10-Q 1 j0391501e10vq.txt GREAT AMERICAN FINANCIAL UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------- FORM 10-Q --------- (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30,2003 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________ TO _______________ COMMISSION FILE NUMBER 1-14154 GA FINANCIAL,INC. (Exact name of registrant as specified in its charter) DELAWARE 25-1780835 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 4750 CLAIRTON BOULEVARD 15236 PITTSBURGH,PENNSYLVANIA (Zip Code) (Address of principal executive offices) (412) 882-9946 (Registrant's telephone number,including area code) NOT APPLICABLE (Former name,former address,and former fiscal year,if changed since last report) ------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Exchange Act). Yes X No --- --- APPLICABLE ONLY TO CORPORATE ISSUERS: 5,025,092 shares of common stock,par value $0.01 per share,were outstanding at October 31,2003. GA Financial, Inc. Form 10-Q September 30, 2003 Contents

1 PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Financial Condition GA Financial, Inc.

The accompanying notes are an integral part of the consolidated financial statements. 1 Consolidated Statements of Income and Comprehensive Income GA Financial, Inc.

The accompanying notes are an integral part of the consolidated financial statements. 2 Consolidated Statement of Shareholders' Equity (Unaudited) GA Financial, Inc.

(1) Other comprehensive loss for the nine months ended September 30, 2003 is net of a tax benefit of $1,768. The accompanying notes are an integral part of the consolidated financial statements. 3 Consolidated Statements of Cash Flows GA Financial, Inc.

The accompanying notes are an integral part of the consolidated financial statements. 4 Notes to the Consolidated Financial Statements (Unaudited) GA Financial, Inc. NOTE 1. BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of GA Financial,Inc.(the "Company") and its subsidiaries, Great American Federal (the "Bank") and New Eagle Capital,Inc.,and the Bank's wholly owned subsidiaries,GA Financial Strategies,LLC, Steel City Investments,Inc.,and Great American Financial Services,Inc. Intercompany accounts and transactions have been eliminated in consolidation. The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States of America 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. In the opinion of the management of the Company,the accompanying consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of the financial position and results of operations for the periods presented.Certain information and note disclosures normally included in financial statements presented in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted.For comparative purposes, reclassifications have been made to certain amounts previously reported to conform with the current period presentation in the consolidated financial statements.It is suggested that the accompanying consolidated financial statements be read in conjunction with the Company's 2002 Annual Report to Shareholders and Annual Report on Form 10-K. NOTE 2. SUBSIDIARY/SEGMENT REPORTING The consolidated operating results of GA Financial,Inc.are presented as a single financial services segment.GA Financial,Inc.is the parent company of Great American Federal,a community bank and the Company's principal subsidiary,New Eagle Capital,Inc.,an investment company,and the Bank's wholly owned subsidiaries,GA Financial Strategies,LLC, which provides wealth management services,Steel City Investments,Inc., established in December 2002 to hold and manage investment securities, and Great American Financial Services,Inc.,currently inactive.GA Financial,Inc.and New Eagle Capital,Inc.,and the Bank's wholly owned subsidiary Steel City Investments,Inc.are incorporated in the state of Delaware.Great American Federal,is a federally chartered savings and loan institution while its wholly owned subsidiaries,GA Financial Strategies,LLC, and Great American Financial Services,Inc.are incorporated in the state of Pennsylvania. The following table sets forth selected financial data for the Company's subsidiaries,parent company,and consolidated results:

5 Notes to the Consolidated Financial Statements (Unaudited) GA Financial, Inc.

NOTE 3. SECURITIES The amortized cost and estimated fair value of available for sale and held to maturity securities are as follows:

6 Notes to the Consolidated Financial Statements (Unaudited) GA Financial, Inc.

NOTE 4. LOANS Loans consist of the following:

(1) Amounts for September 30, 2003 and December 31, 2002 are net of available funds for disbursement of $24.4 million and $21.6 million, respectively. The Company purchased, from local correspondent lenders, approximately $77.3 million and $38.2 million, for the nine months ended September 30, 2003 and 2002, respectively, of residential loans collateralized by single-family properties located within its primary market area. At September 30, 2003 and December 31, 2002, the Company had $2.6 million and $1.5 million in loans which were not accruing interest. The increase in nonperforming loans was due to the addition of an impaired commercial real estate loan that was performing and classified as "special mention" at December 31, 2002. Based on subsequent information the loan was downgraded to "substandard" and placed on nonaccrual status at March 31, 2003. The remaining nonperforming loans at September 30, 2003, consistent with December 31, 2002 were comprised of residential mortgages and consumer home equity loans. In addition, the Company had $37,000 and $34,000 of foreclosed assets at September 30, 2003 and December 31, 2002, respectively. The following table sets forth the changes in the allowance for loan losses for the nine months ended September 30, 2003:

The following table presents information regarding the Company's nonperforming assets for the dates indicated:

7 Notes to the Consolidated Financial Statements (Unaudited) GA Financial, Inc. NOTE 5. SUPPLEMENTARY CASH FLOW INFORMATION Cash paid for the nine months ended September 30, for interest and income taxes, was approximately $14.5 million and $2.3 million, respectively in 2003, and $17.9 million and $1.3 million, respectively in 2002. Noncash investing activities consisted of $272,000 of securities sold, not settled, and $129,000 related to the transfer of the Company's only held for trading security to the available for sale portfolio, for the nine months ended September 30, 2003. Additionally, there were $74,000 and $304,000 of loans transferred to foreclosed assets during the nine months ended September 30, 2003 and 2002, respectively. NOTE 6. EARNINGS PER SHARE Basic earnings per share ("EPS") is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. The calculation of basic and diluted earnings per share follows:

NOTE 7. STOCK-BASED COMPENSATION 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 options. Because the Company accounts for stock options using APB 25, no compensation expense has been recorded in the financial statements. Had compensation cost for these stock options been determined based on the fair value at the grant date consistent with the method of Statement of Financial Accounting Standards ("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:

NOTE 8. GUARANTEES The Company issues standby letters of credit in the normal course of business. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party. The Company is required to perform under a standby letter of credit when drawn upon by the guaranteed third party in the case of nonperformance by the Company's customer. The credit risk associated with standby letters of credit is essentially the same as that involved in extending loans to customers and is subject to normal credit policies. Collateral may be obtained based on management's credit assessment of the customer. The maximum potential amount of future payments the Company could be required to make under these standby letters of credit at September 30, 2003 was $2.6 million. No liability has been recognized by the Company for these obligations. There are no recourse provisions that would enable the Company to recover any amounts from third parties. NOTE 9. SUBSEQUENT EVENTS On October 29, 2003, the Board of Directors declared a cash dividend of $0.20 per share to shareholders of record on November 11, 2003, payable on November 21, 2003. 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Unaudited) GA Financial, Inc. THIS DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS, NOTES, AND TABLES INCLUDED IN THIS REPORT. OVERVIEW GA Financial, Inc. (the "Company") was incorporated in December 1995, and is the holding company for Great American Federal (the "Bank"), a community bank and the Company's principal subsidiary, New Eagle Capital, Inc., an investment company, and the Bank's wholly owned subsidiaries, GA Financial Strategies, LLC, which provides wealth management services, Steel City Investments, Inc. established in December 2002 to hold and manage investment securities, and Great American Financial Services, Inc., currently inactive. In 1996, the Bank 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 Bank. The Company currently transacts banking activities through Great American Federal. The Bank, serving customers for over 85 years, operates its administrative office in Whitehall, Pennsylvania and 12 community offices in Allegheny County located in southwestern Pennsylvania. Through these office locations, the Bank offers a broad array of consumer and commercial loan, deposit, and wealth management products and services. In addition to conducting community banking activities, the Bank invests in various marketable securities. New Eagle Capital, Inc., the Company's other subsidiary, operating as an investment company in Wilmington, Delaware, also invests in various marketable securities as well as marketable equity securities. 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, such as loans and securities, and the interest expense incurred on interest-bearing liabilities, such as deposits and borrowed funds. The Company also generates noninterest income, such as service fees, gains on the sale of securities and education loans, earnings on bank owned life insurance, wealth management fees, and other miscellaneous noninterest income. The Company's operating expenses consist primarily of compensation and employee benefits, occupancy, furniture and equipment, marketing, 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. Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of the consolidated financial statements. The Company's most critical accounting policy relates to the Company's allowance for loan losses, which reflects the estimated losses resulting from the inability of the Company's borrowers to make required loan payments. If the financial condition of the Company's borrowers were to deteriorate, resulting in an impairment of their ability to make payments, the Company's estimates would be updated, and additional provisions for loan losses may be required. Further discussion of the estimates used in determining the allowance for loan losses appears under "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Allowance for Loan Losses" on page 17 and "Notes to the Consolidated Financial Statements -- Note 1. Accounting Policies -- Allowance For Loan Losses" on pages 30 and 31 of the Company's 2002 Annual Report to Shareholders. AVAILABLE INFORMATION The Company makes available free of charge copies of its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the Securities and Exchange Commission. This information is available without charge via the Company's Internet website at www.greatamericanfederal.com. REVIEW OF CONSOLIDATED FINANCIAL CONDITION AT SEPTEMBER 30, 2003 AND DECEMBER 31, 2002 ASSETS The Company's total assets were $883.0 million at September 30, 2003, an increase of $24.9 million or 2.9% compared to total assets of $858.0 million at December 31, 2002. Total loans increased $19.6 million or 4.0% to $503.7 million at September 30, 2003 primarily due to increases in commercial and residential construction and development, commercial real estate, consumer, and multi-family loans. This increase was partially offset by the sale of a substantial portion of the education loan portfolio, and a decrease in residential loans due to refinance activity. The change in loan composition is consistent with the Company's strategy to grow the commercial loan portfolio. Prepaid expenses and other assets increased $6.6 million or 38.9% to $23.5 million at September 30, 2003 primarily due to the purchase of $5.2 million of bank owned life insurance policies on key officers. The Company had $272,000 of securities sold, not settled at September 30, 2003, as compared to $992,000 of securities sold, not settled at December 31, 2002. The held for trading securities portfolio decreased by $129,000 at September 30, 2003 due to the reclassification of the held for trading portfolio, which consisted of one FNMA equity security, to the available for sale securities portfolio. LIABILITIES Total liabilities were $788.4 million at September 30, 2003, an increase of $30.9 million or 4.1% compared to total liabilities of $757.5 million at December 31, 2002. Total deposits increased $21.3 million or 4.1% to $545.4 million. The increase was primarily from strong growth in money market deposit 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Unaudited) GA Financial, Inc. accounts and modest growth in noninterest-bearing checking accounts. This increase was partially offset by a decline in certificates of deposit and savings accounts. This activity is consistent with the Company's strategic focus on restructuring the deposit mix from time deposits to lower cost transaction deposits, which was further evidenced by the introduction of a new free checking account product in September 2003. Borrowed funds increased $9.2 million or 4.1% to $230.7 million. The increase was primarily related to short-term borrowings, which were utilized to fund loans and purchase securities. Although the Company did pay-off maturing FHLB advances during the period, these borrowings were renewed as short-term borrowings and continue to be evaluated based on the needs of the Company. Additionally in August 2003, the Company restructured, without penalty, a $17 million FHLB fixed-rate advance with a cost of 528 basis points and a maturity date of February 2004. This restructuring reduced the borrowing cost to 294 basis points and extended the maturity date to August 2005. Accrued interest payable increased $3.4 million or 210.0% to $5.0 million at September 30, 2003 primarily due to the timing of accrued interest payable on deposit accounts and borrowed funds. Other liabilities decreased $2.8 million or 35.7% to $5.1 million. This decrease was primarily the result of a $1.8 million decline in the deferred tax liability recorded due to the Company's lower net unrealized gain on the available for sale security portfolio. SHAREHOLDERS' EQUITY Shareholders' equity decreased $6.0 million or 5.9% to $94.6 million at September 30, 2003. This was due primarily to the repurchase of 214,900 shares of common stock totaling $5.5 million (under the Company's 5% repurchase program, 42,163 shares remain to be purchased at September 30, 2003), a decrease in accumulated comprehensive income of $3.0 million, and the payment of dividends of $2.9 million. This decrease was partially offset by net income of $5.2 million.

(1) Includes unamortized discounts and premiums. (2) Includes municipal obligations; yield and interest are stated on a taxable equivalent basis. (3) Amount is net of deferred costs (fees), undisbursed funds, discounts and premiums, estimated allowance for loan losses, and includes education loans held for sale, and nonperforming loans. (4) Interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities on a taxable equivalent basis. (5) Net interest margin represents net interest income on a taxable equivalent basis divided by average interest-earning assets. 11 Management's Discussion and Analysis of Financial Condition and Results of Operations (Unaudited) GA Financial, Inc. REVIEW OF THE CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 NET INCOME Net income for the three months ended September 30, 2003 decreased $79,000 or 4.3% as compared to the three months ended September 30, 2002. Changes in the components of net income are discussed herein. INTEREST INCOME Total interest income decreased $1.3 million ($1.4 million on a taxable equivalent basis) or 10.1% to $11.5 million for the three months ended September 30, 2003. This was primarily the result of a decrease of 81 basis points in the average yield on average interest-earning assets, which was partially offset by an increase of $23.0 million in average interest-earning assets. Interest income on loans decreased $959,000 or 11.1% due to a decrease in the average yield of 70 basis points and a decrease in the average balance of $7.1 million. Taxable equivalent interest on securities decreased $277,000 or 6.5% due to a decrease in the average yield of 110 basis points, which was partially offset by an increase in the average balance of $46.6 million. Interest income on interest-earning deposits decreased $94,000 or 81.0% due to a decrease in the average yield of 76 basis points and a decrease in the average balance of $19.3 million. The decrease in interest-earning deposits was primarily due to the movement of these funds into higher yielding loans and securities. INTEREST EXPENSE Total interest expense decreased $1.4 million or 20.5% to $5.5 million for the three months ended September 30, 2003. This was primarily the result of a decrease of 94 basis points in the average cost on average interest-bearing liabilities, which was partially offset by an increase of $35.2 million in the average balance. The interest expense on interest-bearing deposits decreased $1.3 million or 30.7%. This was the result of a decrease in the average cost of 118 basis points, which was partially offset by an increase in the average balance of $26.8 million. This activity is consistent with the Company's strategic focus on restructuring deposit accounts from time deposits to lower cost transaction deposits. Interest expense on borrowed funds decreased $123,000 or 4.5% due primarily to a decrease in the average cost of 38 basis points, which was partially offset by an increase in the average balance of $7.8 million. In August 2003, the Company restructured, without penalty, a $17 million FHLB fixed-rate advance with a cost of 528 basis points and a maturity date of February 2004. This restructuring reduced the borrowing cost to 294 basis points and extended the maturity date to August 2005. The restructuring resulted in cost savings of $66,000 for the three months ended September 30, 2003. PROVISION FOR LOAN LOSSES The provision for loan losses for the three months ended September 30, 2003 was $442,000 as compared to $135,000 for the three months ended September 30, 2002. The allowance for loan losses to loans and nonperforming assets was 0.87% and 164%, respectively at September 30, 2003, as compared to 0.80% and 259%, respectively at December 31, 2002 and 0.78% and 245%, respectively at September 30, 2002. The current quarter provision was primarily influenced by strong loan growth specifically in commercial real estate, multi-family, and commercial and residential construction and development loans. Based on the current risk ratings and increase in outstandings, the Company recorded additional provision to maintain an appropriate level of coverage. Nonperforming loans at September 30, 2003 were $2.6 million as compared to $1.5 million for the respective periods ended December 31, 2002 and September 30, 2002. The increase in nonperforming loans was primarily due to the addition of a commercial real estate loan with a balance of $1.0 million, which was downgraded from "special mention" to "substandard" at March 31, 2003. The remaining balance of nonperforming loans were comprised of residential mortgages and consumer home equity loans. The nonperforming loans for December 31, 2002 and September 30, 2002, were comprised primarily of residential mortgages and consumer home equity loans. The Company monitors all nonperforming loans which could impact the provision for loan losses. The allowance for loan losses is maintained at an amount management considers appropriate to cover estimated losses on loans which are deemed probable based on information currently known to management. While management believes the Company's allowance for loan losses is sufficient to cover losses in its loan portfolio at this time, no assurances can be given that the Company's level of allowance for loan losses will be sufficient to cover future loan losses incurred by the Company, or that future adjustments to the allowance for loan losses will not be necessary if economic and other conditions differ substantially from the economic and other conditions analyzed by management to determine the current level of the allowance for loan losses. NONINTEREST INCOME Total noninterest income increased $350,000 or 32.4% for the three months ended September 30, 2003. This increase was primarily from the recognition of an additional $383,000 of net gains on the sale of available for sale securities. Additionally, there was an increase of $24,000 of earnings on bank owned life insurance due to the purchase of additional policies on key officers in July 2003 and a $21,000 decrease in the net loss position of the held for trading security which was transferred to the available for sale portfolio in August 2003. This increase was partially offset by decreases of $47,000 of gains on the sale of education loans and $37,000 in service fees. NONINTEREST EXPENSE Total noninterest expense increased $240,000 or 5.6% for the three months ended September 30, 2003. This increase was primarily related to $123,000 of other noninterest expense recorded in connection with the contested election of Directors at the Company's 2003 Annual Meeting of Shareholders and related subsequent litigation. There was also an increase of $84,000 of compensation and employee benefits expense related to the Company's Employee Stock Ownership Plan for which expense is recorded based on the average fair value of the Company's stock and the number of shares earned and committed to be released. Additionally, there was an increase of $71,000 in furniture and equipment, which was primarily related to the Company's first quarter 2003 conversion to its new core operating system whereby licensing fees and depreciation on related equipment were recorded. The overall increase for the current three months ended is net of $173,000 in compensation expense recorded in the three months ended September 30, 2002, due to changes in the Company's management structure. PROVISION FOR INCOME TAXES The provision for income taxes increased $22,000 or 3.6% to $639,000 for the three months ended September 30, 2003. The effective tax rate for the three months ended September 30, 2003 was 26.8% as compared to 25.3% for the three months ended September 30, 2002. The increase in the effective tax rate was the result of higher levels of taxable income. 12 Management's Discussion and Analysis of Financial Condition and Results of Operations (Unaudited) GA Financial, Inc. REVIEW OF CONSOLIDATED RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 NET INCOME Net income for the nine months ended September 30, 2003 increased $358,000 or 7.4% as compared to the nine months ended September 30, 2002. Changes in the components of net income are discussed herein. INTEREST INCOME Total interest income decreased $3.2 million ($3.4 million on a taxable equivalent basis) or 8.4% to $35.2 million for the nine months ended September 30, 2003. This was primarily the result of a decrease of 61 basis points in the average yield on average interest-earning assets, which was partially offset by an increase of $9.3 million in average interest-earning assets. Interest income on loans decreased $2.2 million or 8.8% due to a decrease in the average yield of 55 basis points and a decrease in the average balance of $6.1 million. Taxable equivalent interest on securities decreased $889,000 or 6.6% due to a decrease in the average yield of 75 basis points, which was partially offset by an increase in the average balance of $23.9 million. Interest income on interest-earning deposits decreased $198,000 or 55.9% due to a decrease in the average yield of 53 basis points and a decrease in the average balance of $10.1 million. The decrease in interest-earning deposits was primarily due to the movement of these funds into higher yielding loans and securities. INTEREST EXPENSE Total interest expense decreased $3.8 million or 17.5% to $17.9 million for the nine months ended September 30, 2003. This was primarily the result of a decrease of 76 basis points in the average cost on average interest-bearing liabilities, which was partially offset by an increase of $13.5 million in the average balance. The interest expense on interest-bearing deposits decreased $3.1 million or 23.7%. This was the result of a decrease in the average cost of 90 basis points, which was partially offset by an increase in the average balance of $11.7 million. This activity is consistent with the Company's strategic focus on restructuring deposit accounts from time deposits to lower cost transaction deposits. Interest expense on borrowed funds decreased $672,000 or 7.9% due primarily to a decrease in the average cost of 44 basis points, which was partially offset by an increase in the average balance of $1.6 million. In August 2003, the Company restructured, without penalty, a $17 million FHLB fixed-rate advance with a cost of 528 basis points and a maturity date of February 2004. This restructuring reduced borrowing cost to 294 basis points and extended the maturity date to August 2005. The restructuring resulted in cost savings of $66,000 for nine months ended September 30, 2003. PROVISION FOR LOAN LOSSES The provision for loan losses for the nine months ended September 30, 2003 was $865,000 as compared to $690,000 for the nine months ended September 30, 2002. The allowance for loan losses to loans and nonperforming assets was 0.87% and 164%, respectively at September 30, 2003, as compared to 0.80% and 259%, respectively at December 31, 2002 and 0.78% and 245%, respectively at September 30, 2002. The current year provision was primarily influenced by strong loan growth specifically in commercial real estate, multi-family, and commercial and residential construction/development loans. Based on the current risk ratings and increase in outstandings, the Company recorded additional provision to maintain an appropriate level of coverage. In addition, the provision was influenced by a charge-off of $221,000 against the allowance for loan losses for the three months ended March 31, 2003. This charge-off was the result of certain information obtained by the Company relating to a $1.3 million commercial real estate loan, which was performing and classified as "special mention" at December 31, 2002. Based on subsequent information, the loan was downgraded to "substandard" and placed on nonaccrual status at March 31, 2003. Nonperforming loans at September 30, 2003 were $2.6 million as compared to $1.5 million for the respective periods ended December 31, 2002 and September 30, 2002. The increase in nonperforming loans was primarily due to the addition of the commercial real estate loan with a balance of $1.0 million, which was previously noted. The remaining balance of nonperforming loans were comprised of residential mortgages and consumer home equity loans. The nonperforming loans for December 31, 2002 and September 30, 2002, were comprised primarily of residential mortgages and consumer home equity loans. The Company monitors all nonperforming loans which could impact the provision for loan losses. The allowance for loan losses is maintained at an amount management considers appropriate to cover estimated losses on loans which are deemed probable based on information currently known to management. While management believes the Company's allowance for loan losses is sufficient to cover losses in its loan portfolio at this time, no assurances can be given that the Company's level of allowance for loan losses will be sufficient to cover future loan losses incurred by the Company, or that future adjustments to the allowance for loan losses will not be necessary if economic and other conditions differ substantially from the economic and other conditions analyzed by management to determine the current level of the allowance for loan losses. NONINTEREST INCOME Total noninterest income increased $702,000 or 20.5% for the nine months ended September 30, 2003. This increase was primarily from the recognition of an additional $1.5 million of net gains on the sale of available for sale securities. There were also increases of $77,000 in other noninterest income, $38,000 of gains on the sale of education loans in the first quarter of 2003, $27,000 in earnings on bank owned life insurance due to the purchase of additional policies on key officers in July 2003, and a decrease of $40,000 in the net loss position of the held for trading security, which was transferred to the available for sale portfolio in August 2003. This increase was offset by a decline of $230,000 in service fees, and several significant items that occurred in the nine months ended September 30, 2002. In that period, the Company recorded a $905,000 gain on the sale of its North Huntingdon community branch office, which was offset by a $141,000 charge to record an other-than-temporary decline in the valuation of certain investment securities. NONINTEREST EXPENSE Total noninterest expense increased $364,000 or 2.8% for the nine months ended September 30, 2003. The increase was primarily related to $272,000 of compensation and employee benefits expense related to the Company's Employee Stock Ownership Plan for which compensation expense is recorded based on the average fair value of the Company's stock and the number of shares earned and committed to be released. Also, the Company incurred $308,000 of charges included in marketing and other noninterest expense recorded in connection with the contested 13 Management's Discussion and Analysis of Financial Condition and Results of Operations (Unaudited) GA Financial, Inc. election of Directors at the Company's 2003 Annual Meeting of Shareholders and the related subsequent litigation. Additionally, the increase of $217,000 in furniture and equipment was primarily related to the Company's first quarter 2003 conversion to its new core operating system whereby licensing fees and depreciation on related equipment were recorded. The overall increase for the current nine months ended is net of several significant items that were recorded for the nine months ended September 30, 2002. In that period, the Company recorded a $208,000 loss on the closure of the Company's North Versailles Wal-Mart based satellite branch office, $141,000 of compensation expense related to branch system staffing reductions, and $173,000 of compensation expense due to changes in the Company's management structure. PROVISION FOR INCOME TAXES The provision for income taxes increased $362,000 or 25.6% to $1.8 million for the nine months ended September 30, 2003. The effective tax rate for the nine months ended September 30, 2003 was 25.5% as compared to 22.6% for the nine months ended September 30, 2002. The increase in the effective tax rate was the result of a combination of higher pre-tax and taxable income. OTHER MATTERS LIQUIDITY RESOURCES The Company's primary sources of funds are deposits, repayments of loans and securities, sales, calls and maturities of securities, advances from the FHLB, and other borrowed funds. While scheduled maturities of securities and the amortization of loans are predictable sources of funds, deposit flows and prepayments on mortgages, and mortgage-backed and related securities are greatly influenced by market interest rates, economic conditions, and competition. Liquidity can be analyzed by utilizing the Consolidated Statements of Cash Flows. Net cash provided by operating activities was $3.6 million. Net cash used in investing activities was $26.2 million. Net cash provided by financing activities was $21.9 million. Overall, cash and cash equivalents decreased $683,000 for the nine months ended September 30, 2003. Management believes the Company has sufficient liquidity to meet current obligations to borrowers, depositors, debt holders, and others. CAPITAL RESOURCES The Company is not required to maintain any minimum level of capital; however, the Bank is subject to various regulatory capital requirements administered by the Office of Thrift Supervision ("OTS"). At September 30, 2003, the Bank had exceeded the OTS requirements for tier I core (leverage), tier I risk-based, total risk-based, and tangible capital. The OTS requires the Bank to maintain a minimum 4.00% tier I core (leverage) capital ratio (expressed as a percentage of adjusted total assets), a minimum tier I risk-based capital ratio of 4.00%, total risk-based capital ratio of 8.00% (both expressed as a percentage of risk-weighted assets, which includes off-balance sheet items), and a minimum tangible capital ratio of 1.50% of tangible assets, as defined by the OTS. The well-capitalized requirement for tier I core (leverage), tier I risk-based, and total risk-based ratios is 5.00%, 6.00%, and 10.00%, respectively. The Bank has consistently maintained all regulatory capital ratios at or above the well capitalized standards with tier I core (leverage) at 9.62%, tier I risk-based at 16.99%, total risk-based at 18.06%, and tangible at 9.62% at September 30, 2003. OTHER The Company announced in the first quarter of 2002 that it selected Kirchman Bankway(TM) as its core operating system solution. The Company made this investment to support its longer term profitability goals, enhance its speed to market in developing and introducing new competitive products, and improve its already high level of customer service. The conversion to the new system was completed in the first quarter of 2003. NEW ACCOUNTING PRONOUNCEMENTS In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The provisions of SFAS No. 146 are effective for exit and disposal activities that are initiated after December 31, 2002. The adoption of SFAS No. 146 did not have a material effect on the financial position, results of operations, or liquidity of the Company. In November 2002, the FASB issued Interpretation No. 45, ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." This interpretation elaborates on the existing disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued. This interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements in FIN 45 are effective for financial statements of interim and annual periods ending after December 15, 2002. The adoption of FIN 45 did not have a material effect on the financial position, results of operations, or liquidity of the Company. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure," an amendment of SFAS No.123. This statement amends SFAS No. 123 to provide alternative methods of transition for voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure requirements of SFAS No. 123 to require prominent disclosure on both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. The transition alternatives of SFAS No. 148 are available for fiscal years ending after December 15, 2002. The adoption of SFAS No. 148 did not have a material effect on the financial position, results of operations, or liquidity of the Company. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement is generally effective 14 Management's Discussion and Analysis of Financial Condition and Results of Operations (Unaudited) GA Financial, Inc. for contracts entered into or modified after June 30, 2003. The adoption of SFAS 149 did not have a material effect on the financial position, results of operations, or liquidity of the Company. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. Some of the provisions of this Statement are consistent with the current definition of liabilities in FASB Concepts Statement No. 6, "Elements of Financial Statements." The remaining provisions of this Statement are consistent with the Board's proposal to revise that definition to encompass certain obligations that a reporting entity can or must settle by issuing its own equity shares, depending on the nature of the relationship established between the holder and the issuer. This Statement is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material effect on the financial position, results of operations, or liquidity of the Company. FORWARD-LOOKING STATEMENTS This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identified by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project," or similar expressions. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company include, but are not limited to: changes in interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company's market area, and accounting principles and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law and regulation, the Company does not undertake--and specifically disclaims any obligation--to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Item 3. Quantitative and Qualitative Disclosures About Market Risk GA Financial, Inc. Management is responsible for monitoring and limiting the Company's exposure to interest rate risk within established guidelines while maximizing net interest income. The Company will continue to monitor its interest rate sensitivity 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. 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 appropriate level of risk given the Company's business strategy, operating environment, capital and liquidity requirements and performance objectives, and manage the risk consistent with Board of Director approved guidelines. Through such management, the Company monitors its interest rate risk and seeks to reduce the vulnerability of its operations to changes in interest rates. The Company's Board of Directors has established an Asset/Liability Management Committee, which is responsible for reviewing its asset/liability policies, interest rate risk position, liquidity and 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. In recent years, the Company has utilized the following strategies to manage interest rate risk: (1) purchasing adjustable interest rate and shorter term fixed-rate mortgage-backed and related securities; (2) investing in shorter term fixed-rate corporate debt and government agency bonds or in such types of bonds with adjustable interest rates; (3) originating shorter term and adjustable interest rate commercial, residential mortgage, and consumer loan products; and (4) emphasizing transaction and longer term time deposits. To manage the interest rate risk of the Company, the Board of Directors has also established parameters relating to the types of loans the Company may originate/purchase and 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. 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 investing, lending, deposit, and borrowing activities. 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 results of operations. 15 Management's Discussion and Analysis of Financial Condition and Results of Operations (Unaudited) GA Financial, Inc. Item 4. Controls and Procedures GA Financial, Inc. The Company's management,including the Company's principal executive officer and principal financial officer,have evaluated the effectiveness of the Company's "disclosure controls and procedures," as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, ("Exchange Act"). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission ("SEC") (1) is recorded, processed,summarized and reported within the time periods specified in the SEC's rules and forms, and (2) is accumulated and communicated to the Company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, no change in the Company's internal control over financial reporting occurred during the three months ended September 30, 2003 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 16 PART II. OTHER INFORMATION GA Financial, Inc. Item 1. Legal Proceedings The Company and John M. Kish, the Chairman of the Board and Chief Executive Officer, were named as Defendants in a lawsuit filed in the Court of Chancery of the State of Delaware in and for New Castle County on June 12, 2003. The lawsuit was filed by Seidman & Associates, LLC and Lawerence B. Seidman, the Plaintiffs. The basis of the lawsuit was to overturn the certified results of the Company's April 23, 2003 Annual Meeting of Shareholders. The independent inspector of election for the meeting certified that John M. Kish and Darrell J. Hess were elected as Directors to serve three-year terms expiring in 2006. Mr. Seidman, the nominee of the Plaintiffs was not elected. The lawsuit asked the court to declare Mr. Seidman elected a director in place of Mr. Kish. On October 7, 2003, the Court of Chancery, following a trial on the merits, dismissed with prejudice the lawsuit. In dismissing the Complaint with prejudice, the Court rejected all of Seidman's claims and confirmed that Mr. Kish was properly elected director at the Annual Meeting. The Company is not involved in any other pending legal proceedings other than routine legal proceedings 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, results of operations, and cash flows. Item 2. Changes in Securities and Use of Proceeds None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 3.1 Certificate of Incorporation of GA Financial, Inc.(1) 3.2 Amended Bylaws of GA Financial, Inc.(2) 4.0 Stock Certificates of GA Financial, Inc.(1) 11.0 Computation of Earnings per Share. This is incorporated by reference to Note 6 of the Notes to the Consolidated Financial Statements. 31.1 Rule 13a-14(a)/15d-14(a) Chief Executive Officer Certification. 31.2 Rule 13a-14(a)/15d-14(a) Chief Financial Officer Certification. 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K: During the third quarter of 2003, the Company filed or furnished the following Current Report on Form 8-K. (1) A report filed August 4, 2003, which included, under Items 7 and 12, the Company's press release announcing financial results for the quarter ended June 30, 2003. (1) 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. (2) Incorporated by reference into this document from the Company's Form 10-Q filed on November 15, 1999. 17 SIGNATURES GA Financial, Inc. Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date November 14, 2003 ----------------------------------------------------------- GA Financial, Inc. ----------------------------------------------------------- (Registrant) By /s/ John M. Kish ----------------------------------------------------------- John M. Kish Chairman of the Board and Chief Executive Officer (Principal Executive Officer) By /s/ James V. Dionise ----------------------------------------------------------- James V. Dionise Chief Financial Officer and Secretary (Principal Financial and Accounting Officer) 18

GA FINANCIAL INC/PA 10-Q