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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, 1997
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 $144,574,420, based upon the last sales price as listed on
The American Stock Exchange for March 9, 1998.
The number of shares of Common Stock outstanding as of March 9, 1998 is:
7,609,180.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended December
31, 1997, are incorporated by reference into Part II of this Form 10-K.
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INDEX
<TABLE>
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PAGE
PART I
<S> <C> <C>
Item 1. Business.................................................. 1
Additional Item. Executive Officers of the Registrant................ 41
Item 2. Properties................................................ 42
Item 3. Legal Proceedings......................................... 43
Item 4. Submission of Matters to a Vote of Security Holders....... 43
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 43
Item 6. Selected Financial Data................................... 43
Item 7. Management's Discussion and Analysis of Financial......... 44
Condition and Results of Operations....................... 44
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk............................................... 44
Item 8. Financial Statements and Supplementary Data............... 44
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.................... 44
PART III
Item 10. Directors and Executive Officers of the Registrant........ 44
Item 11. Executive Compensation.................................... 44
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................ 44
Item 13. Certain Relationships and Related Transactions............ 45
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K................................................. 45
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, 1997, the Company had total assets of
$783.9 million, total deposits of $462.2 million and total stockholders' equity
of $116.1 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 and borrowed funds from
the Federal Home Loan Bank.
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, Fayette, 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.
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
Corp. and Aluminum Company of
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America. The largest employers in Pittsburgh, by the number of local employees,
include Westinghouse, USAirways, 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, 1997, the
Association had total loans outstanding of $310.0 million, of which $215.0
million were one- to four-family residential mortgage loans, or 69.4% of the
Association's total loans. At such date, the remainder of the Association's
loan portfolio consisted of $78.0 million of consumer loans, or 25.1% of total
loans; $5.8 million of multi-family residential loans, or 1.9% of total loans;
$3.0 million of construction and development loans, or 1.0% of total loans; $4.3
million of commercial real estate loans, or 1.4% of total loans; and $3.9
million of other loans, or 1.2% of total loans. At that same date, 9.8% 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, as a percentage of total assets has decreased from 28.1% of
total assets at December 31, 1996 to 27.4% of total assets at December 31, 1997.
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, 1997, the Association
purchased $56.9 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 the Northeast, Southeast and the Midwest United States.
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,
-------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------------- ------------------- ------------------- ------------------- -------------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family..... $215,024 69.37% $178,234 75.89% $122,509 66.79% $105,419 67.15% $103,190 67.48%
Multi-family............ 5,778 1.86 6,727 2.87 7,208 3.93 8,259 5.26 8,364 5.47
Commercial.............. 4,360 1.41 5,053 2.15 3,290 1.79 2,043 1.30 2,604 1.70
Construction and
development......... 2,966 0.96 3,545 1.51 5,891 3.21 4,830 3.08 8,177 5.35
Consumer loans:
Home equity............. 59,111 19.07 22,153 9.43 20,151 10.99 17,808 11.34 16,518 10.80
Education............... 18,853 6.08 15,383 6.55 20,766 11.32 14,680 9.35 10,151 6.64
Other:
Unsecured personal
loans.................. 1,594 0.51 1,534 0.65 1,250 0.68 1,298 0.83 1,376 0.90
Loans on savings
accounts............. 2,168 0.70 2,062 0.88 2,159 1.18 2,419 1.54 2,176 1.42
Other loans............. 125 0.04 164 0.07 199 0.11 230 0.15 368 0.24
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans... 309,979 100.00% 234,855 100.00% 183,423 100.00% 156,986 100.00% 152,924 100.00%
-------- ====== -------- ====== -------- ====== -------- ====== -------- ======
Less:
Undisbursed loan funds.. (688) (684) (1,363) (1,825) (5,380)
Deferred loan fees...... (1,442) (1,381) (963) (738) (675)
Allowance for loan
losses............... (1,322) (1,031) (822) (850) (846)
-------- -------- -------- -------- --------
Total loans,
net.......... $306,527 $231,759 $180,275 $153,573 $146,023
======== ======== ======== ======== ========
</TABLE>
3
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Loan Maturity. The following table shows the remaining contractual
maturity of the Association's loans at December 31, 1997. At December 31, 1997,
all of the Association's loans, except for education 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 $52.2 million, $37.2 million and $26.9 million for the years
ended December 31, 1997, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
At December 31, 1997
-------------------------------------------------------------------------------
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......... $ 1,094 $ -- $ 9 $1,980 $ 192 $2,493 $ 5,768
-------- --------- ------ ------ ------- ------ --------
After one year:
More than one
year to three
years................. 806 275 15 986 95 69 2,246
More than three
years to five
years................. 3,061 134 66 -- 21,772 1,323 26,356
More than five
years to 10 years..... 11,631 1,012 2,711 -- 53,651 2 69,007
More than 10
years to 20 years..... 27,026 4,357 61 -- 2,254 -- 33,698
More than 20 years..... 171,406 -- 1,498 -- -- -- 172,904
-------- ------ ------ ------ ------- ------ --------
Total due after
December 31, 1998..... 213,930 5,778 4,351 986 77,772 1,394 304,211
-------- ------ ------ ------ ------- ------ --------
Total amount due....... $215,024 $5,778 $4,360 $2,966 $77,964 $3,887 $309,979
======== ====== ====== ====== ======= ====== ========
Less:
Undisbursed
loan funds............................................................................. (688)
Deferred loan
fees, net.............................................................................. (1,442)
Allowance for
loan losses............................................................................ (1,322)
--------
Total loans, net........................................................................... $306,527
========
</TABLE>
4
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The following table sets forth at December 31, 1997 the dollar amount of
loans contractually due after December 31, 1998, and whether such loans have
fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
Due After December 31, 1998
--------------------------------------
Fixed Adjustable Total
--------- ---------- ---------
(In thousands)
<S> <C> <C> <C>
Mortgage loans:
One- to four-family............. $192,924 $21,005 $213,929
Multi-family.................... 5,778 -- 5,778
Construction and development.. 986 -- 986
Commercial...................... 4,279 73 4,352
Consumer loans:
Home equity..................... 58,919 -- 58,919
Education....................... 18,853 -- 18,853
Other Loans:
Unsecured personal loans...... 551 718 1,269
Loans on savings accounts..... -- -- --
Other loans..................... 125 -- 125
-------- ------- --------
Total loans receivable............. $282,415 $21,796 $304,211
======== ======= ========
</TABLE>
Origination, Sale, Servicing and Purchase of Loans. The Association's
mortgage origination lending activities are conducted by loan personnel at its
thirteen 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, 1997, 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 the Northeast, Southeast
and the Midwest United States. 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 (not table funded), closed in the name of the
correspondent financial institution and immediately
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assigned to the Association, and are generally purchased by the Association on a
servicing released basis. At December 31, 1997, the Association had $203.4
million of loans serviced by others which were serviced by approximately 30
third-party loan servicers. At such date, $33.2 million of purchased mortgage
loans, or 58.4% 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,
--------------------------------
1997 1996 1995
--------- --------- --------
(In thousands)
<S> <C> <C> <C>
Gross loans(1):
Beginning balance....................... $234,855 $183,423 $156,986
Loans originated:
Mortgage loans:
One- to four-family........... 4,218 5,004 2,159
Multi-family.................. 120 181 --
Commercial.................... 120 600 2,680
Construction and development.. 1,713 1,976 2,625
Consumer loans:
Home equity................... 15,810 11,256 10,660
Education..................... 10,777 8,680 9,318
Other:
Unsecured personal loans...... 747 780 661
Loans on savings accounts..... 1,275 1,235 1,063
-------- -------- --------
Total loans originated...... 34,780 29,712 29,166
Loans purchased(2)................. 98,546 71,156 24,250
-------- -------- --------
Total....................... 368,181 284,291 210,402
Less:
Principal repayments(3)........... (52,207) (37,186) (26,899)
Sales of loans....................... (5,989) (12,232) --
Transfer to REO.................... (6) (18) (80)
-------- -------- --------
Total loans................... 309,979 234,855 183,423
Loans held for sale................ (18,853) (15,383) --
-------- -------- --------
Ending balance.......................... $291,126 $219,472 $183,423
======== ======== ========
</TABLE>
____________________
(1) Gross loans include receivables held for investment and loans held for sale.
(2) All such loans are secured by single-family properties, and are comprised of
$40.7 million of home equity (consumer loans) and $56.9 million of one- to
four-family mortgage loans for the year 1997. For years 1996 and 1995, all
the loans are secured by one- to four-family mortgage loans. Loans purchased
for the year 1997 include premiums paid of $934,000 for these loans.
(3) Includes amortization of premiums and accretion of discounts.
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
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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, 1997, one- to four-family mortgage
loans totalled $215.0 million, or 69.4% of total loans. Of the Association's
mortgage loans secured by one- to four-family residences, $194.0 million, or
90.2%, 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, Fayette,
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, 1996 to $215.0 million, or 27.4% of total assets and
69.4% of total loans, at December 31, 1997.
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 95%. 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 $450,000 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 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. Because the Association
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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 1997 the Association originated 13 community
loans totalling $664,000.
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 95%, 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, 1997, the Association had $2.7 million of total EMR
loans, or 0.9% 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, 1997,
the Association had $3.0 million of construction and development loans which
constituted 1.0% 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 $350,000 and the maximum loan amount for construction
and development is $1.0 million. 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. 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
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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, 1997, multi-
family loans totalled $5.8 million, or 1.9% 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,
1997, the Association had $623,000 in multi-family real estate loan
participation interests, or 10.8% of multi-family loans and 0.2% 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 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.
9
<PAGE>
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, 1997 was
$4.3 million, or 1.4% 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,
1997, the Association had $1.6 million in commercial real estate loan
participation interests, or 35.8% of commercial real estate loans and 0.5% 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, 1997, the Association's
consumer loans amounted to $78.0 million, or 25.1% of the Association's total
loan portfolio. Home equity loans are generally only available to the residents
of Allegheny, Beaver, Butler, Fayette, 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 5.0% above the prime
rate of interest as published by The Wall Street 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. The home equity
lines of credit are offered to a maximum amount of the lesser of $100,000 or 90%
of the appraised value of the property. Home equity installment loans are
offered to a maximum amount of the lesser of $150,000 or 90% of the appraised
value of the property. 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
10
<PAGE>
land and the construction of a new primary residence. At December 31, 1997,
home equity loans totalled $59.1 million, or 75.8% of consumer loans and 19.1%
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 ("USAF"). 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 USAF policies and procedures program manuals, for loans guaranteed
by each respective agency. At December 31, 1997, education loans totalled $18.9
million, or 24.2% of consumer loans and 6.0% 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 36%.
Secured personal lines of credit and installment loans are generally secured by
certificates of deposit and passbook savings accounts. At December 31, 1997,
personal loans totalled $3.9 million, or 1.2% of total loans of which $2.2
million were secured by savings accounts.
From 1993 until March of 1996, the Association was an agent for a third
party which 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 March of 1996. Credit card
loans require a debt ratio of 36% and are offered to a maximum credit limit of
$7,500.
At December 31, 1997, 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 $125,000.
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 $450,000 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 $450,000 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
11
<PAGE>
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 above $1 million 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,
1997, the loans to one borrower limitation was $15.0 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, 1997, the Association had $203.4 million of loans
serviced by others and $106.6 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.
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
12
<PAGE>
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."
For regulatory purposes, 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.
For financial reporting purposes, the Company follows the guidelines of
Statement of Financial Accounting Standards ("SFAS") No. 114 "Accounting by
Creditors for Impairment of a Loan" and SFAS 118 "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures," an amendment of SFAS
114. SFAS 114 addresses the accounting by creditors for impairment of loans by
specifying how reserves for credit losses related to certain loans should be
measured. SFAS 118 rescinds SFAS 114 rules to permit a creditor to use existing
methods for recognizing interest income on impaired loans and eliminated the
income recognition provisions of SFAS 114.
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.
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, 1997, the
Association had $1.6 million of assets classified as Substandard, $6,000 of
assets classified as Doubtful and $13,000 of assets classified as Loss.
13
<PAGE>
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, 1997, 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, 1997 At December 31, 1996
-------------------------------------------------- --------------------------------------
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..... 48 $ 870 28 $ 720 60 $1,175 38 $ 537
Multi-family............ -- -- -- -- -- -- 1 97
Commercial.............. -- -- -- -- -- -- -- --
Consumer:
Home equity............. 48 1,229 28 930 6 59 6 73
Education............... 22 49 27 69 17 41 8 163
Other loans:
Unsecured personal loans... 11 26 10 14 14 23 11 26
--- ------ -- ------ -- ------ -- -----
Total...................... 129 $2,174 93 $1,733 97 $1,298 64 $ 896
=== ====== == ====== == ====== == =====
Delinquent loans to total
gross loans............... 0.70% 0.56% 0.55% 0.38%
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1995
---------------------------------------------------
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..... 67 $ 909 49 $ 727
Multi-family............ -- -- 1 8
Commercial.............. -- -- -- --
Consumer loans:
Home equity............. 7 75 5 116
Education............... 142 309 129 593
Other loans:
Unsecured personal loans... 5 12 9 16
--- ------ --- ------
Total...................... 221 $1,305 193 $1,460
=== ====== === ======
Delinquent loans to total
gross loans............. 0.71% 0.80%
</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, 1997, 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, 1997, 1996, 1995, 1994 and 1993, 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 $72,000, $37,000, $59,000, $48,000 and $55,000, respectively.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------
1997 1996 1995 1994 1993
------- ----- ------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Mortgage loans:
One- to four-family.................... $ 720 $ 537 $ 727 $ 753 $ 854
Multi-family........................... -- 97 8 -- --
Construction and development........... -- -- -- -- --
Commercial............................. -- -- -- -- 237
Consumer loans:
Home equity............................ 930 73 116 125 35
Education.............................. 69 163 593 329 171
Other loans:
Unsecured personal loans............... 14 26 16 31 14
------ ----- ------ ------ ------
Total non-accrual loans.............. 1,733 896 1,460 1,238 1,311
Real estate owned, net(3)................... -- -- -- 17 17
------ ----- ------ ------ ------
Total non-performing assets............ $1,733 $ 896 $1,460 $1,255 $1,328
====== ===== ====== ====== ======
Allowance for loan losses as a percent
of gross loans receivable(1).............. 0.43% 0.44% 0.45% 0.55% 0.58%
Allowance for loan losses as a percent of
total non-performing loans(2)............. 76.28% 115.07% 56.30% 67.73% 63.70%
Non-performing loans as a
percent of gross loans receivable(1)(2).. 0.56% 0.38% 0.81% 0.81% 0.90%
Non-performing assets as a percent of
total assets(2).......................... 0.22% 0.14% 0.28% 0.27% 0.27%
</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. 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, 1997, the
16
<PAGE>
Association's allowance for loan losses was 0.43% of total loans as compared to
0.44% as of December 31, 1996. The Association had non-accrual loans of $1.7
million and $896,000 at December 31, 1997 and December 31, 1996, 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,
-----------------------------------------
1997 1996 1995 1994 1993
------ ------- ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period... $1,031 $ 822 $ 850 $ 846 $ 751
Provision for loan losses........ 300 210 -- -- 180
Charge-offs:
Mortgage loans:
One- to-four-family...... 9 -- 8 31 20
Multi-family............. -- -- -- -- --
Commercial............... -- -- -- -- 45
Consumer loans:
Education................ 31 5 5 -- 215
Other loans................... 38 15 22 8 11
------ ------ ----- ----- -----
Total............... 78 20 35 39 291
Recoveries....................... 69 19 7 43 206
------ ------ ----- ----- -----
Net (charge-offs) recoveries..... (9) (1) (28) 4 (85)
------ ------ ----- ----- -----
Balance at end of period......... $1,322 $1,031 $ 822 $ 850 $ 846
====== ====== ===== ===== =====
Ratio of net charge-offs during
the period to average loans
outstanding during the period.. 0.00% 0.00% 0.02% 0.00% 0.06%
====== ====== ===== ===== =====
</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,
--------------------------------------------------------------------------------------------------
1997 1996 1995
-------------------------------- ------------------------------ ---------------------------------
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..... $ 624 47.20% 69.37% $ 706 68.48% 75.89% $429 52.19% 66.79%
Multi-family............ 100 7.56 1.86 117 11.35 2.87 103 12.53 3.93
Commercial.............. 14 1.06 1.41 15 1.45 2.15 16 1.95 1.79
Construction and 23 1.74 0.96 27 2.62 1.51 45 5.47 3.21
development..........
Consumer loans:
Home equity............. 530 40.09 19.07 145 14.06 9.43 118 14.35 10.99
Education............... -- -- 6.08 -- -- 6.55 89 10.83 11.32
Other loans:
Unsecured personal
loans................ 31 2.35 0.51 21 2.04 0.65 22 2.68 0.68
Loans on savings
accounts............. -- -- 0.70 -- -- 0.88 -- -- 1.18
Other loans........... -- -- 0.04 -- -- 0.07 -- -- 0.11
------ ------ ------ ------ ------ ------ ---- ------ ------
Total valuation
allowance....... $1,322 100.00% 100.00% $1,031 100.00% 100.00% $822 100.00% 100.00%
====== ====== ====== ====== ====== ====== ==== ====== ======
</TABLE>
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------
1994 1993
------------------------------- -------------------------------------
Percent
of Loans Percent
Percent of in Each Percent of of Loans
Allowance Category Allowance in Each
to Total to Total to Total Category
Amount Allowance Loans Amount Allowance to Total Loans
-------- ---------- -------- ------ ---------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family..... $ 324 38.12% 67.15% $ 513 60.63% 67.48%
Multi-family............ 107 12.59 5.26 105 12.41 5.47
Commercial.............. 171 20.12 1.30 35 4.14 1.70
Construction and 27 3.18 3.08 77 9.10 5.35
development..........
Consumer loans:
Home equity............. 151 17.76 11.34 85 10.05 10.80
Education............... 49 5.76 9.35 18 2.13 6.64
Other loans:
Unsecured personal 21 2.47 0.83 13 1.54 0.90
loans................
Loans on savings -- -- 1.54 -- -- 1.42
accounts.............
Other loans........... -- -- 0.15 -- -- 0.24
------ ------ ------ ------ ------ ------
Total valuation $ 850 100.00% 100.00% $ 846 100.00% 100.00%
allowance....... ====== ====== ====== ====== ====== ======
</TABLE>
18
<PAGE>
Real Estate Owned. At December 31, 1997, 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 estimated costs to sell the property. 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 all investments 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, 1997, 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 Conduit ("REMIC") and other asset-backed
obligation may not, in the aggregate, exceed 5% of total assets and limits the
weighted average
19
<PAGE>
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. As of December 31, 1997, all of the Association's
securities were categorized as available for sale.
Mortgage-Backed Securities. At December 31, 1997, the Association had
$212.7 million in mortgage-backed securities, or 27.1% 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 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, 1997, the Association had
$71.5 million of mortgage-related securities, or 9.1% 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
20
<PAGE>
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, 1997, the Association had
$24.2 million of corporate debt obligations, or 3.1% of total assets. The
Association's investments in corporate debt obligations, as of December 31,
1997, 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.
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
21
<PAGE>
are reflected as off-balance sheet commitments. As of December 31, 1997, the
Association had outstanding forward and standby commitment contracts to purchase
up to $42.0 million of GNMA mortgage-backed securities which had interest rates
ranging from 7.0% to 7.5% 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, 1997, 1996 and 1995,
the Association had net gains from such activity of $79,000, $54,000 and
$207,000, respectively.
U.S. Government Securities. At December 31, 1997, the Company had $77.1
million of U.S. Government agency securities, or 9.8% 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, 1997 the Company had $36.7
million of marketable equity securities, or 4.7% of total assets. This included
$14.0 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,
-------------------------------------------------------------------------
1997 1996 1995
-------------------- -------------------- ---------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
--------- -------- -------- -------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities available for
sale:
Marketable equity securities(1). $ 36,660 8.42% $ 29,730 8.17% $ 22,659 9.45%
U.S. Government Agency debt..... 77,178 17.72 48,499 13.34 20,013 8.34
Municipal Obligations........... 13,278 3.05 8,889 2.44 1,503 .62
Corporate obligations........... 23,910 5.49 17,298 4.76 26,671 11.12
U.S. Treasury................... -- -- 15,037 4.13 -- --
-------- ------ -------- ------ -------- ------
Total investment
securities............... 151,026 34.68 119,453 32.84 70,846 29.53
-------- ------ -------- ------ -------- ------
Mortgage-backed and mortgage
related securities available for
sale:
FHLMC............................. 17,797 4.09 23,107 6.35 29,101 12.13
FNMA.............................. 20,285 4.66 20,092 5.52 4,713 1.97
GNMA.............................. 172,435 39.60 127,732 35.11 84,162 35.09
CMOs.............................. 71,595 16.44 72,303 19.87 50,716 21.15
-------- ------ -------- ------ -------- ------
Total mortgage-backed and
mortgage-related
securities............ 282,112 64.79 243,234 66.85 168,692 70.34
-------- ------ -------- ------ -------- ------
Plus:
Unamortized premium (discount).. 2,288 0.53 1,142 0.31 301 0.13
-------- ------ -------- ------ -------- ------
Total securities, net...... 435,426 100.00% 363,829 100.00 239,839 100.00
-------- ------ -------- ------ -------- ------
</TABLE>
- ------------------------
(1) At December 31, 1997, marketable equity securities consisted of $31.6
million of mutual funds backed by adjustable-rate mortgage-backed
securities, corporate debt, corporate bonds, or government bonds; $1.6
million of FHLMC stock, $61,000 of Student Loan Market Association stock,
$418,000 of FNMA stock and $3.0 million of bank equities.
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,
------------------------------
1997 1996 1995
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Beginning balance....................................................................... $363,829 $239,839 $296,378
Investment securities purchased - held
to maturity................................................................... -- -- 52,404
Investment securities purchased -
available for sale............................................................ 135,608 115,072 9,502
Mortgage-backed and mortgage-related securities
purchased - held to maturity(3)............................................... -- -- 9,040
Mortgage-backed and mortgage-related securities
purchased - available for sale................................................ 119,049 145,461 6,012
Securities purchased, not settled(2)................................................. -- 5,830 41,953
Less:
Sale of investment securities -
available for sale.......................................................... (86,823) (43,439) (13,488)
Sale of mortgage-backed and mortgage-related
securities available for sale............................................... (49,267) (45,310) (29,324)
Securities sold, not settled(2)...................................................... -- -- (73,062)
Investment maturities......................................................... (18,625) (28,930) (55,691)
Principal repayments.......................................................... (34,532) (20,761) (9,429)
Realized gain (loss) on sale of investments, 518
mortgage-backed and mortgage-related securities............................... 630 (1,292)
Amortization of (premium) discount................................................... (103) (14) (410)
Change in net unrealized gain (loss) 5,772
on available for sale......................................................... (4,549) 7,246
-------- -------- --------
Ending balance(1)....................................................................... $435,426 $363,829 $239,839
======== ======== ========
</TABLE>
- ------------------
(1) Certain noncash transactions are included in the investment activity.
(2) The Association conducted sale and purchase activity of securities which had
not yet settled as of the period end.
(3) On December 15, 1995, the Association transferred all of its securities
categorized as held to maturity to its available for sale portfolio.
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 investments,
mortgage-backed and mortgage-related securities at the dates indicated:
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------
1997 1996 1995
--------------------- ------------------ -----------------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
-------- -------- -------- -------- --------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Short-term investments....................... $ 5,791 $ 5,791 $ 17,542 $ 17,542 $ 4,669 $ 4,669
-------- -------- -------- -------- -------- --------
Investment securities:
Available for sale:
Corporate obligations.................. 24,208 24,208 17,354 17,354 26,818 26,818
U.S. Treasury.......................... -- -- 14,949 14,949 -- --
U.S. government and
agency obligations................ 77,137 77,137 48,420 48,420 20,083 20,083
Municipal obligations.................. 13,260 13,260 8,894 8,894 1,500 1,500
Marketable equity
securities(1)......................... 36,660 36,660 29,730 29,730 22,659 22,659
-------- -------- -------- -------- -------- --------
Total available for sale.............. 151,265 151,265 119,347 119,347 71,060 71,060
-------- -------- -------- -------- -------- --------
Mortgage-backed and
mortgage-related securities:
Available for sale:
FHLMC.................................. 18,148 18,148 23,522 23,522 29,637 29,637
GNMA................................... 173,806 173,806 128,178 128,178 83,798 83,798
FNMA................................... 20,742 20,742 20,527 20,527 4,712 4,712
CMOs................................... 71,465 71,465 72,255 72,255 50,632 50,632
-------- -------- -------- -------- -------- --------
Total available for sale.............. 284,161 284,161 244,482 244,482 168,779 168,779
-------- -------- -------- -------- -------- --------
Total short-term investments, investment
securities, mortgage-backed and
mortgage-related securities................. $441,217 $441,217 $381,371 $381,371 $244,508 $244,508
======== ======== ======== ======== ======== ========
</TABLE>
- --------------------
(1) At December 31, 1997, marketable equity securities consisted of
$31.6 million of mutual funds backed by adjustable-rate
mortgage-backed securities, corporate debt, corporate bonds or
government bonds; $1.6 million of FHLMC stock, $61,000 of
Student Loan Market Association stock, $418,000 of FNMA Stock
and $3.0 million of bank equities.
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, 1997.
<TABLE>
<CAPTION>
At December 31, 1997
------------------------------------------------------------------------------------------------------
More than One More than Five
One Year or Less Year to Five Years Years to Ten Years More than Ten Years Total
------------------- -------------------- ------------------- ------------------- -----------------
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Short-term investments..... $ 5,791 5.45% $ -- --% $ -- --% $ -- --% $ 5,791 5.45%
Investment securities:
Available for Sale:
U.S. Government
agency securities.... 11,398 5.48 27,717 6.25 4,037 7.04 33,985 7.42 77,137 6.69
Municipal obligations. -- -- 3,704 4.18 674 4.65 8,882 5.26 13,260 4.92
Corporate obligations. 4,304 6.30 19,904 6.31 -- -- -- -- 24,208 6.31
Marketable equity
securities........... 30,032 6.59 -- -- -- -- -- -- 30,032 6.59
Common Stock.......... 6,628 -- -- -- -- -- -- -- 6,628 --
------- ---- ------- ---- ------ ----- ------- ---- -------- ----
Total investment
securities........... 52,362 -- 51,325 6.12 4,711 6.70 42,867 6.97 151,265 6.16
------- ---- ------- ---- ------ ----- ------- ---- -------- ----
Mortgage-backed and mortgage-related
securities:
Available for Sale:
GNMA................ -- -- -- -- -- -- 173,806 7.68 173,806 7.68
FNMA................ -- -- 2,888 6.60 383 7.22 17,471 6.66 20,742 6.66
FHLMC............... -- -- 13,918 6.70 -- -- 4,230 7.51 18,148 6.89
CMOs................ -- -- -- -- -- -- 71,465 6.76 71,465 6.76
------- ---- ------- ---- ------ ----- ------- ---- -------- ----
Total
mortgage-backed
and mortgage-
related
securities...... -- -- 16,806 6.68 383 7.22 266,972 7.36 284,161 7.32
------- ---- ------- ---- ------ ----- ------- ---- -------- ----
Total short-term
investments, investment
securities,
mortgage-backed
securities
and mortgage-related
securities................ $58,153 $68,131 $5,094 $309,839 $441,217
======= ======= ====== ======== ========
</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, 1997, core deposits represented 52.1% 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. 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, 1997, the Association's balance of
passbook accounts increased by $570,000, or 0.4%, and its balance of
certificates of deposits increased by $9.9 million, or 4.4%. The increase in
certificates of deposit resulted from the Association's raising of the rate paid
on certificates accounts during 1997 which caused depositors to invest in
certificates of deposit.
At December 31, 1997, certificate accounts with maturities of one year or less
totalled $15.9 million, or 3.4% 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,
--------------------------------
1997 1996 1995
------- ------- --------
(In thousands)
<S> <C> <C> <C>
Net deposits (withdrawals)..................... $(5,316) $ 8,551 $(13,864)
Interest credited on deposit accounts.......... 17,904 16,145 15,972
------- ------- --------
Total increase (decrease) in deposit accounts.. $12,588 $24,696 $ 2,108
======= ======= ========
</TABLE>
27
<PAGE>
At December 31, 1997, the Association had $15.9 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...... $ 1,560 5.08%
Over 3 through 6 months... 2,189 5.69
Over 6 through 12 months.. 3,561 5.79
Over 12 months............ 8,564 6.21
-------
Total..................... $15,874
=======
</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,
-------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------ ------------------------------ -------------------------------
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 $ 16,152 3.54% 2.46% $ 16,397 3.86% 2.50% $ 18,496 4.38% 2.51%
accounts..................
Passbook accounts.......... 160,155 35.12 3.00 162,636 38.34 3.01 170,151 40.30 3.00
NOW accounts............... 28,339 6.21 1.95 24,475 5.77 2.03 23,414 5.54 1.98
Non-interest-bearing
accounts.................. 21,784 4.78 -- 19,288 4.55 -- 16,311 3.86 --
-------- ------ ------ -------- ------ ------ -------- ------ ------
Total............... 226,430 49.65 2.54 222,796 52.52 2.60 228,372 54.08 2.64
-------- ------ ------ -------- ------ ------ -------- ------ ------
Certificate accounts:
Less than six months..... 719 0.16 3.83 622 0.15 3.62 738 0.18 3.88
Over six through 12
months.................. 76,267 16.72 4.90 89,627 21.13 4.97 92,260 21.85 5.21
Over 12 through 24 months 46,772 10.26 5.97 16,377 3.86 6.12 7,573 1.79 5.20
Over 24 months........... 60,664 13.30 5.98 52,501 12.37 5.90 52,241 12.37 5.75
IRA/KEOGH............... 45,198 9.91 5.65 42,272 9.97 5.50 41,073 9.73 5.44
-------- ------ ------ -------- ------ ------ -------- ------ ------
Total certificate
accounts............ 229,620 50.35 5.53 201,399 47.48 5.40 193,885 45.92 5.39
-------- ------ ------ -------- ------ ------ -------- ------ ------
Total average
deposits............ $456,050 100.00% 4.05% $424,195 100.00% 3.93% $422,257 100.00% 3.90%
======== ====== ==== ======== ====== ==== ======== ====== ====
</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, 1997.
<TABLE>
<CAPTION>
Period to Maturity from December 31, 1997 At December 31,
-------------------------------------------------- --------------------------
Less than One to Two to Over
One Year Two years Three years Three years 1997 1996 1995
--------- --------- ----------- ----------- ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts:
0 to 2.99%.......... $ -- $ -- $ -- $ -- $ -- $ -- $ --
3.00 to 3.99%........ 1,360 -- -- -- 1,360 1,322 5,771
4.00 to 4.99%........ 8,017 -- 10 26 8,053 87,668 56,479
5.00 to 5.99%........ 90,835 24,620 11,969 5,924 133,348 68,477 82,580
6.00 to 6.99%........ 42,213 20,781 9,691 2,693 75,378 51,103 39,846
7.00 to 7.99%........ 871 3,217 11,845 794 16,727 16,410 15,160
8.00 to 8.99%........ 27 -- -- 1,070 1,097 1,118 992
Over 9.00%........... -- -- -- -- -- -- --
-------- ------- ------- ------- -------- -------- --------
Total............ $143,323 $48,618 $33,515 $10,507 $235,963 $226,098 $200,828
======== ======= ======= ======= ======== ======== ========
</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. 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, 1997,
the Association had $137.2 million in short-term and $56.0 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,
--------------------------
1997 1996 1995
-------- ------- -----
(Dollars in thousands)
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding.............. $149,246 $ 8,204 $ 125
======== ======= =====
Maximum amount outstanding at
any month-end during the period.... 195,398 37,525 --
======== ======= =====
Balance outstanding at end of period..... 193,237 37,525 --
======== ======= =====
Weighted average interest rate
during the period.................. 5.86% 5.48% 6.39%
======== ======= =====
Weighted average interest rate at end
of period........................ 6.04% 5.56% --%
======== ======= =====
</TABLE>
At December 31, 1997, 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, 1997, the Association had 176 authorized full-time
employee positions and 60 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 and its non-insured
institution subsidiaries primarily to activities permissible for bank holding
companies under Section 4(c)(8) of the Bank
32
<PAGE>
Holding Company Act ("BHC Act"), subject to the prior approval of the OTS, and
certain activities authorized by OTS regulation, and no multiple savings and
loan holding company may acquire more than 5% of the voting stock of a company
engaged in impermissible activities.
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 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 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 as principal that are 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 at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain 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
33
<PAGE>
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, 1997, the
Association met each of its capital requirements 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, 1997.
<TABLE>
<CAPTION>
Capital
Excess --------------------
Actual Required (Deficiency) Actual Required
------- -------- ------------ ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible......... 95,895 11,422 84,474 12.59% 1.50%
Core (Leverage).. 95,895 22,844 73,052 12.59% 3.00%
Risk-based....... 97,217 23,040 74,178 33.76% 8.00%
</TABLE>
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 CAMELS 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
34
<PAGE>
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. 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. The SAIF was undercapitalized due
primarily to a 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. 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 was generally tax deductible. The SAIF
Special Assessment recorded by the Association amounted to $2.8 million on a
pre-tax basis and $1.8 million on an after-tax basis.
The Funds Act also spread the obligations for payment of the FICO bonds
across all SAIF and Bank Insurance Fund ("BIF") members. The BIF is the fund
which primarily insures commercial bank deposits. Beginning on January 1, 1997,
BIF deposits were assessed for a FICO payment of approximately 1.3 basis points,
while SAIF deposits pay approximately 6.4 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 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. 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 1997 was 6.5 basis points and
the premium paid for this period was $282,000. 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.
35
<PAGE>
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. Various proposals to eliminate the federal thrift charter, create
a uniform financial institutions charter and abolish the OTS have been
introduced in Congress. Some bills would require federal savings institutions
to convert to a national bank or some type of state charter by a specified date,
or they would automatically become national banks. Under some proposals,
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. A more recent
bill passed by the House Banking Committee would allow federal savings
institutions to continue to exercise activities being conducted when they
convert to a bank regardless of whether a national bank could engage in the
activity. Holding companies for savings institutions would become subject to
the same regulation as holding companies that control commercial banks, with
some limited grandfathering, including for savings and loan holding company
activities. The grandfathering would be lost under certain circumstances such
as a change in control of the Company. The Company is unable to predict whether
such legislation would be enacted or the extent to which the legislation would
restrict or disrupt its operations.
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,
1997, the Association's limit on loans to one borrower was $15.0 million. At
December 31, 1997, the Association's largest aggregate outstanding balance of
loans to one borrower was $2.2 million.
QTL Test. The HOLA requires savings institutions to meet a QTL test.
Under the QTL test, a savings and loan association either must qualify as a
"domestic building and loan association" as defined in the Internal Revenue Code
or 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, 1997, the Association maintained 97.8% of its portfolio assets in
qualified thrift investments and, therefore, met the QTL test. Recent
legislation has expanded the extent to which education loans, credit card loans
and small business loans may be considered "qualified thrift investments."
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
36
<PAGE>
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, 1997,
the Association was a Tier 1 Bank.
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 was 5% for fiscal 1997, but is subject
to change 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. During 1997, OTS regulations also required each savings
institution to maintain an average daily balance of short-term liquid assets of
at least 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 OTS has recently lowered the liquidity
requirement from 5% to 4% and eliminated the 1% short term liquid asset
requirement. The Association's liquidity ratio for December 31, 1997 was
21.9%, 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, 1997 totaled $136,000.
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
37
<PAGE>
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.
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). The Federal Reserve Board
regulations generally required for most of 1997 that reserves be maintained
against aggregate transaction accounts as follows: for accounts aggregating
$49.3 million or less (subject to adjustment by the Federal Reserve Board) the
reserve requirement was 3%; and for accounts aggregating greater than $49.3
million, the reserve requirement was $1.48 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 $49.3 million. The first $4.4
million of otherwise reservable balances (subject to adjustments by the Federal
Reserve Board) were exempted from the reserve requirements. The Association
maintained compliance with the foregoing
38
<PAGE>
requirements. For 1998, the Federal Reserve Board has decreased from $49.3 to
$47.8 million the amount of transaction accounts subject to the 3% reserve
requirement and to increase the amount of exempt reservable balances from $4.4
million to $4.7 million. 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.
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 1997, which covered the tax years up to 1995. For its
1997 taxable year, the Association is subject to a maximum federal income tax
rate of 34.0%.
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.
39
<PAGE>
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 liability. As of December 31, 1997, the Association had deferred
tax liabilities of $765,000 recorded for the tax bad debt reserve. The
Association will pay this liability beginning in 1999 over a four year period.
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.
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 Foreign
Franchise 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.
40
<PAGE>
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 12/31/97 Position
- --------------------- --------------- ------------------------------------------
<S> <C> <C>
Lawrence A. Michael 48 Secretary of the Company and Vice
President and Secretary of the Association
Raymond G. Suchta 49 Chief Financial Officer and Treasurer
of the Company and Vice President
and Chief Financial Officer of the
Association
Aaron T. Flaitz, Jr. 47 Vice President and Assistant Secretary
of the Association
Norman A. Litterini 56 Vice President - Lending of the
Association
Wayne A. Callen 48 Vice President - Data Processing of the
Association
Judith A. Stoeckle 57 Vice President - Systems Coordinator
of the Association
Richard M. Collins 38 Vice President - Commercial Lending
of the Association (started employment
January 2, 1998)
</TABLE>
41
<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
Year Leasehold
Leased Leased Date of Improvements at
or or Lease December 31,
Location Owned Acquired Expiration 1997
- ----------------------------- ------ -------- ---------- ---------------
<S> <C> <C> <C> <C>
Executive/Home Office:
Whitehall
4750 Clairton Boulevard
Whitehall, PA 15236.......... Owned 1983 - $2,322,524
Branch Offices:
Homestead
300 East Eighth Avenue
Homestead, PA 15120......... Owned 1945 - 30,000
McKeesport
225 Fifth Avenue
McKeesport, PA 15134........ Owned 1966 - 211,830
Clairton
608 Miller Avenue
Clairton, PA 15025.......... Owned 1959 - 44,318
Forest Hills
2210 Ardmore Boulevard
Forest Hills, PA 15221...... Owned 1974 - 234,534
Norwin Hills
8775 Norwin Avenue
North Huntingdon, PA 15642.. Leased 1991 2006 3,934
Elizabeth
548 Rock Run Road
Elizabeth Township, PA
15018....................... Owned 1978 - 215,154
Munhall
4600 Main Street
Munhall, PA 15120........... Owned 1982 - 470,550
Caste Village
Baptist & Grove Roads
Whitehall, PA 15236......... Leased 1991 2005 14,908
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
Net Book Value
Original of Property or
Year Leasehold
Leased Leased Date of Improvements at
or or Lease December 31,
Location Owned Acquired Expiration 1997
- ----------------------------- ------ -------- ---------- ---------------
<S> <C> <C> <C> <C>
White Oak
1527 Lincoln Way
White Oak, PA 15131......... Owned 1993 - 186,030
Belle Vernon
100 Sara Way
Belle Vernon, PA 15012....... Leased 1996 1999 220,516
North Fayette
250 Summit Park Drive
Pittsburgh, PA 15275......... Leased 1996 1999 202,587
West Mifflin
2251 Century Drive
West Mifflin, PA 15122...... Leased 1996 2000 200,296
----------
Total..................... $4,357,181
==========
</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 and 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 Information" and "Stock Price"
on the inside back cover of the Registrant's 1997 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 1997 Annual Report to Stockholders
on page 7 and is incorporated herein by reference.
43
<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
1997 Annual Report to Stockholders on pages 8 through 18 and is incorporated
herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
- --------------------------------------------------------------------
This information contained in the Section captioned, "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Asset/Liability Management/Interest Rate Sensitivity Analysis" on pages 8
through 10 of the 1997 Annual Report to Stockholders 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 1997 Annual Report to Stockholders on pages 19 through 42
and are incorporated herein by reference.
Item 9. Changes 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 29, 1998,
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 29, 1998,
at pages 7 and 8 and pages 12 through 17 (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 29, 1998,
at pages 3, 5 and 6.
44
<PAGE>
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 29, 1998, at pages 17 and 18.
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 1997 Annual Report to
Stockholders.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants................................... 19
Consolidated Statements of Financial Condition for the years ended
December 31, 1997 and 1996......................................... 20
Consolidated Statements of Income for the
Years Ended December 31, 1997, 1996 and 1995....................... 21
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1997, 1996 and 1995....................... 22
Consolidated Statements of Shareholders' Equity
for the Years Ended December 31, 1997, 1996 and 1995............... 23
Notes to Consolidated Financial Statements for the
Years Ended December 31, 1997, 1996 and 1995......................... 24-42
</TABLE>
The remaining information appearing in the 1997 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.
45
<PAGE>
(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
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*
11.0 Computation of Earnings Per Share (filed herewith)
13.0 Portions of the 1997 Annual Report to Stockholders
(filed herewith)
21.0 Subsidiary information is incorporated herein by
reference to "Part I - Subsidiaries"
23.0 Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule (filed herewith)
27.2 Restated Financial Data Schedule (filed herewith)
99.1 Proxy Statement, dated March 27, 1998, for the 1998
Annual Meeting of Stockholders
(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.
46
<PAGE>
CONFORMED 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 31, 1998
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 31, 1998
- ---------------- Chief Executive Officer
John M. Kish (principal executive officer)
/s/ John G. Micenko President and Director March 31, 1998
- -------------------
John G. Micenko
/s/ Raymond G. Suchta Chief Financial Officer March 31, 1998
- --------------------- and Treasurer
Raymond G. Suchta (principal accounting and
financial officer)
/s/ William G. Boyer Director March 31, 1998
- --------------------
William G. Boyer
/s/ Thomas E. Bugel Director March 31, 1998
- -------------------
Thomas E. Bugel
/s/ Darrell J. Hess Director March 31, 1998
- -------------------
Darrell J. Hess
/s/ Thomas M. Stanton Director March 31, 1998
- ---------------------
Thomas M. Stanton
/s/ David R. Wasik Director March 31, 1998
- ------------------
David R. Wasik
47
<PAGE>
Exhibit 11.0
GA FINANCIAL, INC.
STATEMENT REGARDING COMPUTATION OF
EARNINGS PER SHARE FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
For the Calendar Year
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
Basic:
Net income............................................. $ 8,317 $ 5,602
Net income applicable to common stock.................. 8,317 5,602
---------- ----------
Average common shares
outstanding - basic.................................. 7,021,900 7,845,214
Basic earnings per share............................... $ 1.18 $ 0.71
---------- ----------
Diluted:
Net income............................................. $ 8,317 $ 5,602
---------- ----------
Average common shares outstanding - basic.............. 7,021,900 7,845,214
Effect of dilutive securities:
Shares issuable upon exercise of outstanding
stock options and stock awards..................... 196,188 --
Average common shares outstanding - diluted............ 7,218,088 7,845,214
---------- ----------
Diluted earnings per share............................... $ 1.15 $ 0.71
========== ==========
</TABLE>
<PAGE>
EXHIBIT 13
Selected Consolidated Financial and Other Data
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
========================================================================
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets............................................ $ 783,948 $ 634,048 $ 521,398 $ 467,655 $ 486,278
Investment securities available for sale................ 151,265 119,347 71,060 20,187 --
Investment securities held to maturity.................. -- -- -- 104,304 204,757
Mortgage-related securities available for sale.......... 284,161 244,482 168,779 49,108 --
Mortgage-backed and mortgage-related
securities held to maturity........................... -- -- -- 122,779 110,205
Loans held for sale..................................... 18,853 15,383 -- -- --
Loans receivable, net................................... 287,674 216,376 180,275 153,573 146,023
Borrowed funds.......................................... 198,237 51,525 -- -- --
Total equity/2/......................................... $ 116,126 $ 122,404 $ 48,230 $ 40,892 $ 39,196
Selected Operating Data:
Interest income......................................... $ 52,680 $ 40,350 $ 32,833 $ 30,403 $ 32,593
Interest expense........................................ 27,233 17,545 16,543 14,769 15,494
-----------------------------------------------------------------------
Net interest income before provision for loan losses.. 25,447 22,805 16,290 15,634 17,099
Provision for loan losses............................. 300 210 -- -- 180
-----------------------------------------------------------------------
Net interest income after provision for loan losses... 25,147 22,595 16,290 15,634 16,919
Other income............................................ 2,648 3,460 422 1,502 4,122
Non-interest expense.................................... 14,752 16,972 12,280 11,982 11,896
-----------------------------------------------------------------------
Income before provision for income taxes and
cumulative effect of change in accounting method...... 13,043 9,083 4,432 5,154 9,145
Provision for income taxes.............................. 4,726 3,481 1,612 1,894 3,519
Cumulative effect of change in accounting method........ -- -- -- -- 314
-----------------------------------------------------------------------
Net income ............................................. $ 8,317 $ 5,602 $ 2,820 $ 3,260 $ 5,312
=======================================================================
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on average assets.............................. 1.15% 1.00% 0.59% 0.67% 1.09%
Return on average equity.............................. 7.19 5.21 6.27 8.00 14.36
Average equity to average assets...................... 15.92 19.22 9.49 8.38 7.61
Equity to total assets at end of period............... 14.81 19.31 9.25 8.74 8.06
Average interest rate spread.......................... 2.81 3.27 3.08 2.98 3.35
Net-interest margin................................... 3.61 4.20 3.54 3.33 3.64
Average interest-earning assets to average
interest-bearing liabilities........................ 120.85 129.07 112.88 111.16 109.12
Non-interest expense to average assets................ 2.03 2.54/1/ 2.59 2.47 2.45
Efficiency ratio...................................... 54.46 58.35 68.21 69.92 56.54
Cash dividends paid per share......................... 0.42 0.13 -- -- --
Dividend payout ratio................................. 36.52 18.31 -- -- --
Regulatory Capital Ratios:
Tier I leverage capital............................... 12.59 15.26 8.76 9.00 8.05
Tier I risk-based capital............................. 33.30 43.59 18.30 22.86 16.73
Total risk-based capital.............................. 33.76 44.08 18.63 23.32 17.09
Asset Quality Ratios:
Non-performing loans as a percent
of gross loans receivable........................... 0.56 0.38 0.81 0.81 0.90
Non-performing assets as a percent of total assets.... 0.22 0.14 0.28 0.27 0.27
Allowance for loan losses as a percent
of gross loans receivable........................... 0.43 0.44 0.45 0.55 0.58
Allowance for loan losses as a percent
of non-performing loans............................. 76.28% 115.00% 56.30% 67.73% 63.70%
Number of full-service customer facilities.............. 13 13 10 10 10
</TABLE>
/1/Excludes one-time SAIF assessment of $2.8 million.
/2/The Company completed its conversion to stock company on March 25, 1996.
7
<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 ten other branch offices in Allegheny County and two offices in
Westmoreland County, all 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, consumer loans 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, sales of
investments, mortgage-related securities and investments, Federal Home Loan Bank
of Pittsburgh (FHLB) advances and, to a significantly lesser extent, sales of
loans.
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.
Management of Interest Rate Risk and Market Risk Analysis
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. The Company has only limited
involvement with derivative financial instruments. Derivatives financial
instruments are held for or issued for purposes other than trading.
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 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
8
<PAGE>
Management's Discussion and Analysis (continued)
-----------------------------------------------
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.
Market risk is the risk of losses resulting from adverse changes in market
pricing and rates. The Company's market risk is primarily its interest rate risk
associated with its lending, deposit and borrowing functions. Interest rate risk
arises when interest rates on assets change in a different time period or in a
different proportion from that of liabilities. Management actively monitors its
interest rate sensitivity position with the primary objective to prudently
structure the balance sheet so that movements of interest rates on assets and
liabilities are highly correlated and produce a reasonable net interest margin
even in periods of volitile interest rates. Interest rate risk is considered by
management to be the Company's most significant market risk that could
materially impact the Company's financial position or result of operations. In
its normal course of business, the Company is not exposed to other types of
market risk such as risk associated with commodity prices or foreign currencies.
Net Portfolio Value
The Association's interest rate sensitivity is monitored by management through
the use of an internally generated model which estimates of the change in the
Association'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 Association's quarterly Thrift Financial Reports, the results of which may
vary from the Association's internal model primarily due to differences in
assumptions utilized between the Association's internal model and the OTS model,
including estimated loan and securities prepayment rates, reinvestment rates,
and deposit decay rates. Management of the Association believes the assumptions
utilized do not materially differ from those utilized by OTS and more closely
approximate the historical experience of the Association. The Association's NPV
analysis assumes that all fixed-rate mortgage loans and securities will amortize
according to the amortization rates experienced by the Association over the last
38 quarters, consumer loans will amortize over 58 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 Association's sensitivity 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 indicates the Association's NPV as of December 31, 1997, as
calculated by the Association, and indicates the composition of the
Association's assets and liabilities would result in a decline in the
Association's NPV in a rising interest rate environment. Specifically, the table
indicates that, as of December 31, 1997, the Association's NPV was $111.4
million (or 14.3% of the market value of total assets) and that, based upon the
assumptions utilized by the Association, an immediate increase in market
interest rates of 400 basis points would result in a $73.7 million, or 66%
decrease in the Association's NPV, and an immediate decrease in market rates of
400 basis points would result in a $90.3 million, or 81% increase in NPV.
As of December 31, 1997
(Dollars in Thousands)
---------------------------------------------------------
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
- --------------------------------------------------------------------------------
+400 bp.............. $ 37,705 ($73,686) -66% 5.5% -62%
+300 bp.............. 54,298 (57,093) -51% 7.6% -47%
+200 bp.............. 73,317 (38,073) -34% 10.0% -30%
+100 bp.............. 93,040 (18,351) -16% 12.3% -14%
Static.............. 111,391 0 0% 14.3% 0%
-100 bp.............. 131,231 19,840 18% 16.4% 14%
-200 bp.............. 152,886 41,496 37% 18.5% 29%
-300 bp.............. 176,352 64,962 58% 20.6% 44%
-400 bp.............. 201,708 90,317 81% 22.8% 60%
9
<PAGE>
Management's Discussion and Analysis (continued)
- ------------------------------------------------
Certain shortcomings are inherent in the methodology used in the above
interest rate 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 Association'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 Association'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 Association's net interest income and will differ from actual results.
Comparison of Financial Condition at December 31, 1997 and December 31, 1996
The Company's total assets were $783.9 million at December 31, 1997, an increase
of $149.9 million or 23.6% over the total assets at December 31, 1996. The
increase was funded primarily through FHLB borrowings consistent with
management's strategy of funding asset growth through the use of FHLB borrowings
as opposed to increasing deposit pricing to attract increased funding. Changes
in the components of assets are discussed herein.
Cash and cash equivalents decreased $11.6 million or 47.6% to $12.7 million
at December 31, 1997. December 1996 balances include savings deposits purchased
in December, 1996.
Investment securities were $151.3 million at December 31, 1997, an increase
of $31.9 million or 26.7% over December 31, 1996 due to purchases of $135.6
million of securities. The increase was funded by the increase in FHLB
borrowings.
Mortgage-related securities were $284.2 million at December 31, 1997, an
increase of $39.7 million or 16.2% over December 31, 1996. This increase,
primarily in GNMA securities, was also funded by FHLB borrowings.
Net loans receivable were $287.7 million at December 31, 1997, an increase
of $71.3 million or 33.0% over December 31, 1996. For a detailed breakout of
loans receivable refer to footnote number 5. The increase was primarily
attributable to the purchase of $97.6 million of loans including $40.7 million
of home equity consumer loans during 1997. The consumer home equity loans were
funded by FHLB borrowings.
Loans held for sale, all of which were education loans, were $18.9 million
at December 31, 1997, an increase of $3.5 million or 22.6% over December 31,
1996. FHLB stock at December 31, 1997 was $9.8 million, an increase of $7.5
million. The increase in FHLB stock was attributable to the increase in FHLB
borrowings. The Association is required to own stock in amounts based on the
amount of FHLB borrowings and a percentage of assets or a percentage of
mortgage-related assets.
Non-performing Loans. The Company's non-performing loans increased $800,000 from
$900,000 at December 31, 1996 to $1.7 million at December 31, 1997. This was
primarily due to the increase in balances of home equity consumer loans. As of
December 31, 1997 and 1996, the Company's non-performing loans were .56% and
.38% respectively, of total loans. The foregone interest income on non-
performing loans was $72,000 in 1997 and $37,000 in 1996.
Prepaid expenses and other assets were $8.2 million at December 31, 1997,
an increase of $6.3 million. This was due to the funding of $6.6 million of
split dollar life insurance policies for selected employees in December, 1997.
Non-interest bearing deposits were $21.4 million at December 31, 1997, an
increase of $1.7 million or 8.6% compared to December 31, 1996. The growth was
due to the Association's active advertisement of this type of account.
Interest-bearing savings accounts were $440.8 million at December 31, 1997,
an increase of $10.9 million compared to December 31, 1996.
Borrowed funds were $198.2 million at December 31, 1997, an increase of
$146.7 million, compared to December 31, 1996. This increase is a result of
management's determination to place increased emphasis on the utilization of
FHLB borrowings to fund asset growth, particularly mortgage-related and
investment securities, and home equity consumer loans. FHLB borrowings can be
invested at yields higher than the cost of the borrowed funds thereby increasing
net interest income. The maximum amount of borrowings outstanding at any month
end during 1997 was $200.4 million.
Accrued interest payable was $1.4 million at December 31, 1997, an increase
of $686,000 or 98.1% over December 31, 1996. This is a result of the increase in
accrued interest payable relating to our borrowings.
There were no securities purchased, not settled, at December 31, 1997. The
$5.8 million of securities purchased, not settled, at December 31, 1996 settled
in January, 1997.
Other liabilities were $4.4 million at December 31, 1997, an increase of
$2.2 million, or 98.0% compared to December 31, 1996. This was due to an
increase of $2.1 million of deferred taxes on unrealized holding gains on
available for sale securities.
10
<PAGE>
Management's Discussion and Analysis (continued)
-----------------------------------------------
Total shareholders' equity was $116.1 million at December 31, 1997, a
decrease of $6.3 million compared to December 31, 1996. The decrease was
primarily due to the Company's repurchase of 689,780 shares or $12.7 million of
GA Financial stock during 1997. The Company also funded the purchase of 306,000
shares of Company stock which was purchased by a trust established to hold
shares awarded under the Company's 1996 stock based incentive plan at a cost of
$4.1 million to complete the total purchase of 356,000 shares. The Company also
paid cash dividends per share to its shareholders in the first, second, third,
and fourth quarters of $.08, $.10, $.12 and $.12, respectively. This totaled
$3.1 million. Net income was $8.3 million for the year ended December 31, 1997.
Also, the change in net unrealized holding gains on securities available for
sale increased $3.6 million, net of taxes.
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.
<TABLE>
<CAPTION>
Dollar amounts in thousands Year ended Dec. 31, 1997 Year ended Dec. 31, 1996
-----------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Interest-earning deposits
short-term investments........... $ 7,829 $ 517 6.60% $ 13,124 $ 816 6.22%
Investment securities, net/1/...... 134,660 8,693 6.46 106,622 6,819 6.40
Loans receivable, net/1,2/......... 273,547 22,310 8.16 214,317 18,025 8.41
Mortgage-related
securities, net/1/............... 280,376 20,706 7.39 206,377 14,551 7.05
FHLB stock......................... 7,543 454 6.02 2,237 139 6.21
-----------------------------------------------------------------
Total interest-earning assets...... 703,955 52,680 7.48 542,677 40,350 7.44%
Non-interest earning assets......... 22,055 -- -- 17,077 -- --
-----------------------------------------------------------------
Total assets....................... $726,010 -- -- $559,754 -- --
-----------------------------------------------------------------
Liabilities and equity:
Interest-bearing liabilities:
Money market savings
accounts......................... $ 16,152 $ 397 2.46 $ 16,397 $ 410 2.50%
Passbook accounts.................. 160,155 4,805 3.00 162,636 4,893 3.01
NOW accounts....................... 28,339 552 1.95 24,475 496 2.03
Certificate accounts............... 229,620 12,688 5.53 201,399 10,880 5.40
Total............................ 434,266 18,442 4.25 404,907 16,679 4.12
Borrowings......................... 146,481 8,755 5.98 13,518 823 6.09
Other.............................. 1,780 36 2.02 2,038 43 2.11
Total interest-bearing
liabilities..................... 582,527 27,233 4.67 420,463 17,545 4.17
Non-interest bearing
liabilities..................... 27,887 -- -- 31,747 -- --
Equity............................. 115,596 -- -- 107,544 -- --
-----------------------------------------------------------------
Total liabilities and
equity.......................... $726,010 -- -- $559,754 -- --
-----------------------------------------------------------------
Net earning assets..................... $121,428 -- -- $122,214 -- --
Net interest income.................... -- $ 25,447 -- -- $ 22,805 --
Net interest rate spread/3/............ -- -- 2.81% -- -- 3.27%
Net interest margin/4/................. -- -- 3.61% -- -- 4.20%
Ratio of interest-earning
assets to interest-bearing
liabilities........................... -- -- 120.85% -- -- 129.07%
<CAPTION>
Dollar amounts in thousands Year ended Dec. 31, 1995
---------------------------------------
Average Yield/
Balance Interest Cost
---------------------------------------
<S> <C> <C> <C>
Assets:
Interest-earning assets:
Interest-earning deposits
short-term investments........ $ 7,518 $ 471 6.26
Investment securities, net/1/... 127,915 6,799 5.32
Loans receivable, net/1,2/...... 166,414 14,000 8.41
Mortgage-related
securities, net/1/............ 157,060 11,440 7.28
FHLB stock...................... 1,839 123 6.69
---------------------------------------
Total interest-earning assets... 460,746 32,833 7.13
Non-interest earning assets...... 13,556 -- --
---------------------------------------
Total assets.................... $474,302 -- --
---------------------------------------
Liabilities and equity:
Interest-bearing liabilities:
Money market savings
accounts...................... $ 18,496 $ 465 2.51
Passbook accounts............... 170,151 5,104 3.00
NOW accounts.................... 23,414 464 1.98
Certificate accounts............ 193,885 10,460 5.39
Total......................... 405,946 16,493 4.06
Borrowings...................... 125 8 6.39
Other........................... 2,187 42 1.92
Total interest-bearing
liabilities.................. 408,258 16,543 4.05
Non-interest bearing
liabilities.................. 21,121 -- --
Equity.......................... 44,923 -- --
---------------------------------------
Total liabilities and
equity....................... $474,302 -- --
---------------------------------------
Net earning assets.................. $ 52,488 -- --
Net interest income................. -- $ 16,290 --
Net interest rate spread/3/......... -- -- 3.08%
Net interest margin/4/.............. -- -- 3.54%
Ratio of interest-earning
assets to interest-bearing
liabilities........................ -- -- 112.88%
</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.
11
<PAGE>
Management's Discussion and Analysis (continued)
- ------------------------------------------------
Comparison of the Consolidated Results of Operation for the Years Ended
December 31, 1997 and 1996
Net Income. Net income for the year ended December 31, 1997 was $8.3 million, an
increase of $2.7 million or 48.5% from net income recorded for the year ended
December 31, 1996. Changes in the components of net income are discussed herein.
Interest Income. Interest income totaled $52.7 million for the year ended
December 31, 1997, an increase of $12.3 million or 30.6% over the amount
recorded in 1996. The average balances of interest-earning assets for 1997 was
$704.0 million, an increase of $161.3 million or 29.7% when compared to the
average balances of interest-earning assets at December 31, 1996. Total weighted
average yield on interest earning assets for 1997 was 7.48% compared to 7.44%
for 1996. Of the $12.3 million increase in net interest income, $12.0 million
was due to the increase in balances and $337,000 was due to the increase in
yield. Interest on loans for the year ended December 31, 1997 was $22.3 million,
an increase of $4.3 million or 23.8%. The increase in loan balances accounted
for an increase in interest income of $5.0 million while the decrease in yield
to a weighted average yield of 8.16% from 8.41% caused a reduction of $697,000
in interest income for a net increase of $4.3 million. The Company purchased
$97.6 million in mortgage loans and consumer home equity loans during 1997
versus purchases of $71.2 million in 1996. Interest on mortgage-related
securities for 1997 was $20.7 million. This was an increase of $6.2 million or
42.3% compared to interest income on mortgage-related securities for 1996 of
$14.6 million. Of the $6.2 million increase in interest on mortgage-related
securities, $5.2 million was caused by an increase in volume (balances) and the
increase in weighted average yield to 7.39% in 1997 from 7.05% in 1996 caused an
increase of $938,000, resulting in the net increase of $6.2 million. The
increase in balances resulted from purchases of mortgage-related securities
funded by FHLB advances. Interest income on investment securities for 1997 was
$8.7 million, an increase of $1.9 million or 27.5% compared to 1996. Of this,
$1.8 million was caused by an increase in balances. Weighted average yield
increased from 6.40% in 1996 to 6.46% in 1997. This increase in yield caused an
increase in interest income of $81,000, for a net increase of $1.9 million.
Interest income on interest bearing deposits was $517,000, a decrease of
$299,000 or 36.6% compared to 1996. A decrease of $329,000 was the result of a
reduction in balances as management moved funds into higher yielding investment
securities. The increase of $30,000 was due to the increase in rates from a
weighted average yield of 6.22% in 1996 to 6.60% in 1997 resulting in a net
decrease of $299,000.
Interest Expense. Interest expense for the year ended December 31, 1997 was
$27.2 million, an increase of $9.7 million or 55.5% compared to interest expense
of $17.5 million in 1996. Of this increase, $9.6 million was caused by an
increase in balances. $76,000 of the increase was caused by an increase in
weighted average costs of interest-bearing liabilities from 4.17% in 1996 to
4.67% in 1997. Average balances of interest-bearing liabilities during 1997 were
$582.5 million, an increase of $162.0 million or 38.5% compared to average
balances of $420.5 million during 1996. The Association took advantage of FHLB
advances to a greater extent in 1997. Interest expense on deposit accounts for
1997 was $18.4 million, an increase of $1.8 million or 10.5% compared to $16.7
million for 1996. Of this increase, $1.5 million was due to an increase in
balances. At the end of 1996 the Association purchased $25.4 million in deposits
from First Home Savings and Loan Association, Pittsburgh, PA. $241,000 of the
increase was caused by an increase in costs of interest bearing deposits to
4.25% in 1997 from 4.12% in 1996. Interest on borrowings for 1997 was $8.8
million, an increase of $7.9 million, compared to $823,000 for 1996. Of the $7.9
million increase, $8.1 million was caused by an increase in balances. A decrease
of $163,000 was caused as rates on borrowed funds fell to 5.98% weighted average
cost during 1997 from 6.09% weighted average cost during 1996. Funding asset
growth through FHLB borrowings is one of the strategies management is currently
employing. Management believes that FHLB borrowings can be invested at yields
higher than the cost of the borrowed funds, thereby increasing net interest
income. FHLB borrowings have been reinvested in mortgage-related securities,
consumer loans, and other investment securities.
12
<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, 1997
Compared to the
Year ended Dec. 31, 1996
Increase (decrease) Due to
(Dollars in Thousands) Volume Rate Net
------------------------
<S> <C> <C> <C>
Interest-earning assets:
Interest-earning deposits and short-term investments.... $ (329) $ 30 $ (299)
Investment securities................................... 1,793 81 1,874
Loans receivable, net................................... 4,982 (697) 4,285
Mortgage-backed securities.............................. 5,217 938 6,155
FHLB Stock.............................................. 330 (15) 315
------------------------
Total interest-earning assets.................. 11,993 337 12,330
------------------------
Interest-bearing liabilities:
Money market savings accounts........................... (6) (7) (13)
Passbook savings accounts............................... (75) (13) (88)
NOW accounts............................................ 78 (22) 56
Certificate accounts.................................... 1,525 283 1,808
Borrowings.............................................. 8,095 (163) 7,932
Other................................................... (5) (2) (7)
------------------------
Total interest-bearing liabilities............. 9,612 76 9,688
------------------------
Net Change in Net Interest Income.............. $2,381 $ 261 $2,642
------------------------
</TABLE>
Provision for Loan Losses. The Company provided $210,000 for loan losses during
1996. The loan loss reserve for the year ended December 31, 1996 was deemed
adequate. During 1997 the Company provided $300,000 to the loan loss provision
due to the continued increase in the residential mortgage and consumer home
equity 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 Company's allowance for loan losses is
sufficient to cover losses inherent in its 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 economic and other conditions
analyzed by management to determine the current level of the allowance for loan
losses.
Net Interest Income. Net interest income after the loan loss provision for 1997
was $25.1 million, an increase of $2.6 million or 11.3% compared to net interest
income of $22.6 million recorded for 1996.
Non-interest Income. Non-interest income consists of service fees, gains
(losses) from the sale of loans and securities, fees from the sale of data
processing services and other miscellaneous items. For the year ended December
31, 1997 non-interest income totaled $2.6 million, a decrease of $812,000 or
23.5% compared to the $3.5 million recorded for 1996. This decrease was due to
the one time $769,000 gain in 1996 on the settlement/curtailment of the defined
benefit pension plan recorded. Service fees increased $402,000 or 44.8% to $1.3
million in 1997 primarily due to increases in fees to checking accounts. Gains
on sales of securities and education loans decreased $236,000 due to timing of
sales. Data processing fees decreased $177,000 from the year ended December 31,
1996. The data processing division lost one client in 1996. Although two new
clients were added in 1997 the volume of revenue produced by these two new
customers was less than the revenue generated by the one client that the
division lost.
13
<PAGE>
Management's Discussion and Analysis (continued)
- -----------------------------------------------
Non-interest Expense. Total non-interest expense for the year ended December 31,
1997 was $14.8 million, a decrease of $2.2 million or 13.1% compared to the
$17.0 million recorded for 1996. Compensation and employee benefits expense for
1997 was $7.6 million, an increase of $859,000 or 12.8% compared to $6.7 million
in 1996. Salary expenses increased approximately 3% for 1997 over 1996. This
increase is primarily due to an increase in compensation related to the
recognition and retention plan (RRP) of $699,000 and an increase in the Employee
Stock Ownership Plan ("ESOP") benefit expense of $260,000. In accordance with
Statement of Position 93-6, "Employers' Accounting for Employee Stock Ownership
Plans," the ESOP plan shares that are vested are recorded at fair value. The
Company recorded twelve months of RRP shares compared to two months in 1996. The
RRP began on October 16, 1996. Deposit insurance premiums were $283,000 in 1997,
a decrease of $3.4 million compared to $3.7 million at December 31, 1996. There
was a one-time special assessment of $2.8 million levied by the FDIC in 1996.
This recapitalization was authorized by legislation passed in September, 1996.
Also capital stock taxes were $495,000 for the year 1997, a decrease of $300,000
or 37.7% compared to 1996. This decrease was due to a lower than expected amount
of capital stock taxes for 1996. The Company will incur approximately $800,000
in capital taxes in 1998 and future years.
Income Tax Expense. The provision for income taxes increased $1.2 million, or
35.8% from $3.5 million for 1996 to $4.7 million for the year ended December 31,
1997. The increase is due to an increase in pretax income. The Company's federal
and state tax rates remained the same for both years.
14
<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 98.7% 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, and 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
(4.0%) compared to interest expense on passbook accounts of $5.1 million at an
average cost of 3.0% 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 $13.3 million in the average balances of
borrowings 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.
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, 1996
Compared to the
Year ended Dec. 31, 1995
Increase (decrease) Due to
(Dollars in Thousands) Volume Rate Net Change
--------------------------
<S> <C> <C> <C>
Interest-earning assets:
Interest-earning deposits and short-term investments $ 351 $ (6) $ 345
Investment securities, net (1,132) 1,152 20
Loans receivable, net 4,030 (5 4,025
Mortgage-backed 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 38.7% 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 economic and other conditions analyzed
by management to determine the current level of the allowance for loan losses.
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,
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 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.
16
<PAGE>
Management's Discussion and Analysis (continued)
-----------------------------------------------
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 award programs. 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 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. Excluding a non-recurring charge to
recapitalize the Savings Association Insurance Fund ("SAIF"), 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.
Other Matters
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
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 total liquidity
for the month of December, 1997 was 21.9%. The higher than required levels of
liquidity are used to better manage interest rate risk.
Liquidity can be further analyzed by utilizing the Consolidated Statement
of Cash Flows. There was an increase in net cash provided by financing
activities of $138.8 million during the year ended December 31, 1997. This was
primarily due to a net increase in borrowings of $146.7 million. Net cash used
in investing activities was $153.9 million, consisting primarily of a $74.7
million net increase in loans and $71.2 million resulting from securities
transactions. Net cash provided by operating activities was $3.6 million.
Overall, cash and cash equivalents decreased $11.6 million at year-end 1997
compared to year-end 1996.
At December 31, 1997 the Association had commitments to originate loans of
$225,000, to fund loans of $9.9 million, and to purchase mortgage-related
securities of $42.0 million.
At December 31, 1997, 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.
Year 2000 Compliance. As the millennium (year 2000) approaches, the Company is
increasingly aware of the potential impact of the century date change on the
Company's information systems and the ability to conduct business in an
uninterrupted and orderly manner. The year 2000 presents a significant exposure
to any company with date sensitive data in its computer and environmental
systems.
As the year 2000 approaches, an important business issue has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. Many existing application software products,
including the Company's, were designed to accommodate a two digit year. For
example, "96" is stored on the system and represents 1996.
17
<PAGE>
Management's Discussion and Analysis (continued)
- -----------------------------------------------
In 1996, the Company's data processing division, DataOne Financial Systems
(DataOne), began to address the risks associated with the coming millennium.
DataOne's approach to the year 2000 project includes five phases: Awareness,
Assessment, Renovation, Validation and Implementation. DataOne is currently in
the Renovation phase of the project and expects full conversion of all data
files and programs by October, 1998. This will allow adequate time to validate
and test all systems.
Additionally, the Company is utilizing internal resources to examine all
personal computer hardware and software and all environmental systems that are
dependent on embedded microchips to ensure year 2000 compliance. The Association
is conducting a Year 2000 compliance review of its third-party vendors and
service bureaus for its ancillary computer operations. In addition, if
significant vendors fail to certify their Year 2000 compliance, the Company
intends to engage alternative vendors and suppliers. While the company cannot
estimate the expenses associated with hiring new vendors and suppliers,
management believes that such expenses would not have a material impact on the
Company's earnings. The Company estimates it will incur costs of $200,000 to
remediate its year 2000 issues.
New Accounting Pronouncements. 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 the 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 does not have a material impact on
the Company's financial position or results of operations.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." This statement establishes standards for
reporting the components of comprehensive income and requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be included in a financial statement that is displayed with
the same prominence as other financial statements. Comprehensive income includes
net income as well as certain items that are reported directly within a separate
component of stockholders' equity and bypass net income. The provisions of this
statement are effective beginning with 1998 interim reporting. These disclosure
requirements will have no material impact on financial position or results of
operations.
In 1997, the Company adopted SFAS No. 128. Please see notes to the
consolidated financial statements.
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.
Recent Developments. The Board of Directors declared a dividend of $.12 per
share to shareholders of record on February 6, 1998, payable on February 20,
1998.
The Company repurchased 106,100 shares of GA Financial, Inc. common stock
in January and February of 1998, which represents a portion of the 5% repurchase
of the outstanding common stock of the Company, as previously approved by the
OTS. The total treasury shares of the Company's stock were 1,290,820 as of
February 28, 1998.
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 1997 Form 10-K.
18
<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, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/S/ COOPERS & LYBRAND LLP
Pittsburgh, Pennsylvania
January 22, 1998
except as to the information
presented in Note 19, for which
the date is February 3, 1998
19
<PAGE>
Consolidated Statements of Financial Condition
- ----------------------------------------------
For the Years Ended December 31, 1997 and December 31, 1996
Dollar amounts in thousands, except share data
<TABLE>
<CAPTION>
Dec. 31, Dec. 31,
1997 1996
-------------------------
<S> <C> <C>
ASSETS
Cash (including interest-bearing demand deposits of $3,291 in 1997 and $15,592 in 1996............ $ 10,242 $ 22,349
Federal funds sold................................................................................ 2,500 1,950
Available for sale securities, at fair value (Note 4):
Investment securities..................................................................... 151,265 119,347
Mortgage-related securities............................................................... 284,161 244,482
Loans receivable, net (Note 5).................................................................... 287,674 216,376
Education loans held for sale (Note 5)............................................................ 18,853 15,383
Accrued interest receivable....................................................................... 5,977 4,252
Federal Home Loan Bank stock (Note 3)............................................................. 9,833 2,326
Office, property and equipment (Note 6)........................................................... 5,203 5,644
Prepaid expenses and other assets................................................................. 8,240 1,939
-------------------------
Total Assets.............................................................................. $783,948 $634,048
=========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Non-interest-bearing demand deposits (Note 7)..................................................... $ 21,375 $ 19,685
Savings accounts (Note 7)......................................................................... 440,779 429,881
Borrowed funds (Note 3)........................................................................... 198,237 51,525
Advances from borrowers for taxes and insurance................................................... 1,602 1,780
Accrued interest payable.......................................................................... 1,385 699
Securities purchased, not settled (Note 4)........................................................ -- 5,830
Other liabilities (Note 8)........................................................................ 4,444 2,244
-------------------------
Total Liabilities......................................................................... 667,822 511,644
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 89
Additional paid-in capital........................................................................ 85,992 86,316
Treasury stock, at cost (1,182,130 shares at December 31, 1997
and 445,000 shares at December 31, 1996).................................................. (19,464) (6,768)
Unearned employee stock ownership plan (ESOP) shares.............................................. (6,104) (6,612)
Unearned recognition and retention plan (RRP) shares.............................................. (3,107) (523)
Net unrealized holding gains on securities (Notes 4 and 8)........................................ 3,724 88
Retained earnings................................................................................. 54,996 49,814
-------------------------
Total Shareholders' Equity................................................................ 116,126 122,404
Total Liabilities and Shareholders' Equity................................................ $783,948 $634,048
=========================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
20
<PAGE>
Consolidated Statements of Income
---------------------------------
For the Years Ended December 31, 1997, 1996, and 1995
Dollar amounts in thousands, except share data
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans, including fees.................................... $ 22,310 $ 18,025 $14,000
Mortgage-related securities.............................. 20,706 14,551 11,440
Investment securities:
Taxable interest....................................... 6,437 4,627 5,420
Taxable dividend....................................... 2,181 2,112 1,490
Nontaxable interest.................................... 529 219 12
Interest on bank deposits.............................. 517 816 471
---------------------------------------------
Total interest income.................................... 52,680 40,350 32,833
---------------------------------------------
Interest expense:
Savings deposits......................................... 18,442 16,679 16,493
Interest on borrowings................................... 8,755 823 8
Other.................................................... 36 43 42
---------------------------------------------
Total interest expense................................... 27,233 17,545 16,543
---------------------------------------------
Net interest income before provision for losses on loans. 25,447 22,805 16,290
Provision for losses on loans (Note 5).................... 300 210 --
---------------------------------------------
Net interest income after provision for losses on loans.. 25,147 22,595 16,290
---------------------------------------------
Non-interest income:
Service fees............................................. 1,299 897 801
Net gain (loss) on sales of securities (Notes 4 and 9)... 518 630 (1,291)
Gain on sale of education loans.......................... 187 311 --
Gain on settlement/curtailment of pension (Note 10)...... -- 769 --
Data processing service fees............................. 632 809 798
Other.................................................... 12 44 114
---------------------------------------------
Total other income....................................... 2,648 3,460 422
---------------------------------------------
Non-interest expense:
Compensation and employee benefits....................... 7,570 6,711 6,133
Occupancy and equipment.................................. 1,770 1,564 1,545
Deposit insurance premiums (Note 13)..................... 283 3,682 970
Data processing service expenses......................... 1,598 1,501 1,524
Capital stock taxes...................................... 495 795 --
Other.................................................... 3,036 2,719 2,108
---------------------------------------------
Total non-interest expense............................... 14,752 16,972 12,280
---------------------------------------------
Income before provision for income taxes.................. 13,043 9,083 4,432
Provision for income taxes (Note 8)....................... 4,726 3,481 1,612
---------------------------------------------
Net income................................................ $ 8,317 $ 5,602 $ 2,820
---------------------------------------------
Basic earnings per share.................................. $ 1.18 $ .71/1,2/ --
Diluted earnings per share................................ 1.15 .71/1,2/ --
---------------------------------------------
Average shares outstanding - Basic........................ 7,021,900 7,845,214 --
Average shares outstanding - Diluted...................... 7,218,088 7,845,214 --
---------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
/1/ Assumes the stock conversion was completed on January 1, 1996.
/2/ Earnings per share were restated to reflect the Company's adoption of
Statement of Financial Accounting Standards No. 128, "Earnings per Share."
21
<PAGE>
Consolidated Statements of Cash Flows
- -------------------------------------
For the Years Ended December 31, 1997, 1996, and 1995
Dollar amounts in thousands
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................................... $ 8,317 $ 5,602 $ 2,820
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for losses on loans................................................ 300 210 --
Depreciation on office, property and equipment............................... 921 865 882
Net premium (discount) amortization (accretion) on securities................ 103 (14) 410
Amortization of net deferred loan fees....................................... (215) (220) (164)
Amortization of intangibles.................................................. 185 15 --
Gain on settlement/curtailment of pension plan............................... -- (769) --
Net realized (gain) loss on sales of securities.............................. (518) (630) 1,292
Net realized (gain) on sale of education loans............................... (187) (311) --
Net realized (gain) on sale of REO........................................... (3) (7) (26)
Allocation of ESOP plan shares............................................... 1,161 622 --
Allocation of recognition and retention plan shares.......................... 812 133 --
Deferred income tax (benefit) provision...................................... (99) 120 11
(Increase) decrease in accrued interest receivable........................... (1,725) (2,038) 1,160
Decrease (increase) in prepaid expenses and other assets..................... (6,486) 615 (5)
Increase (decrease) in other liabilities..................................... 328 858 (192)
Increase in accrued interest payable......................................... 686 178 143
-----------------------------------
Net cash provided by operating activities.................................... 3,580 5,229 6,331
-----------------------------------
Cash flows from investing activities:
Proceeds from sale of available for sale securities.......................... 136,090 161,811 42,812
Repayments and maturities of available for sale securities................... 53,157 49,691 8,667
Repayments, calls and maturities of held to maturity securities.............. -- -- 56,453
Purchases of available for sale securities................................... (260,487) (302,458) (15,514)
Purchases of held to maturity securities..................................... -- -- (61,444)
Proceeds from sale of education loans........................................ 6,176 12,545) --
Premium paid for deposits.................................................... -- (1,296) --
Purchases of loans........................................................... (97,612) (71,156) (24,250)
Net decrease (increase) in loans............................................. 16,764 7,430 (2,288)
Purchases of office, property and equipment, net............................. (480) (826) (600)
Net proceeds from sale of REO................................................ 9 25 64
(Purchase) redemption of Federal Home Loan Bank stock........................ (7,507) (444) (259)
-----------------------------------
Net cash (used in) provided by investing activities.......................... (153,890) (144,678) 3,641
-----------------------------------
Cash flows from financing activities:
Net increase (decrease) in demand and savings deposits....................... 2,723 (574) (18,451)
Net increase in certificates of deposit...................................... 9,865 25,270 20,559
Payments of borrowed funds................................................... (703,963) (539,624) --
Proceeds from borrowed funds................................................. 850,675 591,149 --
Dividends paid............................................................... (3,413) (1,064) --
Net increase (decrease) in advances from borrowers for taxes and insurance... (178) (140) (152)
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................................................... (12,696) (6,768) --
Purchase of recognition and retention plan shares............................ (4,095) (737) --
Payments made under capital lease obligations................................ (165) (186) (187)
-----------------------------------
Net cash provided by financing activities.................................... 138,753 146,578 1,769
-----------------------------------
Net (decrease) increase in cash and cash equivalents......................... (11,557) 7,129 11,741
-----------------------------------
Cash and cash equivalents at beginning of period.............................. 24,299 17,170 5,429
-----------------------------------
Cash and cash equivalents at end of period.................................... $ 12,742 $ 24,299 $ 17,170
===================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
22
<PAGE>
Consolidated Statements of Shareholders' Equity
------------------------------------------------
For the Years Ended December 31, 1997, 1996, and 1995
Dollar amounts in thousands
<TABLE>
<CAPTION>
Net
Number of Unrealized
Common Additional Unearned Unearned Holding
Stock Common Paid Treasury ESOP Plan RRP Plan Gains Retained
Shares Stock in Capital Stock Shares Shares (Losses) Earnings
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994......... -- -- $ -- $ -- $ -- $ -- ($1,564) $42,456
Net income........................... -- -- -- -- -- -- -- 2,820
Change in net unrealized
holding gains (losses) on
securities, net of tax.............. -- -- -- -- -- -- 4,518 --
------------------------------------------------------------------------------------------
Balance at December 31, 1995......... -- -- -- -- -- -- 2,954 45,276
Net income........................... -- -- -- -- -- -- -- 5,602
Change in net unrealized
holding gains (losses) on
securities, net of tax.............. -- -- -- -- -- -- (2,866) --
Stock issued......................... 8,900 89 86,283 -- -- -- -- --
Employee stock ownership
plan purchased...................... (712) -- -- -- (7,120) -- -- --
Treasury stock purchased............. (445) -- -- (6,768) -- -- -- --
Recognition and retention
plan purchased...................... (50) -- (81) -- -- (656) -- --
Cash dividends ($0.13 per share)..... -- -- -- -- -- -- -- (1,064)
Shares allocated employee
stock ownership plan................ 51 -- 114 -- 508 -- -- --
Shares allocated recognition
and retention plan.................. 50 -- -- -- -- 133 -- --
------------------------------------------------------------------------------------------
Balance at December 31, 1996......... 7,794 89 86,316 (6,768) (6,612) (523) 88 49,814
Net income........................... -- -- -- -- -- -- -- 8,317
Change in net unrealized
holding gains (losses) on
securities, net of tax.............. -- -- -- -- -- -- 3,636 --
Treasury stock purchased............. (737) -- -- (12,696) -- -- -- --
Recognition and retention
plan shares purchased............... (259) -- (699) -- -- (3,396) -- --
Cash dividends ($0.42 per share)..... -- -- -- -- -- -- -- (3,135)
Shares allocated employee
stock ownership plan................ 51 -- 375 -- 508 -- -- --
Shares allocated recognition
and retention plan.................. 259 -- -- -- -- 812 -- --
------------------------------------------------------------------------------------------
Balance at December 31, 1997......... 7,108 $89 $85,992 ($19,464) ($6,104) ($3,107) $ 3,724 $54,996
==========================================================================================
<CAPTION>
Total
Share-
holders'
Equity
----------
<S> <C>
Balance at December 31, 1994........ $ 40,892
Net income.......................... 2,820
Change in net unrealized
holding gains (losses) on
securities, net of tax............. 4,518
----------
Balance at December 31, 1995........ 48,230
Net income.......................... 5,602
Change in net unrealized
holding gains (losses) on
securities, net of tax............. (2,866)
Stock issued........................ 86,372
Employee stock ownership
plan purchased..................... (7,120)
Treasury stock purchased............ (6,768)
Recognition and retention
plan purchased..................... (737)
Cash dividends ($0.13 per share).... (1,064)
Shares allocated employee
stock ownership plan............... 622
Shares allocated recognition
and retention plan................. 133
----------
Balance at December 31, 1996........ 122,404
Net income.......................... 8,317
Change in net unrealized
holding gains (losses) on
securities, net of tax............. 3,636
Treasury stock purchased............ (12,696)
Recognition and retention
plan shares purchased.............. (4,095)
Cash dividends ($0.42 per share).... (3,135)
Shares allocated employee
stock ownership plan............... 883
Shares allocated recognition
and retention plan................. 812
----------
Balance at December 31, 1997........ $116,126
==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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, 1997 and December 31, 1996.
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
Securities classified as "available for sale" include investments management
intends to use as part of its asset/liability management strategy, and that may
be sold in response to changes in interest rates, resultant prepayment risk and
other factors. Realized gains and losses on the sale of securities are
recognized using the specific identification method and are included in non-
interest income in the Consolidated Statements of Income.
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.
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan" and
SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures" an amendment of SFAS No. 114. SFAS No. 114
addresses the accounting by creditors for impairment of loans by specifying how
reserves for credit losses related to certain loans should be measured.
Within the context of SFAS No. 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 loan impaired
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
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 accrual status until all amounts due, both
principal and interest, are current and a sustained payment history has been
demonstrated. At December 31, 1997 or 1996, the Company did not have any
recorded investment in loans for which impairment has been recognized in
accordance with SFAS No. 114 and 118. Since the Company had no loans considered
impaired under SFAS No. 114 during the years ended December 31, 1997 or 1996,
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, 1997 or 1996.
24
<PAGE>
Notes to Consolidated Financial Statements (continued)
-----------------------------------------------------
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. SFAS No. 114 does not apply to large groups of smaller balance
homogeneous loans that are collectively evaluated for impairment. Generally, the
Company collectively reviews for impairment consumer, residential and commercial
real estate and commercial loans under $200,000.
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.
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 $1.1
million and $1.3 million at December 31, 1997 and 1996, respectively. Management
annually evaluates 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 reissuance 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 1997 or 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, 1997 and 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, 1997 and 1996.
25
<PAGE>
Notes to Consolidated Financial Statements (continued)
- -----------------------------------------------------
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.
Note 2. The Conversion
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 and loan 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 Association 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.
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. A liquidation
account was established in the amount of $45.3 million in 1996.
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, 1997 and 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.
26
<PAGE>
Notes to Consolidated Financial Statements (continued)
------------------------------------------------------
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 (FHLB), which is carried at cost. The required
investment is based on 1% of its outstanding home loans, and also a percentage
of FHLB borrowings.
The Association can take short-term and long-term advances with the FHLB.
FHLB advances by year of maturity at December 31, 1997 and 1996 are summarized
as follows:
December 31, 1997 Weighted
(Dollars in Thousands) Amount Average Rate
- -----------------------------------------------------
1998 $137,237 6.01%
1999 22,000 6.66
2000 5,000 6.44
2001 4,000 6.31
2002 25,000 5.61
- -----------------------------------------------------
Total $193,237 6.04%
=====================================================
December 31, 1996 Weighted
(Dollars in Thousands) Amount Average Rate
- -----------------------------------------------------
1997 $ 37,525 5.56%
2000 5,000 6.44
2001 4,000 6.10
- -----------------------------------------------------
Total $ 46,525 5.70%
=====================================================
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, 1997 and 1996 the Company also maintained securities sold
under agreements to repurchase.
Securities sold under agreement to repurchase at December 31, 1997 and 1996
are summarized as follows:
- ------------------------------------------------
(Dollars in Thousands) Amount Rate
- ------------------------------------------------
Securities sold under
agreements to repurchase $5,000 6.25%
================================================
Securities sold under agreements to repurchase are collateralized by
investment securities with an amortized cost and fair value of $5.5 million at
December 31, 1997. 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.
27
<PAGE>
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------
Note 4. Investment Securities and Mortgage-Related Securities
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 amortized cost and estimated fair value of investment securities and
mortgage-related securities at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
December 31, 1997
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Available for sale securities: Cost Gains Losses Fair Value
------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed certificates........... $208,995 $ 3,862 $ (161) $212,696
Marketable equity securities........... 34,360 2,317 (17) 36,660
U.S. government agency debt............ 77,060 150 (73) 77,137
Municipal obligations.................. 12,992 270 (2) 13,260
Corporate obligations.................. 24,125 92 (9) 24,208
Collateralized mortgage obligations.... 71,980 285 (800) 71,465
------------------------------------------------
Total................................ $429,512 $ 6,976 $ (1,062) $435,426
================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Available for sale securities: Cost Gains Losses Fair Value
-------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury.......................... $ 14,912 $ 37 $ -- $ 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, 1997, by contractural 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.
December 31, 1997
------------------------
Amortized
Available for sale securities: Cost Fair Value
------------------------
Due in one year or less.................. $ 15,712 $ 15,702
Due after one year through five years.... 68,067 68,132
Due after five years through ten years... 5,045 5,093
Due after ten years...................... 306,328 309,839
------------------------
Total.................................. 395,152 398,766
------------------------
Marketable equity securities............. 34,360 36,660
------------------------
Total $429,512 $435,426
========================
Proceeds from sales of available for sale securities for the year ended
December 31, 1997 were approximately $136.1 million. Gross gains of
approximately $1.7 million and gross losses of approximately $1.3 million were
realized on those sales.
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.
28
<PAGE>
Notes to Consolidated Financial Statements (continued)
------------------------------------------------------
Proceeds from sales of available for sale securities for the year ended
December 31, 1995 were approximately $115.9 million. 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.
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, 1997 and 1996 consist of the following:
(Dollars in Thousands) December 31, 1997 December 31, 1996
---------------------------------------
Mortgages:
One to four family residential....... $215,024 $178,234
Multi-family......................... 5,778 6,727
Commercial........................... 4,360 5,053
Construction and development......... 2,966 3,545
Consumer loans:
Home equity.......................... 59,111 22,153
Educational loans.................... 18,853 15,383
Other:
Loans on savings accounts............ 2,168 2,062
Unsecured personal loans and other... 1,719 1,698
---------------------------------------
Total................................ 309,979 234,855
Less:
Undisbursed mortgage loans........... 688 684
Deferred loan fees................... 1,442 1,381
Allowance for loan losses............ 1,322 1,031
---------------------------------------
Net loans........................... $306,527 $231,759
=======================================
The Company purchased approximately $56.9 million and $71.2 million in 1997
and 1996, 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. Additionally, the Company purchased approximately
$40.7 million in consumer home equity loans in 1997.
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 $740,000 and
$943,000 at December 31, 1997 and 1996, respectively.
The following is a summary of activity in the allowance for loan losses:
Years Ended December 31,
(Dollars in Thousands) 1997 1996 1995
-------------------------------
Balance, beginning of year......... $ 1,031 $ 822 $ 850
Provision charged to operations.... 300 210 --
Loan charge-offs................... (78) (20) (35)
Loan recoveries.................... 69 19 7
-------------------------------
Balance, end of year............... $ 1,322 $ 1,031 $ 822
===============================
At December 31, 1997 and 1996, the Company had approximately $1.7 million
and $900,000, respectively, in loans which were 90 days or more past due and
were not accruing interest.
29
<PAGE>
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------
Note 6. Office, Property and Equipment
Office, property and equipment at December 31, 1997 and 1996 consist of the
following:
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31, 1997 December 31, 1996
-----------------------------------------------------
<S> <C> <C>
Office buildings....................................... $ 8,061 $ 7,750
Equipment.............................................. 9,500 9,467
Land and land improvements............................. 1,001 995
-----------------------------------------------------
Subtotal.............................................. 18,562 18,212
Less: accumulated depreciation and amortization........ 13,359 12,568
-----------------------------------------------------
Net office, property and
equipment............................................ $ 5,203 $ 5,644
=====================================================
</TABLE>
The Company recognized depreciation of approximately $921,000, $865,000
and $882,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
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, 1997 December 31, 1996
-------------------------------------------------------------------------
Average Average
Rate Amount Percent Rate Amount Percent
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing accounts......... $ 21,375 4.63% $ 19,685 4.38%
-------------------------------------------------------------------------
Interest bearing accounts:
Non-certificate accounts:
NOW accounts........................ 2.05% 30,075 6.50% 2.05% 27,652 6.15%
Money market........................ 2.25% 15,133 3.27% 2.25% 17,093 3.80%
Passbook savings.................... 3.00% 159,608 34.54% 3.00% 159,038 35.38%
-------------------------------------------------------------------------
Total non-certificate
accounts.......................... 204,816 44.31% 203,783 45.33%
-------------------------------------------------------------------------
Certificates of deposit:
0% to 4.00%......................... 3.45% 1,360 0.29% 3.54% 1,322 0.29%
4.00% to 4.99%...................... 4.75% 8,053 1.74% 4.64% 87,668 19.50%
5.00% to 5.99%...................... 5.46% 133,348 28.85% 5.47% 68,477 15.23%
6.00% and above..................... 6.82% 93,202 20.17% 6.92% 68,631 15.27%
-------------------------------------------------------------------------
Total certificates of
deposit............................ 6.03% 235,963 51.06% 5.94% 226,098 50.29%
-------------------------------------------------------------------------
Total interest bearing
accounts............................. 440,779 95.37% 429,881 95.62%
-------------------------------------------------------------------------
Total deposits........................ $462,154 100.00% $449,566 100.00%
=========================================================================
</TABLE>
The aggregate amount of certificates of deposit with a minimum
denomination of $100,000 was $15.9 million and $14.1 million at December 31,
1997 and 1996, respectively. Deposits in excess of $100,000 are not federally
insured.
30
<PAGE>
Notes to Consolidated Financial Statements (continued)
------------------------------------------------------
The following table presents, by various rate categories, the amount of
certificate of deposit accounts outstanding at the dates indicated and the
periods to maturity of the certificate of deposit accounts outstanding at
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
(Dollars in Thousands) Period to Maturity at December 31, 1997 Period to Maturity at December 31, 1996
-----------------------------------------------------------------------------------------------------
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 Yr 3 Yrs 3 Yrs Total
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest rate:
Less than 4%............... $ 1,360 $ -- $ -- $ -- $ 1,360 $ 1,317 $ 5 $ -- $ -- $ 1,322
4.00% to 4.99%............. 8,017 -- 36 -- 8,053 86,393 1,221 54 $ -- 87,668
5.00% to 5.99%............. 90,836 24,620 16,821 1,071 133,348 26,028 19,623 12,410 10,416 68,477
6.00% and over............. 43,110 23,999 21,987 4,106 93,202 7,764 31,334 12,684 16,849 68,631
-----------------------------------------------------------------------------------------------------
Total..................... $143,323 $ 48,619 $ 38,844 $ 5,177 $235,963 $121,502 $ 52,183 $ 25,148 $ 27,265 $226,098
=====================================================================================================
</TABLE>
Interest expense on savings accounts for the years ended December 31, 1997,
1996 and 1995 is summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
-------------------------------
<S> <C> <C> <C>
Passbook accounts............................................................. $ 4,805 $ 4,893 $ 5,104
NOW accounts.................................................................. 552 496 464
Money market accounts......................................................... 397 410 465
Certificates of deposit....................................................... 12,688 10,880 10,460
-------------------------------
Total........................................................................ $ 18,442 $ 16,679 $ 16,493
===============================
</TABLE>
Note 8. Income Taxes
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
For the Years Ended December 31,
1997 1996 1995
-----------------------------
<S> <C> <C> <C>
Federal:
Current....................................................................... $ 4,098 $ 2,896 $ 1,376
Deferred...................................................................... (99) 120 11
-----------------------------
3,999 3,016 1,387
State:
Current....................................................................... 727 465 225
-----------------------------
Provision for income taxes..................................................... $ 4,726 $ 3,481 $ 1,612
=============================
</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,
1997 1996 1995
-------------------------
<S> <C> <C> <C>
Federal statutory rate............................................................. 34.0% 34.0% 34.0%
State income taxes, net of federal benefit......................................... 3.7 3.4 3.4
Other.............................................................................. (1.5) 0.9% (1.0)
-------------------------
36.2% 38.3% 36.4%
=========================
</TABLE>
31
<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, 1997 December 31, 1996
---------------------------------------------------------------
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....................................... 449 -- 351 --
Loan origination fees/costs................. 78 -- 109 --
Depreciation/amortization................... -- 764 -- 830
Net unrealized holding
losses (gains)
on securities available
for sale.................................. -- 2,189 -- 52
Other....................................... -- 10 24 --
---------------------------------------------------------------
Deferred tax asset/liability................ $ 527 $ 3,728 $ 484 1,647
===============================================================
</TABLE>
Net accumulated deferred income tax liabilities at December 31, 1997 and
1996 were $3.2 million and $1.2 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. The Company had $42.0 million of forward and standby committments as
of December 31, 1997. Such activity resulted in net gains of approximately
$79,000, $54,000 and $207,000 for the years ended December 31, 1997, 1996 and
1995, respectively.
32
<PAGE>
Notes to Consolidated Financial Statements (continued)
-----------------------------------------------------
Note 10. Employee Benefit Plans
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 the
employee's deferred salary. The compensation expense relating to the 401(k)
match was $41,000 for 1996. The Company increased its match to 50%, effective
January, 1997 which resulted in compensation expense relating to the 401(k)
match of $127,000 for 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, 1997
and 1996, 101,714 and 50,857 of the shares in the ESOP were earned and committed
to be released. Compensation expense related to the ESOP amounted to $883,000
and $622,000 for the years ended December 31, 1997 and 1996. Dividends received
on unallocated ESOP shares in 1997 and 1996 amounted to $278,000 and $93,000 and
are included in compensation expense and will be used to reduce current
principal payments on the ESOP loan. The fair value at December 31, 1997 and
1996 of the unearned shares in the ESOP was $11.5 million and $10 million based
on the last sales price of the company's common stock of approximately $18.875
and $15.125, respectively on those dates.
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 1997 and 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.
Net pension expense for the year ended December 31, 1995 consisted of the
following:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1995
-------
<S> <C>
Service cost-benefits earned during the year...... $ 391
Interest accrued on projected benefit obligation.. 396
Actual investment income on plan assets........... (827)
Net amortization and deferral..................... 505
-------
Net pension expense............................... $ 465
=======
</TABLE>
33
<PAGE>
Notes to Consolidated Financial Statements (continued)
- -----------------------------------------------------
Note 11. Capital Requirements and Regulatory Restrictions
As a savings and loan holding company, GA Financial, Inc. is not required to
maintain any minimum level of capital; however, Great American Federal Savings
and Loan 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 Association's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Association must meet specific capital guidelines that involve quantitative
measures of the Association's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Association's
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Association to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital to risk-weighted assets and Tier I
capital to total assets. Management believes, as of December 31, 1997 that the
Association meets all capital adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the OTS
categorized the Association as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized the
Association must maintain minimum total risk-based, Tier I risk-based, and Tier
I leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the Association's
category.
<TABLE>
<CAPTION>
(Dollars in Thousands) Tier I Leverage Capital Tier I Risk-based Capital Total Risk-based Capital
------------------------------------------------------------------------------
<S> <C> <C> <C>
December 31, 1997:
Equity capital/1/................................... $100,319 $100,319 $100,319
General valuation allowance/2/...................... -- -- 1,322
Less unrealized gains on certain available-
for-sale securities................................ (3,329) (3,329) (3,329)
Less goodwill....................................... (1,095) (1,095) (1,095)
------------------------------------------------------------------------------
Total regulatory capital............................ 95,895 95,895 97,217
Minimum regulatory capital.......................... 30,458 11,520 23,040
------------------------------------------------------------------------------
Excess regulatory capital........................... $ 65,437 $ 84,375 $ 74,177
==============================================================================
Regulatory capital as a percentage.................. 12.59% 33.30% 33.76%
Minimum regulatory capital as a percentage.......... 4.00% 4.00% 8.00%
------------------------------------------------------------------------------
Excess regulatory capital as a percentage........... 8.59% 29.30% 25.76%
==============================================================================
Well capitalized requirement under
prompt corrective actions provisions............... 5.00% 6.00% 10.00%
==============================================================================
Adjusted assets as reported to the OTS.............. $761,451 $288,002 $288,002
==============================================================================
December 31, 1996:
Equity capital/1/................................... $ 93,430 $ 93,430 $ 93,430
General valuation allowance/2/...................... -- -- 1,031
Less unrealized gains on certain available-
for-sale securities................................ (5) (5) (5)
Less goodwill....................................... (1,277) (1,277) (1,277)
------------------------------------------------------------------------------
Total regulatory capital............................ 92,148 92,148 93,179
Minimum regulatory capital.......................... 24,161 8,456 16,913
------------------------------------------------------------------------------
Excess regulatory capital........................... $ 67,987 $ 83,692 $ 76,266
------------------------------------------------------------------------------
Regulatory capital as a percentage.................. 15.26% 43.59% 44.08%
Minimum regulatory capital as a percentage.......... 4.00% 4.00% 8.00%
------------------------------------------------------------------------------
Excess regulatory capital as a percentage........... 11.26% 39.59% 36.08%
==============================================================================
Well capitalized requirement under
prompt corrective actions provisions............... 5.00% 6.00% 10.00%
==============================================================================
Adjusted assets as reported to the OTS.............. $604,031 $211,408 $211,408
==============================================================================
</TABLE>
/1/ Represents equity capital of the Association as reported to the OTS.
/2/ Limited to 1.25% of risk-weighted assets.
34
<PAGE>
Notes to Consolidated Financial Statements (continued)
-----------------------------------------------------
Pursuant to Regulation D of the Federal Reserve, the Association 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,
1997 and 1996 approximated $1.3 million and $1.1 million, respectively.
Note 12. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures 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 contractural 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
counter-parties, 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.
Non-interest-Bearing Demand Deposits
The fair value on these deposits is the amount payable on the reporting date.
Savings Accounts
The fair value of Passbook, NOW 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 on advances from the FHLB with similar
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.
35
<PAGE>
Notes to Consolidated Financial Statements (continued)
- -----------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31, 1997 December 31, 1996
------------------------------------------------------------------------
Estimated Carrying Estimated Carrying
Financial Assets: Fair Value Value Fair Value Value
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash................................................... $ 10,242 $ 10,242 $ 22,349 $ 22,349
Federal funds sold..................................... 2,500 2,500 1,950 1,950
FHLB stock............................................. 9,833 9,833 2,326 2,326
Investment securities.................................. 151,265 151,265 119,347 119,347
Mortgage-related securities............................ 284,161 284,161 244,482 244,482
Loans receivable....................................... 310,719 306,527 230,946 231,759
------------------------------------------------------------------------
$768,720 $ 764,528 $621,400 $622,213
========================================================================
Financial Liabilities:
Non-interest-bearing demand deposits................... $ 21,375 $ 21,375 $ 19,685 $ 19,685
Savings accounts....................................... 440,408 440,779 428,840 429,881
Borrowed funds......................................... 198,395 198,237 51,603 51,525
------------------------------------------------------------------------
$660,178 $ 660,391 $500,128 $501,091
========================================================================
Estimated Contract or Estimated Contract or
Off-Balance Sheet Financial Instruments Fair Value Notional Amt Fair Value Notional Amt
------------------------------------------------------------------------
Commitments to extend credit........................... -- $ 29,300 -- $ 24,400
========================================================================
</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, 1995.................................. $ -- $ --
Purchase commitments.......................................... 122,805 8,000
Commitments matured / expired................................. -- --
Commitments settled........................................... (108,805) (4,000)
Commitments sold.............................................. (4,000) --
--------------------------------------------------------------------
Balance at December 31, 1996.................................. 10,000 4,000
Purchase commitments.......................................... 155,820 16,000
Commitments matured / expired................................. -- (4,000)
Commitments settled........................................... (124,820) --
Commitments sold.............................................. (15,000) --
--------------------------------------------------------------------
Balance at December 31, 1997.................................. $ 26,000 $ 16,000
====================================================================
</TABLE>
The fair value of the forward and standby commitments at December 31, 1997
is $42.7 million.
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, 1997 and 1996
were $29.3 million and $24.4 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, 1997, the Company had approximately $134.1 million of
residential real estate loans located outside 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.
36
<PAGE>
Notes to Consolidated Financial Statements (continued)
-----------------------------------------------------
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, provided
for the eventual merger of the thrift fund with the Bank Insurance Fund ("BIF"),
and reallocated 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
statutority prescribed 1.25 percent designated reserve ratio. The special
assessment, paid by the Association in November 1996, was included as a $2.8
million pretax charge to the Association's operations in 1996. The assessment
reduced the Association's 1996 net after-tax earnings by $1.8 million or $.23
per share.
Effective January 1, 1997, SAIF members have the same risk-based assessment
schedule as BIF members. The Association, as a well capitalized bank, will pay
no assessment for deposit insurance coverage. However, all SAIF and BIF
institutions including the Association will be responsible for sharing the cost
of interest payments on the FICO bonds. The cost to the Association is 6.5 basis
points for SAIF deposits. The annual cost of interest payments for the
Association was $283,000 for the year ended December 31, 1997.
Note 14. Supplementary Cash Flow Information
Cash paid during the years ended December 31, for interest and income taxes was
approximately $26.5 million and $4.5 million, respectively, in 1997, $17.4
million and $2.8 million, respectively, in 1996, $16.4 million and $2.2 million,
respectively, in 1995. Noncash investing and financing activity consisted of the
following: In December, 1996, the Company purchased investment securities that
did not settle with the brokers until subsequent to December 31, 1996.
Accordingly, amount due to broker of $5.8 million is shown separately on the
consolidated statements of financial condition at December 31, 1996.
Note 15. New Accounting Pronouncements
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
the 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 does not have a material impact on the Company's financial
position or results of operations.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." This statement establishes standards for
reporting the components of comprehensive income and requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be included in a financial statement that is displayed with
the same prominence as other financial statements. Comprehensive income includes
net income as well as certain items that are reported directly within a separate
component of stockholders' equity and bypass net income. The provisions of this
statement are effective beginning with 1998 interim reporting. These disclosure
requirements will have no material impact on financial position or results of
operations.
37
<PAGE>
Notes to Consolidated Financial Statements (continued)
- -----------------------------------------------------
Note 16. Earnings per Share
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share," which became effective for the Company for financial
statements issued for periods ending after December 15, 1997. Under the
provisions of SFAS No. 128, primary and fully-diluted earnings per share were
replaced with basic and diluted earnings per share in an effort to simplify the
computation of these measures and align them more closely with the methodology
used internationally. Basic earnings per share is arrived at by dividing net
income available to common stockholders by the weighted-average number of common
shares outstanding and does not include the impact of any potentially dilutive
common stock equivalents. The diluted earnings per share calculation method is
similar to, but slightly different from, the previously required fully-diluted
earnings per share method and is arrived at by dividing net income by the
weighted-average number of shares outstanding, adjusted for the dilutive effect
of outstanding stock options and the conversion impact of convertible equity
securities and other common stock equivalents. The adoption of this
statement did not have a material impact on the Company's earnings per share
computation. For purposes of comparability, all prior-period earnings per share
data has been restated.
The calculation of earnings per share follows:
<TABLE>
<CAPTION>
For the Calendar Year
(Dollars in Thousands, Except Per Share Amounts) 1997 1996
------------------------------
<S> <C> <C>
Basic:
Net income................................................................... $ 8,317 $ 5,602
------------------------------
Net income applicable to common stock........................................ $ 8,317 $ 5,602
==============================
Average common shares outstanding -- basic................................... 7,021,900 7,845,214
==============================
Basic earnings per share..................................................... $ 1.18 $ .71
==============================
Diluted:
Net income................................................................... $ 8,317 $ 5,602
==============================
Average common shares outstanding -- basic................................... 7,021,900 7,845,214
Effect of dilutive securities:
Shares issuable upon exercise of outstanding stock options and stock awards.. 196,188 --
Average common shares outstanding -- diluted................................. 7,218,088 7,845,214
==============================
Diluted earnings per share................................................... $ 1.15 $ .71
==============================
</TABLE>
Note 17. GA Financial, Inc. (Parent Company)
The following are the parent company's condensed financial statements:
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31, 1997 December 31, 1996
----------------------------------------------
<S> <C> <C>
Statement of Financial Condition
ASSETS
Cash............................................. $ 66 $ 21
Mortgage-related securities, at fair value....... -- 1,726
Investment securities, at fair value............. 15,489 26,597
Investment in the Association.................... 100,320 93,429
Accrued interest receivable...................... 53 717
Prepaid expenses and other assets................ 509 83
----------------------------------------------
Total Assets..................................... $ 116,437 $ 122,573
==============================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities................................ $ 311 $ 169
Shareholder's Equity............................. 116,126 122,404
----------------------------------------------
Total Liabilities and Shareholders' Equity........ $116,437 $122,573
==============================================
</TABLE>
38
<PAGE>
Notes to Consolidated Financial Statements (continued)
------------------------------------------------------
<TABLE>
<CAPTION>
For the Calendar Year
(Dollars in Thousands) December 31, 1997 December 31, 1996
--------------------------------------
<S> <C> <C>
Statement of Income
Investment and mortgage-related securities interest income............... $ 1,699 $ 2,075
Net gain on sale of investment securities................................ 196 11
General and administrative expenses...................................... (407) (319)
Income taxes............................................................. (360) (249)
State franchise taxes.................................................... (495) (795)
--------------------------------------
Income before equity in undistributed earnings of subsidiary............. 633 723
Equity in undistributed earnings of Association.......................... 7,684 4,879
--------------------------------------
Net income.............................................................. $ 8,317 $ 5,602
======================================
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended
(Dollars in Thousands) December 31, 1997 December 31, 1996
-------------------------------------
<S> <C> <C>
Statement of Cash Flows
Cash flows from operating activities:
Net income................................................................ $ 8,317 $ 5,602
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of Association......................... (7,684) (4,879)
Net realized gain on securities......................................... (197) (11)
Net (premium amortization) discount accretion on investment securities.. (59) (65)
Decrease (increase) in accrued interest receivable...................... 664 (717)
Allocation of recognition and retention plan shares..................... 812 133
Allocation of ESOP Plan shares.......................................... 1,161 206
Increase in prepaid expenses and other assets........................... (426) (83)
-------------------------------------
Net cash provided by operating activities............................... 2,588 186
-------------------------------------
Cash flows from investing activities:
Proceeds from sale of available for sale securities...................... 50,001 24,004
Repayments, maturities and calls of available for sale securities........ 372 4,274
Purchases of available for sale securities............................... (36,787) (56,393)
-------------------------------------
Net cash provided by (used in) investing activities...................... 13,586 (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............................................... (12,696) (6,768)
Dividend from subsidiary................................................. 4,117 --
Purchase of recognition and retention stock.............................. (4,095) (737)
Proceeds for employee stock ownership plan payment....................... -- 416
Dividends paid to shareholders........................................... (3,413) (1,064
Net (decrease) increase in other liabilities............................. (42) 120
-------------------------------------
Net cash (used in) provided by financing activities...................... (16,129) 27,950
-------------------------------------
Net increase in cash and cash equivalents................................. 45 21
Cash and cash equivalents at beginning of period.......................... 21 --
-------------------------------------
Cash and cash equivalents at end of period................................ $ 66 $ 21
=====================================
</TABLE>
The parent company began operations on March 25, 1996.
39
<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. Legal fees paid to the law firm were
$34,000, $32,000, and $30,000 for the years ended December 31, 1997, 1996 and
1995, respectively.
Note 19. Subsequent Events
The Board of Directors declared a dividend of $.12 per share to shareholders of
record on February 6, 1998, payable on February 20, 1998.
The Company repurchased 106,100 shares of GA Financial, Inc. common stock in
January and February of 1998, which substantially completes the 5% repurchase of
the outstanding common stock of the Company, as previously approved by the OTS.
The total treasury shares of the Company's stock was 1,290,820 as of February 3,
1998.
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 No. 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 "GA Financial, Inc. 1996 Stock
Based Incentive Plan." 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 awarded 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 1997 and 1996 was $812,000 and $133,000, respectively. Since
the plan was approved on October 16, 1996, only two month's expense is recorded
in 1996. The related income tax benefit associated with this compensation
expense was charged to additional paid in capital. The unearned compensation
expense as of December 31, 1997 and 1996 is $3.1 million and $3.9 million,
respectively.
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
average 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 SFAS No. 123 "Accounting for Stock-Based Compensation," the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below.
<TABLE>
<CAPTION>
1997 1996
---------------
<S> <C> <C> <C>
Net income (thousands) As reported $8,317 $ 5,602
Pro forma $8,047 $ 5,553
Basic earnings per share As reported $ 1.18 $ .71
Pro forma $ 1.15 $ .71
Diluted earnings per share As reported $ 1.15 $ .71
Pro forma $ 1.11 $ .71
</TABLE>
40
<PAGE>
Notes to Consolidated Financial Statements (continued)
------------------------------------------------------
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 1997: risk-free interest rate of 5.64%, dividend yield
of 2%, volatility factors of the expected market price of the Company's common
stock of .249, and an average life of the options of 5.5 years. The following
weighted average assumptions were used 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 SFAS No. 123 for pro forma disclosures are not
likely to be representative of the effects on reported net income for future
years.
A summary of the status of the Company's stock awards and fixed stock option
plan as of December 31, 1997 and 1996 and changes during the year is presented
below:
<TABLE>
<CAPTION>
(Dollars in Thousands, Except Share Data) 1997
----------------------------------------------
Weighted Avg.
Exercise Price
Awards Options On Options
----------------------------------------------
<S> <C> <C> <C>
Outstanding at the beginning of the year................................. 308,650 626,500 $12.75
Granted.................................................................. -- --
Exercised................................................................ -- --
Forfeited................................................................ (6,590) (12,500) 12.75
----------------------------------------------
Outstanding at year end.................................................. 302,060 614,000 12.75
----------------------------------------------
Options exercisable at year end.......................................... 124,400
Weighted average fair value of options
granted during the year................................................ --
<CAPTION>
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
---------------------------------------------------------------------------------------
Exercise Remaining Contractual Exercise Number Exercise
Price Outstanding Life Price Exercisable Price
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997......................... $ 12.75 614,000 8.75 years $ 12.75 124,400 $ 12.75
December 31, 1996......................... $ 12.75 626,500 9.75 years $ 12.75 -- $ 12.75
</TABLE>
41
<PAGE>
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------
Note 21. Selected Quarterly Financial Data (unaudited)
<TABLE>
<CAPTION>
Three months ended
--------------------------------------------------
1997 March 31 June 30 September 30 December 31
--------------------------------------------------
<S> <C> <C> <C> <C>
Interest income..................................................... $11,615 $13,206 $13,762 $14,097
Interest expense.................................................... 5,426 6,784 7,301 7,722
Net interest income
before provision for loan losses................................... 6,189 6,422 6,461 6,375
Provision for loan losses........................................... 75 75 75 75
Non-interest income................................................. 445 451 720 1,032
Non-interest expense................................................ 3,623 3,605 3,653 3,871
Income before income taxes.......................................... 2,936 3,193 3,453 3,461
Provision for income taxes.......................................... 1,079 1,175 1,287 1,185
--------------------------------------------------
Net income......................................................... $ 1,857 $ 2,018 $ 2,166 $ 2,276
==================================================
Basic earnings per share/3/......................................... $ 0.26 $ 0.28 $ 0.31 $ 0.33
==================================================
Diluted earnings per share/1,3/..................................... $ 0.25 $ 0.28 $ 0.30 $ 0.32
==================================================
<CAPTION>
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/2/............................................. 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
==================================================
Basic earnings per share/3/......................................... $ 0.12 $ 0.26 $ 0.13 $ 0.19
==================================================
Diluted earnings per share/1,3/..................................... $ 0.12 $ 0.26 $ 0.13 $ 0.19
==================================================
</TABLE>
/1/ Quarterly earnings per share may vary from annual earnings per share due to
rounding.
/2/ The SAIF assessment of $2.8 million was accrued on September 30, 1996.
/3/ Earnings per share were restated to reflect the Company's adoption of SFAS
No. 128, "Earnings per Share."
42
<PAGE>
DIRECTORS AND OFFICERS
----------------------
<TABLE>
<S> <C> <C>
Directors DAVID R. WASIK Principal Officers of
Partner Great American Federal Savings
JOHN M. KISH Savolskis-Wasik-Glenn Funeral Home and Loan Association
Chairman and Chief Executive Officer
GA Financial, Inc. JOSEPH E. BUGEL* JOHN M. KISH
Chief Executive Officer
WILLIAM G. BOYER *Director Emeritus
Retired Vice President of Compliance JOHN G. MICENKO
Great American Federal President
Savings & Loan Association Officers of GA Financial, Inc.
THOMAS E. BUGEL JOHN M. KISH LAWRENCE A. MICHAEL
Vice President Chairman of the Board and Vice President, Secretary
East Liberty Electro-Plating Company Chief Executive Officer
RAYMOND G. SUCHTA, CPA
Vice President, Finance
DARRELL J. HESS JOHN G. MICENKO ANDREW R. GETSY
Owner President Vice President, Treasurer
Dee Jay's Hallmark Card & Gift Shop
JOHN G. MICENKO LAWRENCE A. MICHAEL AARON T. FLAITZ, JR.
President Corporate Secretary Vice President, Assistant Secretary
GA Financial, Inc.
RAYMOND G. SUCHTA, CPA NORMAN A. LITTERINI
Chief Financial Officer and Treasurer Vice President, Lending
THOMAS M. STANTON
Investment Specialist WAYNE A. CALLEN
Mass Mutual Vice President, Data Processing
JUDITH A. STOECKLE
Vice President, Systems Coordinator
RICHARD M. COLLINS
Vice President, Commercial Lending
</TABLE>
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 29, 1998 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. Suckta, Chief Financial Officer and
Treasurer.
STOCK TRANSFER/REGISTER
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.
SPECIAL COUNSEL
Muldoon, Murphy and Faucette, 5101 Wisconsin Avenue, NW Washington, D.C. 20016.
INDEPENDENT ACCOUNTANTS
Coopers and Lybrand L.L.P., 600 Grant Street, 52nd Floor, Pittsburgh, PA 15219.
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 contracting 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 2, 1998, GA Financial, Inc. had 7,609,180 shares of
common stock outstanding and approximately 1,875 shareholders of record.
1997 Cash
Quarter High Low Dividend
STOCK PRICE ---------------------------
The following table illustrates GA Financial, Inc.'s QI 17.25 14.63 $0.08
high and low closing stock price on the American QII 19.68 14.50 $0.10
Stock Exchange and the cash dividend per share paid QIII 19.00 16.00 $0.12
during 1997. QIV 20.00 18.38 $0.12
<PAGE>
Exhibit 23.0
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We consent to the incorporation by reference in the Registration Statement of GA
Financial, Inc. on Form S-8 (File No. 333-37837) of our report dated January 22,
1998, except as to the information presented in Note 19, for which the date is
February 3, 1998, on our audits of the consolidated financial statements of GA
Financial, Inc. as of December 31, 1997 and 1996, and for the years ended
December 31, 1997, 1996 and 1995, which report is incorporated by reference in
this Annual Report on Form 10-K.
/s/ COOPERS & LYBRAND LLP
Pittsburgh, Pennsylvania
March 25, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 1997
10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,951
<INT-BEARING-DEPOSITS> 3,291
<FED-FUNDS-SOLD> 2,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 435,426
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 307,849
<ALLOWANCE> 1,322
<TOTAL-ASSETS> 783,948
<DEPOSITS> 462,154
<SHORT-TERM> 137,237
<LIABILITIES-OTHER> 7,431
<LONG-TERM> 61,000
0
0
<COMMON> 89
<OTHER-SE> 116,037
<TOTAL-LIABILITIES-AND-EQUITY> 783,948
<INTEREST-LOAN> 22,310
<INTEREST-INVEST> 30,370
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 52,680
<INTEREST-DEPOSIT> 18,442
<INTEREST-EXPENSE> 27,233
<INTEREST-INCOME-NET> 25,447
<LOAN-LOSSES> 300
<SECURITIES-GAINS> 518
<EXPENSE-OTHER> 14,752
<INCOME-PRETAX> 13,043
<INCOME-PRE-EXTRAORDINARY> 13,043
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,317
<EPS-PRIMARY> 1.18
<EPS-DILUTED> 1.15
<YIELD-ACTUAL> 7.48
<LOANS-NON> 1,733
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,031
<CHARGE-OFFS> 78
<RECOVERIES> 69
<ALLOWANCE-CLOSE> 1,322
<ALLOWANCE-DOMESTIC> 1,322
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 1997
FIRST QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1996
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997 DEC-31-1996
<CASH> 8,797 8,851 7,634 6,757
<INT-BEARING-DEPOSITS> 872 1,018 14,083 15,592
<FED-FUNDS-SOLD> 6,600 1,900 1,800 1,950
<TRADING-ASSETS> 0 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 362,557 438,023 452,754 363,829
<INVESTMENTS-CARRYING> 0 0 0 0
<INVESTMENTS-MARKET> 0 0 0 0
<LOANS> 232,223 280,700 304,365 232,790
<ALLOWANCE> 1,113 1,199 1,233 1,031
<TOTAL-ASSETS> 670,342 749,748 802,304 634,048
<DEPOSITS> 455,348 458,727 456,872 449,566
<SHORT-TERM> 78,023 134,851 139,398 37,525
<LIABILITIES-OTHER> 7,248 8,378 27,657 10,553
<LONG-TERM> 14,000 34,000 61,000 14,000
0 0 0 0
0 0 0 0
<COMMON> 89 89 89 89
<OTHER-SE> 115,634 113,703 117,288 122,315
<TOTAL-LIABILITIES-AND-EQUITY> 670,342 749,748 802,304 634,048
<INTEREST-LOAN> 4,722 10,084 16,117 18,025
<INTEREST-INVEST> 6,893 14,737 22,466 22,325
<INTEREST-OTHER> 0 0 0 0
<INTEREST-TOTAL> 5,426 24,821 38,583 40,350
<INTEREST-DEPOSIT> 4,459 9,032 13,742 16,679
<INTEREST-EXPENSE> 967 12,210 19,511 17,545
<INTEREST-INCOME-NET> 6,189 12,611 19,072 22,805
<LOAN-LOSSES> 75 150 225 210
<SECURITIES-GAINS> 0 28 38 630
<EXPENSE-OTHER> 3,623 7,228 10,881 16,972
<INCOME-PRETAX> 2,936 6,129 9,582 9,083
<INCOME-PRE-EXTRAORDINARY> 2,936 6,129 9,582 9,083
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 1,857 3,875 6,041 5,602
<EPS-PRIMARY> .26 .54 .85 .71
<EPS-DILUTED> .25 .53 .83 .71
<YIELD-ACTUAL> 7.41 7.49 7.51 7.45
<LOANS-NON> 814 905 1,931 896
<LOANS-PAST> 0 0 0 0
<LOANS-TROUBLED> 0 0 0 0
<LOANS-PROBLEM> 0 0 0 0
<ALLOWANCE-OPEN> 1,031 1,031 1,031 822
<CHARGE-OFFS> 0 9 69 20
<RECOVERIES> 7 27 46 19
<ALLOWANCE-CLOSE> 1,113 1,199 1,233 1,031
<ALLOWANCE-DOMESTIC> 1,113 1,199 1,233 1,031
<ALLOWANCE-FOREIGN> 0 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 0 0
</TABLE>
<PAGE>
EXHIBIT 99.1
Proxy Statement, dated March 27, 1998, for the
1998 Annual Meeting of Stockholders
<PAGE>
GA FINANCIAL, INC.
4750 Clairton Boulevard
Pittsburgh, Pennsylvania 15236
(412) 882-9946
March 27, 1998
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders (the
"Meeting") of GA Financial, Inc. (the "Company"), the holding company for Great
American Federal Savings and Loan Association, Pittsburgh, Pennsylvania (the
"Association"), which will be held on April 29, 1998, at 10:00 a.m., at The
Bradley House, 5239 Brownsville Road, Pittsburgh, Pennsylvania 15236.
The attached notice of the annual meeting and proxy statement describe the
formal business to be transacted at the meeting. Directors and officers of the
Company, as well as a representative of Coopers & Lybrand L.L.P., the Company's
independent auditors, will be present at the Meeting to respond to any questions
that our stockholders may have.
The Board of Directors of the Company has determined that the matters to be
considered at the Meeting are in the best interests of the Company and its
stockholders. For the reasons set forth in the proxy statement, the Board
unanimously recommends a vote "FOR" the nominees listed under Proposal 1 and
"FOR" each of the other matters to be considered.
PLEASE SIGN AND RETURN THE ENCLOSED PROXY PROMPTLY. YOUR COOPERATION IS
APPRECIATED SINCE A MAJORITY OF THE COMMON STOCK MUST BE REPRESENTED, EITHER IN
PERSON OR BY PROXY, TO CONSTITUTE A QUORUM FOR THE CONDUCT OF BUSINESS.
On behalf of the Board of Directors and all of the employees of the Company
and the Association, I wish to thank you for your continued support. We
appreciate your interest.
Sincerely yours,
/s/ John M. Kish
John M. Kish
Chairman of the Board of Directors
<PAGE>
GA FINANCIAL, INC.
4750 CLAIRTON BOULEVARD
PITTSBURGH, PENNSYLVANIA 15236
(412) 882-9946
------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL 29, 1998
------------------
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of GA
Financial, Inc. will be held on Wednesday, April 29, 1998, at 10:00 a.m., at The
Bradley House, 5239 Brownsville Road, Pittsburgh, Pennsylvania 15236.
The annual meeting is for the purpose of considering and voting upon the
following matters:
1. The election of three directors for terms of three years each;
2. The ratification of Coopers & Lybrand L.L.P. as independent auditors
of the Company for the fiscal year ending December 31, 1998; and
3. Such other matters as may properly come before the meeting or any
adjournments thereof.
The Board of Directors has established March 16, 1998 as the record date
for the determination of stockholders entitled to notice of and to vote at the
annual meeting and at any adjournments thereof. Only recordholders of the
common stock of the Company as of the close of business on that date will be
entitled to vote at the annual meeting or any adjournments thereof. In the
event there are not sufficient votes for a quorum or to approve or ratify any of
the foregoing proposals at the time of the annual meeting, the annual meeting
may be adjourned in order to permit further solicitation of proxies by the
Company. A list of stockholders entitled to vote at the annual meeting will be
available at GA Financial, Inc., 4750 Clairton Boulevard, Pittsburgh,
Pennsylvania, for a period of ten days prior to the annual meeting and will also
be available for inspection at the annual meeting itself.
By Order of the Board of Directors
/s/ Lawrence A. Michael
----------------------------------
Lawrence A. Michael
Corporate Secretary
Pittsburgh, Pennsylvania
March 27, 1998
<PAGE>
GA FINANCIAL, INC.
_____________________________
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
_____________________________
April 29, 1998
SOLICITATION AND VOTING OF PROXIES
This proxy statement is being furnished to stockholders of GA Financial,
Inc. (the "Company") in connection with the solicitation by the Board of
Directors of the Company (the "Board of Directors") of proxies to be used at the
Annual Meeting of Stockholders (the "Meeting") to be held on April 29, 1998, at
10:00 a.m., at The Bradley House, 5239 Brownsville Road, Pittsburgh,
Pennsylvania, 15236, and at any adjournments thereof. The 1997 Annual Report to
Stockholders, including the consolidated financial statements for the fiscal
year ended December 31, 1997, accompanies this proxy statement, which is first
being mailed to stockholders on or about March 27, 1998.
Regardless of the number of shares of common stock owned, it is important
that recordholders of a majority of the shares be represented by proxy or
present in person at the Meeting. Stockholders are requested to vote by
completing the enclosed proxy and returning it signed and dated in the enclosed
postage-paid envelope. Stockholders are urged to indicate their vote in the
spaces provided on the proxy. PROXIES SOLICITED BY THE BOARD OF DIRECTORS OF
THE COMPANY WILL BE VOTED IN ACCORDANCE WITH THE DIRECTIONS GIVEN THEREIN.
WHERE NO INSTRUCTIONS ARE INDICATED, SIGNED PROXIES WILL BE VOTED "FOR" THE
ELECTION OF EACH OF THE NOMINEES FOR DIRECTORS NAMED IN THIS PROXY STATEMENT AND
"FOR" THE RATIFICATION OF COOPERS & LYBRAND L.L.P. AS INDEPENDENT AUDITORS OF
THE COMPANY FOR THE FISCAL YEAR ENDING DECEMBER 31, 1998.
The Board of Directors knows of no additional matters that will be
presented for consideration at the Meeting. EXECUTION OF A PROXY, HOWEVER,
CONFERS ON THE DESIGNATED PROXYHOLDERS DISCRETIONARY AUTHORITY TO VOTE THE
SHARES IN ACCORDANCE WITH THEIR BEST JUDGMENT ON SUCH OTHER BUSINESS, IF ANY,
THAT MAY PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENTS THEREOF.
A PROXY MAY BE REVOKED AT ANY TIME PRIOR TO ITS EXERCISE BY THE FILING OF A
WRITTEN NOTICE OF REVOCATION WITH THE SECRETARY OF THE COMPANY, BY DELIVERING TO
THE COMPANY A DULY EXECUTED PROXY BEARING A LATER DATE, OR BY ATTENDING THE
MEETING AND VOTING IN PERSON. HOWEVER, IF YOU ARE A STOCKHOLDER WHOSE SHARES
ARE NOT REGISTERED IN YOUR OWN NAME, YOU WILL NEED APPROPRIATE DOCUMENTATION
FROM YOUR RECORDHOLDER TO VOTE PERSONALLY AT THE MEETING.
The cost of solicitation of proxies on behalf of management will be borne
by the Company. In addition to the solicitation of proxies by mail, Kissel-
Blake, Inc., a proxy solicitation firm, will assist the Company in soliciting
proxies for the Meeting and will be paid a fee of $2,800, plus out-of-pocket
expenses. Proxies may also be solicited personally or by telephone or telegraph
by directors, officers and regular employees of the Company and its subsidiary
Great American Federal Savings and Loan Association (the "Association"), without
additional compensation therefor. The Company will also request persons, firms
and corporations holding shares in their names, or in the name of their
nominees, which are beneficially
1
<PAGE>
owned by others, to send proxy material to and obtain proxies from such
beneficial owners, and will reimburse such holders for their reasonable expenses
in doing so.
VOTING SECURITIES
The securities which may be voted at the Meeting consist of shares of
common stock of the Company (the "Common Stock"), with each share entitling its
owner to one vote on all matters to be voted on at the Meeting except as
described below. There is no cumulative voting for the election of directors.
The close of business on March 16, 1998 has been fixed by the Board of
Directors as the record date (the "Record Date") for the determination of
stockholders of record entitled to notice of and to vote at the Meeting and any
adjournments thereof. The total number of shares of Common Stock outstanding on
the Record Date was 7,609,180 shares.
As provided in the Company's Certificate of Incorporation, recordholders of
Common Stock who beneficially own in excess of 10% of the outstanding shares of
Common Stock (the "Limit") are not entitled to any vote in respect of the shares
held in excess of the Limit. A person or entity is deemed to beneficially own
shares owned by an affiliate of, as well as persons acting in concert with, such
person or entity. The Company's Certificate of Incorporation authorizes the
Board of Directors (i) to make all determinations necessary to implement and
apply the Limit, including determining whether persons or entities are acting in
concert, and (ii) to demand that any person who is reasonably believed to
beneficially own stock in excess of the Limit to supply information to the
Company to enable the Board of Directors to implement and apply the Limit.
The presence, in person or by proxy, of the holders of at least a majority
of the total number of shares of Common Stock entitled to vote (after
subtracting any shares in excess of the Limit pursuant to the Company's
Certificate of Incorporation) is necessary to constitute a quorum at the
Meeting. In the event there are not sufficient votes for a quorum or to approve
or ratify any proposal at the time of the Meeting, the Meeting may be adjourned
in order to permit the further solicitation of proxies.
As to the election of directors, the proxy card being provided by the Board
of Directors enables a shareholder to vote "FOR" the election of the nominees
proposed by the Board, or to "WITHHOLD AUTHORITY" to vote for one or more of the
nominees being proposed. Under Delaware law and the Company's Certificate of
Incorporation and Bylaws, directors are elected by a plurality of the votes
cast, without regard to either (i) broker non-votes, or (ii) proxies as to which
authority to vote for one or more of the nominees being proposed is withheld.
As to the ratification of Coopers & Lybrand L.L.P. and all other matters
that may properly come before the Meeting, by checking the appropriate box, a
shareholder may: (i) vote "FOR" the item; (ii) vote "AGAINST" the item; or
(iii) "ABSTAIN" from voting on such item. Under the Company's Certificate of
Incorporation and Bylaws, unless otherwise required by law, all other matters
shall be determined by a majority of the votes cast, without regard to either
(a) broker non-votes, or (b) proxies marked "ABSTAIN" as to that matter.
Proxies solicited hereby will be returned to the Company, and will be
tabulated by inspectors of election designated by the Board of Directors, who
will not be employed by, or be a director of, the Company or any of its
affiliates.
2
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information as to those persons
believed by management to be beneficial owners of more than 5% of the
outstanding shares of Common Stock on the Record Date, as disclosed in certain
reports regarding such ownership filed with the Company and with the Securities
and Exchange Commission (the "SEC"), in accordance with Sections 13(d) or 13(g)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act") by such
persons and groups. Other than those persons listed below, the Company is not
aware of any person or group, as such term is defined in the Exchange Act, that
owns more than 5% of the Common Stock as of the Record Date.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER PERCENT
TITLE OF CLASS BENEFICIAL OWNER OF OF
SHARES CLASS
- ---------------------------------- ----------------------------------------------- --------------- ----------
<S> <C> <C> <C>
Common Stock Great American Federal Savings and Loan 712,000(1) 9.20%
Association Employee Stock Ownership Plan
and Trust ("ESOP")
4750 Clairton Boulevard
Pittsburgh, Pennsylvania 15236
Common Stock Franklin Resources 441,500(2) 5.60%
777 Mariners Island Boulevard
San Mateo, California 94402
</TABLE>
- -------------------------------------------
(1) First Bankers' Trust, N.A. has been appointed as the corporate trustee for
the ESOP ("ESOP Trustee"). The ESOP Trustee, subject to its fiduciary duty,
must vote all allocated shares held in the ESOP in accordance with the
instructions of the participants. At December 31, 1997, 101,714 shares had
been allocated under the ESOP and 610,286 shares remain unallocated. Under
the ESOP, unallocated shares will be voted by the ESOP Trustee in a manner
calculated to most accurately reflect the instructions received from
participants regarding the allocated stock so long as such vote is in
accordance with the provisions of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA").
(2) Based on information disclosed in a Schedule 13G filed with the SEC on
February 4, 1998.
3
<PAGE>
PROPOSALS TO BE VOTED ON AT THE MEETING
PROPOSAL 1. ELECTION OF DIRECTORS
Pursuant to its Bylaws, the number of directors of the Company is set at
seven (7) unless otherwise designated by the Board of Directors. Directors are
elected for staggered terms of three years each, with a term of office of only
one of the three classes expiring each year. Directors serve until their
successors are elected and qualified.
The three nominees proposed for election at the Meeting are John G. Micenko,
Thomas M. Stanton and Robert J. Ventura. Messrs. Micenko and Stanton are
presently directors of the Company. Mr. Ventura has been nominated to fill a
vacancy on the Board of Directors created by the retirement of William G. Boyer,
effective April 29, 1998. No person being nominated as a director is being
proposed for election pursuant to any agreement or understanding between any
person and the Company.
In the event that any nominee is unable to serve or declines to serve for any
reason, it is intended that proxies will be voted for the election of the
balance of those nominees named and for such other persons as may be designated
by the present Board of Directors. The Board of Directors has no reason to
believe that any of the persons named will be unable or unwilling to serve.
UNLESS AUTHORITY TO VOTE FOR THE DIRECTORS IS WITHHELD, IT IS INTENDED THAT THE
SHARES REPRESENTED BY THE ENCLOSED PROXY, IF EXECUTED AND RETURNED, WILL BE
VOTED "FOR" THE ELECTION OF ALL NOMINEES PROPOSED BY THE BOARD OF DIRECTORS.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF ALL NOMINEES
NAMED IN THIS PROXY STATEMENT.
INFORMATION WITH RESPECT TO NOMINEES, CONTINUING DIRECTORS AND CERTAIN EXECUTIVE
OFFICERS
The following table sets forth, as of the Record Date, the names of the
nominees, continuing directors and the Named Executive Officers, as defined
below, as well as their ages, a brief description of their recent business
experience, including present occupations and employment, certain directorships
held by each, the year in which each became a director of the Association, and
the year in which their terms (or in the case of nominees, their proposed terms)
as director of the Company expire. This table also sets forth the amount of
Common Stock and the percent thereof beneficially owned by each director and
Named Executive Officer and all directors and executive officers as a group as
of the Record Date.
4
<PAGE>
<TABLE>
<CAPTION>
Name and Principal Expiration Shares of Common Ownership
Occupation at Present Director of Term as Stock Beneficially as a Percent
and for the Past Five Years Age Since(2) Director Owned(3) of Class
- --------------------------------- -------- -------------- ------------- --------------- -------------------
<S> <C> <C> <C> <C> <C>
NOMINEES:
John G. Micenko(1)................. 59 1976 2001 97,296(4)(5) 1.28%
Mr. Micenko is President of the
Company and has also served as
President and Chief Executive
Officer of the Association
since 1990.
Thomas M. Stanton.................. 55 1992 2001 19,000(6)(7) *
Mr. Stanton is an investment
specialist for Mass Mutual, an
insurance and financial
services company.
Robert J. Ventura.................. 48 -- 2001 1,000 *
Mr. Ventura is the director of
acquisitions and divestitures
for Rockwell International
Corporation, a global
electronics company.
CONTINUING DIRECTORS:
Thomas E. Bugel.................... 53 1988 1999 34,489(6)(7) *
Mr. Bugel is an owner and Vice
President of East Liberty
Electro-Plating Company.
David R. Wasik..................... 56 1990 1999 34,244(6)(7) *
Mr. Wasik is a partner and
supervisor of
Savolskis-Wasik-Glenn Funeral
Home.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Name and Principal Expiration Shares of Common Ownership
Occupation at Present Director of Term as Stock Beneficially as a Percent
and for the Past Five Years Age Since(2) Director Owned(3) of Class
- --------------------------------- -------- -------------- ------------- --------------- -------------------
<S> <C> <C> <C> <C> <C>
John M. Kish(1) 52 1983 2000 63,897(4)(5) *
Mr. Kish is Chairman of the
Boards of Directors and Chief
Executive Officer of the
Company and the Association.
Mr. Kish is a partner in the
law firm of Kish, Kish & Yarsky.
Darrell J. Hess 65 1991 2000 34,000(6)(7) *
Mr. Hess is the owner of Dee
Jay's Hallmark Card and Gift
Shop and D.J. Hess Advertising,
a promotional product company.
NAMED EXECUTIVE OFFICERS:
(WHO ARE NOT ALSO DIRECTORS)
Andrew R. Getsy 59 -- -- 38,897(4)(5) *
Mr. Getsy has been Vice
President and Treasurer of the
Association since September
1983.
Stock ownership of all directors -- -- -- 552,979(8) 6.78%
and executive officers of the
Company as a group (16 persons).
</TABLE>
- -----------------------------------------------
* Does not exceed 1.0% of the Company's voting securities.
(1) On March 23, 1998, the Board of Directors adopted an Executive Leadership
Plan pursuant to which Mr. Kish became Chief Executive Officer of the
Association and Mr. Micenko remains as President of the Company and the
Association and which also calls for the recruitment of a Chief Operating
Officer of the Association ("COO"). Under this Plan, the COO will assume
primary responsibility for the day to day operation of the Association and
Messrs. Kish and Micenko will devote more of their efforts toward strategic
planning initiatives.
(2) Includes years of service as a director of the Association.
(3) Each person effectively exercises sole (or shares with spouse or other
immediate family member) voting and dispositive power as to shares reported.
(4) Includes 27,000, 55,000 and 20,000 shares awarded to Messrs. Kish, Micenko
and Getsy under the GA Financial, Inc. 1996 Stock-Based Incentive Plan (the
"Incentive Plan"). Awards to officers under the Incentive Plan began vesting
in five equal annual installments on October 16, 1997. Each participant
presently has voting power as to the shares awarded.
(5) Includes 15,000, 19,000 and 5,000 shares subject to options granted to
Messrs. Kish, Micenko and Getsy, under the Incentive Plan. Does not include
the remaining 60,000, 76,000 and 20,000 shares subject to options granted to
Messrs. Kish, Micenko and Getsy, under the Incentive Plan, which will
continue to vest in equal annual installments through October 16, 2001.
(6) Includes 10,000 shares awarded to each outside director pursuant to the
Incentive Plan, which began vesting in five equal annual installments on
October 16, 1997, the voting of which currently can be directed by the
recipient.
(7) Includes 4,000 shares subject to options granted to each outside director
under the Incentive Plan. Does not include the remaining 16,000 shares
subject to options granted to each outside director under the Incentive
Plan, which will continue to vest in equal annual installments through
October 16, 2001.
(8) Includes a total of 257,000 shares awarded under the Incentive Plan as to
which voting may be directed and a total of 101,000 shares which may be
acquired through the exercise of stock options under the Incentive Plan.
Excludes a total of 404,000 shares subject to options granted under the
Incentive Plan.
6
<PAGE>
MEETINGS OF THE BOARD AND COMMITTEES OF THE BOARD
The Board of Directors conducts its business through meetings of the Board
and through activities of its committees. The Board of Directors meets at least
on a quarterly basis and may have additional meetings as needed. During fiscal
1997, the Board of Directors of the Company held 8 regular meetings. All of the
directors of the Company attended at least 75% in the aggregate of the total
number of the Company's board meetings held and committee meetings on which such
directors served during 1997. The Board of Directors of the Company maintains
committees, the nature and composition of which are described below:
Audit and Compliance Committee. The Audit and Compliance Committee of the
Company and Association consists of Messrs. Boyer, Bugel and Wasik. The purpose
of the Audit and Compliance Committee is to review the Company's audit reports
and management's actions regarding the implementation of audit findings and to
review compliance with all relevant laws and regulations. This Committee is also
responsible for making recommendations to the full Board of Directors regarding
the selection of the independent auditor. The committee met 4 times in 1997.
Personnel, Compensation and Benefits Committee. The Personnel,
Compensation and Benefits Committee consists of Messrs. Wasik, Hess and Stanton.
This Committee is responsible for making recommendations to the full Board of
Directors on all matters regarding compensation and fringe benefits. The
committee met 3 times in 1997.
Nominating Committee. The Company's Nominating Committee for the 1998
Annual Meeting consisted of Messrs. Bugel, Hess and Wasik. The Nominating
Committee considers and recommends the nominees for director to stand for
election at the Company's Annual Meeting of Stockholders. The Company's Bylaws
provide for stockholder nominations of directors. These provisions require such
nominations to be made pursuant to timely written notice to the Secretary of the
Company. The stockholders' notice of nominations must contain all information
relating to the nominee which is required to be disclosed by the Company's
Bylaws and by the Exchange Act. See "Additional Information - Notice of
Business to be Conducted at an Annual Meeting." The Nominating Committee met on
January 27, 1998 and February 17, 1998.
DIRECTORS' COMPENSATION
Directors' Fees. Non-employee members of the Board of Directors of the
Company currently receive an annual retainer fee of $1,000 and a fee of $400 for
each Board meeting and a fee of $175 for each committee meeting attended.
However, Directors of the Company do not receive Company Board meeting fees on
dates when an Association Board of Directors meeting is held.
Non-employee directors of the Association are currently paid an annual
retainer of $16,800. Non-employee directors of the Association are also
currently paid a fee of $175 for committee meetings attended and a fee of $400
for each special meeting of the Board of Directors attended. The Association
also maintains one Director Emeritus position that is currently filled by Joseph
E. Bugel, the former Chairman of the Board of Directors who served with the
Association from 1939 to 1988 and the father of Director Thomas E. Bugel. Mr.
Bugel is paid an annual retainer of $6,000 and a fee of $400 for each Board of
Directors meeting which he attends.
7
<PAGE>
Incentive Plan. Under the Incentive Plan maintained by the Company each
member of the Board of Directors of the Company who is not an officer or
employee of the Company or the Association received non-statutory stock options
to purchase 20,000 shares of Common Stock at an exercise price of $12.75, the
fair market value of the Common Stock on October 16, 1996, the date the option
was granted (with Dividend Equivalent Rights attached, as discussed below), and
stock awards for 10,000 shares of Common Stock (collectively "Directors'
Awards"). The Dividend Equivalent Rights provide a separate cash benefit equal
to 100% of the amount of any extraordinary dividend (as defined in the Incentive
Plan) declared by the Company on shares of Common Stock subject to an option.
The Directors' Awards initially granted under the Incentive Plan will vest over
a five-year period, at a rate of 20% each year commencing on October 16, 1997,
the first anniversary of the date of the grant. All unexercised options granted
under the Incentive Plan expire 10 years following the date of grant. All
Directors' Awards will immediately vest upon death or disability.
EXECUTIVE COMPENSATION
The report of the compensation committee and the stock performance graph
shall not be deemed incorporated by reference by any general statement
incorporating by reference this proxy statement into any filing under the
Securities Act of 1933 (the "Securities Act") or the Exchange Act, except as to
the extent that the Company specifically incorporates this information by
reference, and shall not otherwise be deemed filed under such Acts.
Compensation Committee Report on Executive Compensation. Under rules
established by the SEC, the Company is required to provide certain data and
information in regard to the compensation and benefits provided to the Company's
chief executive officer and the other executive officers of the Company. The
disclosure requirements for these executive officers include the use of tables
and a report explaining the rationale and considerations that led to fundamental
compensation decisions affecting those individuals. In fulfillment of this
requirement, the Compensation Committee, at the direction of the Board of
Directors, has prepared the following report for inclusion in this proxy
statement.
Compensation Policies. The policies and objectives of the Compensation
Committee are designed to assist the Company in attracting and retaining
qualified executives, to recognize individual contributions towards achieving
strategic business initiatives and reward them for their achievement and to
closely align the financial interests of the executive officers with those of
its stockholders. In furtherance of these objectives, the Company and
Association maintain a compensation program for executives officers which
consists of both cash and equity based compensation.
The Compensation Committee has discretion to recommend, relative to
performance and peer group comparisons, the base salaries of the executive
officers. The Compensation Committee recommends the level of annual salary for
the Chief Executive Officer and the President, generally based upon a review of
the performance of the Chief Executive Officer and the President and the Company
during the prior year and competitive data for that position. The Compensation
Committee is then responsible for recommending the base salaries of the
remaining executive officers.
In addition, in order to align the interests and performance of its
executive officers with the long term interests of its stockholders, the Company
and the Association adopted plans which reward the executives for delivering
long-term value to the Company and the Association through stock ownership.
8
<PAGE>
The compensation package available to executive officers is composed of the
following components:
(i) Base Salary;
(ii) Annual Cash Incentive Awards; and
(iii) Long Term Incentive Compensation, including Option and Stock
Awards.
Messrs. Kish and Micenko have employment agreements which specify a minimum
base salary and require an annual review of such salary. In addition, Messrs.
Kish and Micenko and all other executive officers of the Company and the
Association participate in other benefit plans available to all employees
including the Association's Employee Stock Ownership Plan.
Base Salaries. The salary levels are intended to be consistent and
competitive with the practices of other comparable financial institutions and
each executives' level of responsibility. The Compensation Committee has
consulted with L.R. Webber. Associates, Inc., an outside consulting firm, in
determining the compensation paid to executive officers performing similar
duties for depository institutions and their holding companies with particular
focus on the level of compensation paid by comparable institutions in
Pennsylvania and the Mid-Atlantic region.
Although the Compensation Committee's recommendations are discretionary and
no specific formula is used for decision making, salary increases are aimed at
reflecting the overall performance of the Company and the performance of the
individual executive officer.
Annual Cash Incentive Awards. As discussed under Base Salaries, cash
incentive awards are intended to be consistent with comparative practices of
other comparable financial institutions and each executive officer's level of
responsibility. Such awards are based on the Committee's subjective
determinations of the executive officer's performance during the year in
relation to the budgeted financial performance of the Company. During fiscal
1997, the Board of Directors consulted with L.R. Webber Associates, Inc. in
developing a more formal recognition and incentive program for annual cash
incentive awards.
Long Term Incentive Compensation. The Company maintains the Incentive Plan
under which executive officers may receive grants and awards of Common Stock and
options to purchase Common Stock of the Company. The Compensation Committee
believes that stock ownership is a significant incentive in building shareholder
value and aligning the interests of employees with shareholders. As approved by
the Company's shareholders on October 16, 1996, all the executive officers
received grants and awards of Common Stock and options to purchase Common Stock
which have vesting periods of 20% per year beginning October 16, 1997. The
exercise price of options granted was the market value of the Common Stock on
the date of shareholder approval. The value of this component of compensation
increases as the Common Stock of the Company appreciates in value. The specific
grants and awards for certain named executive officers are reflected in the
Summary Compensation Table.
Chief Executive Compensation. The base compensation of John M. Kish,
Chairman and Chief Executive Officer of the Company for fiscal 1997 was a
percentage of an annual base salary of $185,400 based upon the amount of time
expended by Mr. Kish in his role as the Chairman of the Board and Chief
Executive Officer of the Company. During fiscal 1997, Mr. Kish's compensation
was $111,240. See the discussion under "Employment Agreements" for further
information regarding Mr. Kish's annual base salary.
9
<PAGE>
The base compensation of John G. Micenko, President of the Company and
President and Chief Executive Officer of the Association, was $211,603, which
represents a 3% increase over his 1996 base salary.
COMPENSATION AND BENEFITS COMMITTEE
Darrell J. Hess
Thomas M. Stanton
David R. Wasik
10
<PAGE>
Stock Performance Graph. The following graph shows a comparison of
stockholder return on the Company's Common Stock based on the market price of
Common Stock assuming the reinvestment of dividends, with the cumulative total
returns for the companies on the American Stock Exchange Index and the SNL
Thrift Index for the period beginning on March 26, 1996, the day the Company's
Common Stock began trading, through December 31, 1997. The graph was derived
from a very limited period of time, and, as a result, may not be indicative of
possible future performance of the Company's Common Stock. The data was
supplied by SNL Securities, Inc., a data service provider for publicly traded
financial institutions.
===============================================================================
<TABLE>
[GRAPH APPEARS HERE]
COMPARISON OF CUMULATIVE TOTAL RETURN AMONG THE COMPANY,
AMERICAN STOCK EXCHANGE INDEX AND SNL THRIFT INDEX
EXCHANGE INDEX AND SNL THRIFT INDEX
<CAPTION>
Measurement Period GA AMEX MARKET SNL
(Fiscal Year Covered) FINANCIAL, INC. INDEX THRIFT INDEX
- ------------------- --------------- ----------- ------------
<S> <C> <C> <C>
Measurement Pt-
3/26/96 $100.00 $100.00 $100.00
FYE 6/30/96 $ 96.70 $101.23 $103.64
FYE 12/31/96 $134.33 $116.35 $129.41
FYE 6/30/97 $170.69 $140.31 $167.75
FYE 12/31/97 $171.78 $148.78 $220.20
</TABLE>
11
<PAGE>
Summary Compensation Table. The following table shows, for the years
ended December 31, 1997, 1996 and 1995, the cash compensation paid by the
Company and Association, as well as certain other compensation paid or accrued
for those years, to the Chief Executive Officers of the Company and the
Association, and the Vice President and Treasurer of the Association, the
highest paid executive officers of the Company and the Association, who earned
and/or received salary and bonus in excess of $100,000 in fiscal year 1997
("Named Executive Officers"). No other executive officer of the Company or the
Association earned and/or received salary and bonus in excess of $100,000 in
fiscal year 1997.
<TABLE>
<CAPTION>
Long-Term Compensation
----------------------------------------
Annual Compensation(1) Awards Payouts
----------------------------------- ---------------------------- ---------
Other Securities
Annual Restricted Underlying LTIP All Other
Name and Principal Compensation Stock Awards Options/SARs Payouts Compensation
Positions Year Salary($) Bonus($) ($)(3) ($)(4) (#)(5) ($)(6) ($)(7)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John M. Kish (2) 1997 $111,240 - - - - None $40,849
Chairman of the Board 1996 99,000 $ 7,000 $ 4,450 $393,900 75,000 None -
and Chief Executive 1995 - - 20,625 - - None -
Officer of the
Company and Chairman
of the Board of the
Association
John G. Micenko 1997 211,603 - - - - None 92,214
Director and President 1996 205,670 7,000 - 722,150 95,000 None 98,066
of the Company and 1995 199,680 41,000 - - - None 8,663
Director, President
and Chief Executive
Officer of the
Association
Andrew R. Getsy 1997 125,291 - - - - None 49,774
Vice President and 1996 121,171 5,000 - 328,250 25,000 None 34,483
Treasurer of the 1995 118,231 19,705 - - - None 9,247
Association
</TABLE>
____________________
(1) The column titled "Bonus" consists of board approved discretionary cash
bonuses. See "Compensation Committee Report on Executive Compensation."
(2) As of January 1, 1996, Mr. Kish was appointed Chief Executive Officer of the
Company. Prior to his appointment as Chief Executive Officer, Mr. Kish
served as the Chairman of the Board of the Association since 1990 and as a
Director of the Association since 1983.
(3) For 1997, there were no (a) perquisites over the lesser of $50,000 or 10% of
the individual's total salary and bonus for the year; (b) payments of above-
market preferential earnings on deferred compensation; (c) payments of
earnings with respect to long-term incentive plans prior to settlement or
maturation; (d) tax payment reimbursements; nor (e) preferential discounts
on stock. For 1995, the Association had no restricted stock or stock
related plans in existence. For Mr. Kish, such amounts represent Board of
Directors fees paid in 1995 and the first quarter of 1996.
(4) Includes stock awards of 30,000, 55,000 and 25,000 shares granted to Messrs.
Kish, Micenko and Getsy respectively, pursuant to the Incentive Plan during
fiscal year 1996. The awards began vesting in five equal annual
installments on October 16, 1997, the first anniversary of the effective
date of the award. When shares become vested and are distributed, the
recipients will also receive an amount equal to accumulated cash and stock
dividends (if any) with respect thereto plus earnings thereon. All awards
vest immediately upon termination of employment due to death or disability.
As of December 31, 1997, the market value of the stock awards held by
Messrs. Kish, Micenko and Getsy was $509,625, $1,038,125, and $377,500,
respectively.
(5) Represents stock options granted to Messrs. Kish, Micenko and Getsy,
respectively, pursuant to the Incentive Plan during fiscal year 1996.
(6) For 1997, 1996 and 1995, there were no payouts or awards under any long-term
incentive plan.
(7) Other compensation includes a taxable fringe benefit group life insurance,
employer contributions to the Association's 401(k) plan, contributions to
the Association's non-qualified Supplemental Executive Retirement Plan the
("SERP"), and grants of common stock pursuant to the Association's ESOP.
During fiscal 1997, Messrs. Kish, Micenko and Getsy received contributions
of $576, $1,983 and $1,080, respectively, under the group life insurance.
Contributions to Messrs. Kish, Micenko and Getsy during fiscal 1997 pursuant
to the 401(k) plan and the SERP were $4,750, $4,750, and $4,750,
respectively, and $0, $49,958, and $8,421, respectively. For fiscal 1997,
Messrs. Kish, Micenko and Getsy were allocated 1,882, 1,882 and 1,882 shares
of Common Stock, respectively, pursuant to the ESOP. Dollar amounts reflect
market value ($18.875) as of December 31, 1997. See "Executive
Compensation."
12
<PAGE>
COMPENSATION ARRANGEMENTS
Employment Agreements. The Association and the Company have entered into
employment agreements with Messrs. Kish and Micenko (individually, the
"Executive"). These employment agreements are intended to ensure that the
Association and the Company will be able to maintain a stable and competent
management base. The continued success of the Association and the Company
depends to a significant degree on the skills and competence of Messrs. Kish and
Micenko.
The employment agreements provide for a three-year term for Messrs. Kish and
Micenko. The Association employment agreement provides that, commencing on the
first anniversary date and continuing each anniversary date thereafter, the
Board of the Association may extend the agreement for an additional year so that
the remaining term shall be three years, unless written notice of non-renewal is
given by the Board of the Association after conducting a performance evaluation
of the Executive. The terms of the Company employment agreements are also
extended on an annual basis unless written notice of non-renewal is given by the
Board of the Company. The agreements provide that the Executive's base salary
will be reviewed annually. The base salary of Mr. Kish is currently a
percentage of an annual base salary of $190,962 based upon the amount of time
expended by Mr. Kish in his role as Chairman of the Board and Chief Executive
Officer of the Company, and it is expected that Mr. Kish's base salary for
1998 will be approximately $175,049 . As part of the Executive Leadership Plan,
adopted by the Company in 1998, Mr. Kish will become a full time employee of the
Company no later than May 1, 1998 and will cease being a partner in his law firm
at that time. The current base salary for Mr. Micenko as President of the
Company and the Association is $218,195. In addition to the base salary, the
agreements provide for, among other things, participation in stock benefit plans
and other fringe benefits applicable to executive personnel.
The agreements provide for termination by the Association or the Company for
cause as defined in the agreements at any time. In the event the Association or
the Company chooses to terminate the Executive's employment for reasons other
than for cause, or in the event of the Executive's resignation from the
Association and the Company upon: (i) failure to re-elect the Executive to his
current offices; (ii) a material change in the Executive's functions, duties or
responsibilities; (iii) a relocation of the Executive's principal place of
employment by more than 25 miles; (iv) liquidation or dissolution of the
Association or the Company; or (v) a breach of the agreement by the Association
or the Company, the Executive or, in the event of Executive's subsequent death,
his beneficiary, beneficiaries or estate, as the case may be, would be entitled
to receive an amount equal to the remaining base salary payments due to the
Executive and the contributions that would have been made on the Executive's
behalf to certain benefit plans of the Association or the Company during the
remaining term of the agreement. The Association and the Company would also
continue and pay for the Executive's life, health and disability coverage for
the remaining term of the agreement. Upon any termination of the Executive, the
Executive is subject to a one year non-competition agreement.
Under the agreements, if voluntary or involuntary termination follows a change
in control of the Association or the Company (as defined in the employment
agreements), the Executive or, in the event of the Executive's death, his
beneficiary, would be entitled to a severance payment equal to the greater of:
(i) the payments due for the remaining terms of the agreement; or (ii) three
times the average of the five preceding taxable years' annual compensation. The
Association and the Company would also continue the Executive's life, health,
and disability coverage for thirty-six months. Notwithstanding that both
agreements provide for a severance payment in the event of a change in control,
the Executive would only be entitled to receive a severance payment under one
agreement. Based solely on the compensation reported in the
13
<PAGE>
Summary Compensation Table for 1997 in the case of Mr. Micenko and the projected
base salary for Mr. Kish and excluding any benefits under any employee plan
which may be payable, following a change in control and termination of
employment Messrs. Kish and Micenko would receive severance payments in the
amount of approximately $556,973 and $634,809, respectively.
Payments under the employment agreements in the event of a change in control
may constitute some portion of an excess parachute payment under Section 280G of
the Internal Revenue Code of 1986, as amended (the "Code") for executive
officers, resulting in the imposition of an excise tax on the recipient and
denial of the deduction for such excess amounts to the Company and the
Association.
Payments to the Executive under the Association's agreement will be guaranteed
by the Company in the event that payments or benefits are not paid by the
Association. Payment under the Company's agreement would be made by the
Company. All reasonable costs and legal fees paid or incurred by the Executive
pursuant to any dispute or question of interpretation relating to the agreements
shall be paid by the Association or Company, respectively, if the Executive is
successful on the merits pursuant to a legal judgment, arbitration or
settlement. The employment agreements also provide that the Association and
Company shall indemnify the Executive to the fullest extent allowable under
federal and Delaware law, respectively.
Change in Control Agreements. For similar reasons as with the employment
agreements, the Association and/or the Company have entered into change in
control agreements with Mr. Getsy and seven other executive officers
(collectively, the "Executive"). Each change in control agreement provides for
a two year term. Commencing on the date of the execution of the Company's
change in control agreement, the term shall be extended for one day each day
until such time as the Board of Directors of the Company or the Executive elects
by written notice not to extend the term, at which time the change in control
agreement will end on the second anniversary of the date of notice. The
Company's change in control agreement provides that at any time following a
change in control of the Association or the Company (as defined in the
agreement), if the Company terminates the Executive's employment for any reason
other than cause, or if the Executive terminates his or her employment following
demotion, loss of title, office or significant authority, a reduction in
compensation, or relocation of the principal place of employment of more than 25
miles, the Executive, or in the event of Executive's subsequent death,
Executive's beneficiary or beneficiaries or estate, as the case may be, would be
entitled to a sum equal to two (2) times the Executive's annual compensation,
including bonuses, cash and stock compensation and other benefits for the
preceding twelve months. The Company would also continue the Executive's life,
medical and disability coverage for twenty-four (24) full calendar months from
the date of termination. The Association's change in control agreement is
similar to that of the Company, with the exception that such agreement may be
extended on an annual basis by the Association and is subject to certain other
limitations imposed by federal regulation. Payments to the Executive under the
Association's change in control agreement will be guaranteed by the Company in
the event that payments or benefits are not paid by the Association. Based
solely on the Compensation reported in the Summary Compensation Table for 1997
and excluding any benefits under any employee plan which may be payable,
following a change in control and termination of employment, Mr. Getsy and the
other seven officers covered by the agreements would receive a severance payment
in the amount of approximately $250,582 and $1.14 million, respectively.
Payments under the change in control agreements in the event of a change in
control may constitute some portion of an excess parachute payment under Section
280G of the Code for executive officers,
14
<PAGE>
resulting in the imposition of an excise tax on the recipient and denial of the
deduction for such excess amounts to the Company and the Association.
Incentive Plan. The Company maintains the Incentive Plan, which provides
discretionary awards of options to purchase Common Stock, option-related awards
and awards of Common Stock (collectively, "Awards") to officers, directors and
key employees as determined by a committee of the Board of Directors. Awards of
Common Stock to officers, directors and key employees is provided under
"Restricted Stock Awards" in the "Summary Compensation Table." No options were
granted under the Incentive Plan to the Named Executive Officers in fiscal 1997.
The following table provides certain information with respect to the number
of shares of Common Stock represented by outstanding options held by the Named
Executive Officers as of December 31, 1997. Also reported are the values for
"in-the-money" options which represent the positive spread between the exercise
price of any such existing stock options and the year end price of the Common
Stock.
FISCAL YEAR-END OPTION/SAR VALUE
<TABLE>
<CAPTION>
Number Value of Unexercised
of Securities in-the-money
Underlying Unexercised Options/SARs
Options/SARs at Fiscal Year-
at Fiscal Year-End(#)(1) End($)(2)(3)
--------------------------------------- ---------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ----------------------- --------------- ----------------- -------------------- ------------------
<S> <C> <C> <C> <C>
John M. Kish 15,000 60,000 $ 91,875 $367,500
John G. Micenko 19,000 76,000 116,375 465,500
Andrew R. Getsy 5,000 20,000 30,625 122,500
</TABLE>
____________________________________
(1) The options in this table have an exercise price of $12.75.
(2) The price of the Common Stock on December 31, 1997 was $18.875.
(3) Based on the market value of the underlying Common Stock at fiscal year end,
minus the exercise price.
15
<PAGE>
Retirement Plan. The Association participates in the Financial Institutions
Retirement Plan, administered by the Pentegra Group, which is a defined benefit
pension plan, for its employees (the "Retirement Plan"). As discussed below, the
Retirement Plan was modified as of July 1, 1996. The following table indicates
the annual retirement benefit payable under the current terms of the Retirement
Plan upon retirement at age 65 to those participants who were not participants
in the Retirement Plan as of July 1, 1996 and who elect to receive his
retirement benefit in the standard form of benefit, assuming various specified
levels of plan compensation and various specified years of credited service
expressed in the form of a ten year certain and life annuity. The benefits
listed in the table below are based upon salary only and are not subject to any
social security adjustment. The following table includes benefits under the
current terms of the Retirement Plan together with any additional amounts
received under the Association's non-qualified Supplemental Retirement Plan.
<TABLE>
<CAPTION>
HIGH-5 10 YEARS 15 YEARS 20 YEARS 25 YEARS 30 YEARS
AVERAGE BENEFIT BENEFIT BENEFIT BENEFIT BENEFIT
COMPENSATION SERVICE SERVICE SERVICE SERVICE SERVICE
- ------------------------ --------------- --------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
$ 20,000 $ 2,400 $ 3,600 $ 4,800 $ 6,000 $ 6,000
30,000 3,600 5,400 7,200 9,000 9,000
50,000 6,000 9,000 12,000 15,000 15,000
75,000 9,000 13,500 18,000 22,500 22,500
100,000 12,000 18,000 24,000 30,000 30,000
150,000 28,000 27,000 36,000 45,000 45,000
200,000 24,000 36,000 48,000 60,000 60,000
250,000 30,000 45,000 60,000 75,000 75,000
</TABLE>
________________________
(1) The maximum amount of annual compensation which can be considered in
computing benefits under Section 401(a)(17) of the Code is $160,000 for
1998.
Effective July 1, 1996, in conjunction with the Association's adoption of a
savings plan qualified under Section 401(k) of the Code (the "401(k) Plan") and
the ESOP, the Association modified the Retirement Plan from a self-administered
defined benefit plan with a 60 percent, High-3 formula and a 25 year target
service minimum to a defined benefit plan with a 30 percent, High-5 formula and
a 25 year target service minimum. As a result, participants in the Retirement
Plan as of July 1, 1996 will effectively receive a benefit under the Retirement
Plan equal to the greater of: (i) the amount of benefit payable under the
Retirement Plan prior to modification or (ii) the amount of benefit payable
under the terms of the modified terms of the Retirement Plan. The following
table indicates the annual retirement benefit payable to participants upon
retirement at age 65 who elect to receive their retirement benefit in the
standard form of benefit, assuming various specified levels of plan compensation
and various specified years of credited service, under the Retirement Plan prior
to its modification. The benefits listed in the retirement tables are based
upon salary only and are not subject to any Social Security adjustment. The
table below sets forth estimated annual pension benefits for individuals at age
65 as of the June 30, 1996 accrued benefit date.
16
<PAGE>
<TABLE>
<CAPTION>
High-3 10 Years 15 Years 20 Years 25 Years 30 Years
Average Benefit Benefit Benefit Benefit Benefit
Compensation Service Service Service Service Service
- ------------------------ --------------- --------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
$ 25,000 $ 6,000 $ 9,000 $12,000 $15,000 $15,000
50,000 12,000 18,000 24,000 30,000 30,000
75,000 18,000 27,000 36,000 45,000 45,000
100,000 24,000 36,000 48,000 60,000 60,000
125,000 30,000 45,000 60,000 75,000 75,000
150,000 36,000 54,000 72,000 90,000 90,000
175,000 36,000 54,000 72,000 90,000 90,000
200,000 36,000 54,000 72,000 90,000 90,000
250,000 36,000 54,000 72,000 90,000 90,000
</TABLE>
________________
(1) The maximum amount of annual compensation which can be considered in
computing benefits under Section 401(a)(17) of the Code is $160,000 for
1998.
The following table sets forth the years of credited service (i.e., benefit
service) as of December 31, 1997 for each Named Executive Officer.
<TABLE>
<CAPTION>
Credited Service
-----------------------------------------------
Years Months
------------------- -----------------
<S> <C> <C>
John M. Kish 0 9
John G. Micenko 34 6
Andrew R. Getsy 29 6
</TABLE>
TRANSACTIONS WITH CERTAIN RELATED PERSONS
The Association's current policy provides that all loans made by the
Association to its directors and executive officers ("insiders") are made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons and do not
involve more than the normal risk of collectibility or present other unfavorable
features. The Financial Institutions Recovery, Reform and Enforcement Act of
1989 ("FIRREA"), subjected the Association to the restrictions of Section 22(g)
and (h) of the Federal Reserve Act and Regulation O promulgated thereunder.
Prior to FIRREA, the Association made loans to executive officers with
discounted interest rates. Recent legislation
17
<PAGE>
has created an exception to this lending prohibition which allows the
Association to extend the same lending terms to insiders as are widely available
to all employees within certain limits.
Set forth below is certain information as of December 31, 1997, with
respect to loans made by the Association on preferential terms to executive
officers of the Company and their affiliates which in the aggregate exceeded
$60,000 at any time since January 1, 1997 plus any additional indebtedness of
such persons to the Association. At the time of origination of the loans as set
forth below, preferential loan rates were available for all full-time employees.
The rates on such loans are equal to the Association's cost of funds rounded to
the next quarter and such preferential interest rates remain in effect as long
as the employee maintains full-time status.
<TABLE>
<CAPTION>
LARGEST
AMOUNT BALANCE INTEREST
MATURITY OUTSTANDING AS OF RATE AS OF
DATE DATE SINCE DECEMBER DECEMBER TYPE OF
NAME AND POSITION OF LOAN OF LOAN JANUARY 1, 1997 31, 1997 31, 1997 LOAN
- ----------------- ------- -------- --------------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Lawrence A. Michael 7/6/87 8/1/17 $ 61,291 $ 59,717 6.25% Mortgage
Secretary of the Company
and Secretary and Vice
President of the
Association
Raymond G. Suchta 1/9/87 6/1/17 105,958 99,141 6.50% Mortgage
Chief Financial Officer
and Treasurer of the
Company and Vice
President of the
Association
Wayne A. Callen 11/18/86 6/1/17 109,744 107,180 7.00% Mortgage
Vice President of the
Association
</TABLE>
John M. Kish is a partner in the law firm of Kish, Kish and Yarsky (the
"firm"), which acts as counsel to the Company and the Association. During 1997,
the Company and the Association made payments to the firm for legal services
totalling $33,904. However, see discussion under "Employment Agreements"
concerning Mr. Kish's future status with the firm.
18
<PAGE>
PROPOSAL 2. RATIFICATION OF APPOINTMENT
OF INDEPENDENT AUDITORS
The Company's independent auditors for the fiscal year ended December 31, 1997
were Coopers & Lybrand L.L.P. The Company's Board of Directors has reappointed
Coopers & Lybrand L.L.P. to continue as independent auditors for the Association
and the Company for the fiscal year ending December 31, 1998, subject to
ratification of such appointment by the stockholders.
Representatives of Coopers & Lybrand L.L.P. will be present at the Meeting.
They will be given an opportunity to make a statement if they desire to do so
and will be available to respond to appropriate questions from stockholders
present at the Meeting.
UNLESS MARKED TO THE CONTRARY, THE SHARES REPRESENTED BY THE ENCLOSED PROXY
WILL BE VOTED "FOR" RATIFICATION OF THE APPOINTMENT OF COOPERS & LYBRAND L.L.P.
AS THE INDEPENDENT AUDITORS OF THE COMPANY.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" RATIFICATION OF THE APPOINTMENT
OF COOPERS & LYBRAND L.L.P. AS THE INDEPENDENT AUDITORS OF THE COMPANY.
ADDITIONAL INFORMATION
STOCKHOLDER PROPOSALS
To be considered for inclusion in the proxy statement and proxy relating to
the Annual Meeting of Stockholders to be held in 1999, a stockholder proposal
must be received by the Secretary of the Company at the address set forth in the
Notice of Annual Meeting of Stockholders, not later than November 27, 1998. Any
such proposal will be subject to Rule 14a-8 of the Rules and Regulations under
the Exchange Act.
NOTICE OF BUSINESS TO BE CONDUCTED AT AN ANNUAL MEETING
The Bylaws of the Company provide an advance notice procedure for certain
business to be brought before an annual meeting. In order for a stockholder to
properly bring business before an annual meeting, the stockholder must give
written notice to the Secretary of the Company not less than ninety (90) days
before the time originally fixed for such meeting; provided, however, that in
the event that less than one hundred (100) days notice or prior public
disclosure of the date of the meeting is given or made to stockholders, notice
by the stockholder to be timely must be received not later than the close of
business on the tenth day following the day on which such notice of the date of
the annual meeting was mailed or such public disclosure was made. The notice
must include the stockholder's name and address, as it appears on the Company's
record of stockholders, a brief description of the proposed business, the reason
for conducting such business at the annual meeting, the class and number of
shares of the Company's capital stock that are beneficially owned by such
stockholder and any material interest of such stockholder in the proposed
business. In the case of nominations to the Board, certain information
regarding the nominee must be provided. Nothing in this paragraph shall be
deemed to require the Company to include in its proxy statement and proxy
relating to an annual meeting any stockholder proposal which does not meet all
of the requirements for inclusion established by the SEC in effect at the time
such proposal is received.
19
<PAGE>
OTHER MATTERS WHICH MAY PROPERLY COME BEFORE THE MEETING
The Board of Directors knows of no business which will be presented for
consideration at the Meeting other than as stated in the Notice of Annual
Meeting of Stockholders. If, however, other matters are properly brought before
the Meeting, it is the intention of the persons named in the accompanying proxy
to vote the shares represented thereby on such matters in accordance with their
best judgment.
Whether or not you intend to be present at the Meeting, you are urged to
return your proxy promptly. If you are present at the Meeting and wish to vote
your shares in person, your proxy may be revoked by voting at the Meeting.
A COPY OF THE FORM 10-K (WITHOUT EXHIBITS) FOR THE YEAR ENDED DECEMBER 31,
1997, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION WILL BE FURNISHED
WITHOUT CHARGE TO STOCKHOLDERS OF RECORD UPON WRITTEN REQUEST TO RAYMOND G.
SUCHTA, CHIEF FINANCIAL OFFICER, GA FINANCIAL, INC., 4750 CLAIRTON BOULEVARD,
PITTSBURGH, PENNSYLVANIA 15236.
By Order of the Board of Directors
/s/ Lawrence A. Michael
Lawrence A. Michael
Corporate Secretary
Pittsburgh, Pennsylvania
March 27, 1998
YOU ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON. WHETHER OR NOT YOU
PLAN TO ATTEND THE MEETING, YOU ARE REQUESTED TO SIGN AND PROMPTLY RETURN THE
ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
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REVOCABLE PROXY
GA FINANCIAL, INC.
[X] PLEASE MARK VOTES
AS IN THIS EXAMPLE
ANNUAL MEETING OF SHAREHOLDERS
April 29, 1998
10:00 a.m. Eastern Time
The undersigned hereby appoints the official proxy committee of the Board of
Directors of GA Financial, Inc. (the "Company"), each with full power of
substitution, to act as proxies for the undersigned, and to vote all shares of
Common Stock of the Company which the undersigned is entitled to vote only at
the Annual Meeting of Shareholders, to be held on April 29, 1998, at 10:00 a.m.,
Eastern Time, at The Bradley House, 5239 Brownsville Road, Pittsburgh,
Pennsylvania 15236, and at any and all adjournments thereof, with all of the
powers the undersigned would possess if personally present a such meeting, as
follows:
Please be sure to sign and date Date
this Proxy in the box below
Shareholder sign above Co-holder (if any) sign above
With- For All
For hold Except
1. The election as directors of all [ ] [ ] [ ]
nominees listed (except as
marked to the contrary below)
John G. Micenko-Thomas M. Stanton-Robert J. Ventura
INSTRUCTION: To withhold authority to vote for any individual nominee, mark "For
All Except" and write that nominee's name in the space provided below.
- --------------------------------------------------------------------------------
2. The ratification of the appointment For Against Abstain
of Coopers & Lybrand L.L.P., as [ ] [ ] [ ]
independent auditors of GA
Financial, Inc. for the fiscal year
ending December 31, 1998
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE LISTED PROPOSALS.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS.
This proxy is revocable and will be voted as directed, but if no instructions
are specified, this proxy will be voted "FOR" each of the proposals listed. If
any other business is presented at the Annual Meeting, including whether or not
to adjourn the meeting, this proxy will be voted by those named in this proxy in
their best judgment. At the present time, the Board of Directors knows of no
other business to be presented at the Annual Meeting.
Detach above card, date, sign and mail in postage paid envelope provided.
GA FINANCIAL, INC.
The above signed acknowledges receipt from the Company prior to the execution
of this proxy of a Notice of the Annual Meeting of Shareholders and of a Proxy
Statement dated March 27, 1998 and of the Annual Report to Shareholders.
Please sign exactly as your name appears on this card. When signing as
attorney, executor, administrator, trustee or guardian, please give your full
title. If shares are held jointly, each holder may sign but only one signature
is required.
PLEASE ACT PROMPTLY
DATE, SIGN & MAIL YOUR PROXY CARD TODAY
