<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, 1996
                         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 $132,808,304, based upon the last sales price as listed on
The American Stock Exchange for March 4, 1997.

     The number of shares of Common Stock outstanding as of March 4, 1997 is:
8,455,000.
                      DOCUMENTS INCORPORATED BY REFERENCE

     PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED DECEMBER
31, 1996, ARE INCORPORATED BY REFERENCE INTO PART II OF THIS FORM 10-K.

     PORTIONS OF THE PROXY STATEMENT FOR THE 1997 ANNUAL MEETING OF SHAREHOLDERS
ARE INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-K.
<PAGE>
 
                                     INDEX

                                                               PAGE
                                     PART I
 
Item 1.    Business...........................................   1

Additional Item. Executive Officers of the Registrant.........  42

Item 2.    Properties.........................................  43

Item 3.    Legal Proceedings..................................  44

Item 4.    Submission of Matters to a Vote of Security Holders  44

                                    PART II

Item 5.    Market for Registrant's Common Equity and Related
           Stockholder Matters................................  44

Item 6.    Selected Financial Data............................  44

Item 7.    Management's Discussion and Analysis of Financial
           Condition and Results of Operations................  45

Item 8.    Financial Statements and Supplementary Data........  45

Item 9.    Changes in and Disagreements with Accountants
           on Accounting and Financial Disclosure.............  45

                                    PART III

Item 10.    Directors and Executive Officers of the 
            Registrant........................................  45

Item 11.    Executive Compensation............................  45

Item 12.    Security Ownership of Certain Beneficial Owners
            and Management....................................  45

Item 13.    Certain Relationships and Related Transactions....  45

                                    PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports
          on Form 8-K.........................................  46

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, 1996, the Company had total assets of
$634.0 million, total deposits of $449.6 million and total stockholders' equity
of $122.4 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.

     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, 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.

                                       1
<PAGE>
 
     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
Electric Corp. and Aluminum Company of America.  The largest employers in
Pittsburgh, by the number of local employees, include Westinghouse, USAir, 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, 1996, the
Association had total loans outstanding of $234.9 million, of which $178.2
million were one- to four-family residential mortgage loans, or 75.9% of the
Association's total loans.  At such date, the remainder of the Association's
loan portfolio consisted of $37.6 million of consumer loans, or 16.0% of total
loans; $6.7 million of multi-family residential loans, or 2.9% of total loans;
$3.5 million of construction and development loans, or 1.5% of total loans; $5.1
million of commercial real estate loans, or 2.1% of total loans; and $3.8
million of other loans, or 1.6% of total loans.  At that same date, 2.3% of the
Association's mortgage loans had adjustable interest rates.  Due, in part, to
the decline in the local economy and a corresponding decline in demand for
mortgage loans secured by one- to four-family residential properties located in
the Association's market area, the Association's one- to four-family mortgage
loan portfolio has decreased from $150.6 million, or 35.3% of total assets, at
December 31, 1990 to $178.2 million, or 28.1% of total assets, at December 31,
1996. 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, 1996, the Association
purchased $71.2 million of such loans primarily secured by properties located in
Pennsylvania, Ohio, Delaware and New York.  Additionally, the Association
intends to expand the number of entities from which it purchases such loans and
the geographic areas in which the properties securing such loans are located, to
include areas of Maryland, Virginia, North Carolina, South Carolina and the
District of Columbia.

     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,                                      
                           --------------------------------------------------------------------------------------------------  
                                    1996                     1995                     1994                     1993     
                           ---------------------     ---------------------     ---------------------     --------------------  
                                        PERCENT                   PERCENT                   PERCENT                   PERCENT  
                             AMOUNT     OF TOTAL     AMOUNT       OF TOTAL     AMOUNT       OF TOTAL     AMOUNT       OF TOTAL 
                           --------     --------     ------       --------     ------       --------     ------       -------- 
<S>                          <C>         <C>        <C>             <C>       <C>            <C>        <C>            <C>    
Mortgage loans:                                                                                                               
 One-to four-family........  $178,234     75.89%    $122,509        66.79%    $105,419        67.15%    $103,190        67.48% 
 Multi-family..............     6,727      2.87        7,208         3.93        8,259         5.26        8,364         5.47  
 Commercial................     5,053      2.15        3,290         1.79        2,043         1.30        2,604         1.70  
 Construction and                                                                                                             
     development...........     3,545      1.51        5,891         3.21        4,830         3.08        8,177         5.35  
Consumer loans:                                                                                                               
 Home equity...............    22,153      9.43       20,151        10.99       17,808        11.34       16,518        10.80  
 Education.................    15,383      6.55       20,766        11.32       14,680         9.35       10,151         6.64  
Other:                                                                                                                        
 Unsecured personal loans..     1,534      0.65        1,250         0.68        1,298         0.83        1,376         0.90  
 Loans on savings accounts.     2,062      0.88        2,159         1.18        2,419         1.54        2,176         1.42  
 Other loans...............       164      0.07          199         0.11          230         0.15          368         0.24  
                             --------    ------     --------       ------     --------       ------     --------       ------  
      Total loans..........   234,855    100.00%     183,423       100.00%     156,986       100.00%     152,924       100.00% 
                             --------    ======     --------       ======     --------       ======     --------       ======  
Less:                                                                                                                         
 Undisbursed loan funds....      (684)                (1,363)                   (1,825)                   (5,380)              
 Unamortized discounts, net        --                     --                        --                        --               
 Deferred loan fees........    (1,381)                  (963)                     (738)                     (675)              
 Allowance for loan losses.    (1,031)                  (822)                     (850)                     (846)              
                             --------               --------                  --------                  --------               
      Total loans, net.....  $231,759               $180,275                  $153,573                  $146,023               
                             ========               ========                  ========                  ========            
<CAPTION> 
                                    AT DECEMBER 31,
                                          1992             
                                -----------------------   
                                               PERCENT     
                                  AMOUNT       OF TOTAL    
                                 ---------    ---------    
<S>                             <C>           <C>                                                            
Mortgage loans:                                            
 One- to four-family........    $124,714        73.52%     
 Multi-family...............       9,855         5.81      
 Commercial.................       2,601         1.53      
 Construction and                                          
     development............       8,128                   
Consumer loans:                                            
 Home equity................      13,853         8.17      
 Education..................       6,378         3.76      
Other:                                                     
 Unsecured personal loans...       1,406         0.83      
 Loans on savings accounts..       2,280         1.34      
 Other loans................         419         0.25      
                                --------       ------      
      Total loans...........     169,634       100.00%     
                                --------       ======
Less:                                                      
 Undisbursed loan funds.....      (4,526)                  
 Unamortized discounts, net.          --                   
 Deferred loan fees.........        (857)                  
 Allowance for loan losses..        (750)                  
                                --------                   
      Total loans, net......    $163,501                    
                                ========
</TABLE>

                                       3
<PAGE>
 
     Loan Maturity.  The following table shows the remaining contractual
maturity of the Association's loans at December 31, 1996.  At December 31, 1996,
all of the Association's 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 $21.8
million, $26.9 million and $31.2 million for the years ended December 31, 1996,
1995, and 1994, respectively.

<TABLE>
<CAPTION>
 
 
                                                                   AT DECEMBER 31, 1996
                                       --------------------------------------------------------------------------
                                         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......................  $    198  $  656      $   22      $1,423     $    82  $2,066    $  4,447
                                         --------  ------      ------      ------     -------  ------    --------
 After one year:
  More than one year to three years....       760     283          54         730          37      77       1,941
  More than three years to five years..     2,114     300          13          --      19,621   1,617      23,665
  More than five years to 10 years.....    12,069     654       2,607          --      16,686      --      32,016
  More than 10 years to 20 years.......    35,451   4,834         535         385       1,110      --      42,315
  More than 20 years...................   127,642      --       1,822       1,007          --      --     130,471
                                         --------  ------      ------      ------     -------  ------    --------
 
  Total due after December 31, 1997....   178,036   6,071       5,031       2,122      37,454   1,694     230,408
                                         --------  ------      ------      ------     -------  ------    --------
 
  Total amount due.....................  $178,234  $6,727      $5,053      $3,545     $37,536  $3,760    $234,855
                                         ========  ======      ======      ======     =======  ======    ========
    Less:
     Undisbursed loan funds..........................................................................        (684)
     Deferred loan fees, net.........................................................................      (1,381)
     Allowance for loan
         losses......................................................................................      (1,031)
                                                                                                         --------
  Total loans, net...................................................................................    $231,759
                                                                                                         ========
</TABLE>

                                       4
<PAGE>
 
     The following table sets forth at December 31, 1996 the dollar amount of
loans contractually due after December 31, 1997, and whether such loans have
fixed interest rates or adjustable interest rates.
<TABLE> 
<CAPTION> 
 
                                            DUE AFTER DECEMBER 31, 1997
                                           -----------------------------
                                            FIXED    ADJUSTABLE   TOTAL
                                           -------  ------------ -------
                                                   (IN THOUSANDS)
Mortgage loans:
<S>                                        <C>      <C>          <C> 
  One- to four-family...................   $174,004      $4,032  $178,036

  Multi-family..........................      6,071          --     6,071

  Construction and development..........      2,122          --     2,122

  Commercial............................      4,946          85     5,031

Consumer loans:

  Home equity...........................     20,670       1,401    22,071

  Education.............................     15,383          --    15,383

Other Loans:

  Unsecured personal loans..............        741         789     1,530

  Loans on savings accounts.............         --          --        --

  Other loans...........................        164          --       164
                                           --------      ------  --------
Total loans receivable..................   $224,101      $6,307  $230,408
                                           ========      ======  ========
</TABLE> 
 

     Origination, Sale, Servicing and Purchase of Loans.  The Association's
mortgage origination lending activities are conducted by loan personnel at its
twelve 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, 1996, there were no mortgage loans categorized as
held for sale. Due to the low demand for mortgage loans secured by properties in
its primary market area, the Association has recently emphasized the purchase of
single-family owner-occupied mortgage loans which are primarily secured by
properties located outside of the Association's primary market area, such as
other regions of Pennsylvania and Ohio and New York.  In addition, in response
to the low demand for one- to four-family mortgage loans in its primary market
area, the Association has also emphasized the origination of consumer loans
consisting of home equity loans and education loans.  The Association intends to
continue purchasing single-family owner-occupied loans to supplement reduced
loan demand as needed, and is attempting to increase the number of entities from
which it purchases such loans and expand the geographic areas in which the
properties securing such loans are located, including regions of Virginia,
Maryland, North Carolina, South Carolina and the District of Columbia.  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, closed in
the name of the correspondent financial institution and immediately assigned to
the

                                       5
<PAGE>
 
Association, and are generally purchased by the Association on a servicing
released basis.  At December 31, 1996, the Association had $113.3 million of
loans serviced by others which were serviced by approximately 30 third-party
loan servicers.  At such date, $53.3 million of purchased loans, or 47.0% 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,
                                --------------------------------
                                   1996       1995       1994
                                ---------  ----------  ---------
                                          (IN THOUSANDS)
<S>                             <C>        <C>         <C> 
Gross loans(1):
Beginning balance...............  $183,423   $156,986   $152,924
Loans originated:
 Mortgage loans:
  One- to four-family...........     5,004      2,159      5,084
  Multi-family..................       181         --        550
  Commercial....................       600      2,680      1,922
  Construction and development..     1,976      2,625      7,802
 Consumer loans:
  Home equity...................    11,256     10,660      9,781
  Education.....................     8,680      9,318      5,559
 Other:
  Unsecured personal loans......       780        661        713
  Loans on savings accounts.....     1,235      1,063      1,361
                                  --------   --------   --------
   Total loans originated.......    29,712     29,166     32,772
Loans purchased(2)..............    71,156     24,250      2,448
                                  --------   --------   --------
   Total........................   284,291    210,402    188,144
Less:
Principal repayments............   (37,186)   (26,899)   (31,158)
Sales of loans..................   (12,232)        --         --
Transfer to REO.................       (18)       (80)         -
                                  --------   --------   --------
  Total loans...................   234,855    183,423    156,986
Loans held for sale.............   (15,383)        --          -
                                  --------   --------   --------
Ending balance..................  $219,472   $183,423   $156,986
                                  ========   ========   ========
</TABLE> 
____________________
(1) Gross loans include receivables held for investment and loans held for sale.
(2) All such loans are secured by single-family properties.

                                       6
<PAGE>
 
     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, 1996, one- to four-family mortgage loans totalled $178.2
million, or 75.9% of total loans.  Of the Association's mortgage loans secured
by one- to four-family residences, $174.2 million, or 97.7%, 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, Washington and
Westmoreland Counties, Pennsylvania.  However, due to the low level of one-to
four-family mortgage loan demand in the Association's primary market area, the
Association's one- to four-family mortgage loan portfolio has decreased 19.3%
from $150.6 million, or 35.3% of total assets and 76.2% of total loans, at
December 31, 1990 to $178.2 million, or 28.1% of total assets and 75.9% of total
loans, at December 31, 1996.

     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 90%.  However, loans with LTV ratios in excess of 80%
generally require the borrower to obtain private mortgage insurance ("PMI").
The Association's one- to four-family residential mortgage loans do not provide
for negative amortization.  Mortgage loans in the Association's portfolio
generally include due-on-sales clauses, which provide the Association with the
contractual right to demand the loan immediately due and payable in the event
the borrower transfers ownership of the property that is subject to the
mortgage.  The maximum one- to four-family loan amount is $325,000, 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

                                       7
<PAGE>
 
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.  Private
mortgage insurance is normally required.  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 1996 the Association originated 23 community loans
totalling $1.1 million.

     The Association offers full-time employees of the Association, other than
executive officers and directors, who satisfy certain criteria and the general
underwriting standards of the Association fixed and adjustable-rate mortgage
loans with interest rates which are currently 25 to 125 basis points below the
rates offered to the Association's other customers, the Employee Mortgage Rate
("EMR").  The EMR is limited for the purchase, construction or refinance of an
employee's single-family owner-occupied primary residence.  When the LTV ratio
does not exceed 80% (75% in the case of refinance loans), the EMR is generally
no less than the Association's overall cost of funds rounded up to the next
quarter percentage point, with a minimum EMR of 6.25%; where the LTV ratio
exceeds 80% but is not greater than 90%, 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, 1996, the Association had $3.1 million of total EMR
loans, or 13.11% of total loans.

     Construction and Development Lending.  The Association originates three
types of construction and development loans for the construction and development
of one- to four-family properties:  (1) acquisition and development loans to
qualified builders; (2) loans and lines of credit to qualified builders; and (3)
construction/permanent financing for other individuals.  At December 31, 1996,
the Association had $3.5 million of construction and development loans which
constituted 1.5% 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 $150,000 and the maximum loan amount for construction
and development is $500,000.  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.

                                       8
<PAGE>
 
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 standards and procedures for
residential construction/permanent financing are similar to those applicable for
one- to four-family residential mortgage lending.  Proceeds of these loans are
dispersed as phases of the construction are completed.  All such loans are
converted to a one- to four-family mortgage loan upon completion of the
construction.

     Construction and development financing is generally considered to involve a
higher degree of credit risk than long-term financing on improved, owner-
occupied real estate.  Risk of loss on a construction loan is dependent largely
upon the accuracy of the initial estimate of the property's value at completion
of construction or development and market demand for similar properties.
Moreover, because of the uncertainties inherent in estimating construction
costs, delays resulting from labor problems, material shortages or weather
conditions and other unpredictable contingencies, it is relatively difficult to
evaluate accurately the total funds required and to establish the related LTV
ratio.  If the estimate of value proves to be inaccurate, the Association may be
confronted with a project, if not completed, having a value which is
insufficient to assure full repayment.

     Multi-Family Lending.  The Association originates multi-family mortgage
loans generally secured by five to one hundred unit apartment buildings located
in the Association's primary market area.  Pursuant to the Association's current
underwriting policies, a multi-family mortgage loan may only be made in an
amount up to 80% of the appraised value of the underlying property.  In
addition, the Association generally requires a debt service ratio of 120%.
Properties securing these loans are appraised by an independent appraiser and
title insurance is required on all such loans.  At December 31, 1996, multi-
family loans totalled $6.7 million, or 2.9% of the Association's total loan
portfolio.

     The Association also has, from time to time, purchased loan participations
in multi-family real estate loans, most of which are located outside of its
primary market area.  Loan participation interests are subject to the same
underwriting criteria as loans originated by the Association.  At December 31,
1996, the Association had $991,000 in multi-family real estate loan
participation interests, or 14.8% of multi-family loans and .4% of total loans.

     When determining whether to originate a multi-family loan, the Association
considers many factors including: the net operating income of the mortgaged
premises before debt service and depreciation; the debt service ratio (the ratio
of net earnings to debt service); and the ratio of loan amount to appraised
value.  When evaluating the qualifications of the borrower for a multi-family
loan, the Association considers the financial resources and income level of the
borrower, the borrower's experience in owning or managing similar property, and
the Association's lending experience with the borrower.  The Association's
underwriting policies require that the borrower be able to demonstrate strong
management

                                       9
<PAGE>
 
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.

     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, 1996 was
$5.1 million, or 2.1% 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,
1996, the Association had $1.6 million in commercial real estate loan
participation interests, or 31.3% of commercial real estate loans and .7% 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, 1996, the Association's
consumer loans amounted to $37.6 million, or 16.0% of the Association's total
loan portfolio.  Home equity loans are generally only available to the residents
of Allegheny, Beaver, Butler, 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 3.0% above the prime
rate of interest as published by the Wall Street

                                       10
<PAGE>
 
Journal and adjust monthly but which are capped at 17.99%.  The Association's
home equity installment loans are offered on a fixed-rate basis only with terms
of one to ten years.  Both types of home equity loans are offered in minimum
amounts of $5,000 to a maximum amount of the lesser of $100,000 or 80% of the
appraised value of the property, except that 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, 1996, home equity
loans totalled $22.2 million, or 59.0% of consumer loans and 9.4% 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
properly.  Loans disbursed after October 1, 1993 are guaranteed to at least 98%
of principal plus eligible interest by the full faith of the United States
Government if serviced properly.  Under certain circumstances loans guaranteed
at the 98% level will be insured to the 100% level.

     Education loans held by the Association are administrated and guaranteed by
one of two agencies:  the Pennsylvania Higher Education Assistance Agency
("PHEAA") or the United States Student Aid Funds ("USA Funds").  Federal
regulations as established by DOE apply to both agencies equally.  The
Association underwrites, operates and administrates participation in the FFELP
under the policies and procedures outlined in the PHEAA guidelines for Loan
Guaranty Programs and USA Funds policies and procedures program manuals, for
loans guaranteed by each respective agency.  At December 31, 1996, education
loans totalled $15.4 million, or 41.0% of consumer loans and 6.6% 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 33%.
Secured personal lines of credit and installment loans are generally secured by
certificates of deposit and passbook savings accounts.  At December 31, 1996,
personal loans totalled $3.8 million, or 1.6% of total loans of which $2.1
million were secured by savings accounts.

     Since 1993, the Association has been an agent for a third party which has
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 the first quarter of 1996.

     At December 31, 1996, 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 $164,000.

                                       11
<PAGE>
 
     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 $325,000 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 $325,000 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 require the approval of the Board of Directors.

     With respect to consumer and other loans, the Board has authorized the
following persons to approve loans up to the amounts indicated:  home equity
loans require the approval of the Vice President of Lending or any officer of
the Association assigned by the President, except that "Class B" home equity
loans must be approved by the Assistant Vice President of Consumer Lending and
the Vice President of Lending or any officer of the Association assigned by the
President; all unsecured personal loans in amounts up to $20,000 must be
approved by the Assistant Vice President of Consumer Lending or the Vice
President of Lending or any officer of the Association assigned by the
President; secured personal loans in excess of $20,000 require the approval of
the Assistant Vice President of Consumer Lending, and the Vice President of
Lending or any officer of the Association assigned by the President.  Pursuant
to OTS regulations, loans to one borrower cannot, subject to certain exceptions,
exceed 15% of the Association's unimpaired capital and surplus.  At December 31,
1996, the loans to one borrower limitation was $18.4 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, 1996, the Association had $113.3 million of loans
serviced by others and $121.6 million of loans serviced by the Association.

     Delinquencies and Classified Assets.  The Board of Directors performs a
monthly review of all delinquent loans ninety days or more past due with
principal balances of $100,000 or more and reviews a summary of the aggregate
level of non-performing loans 90 days or more past due.  In addition, management
reviews on an ongoing basis all loans 30 or more days delinquent.  The
procedures taken by the Association with respect to delinquencies vary depending
on the nature of the loan and period of delinquency.  In the case of real estate
loans, the Association takes legal action and will commence foreclosure
proceedings against any real property that secures the loan.  If a foreclosure
action is instituted and the loan is not brought current, paid in full, or
refinanced before the foreclosure sale, the real property securing the loan is
generally sold at foreclosure.

                                       12
<PAGE>
 
     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."

     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.

     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.

                                       13
<PAGE>
 
     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, 1996, the
Association had  $163,000 of assets classified as Special Mention, $799,000 of
assets classified as Substandard, $67,000 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, 1996, the Association had no foreclosed real estate in its
portfolio.

                                       14
<PAGE>
 
     The following table sets forth delinquencies in the Association's loan
portfolio as of the dates indicated:


<TABLE>
<CAPTION>
 
                                            AT DECEMBER 31, 1996                                AT DECEMBER 31, 1995
                                 --------------------------------------------      -----------------------------------------------
                                     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.........      60        $1,175      38          $  537         67        $  909         49         $  727
 Multi-family................      --            --       1              97         --            --          1              8
 Commercial..................      --            --      --              --         --            --         --             --
Consumer:                                                         
 Home equity.................       6            59       6              73          7            75          5            116
 Education...................      17            41       8             163        142           309        129            593
Other loans:                                                      
 Unsecured personal loans....      14            23      11              26          5            12          9             16
                                  ---        ------     ---          ------   --------     ---------   --------         ------
Total........................      97        $1,298      64          $  896        221        $1,305        193         $1,460
                                  ===        ======     ===          ======   ========     =========   ========         ======
Delinquent loans to total
 gross loans.................                  0.55%                    0.38%                    0.71%                     0.80%
 
<CAPTION>  
                                             AT DECEMBER 31, 1994
                                ------------------------------------------- 
                                    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.........      71        $1,247         41        $  753
 Multi-family................      --            --         --            --
 Commercial..................      --            --         --            --
Consumer  loans:                        
 Home equity.................       4           129          7           125
 Education...................      72           191         63           329
Other loans:                            
 Unsecured personal loans....       8            26         13            31
                                  ---        ------        ---        ------
Total........................        155     $1,593        124        $1,238
                                     ===     ======        ===        ======
Delinquent loans to total
  gross loans..............                    1.01%                    0.79% 
</TABLE>

                                       15
<PAGE>
 
     NON-PERFORMING ASSETS.  General.  The following table sets forth
information regarding non-accrual loans and real estate owned ("REO").  At
December 31, 1996, the Association had no REO properties.  It is the policy of
the Association to cease accruing interest on loans 90 days or more past due and
charge off all accrued interest upon foreclosure or deed in lieu of foreclosure.
For the years ended December 31, 1996, 1995, 1994, 1993 and 1992, 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 $37,000, $59,000, $48,000, $55,000 and $100,000, respectively.

<TABLE>
<CAPTION>
 
                                                              AT DECEMBER 31,                              
                                               --------------------------------------------                
                                                  1996     1995     1994     1993     1992                 
                                               --------  --------  -------  -------  ------                
                                                          (DOLLARS IN THOUSANDS)                           
<S>                                             <C>       <C>      <C>      <C>      <C>                   
Non-accrual loans:
   Mortgage loans:
    One- to four-family..................       $   537   $  727   $  753   $  854   $1,367
    Multi-family.........................            97        8       --       --       --
    Construction and development.........            --       --       --       --       --
    Commercial...........................            --       --       --      237      467
 Consumer loans:
    Home equity..........................            73      116      125       35       --
    Education............................           163      593      329      171      507
 Other loans:
    Unsecured personal loans.............            26       16       31       14        9
                                                -------   ------   ------   ------   ------
     Total non-accrual loans.............           896    1,460    1,238    1,311    2,350
Real estate owned, net(3)................            --       --       17       17      755
                                                -------   ------   ------   ------   ------
    Total non-performing assets..........       $   896   $1,460   $1,255   $1,328   $3,105
                                                =======   ======   ======   ======   ======
Allowance for loan losses
 as a percent of gross loans
 receivable(1)...........................          0.44%    0.45%    0.55%    0.58%    0.46%
Allowance for loan losses
 as a percent of  total
 non-performing loans(2).................        115.07%   56.30%   67.73%   63.70%   24.19%
Non-performing loans as a                                                                    
 percent of gross loans
 receivable(1)(2)........................          0.38%    0.81%    0.81%    0.90%    1.89%  
Non-performing assets as                                                                     
 a percent of total assets(2)............          0.14%    0.28%    0.27%    0.27%    0.65%  
</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.

                                       16
<PAGE>
 
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, 1996, the Association's allowance for loan
losses was 0.44% of total loans as compared to 0.45% as of December 31, 1995.
The Association had non-accrual loans of $896,000 and $1.5 million at December
31, 1996 and December 31, 1995, 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,
                                 -----------------------------------------
                                    1996     1995    1994    1993    1992
                                 --------  -------  ------  ------  ------
                                           (DOLLARS IN THOUSANDS)
<S>                                <C>      <C>     <C>     <C>     <C>

Balance at beginning of period...  $  822   $ 850   $ 846   $ 751   $ 830

Provision for loan losses........     210      --      --     180     426

Charge-offs:

 Mortgage loans:

  One -to-four-family............      --       8      31      20      39

  Multi-family...................      --      --      --      --      38

  Commercial.....................      --      --      --      45      --

 Consumer loans:

  Education......................       5       5      --     215     431

 Other loans.....................      15      22       8      11      --
                                   ------   -----   -----   -----   -----
       Total.....................      20      35      39     291     508

Recoveries.......................      19       7      43     206       3
                                   ------   -----   -----   -----   -----
Net (charge-offs) recoveries.....      (1)    (28)      4     (85)   (505)
                                   ------   -----   -----   -----   -----
Balance at end of period.........  $1,031   $ 822   $ 850   $ 846   $ 751
                                   ======   =====   =====   =====   =====
Ratio of net charge-offs during                                            
  the period to average loans                                              
  outstanding during the period..    0.00%   0.02%   0.00%   0.06%   0.29%
                                   ======   =====   =====   =====   =====  
</TABLE>

                                       17
<PAGE>
 
     The following tables set forth the Association's percent of allowance for
loan losses to total allowance for loan losses and the percent of loans to total
loans in each of the categories listed at the dates indicated.

<TABLE>
<CAPTION>
 
                                                                         AT DECEMBER 31,
                           -------------------------------------------------------------------------------------------------------- 
                                          1996                              1995                                  1994
                           -----------------------------------   ----------------------------------   -----------------------------
                                                      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.......  $  706       68.48%     75.89%       $429       52.19%       66.79%      $324      38.12%     67.15% 
 Multi-family..............     117       11.35       2.87         103       12.53         3.93        107      12.59       5.26  
 Commercial................      15        1.45       2.15          16        1.95         1.79        171      20.12       1.30  
 Construction and                 
  development..............      27        2.62       1.51          45        5.47         3.21         27       3.18       3.08 
Consumer loans:                                                                                                                   
 Home equity...............     145       14.06       9.43         118       14.35        10.99        151      17.76      11.34  
 Education.................      --          --       6.55          89       10.83        11.32         49       5.76       9.35  
Other loans:                                                                                                                    
 Unsecured personal loans..      21        2.04       0.65          22        2.68         0.68         21       2.47       0.83  
 Loans on savings accounts.      --          --       0.88          --          --         1.18         --         --       1.54
 Other loans...............      --          --       0.07         --           --         0.11         --         --       0.15
                             ------      ------     ------       ----       ------       ------       ----     ------     ------
 Total valuation allowance.  $1,031      100.00%    100.00%      $822       100.00%      100.00%      $850     100.00%    100.00%
                             ======      ======     ======       ====       ======       ======       ====     ======     ====== 
</TABLE> 

<TABLE> 
<CAPTION> 
                                                                        AT DECEMBER 31,
                               --------------------------------------------------------------------------------------------
                                                 1993                                              1992
                               ---------------------------------------------     ------------------------------------------
                                                                   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 TOAL
                                AMOUNT          ALLOWANCE           LOANS          AMOUNT        ALLOWANCE         LOANS
                               --------        ------------      -----------      --------      ------------     -----------
                                                                      (DOLLARS IN THOUSANDS)                    
<S>                             <C>              <C>              <C>              <C>           <C>             <C>  
Mortgage loans:                                                                                              
 One- to four-family........      $  513            60.63%           67.48%           $399           53.12%          73.52%
 Multi-family...............         105            12.41             5.47             120           15.98            5.81
 Commercial.................          35             4.14             1.70              47            6.26            1.53
 Construction and                     
  development...............          77             9.10             5.35              81           10.79            4.79   
Consumer loans:                                                                                               
 Home equity................          85            10.05            10.80              67            8.92            8.17
 Education..................          18             2.13             6.64              29            3.86            3.76
Other loans:                                                                                                  
 Unsecured personal loans...          13             1.54             0.90               8            1.07            0.83
 Loans on savings accounts..          00               00             1.42              --              --            1.34
 Other loans................          --               --             0.24              --              --            0.25
                                  ------        ---------         --------          ------       ---------        --------
  Total valuation allowance.      $  846           100.00%          100.00%           $751          100.00%         100.00%
                                  ======        =========         ========          ======       =========        ========
</TABLE>

                                       18
<PAGE>
 
     Real Estate Owned.  At December 31, 1996, the Association had no REO
properties.  When the Association acquires property through foreclosure or deed
in lieu of foreclosure, it is initially recorded at the lower of the recorded
investment in the corresponding loan or the fair value of the related assets at
the date of foreclosure, less costs to sell.  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 anything 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, 1996, 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

                                       19
<PAGE>
 
Conduit ("REMIC") and other 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.  The Association does not currently maintain a
portfolio of securities categorized as held for trading.  On December 15, 1995,
the Association transferred all of its securities included in the held to
maturity portfolio which, at the date of transfer, had a carrying value and fair
value of $230.0 million and $230.6 million, respectively, to its available for
sale portfolio.   Subsequent to such transfer, the Association sold $82.1
million of securities classified as available-for-sale (consisting of $48.6
million of short-term U.S. agency debt securities, $12.5 million of corporate
debt securities and commercial paper, and $21.0 million of CMOs) for an
aggregate loss of $1.7 million in connection with management's restructuring of
its securities portfolio to increase its yield on such portfolio.  The
Association utilized the proceeds to purchase $79.6 million of securities,
consisting of $73.6 million of mortgage backed securities and $6 million of U.S.
agency debt securities.

     Mortgage-Backed Securities.  At December 31, 1996, the Association had
$172.2 million in mortgage-backed securities, or 27.2% 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

                                       20
<PAGE>
 
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, 1996, the Association had
$72.3 million of mortgage-related securities, or 11.4% of total assets,
consisting of CMOs issued by FHLMC and FNMA.  CMOs are a type of debt security
issued by a special purpose entity that aggregates pools of underlying fixed-
and adjustable-rate mortgages or mortgage-backed securities and create different
classes of CMO securities with different maturities and, in some cases,
amortization schedules as well as residual interest with each such class
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, 1996, the Association had
$17.4 million of corporate debt obligations, or 2.7% of total assets. The
Association's investments in corporate debt obligations, as of December 31,
1996, 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.

                                       21
<PAGE>
 
     GNMA Forward Commitments.  As part of its investment activities, the
Association also enters into forward commitment contracts with securities
brokers to purchase mortgage-backed securities issued by GNMA typically up to
six months in advance of the purchase date.  The Association generally enters
into two forms of GNMA forward commitment contracts, one which requires the
Association to purchase a fixed amount of securities and one which requires the
Association to purchase $2 million of such securities on a firm commitment basis
at a one percent discount and, at the option of the seller, $4 million more of
the same securities.  These forward commitment contracts may be sold in the open
market.  The Association's policies limit the aggregate amount of GNMA forward
commitments in which the Association may engage at any one time to 15% of the
Association's assets and limits the maximum amount of such commitments with any
one broker to $20 million.  The Association utilizes these GNMA forward
commitment contracts in periods when it believes the interest rates on the
underlying securities are appropriate for the Association's interest rate risk
management.  For budgeting purposes, the Association reserves funding to cover
all outstanding commitments for the maximum amount of securities which it may
have to purchase but, in accordance with GAAP, records such purchase at the time
of the actual purchase.  Accordingly, the GNMA forward commitment contracts are
reflected as off-balance sheet commitments.  As of December 31, 1996, the
Association had outstanding forward commitment contracts to purchase up to $14
million of GNMA mortgage-backed securities which had interest rates ranging from
7.0% to 8.0% 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, 1996, 1995 and 1994,
the Association had net gains from such activity of $54,000, $207,000 and
$143,000, respectively.

     U.S. Government Securities.  At December 31, 1996 the Company had $14.9
million of U.S. Treasury Securities, or 2.4% of total assets.  Also, at December
31, 1996, the Company had $48.4 million of U.S. Government agency securities, or
7.65% 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, 1996 the Company had $29.7
million of marketable equity securities, or 4.7% of total assets.  This included
$16.6 million of adjustable rate mortgage mutual funds, which are backed by
FNMA, GNMA or FHLMC.  This remaining amount was invested in money market mutual
funds, preferred stock and bank equities.

                                       22
<PAGE>
 
     The following table sets forth the composition of the Association's
investment, mortgage-backed and mortgage-related securities portfolio in dollar
amounts and in percentages of the respective portfolios at the dates indicated.

<TABLE>
<CAPTION>
 
                                                                              AT DECEMBER 31,                               
                                                  -------------------------------------------------------------------       
                                                         1996                    1995                    1994               
                                                  ---------------------  -----------------------  -------------------       
                                                               PERCENT                  PERCENT               PERCENT       
                                                    AMOUNT    OF TOTAL    AMOUNT       OF TOTAL    AMOUNT    OF TOTAL       
                                                  ----------  ---------  --------    -----------  --------  ---------       
                                                                          (DOLLARS IN THOUSANDS)                            
<S>                                               <C>         <C>        <C>              <C>     <C>        <C>            
Investment securities:
 Marketable equity securities(1)...............   $  29,730       8.17%  $ 22,659          9.45%  $ 20,187       6.82%
 U.S. Government Agency debt...................      48,499      13.34     20,013          8.35     56,000      18.89
 Municipal Obligations.........................       8,889       2.44      1,503           .62         --         --
 Corporate obligations.........................      17,298       4.76     26,671         11.12     47,575      16.05
 U.S. Treasury.................................      15,037       4.13         --            --         --         --
                                                  ---------    -------   --------       -------   --------     ------
   Total investment securities.................     119,453      32.84     70,846         29.54    123,762      41.76
                                                  ---------    -------   --------       -------   --------     ------

Mortgage-backed and mortgage
  related securities:
 FHLMC.........................................      23,107       6.35     29,101         12.13      3,596       1.21
 FNMA..........................................      20,092       5.52      4,713          1.97      2,354       0.79
 GNMA..........................................     127,732      35.11     84,162         35.09     83,802      28.28
 CMOs..........................................      72,303      19.87     50,716         21.15     83,463      28.16
                                                  ---------    -------   --------       -------   --------     ------
   Total mortgage-backed and
       mortgage-related securities.............     243,234      66.85    168,692         70.34    173,215      58.44
                                                  ---------    -------   --------       -------   --------     ------
Plus:
 Unamortized premium (discount)................       1,142       0.31        301          0.13       (599)     (0.20)
                                                  ---------    -------   --------       -------   --------     ------
   Total securities, net.......................     363,829     100.00    239,839        100.00    296,378     100.00
                                                  ---------    -------   --------       -------   --------     ------
Less:
 Securities available for sale:
  Marketable equity securities.................     (29,730)     (8.17)   (22,659)        (9.44)   (20,187)     (6.81)
  U.S. Government Agency debt..................     (48,420)    (13.32)   (20,083)        (8.38)        --         --
  Municipal Obligations........................       8,894       2.44      1,500           .63         --         --
  Corporate Obligations........................     (17,354)     (4.77)   (26,818)       (11.18)        --         --
  FNMA.........................................     (20,527)     (5.64)    (4,712)        (1.96)        --         --
  FHLMC........................................     (23,522)     (6.47)   (29,637)       (12.36)        --         --
  GNMA.........................................    (128,178)    (35.23)   (83,798)       (34.94)   (44,662)    (15.07)
  CMOs.........................................     (72,255)     19.86    (50,632)       (21.11)    (4,446)     (1.50)
  U.S. Treasury................................     (14,949)     (4.11)        --            --         --         --
                                                  ---------    -------   --------       -------   --------     ------
   Total available for sale....................     363,829    (100.00)   239,839       (100.00)   (69,295)    (23.38)
                                                  ---------    -------   --------       -------   --------     ------
 Total securities held to maturity(2)..........   $      --         --%  $     --            --%  $227,083      76.62%
                                                  =========    =======   ========       =======   ========     ======
</TABLE>
------------------------
(1) At December 31, 1996, marketable equity securities consisted of 26.4 million
    of mutual funds backed by adjustable-rate mortgage-backed securities,
    corporate debt, corporate bonds, or government bonds; $2.2 million of FHLMC
    stock,$41,000 of Student Loan Market Association stock, $420,000 of FNMA
    stock and $661,000 of bank equities.
(2) On December 15, 1995, the Association transferred all of its securities
    categorized as held to maturity to its available for sale portfolio.  See
    "Management's Discussion and Analysis of Financial Condition and Results of
    Operations -Impact of New Accounting Standards."

                                       23
<PAGE>
 
     The following table sets forth the Association's investment, mortgage-
backed and mortgage-related securities activities for the periods indicated:


<TABLE>
<CAPTION>
 
                                                                   FOR THE YEARS
                                                                 ENDED DECEMBER 31,
                                                        -----------------------------------
                                                         1996         1995           1994
                                                        -------      --------      --------
                                                                 (IN THOUSANDS)
<S>                                                     <C>           <C>          <C>
Beginning balance..................................     $239,839     $296,378      $314,962
 Investment securities purchased - held                                               9,965
  to maturity(1)...................................           --       52,404    
 Investment securities purchased -                                         
  available for sale(1)............................      115,072        9,502         1,411
 Mortgage-backed and mortgage-related securities                           
  purchased - held to maturity(1)..................           --        9,040        48,656
                                                                              
 Mortgage-backed and mortgage-related securities                           
  purchased - available for sale(1)................      145,461        6,012        36,988
                                                                              
 Securities purchased, not settled(3)..............        5,830       41,953    
 Less:                                                                        
  Sale of investment securities -                                          
    available for sale(1)..........................      (43,439)     (13,488)      (22,255)
  Sale of mortgage-backed and mortgage-related                                
    securities available for sale(1)...............      (45,310)     (29,324)           --
 Securities sold, not settled(3)...................           --      (73,062)           --
  Investment maturities............................      (28,930)     (55,691)      (66,830)
  Principal repayments.............................      (20,761)      (9,429)      (21,822)
 Realized gain (loss) on sale of investments,                                 
  mortgage-backed and mortgage-related securities..          630       (1,292)         (101)
 Amortization of (premium) discount................          (14)        (410)       (1,969)
 Change in net unrealized gain (loss)                                      
  on available for sale............................       (4,549)       7,246        (2,627)
                                                        --------     --------      --------
Ending balance(2)..................................     $363,829     $239,839      $296,378
                                                        ========     ========      ========
</TABLE>
---------------
(1) SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities"
    was adopted by the Association on January 1, 1994.
(2) Certain noncash transactions are included in the investment activity.
(3) The Association conducted sale and purchase activity of securities which had
    not yet settled as of the period end.

                                       24
<PAGE>
 
     The following table sets forth certain information regarding the carrying
and market values of the Association's short-term investments (consisting of
federal funds sold and interest-bearing demand deposits) and investment,
mortgage-backed and mortgage-related securities at the dates indicated:

<TABLE>
<CAPTION>
 
                                                                     AT DECEMBER 31,                          
                                           ------------------------------------------------------------------ 
                                                    1996                 1995                  1994     
                                           --------------------  ---------------------  ------------------- 
                                             CARRYING   MARKET   CARRYING      MARKET   CARRYING     MARKET  
                                              VALUE     VALUE     VALUE        VALUE     VALUE       VALUE   
                                            --------  --------  --------     --------  --------     --------
<S>                                          <C>       <C>       <C>         <C>      <C>           <C>  
                                                                      (IN THOUSANDS)                           
Short-term investments...............       $ 17,542  $ 17,542  $  4,669     $  4,669  $    474     $    474  
                                            --------  --------  --------     --------  --------     --------  
Investment securities(1):                                                                                     
 Held to maturity:                                                                                            
  Marketable equity securities.......             --        --        --           --        --           --  
  U.S. Government Agency debt........             --        --        --           --    56,056       51,712  
  Corporate obligations..............             --        --        --           --    48,248       47,701  
  U.S. Treasury......................             --        --        --           --        --           --  
                                            --------  --------  --------     --------  --------     --------  
   Total held to maturity(3).........       $    --   $    --   $     --     $     --  $104,304     $ 99,413  
                                            --------  --------  --------     --------  --------     --------  
 Available for sale:(3)                                                                                       
  Corporate obligations..............         17,354    17,354    26,818       26,818        --           --  
  U.S. Treasury......................         14,949    14,949        --           --        --           --  
  U.S. government and                                                                                         
   agency obligations................         48,420    48,420    20,083       20,083        --           --  
  Municipal obligations..............          8,894     8,894     1,500        1,500        --           --  
  Marketable equity securities(2)....         29,730    29,730    22,659       22,659    20,187       20,187  
   Total available for sale..........        119,347   119,347    71,060       71,060    20,187       20,187  
                                            --------  --------  --------     --------  --------     --------  
Total investment securities..........       $119,347  $119,347  $ 71,060     $ 71,060  $124,491     $119,600  
                                            --------  --------  --------     --------  --------     --------  
Mortgage-backed and                                                                                           
 mortgage-related securities(1):                                                                              
 Held to maturity:                                                                                            
  FNMA...............................             --        --        --           --  $  2,354     $  2,354  
  GNMA...............................             --        --        --           --    38,113       38,601  
  FHLMC..............................             --        --        --           --     3,562        3,569  
  CMOs...............................             --        --        --           --    78,750       73,676  
                                            --------  --------  --------     --------  --------     --------  
   Total held to maturity............             --        --        --           --   122,779      118,200  
                                            --------  --------  --------     --------  --------     --------  
 Available for sale:(3)                                                                                       
  FHLMC..............................         23,522    23,522    29,637       29,637        --           --  
  GNMA...............................        128,178   128,178    83,798       83,798    44,662       44,662  
  FNMA...............................         20,527    20,527     4,712        4,712        --           --  
  CMOs...............................         72,255    72,255    50,632       50,632     4,446        4,446  
                                            --------  --------  --------     --------  --------     --------  
   Total available for sale..........        244,482   244,482   168,779      168,779    49,108       49,108  
                                            --------  --------  --------     --------  --------     --------  
Total mortgage-backed and                                                                                  
    mortgage-related securities......       $244,482  $244,482  $168,779     $168,779  $171,887     $167,308  
                                            --------  --------  --------     --------  --------     --------  
Total short-term investments,                                                                              
    investment securities, mortgage-       
    backed and mortgage-related                                                                               
   securities........................       $381,371  $381,371  $244,508     $244,508  $296,852     $287,382  
                                            ========  ========  ========     ========  ========     ========   
--------------------
</TABLE>
(1) SFAS 115, "Accounting for Certain Investments on Debt and Equity
    Securities," was adopted by the Association on January 1, 1994.
(2) At December 31, 1996, marketable equity securities consisted of $26.4
    million of mutual funds backed by adjustable-rate mortgage-backed
    securities, corporate debt, corporate bonds or government bonds; $2.2
    million of FHLMC stock, $41,000 of Student Loan Market Association stock,
    $420,000 of FNMA Stock and $661,000 of bank equities.
(3) On December 15, 1995, the Association transferred all of its securities
    categorized as held to maturity to its available for sale portfolio.  See
    "Impact of New Accounting Standards."

                                       25
<PAGE>
 
     The table below sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of the Association's
short-term investments (consisting of federal funds sold and interest-bearing
demand deposits), investment securities and mortgage-backed and mortgage related
securities as of December 31, 1996.

<TABLE>
<CAPTION>
 
                                                                           AT DECEMBER 31, 1996
                                       --------------------------------------------------------------------------------------------
                                                                  MORE THAN ONE          MORE THAN FIVE          MORE THAN TEN     
                                        ONE YEAR OR LESS       YEAR TO FIVE YEARS      YEARS TO TEN YEARS            YEARS         
                                       --------------------   ----------------------  --------------------   ----------------------
                                                   WEIGHTED                 WEIGHTED              WEIGHTED                 WEIGHTED
                                       CARRYING     AVERAGE   CARRYING      AVERAGE   CARRYING    AVERAGE    CARRYING      AVERAGE 
                                        VALUE        YIELD     VALUE         YIELD     VALUE       YIELD      VALUE         YIELD  
                                       ----------  ---------  -------      ---------  -------   ---------    ---------   ---------- 
<S>                                      <C>         <C>        <C>         <C>       <C>        <C>       <C>            <C>      
                                                                          (DOLLARS IN THOUSANDS)                                  
Short-term investments.................  $17,542      5.42%     $    --         --%   $    --        --%    $     --        --%
Investment securities:                  
 Available for Sale:                    
  U.S. Government agency securities....   15,000      6.85       18,624       6.51      1,994      7.48       12,802      7.87
  Municipal obligations................       --        --        3,310       4.00      4,681      5.22          903      5.40
  U.S. Treasury Securities.............    6,002      5.85        8,947       6.17         --        --           --        --
  Corporate obligations................   14,512      6.68        2,842       6.33         --        --           --        --
  Marketable equity securities.........   29,069      6.47           --         --         --        --           --        --
  Common Stock.........................      661        --           --         --         --        --           --        --
  Total investment securities..........   65,244      6.48       33,723       6.16      6,675      5.90       13,705      7.71
                                         -------      ----      -------       ----     ------      ----     --------      ----
Mortgage-backed and                     
 mortgage-related securities:           
 Available for Sale:                    
  GNMA.................................       --        --           --         --         --        --      128,178      7.88
  FNMA.................................       --        --        1,842       6.47      2,364      7.03       16,321      7.08
  FHLMC................................       --        --       16,884       6.85        375      7.52        6,263      7.52
  CMOs.................................       --        --        3,281       6.92         --        --       68,974      6.22
  Total mortgage-backed and mortgage-   
   related securities..................       --        --%      22,007       6.83%     2,739      7.10%     219,736      7.29%
                                         -------      ----      -------       ----     ------      ----     --------      ----
                                        
Total short-term investments,           
 investment securities, mortgage-       
 backed securities and mortgage-related 
 securities............................  $82,786                $55,730                $9,414               $233,441
                                         =======                =======                ======               ========
<CAPTION>  

                                           AT DECEMBER 31, 1996
                                          ----------------------
                                                  TOTAL
                                          ----------------------
                                                        WEIGHTED
                                          CARRYING      AVERAGE 
                                           VALUE         YIELD   
                                          ---------   ---------- 
<S>                                       <C>         <C> 
Short-term investments.................   $17,542         5.42%
Investment securities:                                   
 Available for Sale:                                     
  U.S. Government agency securities....    48,420         7.02
  Municipal obligations................     8,894         4.78 
  U.S. Treasury Securities.............    14,949         6.04
  Corporate obligations................    17,354         6.62
  Marketable equity securities.........    29,069         6.47 
  Common Stock.........................       661          --    
  Total investment securities..........   119,347         6.50                   
                                         --------         ----  
Mortgage-backed and                     
 mortgage-related securities:           
 Available for Sale:                                     
  GNMA.................................   128,178         7.88                
  FNMA.................................    20,527         7.02            
  FHLMC................................    23,522         7.04            
  CMOs.................................    72,255         6.25 
  Total mortgage-backed and mortgage-     
   related securities..................   244,482         6.25
                                         --------         ----
                                                   
Total short-term investments,       
 investment securities, mortgage-   
 backed securities and mortgage-related  
 securities............................  $381,371
                                         ========    

</TABLE> 

                                       26
<PAGE>
 
SOURCES OF FUNDS

     General. Deposits, loan repayments and prepayments, proceeds from sales of
loans, principal and interest payments on investment and mortgage-backed and
mortgage-related securities, cash flows generated from operations and FHLB
advances are the primary sources of the Association's funds for use in lending,
investing and for other general purposes.

     Deposits.  The Association offers a variety of deposit accounts with a
range of interest rates and terms.  The Association's deposits consist of
savings, NOW accounts, checking accounts, money market accounts and certificate
accounts.  For the year ended December 31, 1996, core deposits represented 50.3%
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.  In recent years, the
Association has generally paid a rate of interest paid on its deposit product
that is higher than competing institutions operating in the Association's market
area.  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,
1996, the Association's balance of passbook accounts decreased by $5.7 million,
or 3.5%, and its balance of certificates of deposits increased by $25.3 million,
or 12.6%.  The decline in passbook accounts and increase in certificates of
deposit resulted from the Association's raising of the rate paid on certificates
accounts in late 1995 and early 1996 which caused depositors to transfer funds
from passbook accounts to certificates of deposit.

     At December 31, 1996, certificate accounts with maturities of one year or
less totalled $121.5 million, or 27.0% 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,
                                               -------------------------------
                                                   1996      1995       1994
                                               ----------  ---------  --------
                                                        (IN THOUSANDS)
<S>                                             <C>        <C>        <C> 
Net deposits (withdrawals).....................   $ 8,551  $(13,864)  $(28,172)
Interest credited on deposit accounts..........    16,145    15,972     14,258
                                                  -------  --------   --------
Total increase (decrease) in deposit accounts..   $24,696  $  2,108   $(13,914)
                                                  =======  ========   ========
</TABLE> 
                                       27
<PAGE>
 
     At December 31, 1996, the Association had $11.7 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......      $ 2,215      4.84%     
Over 3 through 6 months...        1,994      4.94%     
Over 6 through 12 months..        1,608      5.39%     
Over 12 months............        5,920      6.09%     
                                -------
Total.....................      $11,737
                                =======
</TABLE> 
                                       28
<PAGE>
 
     The following table sets forth the distribution of the Association's
average deposit accounts for the periods indicated and the weighted average
nominal interest rates on each category of deposits presented.  Averages for the
periods presented utilize average month-end balances.

<TABLE>
<CAPTION>
 
 
                                                            FOR THE YEARS ENDED DECEMBER 31,
                               -------------------------------------------------------------------------------------------------
                                              1996                            1995                              1994
                               --------------------------------  --------------------------------   ------------------------------
                                            PERCENT                         PERCENT                            PERCENT
                                           OF TOTAL   WEIGHTED             OF TOTAL      WEIGHTED             OF TOTAL   WEIGHTED
                                 AVERAGE    AVERAGE    AVERAGE   AVERAGE    AVERAGE       AVERAGE   AVERAGE    AVERAGE   AVERAGE
                                 BALANCE   DEPOSITS     COST     BALANCE   DEPOSITS        COST     BALANCE   DEPOSITS     COST
                               ---------  ----------  ---------  -------   --------      ---------  -------   ---------  --------
                                                                        (DOLLARS IN THOUSANDS)
<S>                              <C>        <C>        <C>       <C>       <C>           <C>      <C>        <C>       <C>   
Money market savings accounts..  $ 16,397      3.86%      2.50%  $ 18,496      4.38%      2.51%    $ 22,721      5.24%     2.50%
                                                                                                  
Passbook accounts..............   162,636     38.34       3.01    170,151     40.30       3.00      199,779     46.09      3.00
                                                                                                  
NOW accounts...................    24,475      5.77       2.03     23,414      5.54       1.98       22,822      5.27      2.20
                                                                                                  
Non-interest-bearing accounts..    19,288      4.55         --     16,311      3.86         --       14,134      3.26        --
                                 --------    ------       ----   --------    ------       ----     --------    ------      ----
  Total........................   222,796     52.52       2.60    228,372     54.08       2.64      259,456     59.86      2.72
                                 --------    ------       ----   --------    ------       ----     --------    ------      ----
Certificate accounts:                                                                             
                                                                                                  
 Less than six months..........       622      0.15       3.62        738      0.18       3.88          744      0.17      2.81
                                                                                                  
 Over six through 12 months....    89,627     21.13       4.97     92.260     21.85       5.21       80,309     18.53      3.58
                                                                                                  
 Over 12 through 24 months.....    16,377      3.86       6.12      7,573      1.79       5.20        5,395      1.24      3.70
                                                                                                  
 Over 24 months................    52,501     12.37       5.90     52,241     12.37       5.75       48,109     11.10      5.70
                                                                                                  
 IRA/KEOGH.....................    42,272      9,97       5.50     41,073      9.73       5.44       39,439      9.10      4.47
                                 --------    ------       ----   --------    ------       ----     --------    ------      ----
  Total certificate accounts...   201,399     47.48       5.40    193,885     45.92       5.39      173,996     40.14      4.35
                                 --------    ------       ----   --------    ------       ----     --------    ------      ----
   Total average deposits......  $424,195    100.00%      3.93%  $422,257    100.00%      3.90%    $433,452    100.00%     3.38%
                                 ========    ======       ====   ========    ======       ====     ========    ======      ====
                                                                                                 
</TABLE>

                                       29
<PAGE>
 
     The following table presents, by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at December 31, 1996.

<TABLE>
<CAPTION>
 
 
 
                           PERIOD TO MATURITY FROM DECEMBER 31, 1996           AT DECEMBER 31,
                       ------------------------------------------------  ----------------------------
                         LESS THAN   ONE TO      TWO TO        OVER
                         ONE YEAR   TWO YEARS  THREE YEARS  THREE YEARS    1996       1995      1994
                       -----------  ---------  -----------  -----------  --------   --------  --------
                                                        (IN THOUSANDS)            
<S>                      <C>        <C>         <C>          <C>          <C>        <C>       <C>
Certificate accounts:                                                             
0  to 2.99%............  $     ---  $     ---   $      ---   $      ---    $        $         $     45
                                                                                  
3.00 to 3.99%..........      1,317          5          ---          ---     1,322      5,771    56,411
                                                                                  
4.00 to 4.99%..........     86,393      1,221           54          ---    87,668     56,479    48,584
                                                                                  
5.00 to 5.99%..........     26,028     19,623       12,410       10,416    68,477     82,580    46,210
                                                                                  
6.00 to 6.99%..........      7,306     30,490        8,653        4,655    51,103     39,846    17,140
                                                                                  
7.00 to 7.99%..........        389        819        4,029       11,172    16,410     15,160    10,392
                                                                                  
8.00 to 8.99%..........         69         25            2        1,022     1,118        992     1,487
                                                                                  
Over 9.00%.............        ---        ---          ---          ---       ---        ---       ---
                          --------    -------      -------      -------  --------   --------  --------
                                                                                  
  Total................   $121,502    $52,183      $25,148      $27,265  $226,098   $200,828  $180,269
                          ========    =======      =======      =======  ========   ========  ========
 
</TABLE>

                                       30
<PAGE>
 
     Borrowings.  The Association utilizes advances from the FHLB as an
alternative to retail deposits to fund its operations and may do so in the
future as part of its operating strategy.  The Association generally only
utilizes FHLB borrowings as a source of liquidity.  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, 1996,
the Association had $37.5 million in short-term and $9.0 million in long-term
outstanding advances from the FHLB.

     The following table sets forth certain information regarding the
Association's short-term borrowed funds at or for the periods ended on the dates
indicated:

<TABLE>
<CAPTION>
 
 
                                                            AT OR FOR THE YEAR      
                                                            ENDED DECEMBER 31,      
                                                    ---------------------------------
                                                       1996         1995      1994   
                                                    ----------   ---------  ---------  
                                                          (DOLLARS IN THOUSANDS)   
<S>                                                   <C>        <C>         <C>     
FHLB advances:                                                                        
 Average balance outstanding............              $ 8,204      $ 125      $1,053  
                                                      =======      =====      ======  
 Maximum amount outstanding at                        
    any month-end during the period.....               37,525         --       6,500  
                                                      =======      =====      ======  
 Balance outstanding at end of period...               37,525         --          --  
                                                      =======      =====      ======  
 Weighted average interest rate                                                       
    during the period...................                 5.48%      6.39%       4.60% 
                                                      =======      =====      ======  
 Weighted average interest rate at end                                                
  of period.............................                 5.56%        --%         --% 
                                                      =======      =====      ======  
                                                                                                            
</TABLE>                                                              
                                                                            
     At December 31, 1996, the Association also maintained securities sold under
agreements to purchase of $5.0 million.  Securities sold under agreements to
repurchase are collateralized by mortgage-backed securities.  The $5.0 million
is comprised of one commitment with a scheduled maturity of August 26, 1999 at
an interest rate of 6.25%.
 
SUBSIDIARY ACTIVITIES

     Great American Financial Services, Inc. is a wholly-owned subsidiary of the
Association, which currently does not conduct any activities.

                                       31
<PAGE>
 
PERSONNEL

     As of December 31, 1996, the Association had 161 authorized full-time
employee positions and 51 authorized part-time employee positions.  The
employees are not represented by a collective bargaining unit and the
Association considers its relationship with its employees to be good.


                           REGULATION AND SUPERVISION

GENERAL

     The Company, as a savings and loan holding company, is required to file
certain reports with, and otherwise comply with the rules and regulations of the
Office of Thrift Supervision ("OTS") under the Home Owners' Loan Act, as amended
(the "HOLA").  In addition, the activities of savings institutions, such as the
Association, are governed by the HOLA and the Federal Deposit Insurance Act
("FDI Act").

     The Association is subject to extensive regulation, examination and
supervision by the OTS, as its primary federal regulator, and the FDIC, as the
deposit insurer.  The Association is a member of the Federal Home Loan Bank
("FHLB") System and its deposit accounts are insured up to applicable limits by
the Savings Association Insurance Fund ("SAIF") managed by the FDIC.  The
Association must file reports with the OTS and the FDIC concerning its
activities and financial condition in addition to obtaining regulatory approvals
prior to entering into certain transactions such as mergers with, or
acquisitions of, other savings institutions.  The OTS and/or the FDIC conduct
periodic examinations to test the Association's safety and soundness and
compliance with various regulatory requirements.  This regulation and
supervision establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily for the protection of the
insurance fund and depositors.  The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes.  Any change in such regulatory
requirements and policies, whether by the OTS, the FDIC or the Congress, could
have a material adverse impact on the Company, the Association and their
operations.  Certain of the regulatory requirements applicable to the
Association and to the Company are referred to below or elsewhere herein.  The
description of statutory provisions and regulations applicable to savings
institutions and their holding companies set forth in this Form 10-K does not
purport to be a complete description of such statutes and regulations and their
effects on the Association and the Company.

HOLDING COMPANY REGULATION

     The Company is a nondiversified unitary savings and loan holding company
within the meaning of the HOLA.  As a unitary savings and loan holding company,
the Company generally is not restricted under existing laws as to the types of
business activities in which it may engage, provided that the Association
continues to be a qualified thrift lender ("QTL").  See "Federal Savings
Institution Regulation - QTL Test."  Upon any non-supervisory acquisition by the
Company of another savings institution or savings bank that meets the QTL test
and is deemed to be a savings institution by the OTS, the Company would become a
multiple savings and loan holding company (if the acquired institution is held
as a separate subsidiary) and would be subject to extensive limitations on the
types of business activities in which it could engage.  The HOLA limits the
activities of a multiple savings and loan holding company

                                       32
<PAGE>
 
and its non-insured institution subsidiaries primarily to activities permissible
for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act
("BHC Act"), subject to the prior approval of the OTS, and certain activities
authorized by OTS regulation.

     The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution or holding company thereof,
without prior written approval of the OTS; acquiring or retaining, with certain
exceptions, more than 5% of a nonsubsidiary company engaged in activities other
than those permitted by the HOLA; or acquiring or retaining control of a
depository institution that is not insured by the FDIC.  In evaluating
applications by holding companies to acquire savings institutions, the OTS must
consider the financial and managerial resources and future prospects of the
company and institution involved, the effect of the acquisition on the risk to
the insurance funds, the convenience and needs of the community and competitive
factors.

     The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions:  (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions.  The
states vary in the extent to which they permit interstate savings and loan
holding company acquisitions.

     Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, HOLA does prescribe such restrictions on subsidiary
savings institutions as described below. The Association must notify the OTS 30
days before declaring any dividend to the Company.  In addition, the financial
impact of a holding company on its subsidiary institution is a matter that is
evaluated by the OTS and the agency has authority to order cessation of
activities or divestiture of subsidiaries deemed to pose a threat to the safety
and soundness of the institution.

FEDERAL SAVINGS INSTITUTION REGULATION

     Capital Requirements.  The OTS capital regulations require savings
institutions to meet three minimum capital standards:  a 1.5% tangible capital
ratio, a 3% leverage (core) capital ratio and an 8% risk-based capital ratio.
In addition, the prompt corrective action standards discussed below also
establish, in effect, a minimum 2% tangible capital standard, a 4% leverage
(core) capital ratio (3% for institutions receiving the highest rating on the
CAMEL financial institution rating system), and, together with the risk-based
capital standard itself, a 4% Tier I risk-based capital standard.  Core capital
is defined as common stockholders' equity (including retained earnings), certain
noncumulative perpetual preferred stock and related surplus, and minority
interests in equity accounts of consolidated subsidiaries less intangibles other
than certain purchased mortgage servicing rights and credit card relationships.
The OTS regulations also require that, in meeting the tangible, leverage (core)
and risk-based capital standards, institutions must generally deduct investments
in and loans to subsidiaries engaged in activities not permissible for a
national bank.

     The risk-based capital standard for savings institutions requires the
maintenance of Tier I (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of 4% and 8%, respectively.
In determining the amount of risk-weighted assets, all assets, including certain

                                       33
<PAGE>
 
off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%,
as assigned by the OTS capital regulation based on the risks OTS believes are
inherent in the type of asset.  The components of Tier I (core) capital are
equivalent to those discussed earlier.  The components of supplementary capital
currently include cumulative preferred stock, long-term perpetual preferred
stock, mandatory convertible securities, subordinated debt and intermediate
preferred stock and the allowance for loan and lease losses limited to a maximum
of 1.25% of risk-weighted assets.  Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.

     The OTS regulatory capital requirements also incorporate an interest rate
risk component.  Savings institutions with "above normal" interest rate risk
exposure are subject to a deduction from total capital for purposes of
calculating their risk-based capital requirements.  A savings institution's
interest rate risk is measured by the decline in the net portfolio value of its
assets (i.e., the difference between incoming and outgoing discounted cash flows
from assets, liabilities and off-balance sheet contracts) that would result from
a hypothetical 200 basis point increase or decrease in market interest rates
divided by the estimated economic value of the institution's assets.  In
calculating its total capital under the risk-based capital rule, a savings
institution whose measured interest rate risk exposure exceeds 2% must deduct an
amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
institution's assets.  The Director of the OTS may waive or defer a savings
institution's interest rate risk component on a case-by-case basis.  A savings
institution with assets of less than $300 million and risk-based capital ratios
in excess of 12% is not subject to the interest rate risk component, unless the
OTS determines otherwise.  For the present time, the OTS has deferred
implementation of the interest rate risk component.  At December 31, 1996, the
Association met each of its capital requirements, in each case on a fully
phased-in basis and it is anticipated that the Association will not be subject
to the interest rate risk component.

     The following table presents the Association's capital position at December
31, 1996 relative to regulatory requirements.
<TABLE> 
<CAPTION> 
                                                          CAPITAL
                                         EXCESS  ---------------------
                   ACTUAL   REQUIRED  (DEFICIENCY)   ACTUAL   REQUIRED
                   CAPITAL  CAPITAL      AMOUNT     PERCENT    PERCENT
                 ---------  --------  ------------  -------   --------
                                 (DOLLARS IN THOUSANDS)
<S>               <C>       <C>         <C>         <C>       <C> 
Tangible.........  $92,148   $ 9,061      $83,087     15.26%      1.50%
Core (Leverage)..   92,148    18,121       74,027     15.26%      3.00%
Risk-based.......   93,179    16,913       76,266     44.08%      8.00%
</TABLE> 
                                       34
<PAGE>
 
          Prompt Corrective Regulatory Action.  Under the OTS prompt corrective
action regulations, the OTS is required to take certain supervisory actions
against undercapitalized institutions, the severity of which depends upon the
institution's degree of undercapitalization.  Generally, a savings institution
is considered "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of Tier I (core) capital to risk-weighted
assets is at least 6%, its ratio of core capital to total assets is at least 5%,
and it is not subject to any order or directive by the OTS to meet a specific
capital level.  A savings institution generally is considered "adequately
capitalized" if its ratio of total capital to risk-weighted assets is at least
8%, its ratio of Tier I (core) capital to risk-weighted assets is at least 4%,
and its ratio of core capital to total assets is at least 4% (3% if the
institution receives the highest CAMEL rating).  A savings institution that has
a ratio of total capital to risk weighted assets of less than 8%, a ratio of
Tier I (core) capital to risk-weighted assets of less than 4% or a ratio of core
capital to total assets of less than 4% (3% or less for institutions with the
highest examination rating) is considered to be "undercapitalized."  A savings
institution that has a total risk-based capital ratio less than 6%, a Tier 1
capital ratio of less than 3% or a leverage ratio that is less than 3% is
considered to be "significantly undercapitalized" and a savings institution that
has a tangible capital to assets ratio equal to or less than 2% is deemed to be
"critically undercapitalized."  Subject to a narrow exception, the banking
regulator is required to appoint a receiver or conservator for an institution
that is "critically undercapitalized."  The regulation also provides that a
capital restoration plan must be filed with the OTS within 45 days of the date a
savings institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized."  Compliance
with the plan must be guaranteed by any parent holding company.  In addition,
numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion.  The OTS could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.

     Insurance of Deposit Accounts.  Deposits of the Association are presently
insured by the SAIF.  Both the SAIF and the Bank Insurance Fund ("BIF"), (the
deposit insurance fund that covers most commercial bank deposits), are
statutorily required to be recapitalized to a 1.25% of insured reserve deposits
ratio.  Until recently, members of the SAIF and BIF were paying average deposit
insurance premiums of between 24 and 25 basis points.   The BIF met the required
reserve in 1995, whereas the SAIF was not expected to meet or exceed the
required level until 2002 at the earliest.  This situation was primarily due to
the statutory requirement that SAIF members make payments on bonds issued in the
late 1980s by the Financing Corporation ("FICO") to recapitalize the predecessor
to the SAIF.

     In view of the BIF's achieving the 1.25% ratio, the FDIC ultimately adopted
a new assessment rate schedule of from 0 to 27 basis points under which 92% of
BIF members paid an annual premium of only $2,000.  With respect to SAIF member
institutions, the FDIC adopted a final rule retaining the previously existing
assessment rate schedule applicable to SAIF member institutions of 23 to 31
basis points.  As long as the premium differential continued, it may have had
adverse consequences for SAIF members, including reduced earnings and an
impaired ability to raise funds in the capital markets.  In addition, SAIF
members, such as the Association were placed at a substantial competitive
disadvantage to BIF members with respect to pricing of loans and deposits and
the ability to achieve lower operating costs.

                                       35
<PAGE>
 
     On September 30, 1996, the President signed into law the Deposit Insurance
Funds Act of 1996 (the "Funds Act") which, among other things, imposed a special
one-time assessment on SAIF member institutions, including the Association, to
recapitalize the SAIF.  As required by the Funds Act, the FDIC imposed a special
assessment of 65.7 basis points on SAIF assessable deposits held as of March 31,
1995, payable November 27, 1996 (the "SAIF Special Assessment").  The SAIF
Special Assessment was recognized by the Association as an expense in the
quarter ended September 30, 1996 and is generally tax deductible.  The SAIF
Special Assessment recorded by the Association amounted to $2.8 million on a
pre-tax basis and $1.7 million on an after-tax basis.

     The Funds Act also spreads the obligations for payment of the FICO bonds
across all SAIF and BIF members.  Beginning on January 1, 1997, BIF deposits
will be assessed for FICO payment of 1.3 basis points, while SAIF deposits will
pay 6.48 basis points.  Full pro rata sharing of the FICO payments between BIF
and SAIF members will occur on the earlier of January 1, 2000 or the date the
BIF and SAIF are merged.  The Funds Act specifies that the BIF and SAIF will be
merged on January 1, 1999, provided no savings associations remain as of that
time.

     As a result of the Funds Act, the FDIC recently voted to effectively lower
SAIF assessments to 0 to 27 basis points as of January 1, 1997, a range
comparable to that of BIF members.  SAIF members will also continue to make the
FICO payments described above.  The FDIC also lowered the SAIF assessment
schedule for the fourth quarter of 1996 to 18 to 27 basis points.  Management
cannot predict the level of FDIC insurance assessments on an on-going basis,
whether the savings association charter will be eliminated or whether the BIF
and SAIF will eventually be merged.

     The Association's assessment rate for fiscal 1996 was 23 basis points and
the premium paid for this period was $969,000.  A significant increase in SAIF
insurance premiums would likely have an adverse effect on the operating expenses
and results of operations of the Association.

     Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS.  The management of the Association does not know of any practice, condition
or violation that might lead to termination of deposit insurance.

     Thrift Rechartering Legislation.  The Funds Act provides that the BIF and
SAIF will merge on January 1, 1999 if there are no more savings associations as
of that date.  That legislation also requires that the Department of Treasury
submit a report to Congress by March 31, 1997 that makes recommendations
regarding a common financial institutions charter, including whether the
separate charters for thrifts and banks should be abolished.  Various proposals
to eliminate the federal thrift charter, create a uniform financial institutions
charter and abolish the OTS have been introduced in Congress. The bills would
require federal savings institutions to convert to a national bank or some type
of state charter by a specified date (January 1, 1998 in one bill, June 30, 1998
in the other) or they would automatically become national banks.  Converted
federal thrifts would generally be required to conform their activities to those
permitted for the charter selected and divestiture of nonconforming assets would
be required over a two year period, subject to two possible one year extensions.
State chartered thrifts would become subject to the same federal regulation as
applies to state commercial banks.  Holding companies for savings institutions
would become subject to the same regulation as holding companies that control
commercial banks, with a limited grandfather provision for unitary savings and
loan holding company

                                       36
<PAGE>
 
activities.  The Bank is unable to predict whether such legislation would be
enacted, the extent to which the legislation would restrict or disrupt its
operations or whether the BIF and SAIF funds will eventually merge.

     Loans to One Borrower.  Under the HOLA, savings institutions are generally
subject to the limits on loans to one borrower applicable to national banks.
Generally, savings institutions may not make a loan or extend credit to a single
or related group of borrowers in excess of 15% of its unimpaired capital and
surplus.  An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if such loan is secured by readily-marketable collateral, which is
defined to include certain financial instruments and bullion.  At December 31,
1996, the Association's limit on loans to one borrower was $18.4 million.  At
December 31, 1996, the Association's largest aggregate outstanding balance of
loans to one borrower was $2.7 million.

     QTL Test.  The HOLA requires savings institutions to meet a QTL test.
Under the QTL test, a savings and loan association is required to maintain at
least 65% of its "portfolio assets" (total assets less: (i) specified liquid
assets up to 20% of total assets; (ii) intangibles, including goodwill; and
(iii) the value of property used to conduct business) in certain "qualified
thrift investments" (primarily residential mortgages and related investments,
including certain mortgage-backed securities) in at least 9 months out of each
12 month period.

     A savings institution that fails the QTL test is subject to certain
operating restrictions and may be required to convert to a bank charter.  As of
December 31, 1996, the Association maintained 96.5% of its portfolio assets in
qualified thrift investments and, therefore, met the QTL test.

     Limitation on Capital Distributions.  OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital.  The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level.  An institution that exceeds
all fully phased-in capital requirements before and after a proposed capital
distribution ("Tier 1 Bank") and has not been advised by the OTS that it is in
need of more than normal supervision, could, after prior notice but without
obtaining approval of the OTS, make capital distributions during a calendar year
equal to the greater of (i) 100% of its net earnings to date during the calendar
year plus the amount that would reduce by one-half its "surplus capital ratio"
(the excess capital over its fully phased-in capital requirements) at the
beginning of the calendar year or (ii) 75% of its net income for the previous
four quarters.  Any additional capital distributions would require prior
regulatory approval.  In the event the Association's capital fell below its
regulatory requirements or the OTS notified it that it was in need of more than
normal supervision, the Association's ability to make capital distributions
could be restricted.  In addition, the OTS could prohibit a proposed capital
distribution by any institution, which would otherwise be permitted by the
regulation, if the OTS determines that such distribution would constitute an
unsafe or unsound practice.  In December 1994, the OTS proposed amendments to
its capital distribution regulation that would generally authorize the payment
of capital distributions without OTS approval provided that the payment does not
cause the institution to be undercapitalized within the meaning of the prompt
corrective action regulation.  However, institutions in a holding company
structure would still have a prior notice requirement.  At December 31, 1996,
the Association was a Tier 1 Bank.

                                       37
<PAGE>
 
     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 5% but may be changed from
time to time by the OTS to any amount within the range of 4% to 10% depending
upon economic conditions and the savings flows of member institutions.  OTS
regulations also require each member savings institution to maintain an average
daily balance of short-term liquid assets at a specified percentage (currently
1%) of the total of its net withdrawable deposit accounts and borrowings payable
in one year or less.  Monetary penalties may be imposed for failure to meet
these liquidity requirements.  The Association's liquidity and short-term
liquidity ratios for December 31, 1996 were 25.3% and 8.7% respectively, 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, 1996 totalled $119,000.

     Branching.   OTS regulations permit nationwide branching by federally
chartered savings institutions to the extent allowed by federal statute.  This
permits federal savings institutions to establish interstate networks and to
geographically diversify their loan portfolios and lines of business.  The OTS
authority preempts any state law purporting to regulate branching by federal
savings institutions.

     Transactions with Related Parties.  The Association's authority to engage
in transactions with related parties or "affiliates" (e.g.., any company that
controls or is under common control with an institution, including the Company
and its non-savings institution subsidiaries) is limited by Sections 23A and 23B
of the Federal Reserve Act ("FRA").  Section 23A limits the aggregate amount of
covered transactions with any individual affiliate to 10% of the capital and
surplus of the savings institution.  The aggregate amount of covered
transactions with all affiliates is limited to 20% of the savings institution's
capital and surplus.  Certain transactions with affiliates are required to be
secured by collateral in an amount and of a type described in Section 23A and
the purchase of low quality assets from affiliates is generally prohibited.
Section 23B generally provides that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the institution as those prevailing at the time for comparable
transactions with non-affiliated companies.  In addition, savings institutions
are prohibited from lending to any affiliate that is engaged in activities that
are not permissible for bank holding companies and no savings institution may
purchase the securities of any affiliate other than a subsidiary.

     The Association's authority to extend credit to executive officers,
directors and 10% shareholders ("insiders"), as well as entities such persons
control, is governed by Sections 22(g) and 22(h) of the FRA and Regulation O
thereunder.  Among other things, such loans are required to be made on terms
substantially the same as those offered to unaffiliated individuals and to not
involve more than the normal risk of repayment.  Recent legislation created an
exception for loans made pursuant to a benefit or compensation program that is
widely available to all employees of the institution and does not give
preference to insiders over other employees.  Regulation O also places
individual and aggregate limits on the amount of loans the Association may make
to insiders based, in part, on the Association's capital position and requires
certain board approval procedures to be followed.

                                       38
<PAGE>
 
     Enforcement.  Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring actions
against the institution and all institution-affiliated parties, including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution.  Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors to institution of receivership, conservatorship or termination of
deposit insurance.  Civil penalties cover a wide range of violations and can
amount to $25,000 per day, or even $1 million per day in especially egregious
cases.  Under the FDI Act, the FDIC has the authority to recommend to the
Director of the OTS enforcement action to be taken with respect to a particular
savings institution.  If action is not taken by the Director, the FDIC has
authority to take such action under certain circumstances.  Federal law also
establishes criminal penalties for certain violations.

     Standards for Safety and Soundness.  The federal banking agencies have
adopted Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") and a final rule to implement safety and soundness standards
required under the FDI Act.  The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired.  The
standards set forth in the Guidelines address internal controls and information
systems; internal audit system; credit underwriting; loan documentation;
interest rate risk exposure; asset growth; asset quality; earnings and
compensation, fees and benefits.  If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
Guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard, as required by the FDI
Act.  The final rule establishes deadlines for the submission and review of such
safety and soundness compliance plans when such plans are required.
 
FEDERAL RESERVE SYSTEM

     The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts).  During fiscal 1996, the Federal
Reserve Board regulations generally required that reserves be maintained against
aggregate transaction accounts as follows: for accounts aggregating $52.0
million or less (subject to adjustment by the Federal Reserve Board) the reserve
requirement is 3%; and for accounts aggregating greater than $52.0 million, the
reserve requirement is $1.6 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 $52.0 million.  The first $4.3 million of
otherwise reservable balances (subject to adjustments by the Federal Reserve
Board) were exempted from the reserve requirements.  The Association is in
compliance with the foregoing requirements.  The balances maintained to meet the
reserve requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements imposed by the OTS.

                                       39
<PAGE>
 
                           FEDERAL AND STATE TAXATION

FEDERAL TAXATION

     General.  The Company and the Association report their income on a
consolidated basis and the accrual method of accounting, and are subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Association's reserve for bad debts
discussed below.  The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Association or the Company.  The Association has not been
audited by the IRS since 1988, which covered the tax years up to 1987.  For its
1996 taxable year, the Association is subject to a maximum federal income tax
rate of 34%.

     Bad Debt Reserves.  For fiscal years beginning prior to December 31, 1995,
thrift institutions which qualified under certain definitional tests and other
conditions of the Internal Revenue Code of 1986 (the "Code") were permitted to
use certain favorable provisions to calculate their deductions from taxable
income for annual additions to their bad debt reserve.  A reserve could be
established for bad debts on qualifying real property loans (generally secured
by interests in real property improved or to be improved) under (i) the
Percentage of  Taxable Income Method (the "PTI Method") or (ii)  the Experience
Method.  The reserve for nonqualifying loans was computed using the Experience
Method.

     The Small Business Job Protection Act of 1996 (the "1996 Act"), which was
enacted on August 20, 1996, requires savings institutions to recapture (i.e.,
take into income) certain portions of their accumulated bad debt reserves.  The
1996 Act repeals the reserve method of accounting for bad debts effective for
tax years beginning after 1995.  Thrift institutions that would be treated as
small banks are allowed to utilize the Experience Method applicable to such
institutions, while thrift institutions that are treated as large banks (those
generally exceeding $500 million in assets) are required to use only the
specific charge-off method.  Thus, the PTI Method of accounting for bad debts is
no longer available for any financial institution.

     A thrift institution required to change its method of computing reserves
for bad debts will treat such change as a change in method of accounting,
initiated by the taxpayer, and having been made with the consent of the IRS.
Any Section 481(a) adjustment required to be taken into income with respect to
such change generally will be taken into income ratably over a six-taxable year
period, beginning with the first taxable year beginning after 1995, subject to
the residential loan requirement.

     Under the residential loan requirement provision, the recapture required by
the 1996 Act will be suspended for each of two successive taxable years,
beginning with the Association's current taxable year, in which the Association
originates a minimum of certain residential loans based upon the average of the
principal amounts of such loans made by the Association during its six taxable
years preceding its current taxable year.

     Under the 1996 Act, for its current and future taxable years, the
Association is not permitted to make additions to its tax bad debt reserves.  In
addition, the Association is required to recapture (i.e., take into income) over
a six year period the excess of the balance of its tax bad debt reserves as of
December 31, 1995 other than its supplemental reserve for losses on loans, if
any over the balance of such reserves as of December 31, 1987 (or a lesser
amount since the Association's loan portfolio decreased since December 31,
1987).  As a result of such recapture, the Association will not incur any
additional tax

                                       40
<PAGE>
 
liability.  As of December 31, 1996, the Association had deferred tax
liabilities of $765,000 recorded for the tax bad debt reserve.  The Association
has a two year exemption to pay this liability and then will pay the $765,000
over the next four years.

     Distributions.  Under the 1996 Act, if the Association makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Association's unrecaptured tax bad debt reserves (including
the balance of its reserves as of December 31, 1987) to the extent thereof, and
then from the Association's supplemental reserve for losses on loans, to the
extent thereof, and an amount based on the amount distributed (but not in excess
of the amount of such reserves) will be included in the Association's income.
Non-dividend distributions include distributions in excess of the Association's
current and accumulated earnings and profits, as calculated for federal income
tax purposes, distributions in redemption of stock, and distributions in partial
or complete liquidation.  Dividends paid out of the Association's current or
accumulated earnings and profits will not be so included in the Association's
income.

     The amount of additional taxable income triggered by a non-dividend is an
amount that, when reduced by the tax attributable to the income, is equal to the
amount of the distribution.  Thus, if the Association makes a non-dividend
distribution to the Company, approximately one and one-half times the amount of
such distribution (but not in excess of the amount of such reserves) would be
includable in income for federal income tax purposes, assuming a 35% federal
corporate income tax rate.  The Association does not intend to pay dividends
that would result in a recapture of any portion of its bad debt reserves.

     SAIF Recapitalization Assessment.  The Funds Act levied a 65.7-cent fee on
every $100 of thrift deposits held on March 31, 1995.  For financial statement
purposes, this assessment was reported as an expense for the quarter ended
September 30, 1996.   The Funds Act includes a provision which states that the
amount of any special assessment paid to capitalize SAIF under this legislation
is deductible under Section 162 of the Code in the year of payment.

     Corporate Alternative Minimum Tax.  The Internal Revenue Code of 1986, as
amended (the "Code") imposes a tax on alternative minimum taxable income
("AMTI") at a rate of 20%.  The excess of the bad debt reserve deduction using
the percentage of taxable income method over the deduction that would have been
allowable under the experience method is treated as a preference item for
purposes of computing the AMTI.  Only 90% of AMTI can be offset by net operating
loss carryovers of which the Association currently has none.  AMTI is increased
by an amount equal to 75% of the amount by which the Association's adjusted
current earnings exceeds its AMTI (determined without regard to this preference
and prior to reduction for net operating losses).  In addition, for taxable
years beginning after December 31, 1986 and before January 1, 1996, an
environmental tax of .12% of the excess of AMTI (with certain modifications)
over $2.0 million is imposed on corporations, including the Association, whether
or not an Alternative Minimum Tax ("AMT") is paid.  The Association does not
expect to be subject to the AMT, but may be subject to the environmental tax
liability.

     Dividends Received Deduction and Other Matters.  The Company may exclude
from its income 100% of dividends received from the Association as a member of
the same affiliated group of corporations.  The corporate dividends received
deduction is generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Association will not file a
consolidated tax return, except that if the Company or the Association own more
than 20% of the stock of a corporation distributing a dividend then 80% of any
dividends may be deducted.

                                       41
<PAGE>
 
STATE AND LOCAL TAXATION

     Commonwealth of Pennsylvania.  The Association is subject to the Mutual
Thrift Institutions Tax of the Commonwealth of Pennsylvania based on the
Association's financial net income determined in accordance with generally
accepted accounting principles with certain adjustments.  The tax rate under the
Mutual Thrift Institutions Tax is 11.5%.  Interest on state and federal
obligations is excluded from net income.  An allocable portion of net interest
expense incurred to carry the obligations is disallowed as a deduction.  Three
year carryforwards of losses are allowed.

     The Company is subject to the Corporate Net Income Tax and the Capital
Stock Tax of the Commonwealth of Pennsylvania.

     Delaware Taxation.  As a Delaware holding company not earning income in
Delaware, the Company is exempt from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.

IMPACT OF NEW ACCOUNTING STANDARDS

 

     In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128").
SFAS 128 specifies the computation, presentation, and disclosure requirements
for earnings per share and is substantially similar to the standard recently
issued by the International Accounting Standards Committee titled "International
Accounting Standards, Earnings Per Share" ("IAS 33").  The impact of SFAS 128
has not yet been determined by the Company.

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 12/31/96                          POSITION
--------------------  -----------------------  ---------------------------------------------------
<S>                   <C>                      <C> 
Lawrence A. Michael            47                  Secretary of the Company and Vice
                                                   President and Secretary of the Association 

Raymond G. Suchta              48                  Chief Financial Officer and Treasurer of the
                                                   Company and Vice President and Chief Financial 
                                                   Officer of the Association

Aaron T. Flaitz, Jr.           46                  Vice President and Assistant Secretary of
                                                   the Association

Norman A. Litterini            55                  Vice President - Lending of the Association

Wayne A. Callen                47                  Vice President - Data Processing of the 
                                                   Association

Eugene G. Hreha                59                  Vice President - Marketing of the 
                                                   Association

Judith A. Stoeckle             56                  Vice President - Systems Coordinator of the
                                                   Association
</TABLE> 

                                      42
<PAGE>
 
ITEM 2.  PROPERTIES.
-------------------
     The Association conducts its business through an administrative and full
service office located in the Borough of Whitehall and twelve other full service
branch offices, all of which are located in the greater Pittsburgh metropolitan
area.  Management believes that the Association's current facilities are
adequate to meet the present and immediately foreseeable needs of the
Association and the Company.


<TABLE>
<CAPTION>
 
                                                             NET BOOK VALUE
                                       ORIGINAL              OF PROPERTY OR       TOTAL
                                         YEAR                   LEASEHOLD        DEPOSITS
                               LEASED   LEASED    DATE OF    IMPROVEMENTS AT        AT
                                 OR       OR       LEASE      DECEMBER 31,     DECEMBER 31,
          LOCATION             OWNED   ACQUIRED  EXPIRATION       1996             1996
-------------------------   ---------  --------  ----------  ----------------  ------------
EXECUTIVE/HOME OFFICE:                                                        (In thousands)
<S>                            <C>     <C>       <C>         <C>              <C>
 
Whitehall
4750 Clairton Boulevard
Whitehall, PA  15236.........  Owned       1983           -       $2,487,397       $ 33,940
 
BRANCH OFFICES:
 
Homestead
300 East Eighth Avenue
Homestead, PA  15120.........  Owned       1945           -           30,000         87,384
 
McKeesport
225 Fifth Avenue
McKeesport, PA  15134........  Owned       1966           -          225,547         86,083
 
Clairton
608 Miller Avenue
Clairton, PA  15025..........  Owned       1959           -           51,321         26,800

Forest Hills
2210 Ardmore Boulevard
Forest Hills, PA  15221......  Owned       1974           -          245,317         59,920
 
Norwin Hills
8775 Norwin Avenue
North Huntingdon, PA  15642..  Leased      1991        2006            4,539         10,105
 
Elizabeth
548 Rock Run Road
Elizabeth Township, PA
15018........................  Owned       1978           -          225,145         32,147

Munhall
4600 Main Street
Munhall, PA  15120...........  Owned       1982           -          503,303         81,711
 
Caste Village
Baptist & Grove Roads
Whitehall, PA  15236.........  Leased      1991        2005           17,202          8,536
 
</TABLE> 

                                       43
<PAGE>
 
<TABLE> 
<CAPTION> 

                                                             NET BOOK VALUE
                                       ORIGINAL              OF PROPERTY OR       TOTAL
                                         YEAR                   LEASEHOLD        DEPOSITS
                               LEASED   LEASED    DATE OF    IMPROVEMENTS AT        AT
                                 OR       OR       LEASE      DECEMBER 31,     DECEMBER 31,
          LOCATION             OWNED   ACQUIRED  EXPIRATION       1996             1996
-------------------------   ---------  --------  ----------  ----------------  ------------
<S>                          <C>       <C>        <C>         <C>              <C> 
White Oak
1527 Lincoln Way
White Oak, PA  15131.........  Owned       1993           -          195,105         21,991
 
Belle Vernon
100 Sara Way
Belle Vernon, PA 15012.......  Leased      1996        1999          232,580            942
 
North Fayette
250 Summit Park Drive
Pittsburgh, PA 15275.........  Leased      1996        1999           98,840              7
 
West Mifflin
2251 Century Drive
West Mifflin, PA  15122......  Leased      1996        2000           98,840             --
                                                                  ----------       --------
Total........................                                
                                                                  $4,415,136       $449,566
                                                                  ==========       ========
 
</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 or 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 Inforrmation" and "Stock Price"
on the inside front cover of the Registrant's 1996 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 1996 Annual Report to Stockholders
on page 4 and is incorporated herein by reference.

                                       44
<PAGE>
 
ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
-------------------------------------------------------------------------
          RESULTS OF OPERATIONS.
          ---------------------
     The above-captioned information appears under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Registrant's
1996 Annual Report to Stockholders on pages 5 through 18 and is incorporated
herein by reference.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
-----------------------------------------------------
     The Consolidated Financial Statements of GA Financial, Inc. and its
subsidiary, together with the report thereon by Coopers & Lybrand L.L.P. appears
in the Registrant's 1996 Annual Report to Stockholders on pages 19 through 47
and are incorporated herein by reference.

ITEM 9.   CHANGE 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 30, 1997,
at pages 5 and 6.

ITEM 11.  EXECUTIVE COMPENSATION.
--------------------------------
     The information relating to directors' compensation and executives'
compensation is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 30, 1997,
at  pages 7  and 8 and pages 12 through 19 (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 30, 1997,
at pages 3, 6 and 7.

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 30, 1997, at pages 19 and 20.

                                       45
<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 1996 Annual Report to
    Stockholders.



                                                                            PAGE
 
    Report of Independent Accountants...................................     19
 
    Consolidated Statements of Financial Condition for the years ended
      December 31, 1996 and 1995........................................     20
 
    Consolidated Statements of Income for the
      Years Ended December 31, 1996, 1995 and 1994......................     21
 
    Consolidated Statements of Cash Flows for the
      Years Ended December 31, 1996, 1995 and 1994......................     22
 
    Consolidated Statements of Shareholders' Equity
      for the Years Ended December 31, 1996, 1995 and 1994..............     23
 
    Notes to Consolidated Financial Statements for the
      Years Ended December 31, 1996, 1995 and 1994......................  24-47
 

                                       46
<PAGE>
 
   The remaining information appearing in the 1996 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.

(3)  Exhibits

     (a) The following exhibits are filed as part of this report.

         3.1  Certificate of Incorporation of GA Financial, Inc.*
         3.2  Bylaws of GA Financial, Inc.*
         4.0  Stock Certificate of GA Financial, Inc.*
         10.1 GA Financial Inc. 1996 Stock-Based Incentive Plan **
         10.2 Form of Great American Federal Savings and Loan Association
              Employee Stock Ownership Plan*
         10.3 Form of Employment Agreement between Great American Federal
              Savings and Loan Association and John G. Micenko*
         10.4 Form of Employment Agreement between GA Financial, Inc. and
              John M. Kish and John G. Micenko*
         10.5 Form of Change in Control Agreement between Great American Federal
              Savings and Loan Association and Andrew R. Getsy, Aaron T. Flaitz,
              Jr., Norman A. Litterini, Wayne A. Callen, Eugene G. Hreha 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*
         13.0 Portions of the 1996 Annual Report to Stockholders (filed
              herewith)
         21.0 Subsidiary information is incorporated herein by reference to
              "Part I - Subsidiaries"
         27.0 Financial Data Schedule (filed herewith)

     (b) Reports on Form 8-K

         None.
         __________________________________
         *  Incorporated herein by reference into this document from the
            Exhibits to Form S-1, Registration Statement, filed on December 21,
            1995, as amended, Registration No. 33-80715.
         ** Incorporated herein by reference into this document from the Proxy
            Statement for the Special Meeting of Shareholders filed on August
            30, 1996.

                                       47
<PAGE>
 
                                   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 28, 1997

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.

Name                          Title                             Date
----                          -----                             ----


/s/ John M. Kish           Chairman of the Board and      March 28, 1997 
----------------------     Chief Executive Officer
John M. Kish               (principal executive officer)


/s/ John G. Micenko        President and Director       
----------------------            
John G. Micenko         

/s/ Raymond G. Suchta       Chief Financial Officer       March 28, 1997 
----------------------      and Treasurer             
Raymond G. Suchta           (principal accounting and 
                            financial officer)         
                            
 

/s/ William G. Boyer           Director                   March 28, 1997  
---------------------- 
William G. Boyer       

/s/ Thomas E. Bugel            Director                   March 28, 1997  
---------------------- 
Thomas E. Bugel        

/s/ Darrek J. Hess             Director                   March 28, 1997  
----------------------
Darrell J. Hess       

/s/ Thomas M. Stanton          Director                   March 28, 1997  
---------------------- 
Thomas M. Stanton      

/s/ David R. Wasik             Director                   March 28, 1997  
---------------------- 
David R. Wasik