<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Annual report pursuant to Section 13 of the
Securities Exchange Act of 1934, as amended
For the fiscal year ended December 31, 1998
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 $103,684,204 based upon the last sales price as listed on
The American Stock Exchange for March 8, 1999.
The number of shares of Common Stock outstanding as of March 8, 1999 is:
6,855,154.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended December
31, 1998, are incorporated by reference into Part II of this Form 10-K.
Portions of the Proxy Statement for the 1999 Annual Meeting of Stockholders
are incorporated by reference into Part III of this Form 10-K.
<PAGE>
INDEX
<TABLE>
<CAPTION>
PAGE
PART I
<S> <C> <C>
Item 1. Business.................................................. 1
Additional Item. Executive Officers of the Registrant 39
Item 2. Properties................................................ 39
Item 3. Legal Proceedings......................................... 41
Item 4. Submission of Matters to a Vote of Security Holders....... 41
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 41
Item 6. Selected Financial Data................................... 41
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 41
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 42
Item 8. Financial Statements and Supplementary Data............... 42
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.................... 42
PART III
Item 10. Directors and Executive Officers of the Registrant........ 42
Item 11. Executive Compensation.................................... 42
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................ 42
Item 13. Certain Relationships and Related Transactions............ 42
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K............................................... 43
</TABLE>
SIGNATURES
<PAGE>
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, 1998, the Company had total assets of
$823.3 million, total deposits of $482.5 million and total stockholders' equity
of $109.2 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, 1998, the
Association had total loans outstanding of $334.6 million, of which $239.6
million were one- to four-family residential mortgage loans, or 71.6% of the
Association's total loans. At such date, the remainder of the Association's
loan portfolio consisted of $75.0 million of consumer loans, or 22.4% of total
loans; $5.3 million of multi-family residential loans, or 1.6% of total loans;
$2.4 million of construction and development loans, or 0.7% of total loans; $7.3
million of commercial real estate loans, or 2.2% of total loans; and $5.0
million of other loans, or 1.5% of total loans. At that same date, 10.0% of the
Association's mortgage loans had adjustable interest rates. The Association's
one- to four-family mortgage loan portfolio, as a percentage of total assets has
increased from 27.4% of total assets at December 31, 1997 to 29.1% of total
assets at December 31, 1998. 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, 1998,
the Association purchased $66.5 million of such loans primarily secured by
properties located in the northeast, midwest and south.
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.
2
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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,
---------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
---------------------------------------------------------------------------------------------------
Mortgage loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family............ $239,648 71.62% $215,024 69.37% $178,234 75.89% $122,509 66.79% $105,419 67.15%
Multi-family................. 5,293 1.58 5,778 1.86 6,727 2.87 7,208 3.93 8,259 5.26
Commercial................... 7,329 2.20 4,360 1.41 5,053 2.15 3,290 1.79 2,043 1.30
Construction and
development................. 2,371 0.70 2,966 0.96 3,545 1.51 5,891 3.21 4,830 3.08
Consumer loans:
Home equity.................. 54,953 16.43 59,111 19.07 22,153 9.43 20,151 10.99 17,808 11.34
Education.................... 20,040 5.99 18,853 6.08 15,383 6.55 20,766 11.32 14,680 9.35
Other:
Unsecured personal loans..... 2,930 0.87 1,594 0.51 1,534 0.65 1,250 0.68 1,298 0.83
Loans on savings accounts.... 2,003 0.59 2,168 0.70 2,062 0.88 2,159 1.18 2,419 1.54
Other loans.................. 83 0.02 125 0.04 164 0.07 199 0.11 230 0.15
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans.................... 334,650 100.00% 309,979 100.00% 234,855 100.00% 183,423 100.00% 156,986 100.00%
-------- ====== -------- ====== -------- ====== -------- ====== -------- ======
Less:
Undisbursed loan funds....... (1,350) (688) (684) (1,363) (1,825)
Deferred loan fees........... (968) (1,442) (1,381) (963) (738)
Allowance for loan losses.... (1,604) (1,322) (1,031) (822) (850)
-------- -------- -------- -------- --------
Total loans, net............... $330,728 $306,527 $231,759 $180,275 $153,573
======== ======== ======== ======== ========
</TABLE>
3
<PAGE>
Loan Maturity. The following table shows the remaining contractual maturity
of the Association's loans at December 31, 1998. At December 31, 1998, 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 $65.8 million, $52.2 million and $37.2 million for the years
ended December 31, 1998, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
At December 31, 1998
---------------------------------------------------------------------------------------
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....................... $ 1,717 $ -- $ 20 $1,185 $ 160 $2,717 $ 5,799
-------- ------ ------ ------ ------- ------ --------
After one year:
More than one year to three years.... 1,163 51 -- 1,186 129 214 2,743
More than three years to five years.. 2,614 58 279 -- 22,654 1,795 27,400
More than five years to 10 years..... 16,843 954 2,584 -- 48,371 216 68,968
More than 10 years to 20 years....... 41,668 4,230 333 -- 3,679 74 49,984
More than 20 years................... 175,643 -- 4,113 -- -- -- 179,756
-------- ------ ------ ------------ ------- ------ --------
Total due after December 31, 1999.... 237,931 5,293 7,309 1,186 74,833 2,299 328,851
-------- ------ ------ ------------ ------- ------ --------
Total amount due..................... $239,648 $5,293 $7,329 $2,371 $74,993 $5,016 $334,650
======== ====== ====== ============ ======= ====== ========
Less:
Undisbursed loan funds..................................................................................... (1,350)
Deferred loan fees, net.................................................................................... (968)
Allowance for loan losses.................................................................................. (1,604)
Total loans, net................................................................................................ $330,728
========
</TABLE>
4
<PAGE>
The following table sets forth at December 31, 1998 the dollar amount of loans
contractually due after December 31, 1999, and whether such loans have fixed
interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
Due After December 31, 1999
-----------------------------------------------------
Fixed Adjustable Total
-------------- ---------------- ---------------
(In thousands)
<S> <C> <C> <C>
Mortgage loans:
One- to four-family........................ $214,066 $23,865 $237,931
Multi-family............................... 5,293 -- 5,293
Construction and development............... 1,186 -- 1,186
Commercial................................. 7,247 62 7,309
Consumer loans:
Home equity................................ 54,087 706 54,793
Education.................................. 20,040 -- 20,040
Other Loans:
Unsecured personal loans................... 1,424 792 2,216
Loans on savings accounts.................. -- -- --
Other loans................................ 83 -- 83
-------- ------- --------
Total loans receivable...................... $303,426 $25,425 $328,851
======== ======= ========
</TABLE>
Origination, Sale, Servicing and Purchase of Loans. The Association's
mortgage origination lending activities are conducted by loan personnel at its
fourteen 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, 1998, 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 the
northeast, midwest and south. 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.
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 assigned to the Association, and are generally purchased by the
Association on a servicing released basis. At December 31, 1998, the
Association had $219.6 million of loans serviced by others which were serviced
by approximately 30 third-party loan servicers. At such
5
<PAGE>
date, $26.8 million of purchased mortgage loans, or 40.2% 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,
------------------------------------------------------------------
1998 1997 1996
---------------- ------------------ -----------------
(In thousands)
<S> <C> <C> <C>
Gross loans(1):
Beginning balance............................. $291,126 $234,855 $183,423
Loans originated:
Mortgage loans:
One- to four-family..................... 10,703 4,218 5,004
Multi-family............................ -- 120 181
Commercial.............................. 4,700 120 600
Construction and development............ 2,465 1,713 1,976
Consumer loans:
Home equity............................. 19,900 15,810 11,256
Education............................... 11,507 10,777 8,680
Other:
Unsecured personal loans................ 1,760 747 780
Loans on savings accounts............... 1,293 1,275 1,235
-------- -------- --------
Total loans originated................ 52,328 34,780 29,712
Loans purchased(2).......................... 66,831 98,546 71,156
-------- -------- --------
Total................................. 410,285 368,181 284,291
Less:
Principal repayments(3)..................... (65,798) (52,207) (37,186)
Sales of loans.............................. (8,840) (5,989) (12,232)
Transfer to REO............................. (997) (6) (18)
-------- -------- --------
Total loans........................... 334,650 309,979 234,855
Loans held for sale......................... (20,040) (18,853) (15,383)
-------- -------- --------
Ending balance................................ $314,610 $291,126 $219,472
======== ======== ========
</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
$66.5 million of one- to four-family mortgage loans for the year 1998. For
years 1997 and 1996, all the loans are secured by one- to four-family
mortgage loans and home equity (consumer loans). Loans purchased for the
year 1998 include premiums paid of $294,000 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 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, 1998, one- to four-family mortgage loans
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totalled $239.6 million, or 71.6% of total loans. Of the Association's mortgage
loans secured by one- to four-family residences, $215.8 million, or 90.0%, 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. The Association's one- to
four-family mortgage loan portfolio has increased 11.5% from $215.0 million, or
27.4% of total assets and 69.4% of total loans, at December 31, 1997 to $239.6
million, or 29.1% of total assets and 71.6% of total loans, at December 31, 1998
as a result of an increase in loan purchases to offset the decrease in one- to
four-family mortgage loan demand in the Association's primary market area.
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% 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
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 1998 the Association originated 19 community
loans totalling $1.7 million.
7
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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 95% (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, 1998, the Association had $3.0 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 developers; (2) loans and lines of credit to qualified builders; and
(3) construction/permanent financing for other individuals. At December 31,
1998, the Association had $2.4 million of construction and development loans
which constituted 0.7% 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 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
8
<PAGE>
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 coverage of 120%.
Properties securing these loans are appraised by an independent appraiser and
title insurance is required on all such loans. At December 31, 1998, multi-
family loans totalled $5.3 million, or 1.6% 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, 1998, the
Association had $623,000 in multi-family real estate loan participation
interests, or 11.78% of multi-family loans and 0.19% 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 coverage (the
ratio of net operating income 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, the
borrower's experience in owning and 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.
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.
9
<PAGE>
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, 1998 was $7.3 million, or 2.2% 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, 1998, the Association had $7.3 million in
commercial real estate loan participation interests, or 20.68% of commercial
real estate loans and 0.45% 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, 1998, the Association's
consumer loans amounted to $75.0 million, or 22.4% 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 fifteen 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 land and the
construction of a new primary residence. At December 31, 1998, home equity
loans totalled $55.0 million, or 73.3% of consumer loans and 16.4% of the
Association's total loans.
With respect to education lending, the Association participates in the United
States Department of Education (the "DOE") Title IV loan programs commonly
referred to as the Federal Family of Education Loan Programs ("FFELP"). The
loans in this program that the Association participates in include the Federal
Subsidized Stafford Loan, the Federal Un-Subsidized Stafford Loan and the
Federal Parent Loan to Undergraduate Students (PLUS) Loan. All FFELP loans that
were disbursed prior to October 1, 1993 are 100% guaranteed as to principal and
interest by the full faith of the United States Government if serviced
10
<PAGE>
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 USA Group. 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
common manual of unified student loan policy for loans guaranteed by each
agency. At December 31, 1998, education loans totalled $20.0 million, or 26.7%
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, 1998, personal loans totalled
$5.0 million, or 1.5% of total loans of which $2.0 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
$10,000.
At December 31, 1998, 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 $83,000.
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 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
11
<PAGE>
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, 1998, the loans to one borrower limitation was $14.6
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, 1998, the Association had $219.6 million of loans
serviced by others and $115.0 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 acquired 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 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
12
<PAGE>
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, 1998, the
Association had $2.4 million of assets classified as Substandard, $54,000 of
assets classified as Doubtful and no assets classified as Loss.
The Association generally requires appraisals on an annual basis on foreclosed
properties and at other times as deemed necessary by management. The
Association also conducts external inspections on commercial real estate
properties, foreclosed properties and other properties as deemed necessary. At
December 31, 1998, the Association had $758,000 of foreclosed real estate in its
portfolio. The balance consisted of ten properties for which the Association
held first or second liens.
13
<PAGE>
The following table sets forth delinquencies in the Association's loan
portfolio as of the dates indicated:
<TABLE>
<CAPTION>
At December 31, 1998 At December 31, 1997
-------------------------------------------- ---------------------------------------------
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 $1,040 20 $ 462 48 $ 870 28 $ 720
Multi-family......................... -- -- -- -- -- -- -- --
Commercial........................... -- -- -- -- -- -- -- --
Consumer:
Home equity.......................... 28 705 21 574 48 1,229 28 930
Education............................ 21 57 34 59 22 49 27 69
Other loans:
Unsecured personal loans............. 21 34 9 21 11 26 10 14
--- ------ -- ------ --- ------ -- ---------
Total................................. 118 $1,836 84 $1,116 129 $2,174 93 $1,733
=== ====== == ====== === ====== == =========
Delinquent loans to total
gross loans.......................... 0.55% 0.34% 0.70% 0.56%
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1996
---------------------------------------------
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................... 60 $1,175 38 $ 537
Multi-family.......................... -- -- 1 97
Commercial............................ -- -- -- --
Consumer loans:
Home equity........................... 6 59 6 73
Education............................. 17 41 8 163
Other loans:
Unsecured personal loans.............. 14 23 11 26
-- ------ -- ------
Total.................................. 97 $1,298 64 $ 896
== ====== == ======
Delinquent loans to total
gross loans........................... 0.55% 0.38%
</TABLE>
14
<PAGE>
Non-Performing Assets. General. The following table sets forth information
regarding non-accrual loans and real estate owned ("REO"). At December 31,
1998, the Association held ten REO properties totalling $758,000. 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, 1998, 1997, 1996, 1995 and 1994,
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 $147,000, $72,000, $37,000, $59,000 and $48,000,
respectively.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
Non-accrual loans:
Mortgage loans:
One- to four-family.......................... $ 462 $ 720 $ 537 $ 727 $ 753
Multi-family................................. -- -- 97 8 --
Construction and development................. -- -- -- -- --
Commercial................................... -- -- -- -- --
Consumer loans:
Home equity.................................. 574 930 73 116 125
Education.................................... 59 69 163 593 329
Other loans:
Unsecured personal loans..................... 21 14 26 16 31
------ ------ ------- ------ ------
Total non-accrual loans.................... 1,116 1,733 896 1,460 1,238
Real estate owned, net(3)...................... 758 -- -- -- 17
------ ------ ------- ------ ------
Total non-performing assets.................. $1,874 $1,733 $ 896 $1,460 $1,255
====== ====== ======= ====== ======
Allowance for loan losses as a percent
of gross loans receivable(1)................. 0.48% 0.43% 0.44% 0.45% 0.55%
Allowance for loan losses as a percent of
total non-performing loans(2)................ 85.59% 76.28% 115.07% 56.30% 67.73%
Non-performing loans as a
percent of gross loans receivable(1)(2) 0.56% 0.56% 0.38% 0.81% 0.81%
Non-performing assets as a percent of
total assets(2) 0.23% 0.22% 0.14% 0.28% 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, 1998, the
15
<PAGE>
Association's allowance for loan losses was 0.48% of total loans as compared to
0.43% as of December 31, 1997. The Association had non-accrual loans of $1.9
million and $1.7 million at December 31, 1998 and December 31, 1997,
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,
-----------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------- ------------ -------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period....... $1,322 $1,031 $ 822 $ 850 $ 846
Provision for loan losses............ 360 300 210 -- --
Charge-offs:
Mortgage loans:
One -to-four-family........ 5 9 -- 8 31
Multi-family............... -- -- -- -- --
Commercial................. -- -- -- -- --
Consumer loans:
Home equity................ 44 -- -- -- --
Education.................. 49 31 5 5 --
Other loans....................... 30 38 15 22 8
------ ------ ------ ----- -----
Total................. 128 78 20 35 39
Recoveries........................... 50 69 19 7 43
------ ------ ------ ----- -----
Net (charge-offs) recoveries......... (78) (9) (1) (28) 4
------ ------ ------ ----- -----
Balance at end of period............. $1,604 $1,322 $1,031 $ 822 $ 850
====== ====== ====== ===== =====
Ratio of net charge-offs during
the period to average loans
outstanding during the period...... 0.02% 0.00% 0.00% 0.02% 0.00%
====== ====== ====== ===== =====
</TABLE>
16
<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,
---------------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------- -------------------------------- ---------------------------------
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........... $ 933 58.17% 71.62% $ 624 47.20% 69.37% $ 706 68.48% 75.89%
Multi-family.................. 127 7.92 1.58 100 7.56 1.86 117 11.35 2.87
Commercial.................... -- -- 2.20 14 1.06 1.41 15 1.45 2.15
Construction and development.. 10 0.62 0.70 23 1.74 0.96 27 2.62 1.51
Consumer loans:
Home equity................... 500 31.20 16.43 530 40.09 19.07 145 14.06 9.43
Education..................... -- -- 5.99 -- -- 6.08 -- -- 6.55
Other loans:
Unsecured personal loans...... 34 2.09 0.87 31 2.35 0.51 21 2.04 0.65
Loans on savings accounts..... -- -- 0.59 -- -- 0.70 -- -- 0.88
Other loans................... -- -- 0.02 -- -- 0.04 -- -- 0.07
------ ------ ------ ------ ------ ------ ------ ------ ------
Total valuation allowance... $1,604 100.00% 100.00% $1,322 100.00% 100.00% $1,031 100.00% 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------
1995 1994
-------------------------------- --------------------------------
Percent Percent
of Loans of Loans
Percent of in Each Percent of in Each
Allowance Category Allowance Category
to Total to Total to Total to Total
Amount Allowance Loans Amount Allowance Loans
-------- ------------ ---------- -------- ------------ ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family........... $ 429 52.19% 66.79% $ 324 38.12% 67.15%
Multi-family.................. 103 12.53 3.93 107 12.59 5.26
Commercial.................... 16 1.95 1.79 171 20.12 1.30
Construction and development.. 45 5.47 3.21 27 3.18 3.08
Consumer loans:
Home equity................... 118 14.35 10.99 151 17.76 11.34
Education..................... 89 10.83 11.32 49 5.76 9.35
Other loans:
Unsecured personal loans...... 22 2.68 0.68 21 2.47 0.83
Loans on savings accounts..... -- -- 1.18 -- -- 1.54
Other loans................... -- -- 0.11 -- -- 0.15
------ ------ ------ ------ ------ ------
Total valuation allowance.... $ 822 100.00% 100.00% $ 850 100.00% 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
17
<PAGE>
Real Estate Owned. At December 31, 1998, the Association held 10 REO
properties totalling $758,000. 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, 1998, 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
18
<PAGE>
asset-backed obligation may not, in the aggregate, exceed 5% of total assets and
limits the weighted average life of such investments to less than seven years.
The Association's policies also limit the aggregate investment in such
securities to 20% of total assets.
The OTS "Statement of Policy on Securities Activities," set forth in Thrift
Bulletin 52 ("Bulletin"), requires depository institutions to establish prudent
policies and strategies for securities transactions, describes securities
trading and sales practices that are unsuitable when conducted in an investment
portfolio and sets forth certain factors that must be considered when evaluating
whether the reporting of an institution's investments is consistent with its
intent and ability to hold such investments. The Bulletin also establishes a
framework for identifying when certain mortgage derivative products are "high-
risk" mortgage securities that must be reported in a "trading" or "held for
sale" account. The Association believes that it currently holds and reports its
securities and loans in a manner consistent with the Bulletin. Prior to the
purchase of any security, the Association subjects the security to a stress test
in accordance with OTS guidelines to determine if the securities will be
classified as a "high risk" security, and all of the Association's investment,
mortgage-backed and mortgage-related securities are tested thereafter on a
quarterly basis.
As required by SFAS 115, the Association has established an investment
portfolio of securities that may be categorized as held to maturity, available
for sale or held for trading. As of December 31, 1998, all of the Association's
securities were categorized as available for sale.
Mortgage-Backed Securities. At December 31, 1998, the Association had $185.7
million in mortgage-backed securities, or 22.6% 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, 1998, the Association had $87.4
million of mortgage-related securities, or 10.6% 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
19
<PAGE>
different maturities and, in some cases, amortization schedules as well as
residual interest with each such class possessing different risk
characteristics. The cash flows from the underlying collateral is generally
divided into "tranches" or "classes" whereby such tranches have descending
priorities with respect to the distribution of principal repayments from the
underlying mortgages or mortgage-backed securities. In contrast to mortgage-
backed securities in which cash flow is received (and, accordingly, prepayment
risk is shared) pro rata by all securities holders, the cash flows from the
mortgages or mortgage-backed securities underlying CMOs are segmented and paid
in accordance with a predetermined priority to investors holding various
tranches of such securities or obligations. Accordingly, CMOs attempt to
moderate the reinvestment risk associated with conventional mortgage-backed
securities when prepayments of the mortgages underlying such securities prepay
faster than anticipated. CMOs are issued by special purpose entities formed by
government-sponsored agencies, such as FNMA or FHLMC, and private issuers,
however, the Association generally only invests in CMOs issued by government-
sponsored agencies which are collateralized by mortgage-backed securities.
While CMOs issued by government sponsored agencies involve reduced credit
risk, they involve prepayment risk (i.e., the risk that actual prepayments of
the mortgage loans or mortgage backed securities underlying the CMOs will be
greater than estimated prepayments over the life of the security upon which the
price of the security CMO is based). In the event actual prepayments exceed
estimated prepayments, it may require adjustments to the amortization of any
premium or accretion of any discount relating to such instruments thereby
reducing the net yield on such securities. There is also reinvestment risk
associated with CMOs if the cash flows from such securities are at rate greater
than the estimated cash flow or in the event such securities are redeemed by the
issuer. In addition, the market value of such securities may be adversely
affected by changes in interest rates.
Corporate Debt Obligations. At December 31, 1998, the Association had $27.8
million of corporate debt obligations, or 3.4% of total assets. The
Association's investments in corporate debt obligations, as of December 31,
1998, 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
20
<PAGE>
such purchase at the time of the actual purchase. Accordingly, the GNMA forward
commitment contracts are reflected as off-balance sheet commitments. As of
December 31, 1998, the Association had outstanding forward and standby
commitment contracts to purchase up to $50.0 million of GNMA mortgage-backed
securities which had interest rates ranging from 6.5% to 6.75% 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, 1998, 1997 and 1996,
the Association had net gains from such activity of $230,000, $79,000 and
$54,000, respectively.
U.S. Government Securities. At December 31, 1998, the Company had $40.0
million of U.S. Government agency securities, or 4.9% 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, 1998 the Company had $36.0
million of marketable equity securities, or 4.4% of total assets. This included
$23.2 million of mutual funds, backed by adjustable-rate mortgage-backed
securities, corporate debt, corporate bonds, or government bonds, $2.5 million
of FHLMC stock, $73,000 of Student Loan Marketing Association stock, $416,000 of
FNMA stock, $1.6 million of bank equities, $2.8 million of bank preferred and
trust preferred stock, $3.9 million investment in a Real Estate Limited
Partnership, $325,000 of a Real Estate Investment Trust, and a $1.2 million
investment in a limited partnership.
21
<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,
-------------------------------------------------------------------------------------
1998 1997 1996
---------------------------- ------------------------ ---------------------------
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)........... $ 36,028 8.26% $ 36,660 8.42% $ 29,730 8.17%
U.S. Government Agency debt............... 72,350 16.59 77,178 17.72 48,499 13.34
Municipal Obligations..................... 59,331 13.60 13,278 3.05 8,889 2.44
Corporate obligations..................... 27,630 6.33 23,910 5.49 17,298 4.76
U.S. Treasury............................. -- -- -- -- 15,037 4.13
-------- ------ -------- ------ -------- ------
Total investment securities.............. 195,339 44.78 151,026 34.68 119,453 32.84
-------- ------ -------- ------ -------- ------
Mortgage-backed and mortgage
related securities available for sale:
FHLMC..................................... 7,462 1.71 17,797 4.09 23,107 6.35
FNMA...................................... 12,907 2.96 20,285 4.66 20,092 5.52
GNMA...................................... 163,504 37.48 172,435 39.60 127,732 35.11
CMOs...................................... 87,845 20.14 71,595 16.44 72,303 19.87
-------- ------ -------- ------ -------- ------
Total mortgage-backed and
mortgage-related securities............. 271,718 62.29 282,112 64.79 243,234 66.85
-------- ------ -------- ------ -------- ------
Plus:
Unamortized premium (discount)............ (30,825) (7.07) 2,288 0.53 1,142 0.31
-------- ------ -------- ------ -------- ------
Total securities, net.................... $436,232 100.00% $435,426 100.00% $363,829 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
________________________
(1) At December 31, 1998, marketable equity securities consisted of $23.2
million of mutual funds backed by adjustable-rate mortgage-backed
securities, corporate debt, corporate bonds, or government bonds, $2.5
million of FHLMC stock, $73,000 of Student Loan Marketing Association stock,
$416,000 of FNMA stock, $1.6 million of bank equities, $2.8 million of bank
preferred and trust preferred stock, $3.9 million investment in a Real
Estate Limited Partnership, $325,000 of a Real Estate Investment Trust, and
a $1.2 million investment in a limited partnership.
22
<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,
-----------------------------------------------------------
1998 1997 1996
--------------- ---------------- ----------------
(In thousands)
<S> <C> <C> <C>
Beginning balance........................................... $ 435,426 $363,829 $239,839
Investment securities purchased - held
to maturity............................................... -- -- --
Investment securities purchased -
available for sale........................................ 128,534 135,608 115,072
Mortgage-backed and mortgage-related securities
purchased - held to maturity(3)........................... -- -- --
Mortgage-backed and mortgage-related securities
purchased - available for sale............................ 119,204 119,049 145,461
Securities purchased, not settled(2)....................... 1,901 -- 5,830
Less:
Sale of investment securities -
available for sale....................................... (107,990) (86,823) (43,439)
Sale of mortgage-backed and mortgage-related
securities available for sale............................ (10,962) (49,267) (45,310)
Securities sold, not settled(2)............................ -- -- --
Investment maturities..................................... (11,728) (18,625) (28,930)
Principal repayments...................................... (117,743) (34,532) (20,761)
Realized gain (loss) on sale of investments,
mortgage-backed and mortgage-related securities........... 507 518 630
Amortization of (premium) discount......................... (253) (103) (14)
Change in net unrealized gain (loss)
on available for sale..................................... (664) 5,772 (4,549)
--------- -------- --------
Ending balance(1)........................................... $ 436,232 $435,426 $363,829
========= ======== ========
</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, 1996, the Association transferred all of its securities
categorized as held to maturity to its available for sale portfolio.
23
<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,
------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------- ---------------------------- ----------------------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
------------ ------------ ------------- ------------ ------------ -------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Short-term investments $ 8,205 $ 8,205 $ 5,791 $ 5,791 $ 17,542 $ 17,542
-------- -------- -------- -------- -------- --------
Investment securities:
Available for sale:
Corporate obligations............... 27,802 27,802 24,208 24,208 17,354 17,354
U.S. Treasury....................... -- -- -- -- 14,949 14,949
U.S. government and
agency obligations................. 39,998 39,998 77,137 77,137 48,420 48,420
Municipal obligations.............. 59,280 59,280 13,260 13,260 8,894 8,894
Marketable equity securities(1).... 36,028 36,028 36,660 36,660 29,730 29,730
-------- -------- -------- -------- -------- --------
Total available for sale......... 163,108 163,108 151,265 151,265 119,347 119,347
-------- -------- -------- -------- -------- --------
Mortgage-backed and
mortgage-related securities:
Available for sale:
FHLMC.............................. 7,646 7,646 18,148 18,148 23,522 23,522
GNMA............................... 164,863 164,863 173,806 173,806 128,178 128,178
FNMA............................... 13,219 13,219 20,742 20,742 20,527 20,527
CMOs............................... 87,396 87,396 71,465 71,465 72,255 72,255
-------- -------- -------- -------- -------- --------
Total available for sale......... 273,124 273,124 284,161 284,161 244,482 244,482
-------- -------- -------- -------- -------- --------
Total short-term investments,
investment securities, mortgage-
backed and mortgage-related
securities........................... $444,437 $444,437 $441,217 $441,217 $381,371 #381,371
======== ======== ======== ======== ======== ========
</TABLE>
____________________
(1) At December 31, 1998, marketable equity securities consisted of $23.2
million of mutual funds backed by adjustable-rate mortgage-backed
securities, corporate debt, corporate bonds or government bonds, $2.5
million of FHLMC stock, $73,000 of Student Loan Marketing Association stock,
$416,000 of FNMA Stock, $1.6 million of bank equities, $2.8 million of bank
preferred and trust preferred stock, $3.9 million in a real estate limited
partnership, $325,000 of a real estate investment trust, and a $1.2 million
investment in a limited partnership.
24
<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, 1998.
<TABLE>
<CAPTION>
At December 31, 1998
---------------------------------------------------------------------------------------------------
More than One More than Five More than
One Year or Less Year to Five Years Years to Ten Years 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.......... $ 8,205 4.48% $ -- --% $ -- --% $ -- --% $ 8,205 4.48%
Investment securities:
Available for Sale:
U.S. Government agency
securities................... -- -- 14,750 6.16 5,428 6.62 19,820 7.06 39,998 6.67
Municipal obligations......... -- -- 5,784 4.23 6,732 4.64 46,764 4.79 59,280 4.72
Corporate obligations......... 11,483 6.35 10,492 6.25 5,827 6.45 -- -- 27,802 6.33
Marketable equity securities.. 23,172 7.01 -- -- -- -- -- -- 23,172 7.01
Common Stock.................. 4,115 1.54 -- -- -- -- -- -- 4,115 1.54
Preferred and Trust Preferred
Securities................... 3,252 8.04 -- -- -- -- -- -- 3,252 8.04
Other Investment
Securities (1)............... 5,489 2.86 -- -- -- -- -- -- 5,489 2.86
------- ---- ------- ---- ------- ---- -------- ---- -------- ----
Total investment securities... 47,511 5.97 31,026 5.83 17,987 5.82 66,584 5.47 163,108 5.72
------- ---- ------- ---- ------- ---- -------- ---- -------- ----
Mortgage-backed and mortgage-
related securities:
Available for Sale:
GNMA.......................... -- -- -- -- -- -- 164,864 7.40 164,864 7.40
FNMA.......................... -- -- 2,085 6.64 -- -- 11,134 6.82 13,219 6.79
FHLMC......................... -- -- 7,646 6.50 -- -- -- -- 7,646 6.50
CMOs.......................... -- -- -- -- 17,489 6.32 69,906 6.22 87,395 6.24
------- ---- ------- ---- ------- ---- -------- ---- -------- ----
Total mortgage-backed and
mortgage-related securities.. -- -- 9,731 6.53 17,489 6.32 245,904 7.04 273,124 6.97
------- ---- ------- ---- ------- ---- -------- ---- -------- ----
Total short-term investments,
investment securities,
mortgage-backed securities
and mortgage-related
securities..................... $55,716 $40,757 $35,476 $312,488 $444,437
======= ======= ======= ======== ========
</TABLE>
(1) Other investment securities consisted of $3.9 million of a real estate
investment limited partnership, $1.2 million investment in a limited
partnership and $325,000 of a real estate investment trust.
25
<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, 1998, core deposits represented 53.4% 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, 1998, the Association's balance of
passbook accounts decreased by $96,000, or .06%, and its balance of certificates
of deposits increased by $8.7 million, or 3.7%. The increase in certificates of
deposit resulted from the Association's offering CD specials and increased
advertising during 1998 which caused depositors to invest in certificates of
deposit.
At December 31, 1998, certificate accounts with maturities of one year or less
totalled $131.7 million, or 27.3% 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,
-----------------------------------------------------------
1998 1997 1996
----------------- ---------------- ----------------
(In thousands)
<S> <C> <C> <C>
Net deposits (withdrawals)...................... $ 2,221 $(5,316) $ 8,551
Interest credited on deposit accounts........... 18,173 17,904 16,145
------- ------- -------
Total increase (decrease) in deposit accounts... $20,394 $12,588 $24,696
======= ======= =======
</TABLE>
26
<PAGE>
At December 31, 1998, the Association had $17.4 million in certificate
accounts in amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
Weighted
Maturity Period Amount Average Rate
- ------------------------------------------------- ------------ -------------------
(Dollars in
thousands)
<S> <C> <C>
Three months or less............................. $ 2,655 4.94%
Over 3 through 6 months.......................... 1,975 4.65%
Over 6 through 12 months......................... 3,813 5.94%
Over 12 months................................... 8,978 6.05%
-------
Total............................................ $17,421
=======
</TABLE>
27
<PAGE>
The following table sets forth the distribution of the Association's average
deposit accounts for the periods indicated and the weighted average nominal
interest rates on each category of deposits presented. Averages for the periods
presented utilize average month-end balances.
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------------------------------------------------------------------------------
Percent Percent Percent
of Total Weighted of Total Weighted of Total Weighted
Average Average Average Average Average Average Average Average Average
Balance Deposits Cost Balance Deposits Cost Balance Deposits Cost
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Money market savings accounts.....$ 14,342 3.04% 2.29% $ 16,152 3.54% 2.46% $ 16,397 3.86% 2.50%
Passbook accounts................. 159,374 33.84 2.76 160,155 35.12 3.00 162,636 38.34 3.01
NOW accounts...................... 31,886 6.77 1.78 28,339 6.21 1.95 24,475 5.77 2.03
Non-interest-bearing accounts..... 25,565 5.43 -- 21,784 4.78 -- 19,288 4.55 --
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total.......................... 231,167 49.08 2.29 226,430 49.65 2.54 222,796 52.52 2.60
-------- ------ ---- -------- ------ ---- -------- ------ ----
Certificate accounts:
Less than six months............. 570 0.12 3.56 719 0.16 3.83 622 0.15 3.62
Over six through 12 months....... 68,410 14.53 5.02 76,267 16.72 4.90 89,627 21.13 4.97
Over 12 through 24 months........ 62,294 13.23 5.95 46,772 10.26 5.97 16,377 3.86 6.12
Over 24 months................... 60,910 12.93 5.91 60,664 13.30 5.98 52,501 12.37 5.90
IRA/KEOGH........................ 47,635 10.11 5.59 45,198 9.91 5.65 42,272 9,97 5.50
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total certificate accounts..... 239,819 50.92 5.58 229,620 50.35 5.53 201,399 47.48 5.40
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total average deposits........$470,986 100.00% 3.97% $456,050 100.00% 4.05% $424,195 100.00% 3.93%
======== ====== ==== ======== ====== ==== ======== ====== ====
</TABLE>
28
<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, 1998.
<TABLE>
<CAPTION>
Period to Maturity from December 31, 1998 At December 31,
----------------------------------------------------------- ---------------------------------------
Less than One to Two to Over
One Year Two years Three years Three years 1998 1997 1996
----------- ------------- -------------- -------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
(In thousands)
Certificate accounts:
0 to 2.99%................... $ 684 $ -- $ -- $ -- $ 684 $ -- $ ---
3.00 to 3.99%................. 584 -- -- -- 584 1,360 1,322
4.00 to 4.99%................. 50,254 1,608 1,027 -- 52,889 8,053 87,668
5.00 to 5.99%................. 52,391 49,969 10,326 4,238 116,924 133,348 68,477
6.00 to 6.99%................. 21,612 25,452 2,692 5,230 54,986 75,378 51,103
7.00 to 7.99%................. 6,858 8,077 854 1,661 17,450 16,727 16,410
8.00 to 8.99%................. -- -- 800 338 1,138 1,097 1,118
Over 9.00%.................... -- -- -- -- -- -- --
-------- ------- ------- ------- -------- -------- --------
Total........................ $132,383 $85,106 $15,699 $11,467 $244,655 $235,963 $226,098
======== ======= ======= ======= ======== ======== ========
</TABLE>
29
<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, 1998, the Association had $90.8 million in short-term and $126.8
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,
------------------------------------------------------------------------
1998 1997 1996
--------------------- -------------------- ---------------------
<S> <C> <C> <C>
(Dollars in thousands)
FHLB advances:
Average balance outstanding.................. $217,108 $149,246 $ 8,204
======== ======== =======
Maximum amount outstanding at................ $225,340 $195,398
======== ======== =======
any month-end during the period........... $37,525
=======
Balance outstanding at end of period......... $217,545 $193,237 $37,525
======== ======== =======
Weighted average interest rate............... 5.69% 5.86%
during the period......................... ======== ======== 5.48%
=======
Weighted average interest rate at end........ 5.63% 6.04% 5.56%
of period.................................. ======== ======== =======
</TABLE>
At December 31, 1998, 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.
30
<PAGE>
Personnel
As of December 31, 1998, the Association had 177 authorized full-time employee
positions and 50 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
As a savings and loan holding company, the Company is required by federal law
to file reports with, and otherwise comply with, the rules and regulations of
the Office of Thrift Supervision ("OTS"). 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 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 federal law. 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. 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 qualified
thrift lender 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 generally be
limited to activities permissible for bank holding companies under Section
4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the
OTS, and certain activities authorized by OTS regulation.
A savings and loan holding company is prohibited from, directly or indirectly,
acquiring more than 5% of the voting stock of another savings institution or
savings and loan holding company, without prior written approval of the OTS and
from acquiring or retaining control of a depository institution that is not
31
<PAGE>
insured by the FDIC. In evaluating applications by holding companies to acquire
savings institutions, the OTS considers the financial and managerial resources
and future prospects of the company and institution involved, the effect of the
acquisition on the risk to the deposit insurance funds, the convenience and
needs of the community and competitive factors.
The OTS may not approve 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, federal regulations do 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
Business Activities. The activities of federal savings institutions are
governed by federal law and regulations. These laws and regulations delineate
the nature and extent of the activities in which federal associations may
engage. In particular, many types of lending authority for federal association,
e.g., commercial, non-residential real property loans and consumer loans, are
limited to a specified percentage of the institution's capital or assets.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 3% leverage 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 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 1 risk-
based capital standard. The OTS regulations also require that, in meeting the
tangible, leverage 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 1 (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%, assigned by the OTS capital regulation based on the risks
believed inherent in the type of asset. Core (Tier 1) 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 components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock and the allowance for loan and
32
<PAGE>
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 capital regulations 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. For the present time, the OTS has deferred implementation
of the interest rate risk component. At December 31, 1998, the Association met
each of its capital requirements.
The following table presents the Association's capital position at December 31,
1998.
<TABLE>
<CAPTION>
Capital
Excess ----------------------------------
Actual Required (Deficiency) Actual Required
Capital Capital Amount Percent Percent
--------------- ------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
Tangible ........ $ 97,288 $12,143 $85,145 12.02% 1.50%
Core (Leverage).. $ 97,288 $24,286 $73,002 12.02% 3.00%
Risk-based....... $100,062 $25,188 $74,874 31.78% 8.00%
</TABLE>
Prompt Corrective Regulatory Action. 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 that has a ratio of total capital to risk weighted assets of
less than 8%, a ratio of Tier 1 (core) capital to risk-weighted assets of less
than 4% or a ratio of core capital to total assets of less than 4% (3% or less
for institutions with the highest examination rating) is considered to be
"undercapitalized." A savings institution that has a total risk-based capital
ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio
that is less than 3% is considered to be "significantly undercapitalized" and a
savings institution that has a tangible capital to assets ratio equal to or less
than 2% is deemed to be "critically undercapitalized." Subject to a narrow
exception, the OTS 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. The FDIC maintains a risk-based assessment system by which
institutions are assigned to one of three categories based on their
capitalization and one of three subcategories based on examination ratings and
other supervisory information. An institution's assessment rate depends upon
the categories to which it is
33
<PAGE>
assigned. Assessment rates for SAIF member institutions are determined
semiannually by the FDIC and currently range from zero basis points for the
healthiest institutions to 27 basis points for the riskiest.
In addition to the assessment for deposit insurance, institutions are required
to make payments on bonds issued in the late 1980s by the Financing Corporation
("FICO") to recapitalize the predecessor to the SAIF. During 1998, FICO
payments for SAIF members approximated 6.10 basis points, while Bank Insurance
Fund ("BIF") members paid 1.22 basis points. By law, there will be equal
sharing of FICO payments between SAIF and BIF members on the earlier of January
1, 2000 or the date the SAIF and BIF are merged.
The Association's assessment rate for fiscal 1998 was 6.10 basis points and
the premium paid for this period was $282,000. Payments toward the FICO bonds
amounted to $282,000. The FDIC has authority to increase insurance assessments.
A significant increase in SAIF insurance premiums would likely have an adverse
effect on the operating expenses and results of operations of the Association.
Management cannot predict what insurance assessment rates will be in the future.
Insurance of deposits may be terminated by the FDIC upon a finding that the
institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the OTS. The
management of the Association does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
Thrift Rechartering Legislation. Legislation enacted in 1996 provided that
the BIF and SAIF were to have merged on January 1, 1999 if there were no more
savings associations as of that date. Various proposals to eliminate the
federal savings association charter, create a uniform financial institutions
charter, abolish the OTS and restrict savings and loan holding company
activities have been introduced in Congress. The Association is unable to
predict whether such legislation will be enacted or the extent to which the
legislation would restrict or disrupt its operations.
Loans to One Borrower. Federal law provides that savings institutions are
generally subject to the limits on loans to one borrower applicable to national
banks. A savings institution 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 secured by specified readily-marketable collateral. At December
31, 1998, the Association's limit on loans to one borrower was $14.6 million,
and 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 qualified thrift
lender test. Under the test, a savings association is required to either
qualify as a "domestic building and loan association" under the Internal Revenue
Code or 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 qualified thrift lender test is subject
to certain operating restrictions and may be required to convert to a bank
charter. As of December 31, 1998, the Association
34
<PAGE>
maintained 96.6% of its portfolio assets in qualified thrift investments and,
therefore, met the qualified thrift lending 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 a savings institution, including cash dividends,
payments to repurchase its shares and payments to shareholders of another
institution in a cash-out merger. The rule effective in 1998 established three
tiers of institutions based primarily on an institution's capital level. An
institution that exceeded all capital requirements before and after a proposed
capital distribution ("Tier 1 Association") and had not been advised by the OTS
that it was in need of more than normal supervision, could, after prior notice
but without obtaining approval of the OTS, make capital distributions during the
calendar year equal to the greater of (i) 100% of its net earnings to date
during the calendar year plus the amount that would reduce by one-half the
excess capital over its 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 required prior regulatory approval. At
December 31, 1998, the Association was a Tier 1 Association. Effective April 1,
1999, the OTS's capital distribution regulation will change. Under the new
regulation, an application to and the prior approval of the OTS will be required
prior to any capital distribution if the institution does not meet the criteria
for "expedited treatment" of applications under OTS regulations (i.e.,
generally, examination ratings in the two top categories), the total capital
distributions for the calendar year exceed net income for that year plus the
amount of retained net income for the preceding two years, the institution would
be undercapitalized following the distribution or the distribution would
otherwise be contrary to a statute, regulation or agreement with OTS. If an
application is not required, the institution must still provide prior notice to
OTS of the capital distribution. 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.
Liquidity. The Association is required to maintain an average daily balance
of specified liquid assets equal to a monthly average of not less than a
specified percentage of its net withdrawable deposit accounts plus short-term
borrowings. This liquidity requirement is currently 4%, but may be changed from
time to time by the OTS to any amount within the range of 4% to 10%. Monetary
penalties may be imposed for failure to meet these liquidity requirements. The
Association's liquidity ratio for December 31, 1998 was 66.8%, 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, 1998 totaled $171,000.
Transactions with Related Parties. The Association's authority to engage in
transactions with "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 federal law. The aggregate amount of
covered transactions with any individual affiliate is limited 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
35
<PAGE>
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
federal law. The purchase of low quality assets from affiliates is generally
prohibited. The transactions with affiliates must be on terms and under
circumstances that are at least as favorable to the institution as those
prevailing at the time for comparable transactions with non-affiliated
companies. In addition, savings institutions are prohibited from lending to any
affiliate that is engaged in activities that are not permissible for bank
holding companies and no savings institution may purchase the securities of any
affiliate other than a subsidiary.
The Association's authority to extend credit to executive officers, directors
and 10% shareholders ("insiders"), as well as entities such persons control, is
also governed by federal law. Such loans are required to be made on terms
substantially the same as those offered to unaffiliated individuals and 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. The law limits both the individual
and aggregate 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. 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. The FDIC has the
authority to recommend to the Director of the OTS that 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. 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. If the OTS determines that a savings
institution fails to meet any standard prescribed by the guidelines, the OTS may
require the institution to submit an acceptable plan to achieve compliance with
the standard.
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 regulations generally provide that reserves
be maintained against aggregate transaction accounts as follows: for accounts
aggregating $46.5 million or less (subject to adjustment by the Federal Reserve
Board) the reserve requirement is 3%; and for accounts aggregating greater than
$46.5 million, the reserve requirement is $1.395 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 $46.5 million. The first $4.9
million of otherwise reservable balances (subject to adjustments by the Federal
Reserve Board) are exempted from the reserve requirements. The Association
complies with the foregoing requirements.
36
<PAGE>
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and the Association report their income on a calendar
year, 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
1998 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, repeals the reserve method of accounting for bad
debts for tax years beginning after 1995 and requires savings institutions to
recapture (i.e., take into income) certain portions of their accumulated bad
debt reserves. The thrift institutions eligible to be treated as "small banks"
(assets of $500 million or less) are allowed to use the Experience Method
applicable to such institutions, while thrift institutions that are treated as
large banks (assets exceeding $500 million) are required to use only the
specific charge-off method. 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 a
2-year suspension if the "residential loan requirement" is satisfied.
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 1996 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.
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 incur an additional
tax liability of approximately $765,000 which is to be paid beginning in 1998
over a six year period.
37
<PAGE>
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 34% 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.
38
<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 12/31/98 Position
- ------------------------ ----------------- --------------------------------------------
<S> <C> <C>
Todd L. Cover 37 Executive Vice President and Chief
Operating Officer
Lawrence A. Michael 49 Secretary of the Company and Vice
President and Secretary of the Association
Raymond G. Suchta 50 Chief Financial Officer and Treasurer of
the Company and Vice President and Chief
Financial Officer of the Association
Aaron T. Flaitz, Jr. 48 Vice President and Assistant Secretary of
the Association
Norman A. Litterini 57 Vice President - Lending of the
Association
Wayne A. Callen 49 Vice President - Data Processing of the
Association
Judith A. Stoeckle 58 Vice President - Systems Coordinator of
the Association
</TABLE>
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.
39
<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 1998
- ------------------------------ ----------- ------------ ------------- --------------------
<S> <C> <C> <C> <C>
Executive/Home Office:
Whitehall
4750 Clairton Boulevard
Whitehall, PA 15236............... Owned 1983 - $2,133,882
Branch Offices:
Homestead
300 East Eighth Avenue
Homestead, PA 15120.............. Owned 1945 - 43,927
McKeesport
225 Fifth Avenue
McKeesport, PA 15134............. Owned 1966 - 199,359
Clairton
608 Miller Avenue
Clairton, PA 15025............... Owned 1959 - 37,314
Forest Hills
2210 Ardmore Boulevard
Forest Hills, PA 15221........... Owned 1974 - 224,000
Norwin Hills
8775 Norwin Avenue
North Huntingdon, PA 15642....... Leased 1991 2006 3,329
Elizabeth
548 Rock Run Road
Elizabeth Township, PA 15018...... Owned 1978 - 211,805
Munhall
4600 Main Street
Munhall, PA 15120................ Owned 1982 - 445,712
Caste Village
Baptist & Grove Roads
Whitehall, PA 15236.............. Leased 1991 2005 12,615
White Oak
1527 Lincoln Way
White Oak, PA 15131.............. Owned 1993 - 176,955
Belle Vernon
100 Sara Way
Belle Vernon, PA 15012............ Leased 1996 1999 195,209
</TABLE>
40
<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 1998
- ------------------------------ ----------- ------------ ------------- --------------------
<S> <C> <C> <C> <C>
North Fayette
250 Summit Park Drive
Pittsburgh, PA 15275.............. Leased 1996 1999 179,990
West Mifflin
2251 Century Drive
West Mifflin, PA 15122........... Leased 1996 2000 177,949
Regent Square
1105 South Braddock Avenue
Pittsburgh, PA 15218............. Leased 1998 2008 262,766
----------
$4,304,812
Total........................ ==========
</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 1998 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 1998 Annual Report to Stockholders on page 7
and is incorporated herein by reference.
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
1998 Annual Report to Stockholders on pages 8 through 18 and is incorporated
herein by reference.
41
<PAGE>
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 1998
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 PricewaterhouseCoopers LLP
appears in the Registrant's 1998 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 28, 1999, at pages 4
through 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 28, 1999,
at pages 7 through 9 and pages 11 through 16 (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 28, 1999,
at pages 3 and 4 through 6.
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 28, 1999, at pages 16 and 17.
42
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
- --------------------------------------------------------------------------
(a) The following documents are filed as a part of this report:
(1) Consolidated Financial Statements of the Company are incorporated by
reference to the following indicated pages of the 1998 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, 1998 and 1997........................................ 20
Consolidated Statements of Income for the
Years Ended December 31, 1998, 1997 and 1996...................... 21
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1998, 1997 and 1996...................... 22
Consolidated Statements of Shareholders' Equity
for the Years Ended December 31, 1998, 1997 and 1996.............. 23
Notes to Consolidated Financial Statements for the
Years Ended December 31, 1998, 1997 and 1996...................... 24 - 42
</TABLE>
The remaining information appearing in the 1998 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.
43
<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 Employment Agreements between Great American Federal Savings and
Loan Association and John M. Kish and John G. Micenko***
10.4 Employment Agreements 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 1998 Annual Report to Stockholders (filed
herewith)
21.0 Subsidiary information is incorporated herein by reference to
"Part I - Subsidiaries"
23.0 Consent of PricewaterhouseCoopers LLP (filed herewith)
27.0 Financial Data Schedule (field herewith)
99.1 Proxy Statement, dated March 26, 1999, for the 1999 Annual Meeting
of Stockholders (filed herewith)
(b) Reports on Form 8-K
None.
__________________________________
* Incorporated 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 by reference into this document from the Proxy
Statement for the Special Meeting of Shareholders filed on August
30, 1996.
*** Incorporated by reference into this document from the Company's
Form 10-Q filed on May 13, 1998.
44
<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, 1999
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.
<TABLE>
<CAPTION>
Name Title Date
- ---- ----- ----
<S> <C> <C>
/s/ John M. Kish Chairman of the Board and March 31, 1999
- --------------------- Chief Executive Officer
John M. Kish (principal executive officer)
/s/ John G. Micenko President and Director March 31, 1999
- ---------------------
John G. Micenko
/s/ Raymond G. Suchta Chief Financial Officer March 31, 1999
- --------------------- and Treasurer
Raymond G. Suchta (principal accounting and
financial officer)
/s/ Thomas E. Bugel Director March 31, 1999
- ---------------------
Thomas E. Bugel
/s/ Darrell J. Hess Director March 31, 1999
- ---------------------
Darrell J. Hess
/s/ Thomas M. Stanton Director March 31, 1999
- ---------------------
Thomas M. Stanton
/s/ David R. Wasik Director March 31, 1999
- ---------------------
David R. Wasik
/s/ Robert J. Ventura Director March 31, 1999
- ---------------------
Robert J. Ventura
</TABLE>
<PAGE>
EXHIBIT 11.0
GA FINANCIAL, INC.
STATEMENT REGARDING COMPUTATION OF
EARNINGS PER SHARE FOR THE YEARS ENDED
December 31, 1998 AND 1997
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
For the Calendar Year
------------------------------------------
1998 1997
---------------- ------------------
Basic:
<S> <C> <C>
Net income.......................................... $ 8,242 $ 8,317
Net income applicable to common stock............... 8,242 8,317
---------- ----------
Average common shares............................... 6,516,237 7,021,900
outstanding - basic
Basic earnings per share............................ $ 1.26 $ 1.18
---------- ----------
Diluted:
Net income.......................................... $ 8,242 $ 8,317
---------- ----------
Average common shares outstanding - basic........... 6,516,237 7,021,900
Effect of dilutive securities:
Shares issuable upon exercise of outstanding
stock options and stock awards............... 180,661 196,188
Average common shares outstanding - diluted......... 6,696,898 7,218,088
---------- ----------
Diluted earnings per share............................. $ 1.23 $ 1.15
========== ==========
</TABLE>
<PAGE>
Selected Consolidated Financial and Other Data
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Dollars in thousands
1998 1997 1996 1995 1994
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets........................................... $823,322 $783,948 $634,048 $521,398 $467,655
Investment securities available for sale............... 163,108 151,265 119,347 71,060 20,187
Investment securities held to maturity................. -- -- -- -- 104,304
Mortgage-related securities available for sale......... 273,124 284,161 244,482 168,779 49,108
Mortgage-backed and mortgage-related
securities held to maturity........................... -- -- -- -- 122,779
Loans held for sale.................................... 20,040 18,853 15,383 -- --
Loans receivable, net.................................. 310,688 287,674 216,376 180,275 153,573
Borrowed funds......................................... 222,545 198,237 51,525 -- --
Total equity/2/........................................ $109,216 $116,126 $122,404 $ 48,230 $ 40,892
Selected Operating Data:
Interest income........................................ $ 55,205 $ 52,680 $ 40,350 $ 32,833 $ 30,403
Interest expense....................................... 31,639 27,233 17,545 16,543 14,769
----------------------------------------------------
Net interest income before provision for loan losses.. 23,566 25,447 22,805 16,290 15,634
Provision for loan losses............................. 360 300 210 -- --
----------------------------------------------------
Net interest income after provision for loan losses... 23,206 25,147 22,595 16,290 15,634
Other income........................................... 4,774 2,648 3,460 422 1,502
Non-interest expense................................... 15,580 14,752 16,972 12,280 11,982
----------------------------------------------------
Income before provision for income taxes and
cumulative effect of change in accounting method...... 12,400 13,043 9,083 4,432 5,154
Provision for income taxes............................. 4,158 4,726 3,481 1,612 1,894
----------------------------------------------------
Net income............................................. $ 8,242 $ 8,317 $ 5,602 $ 2,820 $ 3,260
----------------------------------------------------
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on average assets.............................. 1.01% 1.15% 1.00% 0.59% 0.67%
Return on average equity.............................. 7.73 7.19 5.21 6.27 8.00
Average equity to average assets...................... 13.11 15.92 19.22 9.49 8.38
Equity to total assets at end of period............... 13.26 14.81 19.31 9.25 8.74
Average interest rate spread.......................... 2.38 2.81 3.27 3.08 2.98
Net-interest margin................................... 3.03 3.61 4.20 3.54 3.33
Average interest-earning assets to average
interest-bearing liabilities......................... 116.14 120.85 129.07 112.88 111.16
Non-interest expense to average assets................ 1.92 2.03 2.54/1/ 2.59 2.47
Efficiency ratio...................................... 59.13 54.46 58.35 68.21 69.92
Cash dividends paid per share......................... 0.54 0.42 0.13 -- --
Dividend payout ratio................................. 43.90 36.52 18.31 -- --
Regulatory Capital Ratios:
Tier I leverage capital............................... 12.02 12.59 15.26 8.76 9.00
Tier I risk-based capital............................. 30.90 33.30 43.59 18.30 22.86
Total risk-based capital.............................. 31.78 33.76 44.08 18.63 23.32
Asset Quality Ratios:
Non-performing loans as a percent
of gross loans receivable............................ 0.56 0.56 0.38 0.81 0.81
Non-performing assets as a percent of total assets.... 0.23 0.22 0.14 0.28 0.27
Allowance for loan losses as a percent
of gross loans receivable............................ 0.48 0.43 0.44 0.45 0.55
Allowance for loan losses as a percent
of non-performing loans.............................. 85.59 76.28 115.00 56.30 67.73
Number of full-service customer facilities............. 14 13 13 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") and New Eagle Capital, Inc. On March 25, 1996 the Association
completed its conversion from a federally chartered mutual savings and loan
association to a stock form of ownership, and 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 twelve 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 at least 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
8
<PAGE>
Management's Discussion and Analysis (continued)
- --------------------------------------------------------------------------------
effect various market interest rate scenarios will have on the Company's net
portfolio value, interest income, net income and capital position. Such interest
rate scenarios range from an increase in market interest rate of 400 basis
points to a decrease in market interest rates of 400 basis points. In recent
years the Company has attempted to shorten the maturities of its interest-
earning assets by increasing its investment in shorter-term investments and
adjustable-rate mortgage-related securities in order to better position the
Company for an increase in market rates.
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 volatile 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 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
42 quarters, consumer loans will amortize over 56 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, 1998, as
calculated by the Association, and indicates the value 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, 1998, the Association's NPV was $104.8 million (or 12.8% 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 $51.6 million, or 49% decrease in the Association's
NPV, and an immediate decrease in market rates of 400 basis points would result
in a $47.3 million, or 45% increase in the Association's NPV.
<TABLE>
<CAPTION>
As of December 31, 1998
(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
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
+400 bp.................................. $ 53,166 ($51,622) -49% 7.2% -44%
+300 bp.................................. 63,030 (41,758) -40% 8.4% -35%
+200 bp.................................. 76,588 (28,200) -27% 9.9% -23%
+100 bp.................................. 90,732 (14,056) -13% 11.4% -11%
Static................................... 104,788 0 0% 12.8% 0%
-100 bp.................................. 116,232 11,444 11% 13.9% 8%
-200 bp.................................. 127,746 22,958 22% 14.9% 16%
-300 bp.................................. 139,042 34,254 33% 15.8% 23%
-400 bp.................................. 152,084 47,296 45% 16.8% 31%
</TABLE>
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, 1998 and December 31, 1997
The Company's total assets were $823.3 million at December 31, 1998, an increase
of $39.4 million or 5.0% over total assets of $783.9 at December 31, 1997. The
increase was funded partly through FHLB borrowings consistent with management's
strategy of funding asset growth partly through the use of FHLB borrowings as
opposed to aggressively increasing deposit pricing to attract increased
deposits. Changes in the components of assets are discussed herein.
Cash and federal funds sold increased $10.7 million or 84.3% to $23.5 million
at December 31, 1998 due to an increase in savings deposits which were invested
in early January, 1999.
Investment securities increased $11.8 million or 7.8% to $163.1 million at
December 31, 1998 due to purchases of securities primarily through the borrowed
funds at the FHLB.
Mortgage-related securities decreased $11.0 million or 3.9% to $273.1 million
at December 31, 1998 due to prepayments on these investments as the interest
rates on these securities continued to fall.
Loans receivables increased $23.0 million or 8.0% to $310.7 million at
December 31, 1998 due to loan purchases of $66.8 million and loan originations
of $35.0 million. Principal repayments totaled $78.5 million for 1998.
The Company's non-performing loans increased $141,000 to $1.9 million at
December 31, 1998. As of both December 31, 1998 and 1997, the Company's non-
performing loans were .56% of total loans. The foregone interest on these loans
amounted to $147,000 in 1998 and $72,000 in 1997.
Education loans increased $1.2 million or 6.3% to $20.0 million at December
31, 1998 due to originations.
FHLB stock increased $1.6 million or 16.1% due to increased borrowings at the
FHLB. The Association is required to own FHLB stock based partly on the levels
of borrowings at the FHLB.
Prepaid expenses and other assets increased $1.3 million or 15.8% to $9.5
million at December 31, 1998 due to a tax receivable of $578,000 and an increase
in the surrender values of bank owned life insurance policies of $852,000.
Savings accounts increased $20.4 million or 4.4% to $482.5 million due
primarily to interest crediting on the accounts.
Borrowed funds increased $24.3 million or 12.2% to $222.5 million. This
increase is a result of management's decision to continue the utilization of
FHLB borrowings to fund asset growth, particularly in investment and mortgage-
related securities and loan purchases. 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 the
year 1998 was $230.3 million.
Accrued interest payable increased $221,000 or 16.0% to $1.6 million at
December 31, 1998 due to an increase in savings accounts and borrowed funds
during the year.
Securities purchased, not settled, was $1.9 million at December 31, 1998 due
to purchases of municipal securities which will settle in January, 1999. There
were no securities purchased, not settled, at December 31, 1997.
Shareholder's equity decreased $6.9 million or 6.0% to $109.2 million at
December 31, 1998. This was due to net income of $8.2 million, a decrease of
$418,000 in accumulated comprehensive income, cash dividends paid of $3.7
million, purchases of GA Financial stock of $12.9 million, ESOP payment of
$584,000, the related $431,000 to record the allocated shares at fair value, and
stock-based compensation of $801,000.
10
<PAGE>
Management's Discussion and Analysis (continued)
- --------------------------------------------------------------------------------
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, 1998 Year ended Dec. 31, 1997 Year ended Dec. 31, 1996
----------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Interest-earning deposits
short-term investments.......... $ 10,637 $ 637 5.99% $ 7,829 $ 517 6.60% $ 13,124 $ 816 6.22%
Investment securities, net/1/.... 161,531 10,084 6.24 134,660 8,693 6.46 106,622 6,819 6.40
Loans receivable, net/1,2/....... 325,190 25,465 7.83 273,547 22,310 8.16 214,317 18,025 8.41
Mortgage-related
securities, net/1/.............. 268,440 18,290 6.81 280,376 20,706 7.39 206,377 14,551 7.05
FHLB stock....................... 11,291 729 6.46 7,543 454 6.02 2,237 139 6.21
----------------------------------------------------------------------------------------------
Total interest-earning assets.... 777,089 55,205 7.10 703,955 52,680 7.48 542,677 40,350 7.44%
Non-interest earning assets....... 36,125 -- -- 22,055 -- -- 17,077 -- --
----------------------------------------------------------------------------------------------
Total assets..................... $813,214 $ -- -- $726,010 -- -- $559,754 -- --
----------------------------------------------------------------------------------------------
Liabilities and equity:
Interest-bearing liabilities:
Money market savings
accounts........................ $ 14,342 $ 329 2.29% $ 16,152 $ 397 2.46% $ 16,397 $ 410 2.50%
Passbook accounts................ 159,374 4,395 2.76 160,155 4,805 3.00 162,636 4,893 3.01
NOW accounts..................... 31,886 569 1.78 28,339 552 1.95 24,475 496 2.03
Certificate accounts............. 239,819 13,383 5.58 229,620 12,688 5.53 201,399 10,880 5.40
Total........................... 445,421 18,676 4.19 434,266 18,442 4.25 404,907 16,679 4.12
Borrowings....................... 222,057 12,931 5.82 146,481 8,755 5.98 13,518 823 6.09
Other............................ 1,628 32 1.97 1,780 36 2.02 2,038 43 2.11
Total interest-bearing
liabilities................... 669,106 31,639 4.73 582,527 27,233 4.67 420,463 17,545 4.17
Non-interest bearing
liabilities................... 37,492 -- -- 27,887 -- -- 31,747 -- --
Equity........................... 106,616 -- -- 115,596 -- -- 107,544 -- --
----------------------------------------------------------------------------------------------
Total liabilities and equity.... $813,214 -- -- $726,010 -- -- $559,754 -- --
----------------------------------------------------------------------------------------------
Net earning assets................. $107,983 -- -- $121,428 -- -- $122,214 -- --
Net interest income................ -- $23,565 -- -- $25,447 -- -- $22,805 --
Net interest rate spread/3/........ -- -- 2.38% -- -- 2.81% -- -- 3.27%
Net interest margin/4/............. -- -- 3.03% -- -- 3.61% -- -- 4.20%
Ratio of interest-earning assets
to interest-bearing liabilities... -- -- 116.14% -- -- 120.85% -- -- 129.07%
</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 Operations for the Years Ended
December 31, 1998 and 1997
Net Income. Net income for the year ended December 31, 1998 decreased $75,000
or 0.9% to $8.2 million from the previous year. Changes in the components of net
income are discussed herein.
Interest Income. Total interest income increased $2.5 million or 4.8% to $55.2
million for the year ended 1998. This is substantially the result of an increase
of $73.1 million in the average balances of interest-earning assets even though
the weighted average yield fell from 7.48% in 1997 to 7.10% in 1998. This yield
decrease is due to the declining interest rate environment. Interest on deposits
and short-term investments increased $120,000 or 23.2% to $637,000 during 1998
due to the Company having more short-term investments as a result of prepayments
on loans and mortgage-related investment securities. Interest on investment
securities increased $1.4 million or 16.0% due to the Company purchasing
securities with the increased borrowings from the FHLB. Also, interest on loans
receivable increased $3.2 million or 14.1% to $25.5 million due to an increase
in the average balances of loans. The Company purchased $66.5 million of loans
in 1998 as compared to $71.2 million in 1997. Borrowed funds were used to
purchase loans, investment securities and mortgage-related securities. Interest
on mortgage-related securities decreased $2.4 million or 11.7% due to the
average balances declining $11.9 million or 4.3% and yields declining from a
weighted average yield of 7.39% in 1997 to 6.81% in 1998 due to the interest
rate environment. The dividend on FHLB stock increased $275,000 or 60.6% to
$729,000 in 1998 due to an increase of $3.7 million in the weighted average
balance resulting from the purchase of additional FHLB stock. The Association is
required to own FHLB stock based on the levels of FHLB borrowings.
Interest Expense. Total interest on interest-bearing liabilities increased $4.4
million or 16.2% due to an increase in the weighted average balance of interest-
bearing liabilities of $86.6 million or 14.9% to $669.1 million and an increase
in the weighted average cost from 4.67% to 4.73%. The interest on savings
accounts increased $234,000 or 1.3% to $18.7 million for 1998 due to an increase
in the average balances of $11.2 million or 2.6% to $445.4 million while the
weighted average cost decreased 6 basis points. The interest on borrowings
increased $4.2 million or 47.7% due to an increase of $75.6 million or 51.6% in
the weighted average balances of borrowings even though the weighted average
cost decreased from 5.98% to 5.82% for 1998. Funding asset growth through FHLB
borrowings is one of the strategies management is currently employing.
Management believes the FHLB borrowings can be invested at yields higher than
the cost of the borrowed funds, thereby increasing net interest income. FHLB
borrowings have been invested in residential mortgage loans, mortgage-related
securities, and other investment securities.
Rate/Volume Analysis. The following table presents the extent to which changes
in interest rates and changes in the volume of interest-earning assets and
interest-bearing liabilities have affected the Company's interest income and
interest expense during the period indicated. Information is provided with
respect to: (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume); and (iii) the net change. The changes
attributable to the combined impact of volume and rate have been allocated to
changes due to rate.
12
<PAGE>
Management's Discussion and Analysis (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended Dec. 31, 1998
Compared to the
Year ended Dec. 31, 1997
Increase (decrease) Due to
(Dollars in Thousands) Volume Rate Net
-----------------------------------
<S> <C> <C> <C>
Interest-earning assets:
Interest-earning deposits and short-term investments.. $ 185 $ (65) $ 120
Investments securities, net........................... 1,735 (344) 1,391
Loans receivable, net................................. 4,212 (1,057) 3,155
Mortgage-backed securities............................ (881) (1,535) (2,416)
FHLB Stock............................................ 226 49 275
-----------------------------------
Total interest-earning assets....................... 5,477 (2,952) 2,525
-----------------------------------
Interest-bearing liabilities:
Money market savings accounts......................... (44) (24) (68)
Passbook savings accounts............................. (23) (387) (410)
NOW accounts.......................................... 69 (52) 17
Certificate accounts.................................. 564 131 695
Borrowings............................................ 4,517 (341) 4,176
Other................................................. (3) (1) (4)
-----------------------------------
Total interest-bearing liabilities.................. 5,080 (674) 4,406
-----------------------------------
Net Change in Net Interest Income................... $ 397 $(2,278) $(1,881)
-----------------------------------
</TABLE>
Provision for Loan Losses. The Company provided $360,000 for loan losses during
1998 as compared to $300,000 during 1997 due to the continued purchases of
residential mortgage loans. The Company purchased $66.8 million and $97.6
million, including premiums, of loans in 1998 and 1997, respectively. 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 assurance 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 1998
was $23.2 million, a decrease of $1.9 million or 7.7% compared to 1997.
Non-interest Income. Non-interest income consists of service fees, gains on
sale of securities and education loans, data processing fees and other
miscellaneous non-interest income. Service fees increased $534,000 or 41.1% to
$1.8 million for 1998 due to the increase in checking account fees. Gains on the
sale of securities were substantially the same for both periods. Gains on the
sale of education loans increased $58,000 or 31.0% to $245,000 for 1998 due to
the timing of education loan sales. Education loans are sold as they reach
repayment status. Data processing fees increased $122,000 or 19.3% to $754,000
for 1998 due primarily to the additional services provided to current clients.
The Company 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 companies. The information services
department will concentrate on providing data processing services to the
Association only. Other miscellaneous income increased $1.4 million or greater
than 100% to $1.4 million for 1998 due to earnings of $420,000 on the bank owned
life insurance policies the Company purchased in 1997 and $876,000 Pennsylvania
foreign franchise tax receivable.
Non-interest Expense. Total non-interest expense increased $828,000 or 5.6% to
$15.6 million for 1998. Compensation and employee benefits increased $365,000 or
4.8% to $7.9 million for 1998 due to the opening of an additional branch office
and salary increases. Occupancy and equipment, deposit insurance premiums, and
data processing expenses remained substantially the same for both 1998 and 1997.
Other miscellaneous expenses increased $460,000 or 13.0% to $4.0 million for
1998 due substantially to increases in professional fees. The Company has
engaged consulting firms to review operational procedures and human resources at
all levels of the Company. The Company expects that these fees will be offset by
lower operating expenses in future periods.
Income Tax Expense. The provision for income taxes decreased $568,000 or 12.0%
to $4.2 million for 1998 due to an increase in municipal bonds and tax credit
investment security purchases for 1998. The effective tax rate for 1998 is 33.5%
as compared to 36.2% for 1997.
13
<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 invested in mortgage-related securities,
consumer loans, and other investment securities.
14
<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.
15
<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.
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 constant for both years.
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, 1998 was 66.80%. 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 $27.7 million during the year ended December 31, 1998. This was primarily due
to a net increase in borrowings of $24.3 million. Net cash used in investing
activities was $26.2 million, consisting primarily of a $24.9 million net
increase in loans. Net cash provided by operating activities was $9.3 million.
Overall, cash and cash equivalents increased $10.7 million at year-end 1998
compared to year-end 1997.
At December 31, 1998 the Association had commitments to originate loans of
$7.0 million, and to purchase mortgage-related securities of $50.0 million.
At December 31, 1998, 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. Refer to footnote 11 for capital
requirements and regulatory restrictions.
Year 2000 Compliance. In 1996, the Company's data processing division, DataOne
Financial Systems (DataOne), began to address the risks associated with the
coming millennium. A full conversion of all data files and programs was
successfully implemented in January, 1999.
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. 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.
16
<PAGE>
Management's Discussion and Analysis (continued)
- --------------------------------------------------------------------------------
Additionally, the Company is utilizing internal resources to examine all
personal computer hardware and software and all other company environmental
systems that are dependent on embedded microchips to ensure Year 2000
compliance. The Company 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 has expended approximately
$200,000 to date on Year 2000 issues and estimates it will incur additional
costs of $100,000 to remediate its Year 2000 issues.
The Company believes it has an effective plan in place to resolve the Year
2000 issue in a timely manner and, thus far, activities have tracked in
accordance with the original plan. The Company is in the process of modifying
its existing business continuity plans and is also developing contingency plans
to address potential risks in the event of Year 2000 failures, including non-
compliance by third parties. Despite the Company's efforts to date to remediate
affected systems and develop contingency plans for potential risks, the Company
has not yet completed all activities associated with resolving its Year 2000
issues. Under the unlikely scenario that all implementation efforts are not
completed, the Company could be materially adversely affected as a result of not
being able to conduct its core business activities in a timely manner. In
addition, non-compliance by third parties (including loan customers) and
disruptions to the economy in general resulting from Year 2000 issues could also
have a undetermined negative impact on the Company.
The Company has made its customers aware of Year 2000 issues through the use
of account statement inserts in May of 1998 and has made additional information
available at all of our branch locations beginning in November, 1998.
The Company announced that after a long and comprehensive study of its DataOne
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 external
clients of DataOne will be deconverted prior to the year 2000 and the other
client is scheduled to be deconverted during the first six months of the year
2000.
New Accounting Pronouncements. Effective January 1, 1998 the Company adopted
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.
Financial statements for the years ended December 31, 1997 and 1996 have been
reclassified in accordance with SFAS No. 130.
In 1997, the Company adopted SFAS No. 128. Please see notes to the
consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." The
provisions of this statement require disclosure of financial and descriptive
information about an enterprise's operating segments in annual and interim
financial reports issued to shareholders. The statement defines an operating
segment as a component of an enterprise that engages in business activities that
generate revenue and incur expense, whose operating results are reviewed by the
chief operating decision maker in the determination of resource allocation and
performance, and for which discrete financial information is available. These
disclosure requirements had no impact on financial position or results of
operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The provisions of this statement require
that derivative instruments be carried at fair value on the balance sheet. The
statement continues to allow derivative instruments to be used to hedge various
risks and sets forth specific criteria to be used to determine when hedge
accounting can be used. The statement also provides for offsetting changes in
fair value or cash flows of both the derivative and the hedged asset or
liability to be recognized in earnings in the same period; however, any changes
in fair value or cash flow that represent the ineffective portion of a hedge are
required to be recognized in earnings and cannot be deferred. For derivative
instruments not accounted for as hedges, changes in fair value are required to
be recognized in earnings.
The provisions of this statement become effective beginning with the year 2000
interim reporting. Although the statement allows for early adoption in any
quarterly period after June 1998, the Company has no plans to adopt the
provisions of SFAS No. 133 prior to the effective date. The impact of adopting
the provisions of this statement on the Company's financial position, results of
operations and cash flow subsequent to the effective date is not currently
estimable and will depend on the financial position of the Company and the
nature and purpose of the derivative instruments in use by management at that
time.
17
<PAGE>
Management's Discussion and Analysis (continued)
- --------------------------------------------------------------------------------
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 $.16 per
share to shareholders of record on February 10, 1999, payable on February 22,
1999.
The Company repurchased 182,811 shares of GA Financial, Inc. common stock in
February of 1999, which 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 were 2,044,846 as of February 26, 1999.
The Association paid the Company a $32.0 million dividend in March, 1999. The
holding company subsequently made a $32.0 million capital contribution to New
Eagle Capital, Inc. This dividend was previously approved by the OTS in
December, 1998.
On February 24, 1999, the Company engaged KPMG LLP as its principal accountant
to audit the Company's consolidated financial statements for the fiscal year
ended December 31, 1999.
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 1998 Form 10-K.
18
<PAGE>
Report of Independent Accountants
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders of GA Financial, Inc.
In our opinion, the accompanying consolidated statements of financial
condition and the related consolidated statements of income and comprehensive
income, shareholders' equity and of cash flows present fairly, in all material
respects, the financial position of GA Financial, Inc. and subsidiaries (the
Company) at December 31, 1998 and 1997, and the results of their operations and
their cash flows for each of the three years in the period ended December 31,
1998 in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
January 27, 1999
except as to the information
presented in Note 19, for which
the date is February 26, 1999
19
<PAGE>
Consolidated Statements of Financial Condition
For the Years Ended December 31, 1998 and December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Dollar amounts in thousands, except share data
Dec. 31, 1998 Dec. 31, 1997
-----------------------------------
<S> <C> <C>
ASSETS
Cash (including interest-bearing demand deposits of $7,705 in 1998
and $3,291 in 1997)....................................................................... $ 22,987 $ 10,242
Federal funds sold........................................................................ 500 2,500
Available for sale securities, at fair value (Note 4):
Investment securities................................................................... 163,108 151,265
Mortgage-related securities............................................................. 273,124 284,161
Loans receivable, net (Note 5)............................................................ 310,688 287,674
Education loans held for sale (Note 5).................................................... 20,040 18,853
Accrued interest receivable............................................................... 6,050 5,977
Federal Home Loan Bank stock (Note 3)..................................................... 11,413 9,833
Office, property and equipment (Note 6)................................................... 5,114 5,203
Foreclosed assets......................................................................... 758 --
Prepaid expenses and other assets......................................................... 9,540 8,240
-----------------------------------
Total Assets............................................................................ $ 823,322 $ 783,948
-----------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Non-interest-bearing demand deposits (Note 7)............................................. $ 30,373 $ 21,375
Savings accounts (Note 7)................................................................. 452,175 440,779
Borrowed funds (Note 3)................................................................... 222,545 198,237
Advances from borrowers for taxes and insurance........................................... 1,514 1,602
Accrued interest payable.................................................................. 1,606 1,385
Securities purchased, not settled (Note 4)................................................ 1,901 --
Other liabilities (Note 8)................................................................ 3,992 4,444
-----------------------------------
Total liabilities....................................................................... 714,106 667,822
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................................................................ 86,467 85,992
Treasury stock, at cost (1,858,465 shares at December 31, 1998
and 1,182,130 shares at December 31, 1997).............................................. (32,255) (19,464)
Unearned employee stock ownership plan (ESOP) shares...................................... (5,520) (6,104)
Unearned recognition and retention plan (RRP) shares...................................... (2,431) (3,107)
Accumulated other comprehensive income (Notes 4 and 15)................................... 3,306 3,724
Retained earnings......................................................................... 59,560 54,996
-----------------------------------
Total Shareholders' Equity.............................................................. 109,216 116,126
Total Liabilities and Shareholders' Equity.............................................. $ 823,322 $ 783,948
-----------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
20
<PAGE>
Consolidated Statements of Income and Comprehensive Income
For the Years Ended December 31, 1998, 1997, and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Dollar amounts in thousands, except share data
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
Interest income:
Loans, including fees.......................................................... $ 25,465 $ 22,310 $ 18,025
Mortgage-related securities.................................................... 18,290 20,706 14,551
Investment securities:
Taxable interest............................................................. 6,758 6,437 4,627
Taxable dividend............................................................. 2,623 2,181 2,112
Nontaxable interest.......................................................... 1,432 529 219
Interest on bank deposits.................................................... 637 517 816
-----------------------------------------
Total interest income.......................................................... 55,205 52,680 40,350
-----------------------------------------
Interest expense:
Savings deposits............................................................... 18,676 18,442 16,679
Interest on borrowings......................................................... 12,931 8,755 823
Other.......................................................................... 32 36 43
-----------------------------------------
Total interest expense......................................................... 31,639 27,233 17,545
-----------------------------------------
Net interest income before provision for losses on loans....................... 23,566 25,447 22,805
Provision for losses on loans (Note 5)........................................... 360 300 210
-----------------------------------------
Net interest income after provision for losses on loans........................ 23,206 25,147 22,595
-----------------------------------------
Non-interest income:
Service fees................................................................... 1,833 1,299 897
Net gain on sales of securities (Notes 4 and 9)................................ 508 518 630
Gain on sale of education loans................................................ 245 187 311
Gain on settlement/curtailment of pension (Note 10)............................ -- -- 769
Data processing service fees................................................... 754 632 809
Other.......................................................................... 1,434 12 44
-----------------------------------------
Total non-interest income...................................................... 4,774 2,648 3,460
-----------------------------------------
Non-interest expense:
Compensation and employee benefits............................................. 7,935 7,570 6,711
Occupancy and equipment........................................................ 1,782 1,770 1,564
Deposit insurance premiums (Note 13)........................................... 282 283 3,682
Data processing service expenses............................................... 1,590 1,598 1,501
Other.......................................................................... 3,991 3,531 3,514
-----------------------------------------
Total non-interest expense..................................................... 15,580 14,752 16,972
-----------------------------------------
Income before provision for income taxes......................................... 12,400 13,043 9,083
Provision for income taxes (Note 8).............................................. 4,158 4,726 3,481
-----------------------------------------
Net income....................................................................... $ 8,242 $ 8,317 $ 5,602
-----------------------------------------
Other comprehensive income:
Unrealized (losses) gains on available for sale securities,
net of taxes for 1998, 1997, and 1996, respectively.......................... (418) 3,636 (2,866)
-----------------------------------------
Total comprehensive income..................................................... $ 7,824 $ 11,953 $ 2,736
-----------------------------------------
Basic earnings per share......................................................... $ 1.26 $ 1.18 $ .71/1,2/
Diluted earnings per share....................................................... 1.23 1.15 .71/1,2/
-----------------------------------------
Average shares outstanding - Basic............................................... 6,516,237 7,021,900 7,845,214
Average shares outstanding - Diluted............................................. 6,696,898 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, 1998, 1997, and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Dollar amounts in thousands
1998 1997 1996
--------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................................... $ 8,242 $ 8,317 $ 5,602
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for losses on loans................................................ 360 300 210
Provision for writedown of REO............................................... 51 -- --
Depreciation on office, property and equipment............................... 766 921 865
Net premium (discount) amortization (accretion) on securities................ 253 103 (14)
Amortization of net deferred loan fees....................................... (416) (215) (220)
Amortization of intangibles.................................................. 185 185 15
Gain on settlement/curtailment of pension plan............................... -- -- (769)
Net realized (gain) on sale of office, property and equipment................ (32) -- --
Net realized (gain) loss on sales of securities.............................. (507) (518) (630)
Net realized (gain) on sale of education loans............................... (245) (187) (311)
Net realized (gain) on sale of REO........................................... (38) (3) (7)
Allocation of ESOP plan shares............................................... 1,343 1,161 622
Allocation of recognition and retention plan shares.......................... 801 812 133
Deferred income tax (benefit) provision...................................... (328) (99) 120
Decrease in accrued interest receivable...................................... (73) (1,725) (2,038)
(Increase) decrease in prepaid expenses and other assets..................... (1,485) (6,486) 615
Increase in other liabilities................................................ 166 328 858
Increase in accrued interest payable......................................... 221 686 178
--------------------------------------------------
Net cash provided by operating activities.................................... 9,265 3,580 5,229
--------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of available for sale securities.......................... 118,952 136,090 161,811
Repayments and maturities of available for sale securities................... 129,471 53,157) 49,691
Purchases of available for sale securities................................... (247,738) (260,487) (302,458)
Proceeds from sale of education loans........................................ 9,089 6,176 12,545
Premium paid for deposits.................................................... -- -- (1,296)
Purchases of loans........................................................... (66,831) (97,612) (71,156)
Net decrease (increase) in loans............................................. 32,842 16,764 7,430
Purchases of office, property and equipment, net............................. (694) (480) (826)
Net proceeds from sale of REO................................................ 229 9 25
Net proceeds from sale of office, property and equipment..................... 49 -- --
Purchase of Federal Home Loan Bank stock..................................... (1,580) (7,507) (444)
--------------------------------------------------
Net cash used in investing activities........................................ (26,211) (153,890) (144,678)
--------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in demand and savings deposits....................... 11,702 2,723 (574)
Net increase in certificates of deposit...................................... 8,692 9,865 25,270
Payments of borrowed funds................................................... (471,479) (703,963) (539,624)
Proceeds from borrowed funds................................................. 495,787 850,675 591,149
Dividends paid............................................................... (4,007) (3,413) (1,064)
Net increase (decrease) in advances from borrowers for taxes and insurance... (88) (178) (140)
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................................................... (12,872) (12,696) (6,768)
Purchase of recognition and retention plan shares............................ -- (4,095) (737)
Payments made under capital lease obligations................................ (44) (165) (186)
--------------------------------------------------
Net cash provided by financing activities.................................... 27,691 138,753 146,578
--------------------------------------------------
Net (decrease) increase in cash and cash equivalents......................... 10,745 (11,557) 7,129
--------------------------------------------------
Cash and cash equivalents at beginning of period.............................. 12,742 24,299 17,170
--------------------------------------------------
Cash and cash equivalents at end of period.................................... $ 23,487 $ 12,742 $ 24,299
--------------------------------------------------
</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, 1998, 1997, and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Dollar amounts in thousands
Accumulated
Number of Other Total
Common Additional Unearned Unearned Comprehensive Share-
Stock Common Paid Treasury ESOP Plan RRP Plan Income Retained holders'
Shares Stock in Capital Stock Shares Shares (Loss) Earnings Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995....... -- $-- $ -- $ -- $ -- $ -- $ 2, 954 $45,276 $ 48,230
Net income......................... -- -- -- -- -- -- -- 5,602 5,602
Change in comprehensive income,
net of tax........................ -- -- -- -- -- -- (2,866) -- (2,866)
Stock issued....................... 8,900 89 86,283 -- -- -- -- -- 86,372
Employee stock ownership plan
purchased......................... (712) -- -- -- (7,120) -- -- -- (7,120)
Treasury stock purchased........... (445) -- -- (6,768) -- -- -- -- (6,768)
Recognition and retention plan
purchased......................... (50) -- (81) -- -- (656) -- -- (737)
Cash dividends ($0.13 per share)... -- -- -- -- -- -- -- (1,064) (1,064)
Shares allocated employee stock
ownership plan.................... 51 -- 114 -- 508 -- -- -- 622
Shares allocated stock-based
compensation...................... 50 -- -- -- -- 133 -- -- 133
------------------------------------------------------------------------------------------------
Balance at December 31, 1996....... 7,794 $89 $86,316 ($6,768) ($6,612) ($523) $88 $49,814 $122,404
Net income......................... -- -- -- -- -- -- -- 8,317 8,317
Change in comprehensive income,
net of tax........................ -- -- -- -- -- -- 3,636 -- 3,636
Treasury stock purchased........... (737) -- -- (12,696) -- -- -- -- (12,696)
Recognition and retention plan
shares purchased.................. (259) -- (699) -- -- (3,396) -- -- (4,095)
Cash dividends ($0.42 per share)... -- -- -- -- -- -- -- (3,135) (3,135)
Shares allocated employee stock
ownership plan.................... 51 -- 375 -- 508 -- -- -- 883
Shares allocated stock-based
compensation...................... 259 -- -- -- -- 812 -- -- 812
------------------------------------------------------------------------------------------------
Balance at December 31, 1997....... 7,108 $89 $85,992 ($19,464) ($6,104) ($3,107) $ 3,724 $54,996 $116,126
Net income......................... -- -- -- -- -- -- -- 8,242 8,242
Change in comprehensive income,
net of tax........................ -- -- -- -- -- -- (418) -- (418)
Treasury stock purchased........... (678) -- -- (12,872) -- -- -- -- (12,872)
Cash dividends ($0.54 per share)... -- -- -- -- -- -- -- (3,678) (3,678)
Shares allocated employee stock
ownership plan.................... 59 -- 431 -- 584 -- -- -- 1,015
Shares allocated stock-based
compensation...................... -- -- 44 81 -- 676 -- -- 801
------------------------------------------------------------------------------------------------
Balance at December 31, 1998....... 6,489 $89 $86,467 ($32,255) ($5,520) ($2,431) $ 3,306 $59,560 $109,216
- ------------------------------------------------------------------------------------------------------------------------------------
</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 Great American Federal Savings and Loan Association (the
"Association") are as follows:
Basis of Presentation
The accompanying consolidated financial statements include the accounts of GA
Financial, Inc. and its subsidiaries, Great American Federal Savings and Loan
Association and New Eagle Capital, Inc., and the Association's wholly owned
subsidiary, Great American Financial Services, Inc. at December 31, 1998 and
December 31, 1997. 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 and Comprehensive
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 contractual 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, 1998 or 1997, 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
24
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
No. 114 during the years ended December 31, 1998 or 1997, there was no
interest income recognized on impaired loans during the years ended December 31,
1998, 1997, or 1996.
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
$900,000 and $1.1 million at December 31, 1998 and 1997, 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 1998 or 1997 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, 1998 and 1997. 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, 1998 and 1997.
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, 1998 and 1997, 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, 1998 and 1997 are summarized as
follows:
<TABLE>
<CAPTION>
December 31, 1998 Weighted
(Dollars in Thousands) Amount Average Rate
- -------------------------------------------------
<S> <C> <C>
1999 $ 90,785 5.91%
2000 29,760 5.67
2001 4,000 5.90
2002 25,000 5.47
2003 and thereafter 68,000 5.28
- -------------------------------------------------
Total $217,545 5.63%
- -------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997 Weighted
(Dollars in Thousands) Amount Average Rate
- -------------------------------------------------
<S> <C> <C>
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%
- -------------------------------------------------
</TABLE>
Advances from the FHLB are collateralized by qualifying securities and loans.
Qualifying collateral includes U.S. Treasury, government agency and mortgage-
backed securities and real estate loans based upon the amount of outstanding
advances. These advances are subject to restrictions or penalties related to
prepayments.
At December 31, 1998 and 1997 the Company also maintained securities sold
under agreements to repurchase. Securities sold under agreement to repurchase at
December 31, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------
(Dollars in Thousands) Amount Rate
- -------------------------------------------------
<S> <C> <C>
Securities sold under
agreements to repurchase $5,000 6.25%
</TABLE>
Securities sold under agreements to repurchase are collateralized by a
mortgage-backed security with an amortized cost and fair value of $3.9 million
and $5.5 million at December 31, 1998 and 1997, respectively. 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, 1998, there were $1.9 million of securities purchased which did
not settle until January, 1999 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, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Available for sale securities: Cost Gains Losses Fair Value
------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed certificates.......... $183,312 $2,707 $ (291) $185,728
Marketable equity securities.......... 33,750 2,808 (530) 36,028
U.S. government agency debt........... 58,689 858 (267) 59,280
Municipal obligations................. 39,863 154 (19) 39,998
Corporate obligations................. 27,457 345 -- 27,802
Collateralized mortgage obligations... 87,913 821 (1,338) 87,396
------------------------------------------------
Total............................... $430,984 $7,693 $(2,445) $436,232
------------------------------------------------
</TABLE>
<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>
The amortized cost and estimated fair value of investment securities and
mortgage-related securities at December 31, 1998, by contractual maturity, are
shown below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or to prepay obligations with or without
call or prepayment penalties.
<TABLE>
<CAPTION>
December 31, 1998
----------------------
Amortized
Available for sale securities: Cost Fair Value
----------------------
<S> <C> <C>
Due in one year or less.................. $ 11,423 $ 11,483
Due after one year through five years.... 40,500 40,757
Due after five years through ten years... 35,103 35,476
Due after ten years...................... 310,208 312,488
----------------------
Total.................................. 397,234 400,204
----------------------
Marketable equity securities............. 33,750 36,028
----------------------
Total.................................. $430,984 $436,232
----------------------
</TABLE>
Proceeds from sales of available for sale securities for the year ended
December 31, 1998 were approximately $119.0 million. Gross gains of
approximately $348,000 were realized on those sales and gross losses of
approximately $71,000 were realized for the year ended December 31, 1998.
28
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
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.
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, 1998 and 1997 consist of the following:
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31, 1998 December 31, 1997
-------------------------------------
<S> <C> <C>
Mortgages:
One to four family residential....... $239,648 $215,024
Multi-family......................... 5,293 5,778
Commercial........................... 7,329 4,360
Construction and development......... 2,371 2,966
Consumer loans:
Home equity.......................... 54,953 59,111
Educational loans.................... 20,040 18,853
Other:
Loans on savings accounts............ 2,003 2,168
Unsecured personal loans and other... 3,013 1,719
-------------------------------------
Total................................ 334,650 309,979
Less:
Undisbursed mortgage loans........... 1,350 688
Deferred loan fees................... 968 1,442
Allowance for loan losses............ 1,604 1,322
-------------------------------------
Net loans........................... $330,728 $306,527
-------------------------------------
</TABLE>
The Company purchased approximately $66.8 million and $56.9 million in 1998
and 1997, 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 $938,000 and
$740,000 at December 31, 1998 and 1997, respectively.
The following is a summary of activity in the allowance for loan losses:
<TABLE>
<CAPTION>
Years Ended December 31,
(Dollars in Thousands) 1998 1997 1996
-------------------------
<S> <C> <C> <C>
Balance, beginning of year....... $1,322 $1,031 $ 822
Provision charged to operations.. 360 300 210
Loan charge-offs................. (116) (78) (20)
Loan recoveries.................. 38 69 19
-------------------------
Balance, end of year............. $1,604 $1,322 $1,031
-------------------------
</TABLE>
At December 31, 1998 and 1997, the Company had approximately $1.1 million and
$1.7 million, respectively, in loans which were 90 days or more past due and
were not accruing interest. In addition, the Company had $758,000 of foreclosed
assets as of December 31, 1998. There were no foreclosed assets at December 31,
1997.
29
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Note 6. Office, Property and Equipment
Office, property and equipment at December 31, 1998 and 1997 consist of the
following:
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31, 1998 December 31, 1997
-------------------------------------
<S> <C> <C>
Office buildings.................................. $ 8,522 $ 8,061
Equipment......................................... 9,638 9,500
Land and land improvements........................ 1,001 1,001
-------------------------------------
Subtotal......................................... 19,161 18,562
Less: accumulated depreciation and amortization... 14,047 13,359
-------------------------------------
Net office, property and equipment............... $ 5,114 $ 5,203
-------------------------------------
</TABLE>
The Company recognized depreciation of approximately $766,000, $921,000 and
$865,000 for the years ended December 31, 1998, 1997 and 1996, 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, 1998 December 31, 1997
--------------------------------------------------------------------
Average Average
Rate Amount Percent Rate Amount Percent
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing accounts..................... $ 30,373 6.29% $ 21,375 4.63%
--------------------------------------------------------------------
Interest bearing accounts:
Non-certificate accounts:
NOW accounts.................................... 1.80% 34,298 7.11% 2.05% 30,075 6.50%
Money market.................................... 2.00% 13,710 2.84% 2.25% 15,133 3.27%
Passbook savings................................ 2.75% 159,512 33.06% 3.00% 159,608 34.54%
--------------------------------------------------------------------
Total non-certificate accounts................. 207,520 43.01% 204,816 44.31%
Certificates of deposit:
0% to 4.00%..................................... 3.10% 1,268 0.26% 3.45% 1,360 0.29%
4.00% to 4.99%.................................. 4.55% 52,889 10.96% 4.75% 8,053 1.74%
5.00% to 5.99%.................................. 5.47% 116,924 24.23% 5.46% 133,348 28.86%
6.00% and above................................. 6.72% 73,574 15.25% 6.82% 93,202 20.17%
--------------------------------------------------------------------
Total certificates of deposit................... 5.68% 244,655 50.70% 6.03% 235,963 51.06%
--------------------------------------------------------------------
Total interest bearing accounts................... 452,175 93.71% 440,779 95.37%
--------------------------------------------------------------------
Total deposits.................................... $482,548 100.00% $462,154 100.00%
--------------------------------------------------------------------
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was $17.4 million and $15.9 million at December 31, 1998 and 1997,
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, 1998 and 1997:
<TABLE>
<CAPTION>
(Dollars in Thousands) Period to Maturity at December 31, 1998 Period to Maturity at December 31, 1997
-------------------------------------------------------------------------------------------------------
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%............. $ 1,268 $ -- $ -- $ -- $ 1,268 $ 1,360 $ -- $ -- $ -- $ 1,360
4.00% to 4.99%........... 50,254 1,608 1,027 -- 52,889 8,017 -- 36 -- 8,053
5.00% to 5.99%........... 52,391 49,969 10,326 4,238 116,924 90,836 24,620 16,821 1,071 133,348
6.00% and over........... 28,470 33,529 4,346 7,229 73,574 43,110 23,999 21,987 4,106 93,202
-------------------------------------------------------------------------------------------------------
Total................... $132,383 $85,106 $15,699 $11,467 $244,655 $143,323 $48,619 $38,844 $5,177 $235,963
-------------------------------------------------------------------------------------------------------
</TABLE>
Interest expense on savings accounts for the years ended December 31, 1998,
1997 and 1996 is summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
----------------------------------------------
<S> <C> <C> <C>
Passbook accounts............................... $ 4,394 $ 4,805 $ 4,893
NOW accounts.................................... 570 552 496
Money market accounts........................... 329 397 410
Certificates of deposit......................... 13,383 12,688 10,880
----------------------------------------------
Total.......................................... $ 18,676 $ 18,442 $ 16,679
----------------------------------------------
</TABLE>
Note 8. Income Taxes
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
For the Years Ended December 31,
1998 1997 1996
----------------------------------------------
<S> <C> <C> <C>
Federal:
Current.................................... $ 3,831 $ 4,098 $ 2,896
Deferred................................... (328) (99) 120
----------------------------------------------
3,485 3,999 3,016
State:
Current.................................... 673 727 465
----------------------------------------------
Provision for income taxes.................. $ 4,158 $ 4,726 $ 3,481
----------------------------------------------
</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,
1998 1997 1996
----------------------
<S> <C> <C> <C>
Federal statutory rate................................. 34.0% 34.0% 34.0%
State income taxes, net of federal benefit............. 3.6% 3.7% 3.4%
Other.................................................. (4.1)% (1.5)% 0.9%
----------------------
33.5% 36.2% 38.3%
----------------------
</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, 1998 December 31, 1997
---------------------------------------------------------
Deferred Tax Deferred Tax Deferred Tax Deferred Tax
Assets Liabilities Assets Liabilities
---------------------------------------------------------
<S> <C> <C> <C> <C>
Tax bad debt reserve................ $ -- $ 638 $ -- $ 765
Reserve for possible loan loss...... 545 -- 449 --
Loan origination fees/costs......... 32 -- 78 --
Depreciation/amortization........... -- 634 -- 764
Net unrealized holding gains
on securities available for sale... -- 1,943 -- 2,189
Other............................... 11 -- -- 10
---------------------------------------------------------
Deferred tax asset/liability........ $588 $3,215 $527 $3,728
---------------------------------------------------------
</TABLE>
Net accumulated deferred income tax liabilities at December 31, 1998 and 1997
were $2.6 million and $3.2 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 Association, 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 brokers
approved by the Board of Directors. 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 $50.0 million of forward and standby commitments as
of December 31, 1998. Such activity resulted in net gains of approximately
$230,000, $79,000 and $54,000 for the years ended December 31, 1998, 1997 and
1996, 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 $124,000 and $127,000 for 1998 and 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, 1998
and 1997, 159,960 and 101,714, respectively, of the shares in the ESOP were
earned and committed to be released. Compensation expense related to the ESOP
amounted to $1.0 million, $883,000 and $622,000 for the years ended December 31,
1998, 1997 and 1996, respectively. Dividends received on unallocated ESOP shares
in 1998, 1997, and 1996 amounted to $330,000, $278,000, and $93,000,
respectively, 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, 1998 and 1997 of the unearned shares in the ESOP was $8.6 million and $11.5
million, respectively, based on the last sales price of the company's common
stock of approximately $15.50 and $18.875, 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 in fiscal year 1996. 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 1998, 1997, or 1996.
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, 1998 that the
Association meets all capital adequacy requirements to which it is subject.
As of December 31, 1998, 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.
33
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in Thousands) Tier I Leverage Capital Tier I Risk-based Capital Total Risk-based Capital
--------------------------------------------------------------------------------
<S> <C> <C> <C>
December 31, 1998:
Equity capital/1/............................. $101,688 $101,688 $101,688
General valuation allowance/2/................ -- -- 1,604
Less unrealized gains on certain available-
for-sale securities.......................... (3,490) (3,490) (2,320)
Less goodwill................................. (910) (910) (910)
--------------------------------------------------------------------------------
Total regulatory capital...................... 97,288 97,288 100,062
Minimum regulatory capital.................... 32,381 12,594 25,188
--------------------------------------------------------------------------------
Excess regulatory capital..................... $ 64,907 $ 84,694 $ 74,874
--------------------------------------------------------------------------------
Regulatory capital as a percentage............ 12.02% 30.90% 31.78%
Minimum regulatory capital as a percentage.... 4.00% 4.00% 8.00%
--------------------------------------------------------------------------------
Excess regulatory capital as a percentage..... 8.02% 26.90% 23.78%
--------------------------------------------------------------------------------
Well capitalized requirement under
prompt corrective actions provisions......... 5.00% 6.00% 10.00%
--------------------------------------------------------------------------------
Adjusted assets as reported to the OTS........ $809,516 $314,850 $314,850
--------------------------------------------------------------------------------
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
--------------------------------------------------------------------------------
</TABLE>
/1/Represents equity capital of the Association as reported to the OTS.
/2/Limited to 1.25% of risk-weighted assets.
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, 1998 and 1997
approximated $2.3 million and $1.3 million, respectively.
Note 12. Fair Value of Financial Instruments/concentrations
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.
34
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Investments
The fair values of some investments are based on quoted market prices or on bid
quotations received from security dealers. If a quoted market price is not
available, fair value is estimated using quoted market prices for securities
with similar remaining maturities, comparable credit risk and coupon rates.
Mortgage-Related Securities and Collateralized Mortgage Obligations
The fair values are based on quoted market prices or dealer quotes.
Loans Receivable
Fair values were estimated for loan portfolios with similar financial
characteristics by discounting contractual cash flows with adjustments for
prepayment. Assumptions regarding cash flows and discount rates were
judgmentally determined using available internal information which management
believes to be reasonable, taking into consideration the credit rating of the
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.
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31, 1998 December 31, 1997
-------------------------------------------------------------
Estimated Carrying Estimated Carrying
Financial Assets: Fair Value Value Fair Value Value
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash........................................................ $ 22,987 $ 22,987 $ 10,242 $ 10,242
Federal funds sold.......................................... 500 500 2,500 2,500
FHLB stock.................................................. 11,413 11,413 9,833 9,833
Investment securities....................................... 163,108 163,108 151,265 151,265
Mortgage-related securities................................. 273,124 273,124 284,161 284,161
Loans receivable............................................ 335,180 330,728 310,719 306,527
-------------------------------------------------------------
$806,312 $ 801,860 $768,720 $764,528
-------------------------------------------------------------
Financial Liabilities:
Non-interest-bearing demand deposits........................ $ 30,373 $ 30,373 $ 21,375 $ 21,375
Savings accounts............................................ 452,314 452,175 440,408 440,779
Borrowed funds.............................................. 221,887 222,545 198,395 198,237
-------------------------------------------------------------
$704,574 $ 705,093 $660,178 $660,391
-------------------------------------------------------------
<CAPTION>
Estimated Contract or Estimated Contract or
Off-Balance Sheet Financial Instruments Fair Value Notional Amt Fair Value Notional Amt
-------------------------------------------------------------
<S>......................................................... <C> <C> <C> <C>
Commitments to extend credit................................ -- 28,100 -- $ 29,300
-------------------------------------------------------------
</TABLE>
35
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
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, 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
Purchase commitments..................................................... 149,380 16,000
Commitments matured / expired............................................ -- 24,000
Commitments settled...................................................... (94,780) --
Commitments sold......................................................... (38,600) --
-------------------------------------------------------
Balance at December 31, 1998............................................. $ 42,000 $ 8,000
-------------------------------------------------------
</TABLE>
The fair value of the forward and standby commitments at December 31, 1998 is
$50.5 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, 1998 and 1997
were $28.1 million and $29.3 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 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.
The Company's lending is primarily concentrated in the local southwestern
Pennsylvania market. At December 31, 1998, the Company had approximately $176.2
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.
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 Savings
Association Insurance Fund ("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, to 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. For the years ended December 31, 1998
and 1997, the cost to the Association approximated 6.1 and 6.5 basis points for
SAIF deposits. The annual cost of interest payments for the Association was
$282,000 and $283,000 for the years ended December 31, 1998 and 1997.
36
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Note 14. Supplementary Cash Flow Information
Cash paid during the years ended December 31, for interest and income taxes was
approximately $31.4 million and 5.1 million, respectively, in 1998, $26.5
million and $4.5 million, respectively, in 1997 and $17.4 million and $2.8
million, respectively, in 1996. Noncash investing and financing activity
consisted of the following: In December, 1998, the Company purchased investment
securities that did not settle with the brokers until subsequent to December 31,
1998. Accordingly, amount due to broker of $1.9 million is shown separately on
the consolidated statements of financial condition at December 31, 1998. The
Company transferred $997,000 of loans to foreclosed assets during 1998.
Note 15. New Accounting Pronouncements
Effective January 1, 1998 the Company adopted 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. Financial statements
for the years ended December 31, 1997 and 1996 have been reclassified in
accordance with SFAS No. 130.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." The
provisions of this statement require disclosure of financial and descriptive
information about an enterprise's operating segments in annual and interim
financial reports issued to shareholders. The statement defines an operating
segment as a component of an enterprise that engages in business activities that
generate revenue and incur expense, whose operating results are reviewed by the
chief operating decision maker in the determination of resource allocation and
performance, and for which discrete financial information is available. These
disclosure requirements had no impact on financial position or results of
operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The provisions of this statement require
that derivative instruments be carried at fair value on the balance sheet. The
statement continues to allow derivative instruments to be used to hedge various
risks and sets forth specific criteria to be used to determine when hedge
accounting can be used. The statement also provides for offsetting changes in
fair value or cash flows of both the derivative and the hedged asset or
liability to be recognized in earnings in the same period; however, any changes
in fair value or cash flow that represent the ineffective portion of a hedge are
required to be recognized in earnings and cannot be deferred. For derivative
instruments not accounted for as hedges, changes in fair value are required to
be recognized in earnings.
The provisions of this statement become effective beginning with the year 2000
interim reporting. Although the statement allows for early adoption in any
quarterly period after June 1998, the Company has no plans to adopt the
provisions of SFAS No. 133 prior to the effective date. The impact of adopting
the provisions of this statement on the Company's financial position, results of
operations and cash flow subsequent to the effective date is not currently
estimable and will depend on the financial position of the Company and the
nature and purpose of the derivative instruments in use by management at that
time.
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.
The calculation of earnings per share follows:
<TABLE>
<CAPTION>
For the Calendar Year
(Dollars in Thousands, Except Per Share Amounts) 1998 1997 1996
------------------------------------------------
<S>.............................................................................. <C> <C> <C>
Basic:
Net income....................................................................... $ 8,242 $ 8,317 $ 5,602
------------------------------------------------
Net income applicable to common stock........................................... $ 8,242 $ 8,317 $ 5,602
------------------------------------------------
Average common shares outstanding basic........................................ 6,516,237 7,021,900 7,845,214
------------------------------------------------
Basic earnings per share........................................................ $ 1.26 $ 1.18 $ .71
------------------------------------------------
Diluted:
Net income...................................................................... $ 8,242 $ 8,317 $ 5,602
------------------------------------------------
Average common shares outstanding basic........................................ 6,516,237 7,021,900 7,845,214
Effect of dilutive securities:
Shares issuable upon exercise of outstanding stock options and stock awards..... 180,661 196,188 --
Average common shares outstanding diluted...................................... 6,696,898 7,218,088 7,845,214
------------------------------------------------
Diluted earnings per share...................................................... $ 1.23 $ 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, 1998 December 31, 1997
-------------------------------------
<S> <C> <C>
Statement of Financial Condition
ASSETS
Cash............................................................ $ 396 $ 66
Investment securities, at fair value............................ 1,304 15,489
Investment in the association................................... 101,688 100,319
Investment in New Eagle Capital, Inc............................ 7,312 --
Accrued interest receivable..................................... -- 53
Prepaid expenses and other assets............................... 1,201 510
-------------------------------------
Total Assets.................................................... $ 111,901 $ 116,437
-------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities............................................... $ 2,685 $ 311
Shareholder's Equity............................................ 109,216 116,126
-------------------------------------
Total Liabilities and Shareholders' Equity....................... $ 111,901 $ 116,437
-------------------------------------
</TABLE>
38
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Years Ended
(Dollars in Thousands) December 31, 1998 December 31, 1997 December 31, 1996
---------------------------------------------------------
<S> <C> <C> <C>
Statement of Income
Dividend from Association.............................................. $ 6,000 $ 4,117 $ --
Investment and mortgage-related securities interest income............. 1,128 1,699 2,705
Net gain on sale of investment securities.............................. 205 196 11
Tax refund............................................................. 876 -- --
Other income........................................................... 86 -- --
General and administrative expenses.................................... (691) (407) (319)
Income taxes........................................................... (569) (360) (249)
State franchise taxes.................................................. -- (495) (795)
---------------------------------------------------------
Income before equity in undistributed earnings of Association.......... 7,035 4,750 723
Equity in undistributed earnings of Association........................ 1,207 3,567 4,879
---------------------------------------------------------
Net income............................................................ $ 8,242 $ 8,317 $ 5,602
---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended
(Dollars in Thousands) December 31, 1998 December 31, 1997 December 31, 1996
-----------------------------------------------------------
<S> <C> <C> <C>
Statement of Cash Flows
Cash flows from operating activities:
Net income.......................................................... $ 8,242 $ 8,317 $ 5,602
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of Association................... (1,207) (3,567) 4,879
Net realized gain on securities................................... (205) (197) (11)
Net (premium amortization) on investment securities............... -- (59) (65)
Decrease (increase) in accrued interest receivable................ 53 664 (717)
Allocation of recognition and retention plan shares............... 801 812 133
Allocation of ESOP plan shares.................................... 1,343 1,161 206
Increase in prepaid expenses and other assets..................... (690) (426) (83)
-----------------------------------------------------------
Net cash provided by operating activities......................... 8,337 6,705 186
-----------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of available for sale securities................ 46,895 50,001 24,004
Investment in New Eagle............................................ (7,536) -- --
Repayments, maturities and calls of available for sale securities.. -- 372 4,274
Purchases of available for sale securities......................... (33,071) (36,787) (56,393)
-----------------------------------------------------------
Net cash provided by (used in) investing activities................ 6,288 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 Great American Federal capital stock................... -- -- (43,269)
Purchase of treasury stock......................................... (12,872) (12,696) (6,768)
Purchase of recognition and retention stock........................ -- (4,095) (737)
Proceeds for employee stock ownership plan payment................. -- -- 416
Dividends paid to shareholders..................................... (4,007) (3,413) (1,064)
Net increase (decrease) in other liabilities....................... 2,584 (42) 120
-----------------------------------------------------------
Net cash (used in) provided by financing activities................ (14,295) (20,246) 27,950
-----------------------------------------------------------
Net increase in cash and cash equivalents........................... 330 45 21
Cash and cash equivalents at beginning of period.................... 66 21 --
-----------------------------------------------------------
Cash and cash equivalents at end of period.......................... $ 396 $ 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 was a partner in a law firm until
May 1, 1998 which provided services to the Company. Legal fees paid to the law
firm were $27,000, $34,000, and $32,000 for the years ended December 31, 1998,
1997 and 1996, respectively.
Note 19. Subsequent Events
The Board of Directors declared a dividend of $.16 per share to shareholders of
record on February 10, 1999, payable on February 22, 1999.
The Company repurchased 182,811 shares of GA Financial, Inc. common stock in
February of 1999, which 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 2,044,846 as of February 26, 1999.
The Association paid the Company a $32.0 million dividend in March, 1999. The
holding company subsequently made a $32.0 million capital contribution to New
Eagle Capital, Inc. This dividend was previously approved by the OTS in
December, 1998.
On February 24, 1999, the Company engaged KPMG LLP as its principal accountant
to audit the Company's consolidated financial statements for the fiscal year
ended December 31, 1999.
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 originally 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 1998, 1997, and 1996 was $801,000, $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, 1998 and 1997 is
$2.4 million and $3.1 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 originally 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>
1998 1997 1996
----------------------
<S> <C> <C> <C> <C>
Net income (thousands) As reported $8,242 $8,317 $5,602
Pro forma $7,979 $8,047 $5,553
Basic earnings per share As reported $ 1.26 $ 1.18 $ .71
Pro forma $ 1.22 $ 1.15 $ .71
Diluted earnings per share As reported $ 1.23 $ 1.15 $ .71
Pro forma $ 1.19 $ 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 1998: risk-free interest rate of 5.18%, dividend yield
of 4%, volatility factors of the expected market price of the Company's common
stock of .381, and an average life of the options of 4.5 years. The following
weighted average assumptions were used 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, 1998 and 1997 and changes during the year is presented
below:
<TABLE>
<CAPTION>
1998
-------------------------------------------------
Weighted Avg.
Exercise Price
Awards Options On Options
-------------------------------------------------
<S> <C> <C> <C>
Outstanding at the beginning of the year..................................... 302,060 614,000 $12.75
Granted...................................................................... 17,000 30,000 21.24
Exercised.................................................................... -- (9,000) 12.75
Forfeited.................................................................... (10,480) (16,000) 12.75
-------------------------------------------------
Outstanding at year end...................................................... 308,580 619,000 13.16
-------------------------------------------------
Options exercisable at year end.............................................. 233,800
Weighted average fair value of options
granted during the year.................................................... $ 21.24
</TABLE>
<TABLE>
<CAPTION>
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.................................................... --
</TABLE>
<TABLE>
<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>
41
<PAGE>
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
Included in the outstanding awards at December 31, 1998 and 1997 were 58,140
and 61,260 vested shares, respectively. Information about the fixed-stock option
plan is described below:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------------------------------------------
Weighted Avg. Remaining Weighted Avg. Weighted Avg. Number
Exercise Price Outstanding Contractual Life Exercise Price Exercisable
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
December 31, 1998 $13.16 619,000 7.83 years $ 12.75 233,800
December 31, 1997 $12.75 614,000 8.75 years $ 12.75 124,400
</TABLE>
Note 21. Selected Quarterly Financial Data (unaudited)
<TABLE>
<CAPTION>
Dollars in thousands, except per share data Three months ended
------------------------------------------------------------------------
1998 March 31 June 30 September 30 December 31
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income....................................... $ 14,039 $ 13,911 $ 13,822 $ 13,433
Interest expense...................................... 7,737 7,916 8,090 7,896
Net interest income
before provision for loan losses..................... 6,302 5,995 5,732 5,537
Provision for loan losses............................. 90 90 90 90
Non-interest income................................... 807 888 1,764 1,315
Non-interest expense.................................. 4,047 4,101 3,584 3,848
Income before income taxes............................ 2,972 2,692 3,822 2,914
Provision for income taxes............................ 1,042 890 1,279 947
------------------------------------------------------------------------
Net income........................................... $ 1,930 $ 1,802 $ 2,543 $ 1,967
------------------------------------------------------------------------
Basic earnings per share.............................. $ 0.28 $ 0.27 $ 0.40 $ 0.31
------------------------------------------------------------------------
Diluted earnings per share/1/......................... $ 0.27 $ 0.26 $ 0.39 $ 0.31
------------------------------------------------------------------------
<CAPTION>
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/2/........................... $ 0.26 $ 0.28 $ 0.31 $ 0.33
------------------------------------------------------------------------
Diluted earnings per share/1,2/....................... $ 0.25 $ 0.28 $ 0.30 $ 0.32
------------------------------------------------------------------------
</TABLE>
/1/Quarterly earnings per share may vary from annual earnings per share due to
rounding.
/2/Earnings per share were restated to reflect the Company's adoption of SFAS
No. 128, "Earnings per Share."
42
<PAGE>
Directors and Officers
- --------------------------------------------------------------------------------
Directors
John M. Kish
Chairman and Chief Executive Officer
GA Financial, Inc.
Thomas E. Bugel
Vice President
East Liberty Electro-Plating Company
Darrell J. Hess
Owner
Dee Jay's Hallmark Card & Gift Shop
John G. Micenko
President
GA Financial, Inc.
Thomas M. Stanton
Securities Supervisor
Mass Mutual
Robert J. Ventura
Merger and Acquisition Consultant
David R. Wasik
Partner
Savolskis-Wasik-Glenn Funeral Home
Joseph E. Bugel*
*Director Emeritus
Officers of GA Financial, Inc.
John M. Kish
Chairman of the Board and
Chief Executive Officer
John G. Micenko
President
Lawrence A. Michael
Corporate Secretary
Raymond G. Suchta, CPA
Chief Financial Officer and Treasurer
Officers of
New Eagle Capital, Inc.
John M. Kish
President
Raymond G. Suchta
Secretary/Treasurer
Principal Officers of
Great American Federal Savings and Loan Association
John M. Kish
Chief Executive Officer
John G. Micenko
President
Todd L. Cover
Executive Vice President,
Chief Operating Officer
Lawrence A. Michael
Vice President, Secretary
Raymond G. Suchta, CPA
Vice President, Finance
Andrew R. Getsy
Vice President, Treasurer
Aaron T. Flaitz, Jr.
Vice President, Assistant Secretary
Norman A. Litterini
Vice President, Lending
Wayne A. Callen
Vice President, Data Processing
Judith A. Stoeckle
Vice President, Systems Coordinator
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 28, 1999 at The Bradley House, 5239 Brownsville Road, Pittsburgh, PA
15236. Shareholders are encouraged to attend.
Annual Report on Form 10-K
A copy of GA Financial, Inc.'s Annual Report on Form 10-K without exhibits is
available without charge to shareholders upon written request. Requests should
be sent to Mr. Raymond G. Suchta, Chief Financial Officer and Treasurer.
Stock Transfer/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.
Special Counsel
Muldoon, Murphy and Faucette LLP, 5101 Wisconsin Avenue, NW Washington, D.C.
20016.
Independent Accountants
PricewaterhouseCoopers LLP, 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 Mr. Lawrence
A. Michael, Corporate Secretary.
Dividend Reinvestment Plan
GA Financial, Inc. maintains a Dividend Reinvestment/Cash Purchase Plan for
registered holders of its common stock. A brochure describing the Plan and an
application to participate may be obtained by contacting Mr. Lawrence A.
Michael, Corporate Secretary.
Stock Information
GA Financial, Inc. is traded on the American Stock Exchange under the ticker
symbol "GAF." As of March 2, 1999, GA Financial, Inc. had 6,855,154 shares of
common stock outstanding and approximately 1,820 shareholders of record.
Stock Price
The following table illustrates GA Financial, Inc.'s high and low closing stock
price on the American Stock Exchange and the cash dividend per share paid during
1998.
<TABLE>
<CAPTION>
1998
Quarter High Low Cash Dividend
- ----------------------------------------
<S> <C> <C> <C>
QI $21.00 $17.75 $.12
QII $22.44 $18.13 $.14
QIII $18.63 $13.25 $.14
QIV $16.25 $11.38 $.14
</TABLE>
43
<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 (Filed No. 333-66107 and 333-37837) of our report
dated January 27, 1999, except as to the information presented in Note 19, for
which the date is February 26, 1999, on our audits of the consolidated financial
statements of GA Financial, Inc. as of December 31, 1998 and 1997, and for the
years ended December 31, 1998, 1997 and 1996, which report is incorporated by
reference in this Annual Report on Form 10-K.
Pittsburgh, Pennsylvania PricewaterhouseCoopers LLP
March 23, 1999 /s/ PricewaterhouseCoopers LLP
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 1998
10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 15,282
<INT-BEARING-DEPOSITS> 7,705
<FED-FUNDS-SOLD> 500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 436,232
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 332,332
<ALLOWANCE> 1,604
<TOTAL-ASSETS> 823,322
<DEPOSITS> 482,548
<SHORT-TERM> 95,785
<LIABILITIES-OTHER> 9,013
<LONG-TERM> 126,760
0
0
<COMMON> 89
<OTHER-SE> 109,216
<TOTAL-LIABILITIES-AND-EQUITY> 823,322
<INTEREST-LOAN> 25,465
<INTEREST-INVEST> 29,740
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 55,205
<INTEREST-DEPOSIT> 18,676
<INTEREST-EXPENSE> 31,639
<INTEREST-INCOME-NET> 23,566
<LOAN-LOSSES> 360
<SECURITIES-GAINS> 508
<EXPENSE-OTHER> 15,580
<INCOME-PRETAX> 12,400
<INCOME-PRE-EXTRAORDINARY> 12,400
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,242
<EPS-PRIMARY> 1.26
<EPS-DILUTED> 1.23
<YIELD-ACTUAL> 7.10
<LOANS-NON> 1,873
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,322
<CHARGE-OFFS> 128
<RECOVERIES> 50
<ALLOWANCE-CLOSE> 1,604
<ALLOWANCE-DOMESTIC> 1,604
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE>
GA FINANCIAL, INC.
4750 CLAIRTON BOULEVARD
PITTSBURGH, PENNSYLVANIA 15236
(412) 882-9946
March 26, 1999
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 28, 1999, at 10:00 a.m., at The
Bradley House, 5239 Brownsville Road, Pittsburgh, Pennsylvania 15236.
The attached Notice of the Annual Meeting of Stockholders 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
PricewaterhouseCoopers LLP, the Company's independent auditors for the fiscal
year ended December 31, 1998, and a representative of KPMG LLP, the proposed
auditors of the Company for the fiscal year ending December 31, 1999, 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, "FOR"
the ratification of the amendments to the GA Financial, Inc. 1996 Stock-Based
Incentive Plan under Proposal 2, and "FOR" the ratification of KPMG LLP as
independent auditors under Proposal 3.
PLEASE SIGN AND RETURN THE ENCLOSED PROXY CARD 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 past and continued support.
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 28, 1999
_______________
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders (the
"Meeting") of GA Financial, Inc. (the "Company") will be held on Wednesday,
April 28, 1999, at 10:00 a.m., at The Bradley House, 5239 Brownsville Road,
Pittsburgh, Pennsylvania 15236.
The Meeting is for the purpose of considering and voting upon the following
matters:
1. the election of two directors for terms of three years each;
2. the ratification of the amendments to the GA Financial, Inc. 1996
Stock-Based Incentive Plan;
3. the ratification of KPMG LLP as independent auditors of the Company for
the fiscal year ending December 31, 1999; and
4. such other matters as may properly come before the Meeting or any
adjournments thereof.
The Board of Directors has established March 15, 1999 as the record date
for the determination of stockholders entitled to notice of, and to vote at, the
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 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 Meeting, the Meeting may be adjourned in order to
permit further solicitation of proxies by the Company. A list of stockholders
entitled to vote at the Meeting will be available at GA Financial, Inc., 4750
Clairton Boulevard, Pittsburgh, Pennsylvania, for a period of ten days prior to
the Meeting and will also be available for inspection at the Meeting itself.
By Order of the Board of Directors
/s/ Lawrence A. Michael
Lawrence A. Michael
Corporate Secretary
Pittsburgh, Pennsylvania
March 26, 1999
<PAGE>
GA FINANCIAL, INC.
_________________
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
_________________
APRIL 28, 1999
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 28, 1999, at
10:00 a.m., at The Bradley House, 5239 Brownsville Road, Pittsburgh,
Pennsylvania, 15236, and at any adjournments thereof. The 1998 Annual Report to
Stockholders, including the consolidated financial statements for the fiscal
year ended December 31, 1998, accompanies this proxy statement, which is first
being mailed to stockholders on or about March 26, 1999.
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 card 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 card. 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,"FOR" THE RATIFICATION OF THE AMENDMENTS TO THE GA FINANCIAL, INC.
1996 STOCK-BASED INCENTIVE PLAN, AND "FOR" THE RATIFICATION OF KPMG LLP AS
INDEPENDENT AUDITORS OF THE COMPANY FOR THE FISCAL YEAR ENDING DECEMBER 31,
1999.
The Board of Directors knows of no additional matters that will be
presented for consideration at the Meeting. EXECUTION OF A PROXY CARD, 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 $3,000, 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 15, 1999 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 6,855,154 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 the amendments to the GA Financial, Inc. 1996
Stock-Based Incentive Plan, the ratification of KPMG LLP as independent auditors
of the Company, by checking the appropriate box, a shareholder may: (i) vote
"FOR" the item; (ii) "ABSTAIN" from voting on such item; or (iii) vote "AGAINST"
the 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 directors 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 Section 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>
NUMBER PERCENT
NAME AND ADDRESS OF OF OF
TITLE OF CLASS BENEFICIAL OWNER SHARES CLASS
- --------------------------- ------------------------------------------ ----------- -----------
<S> <C> <C> <C>
Common Stock.............. Great American Federal Savings and Loan 707,080(1) 10.3%
Association Employee Stock Ownership Plan
and Trust ("ESOP")
4750 Clairton Boulevard
Pittsburgh, Pennsylvania 15236
Common Stock.............. John Hancock Advisers, Inc. 450,000(2) 6.6%
101 Huntington Avenue
Boston, Massachusetts 02199
Common Stock.............. Franklin Resources 349,000(3) 5.1%
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,
1998, 159,960 shares had been allocated under the ESOP and 552,040 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 with the SEC on January
15, 1999.
(3) Based on information disclosed in a Schedule 13G filed with the SEC on
January 26, 1999.
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 two nominees proposed for election at the Meeting are Thomas E. Bugel
and David R. Wasik. Messrs. Bugel and Wasik are presently directors of the
Company. 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 CARD, 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.
<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(1) DIRECTOR OWNED(2) OF CLASS
- ------------------------------ --- -------- ---------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
NOMINEES:
Thomas E. Bugel......................... 54 1988 2002 40,190(5)(7) *
Mr. Bugel is an owner and Vice
President of East Liberty Electro-
Plating Company.
David R. Wasik.......................... 57 1990 2002 38,555(5)(7) *
Mr. Wasik is a partner and
supervisor of Savolskis-Wasik-
Glenn Funeral Home.
</TABLE>
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(1) DIRECTOR OWNED(2) OF CLASS
- ------------------------------ --- -------- ---------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
CONTINUING DIRECTORS:
Darrell J. Hess.......................... 66 1991 2000 38,000(5)(7) *
Mr. Hess is the owner of Dee
Jay's Hallmark Card and Gift
Shop and D.J. Hess Advertising, a
promotional product company.
John M. Kish............................. 53 1983 2000 80,950(3)(4) 1.18%
Mr. Kish is Chairman of the
Boards of Directors and Chief
Executive Officer of the Company
and the Association.
John G. Micenko.......................... 60 1976 2001 118,727(3)(4) 1.73%
Mr. Micenko is President of the
Company and has been President
of the Association since 1990.
Thomas M. Stanton........................ 56 1992 2001 23,000(5)(7) *
Mr. Stanton is a securities
supervisor for Mass Mutual, an
insurance and financial services
company.
Robert J. Ventura........................ 49 1998 2001 6,000(6)(8) *
Since October 1998,
Mr. Ventura has been an
independent acquisitions and
disvestitures consultant. Prior to
October 1998, Mr. Ventura was
the director of acquisitions and
divestitures for Rockwell
International Corporation.
NAMED EXECUTIVE OFFICERS:
(WHO ARE NOT ALSO DIRECTORS)
Andrew R. Getsy.......................... 60 -- -- 43,956(3)(4) *
Mr. Getsy has been Vice
President and Treasurer of the
Association since September
1983.
Raymond G. Suchta........................ 50 -- -- 54,120(3)(4) *
Mr. Suchta is Treasurer and
Chief Financial Officer of the
Company and has been Vice
President and Chief Financial
Officer of the Association since
1981.
</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(1) DIRECTOR OWNED(2) OF CLASS
- ------------------------------ --- -------- ---------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
Stock ownership of all directors and -- -- -- 623,163(9) 9.09%
executive officers of the Company
and the Association as a group (15
persons).
</TABLE>
________________
* Does not exceed 1.0% of the Company's voting securities.
(1) Includes years of service as a director of the Association.
(2) Each person effectively exercises sole (or shares with spouse or other
immediate family member) voting and dispositive power as to shares
reported.
(3) Includes 27,000, 55,000, 18,350 and 23,050 shares awarded to Messrs. Kish,
Micenko, Getsy and Suchta 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.
(4) Includes 30,000, 38,000, 10,000 and 20,000 shares subject to options
granted to Messrs. Kish, Micenko, Getsy, and Suchta, respectively, under
the Incentive Plan which are currently exercisable. Does not include the
remaining 45,000, 57,000, 15,000 and 30,000 shares subject to options
granted to Messrs. Kish, Micenko, Getsy and Suchta, respectively, under
the Incentive Plan, which are not currently exercisable and will continue
to vest in equal annual installments through October 16, 2001.
(5) Includes 10,000 shares awarded 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.
(6) Includes 5,000 shares awarded pursuant to the Incentive Plan, which will
begin vesting in five equal annual installments beginning on April 29,
1999, the voting of which currently can be directed by the recipient.
(7) Includes 8,000 shares subject to options granted under the Incentive Plan
which are currently exercisable. Does not include the remaining 12,000
shares subject to options granted under the Incentive Plan, which are not
currently exercisable and will continue to vest in equal annual
installments through October 16, 2001.
(8) Does not include 10,000 shares subject to options granted under the
Incentive Plan which are not currently exercisable and begin to vest on
April 29, 1999 in five equal annual installments through April 29, 2003.
(9) Includes a total of 237,770 shares awarded under the Incentive Plan as to
which voting may be directed and a total of 194,000 shares which may be
acquired through the exercise of stock options under the Incentive Plan.
Excludes a total of 321,000 shares subject to options granted under the
Incentive Plan which are not currently exercisable.
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
1998, the Board of Directors of the Company held eight 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 1998. 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. Bugel, Hess 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 four times in 1998.
6
<PAGE>
PERSONNEL, COMPENSATION AND BENEFITS COMMITTEE. The Personnel,
Compensation and Benefits Committee consists of Messrs. Hess, Stanton and Wasik.
This Committee is responsible for making recommendations to the full Board of
Directors on all matters regarding compensation and fringe benefits. The
committee met once in 1998.
NOMINATING COMMITTEE. The Company's Nominating Committee for the 1999
Annual Meeting consisted of Messrs. Micenko, Stanton and Ventura. 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 26, 1999.
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.
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, with the exception of Mr. Ventura,
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"). On April 29, 1998, Mr. Ventura
received non-statutory stock options to purchase 10,000 shares of Common Stock
at an exercise price of $19.76 per share, the fair market value of the Common
Stock on April 29, 1998. Mr. Ventura also received stock awards for 5,000
shares of Common Stock. 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. Mr. Ventura's awards vest at a rate of 20% each year
commencing on April 29, 1999. All Directors' Awards will immediately vest upon
death or disability.
7
<PAGE>
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.
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 independent consulting firm, in
determining the compensation paid to executive officers performing similar
duties for depository institutions and their
8
<PAGE>
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.
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 of 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 one year from the date of
the respective grant. 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 1998 was a
percentage of an annual base salary of $190,962 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 1998, Mr. Kish's compensation
was $175,048. See the discussion under "Employment Agreements" for further
information regarding Mr. Kish's annual base salary.
The base compensation of John G. Micenko, President of the Company and the
Association, was $226,343, which represents a 3.0% increase over his 1997 base
salary.
PERSONNEL, COMPENSATION AND BENEFITS COMMITTEE
MR. WASIK
MR. HESS
MR. STANTON
9
<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, 1998. 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.
COMPARISON OF CUMULATIVE TOTAL RETURN AMONG THE COMPANY,
AMERICAN STOCK EXCHANGE INDEX AND SNL THRIFT INDEX
[GRAPH APPEARS HERE]
Summary
<TABLE>
<CAPTION>
Period Ending
-------------------------------------------------------
3/26/96 12/31/96 6/30/97 12/31/97 6/30/98 12/31/98
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
GA Financial, Inc. 100.00 134.33 170.69 171.78 169.48 145.63
AMEX Market Index 100.00 116.34 140.29 148.74 170.52 179.20
SNL Thrift Index 100.00 129.41 167.75 220.20 227.16 193.67
</TABLE>
10
<PAGE>
SUMMARY COMPENSATION TABLE. The following table shows, for the years ended
December 31, 1998, 1997 and 1996, 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 Officer of the Company and the Association and the
three highest paid executive officers of the Company and the Association, who
earned and/or received salary and bonus in excess of $100,000 in fiscal year
1998 ("Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-------------------------------------
ANNUAL COMPENSATION(1) AWARDS PAYOUTS
------------------------------------------------------------------------
OTHER RESTRICTED SECURITIES
ANNUAL STOCK UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL OMPENSATION AWARDS OPTIONS/SARS PAYOUTS COMPENSATION
POSITIONS YEAR SALARY($) BONUS($) ($)(2) ($)(3) (#)(4) ($)(5) ($)(6)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John M. Kish 1998 $175,048 - - - - None $36,744
Chairman of the 1997 111,240 - - - - None 40,849
Board and Chief 1996 99,000 $7,000 $4,450 $393,900 75,000 None -
Executive
Officer of the
Company and the
Association
John G. Micenko 1998 226,343 - - - - None 92,028
Director and 1997 211,603 - - - - None 92,214
President of the 1996 205,670 7,000 - 722,150 95,000 None 98,066
Company and the
Association
Andrew R. Getsy 1998 134,826 - - - - None 39,179
Vice President 1997 125,291 - - - - None 49,774
and Treasurer 1996 121,171 5,000 - 328,250 25,000 None 34,483
of the Association
Raymond G. Suchta 1998 118,654 - - - - None 29,499
Treasurer and Chief 1997 96,246 - - - - None 42,835
Financial Officer of 1996 90,000 5,000 - 328,250 50,000 None 20,464
the Company and Chief
Financial Officer of
the Association
</TABLE>
____________________
(1) The column titled "Bonus" consists of board approved discretionary cash
bonuses. See "Compensation Committee Report on Executive Compensation."
(2) For 1998, 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 Mr. Kish, such amount represents Board of
Directors fees paid in the first quarter of 1996.
(3) Includes stock awards of 30,000, 55,000, 25,000 and 25,000 shares granted
to Messrs. Kish, Micenko, Getsy and Suchta, 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, 1998, the
market value of the stock awards held by Messrs. Kish, Micenko, Getsy and
Suchta, was $418,500, $852,000, $284,425 and $361,925, respectively.
(4) Represents stock options granted to Messrs. Kish, Micenko, Getsy and
Suchta, respectively, pursuant to the Incentive Plan during fiscal year
1996.
(5) For 1998, 1997 and 1996, there were no payouts or awards under any long-
term incentive plan.
(6) 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. In 1998, the Board voted to terminate the SERP.
During fiscal 1998, Messrs. Kish, Micenko, Getsy and Suchta, received
contributions of $51, $108, $67 and $27, respectively, under the group
life insurance. Contributions to Messrs. Kish, Micenko, Getsy and
Suchta, during fiscal 1998 pursuant to the 401(k) plan and the SERP were
$5,000, $5,000, $4,044 and $3,559, respectively, and $0, $60,346, $8,360
and $2,410, respectively. For fiscal 1998, Messrs. Kish, Micenko, Getsy
and Suchta were allocated 2,044, 2,044, 1,723 and 1,516 shares of Common
Stock, respectively, pursuant to the ESOP. Dollar amounts reflect the
market value of $15.50 per share as of December 31, 1998. See "Executive
Compensation."
11
<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 the Executive elects not to
extend the term of this Agreement by giving written notice or 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 the Executive elects not
to extend the term of this Agreement by giving written notice or 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 as Chief Executive Officer of the Company and the Association is
$194,781. The current base salary for Mr. Micenko as President of the Company
and the Association is $222,559. 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) a material reduction
in the benefits and perquisites to the Executive; (v) liquidation or dissolution
of the Association or the Company; or (vi) 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 term 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 Summary
Compensation Table for 1998 in the case of Messrs. Kish and Micenko and
excluding any benefits under any employee plan which may be payable, following a
change in control and termination of
12
<PAGE>
employment Messrs. Kish and Micenko would receive severance payments in the
amount of approximately $572,886 and $679,029, 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 Messrs. Getsy and Suchta and six 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 1998
and excluding any benefits under any employee plan which may be payable,
following a change in control and termination of employment, Messrs. Getsy,
Suchta and the other six officers covered by the agreements would receive a
severance payment in the amount of approximately $269,652, $237,308 and $1.1
million, respectively.
Payments under the change in control agreements in the event of a change in
control may constitute some portion of an excess parachute payment under Section
280G of the Code for executive officers, resulting in the imposition of an
excise tax on the recipient and denial of the deduction for such excess amounts
to the Company and the Association.
13
<PAGE>
INCENTIVE PLAN. The Company maintains the Incentive Plan, which provides
discretionary awards of options to purchase Common Stock, option-related awards
and awards of Common Stock (collectively, "Awards") to officers, directors and
key employees as determined by a committee of the Board of Directors. Awards of
Common Stock to officers, directors and key employees is provided under
"Restricted Stock Awards" in the "Summary Compensation Table." No options were
granted under the Incentive Plan to the Named Executive Officers in fiscal 1998.
The following table provides certain information with respect to the number
of shares of Common Stock represented by outstanding options held by the Named
Executive Officers as of December 31, 1998. Also reported are the values for
"in-the-money" options which represent the positive spread between the exercise
price of any such existing stock options and the year end price of the Common
Stock.
FISCAL YEAR-END OPTION/SAR VALUE
<TABLE>
<CAPTION>
VALUE OF
NUMBER UNEXERCISED
OF SECURITIES IN-THE-MONEY
UNDERLYING UNEXERCISED OPTIONS/SARS
OPTIONS/SARS AT FISCAL YEAR-
NAME AT FISCAL YEAR-END(#)(1) END($)(2)(3)
- ----------------- ----------------------------- --------------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
John M. Kish 30,000 45,000 $ 82,500 $123,750
John G. Micenko 38,000 57,000 104,500 156,750
Andrew R. Getsy 10,000 15,000 27,500 41,250
Raymond G. Suchta 20,000 30,000 55,000 82,500
</TABLE>
____________________________________
(1) The options in this table have an exercise price of $12.75.
(2) The price of the Common Stock on December 31, 1998 was $15.50.
(3) Based on the market value of the underlying Common Stock at fiscal year
end, minus the exercise price.
14
<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.
<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 18,000 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
1999.
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.
15
<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 42,000 63,000 84,000 105,000 105,000
200,000 48,000 72,000 96,000 120,000 120,000
250,000 60,000 90,000 120,000 150,000 150,000
</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
1999.
The following table sets forth the years of credited service (i.e., benefit
service) as of December 31, 1998 for each Named Executive Officer.
<TABLE>
<CAPTION>
CREDITED SERVICE
-------------------------------------
YEARS MONTHS
----- ------
<S> <C> <C>
John M. Kish....... 1 9
John G. Micenko.... 35 6
Andrew R. Getsy.... 30 6
Raymond G. Suchta.. 16 6
</TABLE>
TRANSACTIONS WITH CERTAIN RELATED PERSONS
The Association's past policy provided that all loans made by the
Association to its directors and executive officers ("insiders") be 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 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. In November 1998, the Association revised its policy to allow insiders
to be eligible to receive the same discounted interest rate that is available to
all employees.
16
<PAGE>
Set forth below is certain information as of December 31, 1998, 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, 1998 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 (but in no event less than 6.25%) and such preferential
interest rates remain in effect as long as the employee maintains full-time
status.
<TABLE>
<CAPTION>
LARGEST BALANCE INTEREST RATE
MATURITY AMOUNT AS OF AS OF
DATE DATE OUTSTANDING SINCE DECEMBER DECEMBER TYPE OF
NAME AND POSITION OF LOAN OF LOAN JANUARY 1, 1998 31, 1998 31, 1998 LOAN
- ----------------- ------- ------- --------------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Raymond G. Suchta, 1/9/87 6/1/17 $ 99,141 $ 91,357 6.50% Mortgage
Chief Financial Officer
and Treasurer of the
Company and Vice
President of the
Association
Wayne A. Callen, 11/18/86 6/1/17 107,180 104,437 7.00 Mortgage
Vice President of the
Association
Todd L. Cover, 9/16/98 10/1/28 208,000 207,551 6.25 Mortgage
Executive Vice President
and Chief Operating
Officer of the
Association
</TABLE>
John M. Kish was previously a partner in the law firm of Kish, Kish and
Yarsky (the "firm"), which acted as local counsel to the Association during
1998. The Company and the Association made payments to the firm for legal
services totaling $26,500.
17
<PAGE>
PROPOSAL NO. 2: RATIFICATION OF THE
AMENDED AND RESTATED GA FINANCIAL, INC.
1996 STOCK-BASED INCENTIVE PLAN
The Board of Directors presents for stockholder ratification the Amended
and Restated GA Financial, Inc. 1996 Stock-Based Incentive Plan (the "Plan").
Stockholders originally approved the GA Financial, Inc. 1996 Stock-Based
Incentive Plan on October 16, 1996. The Board of Directors approved certain
amendments to the Plan in January, 1999, and submits the amended and restated
Plan to stockholders for ratification. The amended and restated Plan is
attached as Annex A.
The Company implemented the Plan primarily to attract, keep and motivate
qualified individuals in key positions. The Plan provides officers, employees
and non-employee directors or "outside directors" of the Company and its
affiliates, including the Association, an incentive to contribute to the success
of the Company by giving them an ownership interest in the Company This
incentive aligns the interests of management and stockholders and rewards
employees for outstanding performance.
The Plan allows the Company to grant awards of restricted shares of the
Company common stock and options to purchase the Company common stock, as well
as certain related rights. All employees and all outside directors of the
Company and its affiliates, including the Association, are eligible to receive
awards under the Plan. A committee consisting of the entire Board of Directors
administers the Plan.
OTS regulations generally provide that restricted stock and stock option
awards granted under any stock-based benefit plan, such as the Plan, adopted by
a financial institution within the first year after conversion to stock form,
must conform to certain OTS regulatory requirements and limitations. The Board
of Directors believes it is in the best interests of the Company and the
Association to amend the Plan to remove certain limitations contained in the
Plan that are imposed by the OTS conversion regulations. The effect of the
amendments will be to allow the Committee the discretion to make grants of
awards which vest at a rate greater than 20% per year and allow the Committee
the discretion to accelerate the vesting of awards upon certain circumstances,
including the retirement of a grantee. The amendments also provide for
automatic acceleration of vesting upon a Change in Control of the Company or the
Association. The amendments did not remove the OTS requirements that the
exercise price of any stock option granted be at least equal to the fair market
value of the underling stock on the date of grant or the quantitative grant
limitations applicable to officers and directors. The Company also amended the
Plan for conforming changes and certain minor administrative matters, including
providing committee discretion with respect to the transferability of non-
statutory stock options for valid estate planning purposes.
As of December 31, 1998, the Company had granted options covering 656,500
shares of the Company's common stock under the Plan and 233,500 shares remained
available under the Plan for future option grants. As of December 31, 1998, the
Company had also granted 323,650 restricted stock awards under the Plan and
32,350 shares of common stock remained available for future grants of restricted
stock awards.
Under generally accepted accounting principles, compensation expense is
generally not recognized with respect to the award of options to directors,
officers and employees of the Company and its subsidiaries. However, the
Financial Accounting Standards Board recently indicated that it would propose
rules during 1999 that would generally require recognition of compensation
expense with respect to awards made to
18
<PAGE>
non-employees, including non-employee directors of the Company, and that the
proposed changes would apply to awards made after December 15, 1998.
SUMMARY OF THE PLAN
Types of Awards. The Plan authorizes the grant of Awards to officers,
employees and outside directors in the form of: (i) options to purchase the
Company's Common Stock intended to qualify as incentive stock options under
Section 422 of the Code (options which afford tax benefits to the recipients
upon compliance with certain conditions and which do not result in tax
deductions to the Company), referred to as "Incentive Stock Options"; (ii)
options that do not so qualify (options which do not afford income tax benefits
to recipients, but which may provide tax deductions to the Company), referred to
as "Non-Statutory Stock Options"; (iii) limited rights which are exercisable
only upon a change in control of the Company or Bank (as defined in the
Incentive Plan) ("Limited Rights"); (iv) restricted shares of Common Stock
("Stock Awards"), (v) Dividend Equivalent Rights; and (vi) Equitable Adjustment
Rights. Each type of Award granted under the Plan may be subject to vesting
requirements or other conditions imposed by the Committee.
Number of Shares of Common Stock Available for Awards. The Company has
reserved 890,000 shares of Common Stock for issuance under the Plan in
connection with the exercise of options and 356,000 shares of Common Stock were
acquired by the Plan trust for Stock Awards under the Plan. Shares to be issued
under the Plan may be either authorized but unissued shares, or reacquired
shares held by the Company as treasury stock or in the case of Stock Awards,
paid from the trust. Any shares subject to an Award which expires, terminates
unexercised (in the case of options) or forfeited will again be available for
grant under the Plan.
Stock Option Grants. The Committee has the discretion to award Incentive
Stock Options or Non-Statutory Stock Options to employees, while only Non-
Statutory Stock Options may be awarded to outside directors. Pursuant to the
Plan, the Committee has the authority to determine the dates and terms on which
each option will become exercisable. The exercise price of all stock options
must be 100% of the fair market value of the underlying Common Stock at the time
of grant, except as provided below, and the term of all stock options may not
exceed ten years. In order to qualify as Incentive Stock Options under Section
422 of the Code, no more than $100,000 of options may become exercisable for the
first time in any taxable year. Also, Incentive Stock Options granted to any
person who is the beneficial owner of more than 10% of the outstanding voting
stock may be exercised only for a period of five years from the date of grant
and the exercise price must be at least equal to 110% of the fair market value
of the underlying Common Stock on the date of grant.
The exercise price of an option may be paid in cash, Common Stock or a
combination of cash and Common Stock, by the surrender of all or part of the
option being exercised, by the immediate sale through a broker of the number of
shares being acquired sufficient to pay the purchase price, or a combination of
these methods as determined by the Committee. Options may be exercised during
periods before and after an optionee terminates employment, as the case may be,
to the extent authorized by the Committee or specified in the Plan or option
agreement.
Limited Rights. The Plan also provides the Committee with the ability to
grant a Limited Right concurrently with any option. Limited Rights are related
to specific options granted and become exercisable only upon a change in control
of the Association or the Company. Upon exercise, the holder will be entitled
19
<PAGE>
to receive, in lieu of purchasing the stock underlying the option, a lump sum
cash payment equal to the difference between the exercise price of the related
option and the fair market value of the shares of Common Stock subject to the
option on the date of exercise of the right less any applicable tax withholding.
Dividend Equivalent Rights. Simultaneously with the grant of any option to
any individual, the Committee may grant a Dividend Equivalent Right with respect
to all or some of the shares covered by such option. The Dividend Equivalent
Right provides the employee with a separate cash benefit equal to 100% of the
amount of any extraordinary dividend declared by the Company on shares of Common
Stock subject to an option. Upon the payment of an extraordinary dividend, the
holder of a Dividend Equivalent Right will receive, at the time of vesting of
the related option, an amount of cash or some other payment as determined under
the Incentive Plan, equal to 100% of the extraordinary dividend paid on shares
of Common Stock, multiplied by the number of shares subject to the underlying
option plus any earnings thereon minus any tax withholding amounts. Payments
shall be decreased by the amount of any applicable tax withholding prior to
distribution in accordance with the Plan. The Dividend Equivalent Right is
transferable only when the underlying option is transferable and under the same
conditions.
Equitable Adjustment Right. Simultaneously with the grant of any option,
in the alternative to a Dividend Equivalent Right, the Committee may grant an
Equitable Adjustment Right. In such a case, upon the payment of an
extraordinary dividend, the Committee may adjust the number of shares and/or the
exercise price of the options underlying the Equitable Adjustment Right, as the
Committee deems appropriate.
Stock Awards. The Plan provides for the grant of Stock Awards in the form
of restricted shares of Common Stock that are subject to restrictions on
transfer and ownership. Unless otherwise specified in the Plan, the Committee
has discretion to determine the terms and conditions of each Stock Award. When
Stock Awards are distributed in accordance with the Plan, the recipients will
also receive amounts equal to accumulated cash and stock dividends (if any) with
respect thereto plus earnings thereon minus any required tax withholding
amounts. Prior to vesting, recipients of Stock Awards may direct the voting of
shares of Common Stock granted to them and held in the Plan trust. Shares of
Common Stock held by the Plan trust which have not been allocated or for which
voting has not been directed are voted by the trustee in the same proportion as
the awarded shares are voted in accordance with the directions given by all
recipients of Stock Awards.
Effect of a Change in Control. In the event of a Change in Control of the
Association or the Company (as defined in the Plan), each outstanding Award
granted under the Plan will become fully vested. All option grants will remain
exercisable until the expiration of the term of the option.
Nontransferability. Unless determined otherwise by the Committee, Awards
under the Plan shall not be transferable by the recipient other than by will or
the laws of intestate succession or pursuant to a domestic relations order.
With the consent of the Committee, a recipient may permit transferability or
assignment for valid estate planning purposes of a Non-Statutory Stock Option as
permitted under the Code or Rule 16b-3 under the Exchange Act and a participant
may designate a person or his or her estate as beneficiary of any Award to which
the recipient would then be entitled, in the event of the death of the
participant.
20
<PAGE>
CERTAIN INCOME TAX CONSEQUENCES
The following brief description of the tax consequences of Awards granted
under the Plan is based on federal income tax laws currently in effect and does
not purport to be a complete description of such federal income tax
consequences.
Stock Options. There are no federal income tax consequences either to the
optionee or to the Company upon the grant of an Incentive Stock Option or a Non-
Statutory Stock Option. On the exercise of an Incentive Stock Option during
employment or within three months thereafter, the optionee will not recognize
any income and the Company will not be entitled to a deduction, although the
excess of the fair market value of the shares on the date of exercise over the
option price is includable in the optionee's alternative minimum taxable income,
which may give rise to alternative minimum tax liability for the optionee.
Generally, if the optionee disposes of shares acquired upon exercise of an
Incentive Stock Option within two years of the date of grant or one year of the
date of exercise, the optionee will recognize ordinary income, and the Company
will be entitled to a deduction, equal to the excess of the fair market value of
the shares on the date of exercise over the option price (limited generally to
the gain on the sale). The balance of any gain or loss will be treated as a
capital gain or loss to the optionee. If the shares are disposed of after the
holding periods mentioned above, the Company will not be entitled to any
deduction, and the entire gain or loss for the optionee will be treated as a
capital gain or loss.
On exercise of a Non-Statutory Stock Option, the excess of the date-of-
exercise fair market value of the shares acquired over the option price will
generally be taxable to the optionee as ordinary income and deductible by the
Company, provided the Company properly withholds taxes in respect of the
exercise. The disposition of shares acquired upon the exercise of a Non-
Statutory Stock Option will generally result in a capital gain or loss for the
optionee, but will have no tax consequences for the Company.
Limited Rights, Dividend Equivalent Rights and Equitable Adjustment Rights.
In the case of Limited Rights, the holder will recognize ordinary income, and
the Company will be entitled to a deduction, equal to the amount paid to him.
Upon the exercise of a Dividend Equivalent Right, the holder will recognize
ordinary income, and the Company will be entitled to a deduction equal to the
amount of cash received under the Dividend Equivalent Right. For tax purposes,
Equitable Adjustment Rights receive the same tax treatment as Non-statutory
Stock Options.
Stock Awards. A participant who has been granted Stock Awards under the
Plan and does not make an election under Section 83(b) of the Code will not
recognize taxable income at the time of the Stock Award grant. At the time any
transfer or forfeiture restrictions applicable to the Stock Award lapse, the
recipient will recognize ordinary income, and the Company will be entitled to a
corresponding deduction, equal to the excess of the fair market value of such
Common Stock at such time over the amount, if any, paid for the award. Any
dividend paid to the recipient on the restricted stock subject to the Stock
Award at or prior to such time will be ordinary compensation income to the
recipient and deductible as such by the Company.
A recipient of a Stock Award who makes an election under Section 83(b) of
the Code will recognize ordinary income at the time of the Stock Award and the
Company will be entitled to a corresponding deduction equal to the fair market
value of such stock at such time over the amount, if any, paid for the award.
Any dividends subsequently paid to the recipient on the restricted stock subject
to the Stock Award will be dividend income to the recipient and not deductible
by the Company. If the recipient makes a Section 83(b) election, there are no
federal income tax consequences either to the recipient or the Company at the
time any transfer or forfeiture restrictions applicable to the restricted stock
award lapse.
21
<PAGE>
ADJUSTMENTS
In the event of any change in the outstanding shares of Common Stock of the
Company by reason of any stock dividend or split, recapitalization, merger,
consolidation, spin-off, reorganization, combination or exchange of shares, or
other similar corporate change, or other increase or decrease in such shares
without receipt or payment of consideration by the Company, or in the event an
extraordinary capital distribution is made, including the payment of an
extraordinary dividend, the Committee may make such adjustments to previously
granted Awards, to prevent dilution, diminution or enlargement of the rights of
the holder. All Awards under the Plan shall be binding upon any successors or
assigns of the Company.
AMENDMENT OF THE PLAN
The Plan allows the Board to amend the Plan without stockholder approval,
unless such approval is required to comply with a tax law, American Stock
Exchange requirements or regulatory requirements.
STOCKHOLDER VOTE
Stockholders are being requested to ratify all amendments to the Plan. If
stockholders fail to ratify Proposal 2, the Plan in the form attached hereto, is
intended to remain in full force and effect at the discretion of the Company's
Board. The affirmative vote of a majority of the votes cast by GA Financial.
Inc. stockholders at the Annual Meeting is required to ratify the Plan, as
amended.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE AMENDMENTS TO THE
GA FINANCIAL, INC. 1996 STOCK-BASED INCENTIVE PLAN.
PROPOSAL NO. 3. RATIFICATION OF APPOINTMENT
OF INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP has been the principal accountants for GA
Financial, Inc. On February 24, 1999, the Company engaged KPMG LLP, as its
principal accountant to audit the Company's consolidated financial statements
for the fiscal year ending December 31, 1999. The decision to change
accountants was recommended by the audit committee and approved by the Company's
Board of Directors.
In connection with the audits of the two fiscal years ended December 31,
1997 and the subsequent period through March 2, 1999, there were no
disagreements with PricewaterhouseCoopers LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedures which disagreements if not resolved to their satisfaction would have
caused them to make reference to the subject matters of the disagreements in
connection with their opinions. In addition, such financial statements
contained no adverse opinion or a disclaimer of opinion, and were not qualified
or modified as to uncertainty, audit scope, or accounting principles.
Representatives of PricewaterhouseCoopers LLP and KPMG LLP will be present
at the Meeting. They will be given an opportunity to make a statement if they
so 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 KPMG LLP AS THE
INDEPENDENT AUDITORS OF THE COMPANY.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" RATIFICATION OF THE
APPOINTMENT OF KPMG LLP AS THE INDEPENDENT AUDITORS OF THE COMPANY.
22
<PAGE>
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 2000, 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 26, 1999. 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. In order for
the notice of a stockholder proposal for consideration at the Company's 2000
Annual Meeting of Stockholders to be timely, the Company would have to receive
such notice no later than January 26, 2000 assuming the 2000 annual meeting is
held on April 26, 2000 and that the Company provides at least 100 days notice or
public disclosure of the date of the meeting. 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 common 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.
23
<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,
1998, 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 26, 1999
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.
24
<PAGE>
APPENDIX A
AMENDED AND RESTATED
GA FINANCIAL, INC.
1996 STOCK-BASED INCENTIVE PLAN
1. DEFINITIONS.
-----------
(a) "Affiliate" means any "parent corporation" or "subsidiary corporation"
of the Holding company, as such terms are defined in Sections 424(e) and 424(f)
of the Code.
(b) "Alternate Option Payment Mechanism" refers to one of several methods
available to a Participant to fund the exercise of a stock option set out in
Section 13 hereof. These mechanisms include: broker assisted cashless exercise
and stock for stock exchange.
(c) "Award" means a grant of one or some combination of one or more Non-
statutory Stock Options, Incentive Stock Options and Stock Awards under the
provisions of this Plan.
(d) "Association" means Great American Federal Savings and Loan
Association.
(e) "Board of Directors" or "Board" means the board of directors of the
Holding Company.
(f) "Change in Control" means a change in control of the Association or
Holding Company of a nature that; (i) would be required to be reported in
response to Item 1 of the current report on Form 8-K, as in effect on the date
hereof, pursuant to Section 13 or 15(d) of the Exchange Act; or (ii) results in
a Change in Control within the meaning of the Home Owners' Loan Act of 1933, as
amended ("HOLA") and the Rules and Regulations promulgated by the Office of
Thrift Supervision ("OTS") (or its predecessor agency), as in effect on the date
hereof (provided, that in applying the definition of change in control as set
forth under such rules and regulations the Board shall substitute its judgment
for that of the OTS); or (iii) without limitation such a Change in Control shall
be deemed to have occurred at such time as (A) any "person" (as the term is used
in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Association or the Holding Company representing
20% or more of the Association's or the Holding Company's outstanding securities
except for any securities of the Association purchased by the Holding Company
and any securities purchased by any tax qualified employee benefit plan of the
Association; or (B) individuals who constitute the Board on the date hereof (the
"Incumbent Board") cease for any reason to constitute at least a majority
thereof, provided that any person becoming a director subsequent to the date
hereof whose election was approved by a vote of at least three-quarters of the
directors comprising the Incumbent Board, or whose nomination for election by
the Holding Company's stockholders was approved by the same Nominating Committee
serving under an Incumbent Board, shall be, for purposes of this clause (B),
considered as though he were a member of the Incumbent Board; or (C) a plan of
reorganization, merger, consolidation, sale of all or substantially all the
assets of the Association or the Holding Company or similar transaction occurs
in which the Association or Holding Company is not the resulting entity; or (D)
a solicitation of shareholders of the Holding
<PAGE>
Company, by someone other than the current management of the Holding Company,
seeking stockholder approval of a plan of reorganization, merger or
consolidation of the Holding Company or Association or similar transaction with
one or more corporations, as a result of which the outstanding shares of the
class of securities then subject to the plan are exchanged for or converted into
cash or property or securities not issued by the Association or the Holding
Company; or (E) a tender offer is made for 20% or more of the voting securities
of the Association or the Holding Company.
(g) "Code" means the Internal Revenue Code of 1986, as amended.
(h) "Committee" means a committee consisting of the entire Board of
Directors or consisting solely of two or more members of the Board of Directors
who are defined as Non-Employee Directors as such term is defined under Rule
16b-3(b)(3)(i) under the Exchange Act as promulgated by the Securities and
Exchange Commission.
(i) "Common Stock" means the Common Stock of the Holding Company, par
value, $.01 per share or any stock exchanged for shares of Common Stock pursuant
to Section 17 hereof.
(j) "Date of Grant" means the effective date of an Award.
(l) "Disability" means the permanent and total inability by reason of
mental or physical infirmity, or both, of a Participant to perform the work
customarily assigned to him or, in the case of a Director, to serve on the
Board. Additionally, a medical doctor selected or approved by the Board of
Directors must advise the Committee that it is either not possible to determine
when such Disability will terminate or that it appears probable that such
Disability will be permanent during the remainder of said Participant's
lifetime.
(m) "Dividend Equivalent Rights" means the right to receive an amount of
cash based upon the terms set forth in Section 10 hereof.
(n) "Effective Date" means October 16, 1996.
(o) "Employee" means any person who is currently employed by the Holding
Company or an Affiliate, including officers, but such term shall not include
Outside Directors.
(p) "Employee Participant" means an Employee who holds an outstanding
Award under the terms of the Plan.
(q) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(r) "Exercise Price" means the purchase price per share of Common Stock
deliverable upon the exercise of each Option in order for the option to be
exchanged for shares of Common Stock.
(s) "Fair Market Value" means, when used in connection with the Common
Stock on a certain date, the average of the high and low bid prices of the
Common Stock as reported by the American Stock Exchange ("AMEX") or the New York
Stock Exchange ("NYSE") or the average
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<PAGE>
of the high and low sale prices of the Common Stock as reported by Nasdaq Stock
Market ("NASDAQ") each as published in the Wall Street Journal, if published, on
such date or, if the Common Stock was not traded on such date, on the next
preceding day on which the Common Stock was traded thereon or the last previous
date on which a sale is reported. If the Common Stock is not reported on the
AMEX, NASDAQ or the NYSE, the Fair Market Value of the Common Stock is the value
so determined by the Board in good faith.
(t) "Holding Company" means GA Financial, Inc.
(u) "Incentive Stock Option" means an Option granted by the Committee to a
Participant, which Option is designated by the Committee as an Incentive Stock
Option pursuant to Section 7 hereof and is intended to be such under Section 422
of the Code.
(v) "Limited Right" means the right to receive an amount of cash based
upon the terms set forth in Section 8 hereof.
(w) "Non-statutory Stock Option" means an Option to a Participant pursuant
to Section 6 hereof, which is not designated by the Committee as an Incentive
Stock Option or which is redesignated by the Committee as a Non-statutory Stock
Option or which is designated an Incentive Stock Option under Section 7 hereof,
but does not meet the requirements of such under Section 422 of the Code.
(x) "Option" means the right to buy a fixed amount of Common Stock at the
Exercise Price within a limited period of time designated as the term of the
option as granted under Sections 6 or 7 hereof.
(y) "Outside Director" means a member of the Board of Directors of the
Holding Company or its Affiliates, who is not also an Employee.
(z) "Outside Director Participant" means an Outside Director who holds an
outstanding Award under the terms of the Plan.
(aa) "Participant(s)" means collectively an Employee Participant and/or an
Outside Director Participant who hold(s) outstanding Awards under the terms of
the Plan.
(bb) "Retirement" with respect to an Employee Participant means termination
of employment which constitutes retirement under any tax-qualified plan
maintained by the Association. However, "Retirement" will not be deemed to have
occurred for purposes of this Plan if a Participant continues to serve as a
consultant to or on the Board of Directors of the Holding Company or its
Affiliates even if such Participant is receiving retirement benefits under any
retirement plan of the Holding Company or its Affiliates. With respect to an
Outside Director, "Retirement" means the termination of service from the Board
of Directors of the Holding Company or its Affiliates following written notice
to the Board as a whole of such Outside Director's intention to retire, except
that an Outside Director shall not be deemed to have "retired" for purposes of
the Plan in the event he continues to serve as a consultant to the Board or as
an advisory director.
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<PAGE>
(cc) "Stock Awards" are Awards of Common Stock which may vest immediately
or over a period of time. Vesting of Stock Awards under Section 9 hereof may be
contingent upon the occurrence of specified events or the attainment of
specified performance goals as determined by the Committee.
(dd) "Termination for Cause" shall mean, in the case of a Director, removal
from the Board of Directors, or, in the case of an employee, termination of
employment, in both such cases as determined by the Board of Directors, because
of a material loss to the Holding Company or one of its Affiliates caused by the
Participant's intentional failure to perform stated duties, personal dishonesty,
willful violation of any law, rule, regulation, (other than traffic violations
or similar offenses) or final cease and desist order. No act, or the failure to
act, on Participant's part shall be "willful" unless done, or omitted to be
done, not in good faith and without reasonable belief that the action or
omission was in the best interest of the Holding Company or its Affiliates.
(ee) "Trust" means a trust established by the Board in connection with this
Plan to hold Plan assets for the purposes set forth herein.
(ff) "Trustee" means that person or persons and entity or entities approved
by the Board to hold legal title to any of the Trust assets for the purposes set
forth herein.
2. ADMINISTRATION.
--------------
(a) The Plan shall be administered by the Committee. The Committee is
authorized, subject to the provisions of the Plan, to grant awards to Employees
and establish such rules and regulations as it deems necessary for the proper
administration of the Plan and to make whatever determinations and
interpretations in connection with the Plan it deems necessary or advisable.
All determinations and interpretations made by the Committee shall be binding
and conclusive on all Employee Participants and Outside Director Participants in
the Plan and on their legal representatives and beneficiaries.
(b) Awards to Outside Directors of the Holding Company or its Affiliates
shall be granted by the Board of Directors or the Committee, pursuant to the
terms of this Plan.
(c) Actual transference of the Award requires no, nor allows any,
discretion by the Trustee.
3. TYPES OF AWARDS AND RELATED RIGHTS.
-----------------------------------
The following Awards and related rights as described below in Paragraphs 6
through 14 hereof may be granted under the Plan:
(a) Non-statutory Stock Options
(b) Incentive Stock Options
(c) Limited Right
(d) Stock Awards
(e) Dividend Equivalent Right
(f) Equitable Adjustment Right
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<PAGE>
4. STOCK SUBJECT TO THE PLAN.
-------------------------
Subject to adjustment as provided in Section 17 hereof, the maximum number
of shares reserved for Awards under the Plan is 1,246,000. Subject to adjustment
as provided in Section 17 hereof, the maximum number of shares reserved hereby
for purchase pursuant to the exercise of Options and Option-related Awards
granted under the Plan is 890,000. Subject to adjustment as provided in Section
17 hereof, the maximum number of the shares reserved for Stock Awards is
356,000. These shares of Common Stock may be either authorized but unissued
shares or authorized shares previously issued and reacquired by the Holding
Company. To the extent that Options and Stock Awards are granted under the Plan,
the shares underlying such Awards will be unavailable for any other use
including future grants under the Plan except that, to the extent that Stock
Awards or Options terminate, expire, or are forfeited without having been
exercised (in the case of Limited Rights, exercised for cash), new Awards may be
made with respect to these shares.
5. ELIGIBILITY.
-----------
Subject to the terms herein, all Employees and Outside Directors shall be
eligible to receive Awards under the Plan.
6. NON-STATUTORY STOCK OPTIONS.
---------------------------
The Committee or the Board of Directors may, subject to the limitations of
the Plan and the availability of shares reserved but unawarded in the Plan,
from time to time, grant Non-statutory Stock Options to Employees and Outside
Directors, upon such terms and conditions as the Committee may determine in
exchange for and upon surrender of previously granted Awards under this Plan.
Non-statutory Stock Options granted under this Plan are subject to the following
terms and conditions:
(a) Exercise Price. The Exercise Price of each Non-statutory Stock Option
--------------
shall be determined by the Committee on the date the option is granted. Such
Exercise Price shall not be less than 100% of the Fair Market Value of the
Holding Company's Common Stock on the Date of Grant. Shares of Common Stock
underlying a Non-statutory Stock Option may be purchased only upon full payment
of the Exercise Price or upon operation of an Alternate Option Payment Mechanism
set out in Section 13 hereof.
(b) Terms of Non-statutory Stock Options. The term during which each Non-
------------------------------------
statutory Stock Option may be exercised shall be determined by the Committee,
but in no event shall a Non-statutory Stock Option be exercisable in whole or in
part more than 10 years from the Date of Grant. The Committee shall determine
the date on which each Non-statutory Stock Option shall become exercisable. The
shares of Common Stock underlying each Non-statutory Stock Option installment
may be purchased in whole or in part by the Participant at any time during the
term of such Non-statutory Stock Option after such installment becomes
exercisable. The Committee may, in its sole discretion, accelerate the time at
which any Non-statutory Stock Option may be exercised in whole or in part. The
acceleration of any Non-statutory Stock Option under the authority of this
paragraph shall create no right, expectation or reliance on the part of any
other Participant or that certain Participant regarding any other unaccelerated
Non-statutory Stock Options.
A-5
<PAGE>
(c) NSO Agreement. The terms and conditions of any Non-statutory Stock
--------------
Option granted shall be evidenced by an agreement (the "NSO Agreement") which
shall be subject to the terms and conditions of the Plan.
(d) Termination of Employment or Service. Unless otherwise determined by
------------------------------------
the Committee, upon the termination of a Participant's employment or service for
any reason other than Disability, death, Termination for Cause, or Retirement,
the Participant's Non-statutory Stock Options shall be exercisable only as to
those shares that were immediately exercisable by the Participant at the date of
termination and only for a period of three (3) months following termination.
Notwithstanding any provisions set forth herein or contained in any NSO
Agreement relating to an award of a Non-statutory Stock Option, in the event of
termination of the Participant's employment or service for Disability or death,
all Non-statutory Stock Options held by such Participant shall immediately vest
and be exercisable for one year after such termination of service, and, in the
event of a Termination for Cause, all rights under the Participant's Non-
statutory Stock Options shall expire immediately upon such Termination for
Cause. Further, unless otherwise determined by the Committee, in the event of a
Participant's Retirement, the Participant may exercise only those Non-statutory
Stock Options that were immediately exercisable by the Participant at the date
of Retirement and only for a period of three (3) months from the date of
Retirement.
(e) Acceleration Upon a Change in Control. In the event of a Change in
-------------------------------------
Control all Non-statutory Stock Options held by a Participant as of the date of
the Change in Control shall immediately become exercisable and shall remain
exercisable until the expiration of the term of the Non-statutory Stock Options.
(f) Non-Transferability. Unless otherwise determined by the Committee in
-------------------
accordance with this Section 6(f), a Participant may not transfer, assign,
hypothecate, or dispose of in any manner, other than by will or the laws of
intestate succession, a Non-statutory Stock Option. The Committee may, however,
in its sole discretion, permit transferability or assignment of a Non-statutory
Stock Option if such transfer or assignment is, in its sole determination, for
valid estate planning purposes and such transfer or assignment is permitted
under the Code and Rule 16b-3 under the Exchange Act. For purposes of this
Section 6(f), a transfer for valid estate planning purposes includes, but is not
limited to: (a) a transfer to a revocable intervivos trust as to which the
Participant is both the settlor and trustee, or (b) a transfer for no
consideration to: (i) any member of the Participant's Immediate Family, (ii) any
trust solely for the benefit of members of the Participant's Immediate Family,
(iii) any partnership whose only partners are members of the Participant's
Immediate Family, and (iv) any limited liability corporation or corporate entity
whose only members or equity owners are members of the Participant's Immediate
Family. For purposes of this Section 6(f), "Immediate Family" includes, but is
not necessarily limited to, a Participant's parents, grandparents, spouse,
children, grandchildren, siblings (including half bothers and sisters), and
individuals who are family members by adoption. Nothing contained in this
Section 6(f) shall be construed to require the Committee to give its approval to
any transfer or assignment of any Non-statutory Stock Option or portion thereof,
and approval to transfer or assign any Non-statutory Stock Option or portion
thereof does not mean that such approval will be given with respect to any other
Non-statutory Stock Option or portion thereof. The transferee or assignee of
any Non-statutory Stock Option shall be subject to all of the terms and
conditions applicable to such Non-statutory Stock Option immediately prior
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<PAGE>
to the transfer or assignment and shall be subject to any other conditions
proscribed by the Committee with respect to such Non-statutory Stock Option.
7. INCENTIVE STOCK OPTIONS.
-----------------------
The Committee may, subject to the limitations of the Plan and the
availability of shares reserved but unawarded in the Plan, from time to time,
grant Incentive Stock Options to Employees. Incentive Stock Options granted
pursuant to the Plan shall be subject to the following terms and conditions:
(a) Exercise Price. The Exercise Price of each Incentive Stock Option
--------------
shall be not less than 100% of the Fair Market Value of the Common Stock on the
Date of Grant. However, if at the time an Incentive Stock Option is granted to
an Employee Participant, the Employee Participant owns Common Stock representing
more than 10% of the total combined voting securities of the Holding Company
(or, under Section 424(d) of the Code, is deemed to own Common Stock
representing more than 10% of the total combined voting power of all classes of
stock of the Holding Company, by reason of the ownership of such classes of
stock, directly or indirectly, by or for any brother, sister, spouse, ancestor
or lineal descendent of such Employee Participant, or by or for any corporation,
partnership, estate or trust of which such Employee Participant is a
shareholder, partner or beneficiary), ("10% Owner"), the Exercise Price per
share of Common Stock deliverable upon the exercise of each Incentive Stock
Option shall not be less than 110% of the Fair Market Value of the Common Stock
on the Date of Grant. Shares may be purchased only upon payment of the full
Exercise Price or upon operation of an Alternate Option Payment Mechanism set
out in Section 13 hereof.
(b) Amounts of Incentive Stock Options. Incentive Stock Options may be
----------------------------------
granted to any Employee in such amounts as determined by the Committee; provided
that the amount granted is consistent with the terms of Section 422 of the Code.
In the case of an Option intended to qualify as an Incentive Stock Option, the
aggregate Fair Market Value (determined as of the time the Option is granted) of
the Common Stock with respect to which Incentive Stock Options granted are
exercisable for the first time by the Employee Participant during any calendar
year (under all plans of the Employee Participant's employer corporation and its
parent and subsidiary corporations) shall not exceed $100,000. The provisions
of this Section 7(b) shall be construed and applied in accordance with Section
422(d) of the Code and the regulations, if any, promulgated thereunder. To the
extent an Award of an Incentive Stock Option under this Section 7 exceeds this
$100,000 limit, the portion of the Award in excess of such limit shall be deemed
a Non-statutory Stock Option. The Committee shall have discretion to
redesignate Options granted as Incentive Stock Options as Non-Statutory Stock
Options. Such Non-statutory Stock Options shall be subject to Section 6 hereof.
(c) Terms of Incentive Stock Options. The term during which each Incentive
--------------------------------
Stock Option may be exercised shall be determined by the Committee, but in no
event shall an Incentive Stock Option be exercisable in whole or in part more
than 10 years from the Date of Grant. If at the time an Incentive Stock Option
is granted to an Employee Participant who is a 10% Owner, the Incentive Stock
Option granted to such Employee Participant shall not be exercisable after the
expiration of five years from the Date of Grant. No Incentive Stock Option is
transferable except by will or the
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<PAGE>
laws of descent and distribution and is exercisable in his lifetime only by the
Employee Participant to whom it is granted. The designation of a beneficiary
does not constitute a transfer.
The Committee shall determine the date on which each Incentive Stock Option
shall become exercisable. The Committee may also determine as of the Date of
Grant any other specific conditions or specific performance goals which must be
satisfied prior to the Incentive Stock Option becoming exercisable. The shares
comprising each installment may be purchased in whole or in part at any time
during the term of such Incentive Stock Option after such installment becomes
exercisable. The Committee may, in its sole discretion, accelerate the time at
which any Incentive Stock Option may be exercised in whole or in part. The
acceleration of any Incentive Stock Option under the authority of this paragraph
shall not create a right, expectation or reliance on the part of any other
Participant or that certain Participant regarding any other unaccelerated
Incentive Stock Options.
(d) ISO Agreement. The terms and conditions of any Incentive Stock Option
-------------
granted shall be evidenced by an agreement (the "ISO Agreement") which shall be
subject to the terms and conditions of the Plan.
(e) Termination of Employment. Unless otherwise determined by the
-------------------------
Committee, upon the termination of an Employee Participant's employment for any
reason other than Disability, death, Termination for Cause, or Retirement, the
Employee Participant's Incentive Stock Options shall be exercisable only as to
those shares that were immediately exercisable by the Participant at the date of
termination and only for a period of three months following termination.
Notwithstanding any provisions set forth herein or contained in any ISO
Agreement relating to an award of an Incentive Stock Option, in the event of
termination of the Employee Participant's employment for Disability or death,
all Incentive Stock Options held by such Employee Participant shall immediately
vest and be exercisable for one year after such termination, and, in the event
of Termination for Cause, all rights under the Employee Participant's Incentive
Stock Options shall expire immediately upon termination. Further, unless
otherwise determined by the Committee, in the event of a Participant's
Retirement, the Participant may exercise only those Incentive Stock Options that
were immediately exercisable by the Participant at the date of Retirement and
only for a period of three (3) months from the date of Retirement.
(f) Acceleration Upon a Change in Control. In the event of a Change in
-------------------------------------
Control all Incentive Stock Options held by a Participant as of the date of the
Change in Control shall immediately become exercisable and shall remain
exercisable until the expiration of the term of the Incentive Stock Options.
(g) Compliance with Code. The Incentive Stock Options granted under this
--------------------
Section 7 are intended to qualify as "incentive stock options" within the
meaning of Section 422 of the Code, but the Holding Company makes no warranty as
to the qualification of any Option as an incentive stock option within the
meaning of Section 422 of the Code. All Options that do not so quality shall be
treated as Non-statutory Stock Options.
(h) Disqualifying Dispositions. Each Participant shall notify the
--------------------------
Committee of any disposition of shares of Common Stock issued pursuant to the
exercise of such Option under the
A-8
<PAGE>
circumstances described in Section 421(b) of the Code (relating to certain
disqualifying dispositions), within 10 days of such disposition.
8. LIMITED RIGHT.
-------------
Simultaneously with the grant of any Option to an Employee, the Committee
may grant a Limited Right with respect to all or some of the shares covered by
such Option. Limited Rights granted under this Plan are subject to the
following terms and conditions:
(a) Terms of Rights. In no event shall a Limited Right be exercisable
in whole or in part before the expiration of six months from the Date of Grant
of the Limited Right. A Limited Right may be exercised only in the event of a
Change in Control.
The Limited Right may be exercised only when the underlying Option is
eligible to be exercised, and only when the Fair Market Value of the underlying
shares on the day of exercise is greater than the Exercise Price of the
underlying Option.
Upon exercise of a Limited Right, the underlying Option shall cease to
be exercisable. Upon exercise or termination of an Option, any related Limited
Rights shall terminate. The Limited Rights may be for no more than 100% of the
difference between the purchase price and the Fair Market Value of the Common
Stock subject to the underlying option. The Limited Right is transferable only
when the underlying option is transferable and under the same conditions.
(b) Payment. Upon exercise of a Limited Right, the holder shall
-------
promptly receive from the Holding Company an amount of cash equal to the
difference between the Exercise Price of the underlying option and the Fair
Market Value of the Common Stock subject to the underlying Option on the date
the Limited Right is exercised, multiplied by the number of shares with respect
to which such Limited Right is being exercised. Payments shall be less any
applicable tax withholding as set forth in Section 18 hereof.
9. STOCK AWARD.
-----------
The Committee (or in the case of an Outside Director Participant, the Board
of Directors) may, subject to the limitations of the Plan, from time to time,
make an Award of some number of shares of Common Stock to Employees and Outside
Directors. The Awards shall be made subject to the following terms and
conditions:
(a) Payment of the Stock Award. The Stock Award may only be made in whole
--------------------------
shares of Common Stock. Stock Awards may only be granted from shares reserved
under the Plan but unawarded at the time the new Stock Award is made.
(b) Terms of the Stock Awards. The Committee shall determine the dates on
-------------------------
which Stock Awards granted to a Participant shall vest and any specific
conditions or performance goals which must be satisfied prior to the vesting of
any installment or portion of the Stock Award. Notwithstanding other paragraphs
in this Section 9, the Committee may, in its sole discretion, accelerate the
vesting of any Stock Award. The acceleration of any Stock Award under the
authority
A-9
<PAGE>
of this paragraph shall create no right, expectation or reliance on the part of
any other Participant or that certain Participant regarding any other
unaccelerated Stock Awards.
(c) Stock Award Agreement. The terms and conditions of any Stock Award
---------------------
shall be evidenced by an agreement (the "Stock Award Agreement") which such
Stock Award Agreement will be subject to the terms and conditions of the Plan.
Each Stock Award Agreement shall set forth:
(i) the period over which the Stock Award will vest;
(ii) the performance goals, if any, which must be satisfied prior to
the vesting of any installment or portion of the Stock Award. The
performance goals may be set by the Committee on an individual level,
for all Participants, for all Awards made during a given period of
time, or for all Awards for indefinite periods;
(d) Certification of Attainment of the Performance Goal. No Stock Award or
---------------------------------------------------
portion thereof that is subject to a performance goal is to be distributed to
the Participant until the Committee certifies that the underlying performance
goal has been achieved.
(e) Termination of Employment or Service. Unless otherwise determined by
------------------------------------
the Committee, upon the termination of a Participant's employment or service for
any reason other than Disability, death, Termination for Cause, or Retirement,
the Participant's unvested Stock Awards as of the date of termination shall be
forfeited and any rights the Participant had to such unvested Stock Awards shall
become null and void. Notwithstanding any provisions set forth herein or
contained in any NSO Agreement relating to an award of a Non-statutory Stock
Option, in the event of termination of the Participant's service due to
Disability or death, all unvested Stock Awards held by such Participant shall
immediately vest and, in the event of the Participant's Termination for Cause,
the Participant's unvested Stock Awards as of the date of such termination shall
be forfeited and any rights the Participant had to such unvested Stock Awards
shall become null and void. Further, unless otherwise determined by the
Committee, in the event of a Participant's Retirement, any Stock Awards in which
the Participant has not become vested as of the date of Retirement shall be
forfeited and any rights the Participant had to such unvested Stock Awards shall
become null and void.
(f) Acceleration Upon a Change in Control. In the event of a Change in
-------------------------------------
Control all unvested Stock Awards held by a Participant shall immediately vest.
(g) Non-Transferability. Except to the extent permitted by the Code, the
-------------------
rules promulgated under Section 16(b) of the Exchange Act or any successor
statutes or rules:
(i) The recipient of a Stock Award shall not sell, transfer, assign,
pledge, or otherwise encumber shares subject to the Stock Award until full
vesting of such shares has occurred. For purposes of this section, the
separation of beneficial ownership and legal title through the use of any "swap"
transaction is deemed to be a prohibited encumbrance.
(ii) Unless determined otherwise by the Committee and except in the
event of the Participant's death or pursuant to a domestic relations order, a
Stock Award is not transferable and
A-10
<PAGE>
may be earned in his lifetime only by the Participant to whom it is granted.
Upon the death of a Participant, a Stock Award is transferable by will or the
laws of descent and distribution. The designation of a beneficiary does not
constitute a transfer.
(iii) If a recipient of a Stock Award is subject to the provisions of
Section 16 of the Exchange Act, shares of Common Stock subject to such Stock
Award may not, without the written consent of the Committee (which consent may
be given in the Stock Award Agreement), be sold or otherwise disposed of within
six months following the date of grant of the Stock Award.
(h) Accrual of Dividends. Whenever shares of Common Stock underlying a
--------------------
Stock Award are distributed to a Participant or beneficiary thereof under the
Plan, such Participant or beneficiary shall also be entitled to receive, with
respect to each such share distributed, a payment equal to any cash dividends
and the number of shares of Common Stock equal to any stock dividends, declared
and paid with respect to a share of the Common Stock if the record date for
determining shareholders entitled to receive such dividends falls between the
date the relevant Stock Award was granted and the date the relevant Stock Award
or installment thereof is issued. There shall also be distributed an appropriate
amount of net earnings, if any, of the Trust with respect to any dividends paid
out.
(i) Voting of Stock Awards. After a Stock Award has been granted but for
-----------------------
which the shares covered by such Stock Award have not yet been earned and
distributed to the Participant pursuant to the Plan, the Participant shall be
entitled to direct the Trustee as to the voting of such shares of Common Stock
which the Stock Award covers subject to the rules and procedures adopted by the
Committee for this purpose. All shares of Common Stock held by the Trust as to
which Participants are not entitled to direct, or have not directed, the voting,
shall be voted by the Trustee in the same proportion as the Common Stock covered
by Stock Awards which have been awarded is voted.
10. DIVIDEND EQUIVALENT RIGHT
-------------------------
Simultaneously with the grant of any Option to a Participant, the Committee
(or Board of Directors, if grant is to an Outside Director Participant) may
grant a Dividend Equivalent Right with respect to all or some of the shares
covered by such Option. Dividend Equivalent Rights granted under this Plan are
subject to the following terms and conditions:
(a) Terms of Rights. The Dividend Equivalent Right provides the Employee
---------------
with a cash benefit per share for each share underlying the unexercised portion
of the related Option equal to the amount of any extraordinary dividend (as
defined in this Section 10 (c)) per share of Common Stock declared by the
Holding Company. The Dividend Equivalent Right is transferable only when the
related Option is transferable and under the same conditions.
(b) Payment. Upon the payment of an extraordinary dividend, the
-------
Participant holding a Dividend Equivalent Right with respect to Options or
portions thereof which have vested shall promptly receive from the Holding
Company the amount of cash equal to the amount of the extraordinary dividend per
share of Common Stock, multiplied by the number of shares of Common Stock
underlying the unexercised portion of the related Option. With respect to
Options or portions thereof which have not vested, the amount that would have
been received pursuant to the Dividend
A-11
<PAGE>
Equivalent Right with respect to the shares underlying such unvested Option or
portion thereof shall be paid to the Participant holding such Dividend
Equivalent Right together with earnings thereon, on such date as the Option or
portion thereof becomes vested. Payments shall be decreased by the amount of any
applicable tax withholding prior to distribution to the Participant as set forth
in Section 18.
(c) Extraordinary Dividend. For purposes of this Section 10, an
----------------------
extraordinary dividend is any dividend paid on shares of Common Stock where the
rate of the dividend exceeds the Association's weighted average cost of funds on
interest-bearing liabilities for the current and preceding three quarters.
(d) The terms and conditions of any Dividend Equivalent Right shall be
evidenced in the agreement for the Option (NSO Agreement or ISO Agreement) and
shall be subject to the terms and conditions of the Plan. The Dividend
Equivalent Right shall be transferable to the extent that the related Option is
transferable.
11. EQUITABLE ADJUSTMENT RIGHT
--------------------------
Simultaneously with the grant of any Option under this Plan, in the
alternative to a Dividend Equivalent Right, the Committee (or Board of
Directors, if grant is to an Outside Director Participant) may grant an
Equitable Adjustment Right with respect to all or some of the shares covered by
such Option
Upon the payment of an extraordinary dividend (as such term is defined in
Section 10(c)), the Committee may adjust the number of shares and/or the
Exercise Price of the related Option, as the Committee deems appropriate as
provided in Section 17 hereof.
The terms and conditions of any Equitable Adjustment Right shall be
evidenced in the agreement for the Option (NSO Agreement or ISO Agreement) and
shall be subject to the terms and conditions of the Plan. The Equitable
Adjustment Right shall be transferable to the extent that the related Option is
transferable.
12. PAYOUT ALTERNATIVES
-------------------
Payments due to a Participant upon the exercise or redemption of an Award,
may be made subject to the following terms and conditions:
(a) Discretion of the Committee. The Committee has the sole discretion to
---------------------------
determine what form of payment (whether monetary, Common Stock, a combination of
payout alternatives or otherwise) it shall use in making distributions of
payments for all Awards. If the Committee requests any or all Participants to
make an election as to form of distribution or payment, it shall not be
considered bound by the election.
(b) Payment in the form of Common Stock. Any shares of Common Stock
-----------------------------------
tendered in satisfaction of an obligation arising under this Plan shall be
valued at the Fair Market Value of the Common Stock on the day preceding the
date of the issuance of such stock to the Participant.
A-12
<PAGE>
13. ALTERNATE OPTION PAYMENT MECHANISM
----------------------------------
The Committee has sole discretion to determine what form of payment it will
accept for the exercise of an Option. The Committee may indicate acceptable
forms in the ISO or NSO Agreement covering such Options or may reserve its
decision to the time of exercise. No Option is to be considered exercised until
payment in full is accepted by the Committee or its agent.
(a) Cash Payment. The exercise price may be paid in cash or by certified
------------
check.
(b) Borrowed Funds. To the extent permitted by law, the Committee may
--------------
permit all or a portion of the exercise price of an Option to be paid through
borrowed funds.
(c) Exchange of Common Stock.
------------------------
(i) The Committee may permit payment by the tendering of previously
acquired shares of Common Stock. This includes the use of "pyramiding
transactions" whereby some number of Options are exercised; then the shares
gained through the exercise are tendered back to the Holding Company as payment
for a greater number of Options. This transaction may be repeated as needed to
exercise all of the Options available.
(ii) Any shares of Common Stock tendered in payment of the exercise
price of an Option shall be valued at the Fair Market Value of the Common
Stock on the date prior to the date of exercise.
14. RIGHTS OF A SHAREHOLDER: NONTRANSFERABILITY.
-------------------------------------------
No Participant or Outside Director shall have any rights as a shareholder
with respect to any shares of Common Stock covered by an Option until the date
of issuance of a stock certificate for such shares. Nothing in this Plan or in
any Award granted confers on any person any right to continue in the employ or
service of the Holding Company or its Affiliates or interferes in any way with
the right of the Holding Company or its Affiliates to terminate a Participant's
services as an officer or other employee at any time.
Except as permitted by Section 6(f) hereof or as permitted under the Code
(with respect to Incentive Stock Options) and the rules promulgated pursuant to
Section 16(b) of the Exchange Act or any successor statutes or rules, no Award
under the Plan shall be transferable by the Participant or Outside Director
other than by will or the laws of intestate succession or pursuant to a
domestic relations order or unless determined otherwise by the Committee.
15. AGREEMENT WITH GRANTEES.
-----------------------
Each Award will be evidenced by a written agreement(s) (whether
constituting an NSO Agreement, ISO Agreement, Stock Award Agreement or any
combination thereof), executed by the Participant and the Holding Company or its
Affiliates that describes the conditions for receiving the Awards including the
date of Award, the Exercise Price if any, the terms or other applicable periods,
A-13
<PAGE>
and other terms and conditions as may be required or imposed by the Plan, the
Committee, the Board of Directors, tax law considerations or applicable
securities law considerations.
16. DESIGNATION OF BENEFICIARY.
--------------------------
A Participant may, with the consent of the Committee, designate a person
or persons to receive, in the event of death, any Award to which the Participant
would then be entitled. Such designation will be made upon forms supplied by
and delivered to the Holding Company and may be revoked in writing. If a
Participant fails effectively to designate a beneficiary, then the Participant's
estate will be deemed to be the beneficiary.
17. DILUTION AND OTHER ADJUSTMENTS.
------------------------------
In the event of any change in the outstanding shares of Common Stock by
reason of any stock dividend or split, recapitalization, merger, consolidation,
spin-off, reorganization, combination or exchange of shares, or other similar
corporate change, or other increase or decrease in such shares without receipt
or payment of consideration by the Holding Company, the Committee will make such
adjustments to previously granted Awards, to prevent dilution or enlargement of
the rights of the Participant, including any or all of the following:
(a) adjustments in the aggregate number or kind of shares of Common Stock
or other securities that may underlie future Awards under the Plan;
(b) adjustments in the aggregate number or kind of shares of Common Stock
or other securities underlying Awards already made under the Plan;
(c) adjustments in the purchase price of outstanding Incentive and/or
Non-statutory Stock Options, or any Limited Rights attached to such
Options.
No such adjustments may, however, materially change the value of benefits
available to a Participant under a previously granted Award. All awards under
this Plan shall be binding upon any successors or assigns of the Holding
Company.
18. TAX WITHHOLDING.
---------------
(a) Whenever under this Plan, cash or shares of Common Stock are to be
delivered upon exercise or payment of an Award or any other event with respect
to rights and benefits hereunder, the Committee shall be entitled to require as
a condition of delivery (i) that the Participant remit an amount sufficient to
satisfy all federal, state, and local withholding tax requirements related
thereto, (ii) that the withholding of such sums come from compensation otherwise
due to the Participant or from any shares of Common Stock due to the Participant
under this Plan or (iii) any combination of the foregoing provided, however,
that no amount shall be withheld from any cash payment or shares of Common Stock
relating to an Award which was transferred by the Participant in accordance with
this Plan.
A-14
<PAGE>
(b) If any disqualifying disposition described in Section 7(g) is made with
respect to shares of Common Stock acquired under an Incentive Stock Option
granted pursuant to this Plan, or any transfer described in Section 6(f) is
made, then the person making such disqualifying disposition, transfer, or
election shall remit to the Holding Company or its Affiliates an amount
sufficient to satisfy all federal, state, and local withholding taxes thereby
incurred; provided that, in lieu of or in addition to the foregoing, the Holding
Company or its Affiliates shall have the right to withhold such sums from
compensation otherwise due to the Participant, or, except in the case of any
transfer pursuant to Section 6(f), from any shares of Common Stock due to the
Participant under this Plan.
19. AMENDMENT OF THE PLAN.
---------------------
The Board of Directors may at any time, and from time to time, modify or
amend the Plan in any respect, prospectively or retroactively; provided however,
that provisions governing grants of Incentive Stock Options, unless permitted by
the rules and regulations or staff pronouncements promulgated under the Code
shall be submitted for shareholder approval to the extent required by such law,
regulation or interpretation.
Failure to ratify or approve amendments or modifications by shareholders
shall be effective only as to the specific amendment or modification requiring
such ratification. Other provisions, sections, and subsections of this Plan
will remain in full force and effect.
No such termination, modification or amendment may adversely affect the
rights of a Participant under an outstanding Award without the written
permission of such Participant.
20. EFFECTIVE DATE OF PLAN.
----------------------
The Plan became effective on October 16, 1996. All amendments are effective
upon approval by the Board of Directors, subject to shareholder ratification
when specifically required under the Plan or by applicable federal or state
statutes, rules or regulations. The failure to obtain shareholder approval for
such purposes will not effect the validity of other provisions of the Plan and
any Awards made under the Plan.
21. TERMINATION OF THE PLAN.
-----------------------
The right to grant Awards under the Plan will terminate upon the earlier
of: (i) ten (10) years after the Effective Date; (ii) the issuance of a number
of shares of Common Stock pursuant to the exercise of Options or the
distribution of Stock Awards which together with the exercise of Limited Rights
is equivalent to the maximum number of shares reserved under the Plan as set
forth in Section 4. The Board of Directors has the right to suspend or
terminate the Plan at any time, provided that no such action will, without the
consent of a Participant, adversely affect a Participant's vested rights under a
previously granted Award.
A-15
<PAGE>
22. APPLICABLE LAW.
--------------
The Plan will be administered in accordance with the laws of the State of
Delaware and applicable federal law.
23. COMPLIANCE WITH OTS CONVERSION REGULATIONS
------------------------------------------
Notwithstanding any other provision contained in this Plan:
(a) no Award granted prior to March 26, 1997, shall become vested or
exercisable at a rate in excess of 20% per year; provided, however,
that any such Award shall become fully vested or immediately
exercisable upon a Change in Control or in the event of a
Participant's termination of service due to death or Disability. The
Committee may also, at its discretion, modify the vesting or
exercisability schedule of any Award granted prior to March 26, 1997,
in connection with a Participant's Retirement;
(b) no Award granted to any individual employee may exceed 25% of the
total amount of Awards which may be granted under the Plan;
(c) no Award granted to any individual Outside Director may exceed 5% of
the total amount of Awards which may be granted under the Plan; and
(d) the aggregate amount of Awards granted to all Outside Directors may
not exceed 30% of the total amount of Awards which may be granted
under the Plan.
24. DELEGATION OF AUTHORITY
-----------------------
The Committee may delegate all authority for: the determination of forms of
payment to be made by or received by the Plan; the execution of Award
agreements; the determination of Fair Market Value; the determination of all
other aspects of administration of the plan to the executive officer(s) of the
Holding Company or the Association. The Committee may rely on the descriptions,
representations, reports and estimate provided to it by the management of the
Holding Company or the Association for determinations to be made pursuant to the
Plan, including the attainment of performance goals. However, only the
Committee or a portion of the Committee may certify the attainment of a
performance goal.
A-16
<PAGE>
[X] PLEASE MARK VOTES REVOCABLE PROXY
AS IN THIS EXAMPLE GA FINANCIAL, INC
<TABLE>
<S> <C> <C> <C> <C>
ANNUAL MEETING OF SHAREHOLDERS
APRIL 28, 1999 1. The election as With- For all
10:00 A.M. EASTERN TIME directors of all nominees For hold Except
listed (except as marked to [_] [_] [_]
The undersigned hereby appoints the official proxy the contrary below)
committee of the Board of Directors of GA Financial, Inc.
(the "Company"), each with full power of substitution, to Thomas E. Bugel David R. Wealz
act as proxies for the undersigned, and to vote all shares
of Common Stock of the Company which the undersigned is INSTRUCTION: To withhold authority to vote for any
entitled to vote only at the Annual Meeting individual nominee, mark "For All Except" and write that
of Shareholders, to be held on April 28, 1999, at nominee's name in the space provided below.
10:00 a.m, Eastern time, at the Bradley House,
5239 Brownsville Road, Pittsburg, Pennsylvania ------------------------------------------------------------------
15236, and at any and all adjournments thereof, with all
of the powers the undersigned would possess if 2. For ratification of
personally present at such meeting, as follows: certain amendments to the For Against Abstain
GA Financial, Inc. 1996 [_] [_] [_]
Stock-Based Incentive Plan.
3. The ratification at the For Against Abstain
appointment of KPMG LLP [_] [_] [_]
as independent auditors
of GA Financial, Inc. for
the fiscal year ending
December 31, 1999.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR"
EACH OF THE LISTED PROPOSALS.
THIS PROXY IS SOLICITED ON BEHALF OF 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,
Please be sure and sign and date ---------------- including whether or not to adjourn the meeting,
this Proxy in the box below. Date this proxy will be voted by those named in this proxy
- ---------------------------------------------------------------- in their best judgement. At the present time, the Board
of Directors knows of no other business to be presented
- ----Shareholder sign above----Co-holder (if any) sign above----- at the Annual Meeting.
................................................................................
</TABLE>
. Detach above card, date, sign and mail in postage 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 26, 1999 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 sign your full
title. If shares are held jointly, each holder may sign but only one signature
is required.
PLEASE COMPLETE, DATE, SIGN AND PROMPTLY MAIL THIS PROXY
IN THE ENCLOSED POSTAGE-PAID ENVELOPE
- -------------------------------------------------------------------------------
