<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

                                       1
<PAGE>
 
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
<PAGE>
 
    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

                                       6
<PAGE>
 
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
<PAGE>
 
  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>