<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to ______________________
Commission File Number 1-14154
-----
GA FINANCIAL, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 25-1780835
-------- ----------
(State or other jurisdiction of (IRS Employer Indentification No.)
(incorporation or organization)
4750 CLAIRTON BOULEVARD, PITTSBURGH, PENNSYLVANIA 15236
- --------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(412)882-9946
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 7,132,975 shares of
common stock, par value $.01 per share, were outstanding as of October 31, 1998.
<PAGE>
GA FINANCIAL, INC.
FORM 10-Q
September 30, 1998
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition -
September 30, 1998 and December 31, 1997.......................... 1
Consolidated Statements of Income and Comprehensive Income -
For the Three and Nine Months Ended September 30, 1998 and 1997... 2
Consolidated Statements of Cash Flows - For the Nine
Months Ended September 30, 1998 and 1997.......................... 3
Notes to Consolidated Financial Statements........................ 4- 7
Report of Independent Accountants................................. 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 9-18
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......... 18
PART II: OTHER INFORMATION................................................... 19
SIGNATURES .................................................................... 20
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
- ------- --------------------
GA Financial, Inc.
Consolidated Statements of Financial Condition
September 30, 1998 and December 31, 1997
<TABLE>
<CAPTION>
Sept. 30, 1998 Dec. 31, 1997
(Unaudited)
- ---------------------------------------------------------------------------------------------------------------------
ASSETS (Dollars in thousands)
<S> <C> <C>
Cash (including interest-bearing demand deposits of $2,656
in 1998 and $3,291 in 1997) $ 9,546 $ 10,242
Federal funds sold 1,000 2,500
Available for sale securities, at fair value:
Investment securities 176,064 151,265
Mortgage-related securities 271,671 284,161
Loans receivable, net 304,330 287,674
Education loans held for sale 22,515 18,853
Accrued interest receivable 6,869 5,977
Federal Home Loan Bank stock 11,413 9,833
Office, property and equipment 5,073 5,203
Foreclosed assets 602 -
Prepaid expenses and other assets 9,810 8,240
- ---------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $818,893 $783,948
=====================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Noninterest-bearing demand deposits $ 25,146 $ 21,375
Savings accounts 444,184 440,779
Borrowed funds 226,955 198,237
Advances from borrowers for taxes and insurance 758 1,602
Accrued interest payable 5,350 1,385
Other liabilities 6,117 4,444
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES $708,510 667,822
Shareholders' Equity:
Preferred stock, (.01 par value); 1,000,000 shares authorized; 0 shares issued - -
Common stock, (.01 par value); 23,000,000 shares authorized;
8,900,000 shares issued 89 89
Additional paid in capital 86,036 85,992
Treasury stock, at cost (1,757,025 shares at September 30, 1998 and
1,182,130 shares at December 31, 1997) (30,721) (19,464)
Unearned employee stock ownership plan (ESOP) shares (6,104) (6,104)
Unearned recognition and retention plan (RRP) shares (2,640) (3,107)
Accumulated other comprehensive income 5,216 3,724
Retained earnings 58,507 54,996
- ---------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 110,383 116,126
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $818,893 $783,948
=====================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-1-
<PAGE>
GA Financial, Inc.
Consolidated Statements of Income and Comprehensive Income
For the Three and Nine Months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended Sept. 30, Ended Sept. 30,
1998 1997 1998 1997
Dollars in thousands, except per share amounts (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Interest income:
Loans $ 6,321 $ 6,033 $19,213 $16,117
Mortgage-related securities 4,420 5,424 13,886 15,415
Investment securities 2,969 2,196 8,226 6,641
Interest on bank deposits 112 109 447 410
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest income $13,822 $13,762 $41,772 $38,583
- ---------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits 4,746 4,710 13,996 13,742
Interest on borrowings 3,335 2,576 9,720 5,728
Other 9 15 27 41
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest expense 8,090 7,301 23,743 19,511
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income before provision for losses on loans $ 5,732 $ 6,461 $18,029 $19,072
Provision for losses on loans 90 75 270 225
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for losses on loans $ 5,642 $ 6,386 $17,759 $18,847
- ---------------------------------------------------------------------------------------------------------------------------------
Non-interest income:
Service fees 622 432 1,386 938
Net gain on sales of securities 100 10 357 38
Net gain on sales of education loans - 113 88 187
Data processing service fees 195 164 565 443
Other 847 1 1,063 10
- ---------------------------------------------------------------------------------------------------------------------------------
Total non-interest income 1,764 720 3,459 1,616
- ---------------------------------------------------------------------------------------------------------------------------------
Non-interest expense:
Compensation and employee benefits 1,992 1,895 5,975 5,515
Occupancy and equipment 464 445 1,342 1,325
Deposit insurance premiums 71 71 213 210
Data processing service expenses 428 424 1,236 1,202
Capital stock taxes 48 161 446 402
Other 581 657 2,520 2,227
- ---------------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 3,584 3,653 11,732 10,881
- ---------------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes $ 3,822 $ 3,453 $ 9,486 $ 9,582
Provision for income taxes 1,279 1,287 3,211 3,541
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $ 2,543 $ 2,166 $ 6,275 $ 6,041
=================================================================================================================================
Other comprehensive income
Unrealized gains on available for sale securities, net of taxes
for 1998 and 1997, respectively 1,948 2,324 1,492 2,447
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 4,491 $ 4,490 $ 7,767 $ 8,488
=================================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements.
Basic earnings per share $ .40 $ .31(1) $ .95 $ .85(1)
======= ======= ===== =====
Diluted earnings per share $ .39 $ .30(1) $ .92 $ .83(1)
======= ======= ===== =====
Dividends per share $ .14 $ .12 $ .40 $ .30
======= ======= ===== =====
Average shares outstanding - basic 6,338,184 6,963,444 6,594,635 7,168,791
Average shares outstanding - diluted 6,506,516 7,216,061 6,830,895 7,375,747
</TABLE>
(1)Earnings per share were restated to reflect the Company's adoption of SFAS
No. 128, "Earnings per Share".
-2-
<PAGE>
GA Financial, Inc.
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
For the Nine Months Ended
- --------------------------------------------------------------------------------------------------------------------
September 30,
1998 1997
(Unaudited)
- --------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities: (Dollars in thousands)
<S> <C> <C>
Net income $ 6,275 $ 6,041
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for losses on loans 270 225
Depreciation on office, property and equipment 598 654
Net premium amortization (discount accretion) on securities 166 (72)
Amortization of net deferred loan fees (297) (140)
Allocation of RRP shares 466 610
Allocation of unallocated ESOP shares 244 198
Net realized (gain) on sales of securities (356) (38)
Net realized (gain) on sale of education loans (88) (187)
(Increase) in accrued interest receivable (892) (1,469)
(Increase) in prepaid expenses and other assets (1,708) (87)
Increase in accrued interest payable 3,965 4,119
Amortization of intangibles 138 138
Increase (decrease) in other liabilities - -
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 8,781 $ 9,992
- --------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of available for sale securities 82,313 88,308
Proceeds from sale of education loans 3,350 6,176
Repayments and maturities of available for sale securities 92,491 32,567
Purchases of available for sale securities (184,556) (194,131)
Purchase of loans (42,902) (90,000)
Net decrease (increase) in loans 18,747 12,553
Purchases of office, property and equipment, net (468) (491)
Purchase of Federal Home Loan Bank stock (1,580) (7,485)
- --------------------------------------------------------------------------------------------------------------------
Net cash (used in) investing activities (32,605) (152,503)
- --------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in demand and savings deposits 705 1,761
Net increase in certificates of deposit 6,471 5,545
Net increase in advances from borrowers for taxes and insurance (3) (2)
Purchase of RRP stock 0 (4,095)
Purchase of treasury stock (11,341) (7,766)
Other stock transactions 129 0
Payments made under capital lease obligations (44) (125)
Payments of borrowed funds (423,069) (463,776)
Proceeds from borrowed funds 451,788 612,649
Dividends paid (3,008) (2,462)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 21,628 141,729
- --------------------------------------------------------------------------------------------------------------------
Net (decrease) in cash and cash equivalents ($2,196) ($782)
Cash and cash equivalents at beginning of period 12,742 24,299
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 10,546 $ 23,517
====================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-3-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of GA Financial, Inc. (the "Company") and its subsidiary, Great
American Federal Savings and Loan Association (the "Association").
In the opinion of the management of the Association, the accompanying
consolidated financial statements include all normal recurring adjustments
necessary for a fair presentation of the financial position and results of
operations for the periods presented. All significant intercompany transactions
have been eliminated in consolidation. Certain information and footnote
disclosure normally included in financial statements presented in accordance
with generally accepted accounting principles have been condensed or omitted.
It is suggested that the accompanying consolidated financial statements be read
in conjunction with the Association's 1997 Annual Report on Form 10-K. The
consolidated financial statements as of September 30, 1998 and for the nine
months ended September 30, 1998 and September 30, 1997 have been reviewed by
PricewaterhouseCoopers LLP, the Company's independent accountants, whose
report is included herein. 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.
2. Capital Requirements and Regulatory Restrictions
As a savings and loan holding company, the Company is not required to maintain
any minimum level of capital; however, the Association is subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory -
and possibly additional discretionary - actions by regulators that, if
undertaken, could have a direct material effect on the 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 of Tier I
capital to total assets. It is management's opinion that the Association meets
all capital adequacy requirements to which it is subject.
As of September 30, 1998, the most recent notification from the Office of Thrift
Supervision (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.
-4-
<PAGE>
<TABLE>
<CAPTION>
Tier I Tier I Total
Leverage Risk-Based Risk-based
Capital Capital Capital
---------------------------------------------------------
<S> <C> <C> <C>
(Dollars in thousands)
September 30, 1998:
Equity capital (1) $102,106 $102,106 $102,106
General valuation allowance (2) - - 1,529
Less unrealized gains on certain available-
for-sale securities (5,563) (5,563) (5,563)
Less core deposit intangible (957) (957) (957)
---------------------------------------------------------
Total regulatory capital $ 95,586 $ 95,586 $ 97,115
Minimum regulatory capital 32,027 12,298 24,595
---------------------------------------------------------
Excess regulatory capital $ 63,559 $ 83,288 $ 72,520
=========================================================
Regulatory capital as a percentage 11.94% 31.09% 31.59%
Minimum regulatory capital as a percentage 4.00% 4.00% 8.00%
---------------------------------------------------------
Excess regulatory capital as a percentage 7.94% 27.09% 23.59%
=========================================================
Well capitalized requirement under
prompt corrective actions provisions 5.00% 6.00% 10.00%
=========================================================
Adjusted assets as reported to the OTS $800,669 $307,438 $307,438
<CAPTION>
Tier I Tier I Total
Leverage Risk-Based Risk-based
Capital Capital Capital
-----------------------------------------------------------
<S> <C> <C> <C>
(Dollars in thousands)
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 core deposit intangible (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
</TABLE>
(1) Represents equity capital of the Association as reported to the Office of
Thrift Supervision.
(2) Limited to 1.25% of risk-weighted assets.
-5-
<PAGE>
3. Changes in Accounting Principles
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." This statement requires
that all items recognized under accounting standards as components of
comprehensive earnings be reported in a financial statement that is displayed
with the same prominence as other financial statements. This statement also
requires that an entity classify items of other comprehensive earnings by their
nature in a financial statement. For example, other comprehensive earnings may
include foreign currency translation adjustments, minimum pension liability
adjustments, and unrealized gains and losses on marketable securities classified
as available-for-sale. Financial statements for prior periods will be
reclassified.
In June 1998, SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities," was issued. Implementation of SFAS No. 133 establishes accounting
and reporting standards for derivative instruments and for hedging activities.
Management of the Company is currently assessing the impact of the adoption of
the standard. Implementation is required for all fiscal quarters of fiscal
years beginning after June 15, 1999 and will be applied prospectively with an
adjustment for the cumulative effect at adoption.
4. Derivative Financial Instruments with Off-Balance Sheet Risk
A reconciliation of forward and standby commitment activity for the period
follows:
<TABLE>
<CAPTION>
(Dollars in thousands) Forward Commitments Standby Commitments
---------------------------------------------
<S> <C> <C>
Balance at December 31, 1997 $ 26,000 $ 16,000
Purchase commitments 80,380 8,000
Commitments sold (38,600) -
Commitments settled (52,780) (16,000)
---------------------------------------------
Balance at September 30, 1998 $ 15,000 $ 8,000
=============================================
</TABLE>
The fair value of the $23.0 million in commitments was approximately $23.5
million at September 30, 1998.
5. Earnings per Share:
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, 1998 September 30, 1997 September 30, 1998 September 30, 1997
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(Dollars in thousands, except per share amounts)
Basic:
Net income $ 2,543 $ 2,166 $ 6,275 $ 6,041
Net income applicable to common stock 2,543 2,166 6,275 6,041
Average common shares - outstanding basic 6,338,184 6,963,444 6,594,635 7,168,791
Basic earnings per share $ .40 $ .31 $ .95 $ .85
Diluted:
Net income $ 2,543 $ 2,166 $ 6,275 $ 6,041
Average common shares - outstanding basic 6,338,184 6,963,444 6,594,635 7,168,791
Effect of dilutive securities:
Shares issuable upon exercise of
outstanding stock options and stock awards 168,332 252,617 236,261 206,956
Average common shares outstanding - diluted 6,506,516 7,216,061 6,830,896 7,375,747
Diluted earnings per share $ .39 $ .30 $ .92 $ .83
================================== ========================================
</TABLE>
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share." This Statement requires the
disclosure of basic and diluted earnings per share and revises the method
required to calculate these amounts under previous standards. Earnings per
share data for the 1997 quarter has been restated to reflect
-6-
<PAGE>
adoption of this Statement. The adoption of this standard did not materially
impact previously reported earnings per share for the 1997 quarter and nine
month period.
6. Consolidated Statements of Shareholders' Equity:
The consolidated statement of shareholders' equity for the nine month period
ending September 30, 1998 is as follows:
<TABLE>
<CAPTION>
Accumulated
Additional Unearned Unearned Other Total
Common Paid in Treasury ESOP RRP Comprehensive Retained Shareholders'
(Dollars in thousands) Stock Capital Stock Plan Shares Plan Shares Income (Loss) Earnings Equity
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at 12/31/97 $89 $85,992 $(19,464) $(6,104) $(3,107) $3,724 $54,996 $116,126
Net income - - - - - - 6,275 6,275
Change in comprehensive
income, net of tax - - - - - 1,492 - 1,492
Treasury stock purchased - - (11,341) - - - - (11,341)
Cash dividends - - - - - - (2,764) (2,764)
Stock awards and options - 44 84 - 467 - - 595
----------------------------------------------------------------------------------------------------
Balance at 9/30/98 $89 $86,036 $(30,721) $(6,104) $(2,640) $5,216 $58,507 $110,383
====================================================================================================
</TABLE>
-7-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
The Board of Directors of
GA Financial, Inc.:
We have reviewed the accompanying consolidated statements of financial condition
of GA Financial, Inc. (the Company) as of September 30, 1998, and the related
consolidated statements of income and comprehensive income, and cash flows for
the three-month and nine-month periods ended September 30, 1998 and September
30, 1997. These consolidated financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the consolidated financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements referred to above
for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated statement of financial condition as of December 31,
1997 and the related consolidated statements of income, cash flows and
shareholders' equity for the year then ended (not presented herein); and in our
report dated January 22, 1998, except as to the information presented in Note
19, for which the date is February 3, 1998, we expressed an unqualified opinion
on those consolidated financial statements. In our opinion, the information set
forth in the accompanying consolidated statement of financial condition as of
December 31, 1997, is fairly stated in all material respects in relation to the
consolidated statement of financial condition from which it has been derived.
/s/PricewaterhouseCoopers LLP
October 21, 1998
Pittsburgh, Pennsylvania
-8-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- ------- -----------------------------------------------------------------------
of Operations
-------------
General
- -------
The Company's and the Association's consolidated results of operations are
dependent primarily on net interest income, which is the difference between the
interest income earned on interest-earning assets, such as loans and
investments, and the interest expense incurred on interest-bearing liabilities,
such as deposits and other borrowings. The Company and the Association refer
hereinto collectively as the "Association". The Association also generates non-
interest income such as service fees and also generates data-processing fees
from its data-processing division. The Association's operating expense consists
primarily of employee compensation, occupancy expenses, federal deposit
insurance premiums, data processing expenses, and other general and
administrative expenses. The Association'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.
Comparison of Financial Condition at September 30, 1998 and December 31, 1997
- -----------------------------------------------------------------------------
The Association's total assets of $818.9 million at September 30, 1998 increased
$34.9 million or 4.5% from December 31, 1997. This increase was primarily
attributed to an increase in investment securities primarily funded by
increased borrowings of $28.7 million in the first nine months of 1998.
Cash and cash equivalents of $10.5 million at September 30, 1998 decreased $2.2
million or 17.2% from December 31, 1997. These funds were invested in
investment securities.
Investment securities classified as available for sale increased $24.8 million
or 16.4% to $176.1 million at September 30, 1998. This was primarily due to
investment of borrowed funds from the Federal Home Loan Bank (the "FHLB") of
Pittsburgh. These funds were invested primarily in municipal bonds and
government securities.
Mortgage-related securities classified as available for sale decreased $12.5
million or 4.4% to $271.7 million at September 30, 1998. This is due to
principal repayments and prepayments.
There were no securities held by the Association which were classified as `held
to maturity' or `held for trading' for either of the respective periods.
The following table presents details of the Association's investment securities
and mortgage-related securities as of
September 30, 1998 (dollars in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Available for sale securities: Cost Gains Losses Fair Value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed certificates $176,592 $4,047 $ (25) $180,614
Collateralized mortgage obligations 90,279 1,184 (406) 91,057
Marketable equity securities 32,059 2,292 (602) 33,749
US government agency debt 71,235 605 (105) 71,735
Corporate obligations 23,297 290 0 23,587
Municipal obligations 45,994 999 0 46,993
- ----------------------------------------------------------------------------------------------------------------------------
Total $439,456 $9,417 $(1,138) $447,735
============================================================================================================================
</TABLE>
-9-
<PAGE>
The following table presents details of the Association's investment securities
and mortgage-related securities as of December 31, 1997 (dollars in thousands):
<TABLE>
<CAPTION>
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
Collateralized mortgage obligations 71,980 285 (800) 71,465
Marketable equity securities 34,360 2,317 (17) 36,660
US government agency debt 77,060 150 (73) 77,137
Corporate obligations 24,125 92 (9) 24,208
Municipal obligations 12,992 270 (2) 13,260
- ----------------------------------------------------------------------------------------------------------------------------
Total $429,512 $6,976 $(1,062) $435,426
============================================================================================================================
</TABLE>
Loans receivable increased $16.7 million or 5.8% to $304.3 million at September
30, 1998. This was due to the Association's purchase and origination of first
mortgage loans.
Education loans increased $3.7 million or 19.4% to 22.5 million due to
originations.
The following table presents details of the Association's loan portfolio
(dollars in thousands):
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
--------------------------------------------
<S> <C> <C>
Mortgages:
One to four family residential $232,119 $215,024
Multi-family residential 5,527 5,778
Commercial 7,422 4,360
Construction and development 1,738 2,966
Consumer loans:
Home equity 56,001 59,111
Education loans 22,515 18,853
Other:
Loans on savings accounts 2,104 2,168
Unsecured personal loans and other 2,795 1,719
- --------------------------------------------------------------------------------------------------
Total $330,221 309,979
Less:
Undisbursed mortgage loans 779 688
Deferred loan fees 1,068 1,442
Allowance for losses 1,529 1,322
- --------------------------------------------------------------------------------------------------
Net loans $326,845 $306,527
==================================================================================================
</TABLE>
Accrued interest receivable increased $892,000 or 14.9% to $6.9 million at
September 30, 1998. This was due to an increase in investment securities
purchased.
FHLB stock increased $1.6 million or 16.1% to $11.4 million at September 30,
1998. The Association is required to own FHLB stock based upon levels of
borrowings. As the use of FHLB advances increases, the amount of required stock
ownership also increases.
Prepaid expenses and other assets increased $1.6 million or 19.1% to $9.8
million at September 30, 1998. This was primarily a result of the increase in
the value of the bank owned life insurance and a $717,000 capital stock tax
benefit recorded in the third quarter.
Foreclosed assets increased $602,000 from December 31, 1997. The Association
foreclosed on nine properties, sold two of them, and is in the process of
selling the others.
Total deposits increased $7.2 million or 1.5% to $469.3 million at September 30,
1998.
-10-
<PAGE>
Borrowed funds increased $28.7 million or 14.5% to $227.0 million at September
30, 1998. This was the result of management's determination to place increased
emphasis on the utilization of FHLB borrowings to fund asset growth,
particularly investments in mortgage-related and investment securities. FHLB
borrowings can be invested at yields higher than the cost of the borrowed funds
thereby increasing net interest income.
Accrued interest payable increased $4.0 million or greater than 100% to $5.4
million at September 30, 1998. This was a result of the timing of accrued
interest payable being credited to deposit accounts and increased FHLB
borrowings.
Other liabilities increased $1.7 million or 37.6% to $6.1 million at September
30, 1998. The change is primarily the result of tax effect of the unrealized
gains on available for sale securities.
Total shareholders' equity decreased $5.7 million or 5.0% to $110.4 million at
September 30, 1998. This was primarily due to the purchase of $11.3 million of
treasury stock, payment of $2.8 million in cash dividends, $1.5 million
increase in other comprehensive income, and $6.3 million in net income.
Comparison of the Consolidated Results of Operation for the Period of Three
- ---------------------------------------------------------------------------
Months Ended September 30, 1998 and 1997.
- -----------------------------------------
Net Income. Net income was $2.5 million for the period of three months ended
September 30, 1998, an increase of $377,000 or 17.4% for the same period in
1997. This was due substantially to a $1.0 million tax benefit recorded in the
current quarter resulting from an anticipated settlement of previously paid
state capital stock taxes and a recalculation of the rate used to accrue these
taxes.
Interest Income. Interest income totaled $13.8 million for the period of three
months ended September 30, 1998, an increase of $60,000 or .4% compared to the
$13.8 million recorded for the period of three months ended September 30, 1997.
The increase was primarily attributable to an increase in the average balance of
interest-earning assets despite a lower yield than in the prior period. The
average balances of interest-earning assets for the period of three months ended
September 30, 1998 increased to $784.5 million, an increase of $55.4 million or
7.6%, compared to the average balance of interest-earning assets of $729.1
million for the same period in 1997. Weighted average yield on interest-earning
assets for the three month period ended September 30, 1998 was 7.05% compared to
7.55% for the comparable period in 1997. This was due to a lower interest rate
environment. Interest on loans for the three month period ended September 30,
1998 was $6.3 million at a weighted average yield of 7.73%, an increase of
$288,000 or 4.8%, compared to interest income on loans of $6.0 million at a
weighted average yield of 8.37% for the three month period ended September 30,
1997. This increase was due to an increase in the average balance of loans.
The Association purchased $4.8 million of residential mortgage loans, which are
outside of its normal lending area, during the third quarter of 1998. For the
three month period ended September 30, 1998 interest income on mortgage-related
securities was $4.4 million at a weighted average yield of 6.70%, a decrease of
$1.0 million or 18.5%, compared to interest income of $5.4 million at a weighted
average yield of 7.31% for the same period in 1997. Average balances in
mortgage-related securities decreased between the two periods as did the
weighted average yield on these investments. This was due to an increase in
principal repayments during the quarter and lower interest rates on reinvested
funds. For the three month period ended September 30, 1998 interest income on
investment securities was $2.8 million at a weighted average yield of 6.37%, an
increase of $721,000 or 35.0%, compared to income of $2.1 million at a weighted
average yield of 6.44% for the same period in 1997. The increase in interest
income was due to the purchase of investment securities. Interest income on
interest-earning deposits and short-term investments was $112,000 at a weighted
average yield of 6.13% for the period of three months ended September 30, 1998,
compared to income of $109,000 at a weighted average yield of 5.92% for the
comparable period in 1997. FHLB stock dividends increased in the current period
compared to the same period in 1997 due to FHLB stock purchases.
Interest Expense. Total interest expense for the three month period ended
September 30, 1998 was $8.1 million, an increase of $789,000 or 10.8%, compared
to $7.3 million for the same period in 1997. Average balances of interest-
bearing liabilities was $676.7 million for the period of three months ended
September 30, 1998 at a weighted average cost of 4.78% compared to average
balance of $608.7 million at a weighted average cost of 4.80% for the period of
three months ended September 30, 1997. The increase in interest expense and the
weighted average cost was primarily due to an increase in the average balance of
interest-bearing liabilities primarily in the form of FHLB borrowings which bear
higher interest rates than the Association's deposits. Average deposits
increased $10.0 million or 2.3% to $447.6 million primarily due to interest
crediting. The average rate paid on deposits decreased from 4.31% to 4.24% due
to the market environment. Average borrowings increased to $227.6 million or
34.4% for the quarter ending September 30, 1998. Management currently believes
it is efficient to fund asset growth through FHLB borrowings, rather than
attempting to fund all asset growth through increases in interest bearing
deposits. Management believes that FHLB borrowings can be
-11-
<PAGE>
invested at yields higher than the cost of the borrowed funds thereby increasing
net interest income. FHLB borrowings have been reinvested in investment,
mortgaged-related securities, and home equity consumer loans.
Net Interest Income: Net interest income before provision for loan losses for
the period of three months ended September 30, 1998 was $5.7 million, a decrease
of $729,000 or 11.3%, compared to $6.5 million recorded for the same period in
1997.
Provision for Loan Losses: The provision for loan losses during the period of
three months ended September 30, 1998 was $90,000 as compared to $75,000 for
the same period in 1997. The increase in the provision reflects the overall
increase in the Association's loan portfolio primarily through continued
purchases of residential mortgage loans originated in areas outside the local
lending area of the Association. Although the Association performs the same
underwriting criteria for purchased loans as it does for originated loans, due
to the recent nature of such purchases the Association does not have as much
loss experience data for such loans. The allowance for loan losses to total
loans and total non-performing loans and foreclosed assets was .46% and 80%,
respectively at September 30, 1998 and as compared to .40% and 64%, respectively
at September 30, 1997. 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 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 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 and
losses on the sale of loans and securities, fees from data processing services
sold and other miscellaneous items. For the period of three months ended
September 30, 1998 non-interest income was $1.8 million, an increase of $1.0
million, or greater than 100%, compared to $720,000 recorded for the same period
in 1997. This was due substantially to a $1.0 million tax benefit resulting
from an anticipated settlement of previously paid state capital stock taxes and
a recalculation of the rate used to accrue those taxes. Service fees totaled
$622,000 for the period of three months ended September 30, 1998, an increase of
$190,000 or 44.0%, compared to $432,000 recorded for the same period in 1997.
This increase primarily resulted from the Association increasing service fees,
particularly on checking accounts. Net gains on the sale of securities is
$100,000, an increase of $90,000 or greater than 100%, compared to the $10,000
recorded for the comparable period in 1997. This increase resulted primarily
from the timing and amounts of security sales. There were $113,000 of gains on
the sale of education loans for the quarter ended September 30, 1997, and none
for the current quarter. Education loans are sold as they enter repayment
status. Data processing service fees increased $31,000, or 18.9%, to $195,000
for the quarter ending September 30, 1998. The Association's data services
division added two new clients in 1997 and they are generating approximately
$30,000 a quarter in new revenue.
Non-interest Expense. Total non-interest expense decreased $69,000 to $3.6
million for the three months ended September 30, 1998. This was substantially
due to a decrease of $290,000 reduction in the accrual for 1998 state capital
stock taxes.
Income Tax Expense. Income tax expense of $1.3 million for the three months
ended September 30, 1998 resulted in an effective tax rate of 33.5%. The income
tax expense recorded for the period of three months ended September 30, 1997 of
$1.3 million is an effective tax rate of 37.3%. This decrease in effective rate
is due to the increased purchase of bank qualified municipal bonds and the bank
owned life insurance.
Comparison of the Consolidated Results of Operation for the Period of Nine
- --------------------------------------------------------------------------
Months Ended September 30, 1998 and 1997.
- -----------------------------------------
Net Income. Net income was $6.3 million for the period of nine months ended
September 30, 1998, an increase of $234,000 or 3.9% for the same period in
1997. This increase was primarily due to a tax benefit of $1.0 million
resulting from an anticipated settlement of previously paid state capital stock
taxes and a recalculation of the rate used to accrue those taxes.
Interest Income. Interest income totaled $41.8 million for the period of nine
months ended September 30, 1998, an increase of $3.2 million or 8.3% compared to
the $38.6 million recorded for the period of nine months ended September 30,
1997. The average balances of interest-earning assets for the period of nine
months ended September 30, 1998 increased to $777.1 million, an increase of
$92.3 million or 13.5%, compared to the average balance of interest-earning
assets of $684.9 million for the same period in 1997. Weighted average yield on
interest-earning assets for the nine month period ended September 30, 1998 was
7.17% compared to 7.51% for the comparable period in 1997 due to market rates.
Interest on loans for the nine month period ended September 30, 1998 was $19.2
million at a weighted average yield of
-12-
<PAGE>
7.86%, an increase of $3.1 million or 19.2%, compared to interest income on
loans of $16.1 million at a weighted average yield of 8.18% for the nine month
period ended September 30, 1997. This increase was due to an increase in the
average balance of loans. The Association purchased $42.9 million of residential
mortgage loans, which are outside of its normal lending area, during the first
nine months of 1998. For the nine month period ended September 30, 1998 interest
income on mortgage-backed securities was $13.9 million at a weighted average
yield of 6.92%, a decrease of $1.5 million or 9.9%, compared to interest income
of $15.4 million at a weighted average yield of 7.43% for the same period in
1997. Average balances in mortgage-backed securities decreased slightly between
the two periods as the weighted average yield decreased on these investments.
For the nine month period ended September 30, 1998 interest income on investment
securities was $7.7 million at a weighted average yield of 6.30%, an increase of
$1.3 million or 21.1%, compared to income of $6.3 million at a weighted average
yield of 6.50% for the same period in 1997. The increase in interest income on
investment securities was due to the purchase of investment securities funded by
FHLB borrowings. Interest income on interest-earning deposits and short-term
investments was $447,000 at a weighted average yield of 5.94% for the period of
nine months ended September 30, 1998, an increase of $37,000 or 9.0%, compared
to income of $410,000 at a weighted average yield of 6.41% for the comparable
period in 1997. The increase was due to an increase in liquid investments in
federal funds sold and in interest-bearing demand deposits. Increases in these
liquid investments are primarily the result of principal repayments and sales of
mortgage-related securities. FHLB stock dividend income increased $246,000 or
83.1% due to an increase of $4.5 million in average balances of FHLB stock which
is required because of the increase in FHLB borrowings.
Interest Expense. Total interest expense for the period of nine months ended
September 30, 1998 was $23.7 million, an increase of $4.2 million or 21.7%,
compared to $19.5 million for the same period in 1997. Average balances of
interest-bearing liabilities was $668.9 million for the period of nine months
ended September 30, 1998 at a weighted average cost of 4.73% compared to average
balance of $564.2 million at a weighted average cost of 4.61% for the period of
nine months ended September 30, 1997. The increase in interest expense and the
weighted average cost was primarily due to an increase in the average balance of
interest-bearing liabilities in the form of FHLB borrowings which bear higher
rates than the retail deposits. Management currently believes it is efficient
to fund asset growth through FHLB borrowings rather than attempting to fund all
asset growth through increased deposit liabilities. 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 investment, mortgage-related securities, and home equity consumer
loans.
Net Interest Income: Net interest income before provision for loan losses for
the period of nine months ended September 30, 1998 was $18.0 million, a decrease
of $1.0 million or 5.5%, compared to $19.1 million recorded for the same period
in 1997.
Provision for Loan Losses: The Association's provision for loan losses was
$270,000 during the period of nine months ended September 30, 1998 as compared
to $225,000 in the same period in 1997. The increase in the provision reflects
the overall increase in the Association's loan portfolio. The Association
continued purchasing one to four family residential mortgage loans originated in
areas outside the local lending area of the Association. The Association
purchased $42.9 million of these loans in the nine months ended September 30,
1998. Although the Association performs the same underwriting criteria for
purchased loans as it does for originated loans, due to the recent nature of
such purchases the Association does not have as much loss experience data for
such loans as it does for loans originated by the Association. Starting in
1997, the Association increased its purchases of single family residential
mortgage loans secured by properties located in areas outside the lending area
of the Association. Such purchases totalled $97.6 million and $42.9 million in
fiscal 1997 and 1998, respectively, as compared to $71.1 million in fiscal 1996.
To the extent the Association continues to increase its purchases of loans
secured outside of its market area, the Association will further increase its
provision for loan losses which would adversely affect net interest income. 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 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 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 and
losses on the sale of loans and securities, fees from data processing services
sold and other miscellaneous items. For the period of nine months ended
September 30, 1998 non-interest income was $3.5 million, an increase of $1.8
million or greater than 100%, compared to $1.6 million recorded for the same
period in 1997. Service fees totaled $1.4 million for the period of nine months
ended September 30, 1998, an increase of $448,000 or 47.8%, compared to $938,000
recorded for the same period in 1997. This increase
-13-
<PAGE>
resulted from the Association increasing service fees, particularly on checking
accounts. Net gains on the sale of securities is $357,000, an increase of
$319,000 or greater than 100%, compared to the $38,000 recorded for the
comparable period in 1997. This increase resulted primarily from the timing and
amounts of security sales. Gains on the sale of education loans were $88,000 for
the nine month ended September 30, 1998 compared to $187,000 for the same period
in 1997. Education loans are sold as they enter repayment status. Fees from the
sale of data processing services were $565,000, an increase of $122,000 or
27.5%, compared to $443,000 recorded for the same period in 1997. Other non-
interest income for the period of nine months ended September 30, 1998 was $1.1
million, an increase of $1.1 million compared to the $10,000 recorded for the
comparable period in 1997. This is substantially due to earnings on the bank
owned life insurance policy purchased in the fourth quarter of 1997 and the
first quarter of 1998 and a $717,000 anticipated refund on Pennsylvania state
capital stock taxes for the years 1996 and 1997.
Non-interest Expense. Total non-interest expense for the nine month period
ended September 30, 1998 was $11.7 million, an increase of $851,000, or 7.8%,
compared to $10.9 million for the same period in 1997. The increase is
primarily attributed to an increase in compensation expense and other non-
interest expenses. Compensation expenses increased $460,000 due to new
personnel and other non-interest expenses increased $293,000 in general
operating expenses.
Income Tax Expense. Income tax expense of $3.2 million for the nine months
ended September 30, 1998 resulted in an effective tax rate of 33.8%. The income
tax expense recorded for the period of nine months ended September 30, 1997 of
$3.5 million is an effective tax rate of 37.0%. This decrease was due to an
increase in bank qualified municipal bond purchases and the purchase of the bank
owned life insurance.
-14-
<PAGE>
Average Balance Sheets and Analysis of Net Interest Income
- ----------------------------------------------------------
Net interest income represents the difference between income on interest-earning
assets and expense on interest-bearing liabilities. Net interest income depends
on the volume of interest-earning assets and interest-bearing liabilities and
the rates earned or paid on them. The following table presents certain
information relating to the Association's average consolidated statements of
financial condition and consolidated statements of income for the period of
three months ended September 30, 1998 and 1997. The yield and costs are derived
by dividing income or expense by the average balance of assets or liabilities,
respectively. Average balances are derived from daily average balances. The
average balance of loans receivable includes loans on which the Association has
discontinued accruing interest. The yields and costs include fees and expenses
which are considered adjustments to yield.
The following table presents average balances yields on interest-earning assets
and average balances and costs of interest-bearing liabilities at September 30,
1998 and September 30, 1997 (Dollars in thousands).
<TABLE>
<CAPTION>
Three Months Ended Sept. 30, 1998 Three Months Ended Sept. 30, 1997
Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Interest-earning deposits and
short-term investments $ 7,309 $ 112 6.13% $ 7,364 $ 109 5.92%
Investment securities, net (1) 174,883 2,783 6.37% 128,018 2,062 6.44%
Loans receivable, net (1) (2) 327,117 6,321 7.73% 288,337 6,033 8.37%
Mortgage-backed securities, net (1) 263,772 4,420 6.70% 296,600 5,424 7.31%
FHLB stock & other equity investments 11,377 186 6.54% 8,751 134 6.13%
------------------------------------------------------------------------
Total interest-earning assets $784,458 $13,822 7.05% $729,070 $13,762 7.55%
Non-interest earning assets 37,598 20,595
---------- --------
Total assets $822,056 $749,665
========== ========
Liabilities and equity:
Interest-bearing liabilities:
Money market savings accounts $ 14,088 $ 83 2.36% $ 15,811 $ 100 2.53%
Passbook accounts 159,639 1,106 2.77% 161,363 1,220 3.02%
NOW accounts 31,903 146 1.83% 29,172 142 1.95%
Certificate accounts 241,937 3,411 5.64% 231,222 3,248 5.62%
------------------------------------------------------------------------
Total $447,567 $ 4,746 4.24% $437,568 $ 4,710 4.31%
FHLB advances & other borrowings 227,566 3,335 5.86% 169,348 2,576 6.08%
Other 1,558 9 2.31% 1,781 15 3.37%
------------------------------------------------------------------------
Total interest-bearing liabilities $676,691 $ 8,090 4.78% $608,697 $ 7,301 4.80%
Non-interest bearing liabilities 41,564 26,771
Shareholders' equity 103,801 114,197
---------- ---------
Total liabilities and shareholders' equity $822,056 $749,665
========== =========
Net interest rate spread (3) $ 5,732 2.27% $ 6,461 2.75%
Net interest margin (4) 2.92% 3.54%
Ratio of interest-earning assets to
interest-bearing liabilities 115.93% 119.78%
</TABLE>
(1) Average balance includes related assets available for sale and unamortized
discounts and premiums.
(2) Average balance 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.
-15-
<PAGE>
The following table presents average balances yields on interest-earning assets
and average balances and costs of interest-bearing liabilities at September 30,
1998 and September 30, 1997 (Dollars in thousands).
<TABLE>
<CAPTION>
Nine Months Ended Sept. 30, 1998 Nine Months Ended Sept. 30, 1997
Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Interest-earning deposits and
short-term investments $ 10,035 $ 447 5.94% $ 8,528 $ 410 6.41%
Investment securities, net (1) 162,632 7,684 6.30% 130,094 6,345 6.50%
Loans receivable, net (1) (2) 325,810 19,213 7.86% 262,836 16,117 8.18%
Mortgage-backed securities, net (1) 267,418 13,886 6.92% 276,651 15,415 7.43%
FHLB stock & other equity investments 11,251 542 6.42% 6,781 296 5.82%
----------------------------------------------------------------------
Total interest-earning assets $777,146 $41,772 7.17% $684,890 $38,583 7.51%
Non-interest earning assets 35,967 22,702
---------- ---------
Total assets $813,113 $707,592
========== =========
Liabilities and equity:
Interest-bearing liabilities:
Money market savings accounts $ 14,569 $ 252 2.31% $ 16,379 $ 305 2.48%
Passbook accounts 160,253 3,307 2.75% 160,883 3,609 2.99%
NOW accounts 31,598 425 1.79% 27,991 416 1.98%
Certificate accounts 238,838 10,012 5.59% 228,663 9,412 5.49%
----------------------------------------------------------------------
Total $445,258 $13,996 4.19% $433,916 $13,742 4.22%
FHLB advances & other borrowings 221,823 9,720 5.84% 128,331 5,728 5.95%
Other 1,793 27 2.01% 1,968 41 2.78%
----------------------------------------------------------------------
Total interest-bearing liabilities $668,874 $23,743 4.73% $564,215 $19,511 4.61%
Non-interest bearing liabilities 37,201 27,103
Shareholders' equity 107,038 116,274
---------- ---------
Total liabilities and shareholders' equity $813,113 $707,592
========== =========
Net interest rate spread (3) $18,029 2.44% $19,072 2.90%
Net interest margin (4) 3.09% 3.71%
Ratio of interest-earning assets to
interest-bearing liabilities 116.19% 121.39%
</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.
Allowance for Loan Losses
- -------------------------
The following table sets forth the changes in the allowance for loan losses for
the nine months ended September 30, 1998 (Dollars in thousands):
<TABLE>
<CAPTION>
<S> <C>
Balance, December 31, 1997 $1,322
Provision for loan losses 270
Net charge-offs (63)
------
Balance, September 30, 1998 $1,529
======
</TABLE>
-16-
<PAGE>
Non-Performing Assets
- ---------------------
The following table presents information regarding the Association's non-
performing assets at the dates indicated:
<TABLE>
<CAPTION>
Sept. 30, 1998 Dec. 31, 1997
-----------------------------
(dollars in thousands)
<S> <C> <C>
Non-performing loans:
Non-accrual loans $1,312 $1,733
Accruing loans which are contractually
past due 90 days or more - -
Restructured loans - -
- -------------------------------------------------------------------------------
Total non-performing loans $1,312 $1,733
Real estate owned 602 -
- -------------------------------------------------------------------------------
Total non-performing assets $1,914 $1,733
===============================================================================
Non-performing loans as a % of gross loans receivable .58% .56%
Non-performing loans to total assets .23% .22%
Allowance for loan loss as a % of gross loans receivable .46% .43%
Allowance for loan loss to non-performing assets 80% 76%
</TABLE>
Liquidity and Capital Resources
- -------------------------------
The Association's primary sources of funds are deposits; principal and interest
payments on loans, mortgage-backed securities 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-backed and 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 as a percentage of net withdrawable deposit accounts plus short-term
borrowings as defined by the Office of Thrift Supervision regulations. The
minimum required liquidity is currently 4%. The Association's liquidity for the
month of September 30, 1998 was 67.15% . The high levels of liquidity were due
to management's maintenance of higher than required levels of liquidity in order
to better manage interest rate risk by investing in investments that are
eligible to be included in liquidity calculations.
At September 30, 1998 the Association had commitments to originate and purchase
loans of $1.6 million and to purchase mortgage-backed securities of $23.0
million. The Association anticipates that it will have sufficient funds
available to meet these commitments.
At September 30, 1998 the Association's equity capital exceeded each of the OTS
capital requirements. OTS requires Tier I capital to adjusted assets of 4.00%
and the Association had 11.94%. Tier I capital to risk-based assets requirement
is 4.00% and the Association had 31.09%. The total capital to risk-based assets
requirement is 8.00% and the Association had 31.59%.
Year 2000 Compliance
- --------------------
As the millennium ( year 2000) approaches, the Association is increasingly aware
of the potential impact of the century date change on the Association'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
Association's, were designed to accommodate a two digit year. For example, "96"
is stored on the system and represents 1996.
-17-
<PAGE>
In 1996, the Association'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 testing in the year 2000 project was
done in October, 1998 and expects full conversion of all data files and programs
by January, 1999. This will allow adequate time to validate and test all
systems for compliance.
Additionally, the Association 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
Association intends to engage alternative vendors and suppliers. While the
Association cannot estimate the expenses associated with hiring new vendors and
suppliers, management believes that such expenses would not have a material
impact on the Association's earnings. The Association has expended
approximately $110,000 to date on year 2000 issues and estimates it will incur
additional costs of $100,000 to remediate its year 2000 issues.
The Association has made our customers aware of year 2000 issues through the use
of account statement inserts and will make additional information available at
all of our branch locations starting in November, 1998
The Association announced that after a long and comprehensive study of its Data
One data processing division, it has concluded that it will no longer continue
to provide data processing services for other financial institutions. The study
included analysis of strategic business planning objectives, a review of the
current data processing system and its operation, as well as review of the
competition in the data processing service arena. Two of the three outside
clients of DataOne will be deconverted prior to the year 2000 and the other
client is scheduled to be deconverted in the first six months of the year 2000.
Private securities Litigation Reform Act Safe Harbor Statement. In addition to
historical information, this 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, 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.
Other Developments
- ------------------
The Board of Directors declared a dividend of $.14 per share to stockholders of
record on November 6, 1998, payable on November 20, 1998.
The Association announced that after a long and comprehensive study of its Data
One data processing division, it has concluded that it will no longer continue
to provide data processing services for other financial institutions. The study
included analysis of strategic business planning objectives, a review of the
current data processing system and its operation, as well as review of the
competition in the data processing service arena. Two of the three outside
clients of DataOne will be deconverted prior to the year 2000 and the other
client is scheduled to be deconverted in the first six months of the year 2000.
As a result of this loss of data processing for other financial institutions,
the Association's revenues will begin to decline in mid 1999. At the same time,
expenses will begin to increase as the Association commences the implementation
of an enhanced system and software. However, the future net costs of data
processing will decrease as the new system replaces the existing system.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- ------- ----------------------------------------------------------
There have been no material changes in information regarding quantitative and
qualitative disclosures about market risk from the information presented as of
December 31, 1997 (in the Company's Form 10-K) to September 30, 1998.
-18-
<PAGE>
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
- ------- -----------------
None
Item 2. Changes in Securities and Use of Proceeds
- ------- -----------------------------------------
None
Item 3. Defaults upon Senior Securities
- ------- -------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
None
Item 5. Other Information
- ------- -----------------
None
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
Exhibit 15 - Independent Accountant's Letter regarding unaudited financial
information
Exhibit 27 - Financial Data Schedule
-19-
<PAGE>
GA FINANCIAL, INC. AND SUBSIDIARIES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GA FINANCIAL, INC.
------------------
(Registrant)
Date November 11, 1998 By /s/ John M. Kish
------------------- -----------------
John M. Kish
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
Date November 11, 1998 By /s/ Raymond G. Suchta
-------------------- ---------------------
Raymond G. Suchta
Chief Financial Officer and Treasurer
(Principal Accounting and Financial Officer)
-20-
<PAGE>
EXHIBIT 15 INDEPENDENT ACCOUNTANT'S LETTER REGARDING UNAUDITED FINANCIAL
INFORMATION
October 21, 1998
Securities and Exchange Commission
450 Fifth Street, NW
Washington DC 20549
RE: GA Financial, Inc.
1. Form S-8 (Registration No. 333-37837)
2. Form S-8 (Registration No. 333-66107)
Ladies and Gentlemen:
We are aware that our report dated October 21, 1998 on our review of interim
financial information of GA Financial, Inc. for the three month and nine month
periods ended September 30, 1998 and included in GA Financial, Inc.'s quarterly
report on Form 10-Q for the period then ended is incorporated by reference in
the registration statements referred to above. Pursuant to Rule 436(c) under the
Securities Act of 1933, this report should not be considered a part of the
registration statements prepared or certified by us within the meaning of
Sections 7 and 11 of that Act.
Very truly yours,
/s/PricewaterhouseCoopers LLP
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 1998
THIRD QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 6,890
<INT-BEARING-DEPOSITS> 2,656
<FED-FUNDS-SOLD> 1,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 447,735
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 328,374
<ALLOWANCE> 1,529
<TOTAL-ASSETS> 818,893
<DEPOSITS> 449,330
<SHORT-TERM> 118,195
<LIABILITIES-OTHER> 12,225
<LONG-TERM> 108,760
0
0
<COMMON> 89
<OTHER-SE> 110,294
<TOTAL-LIABILITIES-AND-EQUITY> 818,893
<INTEREST-LOAN> 19,213
<INTEREST-INVEST> 22,559
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 41,772
<INTEREST-DEPOSIT> 13,996
<INTEREST-EXPENSE> 23,743
<INTEREST-INCOME-NET> 18,029
<LOAN-LOSSES> 270
<SECURITIES-GAINS> 17,759
<EXPENSE-OTHER> 11,732
<INCOME-PRETAX> 9,486
<INCOME-PRE-EXTRAORDINARY> 9,486
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,275
<EPS-PRIMARY> .95
<EPS-DILUTED> .92
<YIELD-ACTUAL> 7.17
<LOANS-NON> 1,914
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,322
<CHARGE-OFFS> 101
<RECOVERIES> 38
<ALLOWANCE-CLOSE> 1,529
<ALLOWANCE-DOMESTIC> 1,529
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
