<PAGE>
1,000,000 Shares
[GRAPHIC OMITTED]
CRUSADER HOLDING CORPORATION
Common Stock
---------------------
All of the shares of Common Stock (the "Common Stock") offered hereby (the
"Offering") are being sold by Crusader Holding Corporation, a Pennsylvania
corporation (the "Company"). Prior to the Offering, there has been no public
market for the Common Stock. See "Underwriting" for a discussion of the factors
considered in determining the initial public offering price.
The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "CRSB."
---------------------
Prospective investors should carefully consider the factors set forth in
"Risk Factors" beginning on page 10 hereof.
---------------------
THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF A BANK
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
INSURER OR GOVERNMENT AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
Underwriting
Discounts and Proceeds to
Price to Public Commissions(1) Company(2)
- --------------------------------------------------------------------------------
Per Share ......... $15.00 $1.05 $13.95
- --------------------------------------------------------------------------------
Total(3) .......... $15,000,000 $1,050,000 $13,950,000
================================================================================
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). The Company has agreed to pay the
representative of the Underwriters (the "Representative") a financial
advisory fee of $75,000. See "Underwriting."
(2) Before deducting estimated expenses of the Offering (exclusive of the
aforementioned financial advisory fee) of approximately $400,000 payable
by the Company and approximately $3.2 million of Company indebtedness to
certain existing shareholders (who are also directors of the Company). See
"Use of Proceeds."
(3) The Company has granted the Underwriters an option to purchase up to
150,000 additional shares of Common Stock at the Price to Public less
Underwriting Discounts and Commissions solely to cover over-allotments, if
any. If the Underwriters exercise such option in full, the total Price to
Public, Underwriting Discounts and Commissions and Proceeds to Company will
be $17,250,000, $1,207,500 and $16,042,500, respectively. See
"Underwriting."
---------------------
The shares of Common Stock are offered severally by the Underwriters named
herein, subject to prior sale, when, as and if delivered to and accepted by the
Underwriters and subject to certain other conditions. It is expected that
delivery of certificates representing the shares of Common Stock will be made
to the Underwriters on or about February 13, 1998.
---------------------
Advest, Inc.
The date of this Prospectus is February 10, 1998
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING STABILIZATION, THE PURCHASE OF COMMON STOCK TO COVER SYNDICATE SHORT
POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING." SUCH STABILIZING TRANSACTIONS, IF COMMENCED,
MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements, including the Notes thereto,
appearing elsewhere in this Prospectus. Unless otherwise indicated, all
information in this Prospectus is based on the assumption that the Underwriters
(as defined herein) will not exercise their over-allotment option, and that
outstanding shares do not include 300,000 shares reserved for issuance under
the Company's stock option plans. Where appropriate, amounts throughout this
Prospectus have been adjusted retroactively to reflect a two-for-one split of
the Company's Common Stock, par value $0.01 per share (the "Common Stock"), in
December 1997 and a twenty-eight-for-one split of the Common Stock in March
1996, both of which were effected in the form of a stock dividend. Except as
the context may otherwise require (i) the "Company" means Crusader Holding
Corporation together with its wholly-owned subsidiary, Crusader Savings Bank,
FSB (the "Bank"), and the subsidiaries of the Bank, (ii) the "Bank" means the
Bank and its subsidiaries, and (iii) "fiscal" or "fiscal year" means the
Company's fiscal year ended June 30th. Ratios computed with respect to fiscal
years are actual and with respect to interim periods have been annualized. See
"Risk Factors."
The Company
The Company, a Pennsylvania corporation established in 1988 and
headquartered in Philadelphia, Pennsylvania, is the holding company for the
Bank, a federally chartered savings bank. Currently, all of the Company's
business activities are conducted through the Bank. At December 31, 1997, the
Company had total assets of $161.3 million, total deposits of $140.7 million
and total shareholders' equity of $5.7 million. The Bank's deposits are
federally insured by the Savings Association Insurance Fund ("SAIF") of the
Federal Deposit Insurance Corporation ("FDIC") to the maximum extent permitted
by law. As a savings and loan holding company, the Company is subject to the
supervision and regulation of the Office of Thrift Supervision ("OTS").
The Bank provides community banking services through two branches and two
automated teller machines ("ATMs") in Philadelphia, and has focused primarily
on mortgage lending for residential and multi-family housing and commercial
real estate. In the latter part of 1995, management began to refocus the
Company and developed a plan designed to expand its operations and to grow its
assets and profitability. The Company's strategy is to maintain a core banking
operation that provides a growing stream of income enhanced by engaging in
various specialty lending and product niche activities designed to provide the
Company with significantly higher risk-adjusted rates of return. These
activities currently include the origination and acquisition for resale of
nonconforming credit residential mortgages ("Nonconforming Mortgages"), the
origination of loans guaranteed by the U.S. Small Business Administration
("SBA") and the acquisition of delinquent property tax liens.
The key elements of the Company's strategy include:
o Maintaining and increasing the Company's core banking operations by
expanding its portfolio lending activities;
o Expanding the Bank's Nonconforming Mortgage operation by developing new
broker relationships, increasing the purchase of loan pools and broadening
the geographic scope of its activities; and
o Increasing other existing specialty lending and product niche activities
and identifying and developing new activities.
The Company believes that the Bank can compete effectively in its various
areas of business activity because of the quality of its management team, its
ready access to federally insured deposits and borrowings from the Federal Home
Loan Bank ("FHLB"), and the ability to use its federal charter to operate
throughout the United States. In addition to generating interest income, the
Bank's specialty lending and product niche activities are beginning to generate
significant levels of non-interest income, in particular from the Bank's sale
of Nonconforming Mortgage loans.
3
<PAGE>
The Bank generally sells for cash its interest in its Nonconforming
Mortgage loans to institutional investors. To date, the Bank has favored this
approach over securitizations because it realizes a cash gain on the sale of
its loans and retains no risks, other than certain repurchase risks associated
with representations and warranties and, in certain cases, first year
prepayment risks. This differentiates the Bank from institutions that
securitize their loans, which retain default and prepayment risk on the loans
they have historically securitized, and which in certain cases, have incurred
write-downs of their securitization receivables due to adverse default and
prepayment experience. The Bank does not retain these risks and, since it sells
its loans together with their related servicing rights, it does not retain any
risk with respect to the ongoing valuation of servicing rights.
The Company, through the Bank, has been successful in implementing its
strategy and has become increasingly profitable. The Company has grown its
assets from $63.6 million as of June 30, 1995 to $161.3 million as of December
31, 1997. During this period of growth, the Company grew its core banking
income by increasing its net interest income and controlling its core operating
expenses. In addition, the Company is continuing to grow and expand its
Nonconforming Mortgage lending operations. Nonconforming Mortgage originations
and acquisitions totaled $24.5 million for the year ended June 30, 1997, $25.6
million for the quarter ended September 30, 1997 and $71.5 million for the
quarter ended December 31, 1997.
The Company had net income of $926,000 for the quarter ended December 31,
1997, as compared to net income of $270,000 for the comparable prior year
period. Net income for the six months ended December 31, 1997 was $1.6 million,
as compared to net income of $497,000, exlcuding a one-time SAIF assessment,
for the comparable prior year period.
The executive office of the Company is located at 1230 Walnut Street,
Philadelphia, Pennsylvania 19107 and its telephone number is (215) 893-1500.
4
<PAGE>
Summary Consolidated Financial Data
<TABLE>
<CAPTION>
At or for the Three
Months Ended September
30, At or for the Year Ended June 30,
----------------------- -------------------------------------
1997 1996 1997 1996 1995
----------- ---------- ----------- ---------- ------------
(Unaudited)
(In thousands, except per share amounts and ratios)
<S> <C> <C> <C> <C> <C>
Net income (loss) ........................... $ 665 $ 35 $ 962 $ 112 $ (65)
Net income (loss), excluding SAIF assess-
ment(1) ................................... 665 227 1,154 112 (65)
Net income (loss) per share(2)(6) ........... 0.31 0.02 0.46 0.07 (0.05)
Net income (loss) per share, excluding
SAIF assessment(1)(2) ..................... 0.31 0.11 0.55 0.07 (0.05)
Total assets ................................ 134,538 88,703 117,093 81,307 63,550
Loans receivable, net ....................... 93,857 62,830 85,992 53,604 43,616
Loans held for sale ......................... 16,767 1,528 6,244 1,659 1,550
Shareholders' notes(3) ...................... 3,238 2,918 2,990 2,918 1,970
Shareholders' equity ........................ 3,871 1,605 2,895 1,512 1,197
Return on average assets(5) ................. 2.02% 0.16% 0.97% 0.17% (0.12)%
Net yield on interest-earning assets ........ 3.31% 2.69% 2.89% 2.23% 2.08%
Supplemental Performance Ratios:
Return on average assets, excluding
SAIF assessment(1)(5) .................... 2.02% 1.07% 1.17% 0.17% (0.12)%
Return on average invested
capital(4)(5) ............................ 37.42% 3.10% 16.35% 2.53% (2.05)%
Return on average invested capital,
excluding SAIF assessment(1)(4)(5) ....... 37.42% 20.08% 19.61% 2.53% (2.05)%
</TABLE>
- -------------
(1) In September 1996, the Company incurred a one-time SAIF assessment of
$296,000 to recapitalize the fund. Net of related tax effects, this
reduced net income by $192,000 for the quarter ended September 30, 1996
and the year ended June 30, 1997.
(2) Adjusted to retroactively reflect prior stock splits. See "Dividends."
(3) The Company issued notes payable to shareholders, the proceeds of which
were contributed as capital to the Bank. Such notes will be repaid from
the proceeds of the Offering. See "Use of Proceeds."
(4) Invested capital is the sum of shareholders' notes and shareholders'
equity.
(5) Interim period ratios are annualized where appropriate.
(6) Supplemental earnings per share would have been $0.29 and $0.47 for the
quarter ended September 30, 1997 and the year ended June 30, 1997,
respectively, assuming that a sufficient number of shares of Common Stock
were issued at the public offering price of $15 per share to permit the
Company to repay the debt to shareholders outstanding during the
respective periods with the proceeds from the sale of such shares.
5
<PAGE>
The Offering
<TABLE>
<S> <C>
Common Stock offered .................. 1,000,000 shares
Common Stock outstanding prior
to the Offering ..................... 2,500,000 shares
Common Stock outstanding after
the Offering ........................ 3,500,000 shares
Use of Proceeds ....................... The estimated net proceeds received by the Company from the sale
of the shares of Common Stock offered hereby will be used to repay
$3.2 million of the Company's indebtedness to certain existing
shareholders (who are also directors of the Company), and the bal-
ance will be contributed as capital to the Bank. The Bank intends to
use such capital for general corporate purposes and to support the
future growth of the assets of the Bank. See "Use of Proceeds."
Dividends on Common Stock ............. The Company does not currently intend to pay cash dividends on
the Common Stock. See "Dividends."
Nasdaq National Market symbol ......... "CRSB."
</TABLE>
Risk Factors
Prospective investors should carefully consider the matters set forth
under "Risk Factors."
6
<PAGE>
Recent Developments
The following is a summary of the Company's results of operations for the
three and six month periods ended December 31, 1997 and 1996, and its financial
condition as of December 31, and June 30, 1997.
<TABLE>
<CAPTION>
At or for the At or for the
Three Months Six Months
Ended December 31, Ended December 31,
-------------------------- --------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
(Unaudited)
(In thousands, except per share amounts and ratios)
<S> <C> <C> <C> <C>
Interest income ............................................. $ 3,523 $ 1,865 $ 6,341 $ 3,531
Interest expense ............................................ 2,190 1,210 3,941 2,321
-------- -------- -------- --------
Net interest income ......................................... 1,333 655 2,400 1,210
Provision for loan losses ................................... 170 10 185 21
-------- -------- -------- --------
Net interest income after provision for loan losses ......... 1,163 645 2,215 1,189
-------- -------- -------- --------
Non-Interest Income:
CMC(1) non-interest income ................................ 1,311 290 2,144 467
Other ..................................................... 149 155 317 286
-------- -------- -------- --------
Total non-interest income ................................... 1,460 445 2,461 753
-------- -------- -------- --------
Non-Interest Expenses:
CMC non-interest expenses ................................. 730 235 1,292 353
Core non-interest expenses ................................ 452 440 901 824
SAIF special assessment ................................... -- -- -- 296
-------- -------- -------- --------
Total non-interest expenses ................................. 1,182 675 2,193 1,473
-------- -------- -------- --------
Income before income tax expense ............................ 1,441 415 2,483 469
Income tax expense .......................................... 507 145 865 164
Income before minority interest ............................. 934 270 1,618 305
Minority interest ........................................... 8 -- 27 --
-------- -------- -------- --------
Net income .................................................. $ 926 $ 270 $ 1,591 $ 305
======== ======== ======== ========
Net income per share ........................................ $ 0.39 $ 0.14 $ 0.70 $ 0.15
======== ======== ======== ========
Selected Ratios:
Return on average assets(2) ............................... 2.39% 1.18% 2.22% 0.68%
Net yield on interest-earning assets(2) ................... 3.49% 2.94% 3.40% 2.82%
Return on average invested capital(2)(3) .................. 47.10% 23.18% 41.04% 13.29%
Non-accrual loans to net loans ............................ 0.93% 1.16% 0.93% 1.16%
Allowance for loan losses to net loans .................... 0.65% 0.61% 0.65% 0.61%
Bank core capital ratio ................................... 5.02% 5.16% 5.02% 5.16%
Total Bank risk-based capital ratio ....................... 10.51% 11.37% 10.51% 11.37%
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
-------------- ----------
(Unaudited)
(In thousands)
<S> <C> <C>
Cash and cash equivalents ............................................ $ 9,121 $ 325
Loans held for sale .................................................. 29,616 6,244
Investment and mortgage-backed securities available-for-sale ......... 18,697 22,343
Loans receivable, net ................................................ 100,407 85,992
Other real estate owned .............................................. 111 --
Other assets ......................................................... 3,376 2,189
-------- --------
Total Assets ........................................................ $161,328 $117,093
======== ========
Deposits ............................................................. $140,657 $ 95,906
Advances from Federal Home Loan Bank ................................. -- 8,950
Securities sold under agreements to repurchase ....................... 10,780 5,780
Other liabilities .................................................... 926 503
Shareholders' notes .................................................. 3,238 2,990
Minority interest .................................................... 46 69
Shareholders' equity ................................................. 5,681 2,895
-------- --------
Total Liabilities and Shareholders' Equity ......................... $161,328 $117,093
======== ========
</TABLE>
- -------------
(1) Crusader Mortgage Corporation ("CMC").
(2) Ratios are annualized where appropriate.
(3) Invested capital is the sum of shareholders' notes and shareholders'
equity.
Results of Operations
Three months ended December 31, 1997 versus three months ended December
31, 1996. Net income increased to $926,000 for the three months ended December
31, 1997 as compared to $270,000 for the comparable prior year period. Net
interest income increased by $678,000 or 103.51% due primarily to a growth in
average earning assets of $63.6 million and an increase in the net yield on
interest-earning assets to 3.49% as compared to 2.94% in the prior year period.
The provision for loan losses increased by $160,000 to $170,000 for the current
year period due to a growth in the loan portfolio. There were no charge-offs of
loans in either period. Non-interest income increased by $1.0 million or
228.81% due primarily to an increase in CMC Nonconforming Mortgage banking
income to $1.3 million as compared to $290,000 for the prior year period.
Non-interest expenses increased by $507,000 due primarily to an increase in CMC
operating expenses of $495,000. Excluding CMC's operating expenses,
non-interest expenses increased by $12,000, due primarily to expansion of the
Bank's staff to accommodate the growth in assets. Income tax expense was
$362,000 higher due to the increased profitability.
Six months ended December 31, 1997 versus six months ended December 31,
1996. Net income increased to $1.6 million for the six months ended December
31, 1996 as compared to $305,000 for the comparable prior year period.
Excluding the one-time SAIF special assessment incurred in the prior year
period, net income increased by $1.1 million or 220.12%. Net interest income
increased by $1.2 million or 98.35% due primarily to a growth in average
earning assets of $55.3 million and an increase in the net yield on
interest-earning assets to 3.40% as compared to 2.82% in the prior year period.
Non-interest income increased by $1.7 million or 226.83% due primarily to an
increase in CMC Nonconforming Mortgage banking income to $2.1 million as
compared to $467,000 for the prior year period. Non-interest expenses increased
by $720,000. Excluding an increase in CMC operating expenses of $939,000 and
the $296,000 one-time SAIF assessment incurred in the prior year period,
non-interest expenses increased by $77,000, which is due primarily to the
Bank's expansion of staff to accommodate the growth in assets. Income tax
expense was $701,000 higher due to the increased profitability.
8
<PAGE>
Financial Condition
The Company's assets increased to $161.3 million at December 31, 1997 as
compared to $117.1 million at June 30, 1997. The increase in assets primarily
reflects the deployment of proceeds from certificates of deposits into loans,
including portfolio loans and loans held for sale. At December 31, 1997, the
loan portfolio aggregated $100.4 million as compared to $86.0 million at June
30, 1997 with the growth concentrated in Commercial Real Estate (as defined
below) loans and conforming adjustable rate residential mortgages. Loans held
for sale increased to $29.6 million at December 31, 1997 as compared to $6.2
million at June 30, 1997. This increase resulted primarily from an increase in
the volume of Nonconforming Mortgage originations and acquisitions, which
aggregated $71.5 million during the three month period ended December 31, 1997.
Cash and cash equivalents aggregated $9.1 million at December 31, 1997 as
compared to $325,000 at June 30, 1997. This increase resulted primarily from
the proceeds of two loan pool sales on December 30, 1997. Other assets
increased by $1.2 million due largely to the $928,000 of excess of cost over
fair value of assets acquired in connection with the Bank's acquisition of the
remaining shares of CMC. Deposits were $140.7 million at December 31, 1997 as
compared to $95.9 million at June 30, 1997 reflecting primarily an increase in
certificates of deposits. Shareholders' equity increased by $2.8 million due to
the $1.6 million of net income generated during the period, and as a result of
the issuance of additional shares of Common Stock in connection with the
September 30, 1997 capital contributions by shareholders and the purchase of
the remaining shares of CMC.
Acquisition of Minority Interest in CMC
Effective November 30, 1997, the Company, the Bank and CMC entered into an
agreement with the minority shareholder of CMC and a corporation controlled by
him (the "Minority Shareholder Corporation"). The agreement, as amended,
provides for the Bank's acquisition of the entire interest in CMC held by the
minority shareholder in exchange for 150,000 shares of the Common Stock, and
further provides for the payment of accrued compensation of $250,000. The
agreement also provides for a reduction in the number of shares of Common Stock
to which the minority shareholder would otherwise be entitled in the event that
CMC's net income for the twelve months ending December 31, 1998 does not exceed
a certain level. The agreement further requires that the minority shareholder's
shares of Common Stock be escrowed for three years, with a portion of such
shares released on each of three designated dates, and provides for the
granting of an irrevocable proxy, pursuant to which the shares will be voted in
the same proportion as the other outstanding shares of the Common Stock are
voted. The agreement also contains certain indemnities in favor of the Company,
the Bank and CMC and prohibits the minority shareholder and the Minority
Shareholder Corporation from competing with the Company for a period of three
years. In addition, for a three year period from the effective date of the
agreement, the Minority Shareholder Corporation shall receive a monthly payment
of $6,250. As a result of this transaction, as of November 30, 1997, the Bank
owned all of the outstanding shares of CMC. If the Bank had owned 100% of CMC
and the Company issued 150,000 additional shares of Common Stock on July 1,
1996, net income would have increased by $43,000 and net income per share would
have decreased by $0.01 for the year ended June 30, 1997 and net income and net
income per share would have increased by $103,000 and $0.02, respectively, for
the quarter ended September 30, 1997.
9
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors, which address those risks material to the Offering and the Company,
should be considered carefully in evaluating an investment in the Common Stock
offered by this Prospectus. Certain statements in this Prospectus are
forward-looking and are identified by the use of forward-looking words or
phrases such as "intended," "will be positioned," "expects," is or are
"expected," "anticipates" and "anticipated." In addition, certain financial
ratios with respect to interim periods have been computed on an annualized
basis and as a result, may be considered forward-looking statements, although
they are not necessarily indicative of the actual ratios that would result from
an entire year of operations. These forward-looking statements are based on the
Company's current expectations. To the extent any of the information contained
in this Prospectus constitutes a "forward-looking statement," the risk factors
set forth below are cautionary statements identifying important factors that
could cause actual results to differ materially from those in the
forward-looking statement.
Restrictions on the Company as a Holding Company
The Company is a legal entity separate and distinct from the Bank,
although the principal source of the Company's operating cash flow is from the
Bank. The right of the Company to participate in the assets of any subsidiary,
including the Bank, upon liquidation, reorganization or otherwise (and thus the
ability of the holders of Common Stock to benefit from any distribution of such
assets) will be subject to the claims of such subsidiary's creditors, which
will have priority over the interests of the holders of Common Stock, except,
under certain circumstances, to the extent that the Company may itself be a
creditor with a recognized claim. The Bank is also subject to restrictions
under federal law which limit the transfer of funds by the Bank to the Company,
whether in the form of loans, extensions of credit, investments, asset
purchases or otherwise. See "Supervision and Regulation."
Risk of Recent Rapid Growth of Company and Bank
During the last several fiscal years, the Company and the Bank have
experienced rapid and significant growth. The total assets of the Company have
increased from $63.6 million at June 30, 1995, to $134.5 million at September
30, 1997. Although the Company believes that it has adequately managed its
growth in the past, there can be no assurance that the Company will continue to
experience similar growth, or any growth, in the future and, to the extent that
it does experience continued growth, that the Company will be able to
adequately and profitably manage such growth. The continued growth of the Bank
has led the Company to undertake the Offering and the capital to be raised from
the Offering is necessary to provide sufficient capital to support the
anticipated future growth of assets. No assurance can be given that rapid
growth will continue, and, if it does, there is no assurance that the earnings
of the Bank or other sources of capital which may be available to the Bank can
adequately provide the necessary capital for the Bank to maintain required
regulatory capital levels commensurate with continued rapid growth. The level
of future earnings of the Company also will depend on the ability of the Bank
to profitably deploy and manage the increased assets. The rapid growth of the
Bank in asset size and the rapid increase in its volume of loans during the
past several fiscal years have increased the possible risks inherent in an
investment in the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Although the Bank has experienced moderate loan losses to date, the rapid
growth of its loan portfolio from $43.6 million at June 30, 1995, to $93.9
million at September 30, 1997, may result in an increase to its loan loss
experience. Many of the loans recently made by the Bank are unseasoned, and,
therefore, specific payment and loss experience for this portion of the
portfolio has not yet been fully established. This may increase the potential
for additional loan losses even if the Bank continues to adhere to the same
underwriting criteria and monitoring procedures that have resulted in the
Bank's moderate loan loss experience to date. In addition, the Bank has
generated non-interest income from certain specialty lending and product niche
activities, and anticipates continued expansion of these activities. However,
there can be no assurance that the Bank will be able to increase these
activities in a manner consistent with management's business goals. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Allowance for Loan Losses."
10
<PAGE>
Adequacy of Allowance for Loan Losses
The risk of loan losses varies with, among other things, general economic
conditions, the type of loan being made, the creditworthiness of the borrower
over the term of the loan and, in the case of a collateralized loan, the value
of the collateral. Management maintains an allowance for loan losses based
upon, among other things, historical experience, an evaluation of economic
conditions and a regular review of delinquencies and loan portfolio quality.
Based upon such factors, management makes various assumptions and judgments
about the ultimate collectibility of the loan portfolio and provides an
allowance for loan losses for specific loans when their ultimate collectibility
is considered questionable and, for other loans, based upon a percentage of the
outstanding balances. Because certain lending activities involve greater risks,
the percentage applied to specific loan types may vary. If management's
assumptions and judgments prove to be incorrect and the allowance for loan
losses is inadequate to absorb future credit losses, or if the regulatory
authorities require the Bank to increase its allowance for loan losses, the
Bank's earnings could be significantly and adversely affected.
As of September 30, 1997, the allowance for loan losses was $487,000,
which represented 45.13% of nonperforming assets and 0.52% of the total net
loan portfolio as of such date. The Bank actively manages its nonperforming
loans in an effort to minimize credit losses and monitors its asset quality to
maintain an adequate allowance for loan losses. As its loan growth has
increased, the Bank has increased its allowance for loan losses. The Bank
believes that such allowance is adequate; however, future additions to the
allowance in the form of the provision for loan losses may be necessary due to
changes in economic conditions and the growth and performance of the Bank's
loan portfolio. See "-- Risk of Recent Rapid Growth of Company and Bank."
Concentration of Credit Risk
The Bank's loan portfolio is concentrated in the Philadelphia metropolitan
area. As a result, a decline in the general economic conditions in the
Philadelphia metropolitan area could have a material adverse effect on the
Company. See "Business -- Core Banking Activities -- Conforming Credit
Residential Lending" and "-- Commercial Real Estate Lending."
Risks Related to Certain Operating Activities
The Company is engaged in a variety of lending activities which generally
involve significant uncertainties and risks, including changing economic
conditions and interest rates. In addition, many of the activities in which the
Company is involved and the loans and securities which it purchases and sells
involve real estate. Accordingly, the Company's operating performance is
subject to and affected by many of the risks typically related to real estate
lending, including borrower default, foreclosure, liquidation, significant
declines in the value of the properties that secure loans and environmental
hazards.
The Company's strategy is to enhance the earnings generated by its core
banking operation by engaging in various specialty lending and product niche
activities that are designed to provide it with significantly higher
risk-adjusted rates of return than its historic bank lending activities. The
Company intends to monitor on an ongoing basis the risk/reward characteristics
of each of its specialty lending and product niche activities and determine
whether to expand, maintain or discontinue such activity. The Company may also
elect to pursue additional specialty lending and product niche activities.
There can be no assurance that the Company will be successful in its assessment
of the risk/reward characteristics of each of its specialty lending and product
niche activities or, even if such characteristics are considered favorable,
that the Company will successfully operate such activity. There can be no
assurance that the Company will be able to identify new specialty lending
activities and if such activities are identified, that the Company will be able
to develop such activities.
Commercial Real Estate Loans. Although as of September 30, 1997,
approximately 68% of the Company's mortgage portfolio was in single family
residential real estate loans, of which approximately 80% conformed to the
underwriting standards of the Federal National Mortgage Association ("FNMA"),
an increasingly significant portion of the Company's mortgage portfolio is in
multi-family residential and non-residential ("Commercial Real Estate") loans.
Mortgage lending with respect to these loans may entail risks of loss in the
event of delinquency and foreclosure that are greater than similar risks
associated with traditional single family residential loans. These risks result
from a variety of factors, including generally larger loan balances, the
dependency on the successful operation of the project for repayment and loan
terms which often do not require a full
11
<PAGE>
amortization of the loan over its term and instead, provide for a balloon
payment at the stated maturity. Although the Company generally requires
personal guarantees on these loans, if the net operating income from the
project is reduced, the borrower's ability to repay the loan may be impaired.
There can be no assurance that the Bank's Commercial Real Estate loans will not
be adversely affected by these and other risks related to such activities.
Nonconforming Credit Residential Real Estate Loans. The Bank originates
and acquires Nonconforming Mortgage loans made to borrowers who, because of
prior credit problems, the absence of a credit history, deviation from FNMA
guidelines or other factors, are unable or unwilling to qualify as borrowers
under FNMA guidelines ("nonconforming borrowers"). The Bank seeks to resell
these loans on a non-recourse basis pursuant to the terms of certain agreements
with purchasers pertaining thereto. The Bank's ability to continue to earn
income from this line of business is dependent, among other things, upon the
volume of loans to nonconforming borrowers that the Bank is able to originate,
acquire and resell. These loans are offered pursuant to various programs,
including programs which provide for reduced or no documentation for verifying
a borrower's income and employment. Loans to nonconforming borrowers present a
higher level of risk of default than conforming loans because of the increased
potential for default by borrowers who may have had previous credit problems or
who do not have any credit history, and may not be as saleable as loans which
conform to FNMA guidelines. There can be no assurance that the Bank will be
able to sell these loans, and if the Bank is unable to sell the loans, they
will become part of the Bank's portfolio.
Potential Impact of Changes in Interest Rates
The Bank's profitability is dependent to a large extent on its net
interest income, which is the difference between its interest income on
interest-earning assets (as defined below) and its interest expense on
interest-bearing liabilities (as defined below). The Bank, like most financial
institutions, is affected by changes in general interest rate levels and by
other economic factors beyond its control. Changes in the general level of
interest rates can affect the Bank's net interest income by affecting the
spread between the Bank's interest-earning assets and interest-bearing
liabilities, as well as, among other things, the ability of the Bank to
originate loans, the value of the Bank's interest-earning assets and its
ability to realize gains from the sale of such assets, the average life of the
Bank's interest-earning assets, and the Bank's ability to obtain deposits in
competition with other available investment alternatives. Historically, a major
source of the Bank's asset growth has been funded by deposits, primarily
certificates of deposit ("CDs"), which typically provide for a higher interest
rate than other bank deposit products, such as checking and savings accounts,
and the rates at which they are offered fluctuate largely as a result of
changes in market interest rates. Interest rates are highly sensitive to many
factors, including government monetary policies, domestic and international
economic and political conditions and other factors beyond the control of the
Bank. Interest rate risk also arises from mismatches between the dollar amount
of repricing or maturing assets and liabilities. Although management believes
that the maturities of the Bank's assets currently are well-balanced in
relation to its liabilities (which belief involves various estimates as to how
changes in the general level of interest rates will impact its assets and
liabilities), there can be no assurance that the profitability of the Bank
would not be adversely affected during any period of change in interest rates.
See "Management's Discussion and Analysis of Results of Operations and
Financial Condition -- Asset and Liability Management."
Limitations Imposed by Government Regulation
Both the Company, as a savings and loan holding company, and the Bank, as
a federally-chartered savings bank, are subject to extensive government
supervision and regulation, which is intended primarily for the protection of
depositors. In addition, both the Company and the Bank are subject to changes
in federal and state laws, including changes in tax laws which could materially
affect the real estate lending industry, as well as changes in regulations,
government policies and accounting principles. Recently enacted, proposed and
future legislation and regulations have had and will continue to have
significant impact on the financial services industry, including the Company.
Some of the legislative and regulatory changes may benefit the Company.
However, other changes may increase the Company's costs of doing business and
assist competitors, which could have a materially adverse effect on the
Company. There can be no assurance that the Company will be able to comply with
regulations promulgated in the future. See "Supervision and Regulation."
12
<PAGE>
Impact of Changes in Economic Conditions and Monetary Policies
Conditions beyond the Company's control may have a significant impact on
changes in the Company's net interest income and non-interest income from one
period to another. Examples of such conditions could include: (i) the strength
of credit demands by customers; (ii) the fiscal and debt management policies of
the federal government, including changes in tax laws; (iii) the monetary
policy of the Board of Governors of the Federal Reserve (the "Federal Reserve
Board"); (iv) the introduction and growth of new investment instruments and
transaction accounts by non-bank financial competitors and (v) changes in rules
and regulations governing the payment of interest on deposit accounts.
High Degree of Competition
The banking business is highly competitive. The Bank competes with other
savings banks, commercial banks, savings and loan associations, mortgage
bankers and brokers, credit unions, finance companies, mutual funds, insurance
companies and brokerage and investment banking firms operating locally and
elsewhere. Many of the Bank's primary competitors are substantially larger,
have substantially greater resources and lending limits than the Bank and may
offer certain services, such as trust services, that the Bank does not provide
at this time. In addition, many of the Bank's primary competitors may have
lower costs of funds than the Bank. Furthermore, the current level of gains
realized by the Bank and its competitors on the sale of loans they originate
and acquire is attracting and may continue to attract additional competitors
into the mortgage markets. Increased competition could have adverse side
effects, including (i) lowering gains that may be realized on the Bank's loan
sales, (ii) reducing the volume of the Bank's loan originations and loan sales
and (iii) increasing the demand for the Bank's experienced personnel and the
potential that such personnel will be recruited by the Bank's competitors. The
profitability of the Company depends upon the Bank's ability to compete in the
market relevant to each of its businesses.
Relationship with Subsidiaries
All of the Company's operations are currently conducted through its
wholly-owned subsidiary, the Bank, and through the Bank's subsidiaries. The
Bank has entered into agreements with the minority shareholders of each
subsidiary which is not wholly-owned. Each of the minority shareholders is
integral to the day-to-day operation of each respective subsidiary. The
profitability of the Company is contingent in part on the profitability of the
Bank's subsidiaries. In the event that any one or more of the subsidiaries
experiences a loss, such loss could have a material adverse effect on the
Company. The Bank does not have employment agreements with the minority
shareholders of the subsidiaries. Severance of the relationship between the
Bank and any of the subsidiaries or its minority shareholders could have a
material adverse effect on the Company. There can be no assurance that the
Bank's relationship with the minority shareholders will continue or that the
subsidiaries will continue to operate profitability.
Effects of Anti-Takeover Provisions in Discouraging Takeover Offers and Changes
in Management
The Company's Articles of Incorporation and Bylaws provide, among other
things, that (1) special meetings of the Company's shareholders may be called
only by the Chairman of the Board of Directors, the President or a majority of
the Company's Board of Directors; (2) the Board of Directors may issue
additional shares of authorized Common Stock and fix the terms and designations
of and issue shares of authorized preferred stock without any further action by
the shareholders; (3) a majority of the shareholders can act by written consent
with prompt notice thereof given to the remaining shareholders thereafter; and
(4) shareholders who propose to nominate a candidate for election to the Board
of Directors must give advance notice of such nomination, and furnish
information relating to the proposed nominee, to the Company. The management of
the Company does not have the ability to waive any of these provisions. See
"Certain Restrictions on Acquisition of the Company and the Bank" and "Certain
Anti-Takeover Provisions in the Articles of Incorporation and Bylaws."
Such provisions are intended to encourage a potential acquiror of the
Company to negotiate with the Board of Directors, which the Company believes is
in the best position to act on behalf of all of the shareholders, before
seeking to obtain control of the Company. Such provisions may, however, have
the effect of discouraging takeover offers that certain shareholders might deem
to be in their best interests, including takeover proposals in which
shareholders might receive a premium for their shares over the then-current
market price. Such provisions will also make it more difficult for individual
shareholders or a group of shareholders to replace existing management, whether
or not such shareholders believe that a change in management is in the best
interest of the Company.
13
<PAGE>
Reliance on Existing Management
The operations of the Company to date have been largely dependent on
existing management. The loss to the Company of one or more of its existing
executive officers could have a material adverse effect on its business and
results of operations. The Company has entered into employment agreements with
certain executive officers of the Company and the Bank. See "Management."
Control by Management/Principal Shareholders
A total of 2,350,000 shares, or 67.14%, of the outstanding shares of
Common Stock will be owned beneficially by the directors and executive officers
of the Company following the Offering. As of the date of this Prospectus (after
giving effect to the Offering), Thomas J. Knox, Chairman and a director of the
Company, will own beneficially 1,610,000 shares, or 46.00%, of the outstanding
shares of Common Stock and Bruce A. Levy, President and a director of the
Company, will own beneficially 690,000 shares, or 19.71%, of the outstanding
shares of Common Stock. Therefore, to the extent they vote together, Mr. Knox
and Mr. Levy will have the ability to control the election of the Company's
Board of Directors and other corporate actions requiring shareholder approval.
See "Security Ownership of Certain Beneficial Owners and Management."
Dilution and Benefit to Existing Shareholders
The proposed initial public offering price is substantially higher than
the net tangible book value per share of the Common Stock as of September 30,
1997. As a result, investors participating in the Offering will incur immediate
and substantial net tangible book value dilution in the amount of $9.82 per
share. See "Dilution."
No Prior Public Market; Determination of Offering Price
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price of the Common Stock will be determined
through negotiations between the Company and the Representative. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price. There can be no assurance that an active
trading market in the Common Stock will develop or be sustained following the
Offering. In addition to the risks inherent in stock market investing in
general, an investment in the Common Stock has the additional risk that the
number of active buyers and sellers of the Common Stock at any particular time
may be limited. Under such circumstances, investors in the Common Stock could
have difficulty disposing of their shares and therefore should not view the
Common Stock as a short-term investment.
Shares Eligible for Future Sale
Sales of shares of Common Stock in the public market following the
Offering by existing shareholders or option holders could adversely affect the
market price of the Common Stock. The Company's executive officers and
directors have agreed not to sell any of their shares until 180 days after the
date of this Prospectus without the prior written consent of the
Representative. According to Rule 144 under the Securities Act, as currently in
effect, these shares will not be eligible for public sale until at least 90
days after the date of this Prospectus, and then will be subject to the volume
limitations and other conditions imposed by Rule 144. No prediction can be made
as to the effect, if any, that future sales of Common Stock, or the
availability of Common Stock for future sale, will have on the market price of
the Common Stock prevailing from time to time. See "Shares Eligible for Future
Sale."
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,000,000 shares of
Common Stock offered by the Company hereby (after giving effect to the payment
of underwriting discounts and commissions and estimated offering expenses) are
estimated to be approximately $13.6 million ($15.6 million if the Underwriters'
over-allotment option is exercised in full). Approximately $3.2 million of the
net proceeds will be used by the Company to repay, without premium or penalty,
borrowings under several notes held by certain of the Company's existing
shareholders (who are also directors of the Company), the proceeds of which
notes were contributed as capital to the Bank. The notes provide for interest
at an annual rate of 6% and mature on March 1 and December 31, 2006 and
September 30, 2007. The balance of the net proceeds will be contributed as
capital to the Bank. The Bank intends to use such proceeds for working capital
and for other general corporate purposes.
DIVIDENDS
Historically, the Company has not paid cash dividends on the Common Stock.
The Company's Board of Directors does not currently intend to pay cash
dividends, and intends to retain all earnings to fund the growth of the Company
and the Bank. In December 1997, a two-for-one split of the Common Stock and in
March 1996, a twenty-eight-for-one split of the Common Stock were effected,
each in the form of a stock dividend. Future declarations of dividends by the
Board of Directors will depend upon a number of factors, including the
Company's and the Bank's financial condition and results of operations,
investment opportunities available to the Company and the Bank, capital
requirements, regulatory limitations, tax considerations and general economic
conditions. No assurance can be given, however, that any dividends will be paid
or, if payment is made, will continue to be paid.
The principal source of income and cash flow for the Company, including
cash flow to pay cash dividends on the Common Stock, is from the Bank. Various
federal laws, regulations and policies limit the ability of the Bank to pay
cash dividends to the Company. For certain limitations on the Bank's ability to
pay cash dividends to the Company, see "Supervision and Regulation --
Regulation of the Bank -- Limitations on Capital Distributions."
15
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company and the regulatory capital ratios of the Bank at September 30, 1997,
and as adjusted, at such date, to give effect to the issuance and sale of the
shares of Common Stock offered hereby and the application of the net proceeds
therefrom as set forth in "Use of Proceeds," including the contribution by the
Company to the capital of the Bank of a portion of the estimated net proceeds
therefrom. The table should be read in conjunction with the Company's
Consolidated Financial Statements, including the Notes thereto, appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
At September 30, 1997
-------------------------
Actual As Adjusted
---------- ------------
(Unaudited)
(Dollars in thousands)
<S> <C> <C>
Shareholders' notes ....................................................... $ 3,238 $ --
------- --------
Shareholders' equity:
Preferred Stock $0.01 par value, 5,000,000 shares authorized, actual and
as adjusted; none outstanding, actual and as adjusted ................. -- --
Common Stock $0.01 par value, 20,000,000 shares authorized, actual
and as adjusted; 2,350,000 shares issued and outstanding, actual and
3,350,000 issued and outstanding, as adjusted (1)(2)(3) ............... 24 34
Additional paid-in capital(1)(3) ....................................... 2,317 15,782
Retained earnings ...................................................... 1,517 1,517
Unrealized gains on securities available-for-sale ...................... 13 13
------- --------
Total shareholders' equity .......................................... 3,871 17,346
------- --------
Total capitalization ................................................... $ 7,109 $ 17,346
======= ========
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1997
-----------------------------------------
Minimum
Regulatory
Actual As Adjusted Requirement
---------- ------------- ------------
(Unaudited)
<S> <C> <C> <C>
Bank Capital Ratios(1):
Tangible capital ....................................................... 5.29% 11.95% 1.50%
Core (leverage) capital ................................................ 5.29 11.95 4.00
Risk-based capital ..................................................... 10.26 23.36 8.00
</TABLE>
- ------------
(1) Assumes the Company will contribute the net proceeds from the sale of the
shares of Common Stock offered hereby, after payment of $3.2 million of
indebtedness, to the Bank as set forth in "Use of Proceeds." Also assumes
that the Underwriters' over-allotment option to purchase up to 150,000
shares is not exercised. The Bank capital ratios, as adjusted, are
computed in a manner consistent with OTS guidelines and assume that the
net proceeds from the Offering that are contributed to the Bank are
invested in assets that carry a 20% risk-weighting.
(2) Excludes 150,000 shares of Common Stock issued effective November 30, 1997
in connection with the Company's acquisition of the minority interest in
CMC. See "Prospectus Summary -- Recent Developments." Also excludes
300,000 shares of Common Stock reserved for issuance under the Company's
stock option plans. See "Management -- Remuneration of Executive Officers
-- Stock Option Plans."
(3) Adjusted retroactively to reflect a two-for-one split of the Common Stock
in December 1997 and a twenty-eight-for-one split of the Common Stock in
March 1996, both of which were effected in the form of a stock dividend.
16
<PAGE>
DILUTION
The difference between the public offering price per share of Common Stock
and the Company's net tangible book value per share after the Offering
constitutes the dilution to new investors in the Offering. Net tangible book
value per share is determined by dividing the net tangible book value of the
Company (total tangible assets less total liabilities) by the number of
outstanding shares of Common Stock.
At September 30, 1997, the net tangible book value of the Company was
$3,871,000, or $1.65 per share. After giving effect to the sale of the
1,000,000 shares of Common Stock being offered hereby and the receipt of the
estimated net proceeds therefrom (less underwriting discounts and commissions
and estimated expenses of the Offering), the pro forma net tangible book value
of the Company at September 30, 1997 would be approximately $17,346,000, or
$5.18 per share, representing an immediate increase in net tangible book value
of $3.53 per share to existing shareholders and an immediate dilution of $9.82
per share to new investors. The following table illustrates the foregoing
information with respect to dilution to new investors on a per share basis.
<TABLE>
<S> <C> <C>
Initial public offering price ....................................... $ 15.00
Net tangible book value before the Offering ...................... $ 1.65
Increase attributable to new investors in the Offering ........... 3.53
------
Adjusted pro forma net tangible book value after the Offering ....... 5.18
--------
Dilution to new investors in the Offering ........................... $ 9.82
========
</TABLE>
The following table sets forth, with respect to existing shareholders and
new investors in the Offering, a comparison of the number of shares of Common
Stock acquired from the Company, the percentage of ownership of such shares,
the total cash consideration paid, the percentage of total cash consideration
paid and the average price per share.
<TABLE>
<CAPTION>
Total Cash
Shares Purchased Consideration Average
------------------------- ---------------------------- Price Per
Number Percent Amount Percent Share
----------- ----------- -------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Existing shareholders ......... 2,350,000 70.15% $ 2,322,000 13.40% $ 0.99
New investors ................. 1,000,000 29.85 15,000,000 86.60 15.00
--------- ------ ----------- ------ -------
Total ......................... 3,350,000 100.00% $17,322,000 100.00% $ 5.17
========= ====== =========== ====== =======
</TABLE>
The above table assumes no exercise of the Underwriters' over-allotment
option, no exercise of outstanding stock options and no purchase by existing
shareholders of shares offered hereby. If the Underwriters' over-allotment
option is exercised in full, new investors will have paid $17,250,000 for
1,150,000 shares of Common Stock, representing approximately 88.14% of the
total cash consideration for 32.86% of the total Common Stock outstanding. In
addition, the above table excludes 150,000 shares of Common Stock issued in
December 1997 in connection with the acquisition of the minority interest in
CMC. See "Prospectus Summary -- Recent Developments." The table also excludes
300,000 shares of Common Stock reserved for issuance under the Company's stock
option plans. Upon consummation of the Offering, there will be outstanding
options to purchase an aggregate of 101,200 shares of Common Stock. See
"Management -- Remuneration of Executive Officers," "Description of the Capital
Stock" and "Underwriting."
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected information regarding the Company should be read in
conjunction with the Company's Consolidated Financial Statements, including the
Notes thereto, appearing elsewhere in this Prospectus. Consolidated historical
financial and other data regarding the Company at or for the three months ended
September 30, 1997 and 1996 have been prepared by the Company without audit and
may not be indicative of results on an annualized basis or any other period. In
the opinion of management, all adjustments (consisting only of normal recurring
accruals) that are necessary for a fair presentation for such periods or dates
have been made.
<TABLE>
<CAPTION>
At or for the Three
Months Ended September 30, At or for the Year Ended June 30,
-------------------------- ---------------------------------------------------------
1997 1996 1997 1996 1995 1994 1993
------------ ------------ --------- --------- --------- --------- ---------
(Unaudited) (In thousands, except per share amounts and ratios)
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Results of Operations:
Interest income(1) ...................... $ 2,818 $ 1,666 $ 7,919 $ 4,973 $ 3,773 $ 2,351 $ 5,219
Interest expense ........................ 1,751 1,111 5,130 3,559 2,681 1,335 3,804
Net interest income ..................... 1,067 555 2,789 1,414 1,092 1,016 1,415
Provision for loan losses ............... 15 11 58 42 30 30 114
Total non-interest income ............... 1,001 308 1,585 417 199 644 1,143
CMC non-interest income(1) ............. 833 177 1,074 0 0 0 0
Total non-interest expenses ............. 1,011 798 2,862 1,616 1,346 1,170 2,937
Core non-interest expenses ............. 449 384 1,680 1,616 1,346 1,170 2,937
CMC expenses ........................... 562 118 886 0 0 0 0
SAIF special assessment(2) ............. 0 296 296 0 0 0 0
Minority interest in earnings ........... 19 0 12 0 0 0 0
Income tax expense (benefit)(3) ......... 358 19 480 61 (20) 211 225
Net income (loss) from continuing
operations ............................. 665 35 962 112 (65) 249 (718)
Income from discontinued opera-
tions(4) ............................... 0 0 0 0 0 301 0
Cumulative effect of change in
accounting principle(3) ................ 0 0 0 0 0 83 0
Net income (loss) ....................... 665 35 962 112 (65) 633 (718)
Net income (loss), excluding SAIF
assessment(2) .......................... 665 227 1,154 112 (65) 633 (718)
Per Share Data:(5)
Income (loss) from continuing opera-
tions per share(10) .................... 0.31 0.02 0.46 0.07 (0.05) 0.18 ( 0.51)
Weighted average shares outstanding . 2,170 2,000 2,083 1,600 1,400 1,400 1,400
Selected Balance Sheet Data:
Total assets ............................ $134,538 $ 88,703 $117,093 $ 81,307 $63,550 $ 39,243 $ 73,869
Loans held for sale ..................... 16,767 1,528 6,244 1,659 1,550 738 17,942
Investment and mortgage-backed
securities(9) .......................... 20,840 22,317 22,343 22,097 16,651 12,770 1,478
Loans receivable net .................... 93,857 62,830 85,992 53,604 43,616 24,471 20,369
Deposits ................................ 110,625 66,381 95,906 59,624 47,530 27,180 63,661
Borrowings .............................. 15,130 16,701 14,730 16,651 12,097 9,402 6,000
Shareholders' notes ..................... 3,238 2,918 2,990 2,918 1,970 880 2,484
Shareholders' equity .................... 3,871 1,605 2,895 1,512 1,197 1,238 605
Performance Ratios:(6)
Return on average assets ................ 2.02% 0.16% 0.97% 0.17% (0.12)% 0.86% ( 0.93)%
Net yield on interest-earning assets .... 3.31% 2.69% 2.89% 2.23% 2.08% 3.12% 2.01%
Supplemental Performance Ratios: (6)
Return on average assets, excluding
SAIF assessment(2) ..................... 2.02% 1.07% 1.17% 0.17% (0.12)% 0.86% ( 0.93)%
Return on average invested capital(7).... 37.42% 3.10% 16.35% 2.53% (2.05)% 11.76% (23.24)%
Return on average invested capital,
excluding SAIF assessment(2)(7) ........ 37.42% 20.08% 19.61% 2.53% (2.05)% 11.76% (23.24)%
Non-interest expenses, excluding CMC
expenses and SAIF assessment, to
average assets(2) ....................... 1.37% 1.81% 1.70% 2.47% 2.48% 4.05% 3.80%
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
At or for the Three
Months Ended September
30, At or for the Year Ended June 30,
---------------------- ----------------------------------------------------------
1997 1996 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Asset Quality Ratios:
Non-accrual loans to net loans(8) ....... 0.66% 0.94% 0.87% 1.11% 0.88% 3.37% 5.07%
Non-performing loans to net loans(8)..... 1.04% 1.58% 1.28% 1.81% 2.43% 7.03% 8.94%
Non-performing assets to net loans
plus OREO(8) ........................... 1.15% 1.71% 1.28% 1.96% 2.56% 7.22% 10.25%
Allowance for loan losses to total
non-accrual loans(8) ................... 75.42% 74.37% 63.36% 72.51% 101.57% 44.61% 36.11%
Allowance for loan losses to net loans 0.52% 0.70% 0.55% 0.80% 0.89% 1.50% 1.83%
Capital Ratios:
Company equity to assets ................ 2.88% 2.03% 2.45% 1.86% 1.88% 3.15% 0.82%
Bank core capital ratio ................. 5.29% 5.48% 5.12% 5.79% 5.05% 5.30% 4.47%
Bank risk-based capital ratio ........... 10.26% 12.57% 10.81% 12.72% 11.65% 12.42% 10.27%
</TABLE>
- ------------
(1) Effective July 1, 1996, the Company adopted SFAS No. 122, "Accounting for
Mortgage Servicing Rights." The effect of adoption was not significant to
the Company's financial position or results of operations.
(2) In September 1996, the Company incurred a one-time SAIF assessment of
$296,000 to recapitalize the fund. Net of related tax effects, this
assessment reduced net income by $192,000 for the quarter ended September
30, 1996 and the year ended June 30, 1997.
(3) Effective July 1, 1993, the Company adopted SFAS No. 109, "Accounting for
Income Taxes." The cumulative effect of the adoption of SFAS No. 109 was
the recognition of deferred tax assets and an $83,000 reduction of income
tax expense for the year ended June 30, 1994.
(4) During the year ended June 30, 1994, the Company sold its conforming
residential mortgage servicing portfolio. Net of related tax effects, this
resulted in a gain of $301,000 for the year ended June 30, 1994.
(5) Per share amounts have been adjusted to retroactively reflect prior stock
splits. See "Dividends."
(6) Interim period ratios are annualized where appropriate. Returns are
calculated based on income (loss) from continuing operations.
(7) Invested capital is the sum of shareholders' notes and shareholders'
equity.
(8) Non-accrual loans are loans past due 90 or more days and on which interest
is not being accrued. Non-performing loans are loans past due 90 or more
days, including non-accrual loans and loans still accruing interest.
Non-performing assets are non-performing loans plus Other Real Estate
Owned ("OREO"). Effective July 1, 1995, the Company adopted SFAS No. 114,
"Accounting for Impairment of a Loan," as amended by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan -- Income Recognition
and Disclosures." The effect of adoption was not significant to the
Company's financial position or results of operations.
(9) Effective July 1, 1994, the Company adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." The effect of adoption
was not material to the Company's financial position or results of
operations.
(10) Supplemental earnings per share would have been $0.29 and $0.47 for the
quarter ended September 30, 1997 and the year ended June 30, 1997,
respectively, assuming that a sufficient number of shares of Common Stock
were issued at the public offering price of $15 per share to permit the
Company to repay the debt to shareholders outstanding during the
respective periods with the proceeds from the sale of such shares.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the Company's consolidated financial condition
and results of operations and capital resources and liquidity should be read in
conjunction with Selected Consolidated Financial Data and the Consolidated
Financial Statements and related Notes included elsewhere herein. Prospective
investors are urged to carefully consider this related information in
connection with a review of the following discussion.
General
The Company is a holding company operating a federally chartered savings
bank. The Bank conducts community banking activities by accepting deposits from
the public and investing the proceeds in loans and investment securities. In
addition to bank lending products, such as single family conforming credit
residential mortgages ("conforming residential mortgages"), home equity loans,
multi-family residential and non-residential real estate (collectively,
"Commercial Real Estate") loans and SBA loans, the Bank originates or acquires
Nonconforming Mortgages that are subsequently resold in larger pools and
delinquent property tax liens. In order to manage its liquidity and interest
rate risk, the Bank maintains an investment portfolio consisting of bonds and
mortgage-backed securities, all of which currently are U.S. Treasury or U.S.
Government Agency quality. The Bank's loan and investment portfolios are funded
with deposits as well as borrowings from the FHLB or collateralized borrowings
secured by the Bank's investment securities. The Bank's earnings are largely
dependent upon its net interest income (the difference between what it earns on
its loans and investments and what it pays on its deposits and borrowings). In
addition to net interest income, the Bank's net income is impacted by its loan
loss provision, non-interest income (such as revenues realized by CMC in its
Nonconforming Mortgage operation, mortgage banking revenue from the sale of
conforming residential mortgage loans and loan, deposit and ATM fees) and
non-interest expenses (such as salaries and benefits, professional fees,
occupancy costs, deposit insurance premiums and expenses related to CMC
Nonconforming Mortgage operations).
Acquisition of Minority Interest in CMC
Effective November 30, 1997, the Company, the Bank and CMC entered into an
agreement with the minority shareholder of CMC and the Minority Shareholder
Corporation. The agreement, as amended, provides for the Bank's acquisition of
the entire interest in CMC held by the minority shareholder in exchange for
150,000 shares of the Common Stock, and further provides for the payment of
accrued compensation of $250,000. The agreement also provides for a reduction
in the number of shares of Common Stock to which the minority shareholder would
otherwise be entitled in the event that CMC's net income for the twelve months
ending December 31, 1998 does not exceed a certain level. The agreement further
requires that the minority shareholder's shares of Common Stock be escrowed for
three years, with a portion of such shares released on each of three designated
dates, and provides for the granting of an irrevocable proxy pursuant to which
the shares will be voted in the same proportion as the other outstanding shares
of the Common Stock are voted. The agreement also contains certain indemnities
in favor of the Company, the Bank and CMC and prohibits the minority
shareholder and the Minority Shareholder Corporation from competing with the
Company for a period of three years. In addition, for a three year period from
the effective date of the agreement, the Minority Shareholder Corporation shall
receive a monthly payment of $6,250. As a result of this transaction, as of
November 30, 1997, the Bank owned all of the outstanding shares of CMC. If the
Bank had owned 100% of CMC and the Company issued 150,000 additional shares of
Common Stock on July 1, 1996, net income would have increased by $43,000 and
net income per share would have decreased by $0.01 for the year ended June 30,
1997 and net income and net income per share would have increased by $103,000
and $0.02, respectively, for the quarter ended September 30, 1997.
Overview
Through 1995, the Bank primarily engaged in the origination and sale of
conforming residential mortgage loans (FNMA fixed rate mortgage loans) and the
origination of adjustable rate single family mortgages for its portfolio. The
Bank has established and seeks to continue developing a loan referral network
consisting of mortgage banking companies affiliated with local realty companies
and local realtors with no mortgage company
20
<PAGE>
affiliation, as well as smaller mortgage bankers and brokers. In this business,
the Bank attempts to distinguish itself from its competition by providing
efficient service and offering specialized adjustable rate loan products. Since
opening its Center City, Philadelphia branch in 1994, the Bank has been
developing a referral base for Commercial Real Estate loans consisting of local
realtors and real estate investors, as well as repeat and referral business
from existing borrowers. In order to better monitor its Commercial Real Estate
loan portfolio, the Bank concentrates its lending in the Philadelphia
metropolitan area, consisting of Bucks, Chester, Delaware, Montgomery and
Philadelphia counties, as well as Central and Southern New Jersey and Northern
Delaware. In order to better compete in this business, the Bank attempts to
provide its applicants with quick responses by having a Board Loan Committee
which meets on an as needed basis to evaluate loan applications.
Through June 30, 1996, the Company experienced minimal returns on assets
and equity since it maintained a high cost infrastructure relative to its then
current asset size. Non-interest expenses as a percentage of average assets for
fiscal years 1994, 1995 and 1996 were 4.05%, 2.48% and 2.47%, respectively. In
addition, during this period, the Company grew its assets primarily by adding
promotional rate adjustable mortgages that were not profitable during the
initial year of origination.
In the latter part of 1995, management began to refocus the Company and
developed a plan designed to grow its assets and profitability. The Company's
strategy is to maintain a core banking operation that provides a growing stream
of core income enhanced by engaging in various specialty lending and product
niche activities designed to provide the Company with significantly higher
risk-adjusted rates of return. In July 1996, the Bank formed CMC to originate
and acquire for resale Nonconforming Mortgages. Initially, the Bank maintained
a 51% controlling interest in CMC which was subsequently increased to 67.5% in
September 1997 and to 100% as of November 1997. See "-- Acquisition of Minority
Interest in CMC." In August 1996, the Bank formed a 60%-owned subsidiary,
Crusader Servicing Corporation ("CSC"), to acquire delinquent property tax
liens.
From June 1995 through September 1997, the Company increased its asset
base from $63.6 million to $134.5 million, primarily relating to its core
banking operation. In addition, the Bank's specialty lending and product niche
activities have produced increasing amounts of non-interest income. Despite the
growth in its assets, the Company has emphasized controlling its operating
expenses. In this regard, the Company has reduced its ratio of core
non-interest expenses (operating expenses exclusive of the SAIF assessment and
CMC expenses) to average assets from 2.47% for fiscal year 1996 to 1.70% for
fiscal year 1997 and to 1.37% for the quarter ended September 30, 1997.
The increase in net interest income resulting from the growth in the
Company's asset base, the containment of core non-interest expenses and the
increase in non-interest income all have contributed to the Company's higher
level of profitability in recent periods. The Company continues to generate
asset growth at a rate that cannot be supported by internally generated capital
growth and thus has determined to offer the shares of Common Stock in the
Offering to support its growth.
Results of Operations
Three months ended September 30, 1997 versus three months ended September
30, 1996. Net income increased to $665,000 for the three months ended September
30, 1997 as compared to $35,000 for the comparable prior year period. Net
interest income increased by $512,000 due primarily to a growth in average
earning assets. Non-interest income increased by $693,000 due primarily to an
increase in the Nonconforming Mortgage banking income of CMC, which commenced
operations in July 1996. Non-interest expenses increased by $213,000. Excluding
an increase of $444,000 in CMC operating expenses and the $296,000 one-time
SAIF assessment incurred during the prior year period, non-interest expenses
increased by $65,000, which is due to the Bank's expansion of staff to
accommodate for the growth in assets. Subsequent to the recapitalization of
SAIF, the ongoing insurance costs were reduced from 0.23% to 0.065% as the Bank
is currently charged the rate attributed to institutions with the lowest risk
rating. Income taxes were $339,000 higher due to the increased profitability.
Year ended June 30, 1997 versus year ended June 30, 1996. Net income
increased to $962,000 for the year ended June 30, 1997 as compared to $112,000
for the prior year. Net interest income increased by $1.4 million
21
<PAGE>
due primarily to a growth in average earning assets. Non-interest income
increased by $1.2 million due primarily to the CMC Nonconforming Mortgage
banking income of $1.1 million. Non-interest expenses increased by $1.2 million
due principally to expenses of $886,000 associated with the operation of CMC
and the one-time SAIF assessment of $296,000. Excluding these two items,
non-interest expenses increased by $64,000 resulting primarily from staff
expansion. Income taxes increased by $419,000 due to the increased
profitability of the Company.
Year ended June 30, 1996 versus year ended June 30, 1995. Net income
increased to $112,000 for the year ended June 30, 1996, as compared to a loss
of $65,000 for the prior year. Net interest income increased by $322,000 due
primarily to a growth in average earning assets. Non-interest income increased
by $218,000 resulting primarily from a $165,000 increase in mortgage banking
income and a $73,000 increase in service fees on deposit accounts. Non-interest
expenses increased by $270,000 due to staff expansion to accommodate current
and anticipated asset growth and, to a lesser extent, higher FDIC premiums
resulting from deposit growth. Income taxes were $81,000 higher due to the
increased profitability.
Net Interest Income
Net interest income is the difference between interest received on the
Bank's loans and investment securities ("interest-earning assets") and interest
paid on deposits and borrowings ("interest-bearing liabilities"). It is the
most significant component of the Bank's operating income and is largely
dependent upon the volume and rate earned on interest-earning assets and the
volume and rate paid on interest-bearing liabilities.
22
<PAGE>
The following tables set forth a summary of average balances with
corresponding interest income and interest expense as well as average yield and
rate information for the periods presented. Average balances are derived from
daily balances during the indicated periods, except where noted otherwise.
<TABLE>
<CAPTION>
Three Months Ended September 30,
-------------------------------------------------------------------------------
1997 1996
-------------------------------------- --------------------------------------
(Dollars in thousands)
Average Average
Average Yield/ Average Yield/
Balance Interest Rate(1) Balance Interest Rate(1)
------------- ---------- --------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Average assets:
Loans receivable(2) ........................ $ 105,792 $2,415 9.13% $ 58,691 $1,264 8.61%
Investment and mortgage-backed
securities(3) ............................. 22,993 403 7.01 23,711 402 6.78
--------- ------ ---- --------- ------ ----
Total interest-earning assets .............. 128,785 2,818 8.75 82,402 1,666 8.09
------ ---- ------ ----
Non-interest-earning assets ................ 2,704 2,688
--------- ---------
Total assets ............................... $ 131,489 $ 85,090
========= =========
Average liabilities and shareholders'
equity:
Interest-bearing deposit accounts .......... 105,729 1,473 5.57 62,097 839 5.40
Borrowings ................................. 16,272 240 5.90 16,785 234 5.58
Shareholders' notes ........................ 2,975 38 5.11 2,918 38 5.21
--------- ------ ---- --------- ------ ----
Total interest-bearing liabilities ......... 124,976 1,751 5.60 81,800 1,111 5.43
------ ---- ------ ----
Non-interest bearing deposit accounts. 2,063 1,421
Other non-interest-bearing liabilities ..... 1,208 310
--------- ---------
Total liabilities .......................... 128,247 83,531
Shareholders' equity(4) .................... 3,242 1,559
--------- ---------
Total liabilities and shareholders'
equity .................................... $ 131,489 $ 85,090
========= =========
Net interest income ........................ $1,067 $ 555
====== ======
Interest rate spread(5) .................... 3.15% 2.66%
==== ====
Net yield on interest-earning assets(6)..... 3.31% 2.69%
==== ====
Ratio of interest-earning assets to
interest-bearing liabilities .............. 103.05% 100.74%
========= =========
</TABLE>
- ------------
(1) Ratios for interim periods have been annualized.
(2) Average balances include non-accrual loans, interest on which is recognized
on a cash basis, and loans held for sale.
(3) Yields are calculated based on the fair value of investment and
mortgage-backed securities. Includes interest-bearing deposits at the
FHLB.
(4) Averages were computed using month-end balances.
(5) Represents the difference between the average yield earned on
interest-earning assets and the average rate paid on interest-bearing
liabilities.
(6) Represents net interest income as a percentage of average interest-earning
assets.
23
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------------------
1997 1996
----------------------------------- -----------------------------------
(Dollars in thousands)
Average Average
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------------ ---------- --------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Average assets:
Loans receivable(1) ........................ $ 74,306 $6,413 8.63% $ 46,390 $3,903 8.41%
Investment and mortgage-backed
securities(2) ............................. 22,183 1,506 6.79 17,088 1,070 6.26
--------- ------ ----- --------- ------ -----
Total interest-earning assets .............. 96,489 7,919 8.21 63,478 4,973 7.83
------ ----- ------ -----
Non-interest-earning assets ................ 2,254 2,014
--------- ---------
Total assets ............................... $ 98,743 $ 65,492
========= =========
Average liabilities and shareholders'
equity:
Interest-bearing deposit accounts .......... 74,403 3,978 5.35 51,358 2,825 5.50
Borrowings ................................. 17,267 995 5.76 9,341 543 5.81
Shareholders' notes ........................ 2,954 157 5.31 1,910 191 10.00
--------- ------ ----- --------- ------ -----
Total interest-bearing and deposit
liabilities ............................... 94,624 5,130 5.42 62,609 3,559 5.68
------ ----- ------ -----
Non-interest-bearing deposit
accounts .................................. 1,794 812
Other non-interest-bearing liabilities. 141 790
--------- ---------
Total liabilities .......................... 96,559 64,211
Shareholders' equity(3) .................... 2,184 1,281
Total liabilities and shareholders'
equity..................................... $ 98,743 $ 65,492
========= =========
Net interest income ........................ $2,789 $1,414
====== ======
Interest rate spread(4) .................... 2.79% 2.15%
===== =====
Net yield on interest-earning
assets(5) ................................. 2.89% 2.23%
===== =====
Ratio of interest-earning assets to
interest-bearing liabilities .............. 101.97% 101.39%
========= =========
</TABLE>
(RESTUBBED TABLE)
<PAGE>
<TABLE>
<CAPTION>
1995
------------------------------------
Average
Average Yield/
Balance Interest Rate
------------ ---------- ----------
<S> <C> <C> <C>
Average assets:
Loans receivable(1) ........................ $ 35,126 $2,724 7.75%
Investment and mortgage-backed
securities(2) ............................. 17,449 1,049 6.01
--------- ------ -----
Total interest-earning assets .............. 52,575 3,773 7.18
------
Non-interest-earning assets ................ 1,677
---------
Total assets ............................... $ 54,252
=========
Average liabilities and shareholders'
equity:
Interest-bearing deposit accounts .......... 38,763 1,881 4.85
Borrowings ................................. 11,970 665 5.56
Shareholders' notes ........................ 1,227 135 11.00
--------- ------ -----
Total interest-bearing and deposit
liabilities ............................... 51,960 2,681 5.16
------ -----
Non-interest-bearing deposit
accounts .................................. 408
Other non-interest-bearing liabilities. 666
---------
Total liabilities .......................... 53,034
Shareholders' equity(3) .................... 1,218
Total liabilities and shareholders'
equity..................................... $ 54,252
=========
Net interest income ........................ $1,092
======
Interest rate spread(4) .................... 2.02%
=====
Net yield on interest-earning
assets(5) ................................. 2.08%
=====
Ratio of interest-earning assets to
interest-bearing liabilities .............. 101.18%
=========
</TABLE>
- ------------
(1) Average balances include non-accrual loans, interest on which is recognized
on a cash basis, and loans held for sale.
(2) Yields are calculated based on the fair value of investment and
mortgage-backed securities. Includes interest-bearing deposits at the
FHLB.
(3) Averages were computed using month-end balances.
(4) Represents the difference between the average yield earned on
interest-earning assets and the average rate paid on interest-bearing
liabilities.
(5) Represents net interest income as a percentage of average interest-earning
assets.
24
<PAGE>
The following table sets forth certain information regarding changes in
interest income and interest expense for the periods indicated for each
category of interest-earning assets and interest-bearing liabilities.
Information is provided on changes attributable to (i) changes in volume
(changes in average volume multiplied by prior rate), (ii) changes in rate
(changes in average rate multiplied by prior average volume), and (iii) changes
in rate and volume (changes in average volume multiplied by changes in average
rate).
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------------------------
1997 versus 1996
Three Months Ended September 30, -------------------------------------------
1997 versus 1996 Increase (Decrease)
Increase (Decrease) Due to Due to
---------------------------------------------- -------------------------------------------
(Dollars in thousands)
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
------------ --------- ---------- --------- -------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable ............... $1,014 $76 $61 $1,151 $2,348 $ 103 $ 59 $2,510
Investment and mortgage-
backed securities ............. (50) 53 (2) 1 317 90 29 436
------ ---- ------ ------ ------ ------- ------- ------
Total interest-earning assets.... 964 129 59 1,152 2,665 193 88 2,946
------ ---- ----- ------ ------ ------- ------- ------
Interest expense:
Deposit accounts ............... 584 30 20 634 1,300 (99) (48) 1,153
Borrowings ..................... (7) 9 4 6 461 (5) (4) 452
Shareholders' notes ............ 3 (1) (2) 0 104 (90) (48) (34)
------- ------ ------ ------ ------ -------- -------- ------
Total interest-bearing
liabilities .................... 580 38 22 640 1,865 (194) (100) 1,571
------- ----- ----- ------ ------ -------- -------- ------
Increase in net interest
income ......................... $ 384 $91 $37 $ 512 $ 800 $ 387 $ 188 $1,375
======= ===== ===== ====== ====== ======== ======== ======
</TABLE>
(RESTUBBED TABLE)
<TABLE>
<CAPTION>
1996 versus 1995
------------------------------------------
Increase (Decrease)
Due to
------------------------------------------
Rate/
Volume Rate Volume Total
--------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Interest income:
Loans receivable ............... $ 873 $ 232 $74 $1,179
Investment and mortgage-
backed securities ............. (22) 44 (1) 21
------- ----- ------ ------
Total interest-earning assets.... 851 276 73 1,200
------- ----- ----- ------
Interest expense:
Deposit accounts ............... 626 239 79 944
Borrowings ..................... (146) 30 (6) (122)
Shareholders' notes ............ 75 (12) (7) 56
------- ----- ------ ------
Total interest-bearing
liabilities .................... 555 257 66 878
------- ----- ----- ------
Increase in net interest
income ......................... $ 296 $ 19 $ 7 $ 322
======= ===== ===== ======
</TABLE>
<PAGE>
Three months ended September 30, 1997 versus three months ended September
30, 1996. Net interest income increased by $512,000 or 92.25% for the three
month period ended September 30, 1997 as compared to the comparable prior year
period. Interest income increased by $1.2 million due primarily to a rise in
average outstanding loan balances of $47.1 million and, to a lesser extent, a
0.52% higher average yield earned on loans. The loan growth occurred largely in
Commercial Real Estate lending and in Nonconforming Mortgages available for
sale. Both of these loan types carry higher yields than Conforming Residential
Mortgages which comprised a more significant portion of the loan balance during
the prior year period. Interest expense increased by $640,000 due primarily to
an increase in average interest-bearing deposit balances of $43.6 million.
Deposits were the primary funding source of the loan growth. The Company's
aggregate cost of funds increased to 5.60% as compared to 5.43% for the
comparable prior year period. The Company's net yield on interest-earning
assets increased to 3.31% as compared to 2.69% for the prior year period. This
0.62% increase was due principally to the Bank's higher yield from loans and an
increase in the Company's average shareholders' equity balances.
Year ended June 30, 1997 versus year ended June 30, 1996. Net interest
income increased by $1.4 million or 97.24% for the year ended June 30, 1997 as
compared to the prior year. Interest income increased by $2.9 million due
primarily to a $33.0 million increase in average earning assets and, to a
lesser extent, an increase in the yield on earning assets of 0.38%. Interest
expense increased by $1.6 million due primarily to a $32.0 million increase in
average interest-bearing liabilities which was partially offset by a decline in
the average rate paid on these liabilities of 0.26%. The net yield on
interest-earning assets increased by 0.66% The increase in the rate on earning
assets resulted from the continued upward repricing of promotional rate
adjustable rate residential mortgage loans, as well as the growth in the higher
yielding Commercial Real Estate loan portfolio. The decline in the rate on
interest-bearing liabilities reflects a decline in general market interest
rates. Loan growth was funded primarily by increases in average
interest-bearing deposits of $23.0 million and in average borrowings of $7.9
million.
Year ended June 30, 1996 versus year ended June 30, 1995. Net interest
income increased by $322,000 or 29.49% for the year ended June 30, 1996 as
compared to the prior year. Interest income increased by $1.2 million primarily
due to a $10.9 million increase in average interest-earning assets and a 0.65%
increase in the average yield. Interest expense increased by $878,000 due
primarily to a $10.6 million increase in average interest-bearing liabilities
and a 0.52% increase in the average rate paid on such liabilities. The net
yield on
25
<PAGE>
interest-earning assets and the rate on interest-bearing liabilities both
increased due to an increase in general market interest rates. The Company's
net yield on interest-earning assets increased 0.15% primarily due to the
Company's loan portfolio comprising a larger relative portion of average
earning assets than in the prior year. Interest rates earned on loans are
generally higher than the rates earned on the investment securities portfolio.
The asset growth was funded through an increase in average interest-bearing
deposits of $12.6 million which was offset by a reduction in average borrowings
of $2.6 million.
Provision for Loan Losses
For the three months ended September 30, 1997, the provision for loan
losses was $15,000, a 36.36% increase compared to the comparable prior year
period. The Bank's provision for loan losses was $58,000 for the year ended
June 30, 1997 compared to $42,000 and $30,000, respectively, for the two prior
years. These increases resulted from the growth in the loan portfolio. On a
quarterly basis, the Bank's Board of Directors and management perform a
detailed analysis of the adequacy of the allowance for loan losses. This
analysis includes an evaluation of credit risk concentration, delinquency
trends, past loss experience, current economic conditions, composition of the
loan portfolio, classified loans and other relevant factors. The loan growth
experienced by the Bank has not resulted in significant increases in
delinquencies or an increase in the chargeoffs incurred by the Bank. Net
chargeoffs by the Bank for the fiscal years ended June 30, 1997, 1996 and 1995
were $16,000, $0, and $10,000, respectively. Charge-offs for the quarters ended
September 30, 1997 and September 30, 1996 were $0 and $1,000, respectively.
The Bank will continue to monitor its allowance for loan losses and make
future adjustments to the allowance through the provision for loan losses as
conditions warrant. Although the Bank believes that the allowance for loan
losses is adequate to provide for losses inherent in the loan portfolio, there
can be no assurance that future losses will not exceed the estimated amounts or
that additional provisions will not be required in the future.
The Bank is subject to periodic regulatory examination by the OTS. As part
of the examination, the OTS will assess the adequacy of the Bank's allowance
for loan losses and may include factors not considered by the Bank. In the
event that an OTS examination results in a conclusion that the Bank's allowance
for loan losses is not adequate, the Bank may be required to increase its
provision for loan losses.
Non-Interest Income
Non-interest income is derived primarily from revenue realized by CMC in
its Nonconforming Mortgage operation, mortgage banking revenue from the Bank's
sale of conforming residential mortgage loans and deposit and loan fees,
including revenues generated from the Bank's ATMs.
For the three month period ended September 30, 1997, non-interest income
increased by $693,000 or 225.00% as compared to the comparable prior year
period. This resulted primarily from a $656,000 increase in the revenues of CMC
as its operations continued to experience strong growth. During the current
year quarter, the Bank had Nonconforming Mortgage loan originations and
acquisitions of $25.6 million, and Nonconforming Mortgage loan sales of $14.9
million, with an average gain on sale of 5.02%. This compares to Nonconforming
Mortgage loan originations of $4.0 million during the comparable prior year
period, which was CMC's first quarter of operation. In addition to the
increased revenue from CMC, the Bank's conforming mortgage banking revenue
increased by $31,000, due primarily to an increased volume of loan sales.
For the year ended June 30, 1997, non-interest income increased by $1.2
million or 280.10% as compared to the prior year. This increase is primarily
the result of CMC's revenues of $1.1 million during the year. During the year,
the Bank had $20.1 million of Nonconforming Mortgage loan sales, with an
average gain on sale of 5.10%. In addition, the Bank instituted a surcharge fee
for the use of its ATMs by non-bank customers which resulted in additional fee
income to the Bank of $64,000.
Non-interest income for the year ended June 30, 1996 increased by $218,000
or 109.55% as compared to the prior year. This increase resulted primarily from
an increase in the Bank's conforming mortgage banking
26
<PAGE>
revenues of $165,000, due to increased demand for fixed rate loans. Although
the Bank's volume of loan originations was comparable in both years, fiscal
1996 loan origination volume included a greater percentage of fixed rate loans
which were resold, while a higher percentage of originations in fiscal 1995
were adjustable rate loans that were maintained in the Bank's loan portfolio.
Non-Interest Expenses
Non-interest expenses for the three month period ended September 30, 1997
increased by $213,000 or 26.69% as compared to the comparable prior year
period. Excluding the $296,000 SAIF assessment incurred in the prior year
period and the $444,000 increase in CMC operating expenses, non-interest
expenses increased by $65,000 or 16.92%. The increase is primarily due to the
hiring of additional personnel in connection with the Bank's growth in assets.
For the year ended June 30, 1997, non-interest expenses increased by $1.2
million or 77.10% as compared to the prior year. Excluding the $296,000 SAIF
assessment and the $886,000 increase in CMC operating expenses, non-interest
expenses increased by $64,000 or 3.96%.
Non-interest expenses for the fiscal year ended June 30, 1996 increased by
$270,000 or 20.06% as compared to the prior year. This was primarily due to
increased compensation costs of $242,000 and, to a lesser extent, a $31,000
increase in FDIC premiums resulting from deposit growth.
Income Tax Expense
Income tax expense was $358,000 for the three month period ended September
30, 1997, as compared to $19,000 during the comparable prior year period.
Income tax expense was $480,000 for the year ended June 30, 1997 as compared to
a $61,000 expense and a $20,000 income tax benefit for the two prior years. The
changes in income tax expense primarily relate to the changes in income before
taxes.
Liquidity and Capital Resources
A major source of the Company's asset growth has been funded through
deposits, mostly CDs, generated through the Bank's two branch offices and a
network of financial planners and brokers. The Bank currently does not intend
to open additional retail branches.
The ability of the Bank to retain and attract deposits is dependent upon a
number of factors, including interest rates offered on the Bank's products.
Historically, most of the Bank's deposits have been in the form of CDs, which
typically provide for a higher interest rate than other bank deposit products,
such as checking and savings accounts, and the rates at which they are offered
fluctuate largely as a result of changes in market interest rates. The Bank
also funds its assets with secured borrowings from the FHLB and collateralized
borrowings secured by its investment securities portfolio. These borrowings
generally provide the Bank with greater flexibility in matching the duration of
its liabilities with that of certain of its assets. Future availability of
these funding sources is largely dependent upon the Bank having sufficient
available eligible assets to collateralize these borrowings. The Bank currently
has available excess collateral to secure future borrowings from these sources
and it anticipates that future asset growth will provide additional eligible
collateral. The Bank's assets generally provide for scheduled principal and
interest payments which provide the Bank with additional sources of funds. If
required, additional funds could be obtained through the sale of either loans
or investment securities, which are classified as available for sale. The Bank
has and will continue to utilize its investment securities portfolio to manage
liquidity.
The Bank's primary uses of funds are the origination and acquisition of
loans, the funding of maturing deposits and the repayment of borrowings. The
Bank has experienced strong loan demand. Based upon management's current
business strategy, the Company believes that its income from operations and
existing funding sources, together with the anticipated proceeds to be provided
by the Offering, will be adequate to meet its operating and growth requirements
for the foreseeable future; however, there can be no assurance that such
strategy will not change or that the implementation of the strategy will not
require additional capital or funding sources.
27
<PAGE>
Net cash used in operating activities for the years ended June 30, 1997
and 1996 was $2.2 million and $838,000, respectively. During fiscal year 1997,
the $2.2 million related principally to growth in loans available for sale
while the $838,000 in fiscal year 1996 related to growth in loans available for
sale and other assets. During fiscal year 1995, the cash used in operating
activities was $1.0 million related primarily to growth in loans available for
sale.
Net cash used in investing activities approximated $33.2 million, $15.9
million and $23.3 million during the years ended June 30, 1997, 1996 and 1995,
respectively. During each year, the primary use was the funding of the growth
in the Bank's loan portfolio.
The Bank monitors its capital level relative to its business operations
and anticipated growth and has continually maintained it at a level which would
allow it to be classified as "well-capitalized" under the Federal Deposit
Insurance Corporation Improvement Act ("FDICIA"). Well-capitalized institutions
are assessed lower deposit insurance premiums. The Company's capital to support
its asset growth has come from internally generated earnings as well as from
additional capital contributions by its shareholders. As a privately owned
company, the Company's shareholders chose to contribute capital on an ongoing
basis only as it was necessary to fund the Company's growth.
The following table sets forth the Bank's regulatory capital levels at
September 30, 1997. The Company is not subject to regulatory capital
requirements.
<TABLE>
<CAPTION>
To Be Well
Capitalized
Required for Under Prompt
Capital Adequacy Corrective Action
Actual Purposes Provisions
--------------------- --------------------- ---------------------
(Dollars in thousands)
Amount Ratio Amount Ratio Amount Ratio
-------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Tangible capital ........... $7,158 5.29% $2,030 1.50% $6,766 5.00%
Core capital ............... 7,158 5.29 5,413 4.00 6,766 5.00
Risk-based capital ......... 7,645 10.26 5,960 8.00 7,450 10.00
</TABLE>
Asset and Liability Management
Managing Interest Rate Risk. Interest rate risk is defined as the
sensitivity of the Company's current and future earnings as well as its capital
to changes in the level of market interest rates. The Bank's exposure to
interest rate risk results from, among other things, the difference in
maturities on interest-earning assets and interest-bearing liabilities. Since
the Bank's assets currently have a longer maturity than its liabilities, the
Bank's earnings could be negatively impacted during a period of rising interest
rates and conversely positively impacted during a period of falling interest
rates. The relationship between the interest rate sensitivity of the Bank's
assets and liabilities is continually monitored by management. In this regard,
the Bank emphasizes the origination of adjustable rate assets for portfolio
while originating longer term fixed rate assets for resale. At September 30,
1997, approximately 94% of the Bank's loan portfolio excluding loans held for
sale was comprised of adjustable rate loans. Additionally, the origination
level of fixed rate assets are continually monitored and if deemed appropriate,
the Bank will enter into forward commitments for the sale of these assets to
ensure the Bank is not exposed to undue interest rate risk.
The Bank utilizes its investment and mortgage-backed security portfolio in
managing its liquidity and therefore seeks securities with a stated or
estimated life of less than five years. These securities are readily marketable
and provide the Bank with a cash flow stream to fund asset growth or liability
maturities.
A significant portion of the Bank's assets have been funded with CDs,
including jumbo CDs. Unlike other deposit products such as checking and savings
accounts, CDs carry a high degree of interest rate sensitivity and therefore,
their renewal will vary based on the competitiveness of the Bank's interest
rates. The Bank has attempted to price its CDs to be competitive at the shorter
maturities (i.e., maturities of less than one year) in order to better match
the repricing characteristics of portfolio loans and the anticipated holding
period for loans held for sale. At September 30, 1997, approximately 87% of the
Bank's deposits were CDs.
28
<PAGE>
The Bank utilizes borrowings from the FHLB and collateralized repurchase
agreements in managing its interest rate risk and as a tool to augment deposits
in funding asset growth. The Bank may utilize these funding sources to better
match its longer term repricing assets (i.e., between one and five years).
The nature of the Bank's current operations is such that it is not subject
to foreign currency exchange or commodity price risk. Additionally, neither the
Company nor the Bank owns any trading assets. At September 30, 1997, the Bank
did not have any hedging transactions in place such as interest rate swaps,
caps or floors.
Interest Rate Sensitivity Analysis. One measure of a bank's interest rate
sensitivity is through the use of a GAP analysis. Using a GAP analysis, the
Bank matches the extent to which its interest-earning assets and
interest-bearing liabilities mature or reprice within specified time horizons.
The interest rate sensitivity gap is defined as the excess of interest-earning
assets maturing or repricing within a specific time period over the
interest-bearing liabilities maturing or repricing within the same time period
(a negative GAP for a specified time period would indicate there are more
liabilities than assets maturing or repricing within that time period). The
Bank attempts to maintain its one and three year GAP positions within +/- 10%
and +/- 15% of assets, respectively.
At September 30, 1997, the Bank had negative one and three year GAP
positions of 9.8% and 4.9%, respectively.
The following table summarizes the maturity and repricing of the Bank's
interest-earning assets and interest-bearing liabilities at September 30, 1997.
Adjustable rate loans are categorized by their repricing date while fixed rate
loans are categorized by the scheduled maturity as adjusted for historical
prepayment rates. Investment and mortgage-backed securities are categorized by
their scheduled maturities as adjusted for historical prepayment rates. Except
as noted in the footnotes, liabilities are categorized at their contractual
maturity date.
<TABLE>
<CAPTION>
Within Four to One to Two to
Three Twelve Two Three
Months Months Years Years
------------ ------------ ------------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Rate-sensitive assets:
Loans receivable(1).....................($) $ 43,745 $ 29,158 $ 11,692 $ 5,831
(Rate) 9.14% 8.46% 8.89% 8.88%
Investment securities(2)................($) 2,095 6,294 3,216 1,645
(Rate) 6.73% 7.05% 6.97% 6.93%
Total rate-sensitive assets ............... $ 45,840 $ 35,452 $ 14,908 $ 7,476
Rate-sensitive liabilities:
Interest-bearing demand deposits(3).....($) -- -- -- --
(Rate) -- -- -- --
Savings deposits(3).....................($) -- -- -- --
(Rate) -- -- -- --
Time certificates.......................($) 47,546 39,763 6,422 1,301
(Rate) 5.58% 5.71% 5.72% 5.97%
FHLB advances...........................($) 4,350 -- -- --
(Rate) 5.82% -- -- --
Securities sold under agreement to
repurchase............................($) -- 2,500 -- 8,280
(Rate) -- 6.05% -- 5.89%
Total rate-sensitive liabilities .......... $ 51,896 $ 42,263 $ 6,422 $ 9,581
Periodic gap .............................. (6,056) (6,811) 8,486 (2,105)
-------- --------- -------- --------
Cumulative gap ............................ (6,056) (12,867) (4,381) (6,486)
-------- --------- -------- --------
Cumulative gap ratio ...................... (4.61)% (9.79)% (3.33)% (4.93)%
-------- --------- -------- --------
</TABLE>
<PAGE>
(RESTUBBED TABLE)
<TABLE>
<CAPTION>
Three to Four to Over
Four Five Five Fair
Years Years Years Total Value
------------ ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Rate-sensitive assets:
Loans receivable(1).....................($) $ 5,397 $ 8,309 $ 6,492 $ 110,624 $112,958
(Rate) 8.86% 8.83% 7.89% 8.81%
Investment securities(2)................($) 1,384 1,169 5,037 20,840 20,840
(Rate) 6.94% 6.84% 6.95% 6.91%
Total rate-sensitive assets ............... $ 6,781 $ 9,478 $11,529 $ 131,464 $133,798
Rate-sensitive liabilities:
Interest-bearing demand deposits(3).....($) -- -- $ 9,883 $ 9,883 $ 9,883
(Rate) -- -- 3.47% 3.47%
Savings deposits(3).....................($) -- -- 1,776 1,776 1,776
(Rate) -- -- 3.00% 3.00%
Time certificates.......................($) 681 820 -- 96,533 96,611
(Rate) 5.67% 5.67% -- 5.65%
FHLB advances...........................($) -- -- -- 4,350 4,350
(Rate) -- -- -- 5.82%
Securities sold under agreement to
repurchase............................($) -- -- -- 10,780 10,780
(Rate) -- -- -- 5.92%
Total rate-sensitive liabilities .......... $ 681 $ 820 $11,659 $ 123,322 $123,400
Periodic gap .............................. 6,100 8,658 (130) 8,142 10,398
-------- ------- ------- --------- --------
Cumulative gap ............................ (386) 8,272 8,142 --
-------- ------- ------- ---------
Cumulative gap ratio ...................... (0.29)% 6.29% 6.19%
-------- ------- -------
</TABLE>
- ------------
(1) Loans held for sale are included in loans receivable and are categorized
within three months as it is the intent to sell those assets within that
time frame.
(2) Includes mortgage-backed securities and interest-bearing deposits at the
FHLB.
(3) Historically, interest bearing demand deposits and savings deposits reflect
insignificant change in deposit trends and, therefore, the Bank classifies
these deposits over five years.
29
<PAGE>
GAP analysis is a useful measurement of asset and liability management,
however, it is difficult to predict the effect of changing interest rates based
solely on this measure. An additional analysis required by the OTS and
generated quarterly is the OTS Interest Rate Exposure Report. This report
forecasts changes in the Bank's market value of portfolio equity ("MVPE") under
alternative interest rate environments. The MVPE is defined as the net present
value of the Bank's existing assets, liabilities and off-balance sheet
instruments. The calculated estimates of change in MVPE at September 30, 1997
are as follows:
MVPE
---------------------------------------------------
Change in Interest Rate Amount % Change
----------------------- --------------- ---------
(In thousands)
+400 Basis Points $ 2,962 (69)%
+300 Basis Points 4,914 (49)
+200 Basis Points 6,733 (29)
+100 Basis Points 8,316 (13)
Flat Rate 9,546 --
--100 Basis Points 10,277 8
--200 Basis Points 10,705 12
--300 Basis Points 11,218 18
--400 Basis Points 11,882 24
Management believes that the assumptions utilized in evaluating the
vulnerability of the Company's earnings and capital to changes in interest
rates approximate actual experience; however, the interest rate sensitivity of
the Bank's assets and liabilities as well as the estimated effect of changes in
interest rates on MVPE could vary substantially if different assumptions are
used or actual experience differs from the experience on which the assumptions
were based.
In the event the Bank should experience a mismatch in its desired GAP
ranges or an excessive decline in its MVPE subsequent to an immediate and
sustained change in interest rate, it has a number of options which it could
utilize to remedy such mismatch. The Bank could restructure its investment
portfolio through sale or purchase of securities with more favorable repricing
attributes. It could also emphasize loan products with appropriate maturities
or repricing attributes, or it could attract deposits or obtain borrowings with
desired maturities.
30
<PAGE>
Impact of Inflation and Changing Prices
The Consolidated Financial Statements of the Company and Notes thereto,
presented elsewhere herein, have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time and
due to inflation. The impact of inflation is reflected in the increased cost of
the Company's operations. Nearly all the assets and liabilities of the Company
are monetary. As a result, interest rates have a greater impact on the
Company's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the price of goods and services.
Financial Condition
General
The Company's assets have grown to $134.5 million at September 30, 1997 as
compared to $117.1 million and $81.3 million at June 30, 1997 and 1996,
respectively. The increase in assets primarily reflects the deployment of
proceeds from certificates of deposits into loans, including portfolio loans
and loans available for sale. At September 30, 1997, the loan portfolio
aggregated $93.9 million as compared to $86.0 million and $53.6 million, at
June 30, 1997 and 1996, respectively. The growth has been concentrated in
Commercial Real Estate loans and conforming adjustable rate residential
mortgages. Loans available for sale increased to $16.8 million at September 30,
1997 as compared to $6.2 million and $1.7 million at June 30, 1997 and 1996,
respectively. This growth is primarily due to increased volume of Nonconforming
Mortgage originations and acquisitions. At September 30, 1997, Nonconforming
Mortgage loans available for sale was $14.7 million as compared to $4.3 million
at June 30, 1997. The Bank carries its Nonconforming Mortgage loans available
for sale at the lower of cost or market until such time as they are sold or, in
certain cases, until the Bank has a firm commitment for the sale of the loans.
Accordingly, the carrying value of the Nonconforming Mortgage loans available
for sale does not fully reflect the gain the Bank anticipates it will realize
upon the ultimate sale of the loans. The Bank had no Nonconforming Mortgage
loans as of June 30, 1996. Deposits were $110.6 million, $95.9 million and
$59.6 million at September 30, 1997, June 30, 1997 and June 30, 1996,
respectively.
Loans
Net loans receivable increased to $93.9 million at September 30, 1997 as
compared to $86.0 million at June 30, 1997 and $53.6 million at June 30, 1996.
These increases were due primarily to internally generated Commercial Real
Estate loans and conforming residential adjustable rate mortgages. At June 30,
1997, the Commercial Real Estate loan portfolio was $28.1 million as compared
to $13.0 million at June 30, 1996, representing an increase of 116.15%. The
conforming residential adjustable rate mortgage loan portfolio grew to $54.5
million at June 30, 1997 compared to $39.5 million at June 30, 1996. The above
noted loan growth was achieved without a significant increase in delinquencies
or charge-offs. The Bank internally underwrites each of its loans to comply
with prescribed policies and approval levels established by its Board of
Directors.
31
<PAGE>
The table below sets forth data relating to the composition of the Bank's
loan portfolio by type of loan on the dates indicated.
<TABLE>
<CAPTION>
At June 30,
At September 30, --------------------------------------------------
1997 1997 1996
------------------------ ------------------------ ------------------------
$ % $ % $ %
----------- ----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Type of Loan
One-to-four family residential real estate. $59,665 63.57% $54,493 63.37% $39,485 73.66%
Multi-family residential real estate ......... 13,973 14.89 13,244 15.41 5,357 9.99
Construction one-to-four family
residential ................................. 1,380 1.47 1,414 1.64 344 0.64
Commercial and non-residential
real estate ................................. 16,827 17.93 14,817 17.23 7,616 14.20
Consumer ..................................... 2,516 2.68 2,375 2.77 1,285 2.40
Less allowance for loan losses ............... (487) ( 0.52) (472) ( 0.55) (430) ( 0.80)
Deferred fees ................................ (17) ( 0.02) 121 0.13 (53) ( 0.09)
------- ------ ------- ------ ------- ------
Net loans .................................... $93,857 100.0% $85,992 100.0% $53,604 100.0%
======= ====== ======= ====== ======= ======
Type of Security
Residential real estate:
One-to-four family .......................... $63,758 67.93% $59,905 69.66% $40,673 75.88%
Multi-family ................................ 13,973 14.89 13,244 15.41 5,357 9.99
Non-residential real estate .................. 14,080 15.00 10,890 12.66 7,076 13.20
Depository accounts .......................... 553 0.59 442 0.52 441 .82
Marketable securities ........................ 1,320 1.41 1,260 1.47 -- --
Other ........................................ 677 0.72 602 0.70 540 1.00
Less allowance for loan losses ............... (487) ( 0.52) (472) ( 0.55) (430) ( 0.80)
Deferred fees ................................ (17) ( 0.02) 121 0.13 (53) ( 0.09)
------- ------ ------- ------ ------- ------
Net loans .................................... $93,857 100.0% $85,992 100.0% $53,604 100.0%
======= ====== ======= ====== ======= ======
</TABLE>
The following table sets forth the estimated maturity of the Bank's loan
portfolio at September 30, 1997. The table does not include prepayments or
scheduled principal repayments. Adjustable-rate mortgage loans are shown as
maturing on their contractual maturities.
<TABLE>
<CAPTION>
Due Due Allowance
within One through Due after for
One year Five years Five years Loan Losses Total
---------- ------------- ------------ ------------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
One-to-four family residential real estate. $ 688 $ 47 $58,913 $(141) $59,507
Multi-family, commercial and non-
residential real estate .................. 413 4,640 25,747 (302) 30,498
Construction -- one-to-four family resi-
dential .................................. 1,380 -- -- (3) 1,377
Consumer .................................. 1,047 95 1,374 (7) 2,509
Unassigned reserve ........................ -- -- -- (34) (34)
------ ------ ------- ------- -------
Total ..................................... $3,528 $4,782 $86,034 $(487) $93,857
====== ====== ======= ======= =======
</TABLE>
32
<PAGE>
The following table sets forth the dollar amount of all loans due after
September 30, 1997, which have pre-determined interest rates and which have
floating or adjustable interest rates.
<TABLE>
<CAPTION>
Floating or
adjustable
Fixed rates rates Total
------------- ------------ ----------
(Dollars in thousands)
<S> <C> <C> <C>
One-to-four family residential real estate ....................... $3,654 $56,011 $59,665
Multi-family, commercial and non-residential real estate ......... 1,009 29,791 30,800
Construction -- one-to-four family residential ................... -- 1,380 1,380
Consumer ......................................................... 553 1,963 2,516
------ ------- -------
Total ............................................................ $5,216 $89,145 $94,361
====== ======= =======
</TABLE>
Non-Performing and Problem Assets
Loan Delinquencies
The recent loan growth experienced by the Bank has not resulted in a
corresponding increase in delinquencies. Collection procedures generally
provide that after a loan is 15 days or more past due, a late charge is added.
The borrower is contacted by mail or telephone and payment is requested. If a
loan becomes 90 days or more contractually delinquent, the Bank will usually
institute foreclosure proceedings. Additionally, all such loans are generally
placed on non-accrual status unless the credit is well secured and in the
process of collection. If collection of principal or interest is deemed
doubtful at an earlier date, the loan would be placed on non-accrual status.
Other Real Estate Owned
Real estate acquired by the Bank as a result of foreclosure on an
outstanding loan balance is classified as Other Real Estate Owned ("OREO")
until such time as the property is sold. Upon acquisition, the property is
recorded at the lower of the unpaid principal balance of the related loan or
its fair value less estimated disposal costs. Write-downs required at
acquisition are charged to the allowance for loan losses. Subsequent
write-downs of OREO are charged to operations. The Bank has had minimal OREO.
At September 30, 1997, the Bank's OREO balance was $105,000.
The following table details the Bank's non-performing loans and OREO at
the dates indicated.
<TABLE>
<CAPTION>
June 30,
September 30, -------------------------
1997 1997 1996
--------------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
Loans accounted for on a non-accrual basis:
One-to-four family residential real estate ................. $ 581 $ 705 $ 553
Consumer ................................................... 40 40 40
-------- -------- --------
Total non-accrual loans .................................... 621 745 593
-------- -------- --------
Accruing loans that are contractually past due 90 days or
more:
One to four family mortgage ................................ 353 353 378
-------- -------- --------
Total 90-day past-due loans ................................ 353 353 378
-------- -------- --------
Total non-accrual and 90-day past due loans ................ 974 1,098 971
Other Real Estate Owned .................................... 105 -- 81
-------- -------- --------
Total non-performing loans ................................. $ 1,079 $ 1,098 $ 1,052
======== ======== ========
Non-accrual loans to net loans ............................. 0.66% 0.87% 1.11%
======== ======== ========
Total non-accrual loans and 90-day past due loans to net
loans ..................................................... 1.04% 1.28% 1.81%
======== ======== ========
Total non-performing assets to net loans plus OREO ......... 1.15% 1.28% 1.96%
======== ======== ========
Total allowance for loan losses to total non-performing
assets .................................................... 45.13% 42.99% 40.87%
======== ======== ========
</TABLE>
33
<PAGE>
Allowance for Loan Losses
It is the policy of Management and the Board of Directors to provide for
losses on both identified and unidentified losses inherent in its loan
portfolio. A provision for loan losses is charged to operations based upon an
evaluation of the potential losses in the loan portfolio. This evaluation takes
into account such factors as portfolio concentrations, delinquency trends,
trends of non-accrual and classified loans, economic conditions, and other
relevant factors. The following table sets forth activity in the Bank's
allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
September 30, June 30,
----------------------- ---------------------
1997 1996 1997 1996
---------- ---------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Allowance for loan losses, beginning of
period ..................................... $ 472 $ 430 $ 430 $ 388
Charge-offs:
One-to-four family residential real estate. 0 (1) (16) 0
------- -------- ------ -------
Total charge-offs ........................... 0 (1) (16) 0
------- -------- ------ -------
Provision for loan losses ................... 15 11 58 42
------- ------- ------ -------
Allowance for loan losses, end of period. $ 487 $ 440 $ 472 $ 430
======= ======= ====== =======
Allowance for loan losses to total loans..... 0.52% 0.48% 0.55% 0.80%
======= ======= ====== =======
Net loans charged-off as a percent of
average loans outstanding .................. -- -- 0.02% --
======= ======= ====== =======
</TABLE>
34
<PAGE>
The following table sets forth the allocation of the Bank's allowance for
loan losses by loan category and the percentage of loans in each category to
total loans receivable at the dates indicated. The portion of the allowance for
loan losses allocated to each loan category does not represent the total
available for future losses that may occur within the loan category, since the
total loan loss allowance is a valuation reserve applicable to the entire loan
portfolio.
<TABLE>
<CAPTION>
At June 30,
At September 30, --------------------------------------------------
1997 1997 1996
------------------------ ------------------------ -----------------------
Percent of Percent of Percent of
Loans to Loans to Loans to
Amount Total Loans Amount Total Loans Amount Total Loans
-------- ------------- -------- ------------- -------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at end of period applicable to:
One-to-four family residential real estate $141 63.57% $129 63.37% $114 73.66%
Multi-family residential real estate ......... 100 14.89 109 15.41 60 9.99
Construction one-to-four family
residential ................................. 3 1.47 4 1.64 1 0.64
Commercial and non-residential real
estate ...................................... 202 17.93 154 17.23 166 14.20
Consumer ..................................... 7 2.68 7 2.77 3 2.40
Unallocated .................................. 34 -- 69 -- 86 --
---- ---- ----
Total allowance for loan losses .............. $487 $472 $430
==== ==== ====
</TABLE>
Investment Securities
The Bank utilizes its investment securities portfolio to manage its
liquidity and interest rate risk. For this reason, the Bank's investment
securities portfolio is classified as available for sale.
The investment policy of the Bank and classification of securities are
established by its Board of Directors. It is based on its asset and liability
management goals and is designed to provide for a portfolio of high quality
liquid investments which optimize interest income. All or a portion of the
Bank's investment securities portfolio may be utilized to collateralize
borrowings from the FHLB or Repurchase Agreements.
<PAGE>
The following table sets forth the carrying value of the Bank's investment
and mortgage-backed securities ("MBS") portfolio at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
1997
---------------------------------------------------
Gross Gross Fair
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ------------ ------------ ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Available-for-sale:
FHLMC ................... $ 7,257 $47 $ (8) $ 7,296
GNMA .................... 4,039 18 (3) 4,054
FNMA .................... 5,436 -- (31) 5,405
------- --- ------ -------
Total MBS ............... 16,732 65 (42) 16,755
------- --- ------ -------
US government &
agency ................. 3,302 -- (3) 3,299
SBA pool ................ -- -- -- --
FHLB stock .............. 786 -- -- 786
------- --- ------ -------
Total securities
available-for-sale ..... $20,820 $65 $(45) $20,840
======= === ====== =======
</TABLE>
(RESTUBBED TABLE)
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------------------------------------------
1997 1996
--------------------------------------------------- -------------------------------------------------
Gross Gross Fair Gross Gross Fair
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
----------- ------------ ------------ ---------- ----------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available-for-sale:
FHLMC ................... $ 7,601 $14 $ (47) $ 7,568 $ 6,572 $ 4 $(122) $ 6,454
GNMA .................... 6,305 23 (15) 6,313 9,462 -- (133) 9,329
FNMA .................... 2,189 1 (27) 2,163 2,398 -- (54) 2,344
------- --- ----- ------- ------- --- ----- -------
Total MBS ............... 16,095 38 (89) 16,044 18,432 4 (309) 18,127
------- --- ----- ------- ------- --- ----- -------
US government &
agency ................. 4,375 -- (11) 4,364 1,971 -- (30) 1,941
SBA pool ................ 1,119 -- (7) 1,112 1,556 -- (2) 1,554
FHLB stock .............. 823 -- -- 823 475 -- -- 475
------- --- ------- ------- ------- --- ------- -------
Total securities
available-for-sale ..... $22,412 $38 $(107) $22,343 $22,434 $ 4 $(341) $22,097
======= === ======= ======= ======= === ======= =======
</TABLE>
35
<PAGE>
The following table sets forth certain information regarding the carrying
values, weighted average yields and maturities of the Bank's investment
portfolio at September 30, 1997. All investment securities are classified as
available-for-sale, therefore the carrying value is the estimated market value.
<TABLE>
<CAPTION>
One Year or Less One to Five Years
--------------------- ---------------------
Carrying Average Carrying Average
Value Yield Value Yield
---------- --------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
US government agencies ..... $597 5.35% $2,702 6.81%
MBS ........................ -- -- -- --
FHLB stock(1) .............. -- -- -- --
---- ------
Total ...................... $597 5.35% $2,702 6.81%
==== ======
</TABLE>
(RESTUBBED TABLE)
<TABLE>
<CAPTION>
Five to Ten Years More than Ten Years Total
--------------------- --------------------- ----------------------
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
---------- --------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
US government agencies ..... -- -- -- -- $ 3,299 6.61%
MBS ........................ $1,848 7.20% $14,907 6.96% 16,755 6.99
FHLB stock(1) .............. -- -- 786 6.50 786 6.50
------ ------- -------
Total ...................... $1,848 7.20% $15,693 6.94% $20,840 7.01%
====== ======= =======
</TABLE>
- ------------
(1) FHLB stock has no stated maturity; however, it must be owned as long as the
Bank remains a member of the FHLB system. The Bank does not anticipate
that it will discontinue its membership and, therefore, the investment is
classified as more than ten years.
<PAGE>
Deposits
Consumer and commercial retail deposits are attracted primarily at the
Bank's two branch locations by offering a broad selection of deposit products.
The Bank evaluates its interest rates and fees on deposit products through a
regular review of competing financial institutions and prevailing market
interest rates.
Competition for retail deposits is intense and the administrative and
operational costs of a retail branch can be high. Therefore, the Bank also
attracts deposits through a network of financial planners and brokers. The Bank
has utilized these deposits to fund a substantial portion of the asset growth
experienced in recent years. While the Bank has attracted deposits by paying
interest rates slightly higher than generally offered in the retail market,
this has allowed the Company to focus on the implementation of its business
strategy, including the development of its specialty lending and product niche
activities, and to control its core non-interest expenses.
Deposits at September 30, 1997 totaled $110.6 million compared to $95.9
and $59.6 million at June 30, 1997 and June 30, 1996, respectively. While the
Bank has established a core level of retail deposits which include both
transaction type of accounts (checking, savings, money market) and CDs, the
growth in the deposit base is attributed primarily to jumbo CDs.
The following table sets forth average deposits by various types of demand
and time deposits.
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------------------------
Three Months
Ended September 30, 1997 1997 1996
------------------------- ------------------------- ------------------------
Deposits Avg. Yield Deposits Avg. Yield Deposits Avg. Yield
---------- ------------ ---------- ------------ ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing demand
deposits ................. $ 2,063 -- $ 1,794 -- $ 812 --
Interest-bearing demand
deposits ................. 10,336 4.02% 9,605 3.92% 6,027 3.78%
Savings deposits .......... 1,799 2.89 1,908 2.80 2,203 2.95
CDs ....................... 93,594 5.80 62,890 5.64 43,128 5.88
-------- ------- -------
Total ..................... $107,792 5.47% $76,197 5.22% $52,170 5.42%
======== ======= =======
</TABLE>
36
<PAGE>
The following table indicates the amount of CDs of $100,000 or more by
remaining maturity at September 30, 1997.
(Dollars in thousands)
Remaining Maturity:
Three months or less .......................... $12,627
Over three months through six months .......... 3,082
Over six months through twelve months ......... 4,138
Over twelve months ............................ 1,042
-------
Total ......................................... $20,889
=======
Borrowings
The Bank utilizes borrowings from the FHLB and collateralized repurchase
agreements in managing its interest rate risk and as a tool to augment deposits
in funding asset growth. FHLB borrowings totaled $4.4 million at September 30,
1997 as compared to $9.0 million at June 30, 1997 and $9.5 million at June 30,
1996. The $4.6 million decline resulted from repayment from proceeds of a
repurchase agreement for which the Bank was able to secure a favorable rate as
compared to rates offered by the FHLB at the time. Repurchase agreements
totaled $10.8 million at September 30, 1997 as compared to $5.8 million at June
30, 1997 and $7.2 million at June 30, 1996. During the quarter ended September
30, 1997, the Bank obtained a longer term repurchase agreement borrowing to
better match the repricing characteristics of the growth it experienced in its
Commercial Real Estate loan portfolio.
The following table sets forth certain balance and rate information with
respect to FHLB borrowings and repurchase agreements for the periods indicated.
Federal Home Loan Bank Advances and Repurchase Agreements
<TABLE>
<CAPTION>
At June 30,
At September 30, ---------------------------
1997 1997 1996
------------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C>
Advances outstanding at period end ................ $ 4,350 $ 8,950 $ 9,500
Interest rate at period end ....................... 5.71% 5.70% 5.55%
Approximate average amount outstanding ............ $ 8,207 $ 8,344 $ 6,694
Maximum month-end balance ......................... $ 9,000 $ 17,450 $ 11,000
Approximate weighted average rate ................. 5.95% 5.56% 5.80%
Repurchase agreements outstanding at end of period. $ 10,780 $ 5,780 $ 7,151
Interest rate ..................................... 5.85% 5.90% 5.85%
Approximate average amount outstanding ............ $ 8,065 $ 8,923 $ 2,647
Maximum month-end balance ......................... $ 10,780 $ 10,431 $ 7,151
Approximate weighted average rate ................. 5.85% 5.95% 5.85%
</TABLE>
In connection with FHLB borrowings and repurchase agreements, the Bank is
required to maintain certain eligible assets as collateral.
Shareholders' Notes and Shareholders' Equity
At September 30, 1997, the Company had outstanding shareholders' notes and
shareholders' equity of $3.2 million and $3.9 million, respectively, as
compared to $3.0 million and $2.9 million at June 30, 1997 and $2.9 million and
$1.5 million at June 30, 1996. The Company has utilized the issuance of notes
as well as the Common Stock to raise money from its shareholders, because the
proceeds from both the notes and the Common Stock can be contributed as capital
to the Bank and be included in the calculation of capital for regulatory
purposes. Since July 1, 1995, in addition to earnings retained in the Company,
the Company's shareholders have contributed an additional $2.1 million of notes
and capital to allow the Company to pursue its significant growth.
37
<PAGE>
Impact of New Financial Account Standards
Accounting For Earnings Per Share. In February 1997, the Financial
Accounting Standards Board (the "FASB") issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128
establishes standards for computing and presenting Earnings Per Share (EPS) and
applies to entities with publicly held common stock or potential common stock.
This statement simplifies the standards for computing earnings per share
previously found in APB Opinion No. 15, "Earnings per share," and makes them
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS and requires dual presentation of
basic and diluted EPS on the face of the income statement for all entities with
complex capital structures. It also requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator
of the diluted EPS computation.
SFAS 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods; earlier application is not
permitted. This statement requires restatement of all prior-period EPS data
presented. The Company will adopt the statement effective for the fiscal year
ending June 30, 1998. Basic and diluted earnings per share under SFAS 128 would
be identical to earnings per share as presented in the financial statements
and, therefore, will not have any material effect on the Company.
Reporting of Comprehensive Income. In June 1997, the FASB issued Statement
of Financial Accounting Standards No. 130, "Reporting of Comprehensive Income"
("SFAS 130"), which establishes standards for the reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of financial statements. This statement also requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
This statement is effective for fiscal years beginning after December 15,
1997. Earlier application is permitted. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
The Company does not anticipate that preparation of disclosure to comply with
SFAS 130 will have a material effect on the Company's financial statements.
Disclosure about Segments and Related Information. In June 1997, the FASB
issued Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"), which
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that such enterprises report selected information about operating
segments in interim financial reports issued to shareholders.
This statement also establishes standards for related disclosures about
products and services, geographic areas, and major customers. This statement
requires the reporting of financial and descriptive information about an
enterprise's reportable operating segments. This statement is effective for
financial statements for periods beginning after December 15, 1997. In the
initial year of application, comparative information for earlier years is to be
restated. The Company does not anticipate that the preparation of disclosure to
comply with SFAS 131 will have a material effect on the Company's financial
statements.
Year 2000 Compliance
The Company is assessing the potential impact of what is commonly
referred to as the "Year 2000" issue, concerning the inability of certain
information systems and automated equipment to properly recognize and process
dates containing the Year 2000 and beyond. If not corrected, these systems and
equipment could fail or create erroneous results. The Company is in the
process of determining which of its systems and equipment, if any, may present
Year 2000 issues, the magnitude of these issues and the steps that may be
necessary to correct them. The majority of the Company's data processing is
outsourced pursuant to an agreement with Fiserv Solutions, Inc. ("Fiserv"), a
provider of data processing services to the banking industry. Fiserv has
informed the Company that it has implemented changes to accommodate maturity
and expiration dates beyond 1999 and that all of Fiserv's national products
and systems are and/or will be Year 2000 compliant. Although the Company will
continue to monitor Fiserv's progress in addressing Year 2000 compliance
issues, there can be no assurance that Fiserv will be successful in addressing
such issues. Therefore, the potential liabilities and costs associated with
Year 2000 compliance cannot be estimated with certainty at this time.
Regardless of the Year 2000 compliance
38
<PAGE>
of the Company's systems, there can be no assurance that the Company will not
be adversely affected by the failure of others to become Year 2000 compliant.
Such risks may include potential losses related to loans made to third parties
whose businesses are adversely affected by the Year 2000 issue, the
contamination or inaccuracy of data provided by non-Year 2000 compliant third
parties and business disruption caused by the failure of service providers,
such as security and data processing companies, to become Year 2000 compliant.
Because of these uncertainties, there can be no assurance that the Year 2000
issue will not have a material financial impact in any future period.
39
<PAGE>
BUSINESS
General
The Company, a Pennsylvania corporation established in 1988 and
headquartered in Philadelphia, Pennsylvania, is the holding company for the
Bank, a federally chartered savings bank. Currently, all of the Company's
business activities are conducted through the Bank. At September 30, 1997, the
Company had total assets of $134.5 million, total deposits of $110.6 million
and total shareholders' equity of $3.9 million. The Bank's deposits are
federally insured by the SAIF of the FDIC to the maximum extent permitted by
law. As a savings and loan holding company, the Company is subject to the
supervision and regulation of the OTS.
The Bank provides community banking services through two branches and two
ATMs in Philadelphia, and has focused primarily on mortgage lending for
residential and multi-family housing and commercial real estate. In the latter
part of 1995, management began to refocus the Company and developed a plan
designed to expand its operations and grow its assets and profitability. The
Company's strategy is to maintain a core banking operation that provides a
growing stream of income enhanced by engaging in various specialty lending and
product niche activities designed to provide the Company with significantly
higher risk-adjusted rates of return. These activities currently include the
origination and acquisition for resale of Nonconforming Mortgages, the
origination of loans guaranteed by the SBA and the acquisition of delinquent
property tax liens.
The Company intends to monitor on an ongoing basis the risk/reward
characteristics of each of its specialty lending and product niche activities
in order to determine whether to expand, maintain or discontinue such activity.
The Company may also elect to pursue additional specialty lending and product
niche activities.
History
The Bank was founded in 1943 and acquired by the Company in 1989. Through
1995, the Bank operated exclusively as a community savings bank, accepting
deposits from the public and investing the proceeds in investment securities
and loans, primarily adjustable rate conforming residential mortgage loans. The
Bank also originated fixed rate mortgages for resale in the secondary market,
earning a fee in connection with such resales, and offered ancillary
residential loan products such as home equity lines of credit. In 1994, the
Bank opened its Center City, Philadelphia branch and, in 1995, began to focus
on the origination of Commercial Real Estate loans.
The Company has grown its assets from $63.6 million as of June 30, 1995 to
$134.5 million as of September 30, 1997. During this period of growth, the
Company has controlled its operating expenses. While increasing its net
interest income from $1.4 million for fiscal year 1996 to $2.8 million for
fiscal year 1997 and to $1.1 million for the quarter ended September 30, 1997,
the Company contained the growth in its core non-interest expenses (operating
expenses exclusive of the SAIF assessment and CMC Nonconforming Mortgage
banking expenses) from $1.6 million (2.47% of average assets) for fiscal year
1996 to $1.7 million (1.70% of average assets) for fiscal year 1997 and
$449,000 for the quarter ended September 30, 1997 (1.37% of average assets).
The Subsidiaries
The Bank's approach to developing certain of its specialty lending and
product niche activities has been to establish and expand them through
majority-owned subsidiaries, with minority interests issued to one or more
individuals with significant experience in the business. This allows the
subsidiary to combine the Bank's financial resources and competitive
advantages, with the experience and knowledge of the minority owner-operator.
Under the typical arrangement, the Bank owns at least 51% of the subsidiary and
funds the loans the subsidiary generates at a cost to the subsidiary equal to
the Bank's cost of funds plus 250 basis points. The minority shareholder does
not receive any monetary benefit from the subsidiary until such time as the
subsidiary's results of operations reflect a profit. This approach allows the
Bank to enter a new business line with an experienced manager who is incented
to maximize the subsidiary's profitability. The Bank closely monitors the
operations and activities of each subsidiary, in turn providing management,
accounting, back office and marketing support to the subsidiary. The Bank, in
concert with the minority shareholders, has developed strict underwriting and
operating guidelines for each subsidiary, and closely monitors compliance with
such guidelines through the review of loans prior to funding.
40
<PAGE>
Currently, the Bank's operating subsidiaries are as follows:
Crusader Servicing Corporation ("CSC") is a 60% owned subsidiary that
commenced operations in August 1996, and acquires, through auction,
delinquent property tax liens in various jurisdictions, assuming a lien
position that is generally superior to any mortgage liens on the property,
and obtaining certain foreclosure rights as defined by local statute.
Crusader Mortgage Corporation of Delaware ("CMCD") is a 51% owned
subsidiary formed in October 1997 in conjunction with the shareholder of
Merit Financial Corporation, a licensed mortgage broker operating
principally in Delaware, to assume the operations previously conducted by
Merit. CMCD will maintain a conforming and nonconforming residential
mortgage lending operation in Wilmington, Delaware.
National Chinese Mortgage Corporation ("NCM") is a 51% owned subsidiary
formed in December 1997 in conjunction with Dr. Haiching Zhao, the sole
shareholder of National Chinese Service Corporation ("NCSC"), a company
that focuses on marketing financial services products to the U.S. Chinese
community. NCM markets residential mortgage loans on an affinity group
basis to the U.S. Chinese community.
CMC was originally a 51% owned subsidiary that commenced operations in
July 1996, for which the Bank originates and acquires nonconforming
residential mortgage loans and services such loans until they are sold in
larger pools, typically within 90 days. The Bank increased its ownership
position in CMC to 67.5% in September 1997 and to 100% effective in
November 1997. See "Prospectus Summary -- Recent Developments."
The Bank also has a wholly-owned subsidiary, Quest Holding Corporation
("QUEST"), that periodically holds title to the real estate holdings of the
Bank acquired through foreclosure, pending resale of such property. In
addition, QUEST is a 50% owner of an office building purchased in December
1996 for $410,000 that includes the offices of CMC, with the other 50%
owned by Ronald L. Caplan, who is a director of the Company and of the
Bank. See "Certain Relationships and Related Transactions."
A brief description of each of the Bank's primary product lines and
services follows:
Core Banking Activities
Conforming Credit Residential Lending
Generally, the Bank's conforming residential lending approach has complied
with the Federal National Mortgage Association ("FNMA") underwriting standards
with respect to credit, debt ratios and documentation. Loans in excess of an
80% loan-to-value ("LTV") ratio carry private mortgage insurance. Generally, to
avoid interest rate risk, all fixed rate mortgages are originated for resale in
the secondary market, and the Bank earns a fee in connection with such resale.
Adjustable rate mortgages, depending upon size, are either sold or retained in
the Bank's portfolio. The Bank also offers a full line of single family
construction loans, rehabilitation loans and home equity lines of credit.
During the past two fiscal years, the Bank originated an average of
approximately $42 million of conforming residential real estate loans annually,
although in the future this volume is likely to fluctuate based on a variety of
factors, including, among other things, housing purchase activity and interest
rates. During the past two years, 71.45% of the Bank's originations were for
home purchases, making it less dependent on interest rate reductions than many
of its competitors which focus more on refinancings. The Bank's portfolio of
conforming residential real estate loans was $59.7 million as of September 30,
1997. The Bank does not retain servicing on loans sold.
The Bank has recently developed several initiatives in an attempt to grow
and enhance the profitability of its conforming mortgage banking operations. In
August 1997, the Bank negotiated a higher fee for the sale of servicing rights
on its fixed rate loans. In October 1997, the Bank formed CMCD to generate
retail loan production in Delaware and to market conforming mortgage products
to the network of brokers established by CMC for its Nonconforming Mortgage
products. In December 1997, the Bank formed NCM to market residential mortgage
loans on an affinity group basis to the U.S. Chinese community in conjunction
with Dr. Haiching Zhao. The Bank, through NCM, has obtained certain
underwriting concessions from FNMA in recognition of the needs of NCM's target
population. The Bank expects to begin generating loan activity through NCM
during the latter part of the quarter ending March 31, 1998.
41
<PAGE>
Commercial Real Estate Lending
The Bank's Commercial Real Estate lending activities consist of loans
secured by apartment buildings, small office buildings and mixed use properties
and occasionally commercial loans secured by non-real estate collateral. The
Bank believes these loans are generally less risky than commercial real estate
loans secured by a property with a single business user, where the ability of
the borrower to repay is dependent upon the operations of the business. The
Bank's Commercial Real Estate loans are generally secured by real estate
located principally in the Philadelphia metropolitan area, and in certain
cases, in southern and central New Jersey and Delaware. The loans are
underwritten in accordance with strict debt service and LTV guidelines,
generally with maximum LTVs of up to 75%. The Bank typically requires personal
guarantees on Commercial Real Estate loans. The Bank will sometimes permit a
borrower to supplement or substitute marketable securities or other property as
collateral for Commercial Real Estate loans in accordance with prescribed
guidelines. All Commercial Real Estate loans are approved by the Loan Committee
of the Bank's Board of Directors (the "Bank Loan Committee").
The Bank has emphasized Commercial Real Estate loans ranging in size
between $500,000 and $1.2 million. The Bank believes this is an underserved
portion of the market, and not subject to the intense competition present with
respect to Commercial Real Estate loans in excess of $1.2 million. This has
allowed the Bank to generate an adequate volume of Commercial Real Estate loans
without generally varying from its strict underwriting guidelines and its
policy of requiring a personal guarantee on all Commercial Real Estate loans.
The Bank's Commercial Real Estate loans provide primarily for fixed
interest rates during an initial period ranging from one year to five years. At
the end of the initial period, the interest rate adjusts to a specified margin
over the prevailing U.S. Treasury rate for the ensuing period. The Bank's
Commercial Real Estate loan portfolio has been priced to provide an average
spread of at least 300 basis points over the comparable Treasury securities at
time of origination. The Bank originated $23.5 million of Commercial Real
Estate loans during the year ended June 30, 1997, and as of September 30, 1997,
had an aggregate outstanding balance of Commercial Real Estate loans of $30.8
million.
Small Business Administration Lending
In 1996, the Bank became an approved SBA lender. Under this program, the
SBA guarantees up to 75% (80% for loans under $100,000) of the outstanding loan
balance of an approved SBA loan. Because the loans are generally collateralized
by real estate or other assets, the ultimate risk of loss is reduced
substantially, as any collateral recoveries are realized by the lending
institution on a pro-rata basis in accordance with the non-guaranteed
percentage of the loan balance. Interest rates on the Bank's SBA loans
generally float based on the prime rate, with typical average margins above
prime of 175 to 275 basis points. Thus, the Bank is able to earn above average
interest rates on the full balance of the loans, while generally limiting its
exposure to a maximum of 20% to 25% of the outstanding balance, which exposure
is further reduced by its share of recoveries.
Because the guaranteed portion of an SBA loan is backed by the full faith
and credit of the U.S. Government, this portion can be sold as a security,
often generating gains on sale of up to 10% of the guaranteed principal
balances. The sale of the guaranteed portion is generally without recourse and
without exposure with respect to prepayment of the loan. Any gain on the sale
of the guaranteed portion further reduces the Bank's exposure with respect to
the loan.
Despite its reduced exposure, the Bank adheres to strict underwriting
guidelines with respect to its origination of SBA loans, including obtaining
personal guarantees from the borrower's principals. All SBA loans require the
approval of the Bank Loan Committee. The Bank utilizes the SBA program
primarily to make commercial loans to single business users of properties and
to make certain loans that do not fit into its traditional underwriting
criteria, such as lending to restaurants and new businesses.
As of September 30, 1997, the Bank had $619,000 of SBA loans outstanding
and received signed commitment letters on an additional $675,000 that were
funded in October 1997.
Investment and Mortgage-Backed Securities
The Bank maintains an investment securities portfolio in order to provide
liquidity and manage interest rate risk. Securities in the portfolio are all
U.S. Treasury or U.S. Agency quality. The Bank's investment securities
42
<PAGE>
portfolio as of September 30, 1997 was $20.8 million, including $16.8 million
of mortgage-backed securities. The Bank's current investment policy allows it
to purchase bonds, mortgage-backed securities, and preferred stock with an "A"
rating or better by Moody's Investor Services, Inc. For details of the Bank's
investment securities portfolio, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Funding of Assets
The Bank has funded its assets through the generation of deposits at its
two branches, and through borrowings from the Federal Home Loan Bank ("FHLB")
and collateralized borrowings against its securities portfolio. Management
closely monitors rates and terms of competing sources of funds on a regular
basis and attempts to utilize the sources that are the most cost effective. As
of September 30, 1997, the Bank had $110.6 million of outstanding deposits and
$15.1 million of borrowings.
The Bank offers a full array of deposit products through its two branches
including checking accounts, certificates of deposit, money market funds and
statement savings accounts. The Bank also offers ancillary products such as
merchant credit card services, and has two full service Automated Teller
Machines.
Approximately 87% of the Bank's deposits are represented by CDs, primarily
marketed through its branches and through financial planners and brokers. The
Bank currently does not intend to open additional branches. While the Bank has
attracted deposits by paying interest rates slightly higher than generally
offered in the retail market, this has allowed the Company to focus on the
implementation of its business strategy, including the development of its
specialty lending and product niche activities, and to control its core
non-interest expenses. For details of the Bank's deposits by product type and
maturity dates, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Deposits."
Specialty Lending and Product Niche Activities
Nonconforming Credit (B/C) Residential Mortgage Lending
The Bank originates and acquires nonconforming credit mortgage loans for
subsequent resale on behalf of CMC. Nonconforming credit loans are those that
generally do not conform to agency underwriting guidelines, whether due to poor
credit histories, the absence of a credit history, excessive debt-to-income
ratios, inability to verify the borrower's income, refinance cash-out
exceptions or a variety of other agency guideline exceptions. In exchange for
the additional lender risk associated with these loans, nonconforming borrowers
generally are required to pay a higher interest rate, and depending upon the
severity of the credit history, a lower LTV may be required than for a
conforming borrower.
The Bank generally originates and acquires nonconforming loans with the
intention of holding the loans for up to 90 days and in turn selling them in
larger pools to institutional investors. In connection with such sales, the
Bank earns a cash premium on the unpaid principal balance of the loans,
generally equal to a designated multiple of the excess of the weighted average
interest rate of the loan pool over the interest rate required by the
institutional investor for the mix of loans delivered.
Currently, all loans and their related servicing rights are sold on a
non-recourse basis pursuant to agreements containing customary representations
and warranties by the Bank regarding the underwriting criteria and the
origination process. The Bank, therefore, could be required to repurchase a
loan in the event of a breach of its representations and warranties. In
addition, in certain of its agreements, the Bank is required to repurchase a
loan in the event of a default on the first monthly payment due the purchaser,
and to refund a portion of the premium received with respect to a loan if the
loan is prepaid in full during the first year after it is sold (such portion
declines ratably to zero by the end of the year). However, absent a breach of
its representations and warranties or, if applicable, a first payment default,
the Bank has no exposure with respect to losses incurred by the purchaser with
respect to a default by the borrower. To date, the Bank has not been required
to repurchase a nonconforming loan, although there is no assurance that it will
not be required to do so in the future.
Historically, the Bank has favored whole loan sales over securitizations
because it realizes cash revenues on the sale of its loans and retains no
risks, other than as described above, with respect to the loans sold. A company
that securitizes its loans generally obtains its "premium" in the form of a
retained interest in certain future revenues of the securitization trust, and
generally recognizes a receivable for the estimated present value of such
43
<PAGE>
future revenues. However, the realization of such receivable is subject to the
actual payment experience of the loan pool. While the securitizer's loans are
eliminated from its balance sheet upon securitization, typically the
securitizer retains a level of default and prepayment risk on the outstanding
loans it is servicing. Some securitizers have incurred substantial write-downs
of their securitization receivables due to adverse default and prepayment
experience. The Bank does not retain these risks and, since it sells its loans
with their related servicing rights, it does not retain any risk with respect
to the ongoing valuation of servicing rights. The Bank from time to time
monitors and evaluates the economics and relative risk/reward characteristics
of whole loan sales and securitizations.
The Bank offers a wide array of nonconforming mortgage products in
accordance with its own internal underwriting guidelines, including fixed rate
first and second mortgages, various types of adjustable rate products, high LTV
products, reduced documentation loans and loans secured by non-owner occupied
properties. The Bank has originated its loans primarily through its own
mortgage originators and through a network of independent mortgage brokerage
and banking firms meeting the Bank's approval criteria ("Brokers"). The Bank
believes that the utilization of small independent Brokers represents the most
cost effective approach for the Bank. By offering a more comprehensive array of
products, excellent service and quick approval and documentation turn-around,
the Bank strives to be the sole or dominant origination source for each of its
Brokers. The Bank, through CMC, employs six regional account executives who
market to Brokers, and whose compensation packages are heavily incentive
oriented based on the dollar volume of loans originated on behalf of their
Brokers. The Bank has agreements with approximately 125 Brokers located
primarily in the Mid-Atlantic and Southeastern parts of the country.
As of November 30, 1997, the Bank, through CMC, had a staff of 24
underwriters, processors, loan closers, funders and quality reviewers who are
responsible for the various processes involved in the origination and sale of a
loan. In addition, the Bank makes extensive use of computer technology in its
processing of loans. All files are computerized so that information can be
accessed by all appropriate individuals. The Bank generally prepares its own
documents on all loans it originates, thereby reducing its dependence on the
Brokers for proper documentation. It also closely monitors compliance issues
and re-discloses broker compensation and other required disclosure matters on
every loan it originates. The Bank typically charges a processing and
underwriting fee averaging $450 on each loan it originates.
During the quarters ended June 30 and September 30, 1997, the Bank
originated or acquired $10 million and $25.6 million, respectively, of
nonconforming loans. Upon achieving this higher volume level, the Bank was able
to generate larger gains from the sale of its nonconforming loans by dividing
the loans into various homogenous pools that are more valuable to purchasers
seeking the type of product in the pool (e.g., fixed rate, adjustable rate,
higher credit grade pool, higher LTV pool).
In October 1997, the Bank began to purchase loans from mortgage banking
firms in pools generally ranging from $500,000 to $3 millon. By purchasing loan
pools, the Bank incurs reduced underwriting and processing costs, since it does
not have to provide pre-approvals on individual loans and can underwrite a
group of loans more efficiently. In connection with the Bank's purchase of loan
pools, the Bank enters into agreements with the sellers that for the most part
mirror the provisions of the agreements the Bank has with purchasers of its
loans. Because of the larger volume of loans it is producing, the Bank has
sometimes utilized forward pricing commitments on its fixed rate loans
generally lasting up to 40 days.
In addition to the revenues derived from the sale of nonconforming loans,
the Bank also earns net interest income on the loans until their subsequent
sale. As of September 30, 1997, the weighted average interest rate on the
Bank's nonconforming loan portfolio available for sale was 11.34%. This
resulted in an annualized spread of approximately 570 basis points on the
nonconforming loan portfolio pending sale.
In an attempt to further accelerate its growth in the origination of
nonconforming loans, CMC hired a Vice President - National Sales on December 1,
1997. The Bank and CMC are also pursuing additional loan pool purchase
relationships.
44
<PAGE>
Delinquent Property Tax Liens/Certificates
Through its 60% owned subsidiary, CSC, the Bank acquires, at auction or
through assignment, delinquent property tax certificates in various
jurisdictions that sell such certificates. The procedures for the sale and
purchase of property tax certificates are defined by local law, but generally,
in exchange for paying the outstanding property taxes and penalties, the
purchaser assumes a lien position on the property that is superior to any
mortgage lien. After a specified holding period, the purchaser has the right to
commence strict foreclosure proceedings, under which the purchaser will receive
title to the property free and clear of any liens, regardless of the
relationship between the property value and the property tax lien. Prior to
such strict foreclosure, the property owner and/or junior lien holders have the
right to redeem the certificate by paying the amount expended by the tax
certificate holder, plus interest and/or penalties as defined by local statute.
Since the outstanding property taxes are generally a small percentage of the
property value, there is an incentive for a junior lien holder or property
owner to redeem the certificate prior to strict foreclosure, as they will not
otherwise share in the excess of the property value over the property tax lien
amount.
CSC is currently focusing its efforts in New Jersey and Connecticut,
although it is exploring other states. While the effective rate of return
(increase in redemption value) of each individual tax lien will vary, CSC has
on average been able to earn approximately a 14% yield with effective LTVs
significantly below the Bank's prevailing lending standards. In New Jersey, by
virtue of acquiring a tax lien, CSC also obtains the right to pay any future
unpaid delinquent property taxes, and, once paid, is statutorily entitled to
interest up to 18% annually on such future delinquent taxes.
Prior to bidding at any auctions, CSC conducts due diligence on available
properties in accordance with internal guidelines, such as the review of
property types, appraised values and lien searches and, depending upon size,
will physically inspect the property. As of September 30, 1997, CSC had a
portfolio of $1.9 million of delinquent property tax certificates.
Properties
The Company's headquarters are located at 1230 Walnut Street in
Philadelphia, Pennsylvania. The Bank operates from two branch offices, one of
which is located at the Company's headquarters and the other is located at 6526
Castor Avenue in Philadelphia. The Bank leases its Walnut Street and Castor
Avenue locations under lease agreements with terms expiring in 2014 and 1999,
respectively, assuming the Bank exercises all of its options to renew such
leases. The Walnut Street location is leased from Walnut Square Partners, a
partnership controlled by Ronald L. Caplan, a director of the Company and the
Bank. In addition, CMC leases space at a building owned by 1334 Walnut Street
Partners, which is a partnership controlled by Mr. Caplan and QUEST, a
wholly-owned subsidiary of the Bank. See "Certain Relationships and Related
Transactions."
Personnel
At November 30, 1997, the Company, including the Bank and its
subsidiaries, had 70 full-time and four part-time employees, of which 22 were
employed by the Bank and 50 were employed by the Bank's subsidiaries. The
Company's only employees were the Chairman and the President. The Company's and
the Bank's employees are not represented by a collective bargaining group. The
Company and the Bank believe that their relationship with their respective
employees is good.
Legal Proceedings
There are various claims and lawsuits in which the Company or the Bank are
periodically involved, such as claims to enforce liens, condemnation
proceedings on properties in which the Bank holds security interests, claims
involving the making and servicing of real property loans, and other issues
incident to the Bank's business. In the opinion of management, there are no
material pending claims or lawsuits.
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SUPERVISION AND REGULATION
General
The Bank is chartered as a federal savings bank under the Home Owners'
Loan Act, as amended (the "HOLA"), which is implemented by regulations adopted
and administered by the OTS. As a federal savings bank, the Bank is subject to
regulation, supervision and regular examination by the OTS. The OTS also has
extensive enforcement authority over all savings institutions and their holding
companies, including the Bank and the Company. Federal banking laws and
regulations control, among other things, the Bank's investments, loans,
required reserves, mergers and consolidations, payment of dividends and other
aspects of the Bank's operations. The deposits of the Bank are insured by the
SAIF administered by the FDIC to the maximum extent provided by law ($100,000
for each depositor). In addition, the FDIC has certain regulatory and
examination authority over OTS-regulated savings institutions and may recommend
enforcement actions against savings institutions to the OTS. The supervision
and regulation of the Bank is intended primarily for the protection of the SAIF
and the Bank's depositors rather than the Company or its shareholders.
As a savings and loan holding company, the Company is registered with the
OTS and subject to OTS regulation and supervision under the HOLA. The Company
also will be required to file certain reports with, and otherwise comply with
the rules and regulations of, the Commission under the federal securities laws.
The following discussion is intended to be a summary of certain statutes,
rules and regulations affecting the Bank and the Company. A number of other
statutes and regulations have an impact on their operations. The following
summary of applicable statutes and regulations does not purport to be complete
and is qualified in its entirety by reference to relevant statutes and
regulations.
Regulation of the Bank
Business Activities. The Bank derives its lending and investment powers
from the HOLA and the regulations of the OTS thereunder. Under these laws and
regulations, the Bank may invest in mortgage loans secured by residential and
commercial real estate, commercial and consumer loans, certain types of
commercial paper and debt securities, and certain other assets. The Bank may
also establish service corporations that may engage in activities reasonably
related to the business of financial institutions but not otherwise permissible
for the Bank, including certain real estate equity investments and securities
and insurance brokerage. These investment powers are subject to various
limitations.
Branching. Subject to certain limitations, OTS regulations currently
permit a federally chartered savings institution like the Bank to establish
branches in any state of the United States, provided that the federal savings
institution qualifies as a "domestic building and loan association" under the
Internal Revenue Code of 1986, as amended (the "Code"), or is a "qualified
thrift lender" under HOLA. See " -- Qualified Thrift Lender Test." The Bank has
no current plans to establish any branch outside Pennsylvania although its
authority to establish interstate branches could facilitate a geographic
diversification in the future.
Regulatory Capital. The OTS has adopted capital adequacy regulations that
require savings institutions such as the Bank to meet three minimum capital
standards: a "core" capital requirement of 3% of adjusted total assets, a
"tangible" capital requirement of 1.5% of adjusted total assets, and a
"risk-based" capital requirement of 8% of total risk-based capital to total
risk-weighted assets. In addition, the OTS has adopted regulations imposing
certain restrictions on savings institutions that have a total risk-based
capital ratio of less than 8%, a ratio of Tier 1 capital to risk-weighted
assets of less than 4% or a ratio of Tier 1 capital to total assets of less
than 4% (or 3% if the institution is rated Composite 1 under the CAMEL
examination rating system). See "-- Prompt Corrective Regulatory Action."
The core capital, or "leverage ratio," requirement mandates that a savings
institution maintain core capital equal to at least 3% of its adjusted total
assets. "Core capital" includes common shareholders' equity (including retained
earnings), noncumulative perpetual preferred stock and related surplus,
minority interests in the equity accounts of fully consolidated subsidiaries
and certain nonwithdrawable accounts and pledged deposits. Core capital is
generally reduced by the amount of the savings institution's intangible assets,
with limited exceptions for permissible mortgage servicing rights ("MSRs"),
purchased credit card relationships and certain intangible
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<PAGE>
assets arising from prior regulatory accounting practices. Core capital is
further reduced by the amount of a savings institution's investments in and
loans to subsidiaries engaged in activities not permissible for national banks.
At September 30, 1997, the Bank had no such investments.
The risk-based capital standards of the OTS require maintenance of core
capital equal to at least 4% of risk-weighted assets and total capital equal
to at least 8% of risk-weighted assets. For purposes of the risk-based capital
requirement, "total capital" includes core capital plus supplementary capital
up to the amount of core capital. Supplementary capital includes preferred
stock that does not qualify as core capital, nonwithdrawable accounts and
pledged deposits to the extent not included in core capital, perpetual and
mandatory convertible subordinated debt and maturing capital instruments
meeting specified requirements and a portion of the institution's loan and
lease loss allowance.
The risk-based capital requirement is measured against risk-weighted
assets, which equal the sum of each asset and the credit-equivalent amount of
each off-balance sheet item after the dollar amount of each such asset and item
is multiplied by an assigned risk weight, which ranges from 0% to 100% as
assigned by the OTS capital regulations based on the risks the OTS believes are
inherent in the type of asset or off-balance sheet item.
The OTS risk-based capital regulation also includes an interest rate risk
("IRR") component that requires savings institutions with greater than normal
IRR, when determining compliance with the risk-based capital requirements, to
maintain additional total capital. The OTS has, however, indefinitely deferred
enforcement of its IRR requirements.
The following table sets forth the Bank's compliance with its regulatory
capital requirements at September 30, 1997.
<TABLE>
<CAPTION>
Capital
Bank Capital Requirements Excess Capital
-------------------- -------------------- ---------------------
Amount Percent Amount Percent Amount Percent
-------- --------- -------- --------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital ................. $7,158 5.29% $2,030 1.50% $5,128 3.79%
Core capital ..................... 7,158 5.29 5,413 4.00 1,745 1.29
Total risk-based capital ......... 7,645 10.26 5,960 8.00 1,685 2.26
</TABLE>
Prompt Corrective Regulatory Action. Under FDICIA, the federal banking
regulators are required to take prompt corrective action in respect of
depository institutions that do not meet certain minimum capital requirements,
including a leverage limit and a risk-based capital requirement. All
institutions, regardless of their capital levels, are restricted from making
any capital distribution or paying any management fees that would cause the
institution to become undercapitalized. As required by FDICIA, banking
regulators, including the OTS, have issued regulations that classify insured
depository institutions by capital levels and provide that the applicable
agency will take various prompt corrective actions to resolve the problems of
any institution that fails to satisfy the capital standards.
Under the joint prompt corrective action regulations, a "well-capitalized"
institution is one that is not subject to any regulatory order or directive to
meet any specific capital level and that has or exceeds the following capital
levels: a total risk-based capital ratio of 10%, a Tier 1 risk-based capital
ratio of 6%, and a ratio of Tier 1 capital to total assets ("leverage ratio")
of 5%. An "adequately capitalized" institution is one that does not qualify as
"well capitalized" but meets or exceeds the following capital requirements: a
total risk-based capital of 8%, a Tier 1 risk-based capital ratio of 4%, and a
leverage ratio of either (i) 4% or (ii) 3% if the institution has the highest
composite examination rating. An institution not meeting these criteria is
treated as "undercapitalized," "significantly undercapitalized," or "critically
undercapitalized" depending on the extent to which its capital levels are below
these standards. An institution that falls within any of the three
"undercapitalized" categories will be subject to certain severe regulatory
sanctions required by FDICIA and the implementing regulations. As of September
30, 1997, the Bank was "well-capitalized" as defined by the regulations, with a
total risk-based capital ratio of 10.26%, a Tier 1 risk-based capital ratio of
9.61% and a leverage ratio of 5.29%.
Federal Deposit Insurance. The Bank is required to pay assessments, based
on a percentage of its insured deposits, to the FDIC for insurance of its
deposits by the SAIF.
Under the FDIC's risk-based deposit insurance assessment system, the
insurance assessment rate for an insured depository institution depends on the
assessment risk classification assigned to the institution. Institutions
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are assigned by the FDIC to one of three capital groups -- well-capitalized,
adequately capitalized, or undercapitalized -- and, within each capital
category, to one of three supervisory subgroups. Unless permitted by the FDIC
or required by law, insured institutions may not state their assessment risk
classification in any advertisement or promotional material.
In order to recapitalize the SAIF and to equalize the deposit insurance
premiums paid by SAIF-insured institutions and institutions with deposits
insured by the Bank Insurance Fund, Congress enacted the Deposit Insurance
Funds Act of 1996 (the "1996 Act"), which authorized the FDIC to impose a
one-time special assessment on all institutions with SAIF-assessable deposits
in the amount necessary to recapitalize the SAIF to the statutorily designated
reserve ratio of 1.25% of insured deposits. Institutions were assessed at the
rate of 65.7 basis points per $100 of each institution's SAIF-assessable
deposits as of March 31, 1995. The 1996 Act provides that the amount of the
special assessment will be deductible for federal income tax purposes for the
taxable year in which the special assessment is paid. Based on the foregoing,
the Bank paid a special assessment of $296,000 on November 26, 1996. Net of
related tax effects, this reduced reported earnings by $192,000 for the three
months ended September 30, 1996 and the year ended June 30, 1997.
As a result of the recapitalization of the SAIF by the 1996 Act, the FDIC
reduced the insurance assessment rate for SAIF-assessable deposits for periods
beginning October 1, 1996. For the first half of 1997, the FDIC set the
effective insurance assessment rates for SAIF-insured institutions, such as the
Bank, at zero to 27 basis points. In addition, SAIF-insured institutions will
be required, until December 31, 1999, to pay assessments to the FDIC at an
annual rate of between 6.0 and 6.5 basis points to help fund interest payments
on certain bonds issued by the Financing Corporation ("FICO"), an agency of the
federal government established to recapitalize the predecessor to the SAIF.
During this period, BIF member banks will be assessed for payment of the FICO
obligations at one-fifth the annual rate applicable to SAIF member
institutions. After December 31, 1999, BIF and SAIF members will be assessed at
the same rate (currently estimated at approximately 2.4 basis points) to
service the FICO obligations.
The 1996 Act also provides that the FDIC may not assess regular insurance
assessments for the SAIF unless required to maintain or to achieve the
designated reserve ratio of 1.25%, except for such assessments on those
institutions that are not classified as "well-capitalized" or that have been
found to have "moderately severe" or "unsatisfactory" financial, operational or
compliance weaknesses. The Bank is classified as "well-capitalized" and has not
been found by the OTS to have such supervisory weaknesses.
Qualified Thrift Lender Test. The HOLA and OTS regulations require all
savings institutions to satisfy one of two Qualified Thrift Lender ("QTL")
tests or to suffer a number of sanctions, including restrictions on activities.
To qualify as a QTL, a savings institution must either (i) be deemed a
"domestic building and loan association" under the Code by maintaining at least
60% of its total assets in specified types of assets, including cash, certain
government securities, loans secured by and other assets related to residential
real property, educational loans, and investments in premises of the
institution or (ii) satisfy the HOLA's QTL test by maintaining at least 65% of
"portfolio assets" in certain "Qualified Thrift Investments." For purposes of
the HOLA's QTL test, portfolio assets are defined as total assets less
intangibles, property used by a savings institution in its business and
liquidity investments in an amount not exceeding 20% of assets. Qualified
Thrift Investments consist of (a) loans or securities related to domestic
residential housing or manufactured housing, (b) loans to small businesses,
student loans and credit card loans and (c) subject to a limitation equal to
20% of portfolio assets, 50% of the dollar amount of residential mortgage loans
subject to sale under certain conditions, 100% of consumer loans (not described
above) and certain other assets, 200% of their investments in loans to finance
"starter homes" (with purchase prices not exceeding 60% of median value) and
loans for construction, development or improvement of housing and community
service facilities or for financing small business in "credit needy" areas.
A savings institution must maintain its status as a QTL on a monthly basis
in at least nine out of every 12 months. An initial failure to qualify as a QTL
results in a number of sanctions, including the imposition of certain operating
restrictions and a restriction on obtaining additional advances from its
Federal Home Loan Bank. If a savings institution does not requalify under the
QTL test within the three-year period after it fails the QTL test, it would be
required to terminate any activity (and dispose of any investment) not
permissible for a national bank and repay as promptly as possible any
outstanding advances from its Federal Home Loan Bank. In addition, the holding
company of such an institution, such as the Company, would be required to
register as a bank holding company with the Federal Reserve Board. At September
30, 1997, the Bank qualified as a QTL.
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<PAGE>
Loans to One Borrower. Under HOLA, savings associations are generally
subject to the national bank limits on loans to one borrower. Generally, a
savings institution may not make a loan or extend credit to a single or related
group of borrowers in excess of 15% of the institution's unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if such loan is fully secured by readily marketable collateral,
which is defined to include certain securities and bullion, but generally does
not include real estate.
Enforcement. Under the Federal Deposit Insurance Act (the "FDI Act"), the
OTS has primary enforcement responsibility over savings associations such as
the Bank and has the authority to bring enforcement action against all
"institution-related parties," including shareholders, attorneys, appraisers,
and accountants who knowingly or recklessly participate in wrongful action that
caused or is likely to cause more than a minimal financial loss to, or a
significant adverse effect on, an insured depository institution. Civil
penalties cover a wide range of violations and actions and range up to $25,000
per day unless a finding of reckless disregard is made, in which case fines of
up to $1 million per day are permitted. Criminal penalties for most financial
institution crimes include fines of up to $1 million and imprisonment for up to
30 years. In addition, regulators have substantial discretion to take
enforcement action against an institution that fails to comply with its
regulatory requirements, particularly with respect to the capital requirements.
Possible enforcement action ranges from requiring the preparation of a capital
plan or imposition of a capital directive to receivership, conservatorship or
the termination of deposit insurance. Under the FDI Act, the FDIC has the
authority to recommend to the director of the OTS that enforcement action 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. The Bank is not presently subject to any of the foregoing
enforcement actions.
Safety and Soundness Standards. FDICIA, as amended by the Riegle Community
Development and Regulatory Improvement Act of 1994, requires the OTS, together
with the other federal bank regulatory agencies, to prescribe standards, by
regulation or guideline, relating to internal controls, information systems and
internal audit systems, loan documentation, credit underwriting, interest rate
risk exposure, asset growth, asset quality, earnings, stock valuation, and
compensation, fees and benefits and such other operational and managerial
standards as the agencies deem appropriate. The OTS and the federal bank
regulatory agencies have adopted a set of guidelines prescribing safety and
soundness standards pursuant to the statute. In general, guidelines adopted by
the OTS require, among other things, appropriate systems and practices to
identify and manage the risks and exposures specified in the guidelines. The
guidelines prohibit excessive compensation as an unsafe and unsound practice
and describe compensation as excessive when the amounts paid are unreasonable
or disproportionate to the services performed by an executive officer,
employee, director or principal shareholder.
In addition, on July 10, 1995, the OTS and the federal bank regulatory
agencies proposed guidelines for asset quality and earnings standards. Under
the proposed standards, a savings institution would be required to maintain
systems, commensurate with its size and the nature and scope of its operations,
to identify problem assets and prevent deterioration in those assets as well as
to evaluate and monitor earnings and ensure that earnings are sufficient to
maintain adequate capital and reserves. Management believes that the asset
quality and earnings standards, in the form proposed by banking agencies, would
not have a material effect on the operations of the Bank.
Limitations on Capital Distributions. OTS regulations impose limitations
upon capital distributions by a savings institution, 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. A savings institution must give notice
to the OTS at least 30 days before a proposed capital distribution. A savings
institution that has capital in excess of all regulatory capital requirements
before and after a proposed capital distribution and that is not otherwise
restricted in making capital distributions, may, after prior notice but without
the approval of the OTS, make capital distributions during a calendar year
equal to the greater of (a) 100% of its net income to date during the calendar
year plus the amount that would reduce by one-half its "surplus capital ratio"
(the excess capital over its capital requirements) at the beginning of the
calendar year, or (b) 75% of its net income for the previous four quarters. Any
additional capital distributions would require prior OTS approval. In addition,
under the OTC's prompt corrective action regulations, the Bank would be
prohibited from paying dividends if the Bank were classified as
"undercapitalized" under such rules. See "-- Prompt Corrective
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<PAGE>
Regulatory Action." Finally, earnings of the Bank appropriated to bad debt
reserves and deducted for federal income tax purposes are not available for
payment of dividends or other distributions to the Company without payment of
taxes at the then current tax rate by the Bank on the amount of earnings
removed from the reserves for such distributions. See "Taxation."
Consumer Credit Regulation. The Bank's mortgage lending activities are
subject to the provisions of various federal and state statutes, including,
among others, the Truth in Lending Act, the Equal Credit Opportunity Act, the
Real Estate Settlement Procedures Act, the Fair Housing Act, statutes limiting
loan fees and charges, and the regulations promulgated thereunder. These
statutes and regulations, among other provisions, prohibit discrimination,
prohibit unfair and deceptive trade practices, require the disclosure of
certain basic information to mortgage borrowers concerning credit terms and
settlement costs, prohibit the payment or receipt of money or other valuable
consideration for a referral of real estate settlement services (including the
origination of mortgage loans) and otherwise regulate terms and conditions of
credit and the procedures by which credit is offered and administered. Failure
to comply (or perceived failure to comply) with these requirements can lead to
administrative enforcement actions, class action lawsuits and demands for
restitution or loan rescission. In recent years, consumer litigation (including
class action litigation) has become increasingly prevalent in the Bank's market
area.
Transactions with Affiliates. The Bank is subject to restrictions imposed
by Sections 23A and 23B of the Federal Reserve Act on extensions of credit to,
and certain other transactions with, the Company and other affiliates, and on
investments in the stock or other securities thereof. Such restrictions prevent
the Company and such other affiliates from borrowing from the Bank unless the
loans are secured by specified collateral at specified levels (equal to or
greater than 100% of the loan amount), and require such transactions to have
terms comparable to terms of arms-length transactions with third persons.
Further, such secured loans and other transactions and investments by the Bank
are generally limited in amount as to the Company or any other affiliate to 10%
of the Bank's capital and surplus and as to the Company and all other
affiliates to an aggregate of 20% of the Bank's capital and surplus. These
restrictions may limit the Company's ability to obtain funds from the Bank for
its cash needs, including funds for acquisitions and for payment of dividends,
interest and operating expenses.
Loans to Directors, Executive Officers and Principal Shareholders. The
Bank's ability to extend credit to the directors, executive officers and 10%
shareholders of the Bank and the Company, as well as to entities controlled by
such persons, is governed by the requirements of Sections 22(g) and 22(h) of
the Federal Reserve Act and Regulation O of the Federal Reserve Board
thereunder. Among other things, these provisions require that an institution's
extensions of credit to these insiders (a) be made on terms that are
substantially the same as, and follow credit underwriting procedures that are
not less stringent than, those prevailing for comparable transactions with
unaffiliated persons and that do not involve more than the normal risk of
repayment or present other unfavorable features and (b) not exceed certain
limitations on the amount of credit extended to such persons, individually and
in the aggregate, which limits are based, in part, on the amount of the
institution's capital. In addition, extensions of credit in excess of certain
limits must be approved by the institution's Board of Directors.
Reserve Requirements. Pursuant to regulations of the Federal Reserve
Board, all FDIC-insured depository institutions must maintain average daily
reserves against their transaction accounts. No reserves are required to be
maintained on the first $4.4 million of transaction accounts, and reserves
equal to 3% must be maintained on the next $49.3 million of transaction
accounts, plus reserves equal to 10% on the remainder. These percentages are
subject to adjustment by the Federal Reserve Board. Because required reserves
must be maintained in the form of vault cash or in a non-interest-bearing
account at a Federal Reserve Bank, the effect of the reserve requirement is to
reduce the amount of the institution's interest-earning assets. As of September
30, 1997, the Bank met its reserve requirements.
Liquidity Requirements. The Bank is required to maintain sufficient
liquidity to insure its safe and sound operation. In addition, for each
calendar quarter, the Bank is required to maintain an average daily balance of
liquid assets (cash, savings accounts and certain time deposits, bankers'
acceptances, highly rated corporate debt
50
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and commercial paper, securities of certain mutual funds, and specified United
States government, state or federal agency obligations with maturities not
exceeding specified lengths) equal to not less than 4% of the average daily
balance or ending balance of its net short-term withdrawable savings deposits
plus short-term borrowings for the prior calendar quarter.
Classification of Assets. Savings institutions are required to classify
their assets on a regular basis, establish appropriate allowances for losses
and report the results of such classification quarterly to the OTS. A savings
institution is also required to set aside adequate valuation allowances and
establish liabilities for off-balance sheet items, such as letters of credit,
when a loss becomes probable and estimable. The OTS has the authority to review
the institution's classification of its assets and to determine whether
additional assets must be classified or the institution's valuation allowances
must be increased.
Community Reinvestment. Under the Community Reinvestment Act (the "CRA"),
as implemented by OTS regulations, a savings institution has a continuing and
affirmative obligation consistent with its safe and sound operation to help
meet the credit needs of its entire community, including low- and
moderate-income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial associations nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best-suited to its particular community. The CRA requires the OTS,
in connection with its examination of a savings institution, to assess the
institution's record of meeting the credit needs of its community and to take
such record into account in evaluating certain applications by such
institution. The CRA also requires all associations to publicly disclose their
CRA rating. The Bank received a CRA rating of "satisfactory" in its most recent
examination.
Federal Home Loan Bank System. The FHLB System consists of 12 district
Federal Home Loan Banks subject to supervision and regulation by the Federal
Housing Finance Board ("FHFB"). The Federal Home Loan Banks provide a central
credit facility primarily for member institutions. As a member of the FHLB, the
Bank is required to acquire and hold shares of capital stock in the FHLB in an
amount at least equal to 1% of the aggregate unpaid principal of its home
mortgage loans, home purchase contracts, and similar obligations at the
beginning of each year, or 1/20 of its advances (borrowings) from the FHLB,
whichever is greater. At September 30, 1997, the Bank was in compliance with
this requirement, with an investment in FHLB stock of $786,000. Long-term FHLB
advances may only be made for the purpose of providing funds for residential
housing finance. At September 30, 1997, the Bank had $4.4 million of total
advances outstanding from the FHLB.
Proposed Legislation. Legislation currently pending before the United
States Congress would, if enacted, require all federal savings institutions
(such as the Bank) to convert to a national bank or a state bank or savings
bank charter. If the pending legislation were to be adopted in its current
form, it would eliminate certain advantages now enjoyed by federal savings
institutions over their commercial bank counterparts, such as unrestricted
interstate branching authority and broader preemption of restrictive state
laws.
As the proposed legislation is part of a larger financial services bill
and is in early stages of consideration, the Company cannot predict whether or
in what form the legislation will be enacted. However, based upon the
provisions of the currently pending legislation, the management of the Company
does not believe that the enactment of such legislation would have a material
adverse effect on its financial condition or results of operations.
Regulation of the Company
The Company is a savings and loan holding company under the HOLA and, as
such, is subject to OTS regulation, supervision and examination. In addition,
the OTS has enforcement authority over the Company and its non-savings
institution subsidiaries and may restrict or prohibit activities that are
determined to represent a serious risk to the safety, soundness or stability of
the Bank or any other subsidiary savings institution.
Under the HOLA, a savings and loan holding company is required to obtain
the prior approval of the OTS before acquiring another savings institution or
savings and loan holding company. A savings and loan holding company may not
(i) acquire, with certain exceptions, more than 5% of a non-subsidiary savings
institution or a non-subsidiary savings and loan holding company; or (ii)
acquire or retain control of a depository institution that is not insured by
the FDIC. In addition, while the Bank generally may acquire a savings
institution by merger in any state without restriction by state law, the
Company could acquire control of an additional savings
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institution in a state other than Pennsylvania only if such acquisition is
permitted under the laws of the target institution's home state. As a unitary
savings and loan holding company, the Company generally will not be subject to
any restriction as to the types of business activities in which it may engage,
provided that the Bank continues to satisfy the QTL test. See "-- Regulation
and Supervision of the Bank -- Qualified Thrift Lender Test."
Upon any non-supervisory acquisition by the Company of another savings
institution that is held as a separate subsidiary, the Company would become a
multiple savings and loan holding company and would be subject to 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 and its
non-insured institution subsidiaries primarily to activities permissible for
bank holding companies under the Bank Holding Company Act, subject to the prior
approval of the OTS, and to other activities authorized by OTS regulation.
TAXATION
General
The Company files a consolidated federal income tax return with the Bank
and its subsidiaries that are more than 80% owned based on its fiscal year.
Consolidated returns have the effect of deferring gain or loss on intercompany
transactions and allowing companies included within the consolidated return to
offset income against losses under certain circumstances. Subsidiaries which
are less than 80% owned by the Company are not permitted to be included in the
Company's consolidated federal income tax return.
Federal Income Taxation
Thrift institutions are subject to the provisions of the Code in the same
general manner as other corporations. Prior to 1996 legislation, institutions
such as the Bank which met certain definitional tests and other conditions
prescribed by the Code benefited from certain favorable provisions regarding
their deductions from taxable income for annual additions to their bad debt
reserve. The bad debt reserve deduction with respect to qualifying real
property loans could be based upon actual loss experience (the "experience
method") or a percentage of taxable income determined without regard to such
deduction (the "percentage of taxable income method"). The 1996 legislation
repealed the percentage of taxable income method of calculating the bad debt
reserve. The Bank historically elected to use the percentage of taxable income
method and has been required by the 1996 legislation to recapture the excess
portion of post-1997 reserves over a six-year period.
Earnings appropriated to the Bank's pre-1988 bad debt reserve are not
available for distribution to shareholders (including distributions made on
dissolution or liquidation), unless the amount of such earnings is included in
the Bank's taxable income, along with the amount deemed necessary to pay the
resulting federal income tax. For information regarding additions to the tax
bad debt reserves, see Note K to Financial Statements.
The Company's federal corporate income tax returns for the years ended
June 30, 1993 and June 30, 1994 have been examined by the Internal Revenue
Service. No changes were made to the Company's reported taxable income as a
result of such examinations.
52
<PAGE>
MANAGEMENT
Directors and Executive Officers
The Board of Directors of the Company is currently composed of ten
members, each of whom serves for a term of one year. The Board of Directors of
the Bank is composed of the same individuals. Executive officers are elected
annually by the Board and serve at the Board's discretion subject to the terms
of employment agreements with certain of its officers.
The following table sets forth information with respect to the directors
and executive officers of the Company.
<TABLE>
<CAPTION>
Name Age Position
- ---------------------------------- ----- --------------------------------------------------
<S> <C> <C>
Thomas J. Knox ................... 57 Chairman and Chief Executive Officer
Bruce A. Levy .................... 43 President and Director
Joseph T. Crowley ................ 35 Director, Vice President, Secretary and Treasurer
Paul Bachow ...................... 45 Director
Ronald L. Caplan ................. 49 Director
D. Walter Cohen, D.D.S. .......... 70 Director
Daniel DiLella ................... 46 Director
Linda R. Knox .................... 52 Director
Joel S. Lawson III ............... 50 Director
Brian McAdams .................... 51 Director
</TABLE>
Biographical Information
Directors and Executive Officers of the Company
The principal occupation for at least the last five years of each
executive officer and director of the Company, as well as certain other
information, is set forth below.
Thomas J. Knox. Mr. Knox has served as Chairman and Chief Executive
Officer of the Company since 1988 and Chairman of the Bank since 1993. From
1989 to 1993, Mr. Knox was President of the Board of Directors of the Bank.
From 1993 to 1995, Mr. Knox served as Special Deputy Rehabilitator and Chief
Executive Officer of Fidelity Mutual Life Insurance Company, a $7.5 billion
life insurance company placed in rehabilitation by the Pennsylvania Insurance
Department. From 1992 to 1993, he served as Deputy Mayor of the City of
Philadelphia overseeing the Office of Management and Productivity. He serves as
a director of the City of Philadelphia Productivity Bank, which he chaired from
1992 to 1993, Vice-Chairman of the Philadelphia Airport Advisory Board,
Chairman of the Concerto Soloist Orchestra and Chairman of the Sunday Serenade.
Mr. Knox is a past director of Independence Blue Cross, the Medical College of
Pennsylvania, St. Christopher's Hospital for Children and the Visiting Nurses
Association.
Bruce A. Levy. Mr. Levy has served as President and a director of the
Company and a director of the Bank since 1996. From 1994 to 1996, Mr. Levy was
a private investor and an independent consultant. From 1992 until its sale in
1994, he was the sole shareholder of Philadelphia Benefits Corporation, a
health benefits consulting and marketing firm. From 1981 to 1992, Mr. Levy
served as President and was a shareholder of Preferred Benefits Corporation, a
401(k) consulting and administration firm he co-founded. From 1975 to 1981, he
served in various capacities with Ernst & Young. Mr. Levy is a graduate of the
Wharton School of the University of Pennsylvania.
Joseph T. Crowley. Mr. Crowley has served as Vice-President, Secretary,
Treasurer and a director of the Company since 1993, President of the Bank since
1993 and was Chief Financial Officer of the Bank from 1992 to 1993. From 1988
to 1992, Mr. Crowley was Senior Vice President of Hansen Savings Bank. From
1985 to 1988, he was an auditor with KPMG Peat Marwick, specializing in the
banking industry. Mr. Crowley is a graduate of Widener University.
53
<PAGE>
Paul Bachow. Mr. Bachow became a director of the Company in 1997 and has
served as director of the Bank since 1993. Since 1985, Mr. Bachow has been
Senior Managing Director and President of Bachow & Associates, Inc. Mr. Bachow
received a B.A. in Accounting and Finance from American University, a Master's
degree in Tax Law from New York University and a Juris Doctor from Rutgers Law
School. Mr. Bachow is a Certified Public Accountant.
Ronald L. Caplan. Mr. Caplan became a director of the Company in 1997 and
has been a director of the Bank since 1995. Mr. Caplan is the President of
Philadelphia Management Corporation, which he founded in 1982. He is also the
founder and President of Roosevelts' Incorporated. Since 1975, Mr. Caplan has
been actively engaged in acquiring, financing, renovating and managing
residential and commercial real estate in the Greater Philadelphia area, with
his activities largely concentrated in Center City Philadelphia. Mr. Caplan is
a graduate of Northeastern University.
D. Walter Cohen, D.D.S. Dr. Cohen became a director of the Company in 1997
and has served as a director of the Bank since 1994. Since 1993, Dr. Cohen has
been Chancellor of the Allegheny University of the Health Sciences. From 1986
to 1993, Dr. Cohen was President of the Medical College of Pennsylvania. Dr.
Cohen is also a partner in a periodontal practice in Philadelphia. Dr. Cohen is
a graduate of the University of Pennsylvania and earned his D.D.S. from its
School of Dental Medicine.
Daniel DiLella. Mr. DiLella became a director of the Company in 1997 and
has served as a director of the Bank since 1991. Mr. DiLella has been President
and CEO of Berwind Property Group since 1983. From 1973 to 1983, Mr. DiLella
was Vice President of Girard Bank. Mr. DiLella is a graduate of Villanova
University and received his MBA from Saint Joseph's University.
Linda R. Knox. Ms. Knox became a director of the Company in 1997, and has
served as President of the Board of Directors of the Bank since 1993 and a
director of the Bank since 1989. Prior to 1993, Ms. Knox was a realtor
specializing in the sale of historical and architecturally significant
properties in the Philadelphia area. Ms. Knox attended Rider University and is
a graduate of the Temple University Real Estate Institute. Ms. Knox is the wife
of Mr. Knox.
Joel S. Lawson III. Mr. Lawson became a director of the Company in 1997
and has served as a director of the Bank since 1994. Mr. Lawson is the Managing
Partner and CEO of Howard, Lawson & Co., an investment banking and corporate
finance firm in Philadelphia, a position he has held since 1980. Mr. Lawson is
also a director of Urban Outfitters, Inc. and several privately-held companies.
He is a graduate of Yale University and received his MBA from the Wharton
School of the University of Pennsylvania.
Brian McAdams. Mr. McAdams became a director of the Company in 1997 and
has served as a director of the Bank since 1989. Mr. McAdams is Chairman and
CEO of STRATVIS Advisement, Chairman of McAdams, Richman & Ong, an advertising
and design firm, and Chairman of Back Health Centers, Inc. Mr. McAdams served
as Chairman and CEO of National Media Corporation from 1994 to 1996, and
continues to serve as a director of that company.
Executive Officers of the Bank's Subsidiaries
Robert N. Morro, age 37. Mr. Morro has served as Executive Vice President
of CMC since 1996. From 1995 to 1996, Mr. Morro was Vice President-Wholesale
Lending for Freedom Mortgage Corporation. From 1993 to 1995, Mr. Morro was
Director of Operations for DSB Funding, a division of Delaware Savings Bank,
and from 1990 to 1993, he was Assistant Vice President of American Financial
Corporation located in Tampa. Mr. Morro is a graduate of Stockton State
College.
Robert W. Stein, age 30. Mr. Stein has served as President of CSC since
1996. From 1995 to 1996, Mr. Stein was an associate with the law firm of Pepper
Hamilton & Scheetz LLP. From 1994 to 1995, Mr. Stein was a law clerk for the
late John F. Gerry, then Chief Judge of the District Court for the District of
New Jersey. Mr. Stein is a graduate of the University of Chicago and received
his law degree from the Rutgers University School of Law.
54
<PAGE>
Michael D. Kushner, age 32. Mr. Kushner has served as President of CMCD
since 1997. Since 1990, Mr. Kushner has been President and the sole shareholder
of Merit Financial Corporation, a licensed mortgage broker. Mr. Kushner is a
graduate of George Washington University.
Haiching Zhao, Ph.D., age 41. Dr. Zhao has served as President of NCM
since 1997. Since 1993, Dr. Zhao has served as President and sole shareholder
of NCSC, a company that markets financial services products to the U.S. Chinese
community. Dr. Zhao is President of the National Council on Chinese Affairs.
Dr. Zhao is a graduate of Peking University and received an M.S. in
Biochemistry and a Ph.D. in Biophysics from the University of Connecticut.
Committees of the Board of Directors
The Board of Directors of the Company recently established Executive,
Audit, Nominating and Compensation Committees. A brief description of these
committees is set forth below.
The Executive Committee is generally responsible to act on behalf of the
Board of Directors on all matters between regular and special meetings of the
Board. Currently, the members of this Committee are Mr. Knox, Mr. Levy and Mr.
Lawson.
The Audit Committee reviews and advises the Board of Directors with
respect to reports by the Company's independent auditors and monitors the
Company's compliance with laws and regulations applicable to the Company's
financial statements. Currently, the members of this Committee are Mr. Levy,
Mr. McAdams and Dr. Cohen.
The Nominating Committee is responsible for considering potential nominees
to the Board of Directors. In its deliberations, the Nominating Committee
considers the candidate's knowledge of the banking business and involvement in
community, business and civic affairs, among other factors. Currently, the
members of this Committee are Mr. Knox, Mr. Levy and Ms. Knox.
The Compensation Committee handles personnel and compensation matters
relating to the executive officers of the Company. Currently, the members of
this Committee are Mr. McAdams and Dr. Cohen.
The Bank has a Loan Committee which reviews all Commercial Real Estate
loans, SBA loans and certain other loans. Currently, the members of this
Committee are Mr. Knox, Ms. Knox, Mr. Levy, Mr. Crowley, Mr. Caplan and Mr.
DiLella.
Compensation Committee Interlocks and Insider Participation
Determinations regarding compensation of the Company's executive officers
are made by the Company's Compensation Committee. Mr. McAdams and Dr. Cohen
currently serve on the Compensation Committee. The Bank extended Mr. McAdams a
$60,000 personal line of credit in September 1997. Amounts outstanding under
the line of credit accrue interest at the prime rate as reported in the Wall
Street Journal ("Prime") minus 0.5% and outstanding amounts are secured by
certain marketable securities. The Bank has also extended a term loan in the
amount of $280,000 to Bastille Associates, L.P., a partnership of which Mr.
McAdams is a general partner. Amounts outstanding under the term loan accrue
interest at a rate of Prime plus 1.5% (adjusted annually) and outstanding
amounts are secured by certain assets of the partnership. Mr. McAdams
personally guaranteed 50% of the loan. The Bank extended Dr. Cohen a $125,000
business line of credit in March 1996. Amounts outstanding under the line of
credit accrue interest at a rate of Prime plus 0.75% and outstanding amounts
are secured by certain assets of Dr. Cohen's dental practice as well as his
personal guarantee. Dr. Cohen is also a limited partner in Bastille Associates,
L.P. Each of these loans has been current throughout its term and was made on
substantially the same terms, including interest rates and collateral
requirements, as those prevailing at the time for comparable transactions with
unrelated persons.
55
<PAGE>
Remuneration of Executive Officers
Summary Compensation Table
The following table sets forth compensation paid to the Chairman and Chief
Executive Officer, President and Vice President of the Company in fiscal year
1997. Except as set forth below, no executive officer of the Company was paid
salary and bonus during the fiscal year that exceeded $100,000 for services
rendered in all capacities to the Company.
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
-------------------------------------- -------------
Securities
Name and Underlying All Other
Principal Position Year Salary Bonus Options(#) Compensation
- --------------------------- ------ ---------------- ---------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Thomas J. Knox(1) ......... 1997 $ --(1) $ -- -- $ --
Chairman and Chief
Executive Officer
Bruce A. Levy(1) .......... 1997 $ 93,000(1) $ -- -- $ --
President
Joseph T. Crowley ......... 1997 $ 88,000 $12,000 -- (2) $ 6,000(3)
Vice President
</TABLE>
- ------------
(1) Mr. Knox received no compensation from the Company and its subsidiary
during the year ended June 30, 1997. Following the Offering, Mr. Knox will
be paid annual compensation of $61,800 and Mr. Levy will be paid
compensation in accordance with his employment agreement. See "--
Employment Agreements." Mr. Knox and Mr. Levy received interest payments
in connection with certain notes to the Company. See "Certain
Relationships and Related Transactions."
(2) In December 1997, the Company granted Mr. Crowley options to purchase
20,000 shares of Common Stock at an exercise price of $12 per share and
options to purchase 8,000 shares of Common Stock at the public offering
price.
(3) Represents automobile allowance of $6,000.
Stock Option Plans
Employee Plan. The Employee Stock Option Plan (the "Employee Plan") was
adopted by the Board and approved by the Company's shareholders in December
1997. The Employee Plan permits the Company to grant non-qualified stock
options to officers, employees and consultants of the Company and its
subsidiaries.
The Employee Plan is administered by the Board, which has the authority to
determine the plan's participants and the terms and conditions of the options
granted under the plan, including the number of shares subject to each option
grant, the exercise price, the option term (which may not exceed ten years) and
vesting and termination provisions. The per share exercise price cannot be less
than 100% of the fair market value of a share of Common Stock on the date of
grant and is payable to the Company in full upon exercise. Payment may be made
in cash or, if approved by the Board, in shares of Common Stock or by reduction
in the number of shares of Common Stock issuable upon exercise of the option.
The particular terms and conditions of each option will be set forth in a
separate agreement. Options generally will terminate when a participant ceases
to be an employee or consultant of the Company or its subsidiaries, except that
options that were exercisable on the date of such termination may be exercised
for a period of 30 days, or one year in the case of a termination due to a
participant's disability. If a participant dies, all options will become fully
exercisable and may be exercised for a period of one year. All options will
become immediately exercisable upon a change of control (as defined in the
plan).
The maximum aggregate number of shares of Common Stock that may be issued
under the Employee Plan is 200,000 shares. As of December 8, 1997, options to
purchase a total of 20,000 shares of Common Stock at
56
<PAGE>
an exercise price of $12.00 per share had been granted under the Employee Plan,
which options will become exercisable in four equal annual installments and
will expire on the fifth anniversary of the date of grant. The Board has also
approved the grant of options to purchase an additional 8,000 shares at an
exercise price equal to the initial public offering price. These options are
granted as of the date of this Prospectus and will become exercisable six
months after such date. Options that expire, terminate or are cancelled or
forfeited will again be available for grant under the Employee Plan. Subject to
the terms of the Employee Plan, the Board may amend, discontinue or terminate
the Employee Plan, provided that the rights of a participant with respect to
any outstanding option may not be diminished or impaired without the
participant's consent.
Directors Plan. The Director Stock Option Plan (the "Director Plan") was
adopted by the Board and approved by the Company's shareholders in December
1997. The Director Plan is administered by the Board and provides for the grant
to non-employee directors of Replacement Stock Options and Annual Stock Options
(as described below).
Replacement Stock Options are granted to each non-employee director as of
the date of this Prospectus in exchange for the surrender by each such director
of the phantom stock options previously granted under the Bank's Phantom Stock
Option Plan. In the aggregate, such Replacement Options will give such
non-employee Directors the right to purchase 54,200 shares of Common Stock at
an exercise price per share equal to the initial public offering price. All
Replacement Stock Options become exercisable six months after the date of grant
and terminate five years after the date of grant.
Annual Stock Options are granted to each non-employee director as of the
date of this Prospectus and each year thereafter on the date of the Company's
Annual Meeting of Shareholders. In the initial grant, each non-employee
director who serves on one or more committees of the Board will receive Annual
Stock Options to purchase 1,000 shares of Common Stock and each non-employee
director who does not serve on any committee of the Board will receive Annual
Stock Options to purchase 500 shares. In each subsequent grant, the number of
shares of Common Stock subject to the Annual Stock Option will be determined by
dividing $15,000 (or $7,500 in the case of a non-employee director who does not
serve on any committee of the Board) by the fair market value of a share of
Common Stock on the date of grant, and rounding up to the next higher whole
number. The exercise price for the initial grant of Annual Stock Options will
be $15 per share; the exercise price for all subsequent grants will be 100% of
the fair market value of a share of Common Stock on the date of grant. All
Annual Stock Options become exercisable one year after the date of grant and
expire five years after the date of grant.
The particular terms and conditions of each option will be set forth in a
separate agreement. Upon exercise of an option, the exercise price must be paid
to the Company in full in cash or, if approved by the Board, in shares of
Common Stock or by reduction in the number of shares of Common Stock issuable
upon such exercise. If a participant ceases to be a director of the Company,
all Replacement Stock Options and Annual Stock Options that were exercisable on
such date may be exercised for a period of 30 days (except that, if a
participant ceases to be a director because of death or disability, all options
will become immediately exercisable and may be exercised for a period of one
year). All options will become immediately exercisable upon a change of control
(as defined in the plan).
The maximum aggregate number of shares of Common Stock that may be issued
under the Director Plan is 100,000 shares. Options that expire, terminate or
are cancelled or forfeited will again be available for grant under the Director
Plan. Subject to the terms of the Director Plan, the Board may amend,
discontinue or terminate the Director Plan, provided that the rights of a
participant with respect to any outstanding option may not be diminished or
impaired without the participant's consent.
Directors' Compensation
In fiscal years 1996 and 1997, grants of options to purchase 27,100 shares
were made to certain directors (other than Mr. Knox, Mr. Levy, Mr. Crowley and
Ms. Knox) under a phantom stock option plan. In December 1997, such directors
renounced their rights to such phantom options and received options to purchase
an aggregate of 54,200 shares of Common Stock at $15 per share. Mr. Bachow, Mr.
Caplan, Dr. Cohen, Mr. DiLella, Mr. Lawson and Mr. McAdams received options to
purchase 3,800, 14,000, 10,200, 7,200, 11,600 and 7,400 shares, respectively.
57
<PAGE>
Each member of the Board of Directors, except for Mr. Knox, Mr. Levy, Mr.
Crowley and Ms. Knox, will be granted the option to purchase 1,000 shares on
the date of this Prospectus (500 if a director does not serve on a committee).
In addition, on each anniversary thereafter, each such member of the Board
shall receive grants to purchase that number of shares having an aggregate
value of $15,000 ($7,500 if a director does not serve on a committee)
determined by dividing the aggregate amount by the price per share of the
Common Stock on the date the options are granted.
Employment Agreements
The Company has a five-year employment agreement, dated March 1, 1996,
with Bruce A. Levy. Under the terms of the agreement, Mr. Levy devotes
substantially all of his time and efforts to conducting the business activities
of the Company as President. Following the Offering, Mr. Levy will receive an
annual salary of $150,000. Mr. Levy's employment is terminable by the Company
for cause as defined in the agreement, and is terminable by Mr. Levy upon
written notice to the Company. Upon termination, Mr. Levy is not permitted to
compete with the Company or any subsidiary or affiliate of the Company by
soliciting its employees or soliciting business from its customers or suppliers
for a period of one year following such termination.
The Bank has a three-year employment agreement, dated December 11, 1997
with Joseph T. Crowley. Under the terms of the agreement, Mr. Crowley will
devote substantially all of his time and effort to conducting the business
activities of the Bank as President thereof and will receive an annual salary
of $100,000 with an eight percent increase as of July 1, 1999. In addition, Mr.
Crowley is eligible for an annual bonus as determined by the Bank's Board of
Directors. Upon termination, Mr. Crowley is not permitted to compete with the
Bank in any of its businesses in the relevant market areas for such businesses
for varying periods following termination depending upon the reason therefor.
If Mr. Crowley's employment is prematurely terminated by the Bank without
cause, Mr. Crowley is eligible to receive a severance payment equal to two
times his annual salary if such termination occurs in the initial year of the
employment agreement, and a severance payment equal to his annual salary if
such termination occurs during the second or third year of the employment
agreement.
58
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to a Management Agreement dated March 1, 1996, between the
Company and the Bank, the Company provides certain services to the Bank,
including the services of an officer of the Company as Chairman of the Board of
Directors of the Bank, the services of another officer of the Company as a
member of the Board of Directors of the Bank, the services of one or more of
the Company's officers as members of the Bank's Loan, Compensation or any other
committees created by the Board of Directors of the Bank and the provision of
advisory services to the Bank. As compensation for these services, the Bank
pays the Company a management fee of $18,500 each month. The Bank paid a
management fee to the Company of $222,000 for each of the years ended June 30,
1997 and 1996.
The Company is indebted to certain of its existing shareholders in the
aggregate principal amount of $3.2 million. Such debts are evidenced by
promissory notes, which are dated March 1, 1996, January 31, 1997 or September
30, 1997 and which accrue interest at a rate of six percent per annum. Thomas
J. Knox and Bruce A. Levy hold notes for the principal amounts of $2,218,228
and $950,670, respectively, and each of Ronald L. Caplan, D. Walter Cohen,
Daniel DiLella, Joel S. Lawson III and Brian McAdams hold notes for $13,800.
The funds obtained in exchange for the issuance of the notes were contributed
as capital to the Bank. Interest on each of the Notes is payable quarterly,
provided, however, that such interest payments are due only to the extent that
such sums are available for payment pursuant to all applicable federal banking
regulations. With the exception of Mr. Knox and Mr. Levy, the shareholders to
whom the Company is indebted have not received and will not receive any
interest on their respective notes upon repayment. Aggregate interest payments
have been made to Mr. Knox and Mr. Levy since the issuance of the Notes in the
amounts of $97,850 and $88,775, respectively. The notes dated March 1, 1996 are
due March 1, 2006, the notes dated January 31, 1997 are due December 31, 2006
and the notes dated September 30, 1997 are due September 30, 2007. These notes
will be repaid upon consummation of the Offering. There is no premium or
penalty for early repayment of these notes.
The Bank's headquarters and Center City Philadelphia branch, located at
1230 Walnut Street, are leased from Walnut Square Partners, a partnership
controlled by Ronald L. Caplan, a director of the Company and the Bank. The
lease covers approximately 6,000 square feet of space on the first and second
floors of the property. The lease expires in 2014, assuming the Bank exercises
its option to renew the lease for two additional terms of five years each. The
base rent under the lease is $48,000 per annum for the initial ten year term.
The base rent increases to $60,000 and $72,000 per annum for the first and
second optional renewal terms, respectively. The terms of the lease were
reached through arms length negotiations and are comparable to the terms the
Company could have obtained from a third party.
QUEST, a wholly-owned subsidiary of the Bank, has formed a partnership
with Ronald L. Caplan, a director of the Company, through which the partnership
acquired an office building located at 1334-36 Walnut Street for a total price
of $410,000. CMC leases approximately 3,600 square feet of space in this
building at an annual rent of $36,000, and beginning January 1998, CMC intends
to lease an additional 2,400 square feet of space in this building at an annual
rent of $24,000. The terms of CMC's lease were reached through arms length
negotiations and are comparable to the terms the Company could have obtained
from a third party.
The Bank has made loans to or to entities controlled by officers,
directors and employees of the Company and the Bank. All such loans were made
in the ordinary course of the Bank's business, were made on substantially the
same terms, including interest rates and collateral requirements, as those
prevailing at the time for comparable transactions with unrelated persons and,
in the opinion of management, do not involve more than the normal risk of
collectibility or present other unfavorable features.
Effective November 30, 1997, the Company, the Bank and CMC entered into an
agreement with Jeffrey Rafsky, currently the holder of 6% of the Common Stock,
and the Minority Shareholder Corporation. The agreement, as amended, provides
for the Bank's acquisition of the entire interest in CMC held by Mr. Rafsky in
exchange for 150,000 shares of the Common Stock, and for the payment of accrued
compensation of $250,000. In addition, for a three year period from the
effective date of the agreement, the Minority Shareholder Corporation shall
receive a monthly payment of $6,250. The agreement also provides for the
granting of an irrevocable proxy, pursuant to which Mr. Rafsky's shares will be
voted in the same proportion as the other outstanding shares of Common Stock
are voted.
59
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth, as of December 1, 1997, the shares of
Common Stock beneficially owned by (i) each person who was a beneficial owner
of more than five percent of the outstanding Common Stock; (ii) each director
and executive officer of the Company; and (iii) all executive officers and
directors of the Company as a group.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percent of Class Percent of Class
Beneficial Owner(1) Beneficial Ownership(2) Before Offering After Offering
- ------------------------------------- ------------------------- ------------------ -----------------
<S> <C> <C> <C>
Thomas J. Knox(3) ................... 1,484,000 59.36% 42.40%
Bruce A. Levy ....................... 690,000 27.60 19.71
Joseph T. Crowley ................... -- -- --
Paul Bachow ......................... -- -- --
Ronald L. Caplan .................... 10,000 * *
D. Walter Cohen ..................... 10,000 * *
Daniel DiLella ...................... 10,000 * *
Linda R. Knox(4) .................... 126,000 5.04 3.60
Joel S. Lawson III .................. 10,000 * *
Brian McAdams ....................... 10,000 * *
Jeffrey K. Rafsky(5) ................ 150,000 6.00 4.29
All directors and officers as a group
(10 persons) ....................... 2,350,000 94.00% 67.14%
</TABLE>
- ------------
* Constitutes less than 1%.
(1) Unless otherwise indicated, the address of all beneficial owners other than
Mr. Rafsky is in care of the Company. Mr. Rafsky's address is 1110
Centennial Road, Narberth, Pennsylvania 19072.
(2) Unless otherwise indicated, includes shares held directly by the individual
as well as by such individual's spouse, shares held in trust and in other
forms of indirect ownership over which shares the individual effectively
exercises sole voting and investment power and shares which the named
individual has a right to acquire pursuant to the exercise of stock
options within sixty days of December 1, 1997.
(3) Excludes 126,000 shares of Common Stock held by Linda R. Knox in trust for
the children of Linda R. and Thomas J. Knox, as to which he disclaims
beneficial ownership.
(4) All shares of Common Stock held in trust for the children of Linda R. and
Thomas J. Knox. Does not include 1,484,000 shares beneficially owned by
her husband, Thomas J. Knox, as to which shares she disclaims beneficial
ownership.
(5) On February 9, 1998, Jeffrey K. Rafsky executed an irrevocable proxy
pursuant to which his shares will be voted in the same proportion as the
other outstanding shares of Common Stock are voted.
60
<PAGE>
CERTAIN RESTRICTIONS ON ACQUISITION OF
THE COMPANY AND THE BANK
Federal laws and regulations contain a number of provisions which govern
the acquisition of insured institutions such as the Bank and savings and loan
holding companies such as the Company. The Change in Bank Control Act provides
that no person, acting directly or indirectly or through or in concert with one
or more persons, may acquire control of a savings association unless the OTS
has been given 60 days' prior written notice and the OTS does not issue a
notice disapproving the proposed acquisition. In addition, certain provisions
of the HOLA provide that no company may acquire control of a thrift without the
prior approval of the OTS. Any company that acquires such control becomes a
"savings and loan holding company" subject to registration, examination and
regulation by the OTS.
Pursuant to applicable regulations, control of a savings association is
conclusively deemed to have been acquired by, among other things, the
acquisition of more than 25% of any class of voting stock of a savings
association or the ability to control the election of a majority of the
directors of an institution. Moreover, control is presumed to have been
acquired, subject to rebuttal, upon the acquisition of more than 10% of any
class of voting stock, or more than 25% of any class of stock, of a savings
association, where one or more enumerated "control factors" are also present in
the acquisition. The OTS may prohibit an acquisition of control if it finds,
among other things, that (i) the acquisition would result in a monopoly or
substantially lessen competition, (ii) the financial condition of the acquiring
person might jeopardize the financial stability of the savings association, or
(iii) the competence, experience or integrity of the acquiring person indicates
that it would not be in the interest of the depositors or the public to permit
the acquisition of control by such person. The foregoing restrictions do not
apply to the acquisition of the Company's capital stock by one or more
tax-qualified employee stock benefit plans, provided that the plan or plans do
not have beneficial ownership in the aggregate of more than 25% of any class of
equity security.
CERTAIN ANTI-TAKEOVER PROVISIONS IN
THE ARTICLES OF INCORPORATION AND BYLAWS
The Company is incorporated under the laws of the Commonwealth of
Pennsylvania. The Pennsylvania Business Corporation Law of 1988, as amended
(the "1988 BCL"), includes certain shareholder protection provisions, some of
which apply to the Company and four of which, relating to "Disgorgement by
Certain Controlling Shareholders," "Control Share Acquisitions," "Control
Transactions" and "Business Combinations," the Company has specifically opted
out of pursuant to an amendment to its Articles of Incorporation. In addition,
the Company has adopted other shareholder protection provisions in its Bylaws.
While the Boards of Directors of the Bank and the Company are not aware of
any effort that might be made to obtain control of the Company, the Board of
Directors, as discussed below, believes that it is appropriate to include
certain provisions as part of the Company's Articles of Incorporation to
protect the interests of the Company and its shareholders from hostile
takeovers which the Board of Directors might conclude are not in the best
interests of the Bank, the Company or the Company's shareholders. These
provisions may have the effect of discouraging a future takeover attempt which
is not approved by the Board of Directors but which individual shareholders may
deem to be in their best interests or in which shareholders may receive a
substantial premium for their shares over then current market prices. As a
result, shareholders who might desire to participate in such a transaction may
not have an opportunity to do so. Such provisions will also render the removal
of the current Board of Directors or management of the Company more difficult.
The following discussion is a general summary of the material provisions
of the Articles of Incorporation, Bylaws and 1988 BCL that apply to the Company
and that may be deemed to have such an "anti-takeover" effect. The description
of these provisions is necessarily general and reference should be made in each
case to the Articles of Incorporation and Bylaws of the Company and the 1988
BCL. For information regarding how to obtain a copy of these documents without
charge, see "Available Information."
Action by Written Consent of Shareholders
The Company's Articles of Incorporation and Bylaws allow a majority of its
shareholders to act by written consent, without a meeting, on any matter
required or permitted to be taken at a meeting of the shareholders with prompt
notice of such action given to those shareholders who have not consented.
61
<PAGE>
Board Consideration of Certain Nonmonetary Factors in the Event of an Offer by
Another Party
The 1988 BCL permits the Board of Directors, committees of the Board of
Directors and individual directors, in evaluating a business combination or a
tender or exchange offer, to consider, in addition to the adequacy of the
amount to be paid in connection with any such transaction, certain specified
factors and any other factors the Board deems relevant, including (i) the
effects of any action upon shareholders, employees, suppliers, customers and
creditors of the corporation, (ii) the short-term and long-term interests of
the corporation, including benefits that may accrue to the corporation from its
long-term plans and the possibility that these interests may be best served by
the continued independence of the corporation, (iii) the resources, intent and
conduct (past, stated and potential) of any person seeking to acquire control
of the corporation and (iv) all other pertinent factors. Further, the Board of
Directors, committees of the Board and individual directors are not required,
in considering the best interests of the corporation or the effects of any
action, to regard any corporate interest or the interests of any particular
group affected by such action as a dominant or controlling interest or factor.
The consideration of the foregoing factors does not constitute a violation of
the applicable standard of care. Such provisions in the 1988 BCL, may put the
Board of Directors in a stronger position to oppose any proposed business
combination, tender or exchange offer if the Board concludes that the
transaction would not be in the best interest of the Company, even if the price
offered is significantly greater than the then market price of any equity
security of the Company.
Authorization of Preferred Stock
The Company's Articles of Incorporation authorize the issuance of up to
5,000,000 shares of preferred stock, which conceivably would represent an
additional class of stock required to approve any proposed acquisition. The
Company is authorized to issue preferred stock from time to time in one or more
series subject to applicable provisions of law, and the Board of Directors is
authorized to fix the designations, powers, preferences, dividends and relative
participating, optional and other special rights of such shares, including
voting rights (which could be multiple or as a separate class) and conversion
rights. Issuance of the preferred stock could adversely affect the relative
voting rights of holders of the Common Stock. In the event of a proposed
merger, tender offer or other attempt to gain control of the Company that the
Board of Directors does not approve, it might be possible for the Board of
Directors to authorize the issuance of a series of preferred stock with rights
and preferences that would impede the completion and, therefore, may deter such
a transaction. The Board of Directors has no present plans or understandings
for the issuance of any preferred stock and does not intend to issue any
preferred stock, except on terms which the Board of Directors deems to be in
the best interests of the Company and its shareholders. This preferred stock,
none of which has been issued by the Company, together with authorized but
unissued shares of Common Stock (the Articles of Incorporation authorize the
issuance of up to 20,000,000 shares of Common Stock), also could represent
additional capital required to be purchased by the acquiror.
Procedures for Shareholder Nominations
The Company's Bylaws provide that any shareholder desiring to make a
nomination for the election of directors at an annual meeting of shareholders
must submit written notice to the Chairman of the Board no later than 270 days
in advance of the anniversary date of the Company's proxy statement for the
Company's annual meeting of shareholders in the previous calendar year.
Amendment of Bylaws
The Company's Bylaws may only be amended by a majority vote of the
Company's Board of Directors with respect to those matters that are not by
statute committed expressly to the shareholders. The Company's Bylaws contain
numerous provisions concerning the Company's governance, such as fixing the
number of directors and determining the number of directors constituting a
quorum. By reducing the ability of a potential corporate raider to make changes
in the Company's Bylaws and to reduce the authority of the Board of Directors,
these provisions could have the effect of discouraging a tender offer or other
takeover attempt where the ability to make fundamental changes through Bylaw
amendments is an important element of the takeover strategy of the acquiror.
62
<PAGE>
The Purpose of Anti-Takeover Provisions of the Company's Articles of
Incorporation and Bylaws
The Board of Directors of the Company believes that the provisions
described above reduce the Company's vulnerability to takeover attempts and
certain other transactions which have not been negotiated with and approved by
its Board of Directors. These provisions will also assist the Company in the
orderly deployment of the net proceeds of the Offering into productive assets.
The Board of Directors of the Company believes these provisions are in the best
interests of the Company and its shareholders. In the judgment of the Board of
Directors of the Company, it is in the best position to consider all relevant
factors and to negotiate for what is in the best interests of the shareholders
and the Company's other constituencies. Accordingly, the Board of Directors of
the Company believes that it is in the best interests of the Company and its
shareholders to encourage potential acquirors to negotiate directly with the
Company's Board of Directors and that these provisions will encourage such
negotiations and discourage non-negotiated takeover attempts. It is also the
view of the Board of Directors that these provisions should not discourage
persons from proposing a merger or other transaction at prices reflective of
the true value of the Company and which is in the best interests of all
shareholders.
Attempts to acquire control of financial institutions and their holding
companies have become increasingly common. Takeover attempts which have not
been negotiated with and approved by the Board of Directors present to
shareholders the risk of a takeover on terms which may be less favorable than
might otherwise be available. A transaction which is negotiated and approved by
the Board of Directors, on the other hand, can be carefully planned and
undertaken at an opportune time to obtain maximum value for the Company and
shareholders, with due consideration given to matters such as the management
and business of the acquiring corporation and maximum strategic development of
the Company's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause great expense. Although a tender offer or
other takeover attempt may be made at a price substantially above then current
market prices, such offers are sometimes made for less than all the outstanding
shares of a target company. As a result, shareholders may be presented with the
alternative of partially liquidating their investment at a time that may be
disadvantageous, or retaining their investment in an enterprise which is under
different management and whose objectives may not be similar to those of the
remaining shareholders.
Despite the belief of the Company as to the benefits to shareholders of
these provisions of its Articles of Incorporation and Bylaws, these provisions
may also have the effect of discouraging a future takeover attempt which would
not be approved by the Company's Board, but pursuant to which the shareholders
may receive a substantial premium for their shares over then current market
prices. As a result, shareholders who might desire to participate in such a
transaction may not have any opportunity to do so. Such provisions will also
render the removal of the Company's Board of Directors and management more
difficult and may tend to depress the Company's stock price, thus limiting
gains which might otherwise be reflected in price increases due to a potential
merger or acquisition. The Board of Directors, however, has concluded that the
potential benefits of these provisions outweigh the possible disadvantages.
Pursuant to applicable regulations, at any annual or special meeting of its
shareholders after the Offering, the Company may adopt additional Articles of
Incorporation provisions regarding the acquisition of the Company's equity
securities that would be permitted by Pennsylvania law.
63
<PAGE>
DESCRIPTION OF THE CAPITAL STOCK
The Company is authorized to issue 5,000,000 shares of preferred stock,
$0.01 par value per share, and 20,000,000 shares of Common Stock, $0.01 par
value per share. There were 2,350,000 shares of Common Stock outstanding on
September 30, 1997, as adjusted to give effect to the two-for-one split of the
Common Stock effected in the form of a stock dividend. There were nine holders
of record of the Company's Common Stock as of December 31, 1997. There are no
outstanding shares of preferred stock.
Common Stock
Dividends
The Company can pay dividends out of statutory surplus or from certain net
profits if, as and when declared by its Board. The payment of dividends by the
Company is subject to limitations which are imposed by law and applicable
regulation. See "Dividends" and "Supervision and Regulation." The holders of
Common Stock will be entitled to receive and share equally in such dividends as
may be declared by the Board out of funds legally available therefor. If the
Company issues preferred stock, the holders thereof may have a priority over
the holders of the Common Stock with respect to dividends.
Voting Rights
Each share of Common Stock has the same relative rights and is identical
in all respects to every other share of Common Stock. The holders of Common
Stock possess exclusive voting rights in the Company, except to the extent that
shares of preferred stock issued in the future may have voting rights, if any.
Each holder of Common Stock is entitled to one vote for each share held of
record on all matters submitted to a vote of holders of Common Stock and is not
permitted to cumulate votes in the election of the Company's directors.
Liquidation
In the event of liquidation, dissolution or winding up of the Company, the
holders of its Common Stock would be entitled to receive, after payment or
provision for payment of all its debts and liabilities, all of the assets of
the Company available for distribution. If preferred stock is issued, the
holders thereof may have a priority over the holders of the Common Stock in the
event of liquidation or dissolution.
Preferred Stock
Under the Company's Articles of Incorporation, the Board of Directors of
the Company may, from time to time, authorize the issuance of up to 5,000,000
shares of preferred stock, in one or more series, with such provisions as to
voting rights, dividend rates and preferences, redemption and convertibility,
and such preferences, privileges and powers, and relative, participating,
optional or other special rights, and qualifications, limitations or
restrictions of such series of preferred stock, as shall be stated in the
resolution of the Board of Directors providing for the issuance of the
preferred stock. The preferred stock may rank prior to Common Stock as to
dividend rights or liquidation preferences, or both, and may have super,
limited or any other voting rights. No preferred stock is currently outstanding
nor will any be issued in the Offering.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Common Stock is StockTrans, Inc.
64
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The Company's Articles of Incorporation authorize the issuance of
5,000,000 shares of preferred stock and 20,000,000 shares of Common Stock. Upon
completion of the Offering, there will be no outstanding shares of preferred
stock and 3,500,000 shares of Common Stock (3,650,000 shares if the
Underwriters' over-allotment option is exercised in full).
All shares of Common Stock issued in the Offering will be available for
resale in the public market without restriction or further registration under
the Securities Act. As of December 1, 1997, there were 2,500,000 shares of the
Company's Common Stock outstanding, of which approximately 2,350,000 shares,
which are owned by the Company's officers and directors, will be eligible for
sale 90 days after the date of this Prospectus pursuant to Rule 144 under the
Securities Act, subject to volume, notice and manner of sale limitations in
that rule. All of the Company's executive officers and directors have agreed
that for a period of 180 days from the date of this Prospectus, they will not
sell, offer for sale or take any action that may constitute a transfer of
shares of Common Stock. There are also 20,000 shares subject to outstanding
options. Although the sale of the shares issued upon exercise of options will
be restricted under Rule 144, the sale of any number of shares of Common Stock
in the public market following the Offering could have an adverse impact on the
then prevailing market price of the shares.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including a person who may be deemed to be an
"affiliate" of the Company as that term is defined under the Securities Act, is
entitled to sell, within any three-month period, a number of restricted shares
as to which at least one year has elapsed from the later of the acquisition of
such shares from the Company or an affiliate of the Company in an amount that
does not exceed the greater of (i) one percent of the then outstanding shares
of Common Stock (35,000 shares based upon 3,500,000 shares to be outstanding
immediately after the Offering), or (ii) if the Common Stock is quoted on the
Nasdaq National Market or a stock exchange, the average weekly trading volume
of the Common Stock during the four calendar weeks preceding such sale. Sales
under Rule 144 are also subject to certain requirements as to the manner of
sale, notice, and the availability of current public information about the
Company. However, a person who is not deemed to have been an affiliate of the
Company during the 90 days preceding a sale by such person and who has
beneficially owned shares as to which at least two years has elapsed from the
latter of the acquisition of such shares from the Company or an affiliate of
the Company, is entitled to sell them without regard to the volume, manner of
sale, or notice requirements of Rule 144.
65
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement (the
"Underwriting Agreement") dated February 9, 1998, between the Company and
Advest, Inc., as the Representative of the several underwriters named therein
(the "Underwriters"), the Company has agreed to sell to the Underwriters, and
the Underwriters have severally agreed to purchase from the Company, the
following respective number of shares of Common Stock at the public offering
price less the underwriting discounts and commissions set forth on the cover
page of this Prospectus:
<TABLE>
<CAPTION>
Number of Shares:
Underwriter: ------------------
<S> <C>
Advest, Inc. .................................... 790,000
Robert W. Baird & Co., Incorporated ............. 35,000
Dominick & Dominick, Incorporated ............... 35,000
Friedman, Billings, Ramsey & Co., Inc. .......... 35,000
Janney Montgomery Scott Inc. .................... 35,000
Legg Mason Wood Walker, Incorporated ............ 35,000
Tucker Anthony Incorporated ..................... 35,000
-------
Total ........................................... 1,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all of the Common Stock offered hereby if any of
such Common Stock is purchased.
The Company has been advised by the Representative that the Underwriters
propose to offer the shares of Common Stock to the public at the public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of $0.60 per share. The
Underwriters may allow, and such dealers may reallow, a concession not in
excess of $0.10 per share to certain other dealers. After the Offering, the
public offering price, concession and reallowance to dealers may be changed by
the Representative. No such change shall affect the amount of proceeds to be
received by the Company as set forth on the cover page of this Prospectus. In
addition, the Company has agreed to pay a financial advisory fee of $75,000 to
the Representative.
The Company has granted to the Underwriters an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to an
additional 150,000 shares of Common Stock at the public offering price. To the
extent that the Underwriters exercise such option, the Company will be
obligated, pursuant to the option, to sell such Common Stock to the
Underwriters. The Underwriters may exercise such option only to cover over-
allotments made in connection with the sale of the Common Stock offered hereby.
If purchased, the Underwriters will offer such additional shares of Common
Stock on the same terms as those on which the 1,000,000 shares are being
offered.
The Company and its officers and directors (who beneficially own an
aggregate of 2,350,000 shares of Common Stock, or 67.14% of the outstanding
Common Stock after giving effect to the Offering) have agreed for a period of
180 days after the date of this Prospectus not to, without the prior written
consent of the Representative, directly or indirectly offer, sell, contract to
sell or otherwise dispose of, any shares of Common Stock or enter into any swap
or other agreement or any transaction that transfers, in whole or in part, the
economic consequences of ownership of shares of Common Stock, whether any such
swap or other agreement is to be settled by delivery of shares of Common Stock,
other securities, cash or otherwise; except for the issuance of shares of
Common Stock upon the exercise of stock options or warrants or the conversion
of convertible securities outstanding on the date of the Underwriting Agreement
to the extent such stock options, warrants and convertible securities are
disclosed herein and except for the grant to employees of stock options to
purchase shares of Common Stock which are not exercisable within 180 days after
the date of this Prospectus.
The initial public offering price of the shares of Common Stock offered
hereby has been determined by negotiations between the Company and the
Representative based on certain factors, in addition to prevailing
66
<PAGE>
market conditions, including the history and prospects for the industry in
which the Company competes, an assessment of the Company's management, the
prospects for the Company, an evaluation of the Company's assets, comparisons
of the relationships between market prices and book values of other financial
institutions of a similar size and asset quality, and other factors that were
deemed relevant. Such determination was not based upon any actual trading
market for the Common Stock; accordingly, there can be no assurance that shares
of Common Stock may be resold at or above the price to public.
The Representative intends to make a market in the Common Stock, as
permitted by applicable laws and regulations. The Representative is not,
however, obligated to make a market in the Common Stock, and any such
market-making activities may be discontinued at any time in the sole discretion
of the Representative.
The Representative has informed the Company that the Underwriters do not
expect to confirm sales of shares of the Common Stock offered hereby to any
accounts over which they exercise discretionary authority.
In connection with the Offering, certain Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may overallot the Offering,
creating a syndicate short position. In addition, the Underwriters may bid for
and purchase the Common Stock in the open market to cover syndicate short
positions or to stabilize the price of the Common Stock. Finally, the
underwriting syndicate may reclaim selling concessions from syndicate members
if the syndicate repurchases previously distributed Common Stock in syndicate
covering transactions, in stabilization transactions or otherwise. Any of these
activities may stabilize or maintain the market price of the Common Stock above
independent market levels. The Underwriters are not required to engage in these
activities and may end any of these activities at any time.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
The Representative and certain of the other Underwriters may in the future
perform various services for the Company, including investment banking
services, for which they may receive customary fees. Howard, Lawson & Co. has
provided certain financial advisory services to the Company in connection with
the Offering and expects to provide financial advisory services to the Company
in the future. Howard, Lawson & Co. receives customary fees for such services.
The aggregate amount of such fees in connection with the Offering are estimated
to be less than $25,000. Joel S. Lawson III, a director of the Company, is the
Managing Partner and Chief Executive Officer of Howard, Lawson & Co.
VALIDITY OF SECURITIES
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Ballard Spahr Andrews & Ingersoll, LLP, Philadelphia,
Pennsylvania. Certain legal matters will be passed upon for the Underwriters by
Wolf, Block, Schorr and Solis-Cohen LLP, Philadelphia, Pennsylvania.
EXPERTS
The Consolidated Financial Statements as of June 30, 1997 and 1996 and for
each of the three fiscal years in the period ended June 30, 1997, included in
this Prospectus and in the Registration Statement, of which this Prospectus
forms a part, have been audited by Grant Thornton LLP, independent certified
public accountants, whose report thereon appears herein and in the Registration
Statement. Such financial statements are included in reliance upon the report
of Grant Thornton LLP, given upon the authority of such firm as experts in
accounting and auditing.
67
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
(the "Registration Statement") under the Securities Act, with respect to the
shares of Common Stock offered hereby. This Prospectus does not contain all of
the information set forth in the Registration Statement, including the exhibits
and schedules thereto. For further information with respect to the Company and
the shares of Common Stock offered hereby, reference is made to the
Registration Statement, including the exhibits and schedules thereto.
Statements contained in this Prospectus as to the contents of any contract or
other document are not necessarily complete and, in each instance where such
contract or document is filed as an exhibit to the Registration Statement,
reference is made to the copy of such contract or document filed as an exhibit
to the Registration Statement, each such statement being qualified in all
respects by such reference. The Company will furnish to its shareholders annual
reports containing audited financial statements and will make available copies
of quarterly reports for the first three quarters of each fiscal year
containing unaudited interim financial information. Copies of the Registration
Statement, including exhibits and schedules thereto, filed therewith, may be
inspected without charge at the public reference facilities of the Commission
at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission located at 7 World Trade Center, Suite 1300,
New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such material can also be obtained at
prescribed rates by writing to the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549. Such material also may be
accessed electronically by means of the Commission's home page on the World
Wide Web at http://www.sec.gov.
68
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Report of Independent Certified Public Accountants ....................................... F-2
Consolidated Balance Sheet as of September 30, 1997 (Unaudited), and June 30, 1997 and
1996 F-3
Consolidated Statements of Operations for the Three Months Ended September 30, 1997 and
1996 (Unaudited) and the Years Ended June 30, 1997, 1996 and 1995 ....................... F-4
Consolidated Statement of Shareholders' Equity for the Three Months Ended September 30,
1997 (Unaudited) and the Years Ended June 30, 1997, 1996 and 1995 ....................... F-5
Consolidated Statements of Cash Flows for the Three Months Ended September 30, 1997 and
1996 (Unaudited) and the Years Ended June 30, 1997, 1996 and 1995 ....................... F-6
Notes to Consolidated Financial Statements ............................................... F-7
</TABLE>
F-1
<PAGE>
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors
Crusader Holding Corporation
We have audited the accompanying consolidated balance sheets of Crusader
Holding Corporation and Subsidiary as of June 30, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended June 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Crusader
Holding Corporation and Subsidiary as of June 30, 1997 and 1996, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended June 30, 1997, in conformity with
generally accepted accounting principles.
/s/ Grant Thornton LLP
- ----------------------
Philadelphia, Pennsylvania
December 9, 1997
F-2
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30,
September 30, --------------------------------
1997 1997 1996
--------------- --------------- --------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents .............................. $ 684,000 $ 325,000 $ 1,197,000
Loans held for sale (estimated market value of
$16,870,000, $6,338,000 and $1,683,000 at Sep-
tember 30, 1997, June 30, 1997 and 1996,
respectively) ........................................ 16,767,000 6,244,000 1,659,000
Investment securities available-for-sale ............... 4,085,000 6,299,000 3,970,000
Mortgage-backed securities available-for-sale .......... 16,755,000 16,044,000 18,127,000
Loans receivable, net .................................. 93,857,000 85,992,000 53,604,000
Accrued interest receivable ............................ 834,000 815,000 574,000
Other real estate owned ................................ 105,000 -- 81,000
Premises and equipment, net ............................ 890,000 880,000 411,000
Deferred income taxes .................................. -- 201,000 262,000
Other assets ........................................... 561,000 293,000 1,422,000
------------ ------------ -----------
Total assets ......................................... $134,538,000 $117,093,000 $81,307,000
============ ============ ===========
LIABILITIES
Deposits ............................................... $110,625,000 $ 95,906,000 $59,624,000
Advances from Federal Home Loan Bank ................... 4,350,000 8,950,000 9,500,000
Securities sold under agreements to repurchase ......... 10,780,000 5,780,000 7,151,000
Shareholders' notes .................................... 3,238,000 2,990,000 2,918,000
Advances from borrowers for taxes and insurance 315,000 270,000 346,000
Other liabilities ...................................... 1,295,000 233,000 209,000
------------ ------------ -----------
Total liabilities .................................... 130,603,000 114,129,000 79,748,000
------------ ------------ -----------
MINORITY INTEREST ....................................... 64,000 69,000 47,000
------------ ------------ -----------
SHAREHOLDERS' EQUITY
Preferred stock -- authorized, 5,000,000 shares of
$0.01 par value; none outstanding .................... -- -- --
Common stock -- authorized, 20,000,000 shares
of $0.01 par value; 2,350,000, 2,170,000 and
2,000,000 shares issued and outstanding at Sep-
tember 30, 1997 and June 30, 1997 and 1996,
respectively ......................................... 23,500 10,850 10,000
Additional paid-in capital ............................. 2,317,000 2,065,900 1,814,750
Retained earnings (accumulated deficit) ................ 1,517,500 864,250 (97,750)
Net unrealized gains (losses) on securities
available-for-sale ................................... 13,000 (46,000) (215,000)
------------ ------------ -----------
Total shareholders' equity ........................... 3,871,000 2,895,000 1,512,000
------------ ------------ -----------
Total liabilities and shareholders' equity ........... $134,538,000 $117,093,000 $81,307,000
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Consolidated Statements of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months
ended September 30, Year ended June 30,
-------------------------------- -----------------------------------------------
1997 1996 1997 1996 1995
--------------- --------------- --------------- --------------- -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees .................. $ 2,415,000 $ 1,264,000 $ 6,413,000 $ 3,903,000 $2,724,000
Investment securities, mortgage-
backed securities and loans held
for sale ............................. 403,000 402,000 1,506,000 1,070,000 1,049,000
----------- ----------- ----------- ----------- ----------
Total interest income ................ 2,818,000 1,666,000 7,919,000 4,973,000 3,773,000
----------- ----------- ----------- ----------- ----------
INTEREST EXPENSE
Deposits ............................... 1,473,000 839,000 3,978,000 2,825,000 1,881,000
Borrowed funds ......................... 240,000 234,000 995,000 543,000 665,000
Shareholder notes ...................... 38,000 38,000 157,000 191,000 135,000
----------- ----------- ----------- ----------- ----------
Total interest expense ............... 1,751,000 1,111,000 5,130,000 3,559,000 2,681,000
----------- ----------- ----------- ----------- ----------
Net interest income .................. 1,067,000 555,000 2,789,000 1,414,000 1,092,000
PROVISION FOR LOAN LOSSES ............... 15,000 11,000 58,000 42,000 30,000
----------- ----------- ----------- ----------- ----------
Net interest income after provi-
sion for loan losses ................ 1,052,000 544,000 2,731,000 1,372,000 1,062,000
----------- ----------- ----------- ----------- ----------
NON-INTEREST INCOME
Service charges on deposit accounts
and other fees ....................... 46,000 18,000 112,000 114,000 41,000
Conforming mortgage banking rev-
enues ................................ 108,000 77,000 309,000 272,000 107,000
Non-interest income from Crusader
Mortgage Corporation ................. 833,000 177,000 1,074,000 -- --
Other .................................. 14,000 36,000 90,000 31,000 51,000
----------- ----------- ----------- ----------- ----------
Total non-interest income ............ 1,001,000 308,000 1,585,000 417,000 199,000
----------- ----------- ----------- ----------- ----------
NON-INTEREST EXPENSES
Employee compensation and ben-
efits ................................ 234,000 201,000 799,000 802,000 560,000
Data processing ........................ 26,000 18,000 93,000 55,000 53,000
Federal insurance premiums ............. 13,000 327,000 375,000 112,000 81,000
Occupancy and equipment ................ 75,000 69,000 294,000 268,000 242,000
Professional fees ...................... 16,000 14,000 86,000 71,000 91,000
Management fee to shareholders ......... -- -- -- -- 24,000
Crusader Mortgage Corporation
expenses ............................. 562,000 118,000 886,000 -- --
Other operating ........................ 85,000 51,000 329,000 308,000 295,000
----------- ----------- ----------- ----------- ----------
Total non-interest expenses .......... 1,011,000 798,000 2,862,000 1,616,000 1,346,000
----------- ----------- ----------- ----------- ----------
Income (loss) before income tax
expense (benefit) ................... 1,042,000 54,000 1,454,000 173,000 (85,000)
INCOME TAX EXPENSE (BEN-
EFIT) .................................. 358,000 19,000 480,000 61,000 (20,000)
----------- ----------- ----------- ----------- ----------
Income (loss) before minority
interest ............................ 684,000 35,000 974,000 112,000 (65,000)
Minority interest ....................... 19,000 -- 12,000 -- --
----------- ----------- ----------- ----------- ----------
NET INCOME (LOSS) .................... $ 665,000 $ 35,000 $ 962,000 $ 112,000 $ (65,000)
=========== =========== =========== =========== ==========
Net income (loss) per share ............. $ 0.31 $ 0.02 $ 0.46 $ 0.07 $ (0.05)
=========== =========== =========== =========== ==========
Weighted average shares outstanding . 2,170,000 2,000,000 2,083,333 1,600,000 1,400,000
=========== =========== =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Consolidated Statement of Shareholders' Equity
Three months ended September 30, 1997
(unaudited) and years ended June 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retained Net unrealized
earnings gains (losses) on Total
Common Additional (accumulated securities shareholders'
stock paid-in capital deficit) available-for-sale equity
---------- ----------------- -------------- -------------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at July 1, 1994 ............... $ 250 $1,375,750 $ (138,000) $ -- $1,238,000
Net loss .............................. -- -- (65,000) -- (65,000)
Net unrealized gain on securities
available-for-sale ................... -- -- -- 24,000 24,000
------- ---------- ----------- ---------- ----------
Balance at June 30, 1995 .............. 250 1,375,750 (203,000) 24,000 1,197,000
Issuance of Common Stock .............. 3,000 439,000 -- -- 442,000
28 for 1 stock split .................. 6,750 -- (6,750) -- --
Net income ............................ -- -- 112,000 -- 112,000
Net unrealized loss on securities
available-for-sale ................... -- -- -- (239,000) (239,000)
------- ---------- ----------- ---------- ----------
Balance at June 30, 1996 .............. 10,000 1,814,750 (97,750) (215,000) 1,512,000
Issuance of Common Stock .............. 850 251,150 -- -- 252,000
Net income ............................ -- -- 962,000 -- 962,000
Net unrealized gain on securities
available-for-sale ................... -- -- -- 169,000 169,000
------- ---------- ----------- ---------- ----------
Balance at June 30, 1997 .............. 10,850 2,065,900 864,250 (46,000) 2,895,000
Net income ............................ -- -- 665,000 -- 665,000
Issuance of Common Stock .............. 900 251,100 -- -- 252,000
2 for 1 stock split ................... 11,750 -- (11,750) -- --
Net unrealized gain on securities
available-for-sale ................... -- -- -- 59,000 59,000
------- ---------- ----------- ---------- ----------
Balance at September 30, 1997 ......... $23,500 $2,317,000 $ 1,517,500 $ 13,000 $3,871,000
======= ========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months
ended September 30, Year ended June 30,
-------------------------------- -----------------------------------------------
1997 1996 1997 1996 1995
--------------- --------------- ---------------- --------------- ---------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ...............................$ 665,000 $ 35,000 $ 962,000 $ 112,000 $ (65,000)
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating
activities Amortization of premiums and
discounts on loans, mortgage-backed secu-
rities and investments ......................... 77,000 127,000 222,000 92,000 48,000
Provision for loan losses ...................... 15,000 11,000 58,000 42,000 30,000
Net gain on sale of loans held for sale ........ (105,000) (77,000) (309,000) (272,000) (107,000)
Depreciation and amortization of premises
and equipment ................................. 34,000 29,000 127,000 112,000 105,000
Proceeds from sale of loans held for sale ...... 20,431,000 8,080,000 39,592,000 19,874,000 20,588,000
Originations of loans held for sale ............ (30,849,000) (7,872,000) (43,868,000) (19,735,000) (21,317,000)
Increase in accrued interest receivable ........ (19,000) (42,000) (241,000) (38,000) (151,000
Decrease (increase) in deferred income
taxes ......................................... 127,000 45,000 74,000 (24,000) 20,000
Other, net ..................................... 259,000 1,407,000 1,172,000 (1,001,000) (179,000)
-------------- ------------- -------------- -------------- --------------
Net cash (used in) provided by
operating activities ....................... (9,365,000) 1,743,000 (2,211,000) (838,000) (1,028,000)
-------------- ------------- -------------- -------------- --------------
INVESTING ACTIVITIES
Net increase in loans ........................... (7,760,000) (9,086,000) (32,725,000) (10,110,000) (19,210,000)
Purchase of investment securities available-
for-sale ....................................... -- (1,000,000) (3,348,000) (1,000,000) (2,688,000)
Purchase of mortgage-backed securities
available-for-sale ............................. (3,255,000) -- (2,596,000) (14,027,000) (3,428,000)
Repayments of principal on investment secu-
rities available-for-sale ...................... 80,000 152,000 1,014,000 3,267,000 225,000
Repayments of principal on mortgage-backed
securities available-for-sale .................. 936,000 776,000 2,728,000 2,725,000 4,000
Repayments of principal on mortgage-backed
securities held-to-maturity .................... -- -- -- -- 1,974,000
Proceeds from sale of mortgage-backed secu-
rities available-for-sale ...................... 3,978,000 -- 1,936,000 3,192,000 --
Proceeds from sale of property acquired
through loan foreclosure actions ............... 105,000 77,000 337,000 59,000 56,000
Purchases of premises and equipment ............. (24,000) (47,000) (596,000) (25,000) (269,000)
-------------- ------------- -------------- -------------- --------------
Net cash used in investing activities ....... (5,940,000) (9,128,000) (33,250,000) (15,919,000) (23,336,000)
-------------- ------------- -------------- -------------- --------------
FINANCING ACTIVITIES
Net increase in deposits ........................ 14,719,000 6,757,000 36,260,000 12,088,000 20,350,000
Advances from Federal Home Loan Bank,
net ............................................ 400,000 50,000 (1,921,000) 4,554,000 2,695,000
Increase (decrease) in advance payments by
borrowers for taxes and insurance .............. 45,000 (65,000) (75,000) (229,000) 310,000
Proceeds from shareholder's notes ............... 248,000 -- 73,000 876,000 1,090,000
Proceeds from issuance of Common Stock .......... 252,000 -- 252,000 442,000 --
-------------- ------------- -------------- -------------- --------------
Net cash provided by financing
activities ................................. 15,664,000 6,742,000 34,589,000 17,731,000 24,445,000
-------------- ------------- -------------- -------------- --------------
Net increase (decrease) in cash and
cash equivalents ........................... 359,000 (643,000) (872,000) 974,000 81,000
Cash and cash equivalents at beginning of year ... 325,000 1,197,000 1,197,000 223,000 142,000
-------------- ------------- -------------- -------------- --------------
Cash and cash equivalents at end of year .........$ 684,000 $ 554,000 $ 325,000 $ 1,197,000 $ 223,000
============== ============= ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Crusader Holding Corporation (the Company) is the holding company for its
wholly-owned subsidiary, Crusader Savings Bank (the Bank), a federally
chartered savings bank. See note B for additional information regarding
majority and wholly-owned subsidiaries of the Bank. The Bank provides banking
services to individual and corporate customers through its two branches in
Philadelphia County, Pennsylvania.
The Bank competes with other banking and financial institutions in its
primary markets. Commercial banks, savings banks, savings and loan
associations, mortgage bankers and brokers, credit unions and money market
funds actively compete for deposits and loans. Such institutions, as well as
consumer finance, mutual funds, insurance companies, and brokerage and
investment banking firms, may be considered competitors of the Bank with
respect to one or more of the services it renders.
The Bank is subject to regulations of certain state and federal agencies
and, accordingly, it is periodically examined by those regulatory authorities.
As a consequence of the extensive regulation of commercial banking activities,
the Bank's business is particularly susceptible to being affected by state and
federal legislation and regulations.
1. Basis of Financial Statement Presentation and Reporting Entity
The accounting and reporting policies of the Company conform with
generally accepted accounting principles and practices within the banking
industry, with respect to the Bank. All intercompany balances and transactions
have been eliminated. The accompanying consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiary, the Bank.
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the balance sheets and the reported amount of revenues and expenses during the
reported period. Therefore, actual results could differ from those estimates.
The principal estimate that is susceptible to significant change in the
near term relates to the allowance for loan losses. The evaluation of the
adequacy of the allowance for loan losses includes an analysis of the
individual loans and overall risk characteristics and size of the different
loan portfolios, and takes into consideration current economic and market
conditions, the capability of specific borrowers to pay specific loan
obligations as well as current loan collateral values. However, actual losses
on specific loans, which also are encompassed in the analysis, may vary from
estimated losses.
The consolidated financial statements as of September 30, 1997 and for the
three months ended September 30, 1997 and 1996 are unaudited. In the opinion of
management, all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation of the financial position and results of
operations have been included. The results of operations for the three months
ended September 30, 1997 and 1996 are not necessarily indicative of the results
that may be attained for an entire fiscal year.
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting of
Comprehensive Income," which establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of financial statements. This statement also requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. This
statement is effective for fiscal years beginning after December 15, 1997.
Earlier application is permitted. Reclassification of financial statements for
earlier periods provided for comparative purposes is required. The Company does
not anticipate that adoption of SFAS No. 130 will have a material impact on the
Company.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosure about Segments of an Enterprise and Related Information"
(SFAS No. 131), which establishes standards for the way
F-7
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
- --------------------------------------------------------------------------------
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
that public business enterprises report information about operating segments in
annual financial statements and requires that such enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. This statement also establishes standards for related disclosures
about products and services, geographic areas, and major customers. This
statement requires the reporting of financial and descriptive information about
the enterprise's reportable operating segments. This statement is effective for
financial statements for periods beginning after December 15, 1997. In the
initial year of application, comparative information for earlier years is to be
restated. The Company does not anticipate that the adoption of SFAS No. 131
will have a material impact on the Company's financial statements.
2. Financial Instruments
The FASB issued SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments," which requires all entities to disclose the estimated fair value
of their assets and liabilities considered to be financial instruments.
Financial instruments requiring disclosure consist primarily of investment
securities, mortgage-backed securities, loans, deposits and borrowings.
3. Loans Held for Sale
Included in loans held for sale are any loans which the Bank believes may
be involved in interest rate risk management or other decisions which might
reasonably result in such loans not being held until maturity. Any such
conforming loans are transferred to loans held for sale and valued at the lower
of aggregate cost or market, including considering of forward commitments to
sell, until ultimate disposition.
The FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," as amended by SFAS No.
127, which provides accounting guidance on transfers of financial assets,
servicing of financial assets and extinguishments of liabilities occurring
after December 31, 1996. The adoption of SFAS No. 125 did not have a material
impact on the Company's consolidated financial position or results of
operations.
4. Investment and Mortgage-Backed Securities
Investments in securities are classified in one of two categories:
held-to-maturity and available-for-sale. Debt securities that the Bank has the
positive intent and ability to hold to maturity are classified as held-to-
maturity and are reported at amortized cost. As the Bank does not engage in
security trading, the balance of its debt securities and any equity securities
are classified as available-for-sale. Net unrealized gains and losses for such
securities, net of tax, are required to be recognized as a separate component
of shareholders' equity and excluded from the determination of net income.
Gains or losses on disposition are based on the net proceeds and cost of the
securities sold, adjusted for amortization of premiums and accretion of
discounts, using the specific identification method.
5. Loans and Allowance for Loan Losses
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are stated at the amount of
unpaid principal and reduced by an allowance for loan losses. Interest on loans
is accrued and credited to operations based upon the principal amounts
outstanding. The allowance for loan losses is established through a provision
for possible loan losses charged to expenses. Loans are charged against the
allowance for loan losses when management believes that the collectibility of
the principal is unlikely. The allowance is an amount that management believes
will be adequate to absorb possible loan losses on existing loans that may
become uncollectible based on evaluations of the collectibility of loans and
prior loan loss experience. The evaluations take into consideration such
factors as changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans and current economic
conditions that may affect the borrower's ability to pay.
F-8
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
- --------------------------------------------------------------------------------
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
Management establishes reserves against interest accruals on loans when
principal and interest become 90 days or more past due and when management
believes, after considering economic and business conditions, collection
efforts and collateral, that the borrower's financial condition is such that
collection of interest is doubtful. Additionally, uncollectible interest on
loans that are contractually past due is charged off, or an allowance is
established based on management's periodic evaluation. The allowance is
established by a charge to interest income equal to all interest previously
accrued and income is subsequently recognized only to the extent that cash
payments are received until, in management's judgment, the borrower's ability
to make periodic interest and principal payments is back to normal, in which
case the loan is returned to accrual status.
The Bank adopted SFAS No. 114, "Accounting by Creditors for Impairment of
a Loan," as amended by SFAS No. 118, "Accounting by Creditors for Impairment of
a Loan - Income Recognition and Disclosures," on July 1, 1995. This new
standard requires that a creditor measure impairment based on the present value
of expected future cash flows discounted at the loan's effective interest rate,
except that as a practical expedient, a creditor may measure impairment based
on a loan's observable market price, or the fair value of the collateral if the
loan is collateral dependent. Regardless of the measurement method, a creditor
must measure impairment based on the fair value of the collateral when the
creditor determines that foreclosure is probable. The adoption of SFAS No. 114,
as amended by SFAS No. 118, did not have a material impact on the Bank's
financial condition or results of operations.
6. Loan Fees
The Bank defers loan fees, net of certain direct loan origination costs.
The balance is accreted into income as a yield adjustment over the life of the
loan using the interest method.
7. Other Real Estate Owned
Other real estate owned (OREO), representing property acquired through
foreclosure, is recorded at the estimated fair market value, less costs of
disposal. When property is acquired, the excess, if any, of the loan balance
over fair market value is charged to the allowance for possible loan losses.
Periodically thereafter, the asset is reviewed for subsequent declines in the
estimated fair market value. Subsequent declines, if any, and holding costs, as
well as gains and losses on subsequent sale, are included in the consolidated
statements of operations.
8. Premises and Equipment
Premises and equipment are carried at cost. Depreciation and amortization
are generally computed on the straight-line method over the estimated useful
lives of the assets.
The FASB issued a new standard, SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
which provides guidance on when to recognize and how to measure impairment
losses of long-lived assets and certain identifiable intangibles and how to
value long-lived assets to be disposed of. At June 30, 1997, the Company and
the Bank had no such long-lived assets.
9. Income Taxes
The Bank and its subsidiaries are included in the consolidated federal
income tax return of the Company. The Company is a party to a tax sharing
agreement with the Bank. Under the terms of the agreement, the Bank's share of
consolidated tax is computed on a separate company basis.
Under the liability method specified by SFAS No. 109, deferred tax assets
and liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities as measured by the enacted
tax rates which will be in effect when these differences reverse. Deferred tax
expense is the result of changes in deferred tax assets and liabilities. The
principal types of differences between assets and liabilities for
F-9
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
- --------------------------------------------------------------------------------
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
financial statement and tax return purposes are the allowance for loan losses,
deferred loan fees and interest reserves. The Company's effective income tax
rate differs from the federal effective rate primarily as a result of state
income taxes, net of federal benefit, lower rate brackets and tax-exempt
income.
10. Net Income (Loss) Per Share
Net income (loss) per share is computed based on the weighted average
number of common and common equivalent shares outstanding during each year. All
weighted average actual share or per share information in the financial
statements has been adjusted retroactively for the effect of stock dividends.
Supplemental earnings per share would have been $0.29 and $.47 for the quarter
ended September 30, 1997 and the year ended June 30, 1997, respectively,
assuming that a sufficient number of shares of Common Stock were issued at an
assumed public offering price of $15 per share to permit the Company to repay
the debt to shareholders outstanding during the respective periods with the
proceeds from the sale of such shares. In February 1997, the FASB issued SFAS
No. 128, "Earnings per Share." SFAS No. 128 establishes standards for computing
and presenting earnings per share (EPS) and applies to entities with publicly
held common stock or potential common stock. This statement simplifies the
standards for computing EPS previously found in Accounting Principles Board
(APB) Opinion No. 15, "Earnings per share," and makes them comparable to
international EPS standards. It replaces the presentation of primary EPS with a
presentation of basic EPS and requires dual presentation of basic and diluted
EPS on the face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of
the basic EPS computation to the numerator and denominator of the diluted EPS
computation. SFAS No. 128 is effective for financial statements issued for
periods endings after December 15, 1997, including interim periods; earlier
application is not permitted. This statement requires restatement of all prior
period EPS and diluted EPS under SFAS No. 128 and will not have a material
impact on the Company.
11. Supplemental Cash Flow Information
The Company and the Bank consider cash on hand, amounts due from banks and
federal funds sold as cash equivalents. Generally, federal funds are purchased
and sold for one-day periods. Other supplemental cash flow information is as
follows:
<TABLE>
<CAPTION>
September 30, June 30,
----------------------------- ---------------------------------------------
1997 1996 1997 1996 1995
------------- ------------- ------------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash payments for interest ......... $1,711,000 $1,066,000 $5,041,000 $3,292,000 $2,594,000
Cash payments for income taxes ..... 160,000 19,000 -- 82,000 --
Transfer of loans into property
acquired through loan
foreclosure actions ............... 105,000 -- 337,000 81,000 59,000
Transfer of investment securities to
available-for-sale ................ -- -- -- 2,032,000 451,000
Transfer of mortgage-backed
securities held-to-maturity to
mortgage-backed securities
available-for-sale ................ -- -- -- 7,106,000 1,353,000
</TABLE>
12. Advertising Costs
It is the Company's and the Bank's policy to expense advertising costs in
the period in which they are incurred. Advertising expense for both the three
months ended September 30, 1997 and 1996 was approximately $6,000, and for the
years ended June 30, 1997, 1996 and 1995 was approximately $25,000, $24,000 and
$34,000, respectively.
F-10
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
- --------------------------------------------------------------------------------
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
13. Reclassification
Certain prior year amounts have been reclassified to conform to the
current year presentation.
NOTE B -- BANKING SUBSIDIARIES
The Bank has three majority-owned subsidiaries and three wholly-owned
subsidiaries. They are as follows:
1. Crusader Mortgage Corporation
In July 1996, the Bank formed Crusader Mortgage Corporation (CMC) for
pursuing the origination and acquisition for resale of non-conforming
mortgages. Initially, the Bank maintained a 51% controlling interest in CMC,
which was subsequently increased to 67.5% in September 1997 and 100% effective
November 1997.
The total revenue, income before income taxes and total assets for this
segment of the business is as
follows:
<TABLE>
<CAPTION>
Bank CMC Consolidated
--------------- ------------ --------------
<S> <C> <C> <C>
Three months ended September 30, 1997 (unaudited)
Total interest income and non-interest income ......... $ 2,879,000 $ 940,000 $ 3,819,000
Income before income taxes ............................ 664,000 378,000 1,042,000
Total assets, end of period ........................... 133,773,000 765,000 134,538,000
Three months ended September 30, 1996 (unaudited)
Total interest income and non-interest income ......... 1,777,000 197,000 1,974,000
Income before income taxes ............................ (25,000) 79,000 54,000
Total assets, end of period ........................... 88,518,000 185,000 88,703,000
Year ended June 30, 1997
Total interest income and non-interest income ......... 8,322,000 1,182,000 9,504,000
Income before income taxes ............................ 1,058,000 396,000 1,454,000
Total assets, end of year ............................. 116,744,000 349,000 117,093,000
</TABLE>
2. Other
Crusader Servicing Corporation, a 60% owned subsidiary that commenced
operations in August 1996, acquires, through auction, delinquent property tax
liens in various jurisdictions throughout the country, assuming a lien position
that is generally superior to any mortgage liens on the property and obtaining
certain foreclosure rights as defined by local statute. Quest Holding
Corporation, a wholly-owned subsidiary, periodically holds title to the real
estate holdings of the Bank acquired through foreclosure, pending resale of
such property. Asset Investment Corporation, a wholly-owned subsidiary, holds
the title to the Bank's multi-family and commercial loan portfolios. Crusader
Mortgage Corporation of Delaware, a 51% owned subsidiary that commenced
operations in October 1997, maintains a conforming and nonconforming
residential mortgage lending operation in Wilmington, Delaware. National
Chinese Mortgage Corporation, a 51% owned subsidiary that commenced operations
in December 1997, markets loans on an affinity group basis to the U.S. Chinese
community.
F-11
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
- --------------------------------------------------------------------------------
NOTE C -- LOANS HELD FOR SALE
Loans held for sale are as follows:
<TABLE>
<CAPTION>
September 30, 1997
-------------------------------------------------------------
Gross Gross Fair
unrealized unrealized market
Cost gains losses value
-------------- ------------ ------------ --------------
(unaudited)
<S> <C> <C> <C> <C>
Residential mortgage loans ......... $16,767,000 $103,000 $-- $16,870,000
=========== ======== === ===========
</TABLE>
<TABLE>
<CAPTION>
June 30, 1997
-----------------------------------------------------------
Gross Gross Fair
unrealized unrealized market
Cost gains losses value
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Residential mortgage loans ......... $6,244,000 $94,000 $-- $6,338,000
========== ======= === ==========
</TABLE>
<TABLE>
<CAPTION>
June 30, 1996
-----------------------------------------------------------
Gross Gross Fair
unrealized unrealized market
Cost gains losses value
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Residential mortgage loans ......... $1,659,000 $24,000 $-- $1,683,000
========== ======= === ==========
</TABLE>
<PAGE>
NOTE D -- INVESTMENT SECURITIES
The amortized cost, unrealized gains and losses, and fair market value of
the Bank's available-for-sale and mortgage-backed securities are as follows:
<TABLE>
<CAPTION>
September 30, 1997
-----------------------------------------------------------
Gross Gross Fair
Amortized unrealized unrealized market
Cost gains losses value
------------- ------------ ------------ -------------
(unaudited)
<S> <C> <C> <C> <C>
Investment securities
U.S. Government agencies .......... $ 3,302,000 $ -- $ 3,000 $ 3,299,000
FHLB stock ........................ 786,000 --- -- 786,000
----------- ------- ------- -----------
4,088,000 -- 3,000 4,085,000
Mortgage-backed securities ......... 16,732,000 65,000 42,000 16,755,000
----------- ------- ------- -----------
$20,820,000 $65,000 $45,000 $20,840,000
=========== ======= ======= ===========
</TABLE>
<TABLE>
<CAPTION>
June 30, 1997
-----------------------------------------------------------
Gross Gross Fair
Amortized unrealized unrealized market
Cost gains losses value
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Investment securities ..............
U.S. Government agencies .......... $ 4,375,000 $ -- $ 11,000 $ 4,364,000
SBA pools ......................... 1,119,000 -- 7,000 1,112,000
FHLB stock ........................ 823,000 -- -- 823,000
----------- ------- -------- -----------
6,317,000 -- 18,000 6,299,000
Mortgage-backed securities ......... 16,095,000 38,000 89,000 16,044,000
----------- ------- -------- -----------
$22,412,000 $38,000 $107,000 $22,343,000
=========== ======= ======== ===========
</TABLE>
F-12
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
- --------------------------------------------------------------------------------
NOTE D -- INVESTMENT SECURITIES -- (Continued)
<TABLE>
<CAPTION>
June 30, 1996
-----------------------------------------------------------
Gross Gross Fair
Amortized unrealized unrealized market
Cost gains losses value
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Investment securities
U.S. Government agencies .......... $ 1,971,000 $ -- $ 30,000 $ 1,941,000
SBA pools ......................... 1,556,000 -- 2,000 1,554,000
FHLB stock ........................ 475,000 -- -- 475,000
----------- ------ -------- -----------
4,002,000 -- 32,000 3,970,000
Mortgage-backed securities ......... 18,432,000 4,000 309,000 18,127,000
----------- ------ -------- -----------
$22,434,000 $4,000 $341,000 $22,097,000
=========== ====== ======== ===========
</TABLE>
The amortized cost and fair market value of investment and mortgage-backed
securities, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
September 30, 1997 June 30, 1997
----------------------------- ------------------------------
Available-for-sale Available-for-sale
----------------------------- ------------------------------
Fair Fair
Amortized market Amortized market
cost value cost value
------------- ------------- ------------- --------------
(unaudited)
<S> <C> <C> <C> <C>
Investment securities ...........................
Due in one year or less ........................ $ 600,000 $ 597,000 $ -- $ --
Due after one year through five years .......... 2,702,000 2,702,000 4,375,000 4,364,000
Due after five years through ten years ......... -- -- 1,119,000 1,112,000
----------- ----------- ----------- -----------
3,302,000 3,299,000 5,494,000 5,476,000
Mortgage-backed securities ...................... 16,732,000 16,755,000 16,095,000 16,044,000
FHLB stock ..................................... 786,000 786,000 823,000 823,000
----------- ----------- ----------- -----------
$20,820,000 $20,840,000 $22,412,000 $22,343,000
=========== =========== =========== ===========
</TABLE>
On November 15, 1995, the FASB issued a Special Report entitled "A Guide
to Implementation of Statement No. 115 on Accounting for Certain Investments in
Debt and Equity Securities." This guide allows enterprises to reassess the
appropriateness of the classification of all securities held. A one-time
reassessment can be made on one day between November 15, 1995 and December 31,
1995. Reclassifications from the held-to-maturity category that result from
this one-time reassessment will not call into question the intent of an
enterprise to hold other debt and equity securities to maturity in the future.
Based on this Special Report, on December 31, 1995, management of the Bank
reclassified approximately $7,106,000 of investment and mortgage-backed
securities from the held-to-maturity category to the available-for-sale
category. The transfer was made to satisfy asset/liability management
objectives and provide an additional source of liquidity to originate and
purchase loans in 1996. The transfer was made at fair value and resulted in an
estimated net unrealized loss of approximately $41,000 and a decrease in
retained earnings of approximately $26,000, net of income taxes, based on
current market values.
F-13
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
- --------------------------------------------------------------------------------
NOTE E -- MORTGAGE-BACKED SECURITIES
The amortized cost, unrealized gains and losses, and fair market values of
the Bank's available-for-sale securities are summarized as follows:
<TABLE>
<CAPTION>
September 30, 1997
-------------------------------------------------------------
(unaudited)
Gross Gross Fair
Amortized unrealized unrealized market
cost gains losses value
-------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Available-for-sale
FHLMC certificates ......... $ 7,257,000 $47,000 $ 8,000 $ 7,296,000
GNMA certificates .......... 4,039,000 18,000 3,000 4,054,000
FNMA certificates .......... 5,436,000 -- 31,000 5,405,000
----------- ------- ------- -----------
$16,732,000 $65,000 $42,000 $16,755,000
=========== ======= ======= ===========
</TABLE>
<TABLE>
<CAPTION>
June 30, 1997
-------------------------------------------------------------
Gross Gross Fair
Amortized unrealized unrealized market
cost gains losses value
-------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Available-for-sale
FHLMC certificates ......... $ 7,601,000 $14,000 $ 47,000 $ 7,568,000
GNMA certificates .......... 6,305,000 23,000 15,000 6,313,000
FNMA certificates .......... 2,189,000 1,000 27,000 2,163,000
----------- ------- -------- -----------
$16,095,000 $38,000 $ 89,000 $16,044,000
=========== ======= ======== ===========
</TABLE>
<TABLE>
<CAPTION>
June 30, 1996
-------------------------------------------------------------
Gross Gross Fair
Amortized unrealized unrealized market
cost gains losses value
-------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Available-for-sale
FHLMC certificates ......... $ 6,572,000 $ 4,000 $122,000 $ 6,454,000
GNMA certificates .......... 9,462,000 -- 133,000 9,329,000
FNMA certificates .......... 2,398,000 -- 54,000 2,344,000
----------- ------- -------- -----------
$18,432,000 $ 4,000 $309,000 $18,127,000
=========== ======= ======== ===========
</TABLE>
Proceeds from the sale of mortgage-backed securities at September 30, 1997
were $3,978,000, and $1,936,000 and $3,192,000 at June 30, 1997 and 1996,
respectively. Gross gains realized on those sales for the three months ended
September 30, 1997 were $-0-, and for the years ended June 30, 1997 and 1996
were $20,000 and $50,000, respectively. There were no sales of mortgage-backed
securities for the three months ended September 30, 1996 and for the year ended
June 30, 1995.
F-14
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
- --------------------------------------------------------------------------------
NOTE F -- LOANS RECEIVABLE
Loans receivable are as follows:
<TABLE>
<CAPTION>
June 30,
September 30, -------------------------------
1997 1997 1996
--------------- -------------- --------------
(unaudited)
<S> <C> <C> <C>
Residential one-to-four family mortgage loans $59,665,000 $54,493,000 $39,485,000
Multi-family mortgage loans ....................... 13,973,000 13,244,000 5,357,000
Construction loans ................................ 1,997,000 2,188,000 608,000
Commercial mortgage loans ......................... 16,827,000 14,817,000 7,616,000
Consumer loans .................................... 2,516,000 2,375,000 1,285,000
----------- ----------- -----------
Total loans .................................... 94,978,000 87,117,000 54,351,000
Loans in process (construction loans) ............. (617,000) (774,000) (264,000)
Deferred loan fees and unearned discounts ......... (17,000) 121,000 (53,000)
Allowance for possible loan losses ................ (487,000) (472,000) (430,000)
----------- ----------- -----------
Net loans ...................................... $93,857,000 $85,992,000 $53,604,000
=========== =========== ===========
</TABLE>
The Bank had loans outstanding which were secured by real estate and/or
deposit accounts to directors and officers of $2,460,000 and $1,176,000 at June
30, 1997 and 1996, respectively. Management of the Bank is of the opinion that
these performing loans were made in the ordinary course of business and on
substantially the same terms as those prevailing at the same time for
comparable transactions with unrelated parties and do not involve more than
normal risk of collectibility or present other unfavorable features.
Included in loans receivable are non-accrual loans past due 90 days or
more in the amounts of $621,000 at September 30, 1997 and $745,000 and $593,000
at June 30, 1997 and 1996, respectively. If interest income had been recorded
on all non-accrual loans had they been current in accordance with their
original terms, income would have increased for the three months ended
September 30, 1997 and 1996 by approximately $20,000 and $14,000, respectively,
and for the years ended June 30, 1997, 1996 and 1995 by approximately $57,000,
$60,000 and $43,000, respectively.
Also included in loans receivable are loans past due 90 days or more and
accruing in the amount of $353,000 at September 30, 1997 and $353,000 and
$378,000 at June 30, 1997 and 1996, respectively, which have not been
classified as non-accrual due to management's belief that the loans are
well-secured and in the process of collection.
There are no impaired loans at September 30, 1997 and June 30, 1997 and
1996.
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
Three months ended
September 30, Year ended June 30,
------------------------- ---------------------------------------
1997 1996 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Balance, beginning of year ......... $472,000 $430,000 $ 430,000 $388,000 $ 368,000
Provision for loan losses .......... 15,000 11,000 58,000 42,000 30,000
Charge-offs ........................ -- (1,000) (16,000) -- (10,000)
-------- -------- --------- -------- ---------
Balance, end of year ............... $487,000 $440,000 $ 472,000 $430,000 $ 388,000
======== ======== ========= ======== =========
</TABLE>
F-15
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
- --------------------------------------------------------------------------------
NOTE G -- PREMISES AND EQUIPMENT
Premises and equipment are as follows:
<TABLE>
<CAPTION>
June 30,
Estimated September 30, -----------------------------
useful lives 1997 1997 1996
--------------- --------------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Furniture, fixtures and equipment ......... 5 to 10 years $1,389,000 $1,341,000 $ 869,000
Less accumulated depreciation ............ (499,000) (461,000) (458,000)
---------- ---------- ----------
$ 890,000 $ 880,000 $ 411,000
========== ========== ==========
</TABLE>
Depreciation expense for the three months ended September 30, 1997 and
1996 was approximately $34,000 and $29,000, respectively, and for the years
ended June 30, 1997, 1996 and 1995 was approximately $127,000, $112,000 and
$105,000, respectively.
NOTE H -- DEPOSITS
Deposits are as follows:
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------
September 30, 1997 1997 1996
-------------------------- -------------------------- -------------------------
Weighted Weighted Weighted
interest interest interest
rate Amount rate Amount rate Amount
---------- -------------- ---------- -------------- --------- --------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Demand ........................ --% $ 2,433,000 --% $ 2,123,000 --% $ 1,283,000
Money market NOW and Super
NOW .......................... 4.02 9,883,000 3.92 9,994,000 4.36 7,744,000
Passbook and statement savings 2.89 1,776,000 2.80 1,689,000 2.19 2,010,000
------------ ----------- -----------
14,092,000 13,806,000 11,037,000
Time deposits ................. 5.80 96,533,000 5.70 82,100,000 5.63 48,587,000
------------ ----------- -----------
$110,625,000 $95,906,000 $59,624,000
============ =========== ===========
</TABLE>
At September 30, 1997, the scheduled maturities of time deposits are as
follows (unaudited):
1997 $47,546,000
1998 39,763,000
1999 6,422,000
2000 1,303,000
2001 1,299,000
2002 and thereafter 200,000
-----------
$96,533,000
===========
Included in deposits as of September 30, 1997 and June 30, 1997 and 1996
are deposits greater than $100,000 of approximately $20,889,000, $10,857,000
and $5,963,000, respectively.
F-16
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
- --------------------------------------------------------------------------------
NOTE I -- BORROWINGS
Advances from the Federal Home Loan Bank of Pittsburgh (FHLB), which
generally have maturities of less than one year, are as follows:
<TABLE>
<CAPTION>
June 30,
September 30, -----------------------------------
1997 1997 1996
--------------- ---------------- ----------------
(unaudited)
<S> <C> <C> <C>
Advances outstanding at end of
period ................................ $ 4,350,000 $ 8,950,000 $ 9,500,000
Interest rate at end of period ......... 5.71% 5.70% 5.55%
Approximate average amount out-
standing .............................. 8,207,000 8,344,000 6,694,000
Maximum month-end balance .............. 9,000,000 17,450,000 11,000,000
Approximate weighted average rate 5.95% 5.56% 5.80%
</TABLE>
Securities sold under agreements to repurchase are as follows:
<TABLE>
<CAPTION>
June 30,
September 30, -----------------------------------
1997 1997 1996
--------------- ---------------- ----------------
(unaudited)
<S> <C> <C> <C>
Repurchase agreements outstand-
ing at end of period .................. $ 10,780,000 $ 5,780,000 $ 7,151,000
Interest rate at end of period ......... 5.85% 5.90% 5.85%
Approximate average amount out-
standing .............................. 8,065,000 8,923,000 2,647,000
Maximum month-end balance .............. 10,780,000 10,431,000 7,151,000
Approximate weighted average rate 5.85% 5.95% 5.85%
</TABLE>
At September 30, 1997, outstanding long-term borrowings mature as follows
(unaudited):
1998 ......... 6,850,000
1999 ......... 3,280,000
2000 ......... --
2001 ......... --
2002 ......... 5,000,000
---------
15,130,000
==========
NOTE J -- SHAREHOLDERS' NOTES
Shareholders' Notes consisted of loans payable to the Company's
shareholders as follows:
<TABLE>
<CAPTION>
June 30,
September 30, ------------------------------
1997 1997 1996
--------------- ------------- --------------
(unaudited)
<S> <C> <C> <C>
Note payable in monthly interest only payments at
6% at September 30, 1997 and June 30, 1997 and
8.25% at June 30, 1996; the remaining principal
plus accrued interest is due and payable on July 1,
1998, unless otherwise extended by the share-
holder ............................................ $ 3,238,000 $2,990,000 $ 2,918,000
=========== ========== ===========
</TABLE>
Additionally, the Company paid a management fee to its shareholder
totaling $24,000 for the year ended June 30, 1995. There were no management
fees paid to its shareholders for the three months ended September 30, 1997 and
1996 and for the years ended June 30, 1997 and 1996.
F-17
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
- --------------------------------------------------------------------------------
NOTE K -- INCOME TAXES
The provision (benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
Three months ended
September 30, Year ended June 30,
------------------------ ------------------------------------------
1997 1996 1997 1996 1995
----------- ---------- ----------- ------------ -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Current
Federal .................. $194,000 $12,000 $ 500,000 $ 62,000 $ (42,000)
State .................... 30,000 2,000 17,000 23,000 2,000
-------- ------- --------- --------- ---------
Total current .......... 224,000 14,000 517,000 85,000 (40,000)
-------- ------- --------- --------- ---------
Deferred
Federal .................. 134,000 5,000 (37,000) (24,000) 21,000
State .................... -- -- -- -- (1,000)
-------- ------- --------- --------- ---------
Total deferred ......... 134,000 5,000 (37,000) (24,000) 20,000
-------- ------- --------- --------- ---------
$358,000 $19,000 $ 480,000 $ 61,000 $ (20,000)
======== ======= ========= ========= =========
</TABLE>
The reconciliation of the statutory federal income tax provision to the
actual tax provision is as follows:
<TABLE>
<CAPTION>
Three months ended
September 30, Year ended June 30,
------------------------ ------------------------------------------
1997 1996 1997 1996 1995
----------- ---------- ----------- ------------ -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Statutory federal income tax ........ $ 354,000 $ 18,000 $ 494,000 $ 59,000 $ (29,000)
State income taxes, net of federal
impact ............................. 30,000 2,000 11,000 15,000 1,000
Low-rate brackets ................... -- -- -- (7,000) --
Tax-exempt income ................... (5,000) -- (13,000) (11,000) (14,000)
Other, net .......................... (21,000) (1,000) (12,000) 5,000 22,000
--------- -------- --------- --------- ---------
Income tax provision (benefit) ..... $ 358,000 $ 19,000 $ 480,000 $ 61,000 $ (20,000)
========= ======== ========= ========= =========
</TABLE>
Deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
June 30,
September 30, -------------------------
1997 1997 1996
--------------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
Deferred tax assets
Deferred loan fees ................ $ -- $ 13,000 $ 17,000
Interest reserve .................. 29,000 31,000 19,000
Provision for loan losses ......... 129,000 123,000 106,000
Unrealized loss on securities
available-for-sale .............. -- 23,000 121,000
Basis of property and equipment -- 11,000 --
--------- -------- --------
158,000 201,000 263,000
--------- -------- --------
Deferred tax liabilities
Unrealized gain on securities
available-for-sale .............. 7,000 -- --
Basis of property and equipment 9,000 -- 1,000
Deferred loan fees ................ 149,000 -- --
--------- -------- --------
165,000 -- 1,000
--------- -------- --------
Net deferred tax (liability)
asset .......................... $ (7,000) $201,000 $262,000
========= ======== ========
</TABLE>
F-18
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
- --------------------------------------------------------------------------------
NOTE L -- SHAREHOLDERS' EQUITY
On December 8, 1997, the Company's Board of Directors declared a two for
one stock split effected in the form of a stock dividend.
On December 8, 1997, the Company amended and restated its Articles of
Incorporation whereby the Company is authorized to issue 20,000,000 shares of
capital stock, par value $0.01 per share and 5,000,000 shares of preferred
stock, par value $0.01 per share.
Under the Company's amended Articles of Incorporation, the Board of
Directors of the Company may, from time to time, authorize the shares of
preferred stock, in one or more series, with such provisions as to voting
rights, dividend rates and preferences, redemption and convertibility, and such
preferences, privileges and powers, and relative, participating, optional or
other special rights, and qualifications, limitations or restrictions of such
series of preferred stock, as shall be stated in the resolution of the Board of
Directors providing for the issuance of the preferred stock. The preferred
stock may rank prior to common stock as to dividend rights or liquidation
preferences, or both, and may have full or limited voting rights. No preferred
stock is currently outstanding nor will any be issued in the Offering.
On March 1, 1996, the Company's Board of Directors declared a twenty-eight
for one stock split effected in the form of a stock dividend.
NOTE M -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND
CONCENTRATIONS OF CREDIT RISK
The Bank is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments include commitments to extend credit. Those instruments
involve, to varying degrees, elements of credit and interest rate risk in
excess of the amount recognized in the consolidated statements of financial
condition. The contract amounts of those instruments reflect the extent of the
Bank's involvement in particular classes of financial instruments. The Bank's
exposure to credit loss in the event of non-performance by the other party to
the financial instrument for commitments to extend credit is represented by the
contractual amounts of these instruments. The Bank uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments. Unless noted otherwise, the Bank does not require
collateral or other security to support financial instruments with credit risk.
Financial instruments, the contract amounts of which represent credit
risk, include commitments to originate loans of $7,560,000 and $9,027,000 at
June 30, 1997 and 1996, respectively, as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------- -------------------------------
Fixed Variable Fixed Variable
rate rate rate rate
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
First mortgage loans .............................. $ 3,115,000 $ 3,194,000 $ 6,040,000 $ 1,647,000
Residential construction .......................... -- 100,000 -- 136,000
Commercial real estate and multi-family mortgages . -- 1,151,000 -- 1,204,000
----------- ----------- ----------- -----------
$ 3,115,000 $ 4,445,000 $ 6,040,000 $ 2,987,000
=========== =========== =========== ===========
</TABLE>
Fees received in connection with these commitments have not been
recognized in income.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since some of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank
F-19
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
- --------------------------------------------------------------------------------
NOTE M -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND
CONCENTRATIONS OF CREDIT RISK -- (Continued)
evaluates each customer's creditworthiness on a case-by-case basis. The amount
of the collateral obtained, if it is deemed necessary by the Bank upon
extension of credit, is based on management's credit evaluation of the
borrower. Collateral held generally includes residential and some commercial
property.
The Bank's loan portfolio primarily consists of one-to-four family
residential real estate loans in the suburban Philadelphia area, primarily
Delaware, Montgomery, Philadelphia, Bucks and Chester counties in Pennsylvania,
as well as southern New Jersey and northern Delaware. The Bank offers both
fixed and adjustable rates of interest on these loans which have amortization
terms ranging to 30 years. The loans are generally originated on the basis of
up to 80% loan-to-value ratio, which has historically provided the Bank with
more than adequate collateral coverage in the event of default. Nevertheless,
the Bank, as with any lending institution, is subject to the risk that
residential real estate values in the primary lending will deteriorate, thereby
potentially impairing collateral values in the primary lending area. However,
management believes that residential real estate values are presently stable in
its primary lending area and that loan loss allowances have been provided for
in amounts commensurate with its current perception of the foregoing risks in
the portfolio.
NOTE N -- COMMITMENTS AND CONTINGENCIES
1. Lease Commitments
The Bank has entered into non-cancellable operating lease agreements for
both branch banking facilities. The lease terms range from 5 to 10 years. The
approximate minimum annual rental payments at June 30, 1997 under these leases
are as follows:
1998 ............... $ 65,000
1999 ............... 65,000
2000 ............... 65,000
2001 ............... 65,000
2002 ............... 48,000
Thereafter ......... 88,000
---------
$ 396,000
=========
Rental expense amounted to $17,000 for the three months ended September
30, 1997 and 1996 and $67,000 for the years ended June 30, 1997, 1996 and 1995.
2. Other
The Bank is party to certain claims and litigation arising in the ordinary
course of business. In the opinion of management, the resolution of such claims
and litigation will not materially impact the Bank's consolidated financial
position or results of operations.
3. Employment Contracts
The Company has a five year employment agreement with its President as of
March 1, 1996. Under the terms of the agreement, he will devote substantially
all of his time and effort to conducting the business activities of the Company
as President and will receive an annual salary of $150,000 for each of the five
years of the agreement. His employment is terminable by the Company for cause
as defined in the agreement, and is terminable by him upon written notice to
the Company. Upon termination, he is not permitted to compete with the Company
or any subsidiary or affiliate of the Company by soliciting its employees or
soliciting business from its customers or suppliers for a period of one year
following such termination.
F-20
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
- --------------------------------------------------------------------------------
NOTE N -- COMMITMENTS AND CONTINGENCIES -- (Continued)
On December 8, 1997, the Bank's Board of Directors approved an employment
agreement with its President. Under the terms of the three-year agreement, he
will devote substantially all of his time and effort to conducting the business
activities of the Bank as President thereof and will receive an annual salary
of $100,000 with an 8% increase as of July 1, 1999. In addition, he is eligible
for an annual bonus of up to 30% of his annual compensation. Upon termination
from the Bank, he is not permitted to compete with the Bank in any of its
businesses in the relevant market areas for such businesses for a specific
period following such termination. If his employment is prematurely terminated
by the Bank without cause, he is eligible to receive a severance payment equal
to two times his annual salary if such termination occurs in the initial year
of the employment agreement, and a severance payment equal to his annual salary
if such termination occurs during the second or third year of the employment
agreement. He received options to purchase 20,000 shares in December 1997 at a
price of $12.00 per share and options to purchase 8,000 shares at the public
offering price.
NOTE O -- EMPLOYEE BENEFIT PLAN
The Bank has a 401(k) defined contribution plan covering all employees, as
defined under the plan document. Employees may contribute up to 15% of
compensation, as defined under the plan document. The Bank can make
discretionary contributions. The Bank contributed $4,000 and $3,000 for the
three months ended September 30, 1997 and 1996, respectively, $5,000 for the
years ended June 30, 1997 and 1996 and $4,000 for the year ended June 30, 1995.
NOTE P -- STOCK OPTION PLAN
In fiscal years 1996 and 1997, grants of phantom options to purchase
31,100 shares were made to an officer and certain directors under a phantom
stock option plan, which plan only provided for a current payout upon a sale or
disposition of the Company. No compensation expense was recorded under the
plan. In December, 1997, the officer and directors renounced their right to
such phantom options and received options to purchase an aggregate of 62,200
shares of Common Stock at the Offering Price. (note U).
The Company has adopted only the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." In accordance with SFAS No. 123, it
has elected to apply APB Opinion No. 25 and related interpretations in
accounting for its plan and thus does not recognize compensation expense. Had
compensation expense for the plan been determined based on the fair value of
the options at the grant date consistent with SFAS No. 123, the Company's net
income for the years ended June 30, 1997 and 1996 would have been reduced from
$962,000 to $955,000 and from $112,000 to $104,000, respectively and net income
per share remained unchanged at $0.46 and $0.07 for both periods. The fair
values of the options are estimated on the dates of grant using the
Black-Scholes option-pricing model assuming 15% volatility, a five year life
and risk-free interest rates of 6.56% and 6.53% in fiscal 1997 and 1996,
respectively. In fiscal 1996, options for 18,000 shares were granted at an
exercise price of $2.33 per share, with an estimated fair value of $0.69 per
option. In fiscal 1997, options for 13,100 shares were granted at an exercise
price of $2.73 per share, with an estimated fair value of $0.81 per option. All
of the options remained outstanding at June 30, 1997.
NOTE Q -- FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 requires disclosure of the estimated fair value of an
entity's assets and liabilities considered to be financial instruments. For the
Bank, as for most financial institutions, the majority of its assets and
liabilities are considered to be financial instruments as defined in SFAS No.
107. However, many such instruments lack an available trading market as
characterized by a willing buyer and seller engaging in an exchange
transaction. Therefore, the Bank had to use significant estimations and present
value calculations to prepare this disclosure, as required by SFAS No. 107.
Accordingly, the information presented below does not purport to represent the
aggregate net fair value of the Bank.
F-21
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
- --------------------------------------------------------------------------------
NOTE Q -- FAIR VALUE OF FINANCIAL INSTRUMENTS -- (Continued)
Changes in assumptions or methodologies used to estimate fair values may
materially affect the estimated amounts. Also, management is concerned that
there may not be reasonable comparability between institutions due to the wide
range of permitted assumptions and methodologies in the absence of active
markets. This lack of uniformity gives rise to a high degree of subjectivity in
estimating financial instrument fair values.
Estimated fair values have been determined by the Bank using the best
available data and an estimation methodology suitable for each category of
financial instrument. The estimation methodologies used, the estimated fair
values, and recorded book balances at September 30, 1997 and June 30, 1997 and
1996 are outlined below.
For cash and due from banks and federal funds sold, the recorded book
value of approximately $684,000, $325,000 and $1,197,000 approximates fair
value at September 30, 1997, June 30, 1997 and 1996, respectively. The
estimated fair values of loans held for sale, investment securities and
mortgage-backed securities are based on quoted market prices, if available.
Estimated fair values are based on quoted market prices of comparable
instruments if quoted market prices are not available.
The fair values of loans are estimated based on a discounted cash flow
analysis using interest rates currently offered for loans with similar terms to
borrowers of similar credit quality. The carrying value of accrued interest
approximates fair value.
<TABLE>
<CAPTION>
June 30,
September 30, 1997 -----------------------------------------------------------------
-------------------------------- 1997 1996
Carrying Estimated Fair -------------------------------- -------------------------------
amount value Carrying Estimated fair Carrying Estimated fair
-------------- ---------------- amount value amount value
(unaudited) -------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Loans held for sale ......... $16,767,000 $16,870,000 $ 6,244,000 $ 6,338,000 $ 1,659,000 $ 1,683,000
Investment and mortgage-
backed securities .......... 20,840,000 20,840,000 22,343,000 22,343,000 22,097,000 22,097,000
Loans ....................... 94,978,000 96,088,000 87,117,000 88,266,000 54,351,000 55,994,000
</TABLE>
The estimated fair values of demand deposits (i.e., interest and
non-interest bearing checking accounts, passbook savings and certain types of
money market accounts) are, by definition, equal to the amount payable on
demand at the reporting date (i.e., their carrying amounts). The carrying
amounts of variable rate, fixed-term money market accounts and certificates of
deposit approximate their fair values at the reporting date. The fair values of
fixed-rate certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered to a schedule
of aggregated expected monthly time deposit maturities. The carrying amount of
accrued interest payable approximates its fair value.
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------------------------------------------------
September 30, 1997 1997 1996
-------------------------------- -------------------------------- -------------------------------
Carrying Estimated Fair Carrying Estimated fair Carrying Estimated fair
amount value amount value amount value
-------------- ---------------- -------------- ---------------- -------------- ---------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Time deposits ......... $96,533,000 $96,611,000 $82,100,000 $81,103,000 $48,587,000 $49,004,000
</TABLE>
The fair values of advances from the FHLB and securities sold under
agreements to repurchase totalling $4,350,000 and $10,780,000, respectively, at
September 30, 1997, $8,950,000 and $5,780,000, respectively, at June 30, 1997,
and $9,500,000 and $7,151,000, respectively, at June 30, 1996 are estimated to
approximate their recorded book balances.
There was no material difference between the contract amount and the
estimated fair value of off-balance-sheet items which totalled approximately
$5,475,000, $7,560,000 and $9,027,000 at September 30, 1997, June 30, 1997 and
1996, respectively, and primarily comprise unfunded loan commitments which are
generally priced at market at the time of funding.
F-22
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
- --------------------------------------------------------------------------------
NOTE R -- REGULATORY MATTERS
1. Dividends
The payment of dividends by the Bank to the Company is prohibited unless
the Bank meets specific capital and earning requirements. In general, the
regulation divides savings banks into three tiers, according to their ability
to meet the current minimum capital requirements.
2. Regulatory Capital
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possible additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Bank's consolidated financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities and certain off-balance sheet items
as calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and core capital (as defined in the regulations) to
risk-weighted assets, and of core capital to adjusted assets. Management
believes, as of September 30, 1997, that the Bank meets all capital adequacy
requirements to which it is subject.
As of September 30, 1997 and June 30, 1997, the most recent notification
from the Office of Thrift Supervision categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized, the Bank must maintain minimum total risk-based, core
risk-based and core leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category.
F-23
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
- --------------------------------------------------------------------------------
NOTE R -- REGULATORY MATTERS -- (Continued)
A summary of the Bank's capital amounts and ratios as of September 30,
1997 follows:
<TABLE>
<CAPTION>
To be well capitalized
Minimum under prompt
for capital corrective action
Actual adequacy purposes provisions
----------------------------- -------------------------- ------------------------
Ratio Amount Ratio Amount Ratio Amount
---------- ----------------- ---------- -------------- ---------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Shareholders' equity and ratio to total
assets ..................................... 5.25% $ 7,107,000
Unrealized gain on available-for sale
securities, net of tax ..................... (13,000)
Minority interest ........................... 64,000
-------------
Tangible capital and ratio to adjusted 1.50% $ 2,030,000
total assets ............................... 5.29 $ 7,158,000 ===========
=============
Core capital and ratio to adjusted total 4.00 $ 5,413,000 5.00% $ 6,766,000
assets ..................................... 5.29 $ 7,158,000 =========== ===========
=============
Core capital and ratio to risk-weighted 6.00 $ 4,470,000
assets ..................................... 9.61 $ 7,158,000 ===========
-------------
Allowance for loan and lease losses ......... 487,000
-------------
Supplementary capital ....................... 487,000 8.00 $ 5,960,000 10.00 $ 7,450,000
------------- =========== ===========
Total risk-based capital and ratio to
risk-weighted assets(1) .................... 10.26 $ 7,645,000
=============
Total assets ................................ $ 135,336,000
=============
Adjusted total assets ....................... $ 135,324,000
=============
Risk-weighted assets ........................ $ 74,496,000
=============
</TABLE>
- ------------
(1) Does not reflect the interest rate risk component to the risk-based capital
requirement, the effective date of which has been postponed.
F-24
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
- --------------------------------------------------------------------------------
NOTE R -- REGULATORY MATTERS -- (Continued)
A summary of the Bank's capital amounts and ratios as of June 30, 1997
follows:
<TABLE>
<CAPTION>
To be well capitalized
Minimum under prompt
for capital corrective action
Actual adequacy purposes provisions
---------------------------- -------------------------- --------------------------
Ratio Amount Ratio Amount Ratio Amount
---------- ---------------- ---------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Shareholders' equity and ratio to total
assets ................................. 5.03% $ 5,885,000
Unrealized loss on available-for sale
securities, net of tax ................. 46,000
Minority interest ....................... 69,000
-------------
Tangible capital and ratio to adjusted
total assets ........................... 5.12 $ 6,000,000 1.50% $ 1,757,000
============= ===========
Core capital and ratio to adjusted
total assets ........................... 5.12 $ 6,000,000 4.00 $ 4,685,000 5.00% $ 5,856,000
============= =========== ===========
Core capital and ratio to
risk-weighted assets ................... 10.02 $ 6,000,000 6.00 $ 3,594,000
------------- ===========
Allowance for loan and lease losses ..... 472,000
-------------
Supplementary capital ................... 472,000
-------------
Total risk-based capital and ratio to
risk-weighted assets(1) ................ 10.81 $ 6,472,000 8.00 $ 4,791,000 10.00 $ 5,989,000
============= =========== ===========
Total assets ............................ $ 117,072,000
=============
Adjusted total assets ................... $ 117,118,000
=============
Risk-weighted assets .................... $ 59,892,000
=============
</TABLE>
- ------------
(1) Does not reflect the interest rate risk component to the risk-based capital
requirement, the effective date of which has been postponed.
F-25
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
- --------------------------------------------------------------------------------
NOTE R -- REGULATORY MATTERS -- (Continued)
A summary of the Bank's capital amounts and ratios as of June 30, 1996
follows:
<TABLE>
<CAPTION>
To be well capitalized
Minimum under prompt
for capital corrective action
Actual adequacy purposes provisions
-------------------------- -------------------------- --------------------------
Ratio Amount Ratio Amount Ratio Amount
---------- -------------- ---------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Shareholders' equity and ratio to total
assets ................................. 5.45% $ 4,433,000
Unrealized loss on available-for sale
securities, net of tax ................. 215,000
Minority interest ....................... 49,000
------------
Tangible capital and ratio to adjusted
total assets ........................... 5.79 $ 4,697,000 1.50% $ 1,216,000
============ ===========
Core capital and ratio to adjusted
total assets ........................... 5.79 $ 4,697,000 4.00 $ 3,243,000 5.00% $ 4,054,000
============ =========== ===========
Core capital and ratio to risk-
weighted assets ........................ 12.72 $ 4,697,000 6.00 $ 2,215,000
------------ ===========
Allowance for loan and lease losses ..... 430,000
------------
Supplementary capital ................... 430,000
------------
Total risk-based capital and ratio to
risk-weighted assets(1) ................ 13.89 $ 5,127,000 8.00 $ 2,953,000 10.00 $ 3,692,000
============ =========== ===========
Total assets ............................ $ 81,302,000
============
Adjusted total assets ................... $ 81,087,000
============
Risk-weighted assets .................... $ 36,915,000
============
</TABLE>
- ------------
(1) Does not reflect the interest rate risk component to the risk-based capital
requirement, the effective date of which has been postponed.
NOTE S -- FINAL SAIF LEGISLATION
On September 30, 1996, the Deposit Insurance Funds Act of 1996 (the Funds
Act) was signed into law which, among other things, imposed a special one-time
assessment to recapitalize the Savings Association Insurance Fund (SAIF). As
required by the Funds Act, the Federal Deposit Insurance Corporation (FDIC)
imposed a special assessment on SAIF-assessable deposits held on March 31,
1995, payable November 27, 1996. The special assessment was recognized as a
tax-deductible expense in 1997. The Bank recorded a special after-tax charge of
$192,000 ($296,000 before-tax) as a result of the FDIC special assessment.
F-26
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
- --------------------------------------------------------------------------------
NOTE T -- CONDENSED FINANCIAL INFORMATION -- PARENT COMPANY
ONLY
The condensed financial information of the Company is as follows:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
-------------------------------
September 30,
1997 1997 1996
-------------- -------------- --------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Cash and due from banks -- non-interest bearing . $ 30,000 $ 7,000 $ 29,000
Investment in subsidiaries ........................... 7,094,000 5,930,000 4,432,000
Other assets ......................................... -- 41,000 23,000
----------- ----------- -----------
Total assets ....................................... $ 7,124,000 $ 5,978,000 $ 4,484,000
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Shareholders' notes .................................. $ 3,238,000 $ 2,990,000 $ 2,918,000
Other liabilities .................................... 15,000 93,000 54,000
Shareholders' equity ................................. 3,871,000 2,895,000 1,512,000
----------- ----------- -----------
Total liabilities and shareholders' equity ......... $ 7,124,000 $ 5,978,000 $ 4,484,000
=========== =========== ===========
</TABLE>
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months
ended September 30, Year ended June 30,
-------------------------- --------------------------------------------
1997 1996 1997 1996 1995
------------ ----------- ------------ ------------ --------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Income
Equity in undistributed net
income (loss) of subsidiary ......... $ 663,000 $ 35,000 $ 988,000 $ 198,000 $ (10,000)
Non-interest income ................... 56,000 56,000 236,000 292,000 174,000
--------- -------- --------- --------- ----------
719,000 91,000 1,224,000 490,000 164,000
Other expenses ......................... 54,000 56,000 262,000 378,000 229,000
--------- -------- --------- --------- ----------
Net income (loss) .................... $ 665,000 $ 35,000 $ 962,000 $ 112,000 $ (65,000)
========= ======== ========= ========= ==========
</TABLE>
F-27
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
- --------------------------------------------------------------------------------
NOTE T -- CONDENSED FINANCIAL INFORMATION -- PARENT COMPANY
ONLY -- (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three months
ended September 30, Year ended June 30,
-------------------------- -----------------------------------------------
1997 1996 1997 1996 1995
------------ ----------- ------------ --------------- --------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net income (loss) ......................... $ 665,000 $ 35,000 $ 962,000 $ 112,000 $ (65,000)
Adjustments to reconcile net income
(loss) to net cash (used in)
provided by operating activities
Decrease (increase) decrease in
other assets ........................... 41,000 19,000 (18,000) 31,000 (4,000)
(Decrease) increase in other
liabilities ............................ (78,000) 2,000 39,000 4,000 (69,000)
Other ................................... 58,000 (17,000) (17,000) 74,000 24,000
Equity in undistributed (income)
loss of subsidiary ..................... (663,000) (35,000) (988,000) (198,000) 10,000
---------- --------- ---------- ------------ ------------
Net cash (used in) provided by
operating activities ................. 23,000 4,000 (22,000) 23,000 (104,000)
---------- --------- ---------- ------------ ------------
Cash flows from investing activities
Investment in subsidiary .................. (500,000) -- (325,000) (1,318,000) (1,090,000)
---------- --------- ---------- ------------ ------------
Net cash used in investing
activities ........................... (500,000) -- (325,000) (1,318,000) (1,090,000)
---------- --------- ---------- ------------ ------------
Cash flows from financing activities
Proceeds from shareholders' notes ......... 248,000 -- 73,000 876,000 1,090,000
Proceeds from issuance of Common
Stock ................................... 252,000 252,000 442,000 --
---------- ---------- ------------ ------------
Net cash provided by (used in)
financing activities ................. 500,000 -- 325,000 1,318,000 1,090,000
---------- --------- ---------- ------------ ------------
Net increase (decrease) in cash
and cash equivalents ................. 23,000 4,000 (22,000) 23,000 (104,000)
Cash and cash equivalents at beginning
of year ................................... 7,000 29,000 29,000 6,000 110,000
---------- --------- ---------- ------------ ------------
Cash and cash equivalents at end of
year ...................................... $ 30,000 $ 33,000 $ 7,000 $ 29,000 $ 6,000
========== ========= ========== ============ ============
</TABLE>
F-28
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
- --------------------------------------------------------------------------------
NOTE U -- PROPOSED PUBLIC OFFERING (UNAUDITED)
The Company anticipates a public offering in January 1998 of 1,000,000
shares (the Shares) of common stock, $0.01 value per share. The Shares may be
purchased separately and will be separately tradable immediately upon issuance.
The Company has granted to the underwriters of such offering a 30-day option to
purchase up to an additional 150,000 shares of common stock on the same terms
and conditions as set forth above solely to cover overallotments.
On December 8, 1997, the Board of Directors and shareholders have adopted
a Directors' Stock Option Plan (the Directors' Plan). Certain directors are
eligible to receive, at no cost to them, options under the Directors' Plan.
Options granted under the Directors' Plan are non-qualified stock options
(options that do not afford favorable tax treatment to recipients upon
compliance with certain restrictions pursuant to Section 422 of the Internal
Revenue Code but that normally result in tax deductions to the Company).
Options granted under the Directors' Plan are five-year options at the fair
market value of the common stock at the time of the grant. Options vest in
accordance with the terms of the grant. Upon termination from the Company,
except in cases of death, the option shares expire after 30 days. Option shares
may be paid in cash, shares of the common stock, or a combination of both. An
aggregate of 100,000 shares of common stock have been reserved under the
Directors' Plan.
On December 8, 1997, the Board of Directors and shareholders have adopted
an Employee Stock Option Plan (the Employee Plan). Employees are eligible to
receive, at no cost to them, options under the Employee Plan. Options granted
under the Employee Plan are non-qualified stock options (options that do not
afford favorable tax treatment to recipients upon compliance with certain
restrictions pursuant to Section 422 of the Internal Revenue Code but that
normally result in tax deductions to the Company). Options granted under the
Employee Plan are five-year options at the fair market value of the common
stock at the time of the grant. Options vest in accordance with the terms of
the grant. Upon termination from the Company, except in cases of death, the
option shares expire after 30 days. Option shares may be paid in cash, shares
of the common stock, or a combination of both. An aggregate of 200,000 shares
of common stock have been reserved under the Employee Plan. On December 8,
1997, the Company granted options to acquire an aggregate of 20,000 shares of
common stock at an exercise price of $12.00 per share to the President of the
Bank.
F-29
<PAGE>
================================================================================
No dealer, salesperson or other individual has been authorized to give
any information or to make any representations not contained in this Prospectus
in connection with the Offering covered by this Prospectus. If given or made,
such information or representations must not be relied upon as having been
authorized by the Company or the Underwriters. This Prospectus does not
constitute an offer to sell or a solicitation of any offer to buy any
securities offered hereby to any person to whom it is unlawful to make such
offer or solicitation in such jurisdiction. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
an implication that there has not been any change in the affairs of the Company
since the date hereof.
-----------------------------------
TABLE OF CONTENTS
Page
---------
Prospectus Summary .................................. 3
Risk Factors ........................................ 10
Use of Proceeds ..................................... 15
Dividends ........................................... 15
Capitalization ...................................... 16
Dilution ............................................ 17
Selected Consolidated Financial Data ................ 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ....................................... 20
Business ............................................ 40
Supervision and Regulation .......................... 46
Taxation ............................................ 52
Management .......................................... 53
Certain Relationships and Related
Transactions ..................................... 59
Security Ownership of Certain Beneficial
Owners and Management ............................ 60
Certain Restrictions on Acquisition of the
Company and the Bank ............................. 61
Certain Anti-Takeover Provisions in the
Articles of Incorporation and Bylaws ............. 61
Description of the Capital Stock .................... 64
Shares Eligible for Future Sale ..................... 65
Underwriting ........................................ 66
Validity of Securities .............................. 67
Experts ............................................. 67
Available Information ............................... 68
Index to Consolidated Financial Statements .......... F-1
Until March 7, 1998 (25 days after the date of this Prospectus), all
dealers effecting transactions in the Common Stock, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligations of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
================================================================================
<PAGE>
================================================================================
1,000,000 Shares
[GRAPHIC OMITTED]
CRUSADER
HOLDING
CORPORATION
Common Stock
----------
PROSPECTUS
----------
Advest, Inc.
February 10, 1998
================================================================================