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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______to______
Commission File Number 0-23663
CRUSADER HOLDING CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2562545
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1230 Walnut Street 19107
Philadelphia, PA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (215) 893-1500
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Securities registered pursuant to Section 12 (b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------------------- ----------------------------------------------
- ------------------------------- ----------------------------------------------
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $0.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or Section 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of the registrant's knowledge,
in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. / /
Aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon closing sale price as quoted on the NASDAQ Stock Market
on September 15, 1998: $46,948,174.
As of September 15, 1998, 3,832,504 shares of the registrant's common
stock were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for its Annual Meeting
of Stockholders to be filed not later than 120 days after the close of the
fiscal year are incorporated by reference in this Report on Form 10-K.
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Part I
Item 1. Business
General
Crusader Holding Corporation (the "Company"), a Pennsylvania corporation
established in 1988 and headquartered in Philadelphia, Pennsylvania, is the
holding company for Crusader Savings Bank, FSB (the "Bank"), a federally
chartered savings bank. Currently, all of the Company's business activities are
conducted through the Bank. At June 30, 1998, the Company had total assets of
$202.0 million, total deposits of $118.8 million and total shareholders' equity
of $23.2 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
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 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 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
$202.0 million as of June 30, 1998. During this period, the Company has grown
its core banking income by increasing its net interest income and controlling
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 $6.0
million for fiscal year 1998, the Company contained the growth in its core
non-interest expenses (operating expenses exclusive of the SAIF assessment and
Crusader Mortgage Corporation ("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 $2.1 million (1.24%
of average assets) for fiscal year 1998.
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
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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.
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
maintains 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, on
average within 90 days. The Bank increased its ownership position in CMC to
67.5% in September 1997 and to 100% in November 1997.
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.
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 fiscal year 1998, the Bank developed several initiatives to grow
and enhance the profitability of its conforming mortgage banking operations. 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. CMCD and NCM began generating loan
activity in the quarter ended March 31, 1998 and experienced significant
increases in volume during the quarter ended June 30, 1998.
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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 $2.5 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 $2.5 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. At June 30, 1998, the Bank's Commercial Real Estate Loan
portfolio aggregated $58.7 million, an increase of $30.6 million as compared to
the prior year.
Small Business Administration Lending
The Bank is 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,
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.
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.
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.
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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 83% of the Bank's deposits are represented by CDs, primarily
marketed through its branches and through financial planners and brokers. 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 Mortgages for subsequent
resale on behalf of CMC. Nonconforming Mortgages 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 Mortgages with
the intention of holding the loans for on average 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. The Bank does not
securitize its Nonconforming Mortgages and thus does not have any exposure in
its financial statements to "gain on sale" securitization accounting.
Currently, Nonconforming 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 repurchased any nonconforming loans previously sold, 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
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.
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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.
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 June 30, 1998, the weighted average interest rate on the Bank's
nonconforming loan portfolio available for sale was 11.11%. This resulted in an
annualized spread of approximately 570 basis points on the nonconforming loan
portfolio pending sale.
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 June 30, 1998, CSC had a portfolio
of $4.5 million of delinquent property tax certificates.
SUPERVISION AND REGULATION
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.
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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 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 June 30, 1998, 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.
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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 June 30,
1998, the Bank was "well-capitalized" as defined by the regulations, with a
total risk-based capital ratio of 21.09%, a Tier 1 risk-based capital ratio of
20.30% and a leverage ratio of 11.00%.
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 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.
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.
7
<PAGE>
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 June 30,
1998, the Bank qualified as a QTL.
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
8
<PAGE>
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 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.
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 June 30, 1998, the Bank was in compliance with this
requirement. Long-term FHLB advances may only be made for the purpose of
providing funds for residential housing finance. At June 30, 1998, the Bank had
$49.2 million of total advances outstanding from the FHLB.
Federal Reserve System. Federal Reserve regulations require savings
associations to maintain non-interest earning reserves against their
transaction accounts (primarily regular checking and NOW accounts). The Bank is
in compliance with these regulations. The balances maintained to meet the
reserve requirements imposed by the Federal Reserve may be used to satisfy
liquidity requirements imposed by the OTS. Because required reserves must be
maintained in the form of vault cash, a non-interest-bearing account at a
Federal Reserve Bank or a pass-through account as defined by the Federal
Reserve, the effect of the reserve requirements is to reduce the Bank's
interest-earning assets. FHLB system members are also authorized to borrow from
the Federal Reserve, but applicable regulations require associations to exhaust
all FHLB sources before borrowing from a Federal Reserve Bank.
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 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 of the Bank -- Qualified
Thrift Lender Test."
9
<PAGE>
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.
Employees
At September 15, 1998, the Company employed 91 persons. The Company is not
subject to any collective bargaing agreements and believes that its
relationship with its employees is good.
Item 2. 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, a partnership controlled by Mr. Caplan and QUEST, a wholly-owned
subsidiary of the Bank.
Item 3. 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.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Part II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company consummated an initial public offering of its Common Stock,
par value $0.01 per share, in February 1998 with underwriters exercising a 15%
over-allotment option in March 1998. The Company's Common Stock is traded on
the Nasdaq Stock Market under the symbol "CRSB". As of September 15, 1998,
there were approximately 984 beneficial owners of the Company's Common Stock.
The following table sets forth, on a quarterly basis, the high and low closing
bid prices for the Company's Common Stock since consummation of the IPO. The
Company has not paid any cash dividends.
Quarter Ended High Low
- ------------------ ----------- -----------
March 31, 1998 $ 14.40 $ 14.17
June 30, 1998 $ 16.90 $ 14.52
10
<PAGE>
Item 6. Selected Consolidated Financial Data
The following selected consolidated financial data with respect to the
Company's income statements for the fiscal years ended June 30, 1996, 1997 and
1998 and with respect to the Company's balance sheets at June 30, 1997 and 1998
are derived from the audited Consolidated Financial Statements of the Company
which are included elsewhere in this report and are qualified by reference to
such Consolidated Financial Statements and the related Notes thereto. Selected
Results of Operations data for the fiscal years ended June 30, 1994 and 1995
and Selected Balance Sheet data at June 30, 1994, 1995 and 1996 are derived
from Consolidated Financial Statements of the Company not included herein. This
selected consolidated financial data set forth below is qualified in its
entirety by, and should be read in conjunction with the Consolidated Financial
Statements, the related Notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
report.
<TABLE>
<CAPTION>
At or for the Year Ended June 30,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ---------- ------------
(In thousands, except per share amounts and ratios)
<S> <C> <C> <C> <C> <C>
Selected Results of Operations:
Interest income ......................... $ 14,521 $ 7,919 $ 4,973 $ 3,773 $ 2,351
Interest expense ........................ 8,485 5,130 3,559 2,681 1,335
Net interest income ..................... 6,036 2,789 1,414 1,092 1,016
Provision for loan losses ............... 385 58 42 30 30
Total non-interest income ............... 5,013 1,585 417 199 644
CMC non-interest income ............... 4,199 1,074 0 0 0
Total non-interest expenses ............. 4,747 2,862 1,616 1,346 1,170
Core non-interest expenses ............ 2,067 1,680 1,616 1,346 1,170
CMC expenses .......................... 2,628 886 0 0 0
CMC goodwill amortization ............. 52 0 0 0 0
SAIF special assessment(2) ............ 0 296 0 0 0
Minority interest in earnings ........... 72 12 0 0 0
Income tax expense (benefit)(3) ......... 2,109 480 61 (20) 211
Net income (loss) from continuing
operations ............................ 3,736 962 112 (65) 249
Income from discontinued
operations(4) ......................... 0 0 0 0 301
Cumulative effect of change in
accounting principle(3) ............... 0 0 0 0 83
Net income (loss) ....................... 3,736 962 112 (65) 633
Net income (loss), excluding SAIF
assessment(2) ......................... 3,736 1,154 112 (65) 633
Per Share Data:(5)
Income (loss) from continuing
operations per share .................. 1.27 0.44 0.07 (0.04) 0.17
Weighted average shares outstanding ..... 2,948 2,188 1,680 1,470 1,470
Selected Balance Sheet Data:
Total assets ............................ $202,034 $117,093 $ 81,307 $63,550 $ 39,243
Investment and mortgage-backed
securities(9) ......................... 17,551 22,343 22,097 16,651 12,770
Loans held for sale ..................... 48,389 6,244 1,659 1,550 738
Loans receivable net .................... 120,984 85,992 53,604 43,616 24,471
Deposits ................................ 118,831 95,906 59,624 47,530 27,180
Borrowings .............................. 57,430 14,730 16,651 12,097 9,402
Shareholders' notes ..................... -- 2,990 2,918 1,970 880
Shareholders' equity(1) ................. 23,223 2,895 1,512 1,197 1,238
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
At or for the Year Ended June 30,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ------------- ----------
(In thousands, except per share amounts and ratios)
<S> <C> <C> <C> <C> <C>
Performance Ratios:(6)
Return on average assets .................. 2.24% 0.97% 0.17% (0.12)% 0.86%
Net yield on interest-earning assets ...... 3.70% 2.89% 2.23% 2.08% 3.12%
Return on average invested capital(7) ..... 30.17% 16.35% 2.53% (2.05)% 11.76%
Non-interest expenses, excluding
CMC expenses and SAIF
assessment, to average assets(2) ........ 1.24% 1.70% 2.47% 2.48% 4.05%
Asset Quality Ratios:
Non-performing assets to total assets ..... .67% .94% 1.29% 1.89% 3.12%
Non-performing assets to net loans(8)...... 1.12% 1.28% 1.96% 2.66% 4.83%
Allowance for loan losses to total
non-performing assets(8) ................ 63.39% 42.99% 40.87% 32.25% 31.64%
Allowance for loan losses to net
loans ................................... 0.71% 0.55% 0.80% 0.86% 1.53%
Capital Ratios:
Company equity to assets .................. 11.49% 2.45% 1.86% 1.88% 3.15%
Bank core capital ratio ................... 11.00% 5.12% 5.79% 5.05% 5.30%
Bank risk-based capital ratio ............. 21.09% 10.81% 12.72% 11.65% 12.42%
</TABLE>
- ------------
(1) The Company completed an initial public offering on February 13, 1998
resulting in the issuance of 1,150,000 share of common stock totaling
approximately $15.4 million net of offering expense.
(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 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
dividends, including the 5% stock dividend payable on August 28, 1998 to
shareholders of record on August 17, 1998. The Company adopted the
provisions of SFAS No. 128, Earnings Per Share, which eliminates primary
and fully diluted earnings per share in conjunction with the disclosure of
the methodology used in computing earnings per share. Basic earnings per
share excludes dilution and is computed by dividing income available to
common shareholders by the weighted average common shares outstanding
during the period. Diluted earnings per share takes into account the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised and converted into common stock. Prior
periods' earnings per share calculations have been restated to reflect the
adoption of SFAS No. 128. There is no difference between basic and diluted
earnings per share.
(6) 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 -- Loan 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.
12
<PAGE>
Item 7. 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 the Consolidated Financial Statements and related Notes
included elsewhere herein. Statements regarding the Company's expectations as
to financial results and other aspects of its business set forth herein or
otherwise made in writing or orally by the Company may constitute forward
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. Although the Company believes that its expectations are
based on reasonable assumptions within the bounds of its knowledge of its
business and operations, there can be no assurance that actual results will not
differ materially from its expectations. Factors that might cause or contribute
to such differences include, but are not limited to, uncertainty of future
profitability, changing economic conditions and monetary policies, uncertainty
of interest rates, risks inherent in banking transactions, competition, extent
of government regulations, and delay in or failure in obtaining regulatory
approvals.
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
acquires 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, primarily 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).
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 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 loan portfolio, the Bank concentrates its
Commercial Real Estate 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.
In the fiscal periods through June 30, 1996, the Company experienced
minimal returns on assets and equity since, in anticipation of future growth,
it maintained a high cost infrastructure relative to its then current asset
size. Non-interest expenses as a percentage of 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.
13
<PAGE>
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. In August 1996, the Bank formed
a 60%-owned subsidiary, Crusader Servicing Corporation ("CSC") to acquire
delinquent property tax liens.
From June 1995 through June 1998, the Company increased its asset base
from $63.6 million to $202.0 million, resulting in increased net interest
income. 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 1.24% for fiscal year 1998.
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.
Results of Operations
Year ended June 30, 1998 versus year ended June 30, 1997. Net income
increased to $3.7 million for the year ended June 30, 1998 as compared to
$962,000 for the prior year. Net interest income increased by $3.2 million due
primarily to a growth in average earning assets. Non-interest income increased
by $3.4 million due primarily to an increase in the Nonconforming Mortgage
banking income of CMC, which commenced operations in July 1996. Non-interest
expenses increased by $1.9 million. Excluding an increase of $1.8 million in
CMC operating expenses and goodwill amortization and the $296,000 one-time SAIF
assessment incurred during the prior year period, non-interest expenses
increased by $387,000, which is primarily due to the Bank's expansion of staff
and related overhead 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 $1.6 million 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 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.
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.
14
<PAGE>
The following table sets 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>
Year Ended June 30,
-------------------------------------------------------------------------
1998 1997
------------------------------------ -----------------------------------
(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) ........................ $ 141,298 $13,109 9.28% $ 74,306 $6,413 8.63%
Investment and mortgage-backed
securities(2) ............................. 21,837 1,412 6.47 22,183 1,506 6.79
--------- ------- ---- --------- ------ ----
Total interest-earning assets .............. 163,135 14,521 8.90% 96,489 7,919 8.21%
------- ---- ------ ----
Non-interest-earning assets ................ 3,651 2,254
--------- ---------
Total assets ............................. $ 166,786 $ 98,743
========= =========
Average liabilities and
shareholders' equity:
Non-interest-bearing deposit
accounts .................................. $ 2,663 $ -- --% $ 1,794 $ -- --%
Interest-bearing deposit accounts .......... 123,038 6,913 5.62 74,403 3,978 5.35
Borrowings ................................. 26,060 1,465 5.62 17,267 995 5.76
Shareholders' notes ........................ 2,209 107 4.84 2,954 157 5.31
--------- ------- ---- --------- ------ ----
Total deposits and interest-bearing
liabilities ............................... 153,970 8,485 5.51% 96,418 5,130 5.32%
------- ---- ------ ----
Other non-interest-bearing liabilities 2,642 141
--------- ---------
Total liabilities .......................... 156,612 96,559
Shareholders' equity(3) .................... 10,174 2,184
--------- ---------
Total liabilities and shareholders'
equity..................................... $ 166,786 $ 98,743
========= =========
Net interest income ........................ $ 6,036 $2,789
======= ======
Interest rate spread ....................... 3.39% 2.89%
==== ====
Net yield on interest-earning-assets
(net interest margin)(4) .................. 3.70% 2.89%
==== ====
Ratio of interest-earning assets to
interest bearing liabilities .............. 106.51% 101.97%
========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------
1996
------------------------------------
(Dollars in thousands)
Average
Average Yield/
Balance Interest Rate
------------ ---------- ----------
<S> <C> <C> <C>
Average assets:
Loans receivable(1) ........................ $ 46,390 $3,903 8.41%
Investment and mortgage-backed
securities(2) ............................. 17,088 1,070 6.26
--------- ------ -----
Total interest-earning assets .............. 63,478 4,973 7.83%
------ -----
Non-interest-earning assets ................ 2,014
---------
Total assets ............................. $ 65,492
=========
Average liabilities and
shareholders' equity:
Non-interest-bearing deposit
accounts .................................. $ 812 $ -- --%
Interest-bearing deposit accounts .......... 51,358 2,825 5.50
Borrowings ................................. 9,341 543 5.81
Shareholders' notes ........................ 1,910 191 10.00
--------- ------ -----
Total deposits and interest-bearing
liabilities ............................... 63,421 3,559 5.61%
------ -----
Other non-interest-bearing liabilities 790
---------
Total liabilities .......................... 64,211
Shareholders' equity(3) .................... 1,281
---------
Total liabilities and shareholders'
equity..................................... $ 65,492
=========
Net interest income ........................ $1,414
======
Interest rate spread ....................... 2.22%
=====
Net yield on interest-earning-assets
(net interest margin)(4) .................. 2.23%
=====
Ratio of interest-earning assets to
interest bearing liabilities .............. 101.39%
=========
</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 net interest income as a percentage of average interest-earning
assets.
15
<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 change in average
rate).
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------------
1998 versus 1997
-----------------------------------------
Increase (Decrease)
Due to
-----------------------------------------
(Dollars in thousands)
Rate/
Volume Rate Volume Total
---------- -------- -------- ---------
<S> <C> <C> <C> <C>
Interest income:
Loans receivable ........................ $5,781 $ 483 $ 432 $6,696
Investment and mortgage-backed
securities ............................. (23) (71) (--) (94)
------ ----- ----- ------
Total interest-earning assets ........... 5,758 412 432 6,602
------ ----- ----- ------
Interest expense:
Deposit accounts ........................ 2,602 240 93 2,935
Borrowings .............................. 506 (24) (12) 470
Shareholders' notes ..................... (40) (14) 4 (50)
------ ----- ----- ------
Total interest-bearing liabilities ...... 3,068 202 85 3,355
------ ----- ----- ------
Increase in net interest income ......... $ 2.690 $ 210 $ 347 $3,247
======= ===== ===== ======
</TABLE>
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------------------------
1997 versus 1996
-------------------------------------------
Increase (Decrease)
Due to
-------------------------------------------
(Dollars in thousands)
Rate/
Volume Rate Volume Total
-------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Interest income:
Loans receivable ........................ $2,348 $ 103 $ 59 $2,510
Investment and mortgage-backed
securities ............................. 317 90 29 436
------ ------ ------ ------
Total interest-earning assets ........... 2,665 193 88 2,946
------ ------ ------ ------
Interest expense:
Deposit accounts ........................ 1,300 (99) (48) 1,153
Borrowings .............................. 461 (5) (4) 452
Shareholders' notes ..................... 104 (90) (48) (34)
------ ------- ------- ------
Total interest-bearing liabilities ...... 1,865 (194) (100) 1,571
------ ------- ------- ------
Increase in net interest income ......... $ 800 $ 387 $ 188 $1,375
====== ======= ======= ======
</TABLE>
<PAGE>
Year ended June 30, 1998 versus year ended June 30, 1997. Net interest
income increased by $3.2 million or 116.42% for the year ended June 30, 1998 as
compared to the prior year. Interest income increased by $6.6 million due
primarily to a rise in average outstanding loan balances of $67.0 million and,
to a lesser extent, a 0.65% 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
$3.4 million due primarily to an increase in average interest-bearing deposit
balances of $48.6 million. Deposits were the primary funding source of the loan
growth. The Company's aggregate cost of funds increased to 5.51% as compared to
5.32% for the comparable prior year period. The Company's net yield on
interest-earning assets increased to 3.70% as compared to 2.89% for the prior
year period. This 0.81% increase was due principally to the Bank's higher yield
from loans and an increase in the Company's average shareholders' equity
balances resulting from the IPO as well as from the growth in retained
earnings.
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 $33.0 million increase in
average deposits and interest-bearing liabilities which was partially offset by
a decline in the average rate paid on these liabilities of 0.29%. 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.
Provision for Loan Losses
For the year ended June 30, 1998, the provision for loan losses was
$385,000 a 563.79% increase compared to the prior year. The Company's provision
for loan losses was $58,000 for the year ended June 30,
16
<PAGE>
1997 compared to $42,000 for the prior year. The provision was increased due to
the growth in the loan portfolio. On a quarterly basis, the Company'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 Company has not resulted
in significant percentage increases in delinquencies or an increase in the
chargeoffs incurred by the Company. Net chargeoffs by the Company for the
fiscal years ended June 30, 1998, 1997 and 1996 were $0, $16,000, and $0,
respectively.
The Company 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 Company 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 year ended June 30, 1998, non-interest income increased by $3.4
million or 216.28% as compared to the prior year. This resulted primarily from
a $3.1 million increase in the revenues of CMC as its operations continued to
experience strong growth. During the current year, the Bank had Nonconforming
Mortgage loan originations and acquisitions of $166.8 million, and
Nonconforming Mortgage loan sales of $128.9 million, with an average gain on
sale of 3.15%. This compares to Nonconforming Mortgage loan originations of
$25.0 million during the prior year which was CMC's first full year of
operation. In addition to the increased revenue from CMC, the Bank's conforming
mortgage banking revenue increased by $204,000, due primarily to an increased
volume of loan sales from the Bank's existing operations as well as its newly
establishing subsidiaries, CMCD and NCM.
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 Expenses
Non-interest expenses for the year ended June 30, 1998 increased by $1.9
million or 65.86% as compared to the prior year. Excluding the $296,000 SAIF
assessment incurred in the prior year period and the $1.8 million increase in
CMC operating expenses and goodwill amortization, non-interest expenses
increased by $387,000 or 23.04%. The increase is primarily due to the hiring of
additional personnel and related overhead 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%. This resulted from a $96,000 increase
in compensation expenses, offset by a reduction of $33,000 in ongoing deposit
insurance premiums, which were reduced following the SAIF Assessment.
17
<PAGE>
Income Tax Expense
Income tax expense was $2.1 million for the year ended June 30, 1998, as
compared to $480,000 and $61,000 for the years ended June 30, 1997 and June 30,
1996 respectively. The increases 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 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 traditional bank savings
account products and tend to fluctuate more frequently than other deposits 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 its operations and
its existing funding sources, 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.
Net cash used in operating activities for the years ended June 30, 1998,
1997 and 1996 was $37.1 million, $2.2 million and $838,000, respectively.
During fiscal years 1998 and 1997, the amounts 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.
Net cash used in investing activities approximated $31.0 million, $33.3
million and $15.9 million during the years ended June 30, 1998, 1997 and 1996,
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 ongoing capital to
support its asset growth has come from internally generated earnings as well as
from additional capital contributions by its shareholders and proceeds from the
IPO. While a private company, the Company operated at lower capital levels
because the Company's shareholders had chosen to contribute capital only when
necessary to fund the Company's growth.
18
<PAGE>
The following table sets forth the Bank's regulatory capital levels at
June 30, 1998. The Company is not subject to regulatory capital requirements.
<TABLE>
<CAPTION>
To Be Well Capitalized
Required for Under Prompt
Capitol Adequacy Corrective Action
Actual Purposes Provisions
------------------------ --------------------- -----------------------
(Dollars in thousands)
Amount Ratio Amount Ratio Amount Ratio
---------- ----------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Tangible capital ........... $22,089 11.00% $3,012 1.50% $10,038 5.00%
Core capital ............... 22,089 11.00% 8,030 4.00% 6,533 6.00%
Risk-based capital ......... 22,944 21.09% 8,711 8.00% 10,889 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. 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 emphasizes 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 core deposits such as checking, savings and money
market accounts, CDs carry a high degree of interest sensitivity and therefore
retention will vary based on the competitiveness of the interest rates offered
by the Bank. 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 available for sale.
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 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 June 30, 1998, 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 June 30,1998, the Bank had a negative one year GAP position of 4.94%
and a positive three year GAP position of 3.99%.
19
<PAGE>
The following table summarizes the maturity and repricing of the Bank's
interest-earning assets and interest-bearing liabilities at June 30, 1998.
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 the earlier of their
contractual maturity date or interest repricing 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)............($) 71,000 39,598 15,189 10,429
(Rate) 9.78% 8.32% 8.99% 8.86%
Investment securities(2).......($) 11,333 5,226 2,387 1,509
(Rate) 5.66% 7.18% 6.99% 6.99%
------ ------ ------ ------
Total rate-sensitive assets ...... 82,333 44,824 17,576 11,938
====== ====== ====== ======
Rate-sensitive liabilities:
Interest-bearing demand
deposits......................($)
(Rate)
Savings deposits(3)............($)
(Rate)
Time certificates..............($) 25,777 66,961 2,357 1,290
(Rate) 5.55% 5.99% 5.83% 5.85%
FHLB advances..................($) 24,150 20,000 5,000
(Rate) 5.60% 5.14% 5.55%
Securities sold under agreement
to repurchase.................($) 3,280
(Rate) 5.95%
------ ------ ------ ------
Total rate-sensitive liabilities.. 49,927 86,961 10,637 1,290
------ ------ ------ ------
Periodic gap ..................... 32,406 (42,137) 6,939 10,648
------ ------- ------ ------
Cumulative gap ................... 32,406 (9,731) (2,792) 7,856
------ ------- ------ ------
Cumulative gap ratio ............. 16.44% (4.94%) (1.42%) 3.99%
------ ------- ------ ------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three to Four to Over
Four Five Five Fair
Years Years Years Total Value
---------- ---------- ---------- ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Rate-sensitive assets:
Loans receivable(1)............($) 7,546 3,686 21,925 169,373 174,437
(Rate) 8.95% 8.76% 8.02% 9.02%
Investment securities(2).......($) 1,271 1,077 4,397 27,700 27,700
(Rate) 6.99% 6.99% 6.97% 6.35%
----- ----- ------ ------- -------
Total rate-sensitive assets ...... 8,817 4,763 26,822 197,073 202,137
===== ===== ====== ======= =======
Rate-sensitive liabilities:
Interest-bearing demand
deposits......................($) 15,076 15,076 15,076
(Rate) 3.93% 3.93%
Savings deposits(3)............($) 1,708 1,708 1,708
(Rate) 2.66% 2.66%
Time certificates..............($) 96,385 96,511
(Rate) 5.86%
FHLB advances..................($) 49,150 49,150
(Rate) 5.41%
Securities sold under agreement
to repurchase.................($) 5,000 8,280 8,280
(Rate) 5.85% 5.89%
----- ----- ------ ------- -------
Total rate-sensitive liabilities ..... -- 5,000 16,784 170,599 170,725
----- ----- ------ ------- -------
Periodic gap ......................... 8,817 (237) 10,038 26,474 31,412
----- ----- ------ ------- -------
Cumulative gap ....................... 16,673 16,436 26,474 --
------ ------ ------ -------
Cumulative gap ratio ................. 8.46% 8.34% 13.43%
------ ------ ------
</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.
20
<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 June 30, 1998 are as
follows:
MVPE
- -------------------------------------------------------
Change in Interest Rate Amount % Change
- ------------------------- --------------- ---------
(In thousands)
+400 Basis Points $24,326 (14)%
+300 Basis Points 26,233 (8)
+200 Basis Points 27,587 (3)
+100 Basis Points 28,335 0
Flat Rate 28,442 --
-100 Basis Points 27,936 (2)
-200 Basis Points 27,342 (4)
-300 Basis Points 26,804 (6)
-400 Basis Points 26,303 (8)
Management believes that the assumptions utilized in evaluating the
vulnerability of the Company's operations 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 Interest Rate
Shock, 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.
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 $202.0 million at June 30, 1998 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 June 30, 1998, the loan portfolio aggregated
$121.0 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 $48.4 million at June 30, 1998 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 as well as conforming originations from the
Bank's recently established CMCD and NCM subsidiaries. At June 30, 1998,
Nonconforming Mortgage loans available for sale was $34.5 million as compared
to $4.3 million at June 30, 1997. The
21
<PAGE>
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 $118.8 million, $95.9 million and $59.6 million at June 30,
1998, June 30, 1997 and June 30, 1996 respectively.
Loans
Net loans receivable increased to $121.0 million at June 30, 1998 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,
1998, the Commercial Real Estate loan portfolio was $58.7 million as compared
to $28.1 million and 13.0 million at June 30, 1997 and 1996, respectively. The
conforming residential mortgage loan portfolio, consisting primarily of
adjustable rate loans, grew to $59.6 million at June 30, 1998 compared to $54.5
and $39.4 million at June 30, 1997 and June 30, 1996, respectively. The above
noted loan growth was achieved without a significant percentage 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.
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,
-------------------------------------------------
1998 1997
------------------------ -----------------------
$ % $ %
(Dollars in thousands)
<S> <C> <C> <C> <C>
Type of Loan
One-to-four family residential real estate ..... $ 59,597 49.26% $54,493 63.37%
Multi-family residential real estate ........... 24,473 20.83 13,244 15.41
Construction one-to-four family residential..... 1,210 1.00 1,414 1.64
Commercial and non-residential real estate...... 34,235 28.30 14,817 17.22
Consumer ....................................... 2,496 2.06 2,375 2.77
Less allowance for loan losses ................. (857) ( 0.71) (472) ( 0.55)
Deferred fees .................................. (170) ( 0.14) 121 0.14
-------- ------- ------- -------
Net loans ..................................... 120,984 100.00 85,992 100.00
======== ======= ======= =======
Type of Security
Residential real estate:
One-to-four family ............................ 62,794 51.90 59,905 69.66
Multi-family .................................. 22,421 18.53 13,244 15.41
Non-residential real estate .................... 27,216 22.50 10,890 12.66
Depository accounts ............................ 511 0.42 442 0.51
Marketable securities .......................... 0 0.00 1,260 1.47
Other .......................................... 9,069 7.50 602 0.70
Less allowance for loan losses ................. (857) ( 0.71) (472) ( 0.55)
Deferred fees .................................. (170) ( 0.14) 121 0.14
-------- ------- ------- -------
Net loans ..................................... 120,984 100.00 85,992 100.00
======== ======= ======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------------------
1996 1995 1994
----------------------- ----------------------- -----------------------
$ % $ % $ %
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Type of Loan
One-to-four family residential real estate ..... $39,485 73.66% $33,084 73.18% $16,641 65.17%
Multi-family residential real estate ........... 5,357 9.99 3,496 7.73 2,528 9.97
Construction one-to-four family residential..... 344 0.64 723 1.60 98 0.39
Commercial and non-residential real estate...... 7,616 14.21 7,237 16.01 5,620 22.17
Consumer ....................................... 1,285 2.40 1,059 2.34 875 3.45
Less allowance for loan losses ................. (430) ( 0.80) (388) ( 0.86) (387) ( 1.53)
Deferred fees .................................. (53) ( 0.10) 1 0.00 (30) ( 0.12)
------- ------- ------- ------- ------- -------
Net loans ..................................... 53,604 100.00 45,212 100.00 25,345 100.00
======= ======= ======= ======= ======= =======
Type of Security
Residential real estate:
One-to-four family ............................ 40,673 75.88 34,769 76.90 17,568 69.33
Multi-family .................................. 5,357 9.99 3,496 7.73 2,528 9.97
Non-residential real estate .................... 7,076 13.20 7,237 16.01 5,620 22.17
Depository accounts ............................ 441 .83 97 0.22 46 0.18
Marketable securities .......................... -- --- 0 0.00 0 0.00
Other .......................................... 540 1.00 0 0.00 0 0.00
Less allowance for loan losses ................. (430) ( 0.80) (388) ( 0.86) (387) ( 1.53)
Deferred fees .................................. (53) ( 0.10) 1 0.00 (30) ( 0.12)
------- ------- ------- ------- ------- -------
Net loans ..................................... 53,604 100.00 45,212 100.00 25,345 100.00
======= ======= ======= ======= ======= =======
</TABLE>
22
<PAGE>
The following table sets forth the estimated maturity of the Bank's loan
portfolio at June 30, 1998. 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 ........................... $ 675 $ 45 $ 58,707 $(156) $ 59,271
Multi-family, commercial and non-
residential real estate .......... 475 4,950 53,281 (478) 58,228
Construction--one-to-four family
residential ...................... 1,210 -- -- (3) 1,207
Consumer .......................... 511 -- 1,985 (9) 2,487
Unassigned reserve ................ -- -- -- (211) (211)
------ ------ -------- ------- --------
Total ............................ $2,871 $4,995 $113,973 $(857) $120,982
====== ====== ======== ======= ========
</TABLE>
The following table sets forth the dollar amount of all loans due after
June 30, 1998 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 $ 55,943 $ 59,597
Multi-family, commercial and non-residential
real estate ........................................ 1,300 57,408 58,708
Construction--one-to-four family residential ......... -- 1,210 1,210
Consumer ............................................. 511 1,985 2,496
------ -------- --------
Total ............................................... $5,465 $116,546 $122,011
====== ======== ========
</TABLE>
Non-Performing and Problem Assets
Loan Delinquencies
The recent loan growth experienced by the Bank has not resulted in a
corresponding percentage 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.
23
<PAGE>
The following table details the Bank's non-performing loans and OREO at the
dates indicated.
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual
basis:
One-to-four family residential real estate. $ 1,154 $ 705 $ 553 338 236
Consumer .................................. 64 40 40 44 41
Multi family, commercial and non-
residential real estate .................. 134 -- -- -- --
-------- -------- ------- --- ---
Total non-accrual loans ................... 1,352 745 593 382 277
-------- -------- ------- --- ---
Accruing loans that are contractually past
due 90 days or more:
One to four family mortgage ............... -- 353 378 750 896
-------- -------- ------- --- ---
Total 90-day past-due loans ............... -- 353 378 750 896
-------- -------- ------- --- ---
Total non-accrual and 90-day past due
loans .................................... 1,352 1,098 971 1,132 1,173
Other Real Estate Owned ................... -- -- 81 71 50
-------- -------- ------- ----- -----
Total non-performing assets ............... $ 1,352 $ 1,098 1,052 1,203 1,223
======== ======== ======= ===== =====
Non-accrual loans to net loans ............ 1.12% 0.87% 1.11% 0.84% 1.09%
======== ======== ======= ===== =====
Total non-accrual loans and 90-day past
due loans to net loans ................... 1.12% 1.28% 1.96% 2.66% 4.83%
======== ======== ======= ===== =====
Total non-performing assets to total
assets ................................... .67% .94% 1.29% 1.89% 3.12%
======== ======== ======= ===== =====
Total allowance for loan losses to total
non-performing assets .................... 63.39% 42.99% 40.87% 32.25% 31.64%
======== ======== ======= ===== =====
</TABLE>
24
<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>
June 30,
---------------------------------------------------------
1998 1997 1996 1995 1994
---------- -------- ---------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses, beginning of
period ........................................ $ 472 $ 430 $ 388 $ 387 $ 377
Charge-offs:
One-to-four family residential real estate. 0 (16) 0 (29) (20)
------- ------ ------- ------ ------
Total charge-offs .............................. 0 (16) 0 (29) (20)
------- ------ ------- ------ ------
Provision for loan losses ...................... 385 58 42 30 30
------- ------ ------- ------ ------
Allowance for loan losses, end of period. $ 857 $ 472 $ 430 $ 388 $ 387
======= ====== ======= ====== ======
Allowance for loan losses to net loans ......... 0.71% 0.55% 0.80% 0.86% 1.53%
======= ====== ======= ====== ======
Net loans charged-off as a percent of
average loans outstanding ................... -- -- 0.02% 0.08% 0.06%
======= ====== ======= ====== ======
</TABLE>
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>
June 30,
-------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at end of period applicable to:
One-to-four family residential real estate $156 $129 $114 $100 $116
Multi-family residential real estate ......... 201 109 60 30 48
Construction one-to-four family residen-
tial ........................................ 3 4 1 162 1
Commercial and non-residential real
estate ...................................... 277 154 166 1 162
Consumer ..................................... 9 7 3 2 2
Unallocated .................................. 211 69 86 93 58
---- ---- ---- ---- ----
Total allowance for loan losses ............. $857 $472 $430 $388 $387
==== ==== ==== ==== ====
</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.
25
<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 June 30,
----------------------------------------------------------------
1998 1997
--------------------------------------------------- -----------
Gross Gross Fair
Amortized Unrealized Unrealized Market Amortized
Cost Gains Losses Value Cost
----------- ------------ ------------ ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Available-for-sale:
FHLMC ..................... $ 6,012 $11 $(13) $ 6,010 $ 7,601
GNMA ...................... 3,832 1 (6) 3,827 6,305
FNMA ...................... 4,344 8 (1) 4,351 2,189
------- --- ----- ------- -------
Total MBS ................. 14,188 20 (20) 14,188 16,095
------- --- ----- ------- -------
US government & agency -- -- -- 4,375 --
SBA pool .................. -- -- -- -- 1,119
Other ..................... 1,000 -- -- 1,000 --
FHLB stock ................ 2,363 2,363 823
------- --- ----- ------- -------
Total securities
available-for-sale ...... $17,551 $20 $(20) $17,551 $22,412
======= === ===== ======= =======
</TABLE>
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------------------------------
1997 1996
-------------------------------------- --------------------------------------------------
Gross Gross Fair Gross Gross Fair
Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Gains Losses Value Cost Gains Losses Value
------------ ------------ ---------- ----------- ------------ ------------ ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Available-for-sale:
FHLMC ..................... $14 $ (47) $ 7,568 $ 6,572 $ 4 $(122) $ 6,454
GNMA ...................... 23 (15) 6,313 9,462 -- (133) 9,329
FNMA ...................... 1 (27) 2,163 2,398 -- (54) 2,344
--- ----- ------- ------- --- ----- -------
Total MBS ................. 38 (89) 16,044 18,432 4 (309) 18,127
--- ----- ------- ------- --- ----- -------
US government & agency (11) 4,364 1,971 -- (30) 1,941
SBA pool .................. -- (7) 1,112 1,556 -- (2) 1,554
Other ..................... -- -- -- -- -- -- --
FHLB stock ................ 823 475 475
--- ------- ------- ------- ---- ------- -------
Total securities
available-for-sale ...... $38 $(107) $22,343 $22,434 $ 4 $(341) $22,097
=== ======= ======= ======= === ======= =======
</TABLE>
26
<PAGE>
The following table sets forth certain information regarding the carrying
values, weighted average yields and maturities of the Bank's investment
portfolio at June 30, 1998. 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 Five to Ten Years
---------------------- ---------------------- -----------------------
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
---------- --------- ---------- --------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities ......... $418 6.00% $479 5.44% $1,942 6.13%
Other ..............................
FHLB stock(1) ......................
---- ---- ---- ---- ------ ----
TOTAL ............................. $418 6.00% $479 5.44% $1,942 6.13%
==== ==== ==== ==== ====== ====
</TABLE>
<TABLE>
<CAPTION>
More than Ten Years Total
---------------------- -----------------------
Carrying Average Carrying Average
Value Yield Value Yield
---------- --------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage-backed securities ......... $11,349 6.59% $14,188 6.47%
Other .............................. 1,000 7.53% 1,000 7.53%
FHLB stock(1) ...................... 2,363 6.50% 2,363 6.50%
------- ---- ------- ----
TOTAL ............................. $14,712 6.66% $17,551 6.54%
======= ==== ======= ====
</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.
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 June 30, 1998 totaled $118.8 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.
27
<PAGE>
The following table sets forth average deposits by various types of demand
and time deposits.
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------------------------------------------------------
1998 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 ................................ $ 2,663 $ 1,794 $ 812
Interest bearing demand deposits ......... 12,764 3.93% 9,605 3.92% 6,027 3.78%
Savings deposits ......................... 1,881 2.66 1,908 2.80 2,203 2.95
Certificates of deposit .................. 108,393 5.86 62,890 5.64 43,128 5.88
-------- ----- ------- ----- ------- -----
Total ................................... $125,701 5.50% $76,197 5.22% $52,170 5.42%
======== ===== ======= ===== ======= =====
</TABLE>
The following table indicates the amount of CDs of $100,000 or more by
remaining maturity at June 30, 1998.
Remaining Maturity:
Three months or less .......................... $15,169
Over three months through six months .......... 20,134
Over six months through twelve months ......... 11,246
Over twelve months ............................ 923
-------
Total ........................................ $47,472
=======
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 $49.2 million at June 30, 1998
as compared to $9.0 million at June 30, 1997 and $9.5 million at June 30, 1996.
The $40.2 million increase during the year ended June 30, 1998 resulted from
proceeds being utilized to fund loan growth, both portfolio and loans available
for sale. Repurchase agreements totaled $8.3 million at June 30, 1998 as
compared to $5.8 million at June 30, 1997 and $7.2 million at June 30, 1996.
The following table sets forth certain balance and rate information with
respect to FHLB borrowings and repurchase agreements for the periods indicated.
The table includes both short and long term maturities.
Federal Home Loan Bank Advances and Repurchase Agreements
<TABLE>
<CAPTION>
At June 30,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C>
Advances outstanding at period end ......................... $ 49,150 $ 8,950 $ 9,500
Interest rate at period end ................................ 5.40% 5.70% 5.55%
Approximate average amount outstanding ..................... $ 16,113 $ 8,344 $ 6,694
Maximum month-end balance .................................. $ 49,150 $ 17,450 $ 11,000
Approximate weighted average rate .......................... 5.48% 5.56% 5.80%
Repurchase agreements outstanding at end of period ......... $ 8,280 $ 5,780 $ 7,151
Interest rate .............................................. 5.89% 5.90% 5.85%
Approximate average amount outstanding ..................... $ 9,947 $ 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.
28
<PAGE>
Shareholders' Notes and Shareholders' Equity
At June 30, 1998, the Company had shareholders' equity of $23.2 million
and no outstanding shareholders' notes, as compared to shareholders' equity and
shareholders' notes at June 30, 1997 of $2.9 million and $3.0 million,
respectively. Prior to the IPO, the Company utilized the issuance of notes as
well as Common Stock to raise money from its shareholders, because the proceeds
from both the notes and the Common Stock could be contributed as capital to the
Bank and be included in the calculation of capital for regulatory purposes. In
March 1998, the Company consummated its IPO whereby it issued an additional
1,150,000 shares of Common Stock and realized net proceeds after issuance costs
of approximately $15.4 million. A portion of the proceeds were utilized to
repay outstanding shareholders' notes with the balance utilized for general
corporate purposes and to continue to pursue its significant growth.
Impact of New Financial Accounting Standards
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 additional disclosures to comply with SFAS 131 will be
significant.
Accounting for Derivative Instruments and Hedging Activity. In June 1998,
the SFAS issued SFAS No. 133, this establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
imbedded in other contracts, and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measures those instruments at fair value.
If certain conditions are met, a derivative may be specifically designated as a
hedge. The accounting for changes in the fair value of a derivative (gains and
losses) depends on the intended use of the derivative and resulting
designation. SFAS No. 133 is effective for all fiscal quarters of fiscal year
beginning after June 15, 1999. Earlier application is permitted only as of the
beginning of any fiscal quarter. The Company is currently reviewing the
provisions of SFAS No. 133.
YEAR 2000 Compliance
The Company has adopted a Year 2000 policy to address 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 produce inaccurate
or unpredictable results commencing on January 1, 2000. The Company, similar to
most financial services providers, is particularly vulnerable to the potential
impact of the Year 2000 Issue due to the nature of financial information.
Potential impacts to the Company may arise from software, computer hardware,
and other equipment both within the Company's direct control and outside of the
Company's ownership, yet with which the Company electronically or operationally
interfaces.
In order to address the Year 2000 Issue, the Company has developed and
implemented a five phase compliance plan divided into the following major
components: (1) Awareness; (2) Assessment; (3) Renovation; (4) Validation and
Testing; and (5) Implementation. The Company has completed the first three
phases of the plan for all of its mission-critical systems and is currently
working on the final two phases. Because the Company outsources the majority of
its data processing operations to Fiserv Solutions, Inc. ("Fiserv"), a provider
of data processing services to the financial services industry, a significant
component of the Year 2000 plan is to work with Fiserv to test and certify
their systems as Year 2000 compliant. Fiserv has informed the Company that,
based upon tests which it has conducted and is currently conducting, it
believes its systems are Year 2000 compliant. The Company anticipates that all
mission-critical systems will complete testing by Spring of 1999. Other
important segments of the Year 2000 plan are to identify those suppliers and
customers whose possible lack of Year 2000 preparedness might expose the
Company to financial loss, and to highlight any servicers of purchased loans or
securities which might present Year 2000 operating problems.
29
<PAGE>
The Company has no internally generated programmed software coding to
correct, as substantially all of the software utilized by the Company is
purchased or licensed from external providers. The Company has initiated
communications with all of its significant suppliers to determine the extent to
which the Company is vulnerable to those third parties' failure to remediate
their own Year 2000 issues. To the extent that the Company does not receive
adequate assurances by December 31, 1998 that any such third party vendors of
mission-critical products or services will be Year 2000 compliant, the Company
is prepared to develop contingency plans, with completion of these plans
scheduled for no later than March 31, 1999. At this time, the Company cannot
estimate the cost, if any, that might be required to implement such contingency
plans.
The Company anticipates that its total Year 2000 project cost will not
exceed $100,000. This estimated project cost is based upon currently available
information and includes expenses for the review and testing by third parties,
including government entities. However, there can be no guarantee that the
hardware, software, and systems of such third parties will be free of
unfavorable Year 2000 issues and therefore not present a material adverse
impact upon the Company. The aforementioned Year 2000 project cost estimate
also may change as the Company progresses in its Year 2000 program and obtains
additional information associated with and conducts further testing concerning
third parties. At this time, no significant projects have been delayed as a
result of the Company's Year 2000 effort.
Financial institution regulators have intensively focused upon Year 2000
exposures, issuing guidance concerning the responsibilities of senior
management and directors. Year 2000 testing and certification is being
addressed as a key safety and soundness issue in conjunction with regulatory
exams. In May 1997, the Federal Financial Institutions Examination Council
("FFIEC") issued an interagency statement to the chief executive officers of
all federally supervised financial institutions regarding Year 2000 project
management awareness. The FFIEC has highly prioritized Year 2000 compliance in
order to avoid major disruptions to the operations of financial institutions
and the country's financial systems when the new century begins. The FFIEC
statement provides guidance to financial institutions, providers of data
services, and all examining personnel of the federal banking agencies regarding
the Year 2000 Issue.
The federal banking agencies have been conducting Year 2000 compliance
examinations. The failure to implement an adequate Year 2000 program can be
identified as an unsafe and unsound banking practice. The Company and the Bank
are subject to regulation and supervision by the OTS which regularly conducts
review of the safety and soundness of the Company's operations, including the
Company's progress in becoming Year 2000 compliant. The OTS has established an
examination procedure which contains three categories of ratings:
"Satisfactory", "Needs Improvement", and "Unsatisfactory". Institutions that
receive a Year 2000 rating of Unsatisfactory may be subject to formal
enforcement action, supervisory agreements, cease and desist orders, civil
money penalties, or the appointment of a conservator. In addition, federal
banking agencies will be taking into account Year 2000 compliance programs when
reviewing applications and may deny an application based on Year 2000 related
issues. Failure by the Company to adequately prepare for Year 2000 issues could
negatively impact the Company's banking operations, including the imposition of
restrictions upon its operations by the OTS.
Despite the Company's activities in regards to the Year 2000 Issue, there
can be no assurance that partial or total systems interruptions or the costs
necessary to update hardware and software would not have a material adverse
effect upon the Company's business, financial condition, results of operations,
and business prospects.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
See Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Asset and Liability Management -- Interest Rate
Sensitivity Analysis.
Item 8. Financial Statements and Supplementary Data
The financial statements and financial statement schedules are set forth
beginning on page F-1 of this report.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
30
<PAGE>
Part III
The information called for by Item 10, Directors and Executive Officers of
the Registrant; Item 11, Executive Compensation; Item 12, Security Ownership of
Certain Beneficial Owners and Management; and Item 13, Certain Relationships
and Related Transactions, is incorporated herein by reference to the
Registrant's definitive Proxy Statement for its Annual Meeting of Stockholders,
scheduled to be held in November 1998, which shall be filed with the Securities
and Exchange Commission within 120 days from the end of the Registrant's fiscal
year.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) 1. Financial Statements of the Registrant
Consolidated Financial Statements of the Registrant and Report of
Independent Certified Public Accountants thereon
Consolidated Balance Sheets as of June 30, 1998 and 1997
Consolidated Statements of Income and Comprehensive Income for the fiscal
years ended June 30, 1998, 1997 and 1996
Consolidated Statement of Shareholders' Equity for the fiscal years ended
June 30, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the fiscal years ended June 30,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
All financial statement schedules are omitted because they are not
applicable or not required, or because the required information is
included in the consolidated financial statements or the notes thereto.
3. Exhibits
See Exhibit Index included herein.
(b) Reports on Form 8-K.
None.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on September 28,
1998.
CRUSADER HOLDING CORPORATION
By: /s/ THOMAS J. KNOX
----------------------------------
Thomas J. Knox
Chairman (Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on September 28, 1998.
/s/ PAUL BACHOW /s/ THOMAS J. KNOX
- --------------------------- ----------------------------------
Paul Bachow Thomas J. Knox
Director Chairman (Chief Executive Officer)
/s/ RONALD L. CAPLAN /s/ BRUCE A. LEVY
- --------------------------- -----------------------------------
Ronald L. Caplan Bruce A. Levy
Director President and Director
/s/ D. WALTER COHEN, D.D.S. /s/ JOSEPH T. CROWLEY
- --------------------------- -----------------------------------
D. Walter Cohen, D.D.S. Joseph T. Crowley
Director Director, Vice President, Secretary
and Treasurer (Chief Financial Officer)
/s/ DANIEL DILELLA
- ---------------------------
Daniel DiLella
Director
/s/ LINDA R. KNOX
- ---------------------------
Linda R. Knox
Director
/s/ JOEL S. LAWSON III
- ---------------------------
Joel S. Lawson III
Director
/s/ BRIAN MCADAMS
- ---------------------------
Brian McAdams
Director
32
<PAGE>
EXHIBIT INDEX
The following exhibits are incorporated in this report, as indicated.
Except as otherwise noted, the exhibit has previously been filed as an exhibit
to the Company's Registration Statement on Form S-1, File No. 333-42215 (the
"Registration Statement"), and is incorporated by reference herein. The exhibit
numbers shown below for exhibits incorporated by reference correspond to those
shown in the Registration Statement.
<TABLE>
<CAPTION>
Exhibit No. Description
- ------------- ----------------------------------------------------------------------------------------------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of the Registrant.
3.2 Amended and Restated Bylaws of the Registrant.
4.1 Form of certificate evidencing Common Stock of the Registrant.
4.2(a) Subscription and Shareholders' Agreement, dated as of March 1, 1996, by and among the
Registrant, Thomas J. Knox and Bruce A. Levy.
4.2(b) Amendment of Shareholders' Agreement, dated January 31, 1997, among the Registrant,
Thomas J. Knox, Bruce A. Levy, Daniel DiLella, Joel S. Lawson III, Brian McAdams and
Ronald Caplan.
4.2(c) Joinder among the Registrant and D. Walter Cohen, dated January 31, 1997, to Subscription
and Shareholders' Agreement dated March 1, 1996, as amended by Amendment of Sharehold-
ers' Agreement dated January 31, 1997.
4.2(d) Second Amendment of Shareholders' Agreement, dated as of January 9, 1998, among the
Registrant, Thomas J. Knox, Bruce A. Levy, Daniel DiLella, Joel S. Lawson III, Brian
McAdams, Ronald Caplan and D. Walter Cohen, Jeffrey K. Rafsky and Satellite Mortgage
Corporation.
4.3 Amended and Restated Promissory Note, dated as of March 1, 1996, issued to Thomas J.
Knox.
4.4 Amended and Restated Promissory Note, dated as of March 1, 1996, issued to Bruce A. Levy.
4.5 Exchangeable Promissory Note, dated as of January 31, 1997, issued to Daniel DiLella.
4.6 Exchangeable Promissory Note, dated as of September 30, 1997, issued to Thomas J. Knox.
4.7 Exchangeable Promissory Note, dated as of September 30, 1997, issued to Bruce A. Levy.
10.1 Directors' Stock Option Plan.+
10.2 Employees' Stock Option Plan.+
10.3 Employment Agreement, dated as of March 1, 1996, between the Registrant and Bruce A.
Levy.+
10.4 Employment Agreement, dated as of December 11, 1997, between Crusader Savings Bank,
FSB and Joseph T. Crowley.+
10.5 Management Agreement, dated as of March 1, 1996, between the Registrant and Crusader
Savings Bank, FSB.
10.6 Lease Agreement and Indenture of Lease, dated as of April 30, 1994, by Walnut Square Part-
ners and Crusader Savings Bank, FSB.
10.7 Lease Agreement, dated as of July 1, 1984, by Goldie Sabel and Crusader Savings Bank,
FSB.
10.8(a) Agreement, dated as of November 30, 1997, among the Registrant, Crusader Savings Bank,
FSB, Crusader Mortgage Corporation and Jeffrey K. Rafsky.
10.8(b) First Amendment to Agreement, dated as of February 9, 1998, among the Registrant,
Crusader Savings Bank, FSB, Crusader Mortgage Corporation and Jeffrey K. Rafsky.
10.9(a) Letter Agreement, dated as of July 8, 1996, among Crusader Savings Bank, FSB and Robert
W. Stein.
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ------------- ------------------------------------------------------------------------------------------
<S> <C>
10.9 (b) Letter Agreement, dated as of September 13, 1996, among Crusader Savings Bank, FSB and
Gary Snyder.
10.9 (c) Shareholders' Agreement, dated as of October 2, 1996, by and among Crusader Savings Bank,
FSB, Robert H. Stein, Gary Snyder and Crusader Servicing Corporation.
10.10(a) Letter Agreement, dated as of July 31, 1997, among Crusader Savings Bank, FSB and Michael
D. Kushner and Gregory K. Kushner.
10.10(b) Subscription and Shareholders' Agreement, dated as of September 16, 1997, by and among
Crusader Savings Bank, FSB, Michael D. Kushner, Gregory K. Kushner and Crusader Mort-
gage Corporation of Delaware.
10.11(a) Letter Agreement, dated as of November 7, 1997, among Crusader Savings Bank, FSB and
Haiching Zhao, Ph.D.
10.11(b) Subscription and Shareholders' Agreement, dated as of December 11, 1997, by and among
Crusader Savings Bank, FSB, Haiching Zhao, Ph.D. and National Chinese Mortgage
Corporation.
10.12 Partnership Agreement, dated as of December 19, 1996 by and between Ronald L. Caplan and
Quest Holding Company.
21 Subsidiaries of the Registrant.
27 Financial Data Schedule.*
</TABLE>
- ------------
+ Constitutes a management contract or compensatory plan.
* Filed herewith.
34
<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, 1998 and 1997, and the
related consolidated statements of income and comprehensive income,
shareholders' equity and cash flows for each of the three years in the period
ended June 30, 1998. 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, 1998 and 1997, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
/s/ Grant Thornton LLP
- --------------------------
Philadelphia, Pennsylvania
July 28, 1998
F-1
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30,
---------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
ASSETS
Cash and due from banks ............................................. $ 521,000 $ 325,000
Interest-earning deposits ........................................... 10,149,000 --
------------ ------------
Cash and cash equivalents ........................................ 10,670,000 325,000
------------ ------------
Loans held for sale (estimated market value of $49,599,000 and
$6,338,000 at June 30, 1998 and 1997, respectively) ............... 48,389,000 6,244,000
Investment securities available-for-sale ............................ 3,363,000 6,299,000
Mortgage-backed securities available-for-sale ....................... 14,188,000 16,044,000
Loans receivable, net ............................................... 120,984,000 85,992,000
Accrued interest receivable ......................................... 1,372,000 815,000
Other real estate owned ............................................. -- --
Premises and equipment, net ......................................... 986,000 880,000
Deferred income taxes ............................................... 331,000 201,000
Goodwill, net ....................................................... 1,219,000 --
Other assets ........................................................ 532,000 293,000
------------ ------------
Total assets ..................................................... $202,034,000 $117,093,000
============ ============
LIABILITIES
Deposits ............................................................ $118,831,000 $ 95,906,000
Advances from Federal Home Loan Bank ................................ 49,150,000 8,950,000
Securities sold under agreements to repurchase ...................... 8,280,000 5,780,000
Notes payable to shareholders ....................................... -- 2,990,000
Advances from borrowers for taxes and insurance ..................... 434,000 270,000
Other liabilities ................................................... 2,023,000 233,000
------------ ------------
Total liabilities ................................................ 178,718,000 114,129,000
------------ ------------
MINORITY INTEREST .................................................... 93,000 69,000
------------ ------------
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;
3,835,000 and 2,170,000 shares issued and outstanding at June 30,
1998 and 1997, respectively ....................................... 38,850 10,850
Class B common stock -- authorized, 500,000 shares of $0.01 par
value; none issued ................................................ -- --
Additional paid-in capital .......................................... 21,606,900 2,065,900
Retained earnings ................................................... 1,577,250 864,250
Net unrealized losses on securities available-for-sale .............. -- (46,000)
------------ ------------
Total shareholders' equity ....................................... 23,223,000 2,895,000
------------ ------------
Total liabilities and shareholders' equity ....................... $202,034,000 $117,093,000
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Consolidated Statements of Income and Comprehensive Income
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------
1998 1997 1996
---------------- --------------- ---------------
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees .......................................... $ 13,109,000 $ 6,413,000 $ 3,903,000
Investment securities, mortgage-backed securities and
assets held for sale ......................................... 1,412,000 1,506,000 1,070,000
------------ ----------- -----------
Total interest income ....................................... 14,521,000 7,919,000 4,973,000
------------ ----------- -----------
INTEREST EXPENSE
Deposits ....................................................... 6,913,000 3,978,000 2,825,000
Borrowed funds ................................................. 1,465,000 995,000 543,000
Notes payable .................................................. 107,000 157,000 191,000
------------ ----------- -----------
Total interest expense ...................................... 8,485,000 5,130,000 3,559,000
------------ ----------- -----------
Net interest income ......................................... 6,036,000 2,789,000 1,414,000
PROVISION FOR LOAN LOSSES 385,000 58,000 42,000
------------ ----------- -----------
Net interest income after provision for loan losses ......... 5,651,000 2,731,000 1,372,000
------------ ----------- -----------
NON-INTEREST INCOME
Service charges and other fees on deposit accounts ............. 170,000 112,000 114,000
Gains on sale of conforming mortgages .......................... 513,000 309,000 272,000
Crusader Mortgage Corporation income ........................... 4,199,000 1,074,000 --
Other .......................................................... 131,000 90,000 31,000
------------ ----------- -----------
Total non-interest income ................................... 5,013,000 1,585,000 417,000
------------ ----------- -----------
NON-INTEREST EXPENSES
Employee compensation and benefits ............................. 1,076,000 799,000 802,000
Data processing ................................................ 109,000 93,000 55,000
Federal insurance premiums ..................................... 63,000 375,000 112,000
Occupancy and equipment ........................................ 320,000 294,000 268,000
Professional fees .............................................. 102,000 86,000 71,000
Crusader Mortgage Corporation expenses ......................... 2,628,000 886,000 --
Goodwill amortization .......................................... 52,000 -- --
Other operating ................................................ 397,000 329,000 308,000
------------ ----------- -----------
Total non-interest expenses ................................. 4,747,000 2,862,000 1,616,000
------------ ----------- -----------
Income before income tax expense ............................. 5,917,000 1,454,000 173,000
INCOME TAX EXPENSE 2,109,000 480,000 61,000
------------ ----------- -----------
Income before minority interest ............................. 3,808,000 974,000 112,000
Minority interest ............................................... 72,000 12,000 --
------------ ----------- -----------
NET INCOME .................................................. $ 3,736,000 $ 962,000 $ 112,000
============ =========== ===========
Unrealized gain (loss) on securities, net of tax ............ 46,000 169,000 (239,000)
------------ ----------- -----------
Comprehensive income (loss) ................................. $ 3,782,000 $ 1,131,000 $ (127,000)
============ =========== ===========
Net income per share -- basic and diluted ....................... $ 1.27 $ 0.44 $ 0.07
============ =========== ===========
Weighted average shares outstanding ............................. 2,948,000 2,187,500 1,680,000
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Consolidated Statement of Shareholders' Equity
<TABLE>
<CAPTION>
Retained Net unrealized
earnings gains (losses) on Total
Common Additional (accumulated securities available- shareholders'
stock paid-in capital deficit) for-sale equity
----------- ----------------- -------------- ----------------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at July 1, 1995 ................ $ 250 $ 1,375,750 $ (203,000) $ 24,000 $ 1,197,000
Contributions .......................... 3,000 439,000 -- -- 442,000
28-to-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
Contributions .......................... 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 ............................. -- -- 3,736,000 -- 3,736,000
Contributions .......................... 900 251,100 -- -- 252,000
2-to-1 stock split ..................... 11,750 -- (11,750) -- --
Issuance of common stock for minority
interest acquisition .................. 1,500 888,500 -- -- 890,000
Net proceeds of initial public offering 12,000 15,392,000 -- -- 15,404,000
5% stock dividend ...................... 1,850 3,009,400 (3,011,250) -- --
Net unrealized gain on securities
available-for-sale .................... -- -- -- 46,000 46,000
-------- ----------- ------------ ----------- -----------
Balance at June 30, 1998 ............... $ 38,850 $21,606,900 $ 1,577,250 $ -- $23,223,000
======== =========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------------
1998 1997 1996
----------------- ---------------- ----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income ................................................... $ 3,736,000 $ 962,000 $ 112,000
Adjustments to reconcile net income to net cash used
in operating activities
Amortization of premiums and discounts on loans,
mortgage-backed securities and investments ................ 201,000 221,000 92,000
Provision for loan losses .................................. 385,000 58,000 42,000
Net gain on sale of loans held for sale .................... (3,012,000) (309,000) (272,000)
Amortization of goodwill ................................... 52,000 -- --
Depreciation and amortization of premises and
equipment ................................................. 176,000 127,000 112,000
Proceeds from sale of loans held for sale .................. 195,892,000 39,592,000 19,874,000
Originations of loans held for sale ........................ (235,025,000) (43,868,000) (19,735,000)
Increase in accrued interest receivable .................... (557,000) (241,000) (38,000)
Decrease (increase) in deferred income taxes ............... (130,000) 74,000 (24,000)
Other, net ................................................. 1,170,000 1,173,000 (1,001,000)
-------------- ------------- -------------
Net cash used in operating activities ..................... (37,112,000) (2,211,000) (838,000)
-------------- ------------- -------------
INVESTING ACTIVITIES
Net increase in loans ........................................ (35,377,000) (32,725,000) (10,110,000)
Purchase of investment securities available-for-sale ......... (2,000,000) (3,348,000) (1,000,000)
Purchase of mortgage-backed securities
available-for-sale ......................................... (4,661,000) (2,596,000) (14,027,000)
Repayments of principal on investment securities
available-for-sale ......................................... 3,527,000 1,014,000 3,267,000
Repayments of principal on mortgage-backed securities
available-for-sale ......................................... 5,959,000 2,728,000 2,725,000
Repayments of principal on mortgage-backed securities
held-to-maturity ........................................... -- -- --
Proceeds from sale of mortgage-backed securities
available-for-sale ......................................... 1,915,000 1,936,000 3,192,000
Proceeds from sale of property acquired through loan
foreclosure actions ........................................ 111,000 337,000 59,000
Purchases of premises and equipment .......................... (472,000) (596,000) (25,000)
-------------- ------------- -------------
Net cash used in investing activities ..................... (30,998,000) (33,250,000) (15,919,000)
-------------- ------------- -------------
FINANCING ACTIVITIES
Net increase in deposits ..................................... 22,925,000 36,260,000 12,088,000
Advances from Federal Home Loan Bank, net .................... 42,700,000 (1,921,000) 4,554,000
Increase (decrease) in advance payments by borrowers
for taxes and insurance .................................... 164,000 (75,000) (229,000)
Proceeds from notes payable to shareholders .................. (2,990,000) 73,000 876,000
Capital contributions ........................................ 252,000 252,000 442,000
Proceeds from initial public offering ........................ 15,404,000 -- --
-------------- ------------- -------------
Net cash provided by financing activities ................. 78,455,000 34,589,000 17,731,000
-------------- ------------- -------------
Net increase (decrease) in cash and cash
equivalents ............................................. 10,345,000 (872,000) (974,000)
Cash and cash equivalents at beginning of year ................ 325,000 1,197,000 223,000
-------------- ------------- -------------
Cash and cash equivalents at end of year ...................... $ 10,670,000 $ 325,000 $ 1,197,000
============== ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<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 market communities. Commercial banks, savings banks, savings and loan
associations, mortgage bankers and brokers, credit unions and money market
funds actively compete for savings and time deposits and for types of 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 Company has adopted the provisions of 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.
In June 1997, the FASB issued SFAS No. 131, Disclosure about Segments of
an Enterprise and Related Information, 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 the enterprise's reportable operating
segments. This statement is effective for financial statements for the years
beginning after December 15, 1997. The Company does not anticipate that the
additional disclosures to comply with SFAS No. 131 will be significant.
F-6
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
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.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activity. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments imbedded in other contracts, and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as a hedge. The accounting for changes in the fair
value of a derivative (gains and losses) depends on the intended use of the
derivative and resulting designation. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. Earlier application is
permitted only as of the beginning of any fiscal quarter. The Company is
currently reviewing the provisions of SFAS No. 133.
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 payoff 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-7
<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. This 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 lower of cost or 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. Goodwill
Goodwill resulted from the acquisition of the minority interest of CMC and
is being amortized on a straight-line basis over approximately 15 years.
9. 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 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, 1998 and 1997, the Company and
the Bank had no such long-lived assets.
10. Employee Benefit Plans
The Company has certain employee benefit plans covering substantially all
employees. The Company accrues such costs as incurred.
The Company accounts for its stock options under SFAS No. 123, Accounting
for Stock-Based Compensation, which contains a fair value-based method for
valuing stock-based compensation that entities may use,
F-8
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
which measures compensation cost at the grant date based on the fair value of
the award. Compensation is then recognized over the service period, which is
usually the vesting period. Alternatively, the standard permits entities to
continue accounting for employee stock options and similar equity instruments
under APB Opinion No. 25, Accounting for Stock Issued to Employees. Entities
that continue to account for stock options using APB Opinion No. 25 are
required to make pro forma disclosures of net income and EPS, as if the fair
value-based method of accounting defined in SFAS No. 123 had been applied. The
Company's stock option plan is accounted for under APB Opinion No. 25.
11. 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 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.
12. Net Income Per Share
The Company adopted the provisions of SFAS No. 128, Earnings Per Share,
which eliminates primary and fully diluted earnings per share and requires
presentation of basic and diluted earnings per share in conjunction with the
disclosure of the methodology used in computing such earnings per share. Basic
earnings per share excludes dilution and is computed by dividing income
available to common shareholders by the weighted average common shares
outstanding during the period. Diluted earnings per share takes into account
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised and converted into common stock. Prior
periods' earnings per share calculations have been restated to reflect the
adoption of SFAS No. 128.
13. 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>
June 30,
---------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Cash payments for interest ...................................... $8,306,000 $5,041,000 $3,292,000
Cash payments for income taxes .................................. 1,710,000 -- 82,000
Transfer of loans into property acquired through loan
foreclosure actions ............................................ 111,000 337,000 81,000
Transfer of investment securities to available-for-sale ......... -- -- 2,032,000
Transfer of mortgage-backed securities held-to-maturity
to mortgage-backed securities available-for-sale ............... -- -- 7,106,000
Issuance of stock, for purchase of minority interest ............ 890,000 -- --
</TABLE>
14. Advertising Costs
It is the Company's policy to expense advertising costs in the period in
which they are incurred. Advertising expense for June 30, 1998, 1997 and 1996
was approximately $25,000, $25,000 and $24,000, respectively.
F-9
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
15. Reclassification
Certain prior year amounts have been reclassified to conform to the
current year presentation.
NOTE B -- BANK SUBSIDIARIES
The Bank has three majority-owned subsidiaries and four 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 30, 1997. The additional interest purchased in September 1997 was
purchased for $155,000. The remaining interest purchased in November was
exchanged for 150,000 shares of the common stock of the Company and the payment
of accrued compensation of $250,000 to the former minority shareholder. These
transactions were accounted for under the purchase method of accounting. A
total of $1,271,000 of goodwill was recorded and is being amortized over a
15-year period. Additionally, the November agreement with the former minority
shareholder provides for a reduction in the number of shares of common stock to
which the minority shareholder would otherwise be entitled in the event CMS's
net income does not exceed certain levels for the twelve months ending December
31, 1998. 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 common stock are voted. The
agreement also contains certain indemnities in favor of the Company, the Bank,
and CMC, and prohibits the minority shareholder from competing with the Company
for a period of three years.
CMC originates conforming mortgage loans and sells the loans in the
secondary market. The components of CMC net income are as follows:
<TABLE>
<CAPTION>
Bank CMC Consolidated
-------------- ------------- --------------
<S> <C> <C> <C>
Year ended June 30, 1998
Total interest income and noninterest income $14,259,000 $5,275,000 $19,534,000
Income before income taxes ................. 3,270,000 2,647,000 5,917,000
Total assets, end of period ................ 197,595,000 4,439,000 202,034,000
Year ended June 30, 1997
Total interest income and noninterest 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, a 51% owned subsidiary that commenced operations in December
1997, markets loans on an affinity group basis to the U.S. Chinese community.
F-10
<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>
June 30, 1998
-------------------------------------------------------------
Gross Gross Fair
unrealized unrealized market
Cost gains losses value
-------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Residential mortgage loans ......... $48,389,000 $1,210,000 $-- $49,599,000
=========== ========== === ===========
</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>
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>
June 30, 1998
-------------------------------------------------------------
Gross Gross Fair
unrealized unrealized market
Cost gains losses value
-------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Investment securities
U.S. Government agencies .......... $ -- $ -- $ -- $ --
Other ............................. 1,000,000 -- -- 1,000,000
FHLB stock ........................ 2,363,000 -- -- 2,363,000
----------- ------- --------- -----------
3,363,000 -- -- 3,363,000
Mortgage-backed securities ......... 14,188,000 20,000 (20,000) 14,188,000
----------- ------- --------- -----------
$17,551,000 $20,000 $ (20,000) $17,551,000
=========== ======= ========= ===========
</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-11
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
NOTE D -- INVESTMENT SECURITIES -- (Continued)
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.
June 30, 1998
-----------------------------
Available-for-sale
-----------------------------
Fair
Amortized market
cost value
------------- -------------
Investment securities
Due after ten years ............... $ 1,000,000 $ 1,000,000
Mortgage-backed securities ......... 14,188,000 14,188,000
FHLB stock ......................... 2,363,000 2,363,000
----------- -----------
$17,551,000 $17,551,000
=========== ===========
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>
June 30, 1998
-----------------------------------------------------------
Gross Gross Fair
Amortized unrealized unrealized market
cost gains losses value
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Available-for-sale
FHLMC certificates ......... $ 6,012,000 $ 11,000 $ (13,000) $ 6,010,000
GNMA certificates .......... 3,832,000 1,000 (6,000) 3,827,000
FNMA certificates .......... 4,344,000 8,000 (1,000) 4,351,000
----------- -------- --------- -----------
$14,188,000 $ 20,000 $ (20,000) $14,188,000
=========== ======== ========= ===========
</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>
Proceeds from the sale of mortgage-backed securities were $1,932,000 and
$1,936,000 at June 30, 1998 and 1997, respectively.
F-12
<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,
---------------------------------
1998 1997
---------------- --------------
<S> <C> <C>
Residential one-to-four family mortgage loans $ 59,597,000 $54,493,000
Multi-family mortgage loans ....................... 24,473,000 13,244,000
Construction loans ................................ 1,210,000 2,188,000
Commercial mortgage loans ......................... 34,235,000 14,817,000
Consumer loans .................................... 2,496,000 2,375,000
------------ -----------
Total loans .................................... 122,011,000 87,117,000
Construction loans in process ..................... -- (774,000)
Deferred loan fees and unearned discounts ......... (170,000) 121,000
Allowance for possible loan losses ................ (857,000) (472,000)
------------ -----------
Net loans ...................................... $120,984,000 $85,992,000
============ ===========
</TABLE>
The Bank had loans outstanding which were secured by real estate and/or
deposit accounts to directors and officers of $2,862,000 and $2,460,000 at June
30, 1998 and 1997, respectively. During 1998, 427,000 of new loans were made
and repayments totaled $25,000. 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 $1,352,000 and $745,000 at June 30, 1998 and 1997,
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 years ended June 30, 1998, 1997 and 1996 by approximately
$57,000, $57,000 and $60,000, respectively.
Also included in loans receivable are loans past due 90 days or more and
accruing in the amount of $-0- and $353,000 at June 30, 1998 and 1997,
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 were no impaired loans at June 30, 1998 and 1997.
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------------
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
Balance, beginning of year ......... $ 472,000 $ 430,000 $ 388,000
Provision for loan losses .......... 385,000 58,000 42,000
Charge-offs ........................ -- (16,000) --
--------- --------- ---------
Balance, end of year ............... $ 857,000 $ 472,000 $ 430,000
========= ========= =========
</TABLE>
F-13
<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 -----------------------------
useful lives 1998 1997
--------------- ------------- -------------
<S> <C> <C> <C>
Furniture, fixtures and equipment ......... 5 to 10 years $1,627,000 $1,341,000
Less accumulated depreciation ............ (641,000) (461,000)
---------- ----------
$ 986,000 $ 880,000
========== ==========
</TABLE>
Depreciation expense for the years ended June 30, 1998, 1997 and 1996 was
approximately $176,000, $127,000 and $112,000, respectively.
NOTE H -- DEPOSITS
Deposits are as follows:
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------
1998 1997
---------------------------- -------------------------
Weighted Weighted
interest interest
rate Amount rate Amount
---------- --------------- --------- -------------
<S> <C> <C> <C> <C>
Demand ................................. -- % $ 5,662,000 --% $ 2,123,000
Money market NOW and Super NOW ......... 3.93 15,076,000 3.92 9,994,000
Passbook and statement savings ......... 2.66 1,708,000 2.80 1,689,000
------------ -----------
22,446,000 13,806,000
Time deposits .......................... 5.86 96,385,000 5.70 82,100,000
------------ -----------
$118,831,000 $95,906,000
============ ===========
</TABLE>
At June 30, 1998, the scheduled maturities of time deposits are as
follows:
1998 ........................ $68,450,000
1999 ........................ 23,010,000
2000 ........................ 1,453,000
2001 ........................ 608,000
2002 ........................ 1,666,000
2003 and thereafter ......... 1,198,000
-----------
$96,385,000
===========
Included in deposits as of June 30, 1998 and 1997 are deposits greater
than $100,000 of approximately $47,472,000 and $10,857,000, respectively.
F-14
<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,
----------------------------------
1998 1997
---------------- ---------------
<S> <C> <C>
Advances outstanding at end of period .......... $ 24,150,000 $ 8,950,000
Interest rate at end of period ................. 5.60% 5.70%
Approximate average amount outstanding ......... 14,253,000 8,344,000
Maximum month-end balance ...................... 43,500,000 17,450,000
Approximate weighted average rate .............. 5.89% 5.56%
</TABLE>
At June 30, 1998 and 1997, long term advances from the FHLB totaling
$25,000,000 and $-0- mature through 2003. These advances are collateralized by
certain first mortgage loans and mortgage-backed securities.
At June 30, 1998 and 1997, long-term securities sold under agreements to
repurchase totaling $8,280,000 and $5,780,000 have maturities of one to four
years. These repurchase agreements are collateralized by certain
mortgage-backed securities.
At June 30, 1998, outstanding long-term securities sold under agreements
mature as follows:
1999 .................................. $3,280,000
2000 .................................. --
2001 .................................. --
2002 .................................. 5,000,000
----------
$8,280,000
==========
NOTE J -- SHAREHOLDERS NOTES
Notes payable consisted of loans payable to the Company's shareholders as
follows:
<TABLE>
<CAPTION>
June 30,
----------------------
1998 1997
------ -------------
<S> <C> <C>
Note payable in monthly interest only payments at
6% at June 30, 1997, the remaining principal plus
accrued interest is due and payable on July 1,
1998, unless otherwise extended by the share-
holder. These notes were repaid on February 13,
1998. ........................................... $-- $2,990,000
=== ==========
</TABLE>
F-15
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
NOTE K -- INCOME TAXES
The provision for income taxes is as follows:
Year ended June 30,
-------------------------------------------
1998 1997 1996
-------------- ----------- ------------
Current
Federal ................... $ 2,034,000 $ 500,000 $ 62,000
State ..................... 228,000 17,000 23,000
----------- --------- ---------
Total current .......... 2,262,000 517,000 85,000
----------- --------- ---------
Deferred
Federal ................... (153,000) (37,000) (24,000)
----------- --------- ---------
Total deferred ......... (153,000) (37,000) (24,000)
----------- --------- ---------
$ 2,109,000 $ 480,000 $ 61,000
=========== ========= =========
The reconciliation of the statutory federal income tax provision to the
actual tax provision is as follows:
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------------
1998 1997 1996
-------------- ----------- ------------
<S> <C> <C> <C>
Statutory federal income tax ................................ $ 1,987,000 $ 494,000 $ 59,000
State and local income taxes, net of federal impact ......... 165,000 11,000 15,000
Tax-exempt income ........................................... (25,000) (13,000) (11,000)
Goodwill amortization ....................................... 18,000 -- --
Other, net .................................................. 36,000 (12,000) (2,000)
----------- --------- ---------
Income tax provision ..................................... $ 2,109,000 $ 480,000 $ 61,000
=========== ========= =========
</TABLE>
Deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
June 30,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Deferred tax assets
Deferred loan fees ............................... $ 10,000 $ 13,000
Interest reserve ................................. 53,000 31,000
Provision for loan losses ........................ 254,000 123,000
Unrealized loss on securities available-for-sale . -- 23,000
Basis of property and equipment .................. 14,000 11,000
-------- --------
331,000 201,000
-------- --------
Net deferred tax asset ........................ $331,000 $201,000
======== ========
</TABLE>
F-16
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
NOTE L -- SHAREHOLDERS' EQUITY
On July 28, 1998, the Company declared a 5% stock dividend payable August
28, 1998 to shareholders of record on August 21, 1998. Shareholders' equity at
June 30, 1998, has been retroactively adjusted to reflect this dividend.
The Company completed its initial public offering on February 13, 1998
(the closing date) of 1,150,000 shares (the Shares) of common stock, $0.01 par
value. The initial public offering price of the Shares was $15.00. The net
proceeds received by the Company in connection with the public offering were
approximately $15,404,000. Total offering costs approximated $1,800,000,
including underwriting discounts.
On December 8, 1997, the Company declared a two for one stock split
effected in the form of a 100% 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 28-for-1
stock split effected in the form of a stock dividend.
NOTE M -- EARNINGS PER SHARE
The Company's calculation of earnings per share in accordance with SFAS
No. 128 is as follows:
<TABLE>
<CAPTION>
Year ended June 30, 1998
--------------------------------------------
Income Shares Per share
(numerator) (denominator) amount
------------- --------------- ----------
<S> <C> <C> <C>
Basic earnings per share
Net income available to common stockholders ......... $3,736,000 2,948,000 $ 1.27
Effect of dilutive securities
Options ............................................. -- 12,000 --
---------- --------- ------
Diluted earnings per share .............................
Net income available to common stockholders plus
assumed conversions ................................ $3,736,000 2,960,000 $ 1.27
========== ========= ======
</TABLE>
Basic and diluted weighted average shares outstanding for the years ended
June 30, 1997 and 1996, were 2,187,500 and 1,680,000, respectively. There were
no dilutive securities outstanding in 1997 and 1996.
F-17
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
NOTE N -- 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 balance sheet. 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 $5,244,000 and $7,560,000 at
June 30, 1998 and 1997, respectively, as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------ -----------------------------
Fixed Variable Fixed Variable
rate rate rate rate
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
First mortgage loans .................. $1,346,000 $ 549,000 $3,115,000 $3,194,000
Residential construction .............. -- -- -- 100,000
Commercial real estate and multi-family
mortgages ............................ -- 3,349,000 -- 1,151,000
---------- ----------- ---------- ----------
$1,346,000 $ 3,898,000 $3,115,000 $4,445,000
========== =========== ========== ==========
</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 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 loan portfolio 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.
F-18
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
NOTE O -- COMMITMENTS AND CONTINGENCIES
1. Lease Commitments
The Bank has entered into non-cancelable operating lease agreements for
both branch banking facilities and office space. The lease terms range from 5
to 10 years. The approximate minimum annual rental payments at June 30, 1998,
under these leases are as follows:
1999 ........................ $108,000
2000 ........................ 108,000
2001 ........................ 108,000
2002 ........................ 96,000
2003 ........................ 60,000
Thereafter .................. 56,000
--------
$536,000
========
Rental expense amounted to $73,000 for the year ended June 30, 1998 and
$67,000 for the years ended June 30, 1997 and 1996.
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 affect 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.
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, additionally, he was granted options to purchase
8,000 shares at the public offering price of $15.00.
F-19
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
NOTE P -- 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 $7,000 for the year ended
June 30, 1998 and $5,000 for 1997 and 1996.
NOTE Q -- STOCK OPTION PLAN
The Board of Directors and shareholders 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 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. At June 30, 1998,
59,700 options were granted under the Directors' Plan.
Prior to the public offering, grants of option to purchase 27,100 shares
were made to certain directors under a phantom stock option plan. At the time
of the Offering, certain directors will renounce their right to such phantom
options and will, based upon their prior interests in the phantom options,
receive options to purchase an aggregate of 54,200 shares pursuant to the
Directors' Stock Option Plan at the Offering price.
The Board of Directors and shareholders 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 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. At June 30,
1998, 40,000 options were granted under the Employee Plan.
Had compensation cost for the plans been determined based on the fair
value of the options at the grant dates consistent with SFAS No. 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below.
<TABLE>
<CAPTION>
Year ended
June 30, 1998
--------------
<S> <C> <C>
Net income ............................................. As reported $ 3,736,000
Pro forma 3,711,000
Net income per common share--basic and diluted ......... As reported $ 1.27
Pro forma $ 1.26
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes options-pricing model with the following weighted
average assumptions used for grants in 1998: dividend yield of -0-% in 1998;
expected volatility of 22% in 1998; risk-free interest rates of 5.6% in 1998;
and expected lives of five years for 1998.
F-20
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
NOTE Q -- STOCK OPTION PLAN -- (Continued)
A summary of the status of the Company's stock option plans as of June 30,
1998, and the change during the year ending June 30, 1998, are represented
below:
<TABLE>
<CAPTION>
Weighted
average
exercise
Shares price
-------- ---------
<S> <C> <C>
Outstanding, beginning of year ......................................... -- $ --
Granted ................................................................ 99,700 14.39
Exercised .............................................................. -- --
------ ------
Outstanding, end of year ............................................... 99,700 $ 14.39
------ =======
Options exercisable at year-end ........................................ --
Weighted average fair value of options granted during the year ......... $ 4.54
====== =======
</TABLE>
The following table summarizes information about options outstanding at
June 30, 1998:
Options outstanding
- -----------------------------------------------------------------------
Weighted
Number average Weighted
outstanding at remaining average
Range of June 30, contractual exercise
exercise prices 1998 life (years) price
- --------------------- ---------------- -------------- -----------
$12.00--$15.00 ...... 99,700 4 1/2 $14.39
NOTE R -- 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.
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 June 30, 1998 and 1997 are outlined
below.
For cash and due from banks and federal funds sold, the recorded book
value of approximately $10,670,000 and $325,000 approximates fair value at June
30, 1998 and 1997, 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.
F-21
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
NOTE R -- FAIR VALUE OF FINANCIAL INSTRUMENTS -- (Continued)
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------------------------
1998 1997
--------------------------------- -------------------------------
Carrying Estimated fair Carrying Estimated fair
amount value amount value
-------------- ---------------- ------------- ---------------
<S> <C> <C> <C> <C>
Loans held for sale ............................... $48,389,000 $ 49,599,000 $6,244,000 $ 6,338,000
Investment and mortgage-backed securities ......... 17,551,000 17,551,000 22,343,000 22,343,000
Loans ............................................. 122,011,000 124,838,000 87,117,000 88,266,000
</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,
--------------------------------------------------------------------
1998 1997
--------------------------------- --------------------------------
Carrying Estimated fair Carrying Estimated fair
amount value amount value
-------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C>
Time deposits ......... $96,385,000 $96,511,000 $82,100,000 $81,103,000
</TABLE>
The fair values of advances from the FHLB and securities sold under
agreements to repurchase totalling $49,150,000 and $8,280,000 at June 30, 1998
and $8,950,000 and $5,780,000, respectively, at June 30, 1997, 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
$5,243,000 and $7,560,000 at June 30, 1998 and 1997, respectively, and
primarily comprise unfunded loan commitments which are generally priced at
market at the time of funding.
NOTE S -- 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 June 30, 1998, that the Bank meets all capital adequacy
requirements to which it is subject.
F-22
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
NOTE S -- REGULATORY MATTERS -- (Continued)
As of June 30, 1998, 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.
A summary of the Bank's capital amounts and ratios as of June 30, 1998,
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 ....................... 10.96% $ 23,215,000
Goodwill ............................ (1,219,000)
Minority interest ................... 93,000
------------
Tangible capital and ratio to
adjusted total assets .............. 11.00 $ 22,089,000 1.50% $3,011,000
============ ==========
Core capital and ratio to adjusted
total assets ....................... 11.00 $ 22,089,000 4.00 $8,030,000 5.00% $10,038,000
============ ========== ===========
Core capital and ratio to risk-
weighted assets .................... 20.30 $ 22,089,000 6.00 $ 6,533,000
------------ ===========
Allowance for loan and lease losses 855,000
------------
Supplementary capital ............... 855,000
------------
Total risk-based capital and ratio to
risk-weighted assets (1) ........... 21.09 $ 22,944,000 8.00 $8,711,000 10.00 $10,889,000
============ ========== ===========
Total assets ........................ $201,978,000
============
Adjusted total assets ............... $200,759,000
============
Risk-weighted assets ................ $108,888,000
============
</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-23
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
NOTE S -- 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.
NOTE T -- 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-24
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
NOTE U -- CONDENSED FINANCIAL INFORMATION -- PARENT COMPANY ONLY
The condensed financial information of the Company is as follows:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
----------------------------
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks--non-interest bearing ......... $ 71,000 $ 7,000
Investment in subsidiaries ............................ 23,215,000 5,930,000
Other assets .......................................... 13,000 41,000
----------- ----------
Total assets ........................................ $23,299,000 $5,978,000
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Shareholders notes .................................... $ -- $2,990,000
Other liabilities ..................................... 76,000 93,000
Shareholders' equity .................................. 23,223,000 2,895,000
----------- ----------
Total liabilities and shareholders' equity .......... $23,299,000 $5,978,000
=========== ==========
</TABLE>
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------------
1998 1997 1996
------------- ------------ -----------
<S> <C> <C> <C>
Income
Equity in undistributed net income of subsidiary ..... $3,730,000 $ 988,000 $198,000
Non-interest income .................................. 222,000 236,000 292,000
---------- --------- --------
3,952,000 1,224,000 490,000
Other expenses ........................................ 216,000 262,000 378,000
---------- --------- --------
Net income ......................................... $3,736,000 $ 962,000 $112,000
========== ========= ========
</TABLE>
F-25
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
NOTE U -- CONDENSED FINANCIAL INFORMATION -- PARENT COMPANY ONLY -- (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------------------
1998 1997 1996
--------------- ------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income ............................................. $ 3,736,000 $ 962,000 $ 112,000
Adjustments to reconcile net income to net cash
(used in) provided by operating activities
Decrease (increase) decrease in other assets ......... 28,000 (18,000) 31,000
(Decrease) increase in other liabilities ............. (17,000) 39,000 4,000
Other ................................................ 49,000 (17,000) 2,000
Equity in undistributed (income) loss of
subsidiary .......................................... (3,730,000) (988,000) (198,000)
------------- ---------- ------------
Net cash (used in) provided by operating
activities ....................................... 66,000 (22,000) (49,000)
------------- ---------- ------------
Cash flows from investing activities
Investment in subsidiary ............................... (12,668,000) (325,000) (1,318,000)
------------- ---------- ------------
Net cash used in investing activities ................ (12,668,000) (325,000) (1,318,000)
------------- ---------- ------------
Cash flows from financing activities
Proceeds from notes payable to shareholders ............ (2,990,000) 73,000 948,000
Capital contributions .................................. 252,000 252,000 442,000
Proceeds from initial public offering .................. 15,404,000 -- --
------------- ---------- ------------
Net cash provided by financing activities ......... 12,666,000 325,000 1,390,000
------------- ---------- ------------
Net increase (decrease) in cash and cash
equivalents ...................................... 64,000 (22,000) 23,000
Cash and cash equivalents at beginning of year .......... 7,000 29,000 6,000
------------- ---------- ------------
Cash and cash equivalents at end of year ................ $ 71,000 $ 7,000 $ 29,000
============= ========== ============
</TABLE>
F-26
