------------------------------------------------------------------------
Total certificates of
deposit 5.94% 226,098 50.29 5.55% 200,828 47.27
- -------------------------------------------------------------------------------------------
Total interest bearing
accounts 429,881 95.62 407,406 95.89
- -------------------------------------------------------------------------------------------
Total deposits $449,566 100.00% $424,870 100.00%
===========================================================================================
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000 was $14.1 million and $12.1 million at December 31, 1996 and 1995,
respectively. Deposits in excess of $100,000 are not federally insured.
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) PERIOD TO MATURITY AT DECEMBER 31, 1996 PERIOD TO MATURITY AT DECEMBER 31, 1995
- -----------------------------------------------------------------------------------------------------------------------
WITHIN ONE TO TWO TO OVER WITHIN ONE TO TWO TO OVER
ACTUAL RATES ONE YR TWO YRS 3 YRS 3 YRS TOTAL ONE YR TWO YRS 3 YRS 3 YRS TOTAL
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest rate:
Less than 4% $ 1,317 $ 5 $ -- $ -- $ 1,322 $ 5,771 $ - $ - $ -- $ 5,771
4.00% to 4.99% 86,393 1,221 54 -- 87,668 52,181 3,324 974 -- 56,479
5.00% to 5.99% 26,028 19,623 12,410 10,416 68,477 51,499 11,631 11,846 7,604 82,580
6.00% and over 7,764 31,334 12,684 16,849 68,631 19,072 6,479 3,669 26,778 55,998
- -----------------------------------------------------------------------------------------------------------------------
Total $121,502 $52,183 $25,148 $27,265 $226,098 $128,523 $21,434 $16,489 $34,382 $200,828
=======================================================================================================================
</TABLE>
32 GA Financial, Inc. Annual Report 1996
<PAGE>
Notes to Consolidated Financial Statements (CONTINUED)
<TABLE>
<CAPTION>
Interest expense on savings accounts for the years ended December 31, 1996, Dollar amounts
1995 and 1994 is summarized as follows: in thousands
YEARS ENDED DECEMBER 31,
- -------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Passbook accounts $ 4,893 $ 5,104 $ 6,000
NOW/Super NOW accounts 496 464 503
Money market accounts 410 465 568
Certificates of deposit 10,880 10,460 7,565
- -------------------------------------------------------------------------------
Total $16,679 $16,493 $14,636
===============================================================================
</TABLE>
NOTE 8. INCOME TAXES
...............................................................................
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
- -------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $2,896 $1,376 $1,667
Deferred 120 11 21
- -------------------------------------------------------------------------------
3,016 1,387 1,688
State:
Current 465 225 206
- -------------------------------------------------------------------------------
Provision for income taxes $3,481 $1,612 $1,894
===============================================================================
</TABLE>
A reconciliation of the federal statutory tax rate to the tax rate applicable
to income before federal income taxes follows:
<TABLE>
<CAPTION>
DECEMBER 31,
- -------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory rate 34% 34% 34%
State income taxes 3 3 4
Other 1 (1) (1)
- -------------------------------------------------------------------------------
38% 36% 37%
===============================================================================
</TABLE>
GA Financial, Inc. Annual Report 1996 33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The deferred tax assets and deferred tax liabilities recorded on the
statements of financial condition are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) DECEMBER 31, 1996 DECEMBER 31, 1995
- -------------------------------------------------------------------------------------------------------------
DEFERRED TAX DEFERRED TAX DEFERRED TAX DEFERRED TAX
ASSETS LIABILITIES ASSETS LIABILITIES
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tax bad debt reserve $ -- $ 765 $ -- $ 765
Reserve for possible loan loss 351 -- 279 --
Loan origination fees/costs 109 -- 135 --
Depreciation/amortization -- 830 -- 803
Employee benefits -- -- 183 --
Net unrealized holding losses (gains)
on securities available for sale -- 52 -- 1,735
Other 24 -- -- 16
- -------------------------------------------------------------------------------------------------------------
Deferred tax asset/liability $484 $1,647 $ 597 $3,319
=============================================================================================================
</TABLE>
Net accumulated deferred income tax assets (liabilities) at December 31, 1996
and 1995 were ($1.2) million and ($2.7) million, respectively.
NOTE 9. DERIVATIVE FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK AND
CONCENTRATION OF CREDIT RISK
- --------------------------------------------------------------------------------
The Company has only limited involvement with derivative financial instruments.
Derivative financial instruments are held for or issued for purposes other than
trading. These investments are used to manage interest rate and prepayment
risk. Periodically, the Company enters into unconditional forward commitments
to purchase mortgage-backed certificates, such as those issued by the Government
National Mortgage Company, at a fixed price and coupon rate to be delivered,
typically, no longer than six months in the future. In addition, the Company
also enters into 50-50 flexible commitments to purchase GNMA's whereby the
broker will deliver at least 50% of the commitment amount or up to 150% of the
total commitment amount on the settlement date. In effect, 50% of the
commitment represents an unconditional forward commitment and the remaining
portion of the commitment represents standby commitments (put options) with
certain Board of Directors approved brokers. These commitments can be sold on
the open market. The Company will only enter into these commitments when it has
available liquidity to meet the full amount of the commitment and believes the
coupon interest rate is appropriate for asset liability management, thereby
reducing its own exposure to fluctuations in interest rates as well as to
enhance the yield due to a discount received for writing a put option.
Risks associated with these commitments arise from the possible inability of
counterparties to meet the terms of their contracts and from movements in
securities values and interest rates. Under standby commitments, the Company
bears the risk of an unfavorable change in the price of the mortgage-backed
certificates underlying the options. The Company reviews the creditworthiness
of the party to these commitments and disposes of forward commitments in the
event the market risk reaches specified levels.
A purchase commitment can be "paired off" against a sale commitment for the
same type of security bearing the same contract amount, rate and settlement
date. This is usually done when the sale commitment is at a higher fixed price
than the purchase commitment and management determines there is a high risk of
prepayment. During calendar years 1996, 1995 and 1994, certain purchase
commitments were "paired off" against sale commitments. Such activity resulted
in net gains of approximately $54,000, $207,000 and $143,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
34 GA Financial, Inc. Annual Report 1996
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. EMPLOYEE BENEFIT PLANS
On July 1, 1996 the Company merged its defined benefit plan (Plan) with the
Financial Institutions Retirement Fund (FIRF), a multi-employer plan. This
merger effectively resulted in a settlement and curtailment of the Plan. This
merger resulted in a before tax gain of $769,000. The Plan was modified to
reduce the benefit formula from a 60% high three year average salary to a 30%
high five year average salary and a 25 year target service minimum. Any full-
time employee as of June 30, 1996 is eligible to participate in the current
Plan.
Pension expense under FIRF will match the Company's required contribution to
the FIRF as determined annually. The Company was not required to make any
contributions to the FIRF for fiscal 1996.
The Company had a noncontributory, defined benefit pension plan (the Plan)
covering substantially all employees meeting minimum age and service
requirements. The Plan generally provides benefits based on years of credited
service and final average earnings. The Company's current funding policy was to
annually contribute the amount recommended by its consulting actuary subject to
current pension laws.
Net pension expense for the years ended December 31, 1995 and 1994 consists
of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(Dollars in Thousands) 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Service cost-benefits earned during the year $ 391 $ 475
Interest accrued on projected benefit obligation 396 373
Actual investment income on plan assets (827) 135
Net amortization and deferral 505 (389)
- --------------------------------------------------------------------------------
Net pension expense $ 465 $ 594
================================================================================
</TABLE>
The following table sets forth the Plan's funded status and amounts
recognized in the Company's consolidated statement of financial condition at
December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(Dollars in Thousands) 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of approximately $3.7 million
and $3.4 million for 1995 and 1994, respectively $3,778 $ 3,366
Projected salary increases 2,487 2,455
- --------------------------------------------------------------------------------
Projected benefit obligation 6,265 5,821
Plan assets at fair value 5,493 4,403
- --------------------------------------------------------------------------------
Plan assets less than projected benefit obligation (772) (1,418)
Unrecognized actuarial losses 255 926
Unrecognized transition credit (112) (125)
Unrecognized prior service costs 90 98
- --------------------------------------------------------------------------------
Accrued pension costs included in the consolidated
statements of financial condition ($539) ($519)
================================================================================
</TABLE>
The projected benefit obligation was determined using an assumed discount
rate of 7.0% for 1995 and 5.75% in 1994. The expected rate of increase in
compensation was 5.50% and the expected long term rate of return on the plan
assets was 7.50% for 1995 and 1994.
GA Financial, Inc. Annual Report 1996 35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Pension plan assets were primarily certificates of deposit with maturities of
not more than one year and U.S. Treasury Securities. Changes in these values,
attributable to differences between actual and expected returns on plan assets,
were deferred as unrecognized gains or losses and included in the determination
of net pension costs over time. For the year ended December 31, 1995, the
Plan's assets included investments in the Company's certificates of deposit and
interest-bearing checking accounts which approximated $776,000.
On January 30, 1996 the Board of Directors approved a 401(k) program for all
eligible employees permitting participants to defer a maximum of 15% of their
base salary with the Company contributing a 25% match on the first 6% of
deferred income. The compensation expense relating to the 401(k) match was
$41,000 for 1996. The Company will match 50% beginning in 1997.
The Company has established for full-time employees who have attained the age
of 21 a separate Employee Stock Ownership Plan ("ESOP") in connection with the
conversion (See Note 2). The ESOP borrowed an aggregate of $7.1 million from the
Company and purchased 712,000 common shares issued in the conversion. The
Association intends to make scheduled discretionary cash contributions to the
ESOP sufficient to service and repay the amounts borrowed over a period of up to
14 years. In connection with the formation of the ESOP, the Company adopted
Statement of Position 93-6. As shares in the ESOP are earned and committed to be
released, compensation expense will be recorded based on their fair value during
each reporting period. The difference between the fair value of the shares
committed to be released and the cost of those shares to the ESOP will be
charged or credited to additional paid-in capital. The balance of unearned
shares held by the ESOP is shown as a reduction of shareholders' equity. Only
those shares in the ESOP which have been earned and are committed to be released
will be included in the computation of earnings per share. At December 31, 1996,
50,857 of the shares in the ESOP were earned and committed to be released.
Compensation expense related to the ESOP amounted to $622,000 for the year ended
December 31, 1996. Dividends received on unallocated ESOP shares in 1996
amounted to $93,000 and are included in compensation expense. The fair value at
December 31, 1996 of the unearned shares in the ESOP was $10 million based on
the last sales price of the company's common stock of approximately $15.125 on
that date.
NOTE 11. CAPITAL REQUIREMENTS AND REGULATORY RESTRICTIONS
- --------------------------------------------------------------------------------
As a savings and loan holding company, the Company is not required to maintain
any minimum level of capital; however, the Association is subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory --
and possibly additional discretionary -- actions by regulators that, if
undertaken, could have a direct material effect on the Company's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company must meet specific capital guidelines that
involve quantitative measures of the Company's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Company's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors. The Association is considered "well-capitalized" under the OTS' prompt
corrective action regulations.
Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989
(FIRREA), the Office of Thrift Supervision (the OTS) issued regulations covering
minimum regulatory capital requirements. Under OTS regulations, the Association
is required to maintain minimum regulatory tangible capital of at least 1.5% of
total assets, a minimum 3.0% leverage core capital ratio (expressed as a
percentage of tangible assets) and minimum risk-based capital of 8.0% (expressed
as a percentage of risk-weighted assets, which includes off-balance sheet items)
as defined by the OTS.
36 GA Financial, Inc. Annual Report 1996
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMNETS (CONTINUED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) TANGIBLE CAPITAL CORE CAPITAL RISK-BASED CAPITAL
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
December 31, 1996:
Consolidated shareholders' equity $122,404 $122,404 $122,404
General valuation allowance -- -- 1,031
Unrealized gains on certain available-for-
sale securities (88) (88) (88)
Core deposit intangible (1,277) (1,277) (1,277)
- ------------------------------------------------------------------------------------------------------
Regulatory capital computed 121,039 121,039 122,070
- ------------------------------------------------------------------------------------------------------
Minimum capital requirement 9,489 18,979 17,477
- ------------------------------------------------------------------------------------------------------
Regulatory capital excess $111,550 $102,060 $104,593
======================================================================================================
Computed capital ratio 19.13% 19.13% 55.88%
Minimum capital ratio 1.50% 3.00% 8.00%
- ------------------------------------------------------------------------------------------------------
Regulatory capital excess 17.63% 16.13% 47.88%
======================================================================================================
December 31, 1995:
Consolidated retained earnings $ 48,230 $ 48,230 $ 48,230
General valuation allowance -- -- 822
Unrealized gains on certain available-for
sale securities (2,954) (2,954) (2,954)
- ------------------------------------------------------------------------------------------------------
Regulatory capital computed 45,276 45,276 46,098
- ------------------------------------------------------------------------------------------------------
Minimum capital requirement 7,750 15,500 19,784
- ------------------------------------------------------------------------------------------------------
Regulatory capital excess $ 37,526 $ 29,776 $ 26,314
======================================================================================================
Computed capital ratio 8.77% 8.77% 18.64%
Minimum capital ratio 1.50% 3.00% 8.00%
- ------------------------------------------------------------------------------------------------------
Regulatory capital excess 7.27% 5.77% 10.64%
======================================================================================================
</TABLE>
Pursuant to Regulation D of the Federal Reserve, the Company is required to
maintain certain balances which include both cash on hand and deposits with the
Federal Reserve. The amount of these balances at December 31, 1996 and 1995
approximated $1.1 million and $961,000, respectively.
GA Financial, Inc. Annual Report 1996 37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
SFAS No. 107, "Disclosure About Fair Value of Financial Instruments," requires
the determination of fair value for certain of the Company's assets, liabilities
and off balance sheet liabilities. The following methods and assumptions were
used to estimate the fair value of each class of financial instruments for which
it is practicable to estimate that value.
CASH
The carrying amount of cash, which includes interest-bearing demand deposits,
approximates fair value.
FEDERAL FUNDS SOLD
The carrying amount of these overnight federal funds approximates fair value.
INVESTMENTS
The fair values of some investments are based on quoted market prices or on bid
quotations received from security dealers. If a quoted market price is not
available, fair value is estimated using quoted market prices for securities
with similar remaining maturities, comparable credit risk and coupon rates.
Mortgage-Related Securities and Collateralized Mortgage Obligations
The fair values are based on quoted market prices or dealer quotes.
LOANS RECEIVABLE
Fair values were estimated for loan portfolios with similar financial
characteristics by discounting contractual cash flows with adjustments for
prepayment. Assumptions regarding cash flows and discount rates were
judgmentally determined using available internal information which management
believes to be reasonable, taking into consideration the credit rating of the
counterparties, current interest rates and remaining maturities.
FEDERAL HOME LOAN BANK STOCK
The stock can be redeemed at its carrying amount; therefore, the carrying amount
approximates fair value.
Noninterest-Bearing Demand Deposits
The fair value on these deposits is the amount payable on the reporting date.
SAVINGS ACCOUNTS
The fair value of Passbook, SuperNOW and Money Market accounts is the amount
payable on demand at the reporting date. The fair value of fixed-maturity
certificates of deposit is estimated based on present value computations using
as a discount rate the rates currently offered for deposits of similar remaining
maturities.
BORROWED FUNDS
Fair value is determined by discounting the borrowings using current rates of
borrowings with comparable maturities as of the reporting date.
COMMITMENTS TO EXTEND CREDIT
Fair value was estimated using the fees currently charged, if any, to enter into
similar agreements, taking into account the remaining terms of the agreements
and the creditworthiness of the counterparties.
FORWARD AND STANDBY COMMITMENTS
Fair value was estimated based on bid quotations from security dealers.
38 GA Financial, Inc. Annual Report 1996
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) DECEMBER 31, 1996 DECEMBER 31, 1995
- -------------------------------------------------------------------------------------------------
ESTIMATED BOOK ESTIMATED BOOK
FINANCIAL ASSETS: FAIR VALUE VALUE FAIR VALUE VALUE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash $ 22,349 $ 22,349 $ 16,870 $ 16,870
Federal funds sold 1,950 1,950 300 300
Investment securities 119,347 119,347 71,060 71,060
Mortgage-related securities 244,482 244,482 168,779 168,779
Loans receivable 230,946 231,759 185,401 180,275
- -------------------------------------------------------------------------------------------------
$619,074 $619,887 $442,410 $437,284
=================================================================================================
FINANCIAL LIABILITIES:
Noninterest-bearing demand deposits $ 19,685 $ 19,685 $ 17,464 $ 17,464
Savings accounts 428,840 429,881 407,218 407,406
Borrowed funds 51,603 51,525 -- --
- -------------------------------------------------------------------------------------------------
$500,128 $501,091 $424,682 $424,870
=================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Estimated Contract or Estimated Contract or
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS Fair Value Notional Amt Fair Value Notional Amt
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commitments to extend credit -- $24,400 -- $25,600
=================================================================================================
</TABLE>
A reconciliation of forward and standby commitment activity for periods
presented as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) FORWARD COMMITMENTS STANDBY COMMITMENTS
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at December 31, 1994 $ -- $ --
Purchase commitments 32,000 12,000
Commitments matured/expired -- (12,000)
Commitments settled (9,000) --
Commitments sold (23,000) --
- -------------------------------------------------------------------------------------------------
Balance at December 31, 1995 $ -- $ --
=================================================================================================
Purchase commitments $ 126,805 $ 4,000
Commitments matured/expired -- --
Commitments settled (108,805) (4,000)
Commitments sold (4,000) --
- -------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $ 14,000 $ --
=================================================================================================
</TABLE>
The fair value of the forward commitments at December 31, 1996 is $14.1 million.
GA Financial, Inc. Annual Report 1996 39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company also has loan commitments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
instruments involve elements of credit risk in excess of the amount recognized
in the consolidated financial statements. The Company's exposure to credit loss
in the event of nonperformance by the counterparty to the financial instruments
for commitments to extend credit is represented by the contractual amount of
those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments and the commitments expire within 60 days. The Company evaluates
each customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Company upon extension of
credit, is based on management's credit evaluation of the counterparty.
Collateral held includes residential real estate and income-producing
properties. Total commitments to extend credit at December 31, 1996 and 1995
were $24.4 million and $25.6 million, respectively, in loan commitments and
unused lines of credit which bear market rates at the time the commitments are
exercised. The loan commitments are held other than for trading. Since many of
the loan commitments may expire without being drawn upon, the total commitment
amount does not necessarily represent future cash requirements. The Company's
lending is primarily concentrated in the local southwestern Pennsylvania market.
At December 31, 1996, the Company had approximately $113.3 million of
residential real estate loans located out of its primary market area. These
loans are concentrated in other regions of Pennsylvania, Ohio, Delaware and New
York and are not serviced by the Company. The Company has no significant
concentrations of credit risk with any individual counterparty to originate
loans.
The Company believes that reasonable comparability between financial
institutions may not be likely due to the wide range of permitted valuation
techniques and numerous estimates which must be made given the absence of active
secondary markets for many financial instruments. This lack of uniform
valuation methodologies also introduces a greater degree of subjectivity to
these estimated values.
NOTE 13. SAIF ASSESSMENT
................................................................................
On September 30, 1996, President Clinton signed into law the Deposit Insurance
Funds Act of 1996, which included provisions recapitalizing the SAIF, provides
for the eventual merger of the thrift fund with the Bank Insurance Fund ("BIF"),
and reallocates payment of the annual Financing Corp. ("FICO") bond obligation.
As part of the package, the Federal Deposit Insurance Corp. ("FDIC") imposed a
special one-time assessment of 65.7 basis points to be applied against all SAIF-
assessable deposits as of March 31, 1995, which will bring the SAIF up to the
statutorily prescribed 1.25 percent designated reserve ratio. The special
assessment, paid by the Company in November 1996, was included as a $2.8 million
pretax charge to the Company's operations in 1996. The assessment reduced the
Company's 1996 net after-tax earnings of $1.8 million or $.23 per share.
Effective January 1, 1997, SAIF members will have the same risk-based
assessment schedule as BIF members. The Company, as a well capitalized bank,
will effectively pay no assessment for deposit insurance coverage beginning on
January 1, 1997. However, all SAIF and BIF institutions including the Company
will be responsible for sharing the cost of interest payments on the FICO bonds.
The cost will be an annualized charge of 1.3 basis points for BIF deposits and
6.4 basis points for SAIF deposits. The approximate annual cost of interest
payments for the Company is estimated at $288,000.
The Deposit Insurance Funds Act provides that the BIF and SAIF will merge on
January 1, 1999 if there are no more savings associations as of that date. That
legislation also requires that the Department of Treasury submit a report to
Congress by March 31, 1997 that makes recommendations regarding a common
financial institutions charter, including whether the separate charters for
thrifts and banks should be abolished. Various proposals to eliminate the
federal thrift charter, create a uniform financial institutions charter and
abolish the OTS have been introduced in Congress. The bills would require
federal savings institutions to convert to a national bank or some type of state
charter by a specified date (January 1, 1998 in one bill, June 30, 1998 in the
other) or they would automatically become national banks. Converted federal
thrifts would generally be required to conform their activities to those
permitted for the charter selected and divestiture of nonconforming assets would
be required over a two year period, subject to two possible one year extensions.
State chartered thrifts would become subject to the same federal regulation as
applies to state commercial banks. Holding companies
40 GA Financial, Inc. Annual Report 1996
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For savings institutions would become subject to the same regulation as holding
companies that control commercial banks, with a limited grandfather provision
for unitary savings and loan holding company activities. The Bank is unable to
predict whether such legislation would be enacted, the extent to which the
legislation would restrict or disrupt its operations or whether the BIF and SAIF
funds will eventually merge.
NOTE 14. SUPPLEMENTARY CASH FLOW INFORMATION
................................................................................
Cash paid during the years ended December 31, for interest and income taxes was
approximately $17.4 million and $2.8 million, respectively, in 1996, $16.4
million and $2.2 million, respectively, in 1995 and $14.7 million and $1.8
million, respectively, in 1994. Noncash investing and financing activity
consisted of the following: Investment securities and mortgage-backed
securities with an amortized cost of $230 million were reclassed from the
Company's held to maturity portfolio to their available for sale portfolio in
1995. In addition, in December, 1996 and December, 1995, the Company either
sold or purchased both investment securities and mortgage-backed certificates
and collateralized mortgage obligations that did settle with the brokers until
subsequent to December 31. Accordingly, amounts due to brokers of $5.8 million
and $42.0 million are shown separately on the consolidated statements of
financial condition at December 31, 1996 and December 31, 1995. Amounts due
from brokers of $73.1 million is shown separately on the consolidated financial
statements of financial condition at December 31, 1995. In 1994, the Company
designated $17.3 million of held to maturity investment securities as available
for sale investment securities upon the adoption of SFAS No. 115.
NOTE 15. NEW ACCOUNTING PRONOUNCEMENTS
................................................................................
In March 1995 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed of." The adoption of
this standard in 1996 did not have an effect on the Company's results of
operations.
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." The statement provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings based on a control-oriented "financial-components" approach. Under
this approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and liabilities it has incurred,
derecognizes financial assets when control has been surrendered and derecognizes
liabilities when extinguished. The provisions of SFAS No. 125 are effective for
transactions occurring after December 31, 1996, except those provisions relating
to repurchase agreements, securities lending, and other similar transactions and
pledged collateral, which have been delayed until after December 31, 1997 by
SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125, an amendment of FASB Statement No. 125." The adoption of
these statements is not expected to have a material impact on the Company's
financial position or results of operations.
NOTE 16. EARNINGS PER SHARE
................................................................................
The average number of shares outstanding for the period since March 25, 1996 is
8,154,000. Primary earnings per share is calculated by dividing net income by
the weighted average number of common shares and common stock equivalents
outstanding. Shares outstanding for 1996 do not include ESOP shares that were
purchased and unallocated during 1996 in accordance with SOP 93-6, "Employers'
Accounting for Employee Stock Ownership Plans." Shares granted but not yet
purchased under the Company's Stock Award Plan are considered common stock
equivalents for the earnings per share calculation. Earnings per share
information is not comparable for prior periods as the Company did not complete
its stock offering until March 25, 1996. The earnings per share for 1996
assumes the stock conversion was completed on January 1, 1996.
GA Financial, Inc. Annual Report 1996 41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17. GA FINANCIAL, INC. (PARENT COMPANY)
................................................................................
The following are the parent company's condensed financial statements:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(Dollars in Thousands) December 31, 1996
- --------------------------------------------------------------------------------
<S> <C>
STATEMENT OF FINANCIAL CONDITION
ASSETS
Cash $ 21
Mortgage related securities, at fair value 1,726
Investment securities, at fair value 26,597
Investment in the Association 93,768
Accrued interest receivable 378
Prepaid expenses and other assets 83
- --------------------------------------------------------------------------------
Total Assets $122,573
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Other $ 169
Shareholder's Equity:
Total Shareholders' Equity 122,404
- --------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $122,573
================================================================================
<CAPTION>
- --------------------------------------------------------------------------------
(Dollars in Thousands) For the Year Ended December 31, 1996
- --------------------------------------------------------------------------------
<S> <C>
STATEMENT OF INCOME
Investment securities interest income $ 2,042
Net gain on sale of investment securities 11
Mortgage related securities interest income 33
General and administrative expenses (319)
Income taxes (249)
State franchise taxes (795)
- --------------------------------------------------------------------------------
Income before equity in undistributed earnings of subsidiary 723
Equity in undistributed earnings of Association 4,879
- --------------------------------------------------------------------------------
Net income $ 5,602
================================================================================
</TABLE>
42 GA Financial, Inc. Annual Report 1996
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(Dollars in Thousands) For the Year Ended December 31, 1996
- --------------------------------------------------------------------------------
<S> <C>
STATEMENT OF CASH FLOWS
Cash flows from operating activities:
Net income $ 5,602
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of Association (4,879)
Net realized gain on securities (11)
Net discount accretion on investment securities (65)
Increase in accrued interest receivable (378)
Increase in prepaid expenses and other assets (83)
- --------------------------------------------------------------------------------
Net cash provided by operating activities 186
- --------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of available for sale securities 24,004
Repayments, maturities and calls of available for sale securities 4,274
Purchases of available for sale securities (56,393)
- --------------------------------------------------------------------------------
Net cash used in investing activities (28,115)
- --------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of common stock, net 86,372
Purchase of unearned employee stock ownership plan shares (7,120)
Purchase of Company capital stock (43,269)
Purchase of treasury stock (6,768)
Purchase of recognition and retention stock (737)
Proceeds for employee stock ownership plan payment 416
Dividends paid to shareholders (1,064)
Net increase in other liabilities 120
- --------------------------------------------------------------------------------
Net cash provided by financing activities 27,950
- --------------------------------------------------------------------------------
Net increase in cash and cash equivalents 21
Cash and cash equivalents at beginning of period --
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 21
================================================================================
</TABLE>
The parent company began operations on March 25, 1996.
GA Financial, Inc. Annual Report 1996 43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18. RELATED PARTY TRANSACTIONS
................................................................................
A member of senior management of the Company is also a partner in a law firm
which provided services to the Company during 1996. Legal fees paid to the law
firm during the year ended December 31, 1996 were $32,000. For the years ended
December 31, 1995 and 1994, payments to the legal firm for legal services
performed were $30,000 and $22,000.
NOTE 19. SUBSEQUENT EVENTS
................................................................................
The Board of Directors declared a dividend of $.08 per share to shareholders of
record on February 10, 1997, payable on February 21, 1997.
The Company's data processing division, DataOne Financial Services, provided
data processing services to the Company and two other financial institutions in
1996. One of these institutions notified DataOne that it would not renew its
contract when it expired in December 1996. The revenue from this institution in
1996 was $292,000. DataOne is attempting to replace this company with a new
client.
The trustee for the Company's 1996 stock-based incentive plan completed the
purchase of the Plan's 356,000 shares in February, 1997. There were 50,000
shares purchased as of December 31, 1996.
The Company has filed an application to the OTS, dated February 19, 1997, to
repurchase up to 10% of the outstanding common stock of the Company.
NOTE 20. STOCK-BASED COMPENSATION PLANS
................................................................................
The Company has two stock-based compensation plans which are described below.
The Company has elected to follow Accounting Principles Board Opinion Number 25,
"Accounting For Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its stock-based compensation plans.
STOCK AWARDS
On October 16, 1996 shareholders approved the Company's Stock Award Program.
Under this program up to 4% of the Company's outstanding shares or 356,000
shares could be awarded to directors, officers, or employees. The Board of
Directors issued 308,650 shares to directors, officers, and employees. The
awards vest at the rate of 20% per year for five years and can be forfeited if
an employee is dismissed for cause. The value of the stock on the award date was
$13.13 which was equal to the market price of the stock on that date.
Compensation expense recorded in the consolidated financial statements under
this plan for 1996 was $133,000. The unearned compensation expense and common
stock yet to be issued under the current year award as of December 31, 1996 is
$3.9 million and $3.4 million, respectively.
44 GA Financial, Inc. Annual Report 1996
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STOCK OPTIONS
Under the Company's 1996 Stock Option Plan the Company was authorized to issue
options of up to 890,000 shares. The Plan was approved by shareholders on
October 16, 1996. The Board of Directors awarded options of 626,500 shares.
Under this plan the exercise price of $12.75 for each option is equal to the
market price of the stock on the date of the grant. The options vest at the
rate of 20% per year for five years and are exercisable over a period of ten
years from the date of the grant. Because the Company accounts for this stock
option plan using APB 25, no compensation expense has been recorded in the
financial statements for this plan. Had compensation cost for this stock option
plan been determined based on the fair value at the grant date consistent with
the method of FASB Statement 123, the Company's net income and earnings per
share would have been reduced to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
- -----------------------------------------------------------
1996
- -----------------------------------------------------------
<S> <C> <C>
Net income (thousands) As reported $5,602
Pro forma $5,553
Primary earnings per share As reported $ 0.69
Pro forma $ 0.68
Fully diluted earnings per share As reported $ 0.68
Pro forma $ 0.68
</TABLE>
The fair value for the options described above was estimated at the date of
the grant using a Black-Scholes option pricing model with the following weighted
average assumptions for 1996: risk-free interest rate of 6.82%, dividend yield
of 2%, volatility factors of the expected market price of the Company's common
stock of .253, and an average life of the options of 6.5 years. The Black-
Scholes valuation model was developed for use in estimating the fair value of
traded options which have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective
assumptions including the expected stock price volatility. Because the Company's
employee 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 effect
of applying FAS 123 for pro forma disclosures are not likely to be
representative of the effects on reported net income for future years.
GA Financial, Inc. Annual Report 1996 45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the status of the Company's stock awards and fixed stock
option plan as of December 31, 1996 and changes during the year is presented
below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands, Except Share Data) 1996
- ---------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVG.
EXERCISE PRICE
AWARDS OPTIONS ON OPTIONS
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at the beginning of the year -- -- --
Granted 308,650 626,500 $12.75
Exercised -- -- --
Forfeited -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Outstanding at year end 308,650 626,500 $12.75
- ---------------------------------------------------------------------------------------------------------------------------------
Options exercisable at year end --
Weighted average fair value of options
granted during the year $12.75
</TABLE>
Information about the fixed-stock option plan is described below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands, Except Share Data) OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------------------------------------------------------------------------------------------
REMAINING NUMBER
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICE AT 12/31/96 LIFE PRICE AT 12/31/96 PRICE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$12.75 626,500 9.75 years $12.75 -- $12.75
</TABLE>
46 GA Financial, Inc. Annual Report 1996
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 21. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
THREE MONTHS ENDED
- --------------------------------------------------------------------------------
1996 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $8,731 $10,216 $10,515 $10,888
Interest expense 4,218 4,113 4,350 4,864
Net interest income
before provision for loan
losses 4,513 6,103 6,165 6,024
Provision for loan losses 30 30 75 75
Non-interest income 407 576 1,988 489
Non-interest expense/3/ 3,267 3,397 6,412 3,896
Income before income taxes 1,623 3,252 1,666 2,542
Provision for income taxes 612 1,159 584 1,126
- --------------------------------------------------------------------------------
Net income $1,011 $ 2,093 $ 1,082 $ 1,416
================================================================================
Earnings per share/1/ .12 .26 .13 .17
================================================================================
<CAPTION>
1995 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $7,982 $ 8,123 $ 8,393 $ 8,335
Interest expense 3,884 4,166 4,275 4,218
Net interest income
before provision for loan
losses 4,098 3,957 4,118 4,117
Provision for loan losses -- -- -- --
Non-interest income 456 520 620 (1,174)
Non-interest expense 3,151 2,767 3,022 3,340
Income before income taxes 1,403 1,710 1,716 (397)
Provision for income taxes 526 618 629 (161)
- --------------------------------------------------------------------------------
Net income (loss) $ 877 $ 1,092 $ 1,087 $ (236)
================================================================================
Earnings per share/2/ -- -- -- --
================================================================================
</TABLE>
/1/Quarterly earnings per share may vary from annual earnings per share due to
rounding.
/2/Earnings per share information for the prior period is not comparable as the
Company did not complete its stock offering until March 25, 1996.
/3/The SAIF assessment of $2.8 million was accrued on September 30, 1996.
GA Financial, Inc. Annual Report 1996 47
<PAGE>
<PAGE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 1996
10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<MULTIPLIER> 1,000
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 6,757
<INT-BEARING-DEPOSITS> 15,592
<FED-FUNDS-SOLD> 1,950
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 363,829
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 232,790
<ALLOWANCE> 1,031
<TOTAL-ASSETS> 634,048
<DEPOSITS> 449,566
<SHORT-TERM> 37,525
<LIABILITIES-OTHER> 10,553
<LONG-TERM> 14,000
0
0
<COMMON> 89
<OTHER-SE> 122,315
<TOTAL-LIABILITIES-AND-EQUITY> 634,048
<INTEREST-LOAN> 18,025
<INTEREST-INVEST> 22,325
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 40,350
<INTEREST-DEPOSIT> 16,679
<INTEREST-EXPENSE> 17,545
<INTEREST-INCOME-NET> 22,805
<LOAN-LOSSES> 210
<SECURITIES-GAINS> 630
<EXPENSE-OTHER> 16,972
<INCOME-PRETAX> 9,083
<INCOME-PRE-EXTRAORDINARY> 9,083
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,602
<EPS-PRIMARY> .69
<EPS-DILUTED> .69
<YIELD-ACTUAL> 7.45
<LOANS-NON> 896
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 822
<CHARGE-OFFS> 20
<RECOVERIES> 19
<ALLOWANCE-CLOSE> 1,031
<ALLOWANCE-DOMESTIC> 1,031
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
