<PAGE>
As filed with the Securities and Exchange Commission via EDGAR on
January 23, 1998
Registration No. 333-42215
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
Amendment No. 1
to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
CRUSADER HOLDING CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania
(State or other jurisdiction of incorporation or organization)
6749 23-2562545
(Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification No.)
1230 Walnut Street
Philadelphia, Pennsylvania 19107
(215) 893-1500
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
Bruce A. Levy
President
Crusader Holding Corporation
1230 Walnut Street
Philadelphia, Pennsylvania 19107
(215) 893-1500
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
Copies to:
<TABLE>
<CAPTION>
<S> <C>
Justin P. Klein, Esquire Mark K. Kessler, Esquire
Ballard Spahr Andrews & Ingersoll Richard A. Silfen, Esquire
1735 Market Street, 51st Floor Wolf, Block, Schorr and Solis-Cohen LLP
Philadelphia, Pennsylvania 19103 111 South 15th Street, 12th Floor
(215) 665-8500 Philadelphia, Pennsylvania 19102
(215) 977-2000
</TABLE>
Approximate date of commencement of proposed sale to public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Secur-ities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
---------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Secur-ities Act of 1933 or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
================================================================================
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JANUARY 23, 1998
1,000,000 Shares
[GRAPHIC OMITTED]
CRUSADER HOLDING CORPORATION
Common Stock
---------------------
All of the shares of Common Stock (the "Common Stock") offered hereby (the
"Offering") are being sold by Crusader Holding Corporation, a Pennsylvania
corporation (the "Company"). Prior to the Offering, there has been no public
market for the Common Stock.
It is currently estimated that the initial public offering price will be
between $14 and $16 per share. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price.
Application has been made to have the Common Stock approved for quotation
on the Nasdaq National Market under the symbol "CRSB."
---------------------
Prospective investors should carefully consider the factors set forth in
"Risk Factors" beginning on page 10 hereof.
---------------------
THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF A BANK
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
INSURER OR GOVERNMENT AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
Underwriting
Discounts and Proceeds to
Price to Public Commissions(1) Company(2)
- --------------------------------------------------------------------------------
Per Share ......... $ $ $
- --------------------------------------------------------------------------------
Total(3) .......... $ $ $
================================================================================
<PAGE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). The Company has agreed to pay the
representative of the Underwriters (the "Representative") a financial
advisory fee of $75,000. See "Underwriting."
(2) Before deducting estimated expenses of the Offering (exclusive of the
aforementioned financial advisory fee) of approximately $400,000 payable by
the Company and approximately $3.2 million of Company indebtedness to
certain existing shareholders (who are also directors of the Company). See
"Use of Proceeds."
(3) The Company has granted the Underwriters an option to purchase up to 150,000
additional shares of Common Stock at the Price to Public less
Underwriting Discounts and Commissions solely to cover over-allotments, if
any. If the Underwriters exercise such option in full, the total Price to
Public, Underwriting Discounts and Commissions and Proceeds to Company will
be $ , $ and $ , respectively. See "Underwriting."
---------------------
The shares of Common Stock are offered severally by the Underwriters named
herein, subject to prior sale, when, as and if delivered to and accepted by the
Underwriters and subject to certain other conditions. It is expected that
delivery of certificates representing the shares of Common Stock will be made to
the Underwriters on or about February , 1998.
---------------------
Advest, Inc.
The date of this Prospectus is February , 1998
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING STABILIZATION, THE PURCHASE OF COMMON STOCK TO COVER SYNDICATE SHORT
POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING." SUCH STABILIZING TRANSACTIONS, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements, including the Notes thereto,
appearing elsewhere in this Prospectus. Unless otherwise indicated, all
information in this Prospectus is based on the assumption that the Underwriters
(as defined herein) will not exercise their over-allotment option, and that
outstanding shares do not include 300,000 shares reserved for issuance under the
Company's stock option plans. Where appropriate, amounts throughout this
Prospectus have been adjusted retroactively to reflect a two-for-one split of
the Company's Common Stock, par value $0.01 per share (the "Common Stock"), in
December 1997 and a twenty-eight-for-one split of the Common Stock in March
1996, both of which were effected in the form of a stock dividend. Except as the
context may otherwise require (i) the "Company" means Crusader Holding
Corporation together with its wholly-owned subsidiary, Crusader Savings Bank,
FSB (the "Bank"), and the subsidiaries of the Bank, (ii) the "Bank" means the
Bank and its subsidiaries, and (iii) "fiscal" or "fiscal year" means the
Company's fiscal year ended June 30th. Ratios computed with respect to fiscal
years are actual and with respect to interim periods have been annualized. See
"Risk Factors."
The Company
The Company, a Pennsylvania corporation established in 1988 and
headquartered in Philadelphia, Pennsylvania, is the holding company for the
Bank, a federally chartered savings bank. Currently, all of the Company's
business activities are conducted through the Bank. At December 31, 1997, the
Company had total assets of $161.3 million, total deposits of $140.7 million and
total shareholders' equity of $5.7 million. The Bank's deposits are federally
insured by the Savings Association Insurance Fund ("SAIF") of the Federal
Deposit Insurance Corporation ("FDIC") to the maximum extent permitted by law.
As a savings and loan holding company, the Company is subject to the supervision
and regulation of the Office of Thrift Supervision ("OTS").
The Bank provides community banking services through two branches and two
automated teller machines ("ATMs") in Philadelphia, and has focused primarily on
mortgage lending for residential and multi-family housing and commercial real
estate. In the latter part of 1995, management began to refocus the Company and
developed a plan designed to expand its operations and to grow its assets and
profitability. The Company's strategy is to maintain a core banking operation
that provides a growing stream of income enhanced by engaging in various
specialty lending and product niche activities designed to provide the Company
with significantly higher risk-adjusted rates of return. These activities
currently include the origination and acquisition for resale of nonconforming
credit residential mortgages ("Nonconforming Mortgages"), the origination of
loans guaranteed by the U.S. Small Business Administration ("SBA") and the
acquisition of delinquent property tax liens.
The key elements of the Company's strategy include:
o Maintaining and increasing the Company's core banking operations by
expanding its portfolio lending activities;
o Expanding the Bank's Nonconforming Mortgage operation by developing new
broker relationships, increasing the purchase of loan pools and broadening
the geographic scope of its activities; and
o Increasing other existing specialty lending and product niche activities
and identifying and developing new activities.
The Company believes that the Bank can compete effectively in its various
areas of business activity because of the quality of its management team, its
ready access to federally insured deposits and borrowings from the Federal Home
Loan Bank ("FHLB"), and the ability to use its federal charter to operate
throughout the United States. In addition to generating interest income, the
Bank's specialty lending and product niche activities are beginning to generate
significant levels of non-interest income, in particular from the Bank's sale of
Nonconforming Mortgage loans.
3
<PAGE>
The Bank generally sells for cash its interest in its Nonconforming
Mortgage loans to institutional investors. To date, the Bank has favored this
approach over securitizations because it realizes a cash gain on the sale of its
loans and retains no risks, other than certain repurchase risks associated with
representations and warranties and, in certain cases, first year prepayment
risks. This differentiates the Bank from institutions that securitize their
loans, which retain default and prepayment risk on the loans they have
historically securitized, and which in certain cases, have incurred write-downs
of their securitization receivables due to adverse default and prepayment
experience. The Bank does not retain these risks and, since it sells its loans
together with their related servicing rights, does not retain any risk with
respect to the ongoing valuation of servicing rights.
The Company, through the Bank, has been successful in implementing its
strategy and has become increasingly profitable. The Company has grown its
assets from $63.6 million as of June 30, 1995 to $161.3 million as of December
31, 1997. During this period of growth, the Company grew its core banking income
by increasing its net interest income and controlling its core operating
expenses. In addition, the Company is continuing to grow and expand its
Nonconforming Mortgage lending operations. Nonconforming Mortgage originations
totaled $24.5 million for the year ended June 30, 1997, $25.6 million for the
quarter ended September 30, 1997 and $71.5 million for the quarter ended
December 31, 1997.
The Company had net income of $926,000 for the quarter ended December 31,
1997, as compared to net income of $270,000 for the comparable prior year
period. Net income for the six months ended December 31, 1997 was $1.6 million,
as compared to net income of $497,000, exlcuding a one-time SAIF assessment, for
the comparable prior year period.
The executive office of the Company is located at 1230 Walnut Street,
Philadelphia, Pennsylvania 19107 and its telephone number is (215) 893-1500.
4
<PAGE>
Summary Consolidated Financial Data
<TABLE>
<CAPTION>
At or for the Three
Months Ended September 30, At or for the Year Ended June 30,
-------------------------- -------------------------------------
1997 1996 1997 1996 1995
----------- ---------- ----------- ---------- ------------
(Unaudited)
(In thousands, except per share amounts and ratios)
<S> <C> <C> <C> <C> <C>
Net income (loss) ........................... $ 665 $ 35 $ 962 $ 112 $ (65)
Net income (loss), excluding SAIF assess-
ment(1) ................................... 665 227 1,154 112 (65)
Net income (loss) per share(2)(6) ........... 0.31 0.02 0.46 0.07 (0.05)
Net income (loss) per share, excluding
SAIF assessment(1)(2) ..................... 0.31 0.11 0.55 0.07 (0.05)
Total assets ................................ 134,538 88,703 117,093 81,307 63,550
Loans receivable, net ....................... 93,857 62,830 85,992 53,604 43,616
Loans held for sale ......................... 16,767 1,528 6,244 1,659 1,550
Shareholders' notes(3) ...................... 3,238 2,918 2,990 2,918 1,970
Shareholders' equity ........................ 3,871 1,605 2,895 1,512 1,197
Return on average assets(5) ................. 2.02% 0.16% 0.97% 0.17% (0.12)%
Net yield on interest-earning assets ........ 3.31% 2.69% 2.89% 2.23% 2.08 %
Supplemental Performance Ratios:
Return on average assets, excluding
SAIF assessment(1)(5) .................... 2.02% 1.07% 1.17% 0.17% (0.12)%
Return on average invested
capital(4)(5) ............................ 37.42% 3.10% 16.35% 2.53% (2.05)%
Return on average invested capital,
excluding SAIF assessment(1)(4)(5) ....... 37.42% 20.08% 19.61% 2.53% (2.05)%
</TABLE>
- -------------
(1) In September 1996, the Company incurred a one-time SAIF assessment of
$296,000 to recapitalize the fund. Net of related tax effects, this reduced
net income by $192,000 for the quarter ended September 30, 1996 and the year
ended June 30, 1997.
(2) Adjusted to retroactively reflect prior stock splits. See "Dividends." (3)
The Company issued notes payable to shareholders, the proceeds of which
were contributed as capital to the Bank. Such notes will be repaid from
the proceeds of the Offering. See "Use of Proceeds."
(4) Invested capital is the sum of shareholders' notes and shareholders' equity.
(5) Interim period ratios are annualized where appropriate.
(6) Supplemental earnings per share would have been $0.29 and $0.47 for the
quarter ended September 30, 1997 and the year ended June 30, 1997,
respectively, assuming that a sufficient number of shares of Common Stock
were issued at an assumed public offering price of $15 per share to
permit the Company to repay the debt to shareholders outstanding during
the respective periods with the proceeds from the sale of such shares.
5
<PAGE>
The Offering
<TABLE>
<S> <C>
Common Stock offered .................. 1,000,000 shares
Common Stock outstanding prior
to the Offering ..................... 2,500,000 shares
Common Stock outstanding after
the Offering ........................ 3,500,000 shares
Use of Proceeds ....................... The estimated net proceeds received by the Company from the sale
of the shares of Common Stock offered hereby will be used to repay
$3.2 million of the Company's indebtedness to certain existing
shareholders (who are also directors of the Company), and the bal-
ance will be contributed as capital to the Bank. The Bank intends to
use such capital for general corporate purposes and to support the
future growth of the assets of the Bank. See "Use of Proceeds."
Dividends on Common Stock ............. The Company does not currently intend to pay cash dividends on
the Common Stock. See "Dividends."
Nasdaq National Market symbol ......... Application has been made to have the Common Stock approved for
quotation on the Nasdaq National Market under the symbol
"CRSB."
</TABLE>
Risk Factors
Prospective investors should carefully consider the matters set forth
under "Risk Factors."
6
<PAGE>
Recent Developments
The following is a summary of the Company's results of operations for the
three and six month periods ended December 31, 1997 and 1996, and its financial
condition as of December 31, and June 30, 1997.
<TABLE>
<CAPTION>
At or for the At or for the
Three Months Six Months
Ended December 31, Ended December 31,
-------------------------- --------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
(Unaudited)
(In thousands, except per share amounts and ratios)
<S> <C> <C> <C> <C>
Interest income ............................................. $ 3,523 $ 1,865 $ 6,341 $ 3,531
Interest expense ............................................ 2,190 1,210 3,941 2,321
-------- -------- -------- --------
Net interest income ......................................... 1,333 655 2,400 1,210
Provision for loan losses ................................... 170 10 185 21
-------- -------- -------- --------
Net interest income after provision for loan losses ......... 1,163 645 2,215 1,189
-------- -------- -------- --------
Non-Interest Income:
CMC(1) non-interest income ................................ 1,311 290 2,144 467
Other ..................................................... 149 155 317 286
-------- -------- -------- --------
Total non-interest income ................................... 1,460 445 2,461 753
-------- -------- -------- --------
Non-Interest Expenses:
CMC non-interest expenses ................................. 730 235 1,292 353
Core non-interest expenses ................................ 452 440 901 824
SAIF special assessment ................................... -- -- -- 296
-------- -------- -------- --------
Total non-interest expenses ................................. 1,182 675 2,193 1,473
-------- -------- -------- --------
Income before income tax expense ............................ 1,441 415 2,483 469
Income tax expense .......................................... 507 145 865 164
Income before minority interest ............................. 934 270 1,618 305
Minority interest ........................................... 8 -- 27 --
-------- -------- -------- --------
Net income .................................................. $ 926 $ 270 $ 1,591 $ 305
======== ======== ======== ========
Net income per share ........................................ $ 0.39 $ 0.14 $ 0.70 $ 0.15
======== ======== ======== ========
Selected Ratios:
Return on average assets(2) ............................... 2.39% 1.18% 2.22% 0.68%
Net yield on interest-earning assets(2) ................... 3.49% 2.94% 3.40% 2.82%
Return on average invested capital(2)(3) .................. 47.10% 23.18% 41.04% 13.29%
Non-accrual loans to net loans ............................ 0.93% 1.16% 0.93% 1.16%
Allowance for loan losses to net loans .................... 0.65% 0.61% 0.65% 0.61%
Bank core capital ratio ................................... 5.02% 5.16% 5.02% 5.16%
Total Bank risk-based capital.............................. 10.51% 11.37% 10.51% 11.37%
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
-------------- ----------
(Unaudited)
(In thousands)
<S> <C> <C>
Cash and cash equivalents ............................................ $ 9,121 $ 325
Loans held for sale .................................................. 29,616 6,244
Investment and mortgage-backed securities available-for-sale ......... 18,697 22,343
Loans receivable, net ................................................ 100,407 85,992
Other real estate owned .............................................. 111 --
Other assets ......................................................... 3,376 2,189
-------- --------
Total Assets ........................................................ $161,328 $117,093
======== ========
Deposits ............................................................. $140,657 $ 95,906
Advances from Federal Home Loan Bank ................................. -- 8,950
Securities sold under agreements to repurchase ....................... 10,780 5,780
Other liabilities .................................................... 926 503
Shareholders' notes .................................................. 3,238 2,990
Minority interest .................................................... 46 69
Shareholders' equity ................................................. 5,681 2,895
-------- --------
Total Liabilities and Shareholders' Equity ......................... $161,328 $117,093
======== ========
</TABLE>
- -------------
(1) Crusader Mortgage Corporation ("CMC").
(2) Ratios are annualized where appropriate.
(3) Invested capital is the sum of shareholders' notes and shareholders' equity.
Results of Operations
Three months ended December 31, 1997 versus three months ended December 31,
1996. Net income increased to $926,000 for the three months ended December 31,
1997 as compared to $270,000 for the comparable prior year period. Net interest
income increased by $678,000 or 103.51% due primarily to a growth in average
earning assets of $63.6 million and an increase in the net yield on
interest-earning assets to 3.49% as compared to 2.94% in the prior year period.
The provision for loan losses increased by $160,000 to $170,000 for the current
year period due to a growth in the loan portfolio. There were no charge-offs of
loans in either period. Non-interest income increased by $1.0 million or 228.81%
due primarily to an increase in CMC Nonconforming Mortgage banking income to
$1.3 million as compared to $290,000 for the prior year period. Non-interest
expenses increased by $507,000 due primarily to an increase in CMC operating
expenses of $495,000. Excluding CMC's operating expenses, non-interest expenses
increased by $12,000, due primarily to expansion of the Bank's staff to
accommodate the growth in assets. Income tax expense was $362,000 higher due to
the increased profitability.
Six months ended December 31, 1997 versus six months ended December 31,
1996. Net income increased to $1.6 million for the six months ended December 31,
1996 as compared to $305,000 for the comparable prior year period. Excluding the
one-time SAIF special assessment incurred in the prior year period, net income
increased by $1.1 million or 220.12%. Net interest income increased by $1.2
million or 98.35% due primarily to a growth in average earning assets of $55.3
million and an increase in the net yield on interest-earning assets to 3.40% as
compared to 2.82% in the prior year period. Non-interest income increased by
$1.7 million or 226.83% due primarily to an increase in CMC Nonconforming
Mortgage banking income to $2.1 million as compared to $467,000 for the prior
year period. Non-interest expenses increased by $720,000. Excluding an increase
in CMC operating expenses of $939,000 and the $296,000 one-time SAIF assessment
incurred in the prior year period, non-interest expenses increased by $77,000,
which is due primarily to the Bank's expansion of staff to accommodate the
growth in assets. Income tax expense was $701,000 higher due to the increased
profitability.
8
<PAGE>
Financial Condition
The Company's assets increased to $161.3 million at December 31, 1997 as
compared to $117.1 million at June 30, 1997. The increase in assets primarily
reflects the deployment of proceeds from certificates of deposits into loans,
including portfolio loans and loans held for sale. At December 31, 1997, the
loan portfolio aggregated $100.4 million as compared to $86.0 million at June
30, 1997 with the growth concentrated in Commercial Real Estate (as defined
below) loans and conforming adjustable rate residential mortgages. Loans held
for sale increased to $29.6 million at December 31, 1997 as compared to $6.2
million at June 30, 1997. This increase resulted primarily from an increase in
the volume of Nonconforming Mortgage originations and acquisitions, which
aggregated $71.5 million during the three month period ended December 31, 1997.
Cash and cash equivalents aggregated $9.1 million at December 31, 1997 as
compared to $325,000 at June 30, 1997. This increase resulted primarily from the
proceeds of two loan pool sales on December 30, 1997. Other assets increased by
$1.2 million due largely to the $928,000 of excess of cost over fair value of
assets acquired in connection with the Bank's acquisition of the remaining
shares of CMC. Deposits were $140.7 million at December 31, 1997 as compared to
$95.9 million at June 30, 1997 reflecting primarily an increase in certificates
of deposits. Shareholders' equity increased by $2.8 million due to the $1.6
million of net income generated during the period, and as a result of the
issuance of additional shares of Common Stock in connection with the September
30, 1997 capital contributions by shareholders and the purchase of the remaining
shares of CMC.
Acquisition of Minority Interest in CMC
Effective November 30, 1997, the Company, the Bank and CMC entered into an
agreement with the minority shareholder of CMC and a corporation controlled by
him (the "Minority Shareholder Corporation"). The agreement provides for the
Bank's acquisition of the entire interest in CMC held by the minority
shareholder in exchange for 150,000 shares of the Common Stock, and further
provides for the payment of accrued compensation of $250,000. The agreement also
provides for a reduction in the number of shares of Common Stock to which the
minority shareholder would otherwise be entitled in the event that CMC's net
income for the twelve months ending December 31, 1998 does not exceed a certain
level. The agreement further requires that the minority shareholder's shares of
Common Stock be escrowed for three years, with a portion of such shares released
on each of three designated dates. The agreement also contains certain
indemnities in favor of the Company, the Bank and CMC and prohibits the minority
shareholder and the Minority Shareholder Corporation from competing with the
Company for a period of three years. In addition, for a three year period from
the effective date of the agreement, the Minority Shareholder Corporation shall
receive a monthly payment of $6,250, and the minority shareholder shall be
available, upon request and subject to regulatory approval, to serve as a
consultant to CMC. As a result of this transaction, as of November 30, 1997, the
Bank owned all of the outstanding shares of CMC. If the Bank had owned 100% of
CMC and the Company issued 150,000 additional shares of Common Stock on July 1,
1996, net income would have increased by $43,000 and net income per share would
have decreased by $0.01 for the year ended June 30, 1997 and net income and net
income per share would have increased by $103,000 and $0.02, respectively, for
the quarter ended September 30, 1997.
9
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors, which address those risks material to the Offering and the Company,
should be considered carefully in evaluating an investment in the Common Stock
offered by this Prospectus. Certain statements in this Prospectus are
forward-looking and are identified by the use of forward-looking words or
phrases such as "intended," "will be positioned," "expects," is or are
"expected," "anticipates" and "anticipated." In addition, certain financial
ratios with respect to interim periods have been computed on an annualized basis
and as a result, may be considered forward-looking statements, although they are
not necessarily indicative of the actual ratios that would result from an entire
year of operations. These forward-looking statements are based on the Company's
current expectations. To the extent any of the information contained in this
Prospectus constitutes a "forward-looking statement," the risk factors set forth
below are cautionary statements identifying important factors that could cause
actual results to differ materially from those in the forward-looking statement.
Restrictions on the Company as a Holding Company
The Company is a legal entity separate and distinct from the Bank, although
the principal source of the Company's operating cash flow is from the Bank. The
right of the Company to participate in the assets of any subsidiary, including
the Bank, upon liquidation, reorganization or otherwise (and thus the ability of
the holders of Common Stock to benefit from any distribution of such assets)
will be subject to the claims of such subsidiary's creditors, which will have
priority over the interests of the holders of Common Stock, except, under
certain circumstances, to the extent that the Company may itself be a creditor
with a recognized claim. The Bank is also subject to restrictions under federal
law which limit the transfer of funds by the Bank to the Company, whether in the
form of loans, extensions of credit, investments, asset purchases or otherwise.
See "Supervision and Regulation."
Risk of Recent Rapid Growth of Company and Bank
During the last several fiscal years, the Company and the Bank have
experienced rapid and significant growth. The total assets of the Company have
increased from $63.6 million at June 30, 1995, to $134.5 million at September
30, 1997. Although the Company believes that it has adequately managed its
growth in the past, there can be no assurance that the Company will continue to
experience similar growth, or any growth, in the future and, to the extent that
it does experience continued growth, that the Company will be able to adequately
and profitably manage such growth. The continued growth of the Bank has led the
Company to undertake the Offering and the capital to be raised from the Offering
is necessary to provide sufficient capital to support the anticipated future
growth of assets. No assurance can be given that rapid growth will continue,
and, if it does, there is no assurance that the earnings of the Bank or other
sources of capital which may be available to the Bank can adequately provide the
necessary capital for the Bank to maintain required regulatory capital levels
commensurate with continued rapid growth. The level of future earnings of the
Company also will depend on the ability of the Bank to profitably deploy and
manage the increased assets. The rapid growth of the Bank in asset size and the
rapid increase in its volume of loans during the past several fiscal years have
increased the possible risks inherent in an investment in the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Although the Bank has experienced moderate loan losses to date, the rapid
growth of its loan portfolio from $43.6 million at June 30, 1995, to $93.9
million at September 30, 1997, may result in an increase to its loan loss
experience. Many of the loans recently made by the Bank are unseasoned, and,
therefore, specific payment and loss experience for this portion of the
portfolio has not yet been fully established. This may increase the potential
for additional loan losses even if the Bank continues to adhere to the same
underwriting criteria and monitoring procedures that have resulted in the Bank's
moderate loan loss experience to date. In addition, the Bank has generated
non-interest income from certain specialty lending and product niche activities,
and anticipates continued expansion of these activities. However, there can be
no assurance that the Bank will be able to increase these activities in a manner
consistent with management's business goals. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Allowance for Loan
Losses."
10
<PAGE>
Adequacy of Allowance for Loan Losses
The risk of loan losses varies with, among other things, general economic
conditions, the type of loan being made, the creditworthiness of the borrower
over the term of the loan and, in the case of a collateralized loan, the value
of the collateral. Management maintains an allowance for loan losses based upon,
among other things, historical experience, an evaluation of economic conditions
and a regular review of delinquencies and loan portfolio quality. Based upon
such factors, management makes various assumptions and judgments about the
ultimate collectibility of the loan portfolio and provides an allowance for loan
losses for specific loans when their ultimate collectibility is considered
questionable and, for other loans, based upon a percentage of the outstanding
balances. Because certain lending activities involve greater risks, the
percentage applied to specific loan types may vary. If management's assumptions
and judgments prove to be incorrect and the allowance for loan losses is
inadequate to absorb future credit losses, or if the regulatory authorities
require the Bank to increase its allowance for loan losses, the Bank's earnings
could be significantly and adversely affected.
As of September 30, 1997, the allowance for loan losses was $487,000, which
represented 45.13% of nonperforming assets and 0.52% of the total net loan
portfolio as of such date. The Bank actively manages its nonperforming loans in
an effort to minimize credit losses and monitors its asset quality to maintain
an adequate allowance for loan losses. As its loan growth has increased, the
Bank has increased its allowance for loan losses. The Bank believes that such
allowance is adequate; however, future additions to the allowance in the form of
the provision for loan losses may be necessary due to changes in economic
conditions and the growth and performance of the Bank's loan portfolio. See "--
Risk of Recent Rapid Growth of Company and Bank."
Concentration of Credit Risk
The Bank's loan portfolio is concentrated in the Philadelphia metropolitan
area. As a result, a decline in the general economic conditions in the
Philadelphia metropolitan area could have a material adverse effect on the
Company. See "Business -- Core Banking Activities -- Conforming Credit
Residential Lending" and "-- Commercial Real Estate Lending."
Risks Related to Certain Operating Activities
The Company is engaged in a variety of lending activities which generally
involve significant uncertainties and risks, including changing economic
conditions and interest rates. In addition, many of the activities in which the
Company is involved and the loans and securities which it purchases and sells
involve real estate. Accordingly, the Company's operating performance is subject
to and affected by many of the risks typically related to real estate lending,
including borrower default, foreclosure, liquidation, significant declines in
the value of the properties that secure loans and environmental hazards.
The Company's strategy is to enhance the earnings generated by its core
banking operation by engaging in various specialty lending and product niche
activities that are designed to provide it with significantly higher
risk-adjusted rates of return than its historic bank lending activities. The
Company intends to monitor on an ongoing basis the risk/reward characteristics
of each of its specialty lending and product niche activities and determine
whether to expand, maintain or discontinue such activity. The Company may also
elect to pursue additional specialty lending and product niche activities. There
can be no assurance that the Company will be successful in its assessment of the
risk/reward characteristics of each of its specialty lending and product niche
activities or, even if such characteristics are considered favorable, that the
Company will successfully operate such activity. There can be no assurance that
the Company will be able to identify new specialty lending activities and if
such activities are identified, that the Company will be able to develop such
activities.
Commercial Real Estate Loans. Although as of September 30, 1997,
approximately 68% of the Com-pany's mortgage portfolio was in single family
residential real estate loans, of which approximately 80% conformed to the
underwriting standards of the Federal National Mortgage Association ("FNMA"), an
increasingly significant portion of the Company's mortgage portfolio is in
multi-family residential and non-residential ("Commercial Real Estate") loans.
Mortgage lending with respect to these loans may entail risks of loss in the
event of delinquency and foreclosure that are greater than similar risks
associated with traditional single family residential loans. These risks result
from a variety of factors, including generally larger loan balances, the
dependency on the successful operation of the project for repayment and loan
terms which often do not require a full
11
<PAGE>
amortization of the loan over its term and instead, provide for a balloon
payment at the stated maturity. Although the Company generally requires personal
guarantees on these loans, if the net operating income from the project is
reduced, the borrower's ability to repay the loan may be impaired. There can be
no assurance that the Bank's Commercial Real Estate loans will not be adversely
affected by these and other risks related to such activities.
Nonconforming Credit Residential Real Estate Loans. The Bank originates and
acquires Nonconforming Mortgage loans made to borrowers who, because of prior
credit problems, the absence of a credit history, deviation from FNMA guidelines
or other factors, are unable or unwilling to qualify as borrowers under FNMA
guidelines ("nonconforming borrowers"). The Bank seeks to resell these loans on
a non-recourse basis pursuant to the terms of certain agreements with purchasers
pertaining thereto. The Bank's ability to continue to earn income from this line
of business is dependent, among other things, upon the volume of loans to
nonconforming borrowers that the Bank is able to originate, acquire and resell.
These loans are offered pursuant to various programs, including programs which
provide for reduced or no documentation for verifying a borrower's income and
employment. Loans to nonconforming borrowers present a higher level of risk of
default than conforming loans because of the increased potential for default by
borrowers who may have had previous credit problems or who do not have any
credit history, and may not be as saleable as loans which conform to FNMA
guidelines. There can be no assurance that the Bank will be able to sell these
loans, and if the Bank is unable to sell the loans, they will become part of the
Bank's portfolio.
Potential Impact of Changes in Interest Rates
The Bank's profitability is dependent to a large extent on its net interest
income, which is the difference between its interest income on interest-earning
assets (as defined below) and its interest expense on interest-bearing
liabilities (as defined below). The Bank, like most financial institutions, is
affected by changes in general interest rate levels and by other economic
factors beyond its control. Changes in the general level of interest rates can
affect the Bank's net interest income by affecting the spread between the Bank's
interest-earning assets and interest-bearing liabilities, as well as, among
other things, the ability of the Bank to originate loans, the value of the
Bank's interest-earning assets and its ability to realize gains from the sale of
such assets, the average life of the Bank's interest-earning assets, and the
Bank's ability to obtain deposits in competition with other available investment
alternatives. Historically, a major source of the Bank's asset growth has been
funded by deposits, primarily certificates of deposit ("CDs"), which typically
provide for a higher interest rate than other bank deposit products, such as
checking and savings accounts, and the rates at which they are offered fluctuate
largely as a result of changes in market interest rates. Interest rates are
highly sensitive to many factors, including government monetary policies,
domestic and international economic and political conditions and other factors
beyond the control of the Bank. Interest rate risk also arises from mismatches
between the dollar amount of repricing or maturing assets and liabilities.
Although management believes that the maturities of the Bank's assets currently
are well-balanced in relation to its liabilities (which belief involves various
estimates as to how changes in the general level of interest rates will impact
its assets and liabilities), there can be no assurance that the profitability of
the Bank would not be adversely affected during any period of change in interest
rates. See "Management's Discussion and Analysis of Results of Operations and
Financial Condition -- Asset and Liability Management."
Limitations Imposed by Government Regulation
Both the Company, as a savings and loan holding company, and the Bank, as a
federally-chartered savings bank, are subject to extensive government
supervision and regulation, which is intended primarily for the protection of
depositors. In addition, both the Company and the Bank are subject to changes in
federal and state laws, including changes in tax laws which could materially
affect the real estate lending industry, as well as changes in regulations,
government policies and accounting principles. Recently enacted, proposed and
future legislation and regulations have had and will continue to have
significant impact on the financial services industry, including the Company.
Some of the legislative and regulatory changes may benefit the Company. However,
other changes may increase the Company's costs of doing business and assist
competitors, which could have a materially adverse effect on the Company. There
can be no assurance that the Company will be able to comply with regulations
promulgated in the future. See "Supervision and Regulation."
12
<PAGE>
Impact of Changes in Economic Conditions and Monetary Policies
Conditions beyond the Company's control may have a significant impact on
changes in the Company's net interest income and non-interest income from one
period to another. Examples of such conditions could include: (i) the strength
of credit demands by customers; (ii) the fiscal and debt management policies of
the federal government, including changes in tax laws; (iii) the monetary policy
of the Board of Governors of the Federal Reserve (the "Federal Reserve Board");
(iv) the introduction and growth of new investment instruments and transaction
accounts by non-bank financial competitors and (v) changes in rules and
regulations governing the payment of interest on deposit accounts.
High Degree of Competition
The banking business is highly competitive. The Bank competes with other
savings banks, commercial banks, savings and loan associations, mortgage bankers
and brokers, credit unions, finance companies, mutual funds, insurance companies
and brokerage and investment banking firms operating locally and elsewhere. Many
of the Bank's primary competitors are substantially larger, have substantially
greater resources and lending limits than the Bank and may offer certain
services, such as trust services, that the Bank does not provide at this time.
In addition, many of the Bank's primary competitors may have lower costs of
funds than the Bank. Furthermore, the current level of gains realized by the
Bank and its competitors on the sale of loans they originate and acquire is
attracting and may continue to attract additional competitors into the mortgage
markets. Increased competition could have adverse side effects, including (i)
lowering gains that may be realized on the Bank's loan sales, (ii) reducing the
volume of the Bank's loan originations and loan sales and (iii) increasing the
demand for the Bank's experienced personnel and the potential that such
personnel will be recruited by the Bank's competitors. The profitability of the
Company depends upon the Bank's ability to compete in the market relevant to
each of its businesses.
Relationship with Subsidiaries
All of the Company's operations are currently conducted through its
wholly-owned subsidiary, the Bank, and through the Bank's subsidiaries. The Bank
has entered into agreements with the minority shareholders of each subsidiary
which is not wholly-owned. Each of the minority shareholders is integral to the
day-to-day operation of each respective subsidiary. The profitability of the
Company is contingent in part on the profitability of the Bank's subsidiaries.
In the event that any one or more of the subsidiaries experiences a loss, such
loss could have a material adverse effect on the Company. The Bank does not have
employment agreements with the minority shareholders of the subsidiaries.
Severance of the relationship between the Bank and any of the subsidiaries or
its minority shareholders could have a material adverse effect on the Company.
There can be no assurance that the Bank's relationship with the minority
shareholders will continue or that the subsidiaries will continue to operate
profitability.
Effects of Anti-Takeover Provisions in Discouraging Takeover Offers and Changes
in Management
The Company's Articles of Incorporation and Bylaws provide, among other
things, that (1) special meetings of the Company's shareholders may be called
only by the Chairman of the Board of Directors, the President or a majority of
the Company's Board of Directors; (2) the Board of Directors may issue
additional shares of authorized Common Stock and fix the terms and designations
of and issue shares of authorized preferred stock without any further action by
the shareholders; (3) a majority of the shareholders can act by written consent
with prompt notice thereof given to the remaining shareholders thereafter and
(4) shareholders who propose to nominate a candidate for election to the Board
of Directors must give advance notice of such nomination, and furnish
information relating to the proposed nominee, to the Company. The management of
the Company does not have the ability to waive any of these provisions. See
"Certain Restrictions on Acquisition of the Company and the Bank" and "Certain
Anti-Takeover Provisions in the Articles of Incorporation and Bylaws."
Such provisions are intended to encourage a potential acquiror of the
Company to negotiate with the Board of Directors, which the Company believes is
in the best position to act on behalf of all of the shareholders, before seeking
to obtain control of the Company. Such provisions may, however, have the effect
of discouraging takeover offers that certain shareholders might deem to be in
their best interests, including takeover proposals in which shareholders might
receive a premium for their shares over the then-current market price. Such
provisions will also make it more difficult for individual shareholders or a
group of shareholders to replace existing management, whether or not such
shareholders believe that a change in management is in the best interest of the
Company.
13
<PAGE>
Reliance on Existing Management
The operations of the Company to date have been largely dependent on
existing management. The loss to the Company of one or more of its existing
executive officers could have a material adverse effect on its business and
results of operations. The Company has entered into employment agreements with
certain executive officers of the Company and the Bank. See "Management."
Control by Management/Principal Shareholders
A total of 2,350,000 shares, or 67.14%, of the outstanding shares of Common
Stock will be owned beneficially by the directors and executive officers of the
Company following the Offering. As of the date of this Prospectus (after giving
effect to the Offering), Thomas J. Knox, Chairman and a director of the Company,
will own beneficially 1,610,000 shares, or 46.00%, of the outstanding shares of
Common Stock and Bruce A. Levy, President and a director of the Company, will
own beneficially 690,000 shares, or 19.71%, of the outstanding shares of Common
Stock. Therefore, to the extent they vote together, Mr. Knox and Mr. Levy will
have the ability to control the election of the Company's Board of Directors and
other corporate actions requiring shareholder approval. See "Security Ownership
of Certain Beneficial Owners and Management."
Dilution and Benefit to Existing Shareholders
The proposed initial public offering price is substantially higher than
the net tangible book value per share of the Common Stock as of September 30,
1997. As a result, investors participating in the Offering will incur immediate
and substantial net tangible book value dilution in the amount of $9.82 per
share. See "Dilution."
No Prior Public Market; Determination of Offering Price
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price of the Common Stock will be determined
through negotiations between the Company and the Representative. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price. There can be no assurance that an active
trading market in the Common Stock will develop or be sustained following the
Offering. In addition to the risks inherent in stock market investing in
general, an investment in the Common Stock has the additional risk that the
number of active buyers and sellers of the Common Stock at any particular time
may be limited. Under such circumstances, investors in the Common Stock could
have difficulty disposing of their shares and therefore should not view the
Common Stock as a short-term investment.
Shares Eligible for Future Sale
Sales of shares of Common Stock in the public market following the Offering
by existing shareholders or option holders could adversely affect the market
price of the Common Stock. The Company's executive officers and directors have
agreed not to sell any of their shares until 180 days after the date of this
Prospectus without the prior written consent of the Representative. According to
Rule 144 under the Securities Act, as currently in effect, these shares will not
be eligible for public sale until at least 90 days after the date of this
Prospectus, and then will be subject to the volume limitations and other
conditions imposed by Rule 144. No prediction can be made as to the effect, if
any, that future sales of Common Stock, or the availability of Common Stock for
future sale, will have on the market price of the Common Stock prevailing from
time to time. See "Shares Eligible for Future Sale."
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,000,000 shares of
Common Stock offered by the Company hereby (assuming an initial public offering
price of $15 per share and after giving effect to the payment of underwriting
discounts and commissions and estimated offering expenses) are estimated to be
approximately $13.5 million ($15.6 million if the Underwriters' over-allotment
option is exercised in full). Approximately $3.2 million of the net proceeds
will be used by the Company to repay, without premium or penalty, borrowings
under several notes held by certain of the Company's existing shareholders (who
are also directors of the Company), the proceeds of which notes were contributed
as capital to the Bank. The notes provide for interest at an annual rate of 6%
and mature on March 1 and December 31, 2006 and September 30, 2007. The balance
of the net proceeds will be contributed as capital to the Bank. The Bank intends
to use such proceeds for working capital and for other general corporate
purposes.
DIVIDENDS
Historically, the Company has not paid cash dividends on the Common Stock.
The Company's Board of Directors does not currently intend to pay cash
dividends, and intends to retain all earnings to fund the growth of the Company
and the Bank. In December 1997, a two-for-one split of the Common Stock and in
March 1996, a twenty-eight-for-one split of the Common Stock were effected, each
in the form of a stock dividend. Future declarations of dividends by the Board
of Directors will depend upon a number of factors, including the Company's and
the Bank's financial condition and results of operations, investment
opportunities available to the Company and the Bank, capital requirements,
regulatory limitations, tax considerations and general economic conditions. No
assurance can be given, however, that any dividends will be paid or, if payment
is made, will continue to be paid.
The principal source of income and cash flow for the Company, including
cash flow to pay cash dividends on the Common Stock, is from the Bank. Various
federal laws, regulations and policies limit the ability of the Bank to pay cash
dividends to the Company. For certain limitations on the Bank's ability to pay
cash dividends to the Company, see "Supervision and Regulation -- Regulation of
the Bank -- Limitations on Capital Distributions."
15
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company and the regulatory capital ratios of the Bank at September 30, 1997, and
as adjusted, at such date, to give effect to the issuance and sale of the shares
of Common Stock offered hereby and the application of the net proceeds therefrom
as set forth in "Use of Proceeds," including the contribution by the Company to
the capital of the Bank of a portion of the estimated net proceeds therefrom.
The table should be read in conjunction with the Company's Consolidated
Financial Statements, including the Notes thereto, appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
At September 30, 1997
-------------------------
Actual As Adjusted
---------- ------------
(Unaudited)
(Dollars in thousands)
<S> <C> <C>
Shareholders' notes ....................................................... $ 3,238 $ --
------- --------
Shareholders' Equity:
Preferred Stock $0.01 par value, 5,000,000 shares authorized, actual and
as adjusted; none outstanding, actual and as adjusted ................. -- --
Common Stock $0.01 par value, 20,000,000 shares authorized, actual
and as adjusted; 2,350,000 shares issued and outstanding, actual and
3,350,000 issued and outstanding, as adjusted (1)(2)(3) ............... 24 34
Additional paid-in capital(1)(3) ....................................... 2,317 15,782
Retained earnings ...................................................... 1,517 1,517
Unrealized gains on securities available-for-sale ...................... 13 13
------- --------
Total shareholders' equity .......................................... 3,871 17,346
------- --------
Total capitalization ................................................... $ 7,109 $ 17,346
======= ========
</TABLE>
At September 30, 1997
-----------------------------------------
Minimum
Regulatory
Actual As Adjusted Requirement
---------- ------------- ------------
(Unaudited)
Bank Capital Ratios(1):
Tangible capital ................ 5.29% 11.95% 1.50%
Core (leverage) capital ......... 5.29 11.95 4.00
Risk-based capital .............. 10.26 23.36 8.00
- ------------
(1) Assumes the Company will contribute the net proceeds from the sale of the
shares of Common Stock offered hereby, after payment of $3.2 million of
indebtedness, to the Bank as set forth in "Use of Proceeds." Also assumes
that the Underwriters' over-allotment option to purchase up to 150,000
shares is not exercised. The Bank capital ratios, as adjusted, are computed
in a manner consistent with OTS guidelines and assume that the net proceeds
from the Offering that are contributed to the Bank are invested in assets
that carry a 20% risk-weighting.
(2) Excludes 150,000 shares of Common Stock issued effective November 30, 1997
in connection with the Company's acquisition of the minority interest in
CMC. See "Prospectus Summary -- Recent Developments." Also excludes 300,000
shares of Common Stock reserved for issuance under the Company's stock
option plans. See "Management -- Remuneration of Executive Officers -- Stock
Option Plans."
(3) Adjusted retroactively to reflect a two-for-one split of the Common Stock in
December 1997 and a twenty-eight-for-one split of the Common Stock in March
1996, both of which were effected in the form of a stock dividend.
16
<PAGE>
DILUTION
The difference between the public offering price per share of Common Stock
and the Company's net tangible book value per share after the Offering
constitutes the dilution to new investors in the Offering. Net tangible book
value per share is determined by dividing the net tangible book value of the
Company (total tangible assets less total liabilities) by the number of
outstanding shares of Common Stock.
At September 30, 1997, the net tangible book value of the Company was
$3,871,000, or $1.65 per share. After giving effect to the sale of the 1,000,000
shares of Common Stock being offered hereby and the receipt of the estimated net
proceeds therefrom (assuming an initial public offering price of $15 per share
and less underwriting discounts and commissions and estimated expenses of the
Offering), the pro forma net tangible book value of the Company at September 30,
1997 would be approximately $17,346,000, or $5.18 per share, representing an
immediate increase in net tangible book value of $3.53 per share to existing
shareholders and an immediate dilution of $9.82 per share to new investors. The
following table illustrates the foregoing information with respect to dilution
to new investors on a per share basis.
<TABLE>
<S> <C> <C>
Assumed initial public offering price ............................... $ 15.00
Net tangible book value before the Offering ...................... $ 1.65
Increase attributable to new investors in the Offering ........... 3.53
------
Adjusted pro forma net tangible book value after the Offering ....... 5.18
-------
Dilution to new investors in the Offering ........................... $ 9.82
=======
</TABLE>
The following table sets forth, with respect to existing shareholders and
new investors in the Offering, a comparison of the number of shares of Common
Stock acquired from the Company, the percentage of ownership of such shares, the
total cash consideration paid, the percentage of total cash consideration paid
and the average price per share.
<TABLE>
<CAPTION>
Total Cash
Shares Purchased Consideration Average
------------------------- ---------------------------- Price Per
Number Percent Amount Percent Share
----------- ----------- -------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Existing shareholders ......... 2,350,000 70.15% $ 2,322,000 13.40% $ 0.99
New investors ................. 1,000,000 29.85 15,000,000 86.60 15.00
--------- ------ ----------- ------ -------
Total ......................... 3,350,000 100.00% $17,322,000 100.00% $ 5.17
========= ====== =========== ====== =======
</TABLE>
The above table assumes an initial public offering price of $15 per share,
no exercise of the Underwriters' over-allotment option, no exercise of
outstanding stock options and no purchase by existing shareholders of shares
offered hereby. If the Underwriters' over-allotment option is exercised in full,
new investors will have paid $17,250,000 for 1,150,000 shares of Common Stock,
representing approximately 88.14% of the total cash consideration for 32.86% of
the total Common Stock outstanding. In addition, the above table excludes
150,000 shares of Common Stock issued in December 1997 in connection with the
acquisition of the minority interest in CMC. See "Prospectus Summary -- Recent
Developments." The table also excludes 300,000 shares of Common Stock reserved
for issuance under the Company's stock option plans. Upon consummation of the
Offering, there will be outstanding options to purchase an aggregate of 101,200
shares of Common Stock. See "Management -- Remuneration of Executive Officers,"
"Description of the Capital Stock" and "Underwriting."
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected information regarding the Company should be read in
conjunction with the Company's Consolidated Financial Statements, including the
Notes thereto, appearing elsewhere in this Prospectus. Consolidated historical
financial and other data regarding the Company at or for the three months ended
September 30, 1997 and 1996 have been prepared by the Company without audit and
may not be indicative of results on an annualized basis or any other period. In
the opinion of management, all adjustments (consisting only of normal recurring
accruals) that are necessary for a fair presentation for such periods or dates
have been made.
<TABLE>
<CAPTION>
At or for the Three
Months Ended September 30,
--------------------------
1997 1996
------------ ------------
(Unaudited)
(In thousands, except per
share amounts and ratios)
<S> <C> <C>
Selected Results of Operations:
Interest income(1) ...................... $ 2,818 $ 1,666
Interest expense ........................ 1,751 1,111
Net interest income ..................... 1,067 555
Provision for loan losses ............... 15 11
Total non-interest income ............... 1,001 308
CMC non-interest income(1) ............. 833 177
Total non-interest expenses ............. 1,011 798
Core non-interest expenses ............. 449 384
CMC expenses ........................... 562 118
SAIF special assessment(2) ............. 0 296
Minority interest in earnings ........... 19 0
Income tax expense (benefit)(3) ......... 358 19
Net income (loss) from continuing
operations ............................. 665 35
Income from discontinued opera-
tions(4) ............................... 0 0
Cumulative effect of change in
accounting principle(3) ................ 0 0
Net income (loss) ....................... 665 35
Net income (loss), excluding SAIF
assessment(2) .......................... 665 227
Per Share Data:(5)
Income (loss) from continuing opera-
tions per share(10) .................... 0.31 0.02
Weighted average shares outstanding . 2,170 2,000
Selected Balance Sheet Data:
Total assets ............................ $134,538 $ 88,703
Loans held for sale ..................... 16,767 1,528
Investment and mortgage-backed
securities(9) .......................... 20,840 22,317
Loans receivable net .................... 93,857 62,830
Deposits ................................ 110,625 66,381
Borrowings .............................. 15,130 16,701
Shareholders' notes ..................... 3,238 2,918
Shareholders' equity .................... 3,871 1,605
Performance Ratios:(6)
Return on average assets ................ 2.02% 0.16%
Net yield on interest-earning assets .... 3.31% 2.69%
Supplemental Performance Ratios: (6)
Return on average assets, excluding
SAIF assessment(2) ..................... 2.02% 1.07%
Return on average invested capital(7).... 37.42% 3.10%
Return on average invested capital,
excluding SAIF assessment(2)(7) ........ 37.42% 20.08%
Non-interest expenses, excluding CMC
expenses and SAIF assessment, to
average assets(2) ....................... 1.37% 1.81%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At or for the Year Ended June 30,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
(In thousands, except per share amounts and ratios)
<S> <C> <C> <C> <C> <C>
Selected Results of Operations:
Interest income(1) ...................... $ 7,919 $ 4,973 $ 3,773 $ 2,351 $ 5,219
Interest expense ........................ 5,130 3,559 2,681 1,335 3,804
Net interest income ..................... 2,789 1,414 1,092 1,016 1,415
Provision for loan losses ............... 58 42 30 30 114
Total non-interest income ............... 1,585 417 199 644 1,143
CMC non-interest income(1) ............. 1,074 0 0 0 0
Total non-interest expenses ............. 2,862 1,616 1,346 1,170 2,937
Core non-interest expenses ............. 1,680 1,616 1,346 1,170 2,937
CMC expenses ........................... 886 0 0 0 0
SAIF special assessment(2) ............. 296 0 0 0 0
Minority interest in earnings ........... 12 0 0 0 0
Income tax expense (benefit)(3) ......... 480 61 (20) 211 225
Net income (loss) from continuing
operations ............................. 962 112 (65) 249 (718)
Income from discontinued opera-
tions(4) ............................... 0 0 0 301 0
Cumulative effect of change in
accounting principle(3) ................ 0 0 0 83 0
Net income (loss) ....................... 962 112 (65) 633 (718)
Net income (loss), excluding SAIF
assessment(2) .......................... 1,154 112 (65) 633 (718)
Per Share Data:(5)
Income (loss) from continuing opera-
tions per share(10) .................... 0.46 0.07 (0.05) 0.18 ( 0.51)
Weighted average shares outstanding . 2,083 1,600 1,400 1,400 1,400
Selected Balance Sheet Data:
Total assets ............................ $117,093 $ 81,307 $63,550 $ 39,243 $ 73,869
Loans held for sale ..................... 6,244 1,659 1,550 738 17,942
Investment and mortgage-backed
securities(9) .......................... 22,343 22,097 16,651 12,770 1,478
Loans receivable net .................... 85,992 53,604 43,616 24,471 20,369
Deposits ................................ 95,906 59,624 47,530 27,180 63,661
Borrowings .............................. 14,730 16,651 12,097 9,402 6,000
Shareholders' notes ..................... 2,990 2,918 1,970 880 2,484
Shareholders' equity .................... 2,895 1,512 1,197 1,238 605
Performance Ratios:(6)
Return on average assets ................ 0.97% 0.17% (0.12)% 0.86% ( 0.93)%
Net yield on interest-earning assets .... 2.89% 2.23% 2.08% 3.12% 2.01%
Supplemental Performance Ratios: (6)
Return on average assets, excluding
SAIF assessment(2) ..................... 1.17% 0.17% (0.12)% 0.86% ( 0.93)%
Return on average invested capital(7).... 16.35% 2.53% (2.05)% 11.76% (23.24)%
Return on average invested capital,
excluding SAIF assessment(2)(7) ........ 19.61% 2.53% (2.05)% 11.76% (23.24)%
Non-interest expenses, excluding CMC
expenses and SAIF assessment, to
average assets(2) ....................... 1.70% 2.47% 2.48% 4.05% 3.80%
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
At or for the Three
Months Ended September 30, At or for the Year Ended June 30,
------------------------- ----------------------------------------------------------
1997 1996 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Asset Quality Ratios:
Non-accrual loans to net loans(8) ....... 0.66% 0.94% 0.87% 1.11% 0.88% 3.37% 5.07%
Non-performing loans to net loans(8)..... 1.04% 1.58% 1.28% 1.81% 2.43% 7.03% 8.94%
Non-performing assets to net loans
plus OREO(8) ........................... 1.15% 1.71% 1.28% 1.96% 2.56% 7.22% 10.25%
Allowance for loan losses to total
non-accrual loans(8) ................... 75.42% 74.37% 63.36% 72.51% 101.57% 44.61% 36.11%
Allowance for loan losses to net loans 0.52% 0.70% 0.55% 0.80% 0.89% 1.50% 1.83%
Capital Ratios:
Company equity to assets ................ 2.88% 2.03% 2.45% 1.86% 1.88% 3.15% 0.82%
Bank core capital ratio ................. 5.29% 5.48% 5.12% 5.79% 5.05% 5.30% 4.47%
Bank risk-based capital ratio ........... 10.26% 12.57% 10.81% 12.72% 11.65% 12.42% 10.27%
</TABLE>
- ------------
(1) Effective July 1, 1996, the Company adopted SFAS No. 122, "Accounting for
Mortgage Servicing Rights." The effect of adoption was not significant to
the Company's financial position or results of operations.
(2) In September 1996, the Company incurred a one-time SAIF assessment of
$296,000 to recapitalize the fund. Net of related tax effects, this
assessment reduced net income by $192,000 for the quarter ended September
30, 1996 and the year ended June 30, 1997.
(3) Effective July 1, 1993, the Company adopted SFAS No. 109, "Accounting for
Income Taxes." The cumulative effect of the adoption of SFAS No. 109 was
the recognition of deferred tax assets and an $83,000 reduction of income
tax expense for the year ended June 30, 1994.
(4) During the year ended June 30, 1994, the Company sold its conforming
residential mortgage servicing portfolio. Net of related tax effects, this
resulted in a gain of $301,000 for the year ended June 30, 1994.
(5) Per share amounts have been adjusted to retroactively reflect prior stock
splits. See "Dividends."
(6) Interim period ratios are annualized where appropriate. Returns are
calculated based on income (loss) from continuing operations.
(7) Invested capital is the sum of shareholders' notes and shareholders'
equity.
(8) Non-accrual loans are loans past due 90 or more days and on which interest
is not being accrued. Non-performing loans are loans past due 90 or more
days, including non-accrual loans and loans still accruing interest.
Non-performing assets are non-performing loans plus Other Real Estate Owned
("OREO"). Effective July 1, 1995, the Company adopted SFAS No. 114,
"Accounting for Impairment of a Loan," as amended by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan -- Income Recognition and
Disclosures." The effect of adoption was not significant to the Company's
financial position or results of operations.
(9) Effective July 1, 1994, the Company adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." The effect of adoption
was not material to the Company's financial position or results of
operations.
(10) Supplemental earnings per share would have been $0.29 and $0.47 for the
quarter ended September 30, 1997 and the year ended June 30, 1997,
respectively, assuming that a sufficient number of shares of Common Stock
were issued at an assumed public offering price of $15 per share to permit
the Company to repay the debt to shareholders outstanding during the
respective periods with the proceeds from the sale of such shares.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the Company's consolidated financial condition
and results of operations and capital resources and liquidity should be read in
conjunction with Selected Consolidated Financial Data and the Consolidated
Financial Statements and related Notes included elsewhere herein. Prospective
investors are urged to carefully consider this related information in connection
with a review of the following discussion.
General
The Company is a holding company operating a federally chartered savings
bank. The Bank conducts community banking activities by accepting deposits from
the public and investing the proceeds in loans and investment securities. In
addition to bank lending products, such as single family conforming credit
residential mortgages ("Conforming Residential Mortgages"), home equity loans,
multi-family residential and non-residential real estate (collectively,
"Commercial Real Estate") loans and SBA loans, the Bank originates or acquires
Nonconforming Mortgages that are subsequently resold in larger pools and
delinquent property tax liens. In order to manage its liquidity and interest
rate risk, the Bank maintains an investment portfolio consisting of bonds and
mortgage-backed securities, all of which currently are U.S. Treasury or U.S.
Government Agency quality. The Bank's loan and investment portfolios are funded
with deposits as well as borrowings from the FHLB or collateralized borrowings
secured by the Bank's investment securities. The Bank's earnings are largely
dependent upon its net interest income (the difference between what it earns on
its loans and investments and what it pays on its deposits and borrowings). In
addition to net interest income, the Bank's net income is impacted by its loan
loss provision, non-interest income (such as revenues realized by CMC in its
Nonconforming Mortgage operation, mortgage banking revenue from the sale of
conforming residential mortgage loans and loan, deposit and ATM fees) and
non-interest expenses (such as salaries and benefits, professional fees,
occupancy costs, deposit insurance premiums and expenses related to CMC
Nonconforming Mortgage operations).
Acquisition of Minority Interest in CMC
Effective November 30, 1997, the Company, the Bank and CMC entered into an
agreement with the minority shareholder of CMC and the Minority Shareholder
Corporation. The agreement provides for the Bank's acquisition of the entire
interest in CMC held by the minority shareholder in exchange for 150,000 shares
of the Common Stock, and further provides for the payment of accrued
compensation of $250,000. The agreement also provides for a reduction in the
number of shares of Common Stock to which the minority shareholder would
otherwise be entitled in the event that CMC's net income for the twelve months
ending December 31, 1998 does not exceed a certain level. The agreement further
requires that the minority shareholder's shares of Common Stock be escrowed for
three years, with a portion of such shares released on each of three designated
dates. The agreement also contains certain indemnities in favor of the Company,
the Bank and CMC and prohibits the minority shareholder and the Minority
Shareholder Corporation from competing with the Company for a period of three
years. In addition, for a three year period from the effective date of the
agreement, the Minority Shareholder Corporation shall receive a monthly payment
of $6,250, and the minority shareholder shall be available, upon request and
subject to regulatory approval, to serve as a consultant to CMC. As a result of
this transaction, as of November 30, 1997, the Bank owned all of the outstanding
shares of CMC. If the Bank had owned 100% of CMC and the Company issued 150,000
additional shares of Common Stock on July 1, 1996, net income would have
increased by $43,000 and net income per share would have decreased by $0.01 for
the year ended June 30, 1997 and net income and net income per share would have
increased by $103,000 and $0.02, respectively, for the quarter ended September
30, 1997.
Overview
Through 1995, the Bank primarily engaged in the origination and sale of
conforming residential mortgage loans (FNMA fixed rate mortgage loans) and the
origination of adjustable rate single family mortgages for its portfolio. The
Bank has established and seeks to continue developing a loan referral network
consisting of mortgage banking companies affiliated with local realty companies
and local realtors with no mortgage company
20
<PAGE>
affiliation, as well as smaller mortgage bankers and brokers. In this business,
the Bank attempts to distinguish itself from its competition by providing
efficient service and offering specialized adjustable rate loan products. Since
opening its Center City, Philadelphia branch in 1994, the Bank has been
developing a referral base for Commercial Real Estate loans consisting of local
realtors and real estate investors, as well as repeat and referral business from
existing borrowers. In order to better monitor its Commercial Real Estate loan
portfolio, the Bank concentrates its lending in the Philadelphia metropolitan
area, consisting of Bucks, Chester, Delaware, Montgomery and Philadelphia
counties, as well as Central and Southern New Jersey and Northern Delaware. In
order to better compete in this business, the Bank attempts to provide its
applicants with quick responses by having a Board Loan Committee which meets on
an as needed basis to evaluate loan applications.
Through June 30, 1996, the Company experienced minimal returns on assets
and equity since it maintained a high cost infrastructure relative to its then
current asset size. Non-interest expenses as a percentage of average assets for
fiscal years 1994, 1995 and 1996 were 4.05%, 2.48% and 2.47%, respectively. In
addition, during this period, the Company grew its assets primarily by adding
promotional rate adjustable mortgages that were not profitable during the
initial year of origination.
In the latter part of 1995, management began to refocus the Company and
developed a plan designed to grow its assets and profitability. The Company's
strategy is to maintain a core banking operation that provides a growing stream
of core income enhanced by engaging in various specialty lending and product
niche activities designed to provide the Company with significantly higher
risk-adjusted rates of return. In July 1996, the Bank formed CMC to originate
and acquire for resale Nonconforming Mortgages. Initially, the Bank maintained a
51% controlling interest in CMC which was subsequently increased to 67.5% in
September 1997 and to 100% as of November 1997. See "-- Acquisition of Minority
Interest in CMC." In August 1996, the Bank formed a 60%-owned subsidiary,
Crusader Servicing Corporation ("CSC"), to acquire delinquent property tax
liens.
From June 1995 through September 1997, the Company increased its asset base
from $63.6 million to $134.5 million, primarily relating to its core banking
operation. In addition, the Bank's specialty lending and product niche
activities have produced increasing amounts of non-interest income. Despite the
growth in its assets, the Company has emphasized controlling its operating
expenses. In this regard, the Company has reduced its ratio of core non-interest
expenses (operating expenses exclusive of the SAIF assessment and CMC expenses)
to average assets from 2.47% for fiscal year 1996 to 1.70% for fiscal year 1997
and to 1.37% for the quarter ended September 30, 1997.
The increase in net interest income resulting from the growth in the
Company's asset base, the containment of core non-interest expenses and the
increase in non-interest income all have contributed to the Company's higher
level of profitability in recent periods. The Company continues to generate
asset growth at a rate that cannot be supported by internally generated capital
growth and thus has determined to offer the shares of Common Stock in the
Offering to support its growth.
Results of Operations
Three months ended September 30, 1997 versus three months ended September
30, 1996. Net income increased to $665,000 for the three months ended September
30, 1997 as compared to $35,000 for the comparable prior year period. Net
interest income increased by $512,000 due primarily to a growth in average
earning assets. Non-interest income increased by $693,000 due primarily to an
increase in the Nonconforming Mortgage banking income of CMC, which commenced
operations in July 1996. Non-interest expenses increased by $213,000. Excluding
an increase of $444,000 in CMC operating expenses and the $296,000 one-time SAIF
assessment incurred during the prior year period, non-interest expenses
increased by $65,000, which is due to the Bank's expansion of staff to
accommodate for the growth in assets. Subsequent to the recapitalization of
SAIF, the ongoing insurance costs were reduced from 0.23% to 0.065% as the Bank
is currently charged the rate attributed to institutions with the lowest risk
rating. Income taxes were $339,000 higher due to the increased profitability.
Year ended June 30, 1997 versus year ended June 30, 1996. Net income
increased to $962,000 for the year ended June 30, 1997 as compared to $112,000
for the prior year. Net interest income increased by $1.4 million
21
<PAGE>
due primarily to a growth in average earning assets. Non-interest income
increased by $1.2 million due primarily to the CMC Nonconforming Mortgage
banking income of $1.1 million. Non-interest expenses increased by $1.2 million
due principally to expenses of $886,000 associated with the operation of CMC and
the one-time SAIF assessment of $296,000. Excluding these two items,
non-interest expenses increased by $64,000 resulting primarily from staff
expansion. Income taxes increased by $419,000 due to the increased profitability
of the Company.
Year ended June 30, 1996 versus year ended June 30, 1995. Net income
increased to $112,000 for the year ended June 30, 1996, as compared to a loss of
$65,000 for the prior year. Net interest income increased by $322,000 due
primarily to a growth in average earning assets. Non-interest income increased
by $218,000 resulting primarily from a $165,000 increase in mortgage banking
income and a $73,000 increase in service fees on deposit accounts. Non-interest
expenses increased by $270,000 due to staff expansion to accommodate current and
anticipated asset growth and, to a lesser extent, higher FDIC premiums resulting
from deposit growth. Income taxes were $81,000 higher due to the increased
profitability.
Net Interest Income
Net interest income is the difference between interest received on the
Bank's loans and investment securities ("interest-earning assets") and interest
paid on deposits and borrowings ("interest-bearing liabilities"). It is the most
significant component of the Bank's operating income and is largely dependent
upon the volume and rate earned on interest-earning assets and the volume and
rate paid on interest-bearing liabilities.
22
<PAGE>
The following tables set forth a summary of average balances with
corresponding interest income and interest expense as well as average yield and
rate information for the periods presented. Average balances are derived from
daily balances during the indicated periods, except where noted otherwise.
<TABLE>
<CAPTION>
Three Months Ended September 30,
-------------------------------------------------------------------------------
1997 1996
-------------------------------------- --------------------------------------
(Dollars in thousands)
Average Average
Average Yield/ Average Yield
Balance Interest Rate(1) Balance Interest Rate(1)
------------- ---------- --------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Average assets:
Loans receivable(2) ........................ $ 105,792 $2,415 9.13% $ 58,691 $1,264 8.61%
Investment and mortgage-backed
securities(3) ............................. 22,993 403 7.01 23,711 402 6.78
--------- ------ ---- --------- ------ ----
Total interest-earning assets .............. 128,785 2,818 8.75 82,402 1,666 8.09
------ ---- ------ ----
Non-interest-earning assets ................ 2,704 2,688
--------- ---------
Total assets ............................... $ 131,489 $ 85,090
========= =========
Average liabilities and shareholders' equity:
Interest-bearing deposit accounts .......... 105,729 1,473 5.57 62,097 839 5.40
Borrowings ................................. 16,272 240 5.90 16,785 234 5.58
Shareholders' notes ........................ 2,975 38 5.11 2,918 38 5.21
--------- ------ ---- --------- ------ ----
Total interest-bearing liabilities ......... 124,976 1,751 5.60 81,800 1,111 5.43
------ ---- ------ ----
Non-interest bearing deposit accounts. 2,063 1,421
Other non-interest-bearing liabilities ..... 1,208 310
--------- ---------
Total liabilities .......................... 128,247 83,531
Shareholders' equity(4) .................... 3,242 1,559
--------- ---------
Total liabilities and shareholders'
equity .................................... $ 131,489 $ 85,090
========= =========
Net interest income ........................ $1,067 $ 555
====== ======
Interest rate spread(5) .................... 3.15% 2.66%
==== ====
Net yield on interest-earning assets(6)..... 3.31% 2.69%
==== ====
Ratio of interest-earning assets to
interest-bearing liabilities .............. 103.05% 100.74%
========= =========
</TABLE>
- ------------
(1) Ratios for interim periods have been annualized.
(2) Average balances include non-accrual loans, interest on which is recognized
on a cash basis, and loans held for sale.
(3) Yields are calculated based on the fair value of investment and
mortgage-backed securities. Includes interest-bearing deposits at the
FHLB.
(4) Averages were computed using month-end balances.
(5) Represents the difference between the average yield earned on
interest-earning assets and the average rate paid on interest-bearing
liabilities.
(6) Represents net interest income as a percentage of average interest-earning
assets.
23
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------------------
1997 1996
----------------------------------- -----------------------------------
(Dollars in thousands)
Average Average
Average Yield/ Average Yield
Balance Interest Rate Balance Interest Rate
------------ ---------- --------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Average assets:
Loans receivable(1) ........................ $ 74,306 $6,413 8.63% $ 46,390 $3,903 8.41%
Investment and mortgage-backed
securities(2) ............................. 22,183 1,506 6.79 17,088 1,070 6.26
--------- ------ ----- --------- ------ -----
Total interest-earning assets .............. 96,489 7,919 8.21 63,478 4,973 7.83
------ ----- ------ -----
Non-interest-earning assets ................ 2,254 2,014
--------- ---------
Total assets ............................... $ 98,743 $ 65,492
========= =========
Average liabilities and shareholders' equity:
Interest-bearing deposit accounts .......... 74,403 3,978 5.35 51,358 2,825 5.50
Borrowings ................................. 17,267 995 5.76 9,341 543 5.81
Shareholders' notes ........................ 2,954 157 5.31 1,910 191 10.00
--------- ------ ----- --------- ------ -----
Total interest-bearing and deposit
liabilities ............................... 94,624 5,130 5.42 62,609 3,559 5.68
------ ----- ------ -----
Non-interest-bearing deposit
accounts .................................. 1,794 812
Other non-interest-bearing liabilities. 141 790
--------- ---------
Total liabilities .......................... 96,559 64,211
Shareholders' equity(3) .................... 2,184 1,281
Total liabilities and shareholders'
equity..................................... $ 98,743 $ 65,492
========= =========
Net interest income ........................ $2,789 $1,414
====== ======
Interest rate spread(4) .................... 2.79% 2.15%
===== =====
Net yield on interest-earning
assets(5) ................................. 2.89% 2.23%
===== =====
Ratio of interest-earning assets to
interest-bearing liabilities .............. 101.97% 101.39%
========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1995
------------------------------------
Average
Average Yield
Balance Interest Rate
------------ ---------- ----------
<S> <C> <C> <C>
Average assets:
Loans receivable(1) ........................ $ 35,126 $2,724 7.75%
Investment and mortgage-backed
securities(2) ............................. 17,449 1,049 6.01
--------- ------ -----
Total interest-earning assets .............. 52,575 3,773 7.18
------
Non-interest-earning assets ................ 1,677
---------
Total assets ............................... $ 54,252
=========
Average liabilities and shareholders' equity:
Interest-bearing deposit accounts .......... 38,763 1,881 4.85
Borrowings ................................. 11,970 665 5.56
Shareholders' notes ........................ 1,227 135 11.00
--------- ------ -----
Total interest-bearing and deposit
liabilities ............................... 51,960 2,681 5.16
------ -----
Non-interest-bearing deposit
accounts .................................. 408
Other non-interest-bearing liabilities. 666
---------
Total liabilities .......................... 53,034
Shareholders' equity(3) .................... 1,218
Total liabilities and shareholders'
equity..................................... $ 54,252
=========
Net interest income ........................ $1,092
======
Interest rate spread(4) .................... 2.02%
=====
Net yield on interest-earning
assets(5) ................................. 2.08%
=====
Ratio of interest-earning assets to
interest-bearing liabilities .............. 101.18%
=========
</TABLE>
- ------------
(1)Average balances include non-accrual loans, interest on which is recognized
on a cash basis, and loans held for sale.
(2) Yields are calculated based on the fair value of investment and
mortgage-backed securities. Includes interest-bearing deposits at the FHLB.
(3) Averages were computed using month-end balances.
(4) Represents the difference between the average yield earned on
interest-earning assets and the average rate paid on interest-bearing
liabilities.
(5) Represents net interest income as a percentage of average interest-earning
assets.
24
<PAGE>
The following table sets forth certain information regarding changes in
interest income and interest expense for the periods indicated for each category
of interest-earning assets and interest-bearing liabilities. Information is
provided on changes attributable to (i) changes in volume (changes in average
volume multiplied by prior rate), (ii) changes in rate (changes in average rate
multiplied by prior average volume), and (iii) changes in rate and volume
(changes in average volume multiplied by change in average rate).
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------------------------
1997 versus 1996
Three Months Ended September 30, -------------------------------------------
1997 versus 1996 Increase (Decrease)
Increase (Decrease) Due to Due to
---------------------------------------------- -------------------------------------------
(Dollars in thousands)
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
------------ --------- ---------- --------- -------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable ............... $1,014 $76 $61 $1,151 $2,348 $ 103 $ 59 $2,510
Investment and mortgage-
backed securities ............. (50) 53 (2) 1 317 90 29 436
------ ---- ------ ------ ------ ------- ------- ------
Total interest-earning assets.... 964 129 59 1,152 2,665 193 88 2,946
------ ---- ----- ------ ------ ------- ------- ------
Interest expense:
Deposit accounts ............... 584 30 20 634 1,300 (99) (48) 1,153
Borrowings ..................... (7) 9 4 6 461 (5) (4) 452
Shareholders' notes ............ 3 (1) (2) 0 104 (90) (48) (34)
------- ------ ------ ------ ------ -------- -------- ------
Total interest-bearing
liabilities .................... 580 38 22 640 1,865 (194) (100) 1,571
------- ----- ----- ------ ------ -------- -------- ------
Increase in net interest
income ......................... $ 384 $91 $37 $ 512 $ 800 $ 387 $ 188 $1,375
======= ===== ===== ====== ====== ======== ======== ======
1996 versus 1995
------------------------------------------
Increase (Decrease)
Due to
------------------------------------------
Rate/
Volume Rate Volume Total
--------- -------- ---------- ---------
Interest income:
Loans receivable ............... $ 873 $ 232 $74 $1,179
Investment and mortgage-
backed securities ............. (22) 44 (1) 21
------- ----- ------ ------
Total interest-earning assets.... 851 276 73 1,200
------- ----- ----- ------
Interest expense:
Deposit accounts ............... 626 239 79 944
Borrowings ..................... (146) 30 (6) (122)
Shareholders' notes ............ 75 (12) (7) 56
------- ----- ------ ------
Total interest-bearing
liabilities .................... 555 257 66 878
------- ----- ----- ------
Increase in net interest
income ......................... $ 296 $ 19 $ 7 $ 322
======= ===== ===== ======
</TABLE>
<PAGE>
Three months ended September 30, 1997 versus three months ended September
30, 1996. Net interest income increased by $512,000 or 92.25% for the three
month period ended September 30, 1997 as compared to the comparable prior year
period. Interest income increased by $1.2 million due primarily to a rise in
average outstanding loan balances of $47.1 million and, to a lesser extent, a
0.52% higher average yield earned on loans. The loan growth occurred largely in
Commercial Real Estate lending and in Nonconforming Mortgages available for
sale. Both of these loan types carry higher yields than Conforming Residential
Mortgages which comprised a more significant portion of the loan balance during
the prior year period. Interest expense increased by $640,000 due primarily to
an increase in average interest-bearing deposit balances of $43.6 million.
Deposits were the primary funding source of the loan growth. The Company's
aggregate cost of funds increased to 5.60% as compared to 5.43% for the
comparable prior year period. The Company's net yield on interest-earning assets
increased to 3.31% as compared to 2.69% for the prior year period. This 0.62%
increase was due principally to the Bank's higher yield from loans and an
increase in the Company's average shareholders' equity balances.
Year ended June 30, 1997 versus year ended June 30, 1996. Net interest
income increased by $1.4 million or 97.24% for the year ended June 30, 1997 as
compared to the prior year. Interest income increased by $2.9 million due
primarily to a $33.0 million increase in average earning assets and, to a lesser
extent, an increase in the yield on earning assets of 0.38%. Interest expense
increased by $1.6 million due primarily to a $32.0 million increase in average
interest-bearing liabilities which was partially offset by a decline in the
average rate paid on these liabilities of 0.26%. The net yield on
interest-earning assets increased by 0.66% The increase in the rate on earning
assets resulted from the continued upward repricing of promotional rate
adjustable rate residential mortgage loans, as well as the growth in the higher
yielding Commercial Real Estate loan portfolio. The decline in the rate on
interest-bearing liabilities reflects a decline in general market interest
rates. Loan growth was funded primarily by increases in average interest-bearing
deposits of $23.0 million and in average borrowings of $7.9 million.
Year ended June 30, 1996 versus year ended June 30, 1995. Net interest
income increased by $322,000 or 29.49% for the year ended June 30, 1996 as
compared to the prior year. Interest income increased by $1.2 million primarily
due to a $10.9 million increase in average interest-earning assets and a 0.65%
increase in the average yield. Interest expense increased by $878,000 due
primarily to a $10.6 million increase in average interest-bearing liabilities
and a 0.52% increase in the average rate paid on such liabilities. The net yield
on
25
<PAGE>
interest earning assets and the rate on interest-bearing liabilities both
increased due to an increase in general market interest rates. The Company's net
yield on interest-earning assets increased 0.15% primarily due to the Company's
loan portfolio comprising a larger relative portion of average earning assets
than in the prior year. Interest rates earned on loans are generally higher than
the rates earned on the investment securities portfolio. The asset growth was
funded through an increase in average interest-bearing deposits of $12.6 million
which was offset by a reduction in average borrowings of $2.6 million.
Provision for Loan Losses
For the three months ended September 30, 1997, the provision for loan
losses was $15,000, a 36.36% increase compared to the comparable prior year
period. The Bank's provision for loan losses was $58,000 for the year ended June
30, 1997 compared to $42,000 and $30,000, respectively, for the two prior years.
These increases resulted from the growth in the loan portfolio. On a quarterly
basis, the Bank's Board of Directors and management perform a detailed analysis
of the adequacy of the allowance for loan losses. This analysis includes an
evaluation of credit risk concentration, delinquency trends, past loss
experience, current economic conditions, composition of the loan portfolio,
classified loans and other relevant factors. The loan growth experienced by the
Bank has not resulted in significant increases in delinquencies or an increase
in the chargeoffs incurred by the Bank. Net chargeoffs by the Bank for the
fiscal years ended June 30, 1997, 1996 and 1995 were $16,000, $0, and $10,000,
respectively. Charge-offs for the quarters ended September 30, 1997 and
September 30, 1996 were $0 and $1,000, respectively.
The Bank will continue to monitor its allowance for loan losses and make
future adjustments to the allowance through the provision for loan losses as
conditions warrant. Although the Bank believes that the allowance for loan
losses is adequate to provide for losses inherent in the loan portfolio, there
can be no assurance that future losses will not exceed the estimated amounts or
that additional provisions will not be required in the future.
The Bank is subject to periodic regulatory examination by the OTS. As part
of the examination, the OTS will assess the adequacy of the Bank's allowance for
loan losses and may include factors not considered by the Bank. In the event
that an OTS examination results in a conclusion that the Bank's allowance for
loan losses is not adequate, the Bank may be required to increase its provision
for loan losses.
Non-Interest Income
Non-interest income is derived primarily from revenue realized by CMC in
its Nonconforming Mortgage operation, mortgage banking revenue from the Bank's
sale of conforming residential mortgage loans and deposit and loan fees,
including revenues generated from the Bank's ATMs.
For the three month period ended September 30, 1997, non-interest income
increased by $693,000 or 225.00% as compared to the comparable prior year
period. This resulted primarily from a $656,000 increase in the revenues of CMC
as its operations continued to experience strong growth. During the current year
quarter, the Bank had Nonconforming Mortgage loan originations and acquisitions
of $25.6 million, and Nonconforming Mortgage loan sales of $14.9 million, with
an average gain on sale of 5.02%. This compares to Nonconforming Mortgage loan
originations of $4.0 million during the comparable prior year period, which was
CMC's first quarter of operation. In addition to the increased revenue from CMC,
the Bank's conforming mortgage banking revenue increased by $31,000, due
primarily to an increased volume of loan sales.
For the year ended June 30, 1997, non-interest income increased by $1.2
million or 280.10% as compared to the prior year. This increase is primarily the
result of CMC's revenues of $1.1 million during the year. During the year, the
Bank had $20.1 million of Nonconforming Mortgage loan sales, with an average
gain on sale of 5.10%. In addition, the Bank instituted a surcharge fee for the
use of its ATMs by non-bank customers which resulted in additional fee income to
the Bank of $64,000.
Non-interest income for the year ended June 30, 1996 increased by $218,000
or 109.55% as compared to the prior year. This increase resulted primarily from
an increase in the Bank's conforming mortgage banking
26
<PAGE>
revenues of $165,000, due to increased demand for fixed rate loans. Although the
Bank's volume of loan originations was comparable in both years, fiscal 1996
loan origination volume included a greater percentage of fixed rate loans which
were resold, while a higher percentage of originations in fiscal 1995 were
adjustable rate loans that were maintained in the Bank's loan portfolio.
Non-Interest Expenses
Non-interest expenses for the three month period ended September 30, 1997
increased by $213,000 or 26.69% as compared to the comparable prior year period.
Excluding the $296,000 SAIF assessment incurred in the prior year period and the
$444,000 increase in CMC operating expenses, non-interest expenses increased by
$65,000 or 16.92%. The increase is primarily due to the hiring of additional
personnel in connection with the Bank's growth in assets.
For the year ended June 30, 1997, non-interest expenses increased by $1.2
million or 77.10% as compared to the prior year. Excluding the $296,000 SAIF
assessment and the $886,000 increase in CMC operating expenses, non-interest
expenses increased by $64,000 or 3.96%.
Non-interest expenses for the fiscal year ended June 30, 1996 increased by
$270,000 or 20.06% as compared to the prior year. This was primarily due to
increased compensation costs of $242,000 and, to a lesser extent, a $31,000
increase in FDIC premiums resulting from deposit growth.
Income Tax Expense
Income tax expense was $358,000 for the three month period ended September
30, 1997, as compared to $19,000 during the comparable prior year period. Income
tax expense was $480,000 for the year ended June 30, 1997 as compared to a
$61,000 expense and a $20,000 income tax benefit for the two prior years. The
changes in income tax expense primarily relate to the changes in income before
taxes.
Liquidity and Capital Resources
A major source of the Company's asset growth has been funded through
deposits, mostly CDs, generated through the Bank's two branch offices and a
network of financial planners and brokers. The Bank currently does not intend to
open additional retail branches.
The ability of the Bank to retain and attract deposits is dependent upon a
number of factors, including interest rates offered on the Bank's products.
Historically, most of the Bank's deposits have been in the form of CDs, which
typically provide for a higher interest rate than other bank deposit products,
such as checking and savings accounts, and the rates at which they are offered
fluctuate largely as a result of changes in market interest rates. The Bank also
funds its assets with secured borrowings from the FHLB and collateralized
borrowings secured by its investment securities portfolio. These borrowings
generally provide the Bank with greater flexibility in matching the duration of
its liabilities with that of certain of its assets. Future availability of these
funding sources is largely dependent upon the Bank having sufficient available
eligible assets to collateralize these borrowings. The Bank currently has
available excess collateral to secure future borrowings from these sources and
it anticipates that future asset growth will provide additional eligible
collateral. The Bank's assets generally provide for scheduled principal and
interest payments which provide the Bank with additional sources of funds. If
required, additional funds could be obtained through the sale of either loans or
investment securities, which are classified as available for sale. The Bank has
and will continue to utilize its investment securities portfolio to manage
liquidity.
The Bank's primary uses of funds are the origination and acquisition of
loans, the funding of maturing deposits and the repayment of borrowings. The
Bank has experienced strong loan demand. Based upon management's current
business strategy, the Company believes that its income from operations and
existing funding sources, together with the anticipated proceeds to be provided
by the Offering, will be adequate to meet its operating and growth requirements
for the foreseeable future; however, there can be no assurance that such
strategy will not change or that the implementation of the strategy will not
require additional capital or funding sources.
27
<PAGE>
Net cash used in operating activities for the years ended June 30, 1997 and
1996 was $2.2 million and $838,000, respectively. During fiscal year 1997, the
$2.2 million related principally to growth in loans available for sale while the
$838,000 in fiscal year 1996 related to growth in loans available for sale and
other assets. During fiscal year 1995, the cash used in operating activities was
$1.0 million related primarily to growth in loans available for sale.
Net cash used in investing activities approximated $33.2 million, $15.9
million and $23.3 million during the years ended June 30, 1997, 1996 and 1995,
respectively. During each year, the primary use was the funding of the growth in
the Bank's loan portfolio.
The Bank monitors its capital level relative to its business operations and
anticipated growth and has continually maintained it at a level which would
allow it to be classified as "well-capitalized" under the Federal Deposit
Insurance Corporation Improvement Act ("FDICIA"). Well-capitalized institutions
are assessed lower deposit insurance premiums. The Company's capital to support
its asset growth has come from internally generated earnings as well as from
additional capital contributions by its shareholders. As a privately owned
company, the Company's shareholders chose to contribute capital on an ongoing
basis only as it was necessary to fund the Company's growth.
The following table sets forth the Bank's regulatory capital levels at
September 30, 1997. The Company is not subject to regulatory capital
requirements.
<TABLE>
<CAPTION>
To Be Well
Capitalized
Required for Under Prompt
Capital Adequacy Corrective Action
Actual Purposes Provisions
--------------------- --------------------- ---------------------
(Dollars in thousands)
Amount Ratio Amount Ratio Amount Ratio
-------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Tangible capital ........... $7,158 5.29% $2,030 1.50% $6,766 5.00%
Core capital ............... 7,158 5.29 5,413 4.00 6,766 5.00
Risk-based capital ......... 7,645 10.26 5,960 8.00 7,450 10.00
</TABLE>
Asset and Liability Management
Managing Interest Rate Risk. Interest rate risk is defined as the
sensitivity of the Company's current and future earnings as well as its capital
to changes in the level of market interest rates. The Bank's exposure to
interest rate risk results from, among other things, the difference in
maturities on interest-earning assets and interest-bearing liabilities. Since
the Bank's assets currently have a longer maturity than its liabilities, the
Bank's earnings could be negatively impacted during a period of rising interest
rates and conversely positively impacted during a period of falling interest
rates. The relationship between the interest rate sensitivity of the Bank's
assets and liabilities is continually monitored by management. In this regard,
the Bank emphasizes the origination of adjustable rate assets for portfolio
while originating longer term fixed rate assets for resale. At September 30,
1997, approximately 94% of the Bank's loan portfolio excluding loans held for
sale was comprised of adjustable rate loans. Additionally, the origination level
of fixed rate assets are continually monitored and if deemed appropriate, the
Bank will enter into forward commitments for the sale of these assets to ensure
the Bank is not exposed to undue interest rate risk.
The Bank utilizes its investment and mortgage-backed security portfolio in
managing its liquidity and therefore seeks securities with a stated or estimated
life of less than five years. These securities are readily marketable and
provide the Bank with a cash flow stream to fund asset growth or liability
maturities.
A significant portion of the Bank's assets have been funded with CDs,
including jumbo CDs. Unlike other deposit products such as checking and savings
accounts, CDs carry a high degree of interest rate sensitivity and therefore,
their renewal will vary based on the competitiveness of the Bank's interest
rates. The Bank has attempted to price its CDs to be competitive at the shorter
maturities (i.e., maturities of less than one year) in order to better match the
repricing characteristics of portfolio loans and the anticipated holding period
for loans held for sale. At September 30, 1997, approximately 87% of the Bank's
deposits were CDs.
28
<PAGE>
The Bank utilizes borrowings from the FHLB and collateralized repurchase
agreements in managing its interest rate risk and as a tool to augment deposits
in funding asset growth. The Bank may utilize these funding sources to better
match its longer term repricing assets (i.e., between one and five years).
The nature of the Bank's current operations is such that it is not subject
to foreign currency exchange or commodity price risk. Additionally, neither the
Company nor the Bank owns any trading assets. At September 30, 1997, the Bank
did not have any hedging transactions in place such as interest rate swaps, caps
or floors.
Interest Rate Sensitivity Analysis. One measure of a bank's interest rate
sensitivity is through the use of a GAP analysis. Using a GAP analysis, the Bank
matches the extent to which its interest-earning assets and interest-bearing
liabilities mature or reprice within specified time horizons. The interest rate
sensitivity gap is defined as the excess of interest-earning assets maturing or
repricing within a specific time period over the interest-bearing liabilities
maturing or repricing within the same time period (a negative GAP for a
specified time period would indicate there are more liabilities than assets
maturing or repricing within that time period). The Bank attempts to maintain
its one and three year GAP positions within +/- 10% and +/- 15% of assets,
respectively.
At September 30, 1997, the Bank had negative one and three year GAP
positions of 9.8% and 4.9%, respectively.
The following table summarizes the maturity and repricing of the Bank's
interest-earning assets and interest-bearing liabilities at September 30, 1997.
Adjustable rate loans are categorized by their repricing date while fixed rate
loans are categorized by the scheduled maturity as adjusted for historical
prepayment rates. Investment and mortgage-backed securities are categorized by
their scheduled maturities as adjusted for historical prepayment rates. Except
as noted in the footnotes, liabilities are categorized at their contractual
maturity date.
<TABLE>
<CAPTION>
Within Four to One to Two to
Three Twelve Two Three
Months Months Years Years
------------ ------------ ------------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Rate-sensitive assets:
Loans receivable(1) ....($) $ 43,745 $ 29,158 $ 11,692 $ 5,831
(Rate) 9.14% 8.46% 8.89% 8.88%
Investment securities(2)....($) 2,095 6,294 3,216 1,645
(Rate) 6.73% 7.05% 6.97% 6.93%
Total rate-sensitive assets ............ $ 45,840 $ 35,452 $ 14,908 $ 7,476
Rate-sensitive liabilities:
Interest-bearing demand deposits(3) ....($) -- -- -- --
(Rate) -- -- -- --
Savings deposits(3) ...($) -- -- -- --
(Rate) -- -- -- --
Time certificates....($) 47,546 39,763 6,422 1,301
(Rate) 5.58% 5.71% 5.72% 5.97%
FHLB advances ...($) 4,350 -- -- --
(Rate) 5.82% -- -- --
Securities sold under agreement to
repurchase ...........................($) -- 2,500 -- 8,280
(Rate) -- 6.05% -- 5.89%
Total rate-sensitive liabilities ....... $ 51,896 $ 42,263 $ 6,422 $ 9,581
Periodic gap ........................... (6,056) (6,811) 8,486 (2,105)
-------- --------- -------- --------
Cumulative gap ......................... (6,056) (12,867) (4,381) (6,486)
-------- --------- -------- --------
Cumulative gap ratio ................... (4.61)% (9.79)% (3.33)% (4.93)%
-------- --------- -------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three to Four to Over
Four Five Five Fair
Years Years Years Total Value
------------ ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Rate-sensitive assets:
Loans receivable(1) ....($) $ 5,397 $ 8,309 $ 6,492 $ 110,624 $112,958
(Rate) 8.86% 8.83% 7.89% 8.81%
Investment securities(2)....($) 1,384 1,169 5,037 20,840 20,840
(Rate) 6.94% 6.84% 6.95% 6.91%
Total rate-sensitive assets ............ $ 6,781 $ 9,478 $11,529 $ 131,464 $133,798
Rate-sensitive liabilities:
Interest-bearing demand deposits(3) ....($) -- -- $ 9,883 $ 9,883 $ 9,883
(Rate) -- -- 3.47% 3.47%
Savings deposits(3) ...($) -- -- 1,776 1,776 1,776
(Rate) -- -- 3.00% 3.00%
Time certificates....($) 681 820 -- 96,533 96,611
(Rate) 5.67% 5.67% -- 5.65%
FHLB advances ...($) -- -- -- 4,350 4,350
(Rate) -- -- -- 5.82%
Securities sold under agreement to
repurchase ...........................($) -- -- -- 10,780 10,780
(Rate) -- -- -- 5.92%
Total rate-sensitive liabilities ....... $ 681 $ 820 $11,659 $ 123,322 $123,400
Periodic gap ........................... 6,100 8,658 (130) 8,142 10,398
-------- ------- ------- --------- --------
Cumulative gap ......................... (386) 8,272 8,142 --
-------- ------- ------- ---------
Cumulative gap ratio ................... (0.29)% 6.29% 6.19%
-------- ------- -------
</TABLE>
- ------------
(1) Loans held for sale are included in loans receivable and are categorized
within three months as it is the intent to sell those assets within that
time frame.
(2) Includes mortgage-backed securities and interest-bearing deposits at the
FHLB.
(3) Historically, interest bearing demand deposits and savings deposits reflect
insignificant change in deposit trends and, therefore, the Bank classifies
these deposits over five years.
29
<PAGE>
GAP analysis is a useful measurement of asset and liability management,
however, it is difficult to predict the effect of changing interest rates based
solely on this measure. An additional analysis required by the OTS and generated
quarterly is the OTS Interest Rate Exposure Report. This report forecasts
changes in the Bank's market value of portfolio equity ("MVPE") under
alternative interest rate environments. The MVPE is defined as the net present
value of the Bank's existing assets, liabilities and off-balance sheet
instruments. The calculated estimates of change in MVPE at September 30, 1997
are as follows:
MVPE
- -------------------------------------------------------------------------------
Change in Interest Rate Amount % Change
- --------------------------- --------------- ---------
(In thousands)
+400 Basis Points $ 2,962 (69)%
+300 Basis Points 4,914 (49)
+200 Basis Points 6,733 (29)
+100 Basis Points 8,316 (13)
Flat Rate 9,546 --
--100 Basis Points 10,277 8
--200 Basis Points 10,705 12
--300 Basis Points 11,218 18
--400 Basis Points 11,882 24
Management believes that the assumptions utilized in evaluating the
vulnerability of the Company's earnings and capital to changes in interest rates
approximate actual experience; however, the interest rate sensitivity of the
Bank's assets and liabilities as well as the estimated effect of changes in
interest rates on MVPE could vary substantially if different assumptions are
used or actual experience differs from the experience on which the assumptions
were based.
In the event the Bank should experience a mismatch in its desired GAP
ranges or an excessive decline in its MVPE subsequent to an immediate and
sustained change in interest rate, it has a number of options which it could
utilize to remedy such mismatch. The Bank could restructure its investment
portfolio through sale or purchase of securities with more favorable repricing
attributes. It could also emphasize loan products with appropriate maturities or
repricing attributes, or it could attract deposits or obtain borrowings with
desired maturities.
30
<PAGE>
Impact of Inflation and Changing Prices
The Consolidated Financial Statements of the Company and Notes thereto,
presented elsewhere herein, have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time and
due to inflation. The impact of inflation is reflected in the increased cost of
the Company's operations. Nearly all the assets and liabilities of the Company
are monetary. As a result, interest rates have a greater impact on the Company's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the price
of goods and services.
Financial Condition
General
The Company's assets have grown to $134.5 million at September 30, 1997 as
compared to $117.1 million and $81.3 million at June 30, 1997 and 1996,
respectively. The increase in assets primarily reflects the deployment of
proceeds from certificates of deposits into loans, including portfolio loans and
loans available for sale. At September 30, 1997, the loan portfolio aggregated
$93.9 million as compared to $86.0 million and $53.6 million, at June 30, 1997
and 1996, respectively. The growth has been concentrated in Commercial Real
Estate loans and conforming adjustable rate residential mortgages. Loans
available for sale increased to $16.8 million at September 30, 1997 as compared
to $6.2 million and $1.7 million at June 30, 1997 and 1996, respectively. This
growth is primarily due to increased volume of Nonconforming Mortgage
originations and acquisitions. At September 30, 1997, Nonconforming Mortgage
loans available for sale was $14.7 million as compared to $4.3 million at June
30, 1997. The Bank carries its Nonconforming Mortgage loans available for sale
at the lower of cost or market until such time as they are sold or, in certain
cases, until the Bank has a firm commitment for the sale of the loans.
Accordingly, the carrying value of the Nonconforming Mortgage loans available
for sale does not fully reflect the gain the Bank anticipates it will realize
upon the ultimate sale of the loans. The Bank had no Nonconforming Mortgage
loans as of June 30, 1996. Deposits were $110.6 million, $95.9 million and $59.6
million at September 30, 1997, June 30, 1997 and June 30, 1996, respectively.
Loans
Net loans receivable increased to $93.9 million at September 30, 1997 as
compared to $86.0 million at June 30, 1997 and $53.6 million at June 30, 1996.
These increases were due primarily to internally generated Commercial Real
Estate loans and conforming residential adjustable rate mortgages. At June 30,
1997, the Commercial Real Estate loan portfolio was $28.1 million as compared to
$13.0 million at June 30, 1996, representing an increase of 116.15%. The
conforming residential adjustable rate mortgage loan portfolio grew to $54.5
million at June 30, 1997 compared to $39.5 million at June 30, 1996. The above
noted loan growth was achieved without a significant increase in delinquencies
or charge-offs. The Bank internally underwrites each of its loans to comply with
prescribed policies and approval levels established by its Board of Directors.
31
<PAGE>
The table below sets forth data relating to the composition of the Bank's
loan portfolio by type of loan on the dates indicated.
<TABLE>
<CAPTION>
At June 30,
At September 30, --------------------------------------------------
1997 1997 1996
------------------------ ------------------------ ------------------------
$ % $ % $ %
----------- ----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Type of Loan
One-to-four family residential real estate. $59,665 63.57% $54,493 63.37% $39,485 73.66%
Multi-family residential real estate ......... 13,973 14.89 13,244 15.41 5,357 9.99
Construction one-to-four family
residential ................................. 1,380 1.47 1,414 1.64 344 0.64
Commercial and non-residential
real estate ................................. 16,827 17.93 14,817 17.23 7,616 14.20
Consumer ..................................... 2,516 2.68 2,375 2.77 1,285 2.40
Less allowance for loan losses ............... (487) (0.52) (472) (0.55) (430) (0.80)
Deferred fees ................................ (17) (0.02) 121 0.13 (53) (0.09)
------- ------ ------- ------ ------- ------
Net loans .................................... $93,857 100.0% $85,992 100.0% $53,604 100.0%
======= ====== ======= ====== ======= ======
Type of Security Residential real estate:
One-to-four family .......................... $63,758 67.93% $59,905 69.66% $40,673 75.88%
Multi-family ................................ 13,973 14.89 13,244 15.41 5,357 9.99
Non-residential real estate .................. 14,080 15.00 10,890 12.66 7,076 13.20
Depository accounts .......................... 553 0.59 442 0.52 441 .82
Marketable securities ........................ 1,320 1.41 1,260 1.47 -- --
Other ........................................ 677 0.72 602 0.70 540 1.00
Less allowance for loan losses ............... (487) (0.52) (472) (0.55) (430) (0.80)
Deferred fees ................................ (17) (0.02) 121 0.13 (53) (0.09)
------- ------ ------- ------ ------- ------
Net loans .................................... $93,857 100.0% $85,992 100.0% $53,604 100.0%
======= ====== ======= ====== ======= ======
</TABLE>
The following table sets forth the estimated maturity of the Bank's loan
portfolio at September 30, 1997. The table does not include prepayments or
scheduled principal repayments. Adjustable-rate mortgage loans are shown as
maturing on their contractual maturities.
<TABLE>
<CAPTION>
Due Due Allowance
within One through Due after for
One year Five years Five years Loan Losses Total
---------- ------------- ------------ ------------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
One-to-four family residential real estate. $ 688 $ 47 $58,913 $(141) $59,507
Multi-family, commercial and non-
residential real estate .................. 413 4,640 25,747 (302) 30,498
Construction -- one-to-four family resi-
dential .................................. 1,380 -- -- (3) 1,377
Consumer .................................. 1,047 95 1,374 (7) 2,509
Unassigned reserve ........................ -- -- -- (34) (34)
------ ------ ------- ------- -------
Total ..................................... $3,528 $4,782 $86,034 $(487) $93,857
====== ====== ======= ======= =======
</TABLE>
32
<PAGE>
The following table sets forth the dollar amount of all loans due after
September 30, 1997, which have pre-determined interest rates and which have
floating or adjustable interest rates.
<TABLE>
<CAPTION>
Floating or
adjustable
Fixed rates rates Total
------------- ------------ ----------
(Dollars in thousands)
<S> <C> <C> <C>
One-to-four family residential real estate ....................... $3,654 $56,011 $59,665
Multi-family, commercial and non-residential real estate ......... 1,009 29,791 30,800
Construction -- one-to-four family residential ................... -- 1,380 1,380
Consumer ......................................................... 553 1,963 2,516
------ ------- -------
Total ............................................................ $5,216 $89,145 $94,361
====== ======= =======
</TABLE>
Non-Performing and Problem Assets
Loan Delinquencies
The recent loan growth experienced by the Bank has not resulted in a
corresponding increase in delinquencies. Collection procedures generally provide
that after a loan is 15 days or more past due, a late charge is added. The
borrower is contacted by mail or telephone and payment is requested. If a loan
becomes 90 days or more contractually delinquent, the Bank will usually
institute foreclosure proceedings. Additionally, all such loans are generally
placed on non-accrual status unless the credit is well secured and in the
process of collection. If collection of principal or interest is deemed doubtful
at an earlier date, the loan would be placed on non-accrual status.
Other Real Estate Owned
Real estate acquired by the Bank as a result of foreclosure on an
outstanding loan balance is classified as Other Real Estate Owned ("OREO") until
such time as the property is sold. Upon acquisition, the property is recorded at
the lower of the unpaid principal balance of the related loan or its fair value
less estimated disposal costs. Write-downs required at acquisition are charged
to the allowance for loan losses. Subsequent write-downs of OREO are charged to
operations. The Bank has had minimal OREO. At September 30, 1997, the Bank's
OREO balance was $105,000.
The following table details the Bank's non-performing loans and OREO at the
dates indicated.
<TABLE>
<CAPTION>
June 30,
September 30, -------------------------
1997 1997 1996
--------------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
Loans accounted for on a non-accrual basis:
One-to-four family residential real estate ................. $ 581 $ 705 $ 553
Consumer ................................................... 40 40 40
-------- -------- --------
Total non-accrual loans .................................... 621 745 593
-------- -------- --------
Accruing loans that are contractually past due 90 days or more:
One to four family mortgage ................................ 353 353 378
-------- -------- --------
Total 90-day past-due loans ................................ 353 353 378
-------- -------- --------
Total non-accrual and 90-day past due loans ................ 974 1,098 971
Other Real Estate Owned .................................... 105 -- 81
-------- -------- --------
Total non-performing loans ................................. $ 1,079 $ 1,098 $ 1,052
======== ======== ========
Non-accrual loans to net loans ............................. 0.66% 0.87% 1.11%
======== ======== ========
Total non-accrual loans and 90-day past due loans to net
loans ..................................................... 1.04% 1.28% 1.81%
======== ======== ========
Total non-performing assets to net loans plus OREO ......... 1.15% 1.28% 1.96%
======== ======== ========
Total allowance for loan losses to total non-performing
assets .................................................... 45.13% 42.99% 40.87%
======== ======== ========
</TABLE>
33
<PAGE>
Allowance for Loan Losses
It is the policy of Management and the Board of Directors to provide for
losses on both identified and unidentified losses inherent in its loan
portfolio. A provision for loan losses is charged to operations based upon an
evaluation of the potential losses in the loan portfolio. This evaluation takes
into account such factors as portfolio concentrations, delinquency trends,
trends of non-accrual and classified loans, economic conditions, and other
relevant factors. The following table sets forth activity in the Bank's
allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
September 30, June 30,
----------------------- ---------------------
1997 1996 1997 1996
---------- ---------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Allowance for loan losses, beginning of
period ..................................... $ 472 $ 430 $ 430 $ 388
Charge-offs:
One-to-four family residential real estate. 0 (1) (16) 0
------- -------- ------ -------
Total charge-offs ........................... 0 (1) (16) 0
------- -------- ------ -------
Provision for loan losses ................... 15 11 58 42
------- ------- ------ -------
Allowance for loan losses, end of period. $ 487 $ 440 $ 472 $ 430
======= ======= ====== =======
Allowance for loan losses to total loans..... 0.52% 0.48% 0.55% 0.80%
======= ======= ====== =======
Net loans charged-off as a percent of
average loans outstanding .................. -- -- 0.02% --
======= ======= ====== =======
</TABLE>
34
<PAGE>
The following table sets forth the allocation of the Bank's allowance for
loan losses by loan category and the percentage of loans in each category to
total loans receivable at the dates indicated. The portion of the allowance for
loan losses allocated to each loan category does not represent the total
available for future losses that may occur within the loan category, since the
total loan loss allowance is a valuation reserve applicable to the entire loan
portfolio.
<TABLE>
<CAPTION>
At June 30,
At September 30, --------------------------------------------------
1997 1997 1996
------------------------ ------------------------ -----------------------
Percent of Percent of Percent of
Loans to Loans to Loans to
Amount Total Loans Amount Total Loans Amount Total Loans
-------- ------------- -------- ------------- -------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at end of period applicable to:
One-to-four family residential real estate $141 63.57% $129 63.37% $114 73.66%
Multi-family residential real estate ......... 100 14.89 109 15.41 60 9.99
Construction one-to-four family
residential ................................. 3 1.47 4 1.64 1 0.64
Commercial and non-residential real
estate ...................................... 202 17.93 154 17.23 166 14.20
Consumer ..................................... 7 2.68 7 2.77 3 2.40
Unallocated .................................. 34 -- 69 -- 86 --
---- ---- ----
Total allowance for loan losses .............. $487 $472 $430
==== ==== ====
</TABLE>
Investment Securities
The Bank utilizes its investment securities portfolio to manage its
liquidity and interest rate risk. For this reason, the Bank's investment
securities portfolio is classified as available for sale.
The investment policy of the Bank and classification of securities are
established by its Board of Directors. It is based on its asset and liability
management goals and is designed to provide for a portfolio of high quality
liquid investments which optimize interest income. All or a portion of the
Bank's investment securities portfolio may be utilized to collateralize
borrowings from the FHLB or Repurchase Agreements.
The following table sets forth the carrying value of the Bank's investment
and mortgage-backed securities ("MBS") portfolio at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
1997
---------------------------------------------------
Gross Gross Fair
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Available-for-sale:
FHLMC ................... $ 7,257 $47 $ (8) $ 7,296
GNMA .................... 4,039 18 (3) 4,054
FNMA .................... 5,436 -- (31) 5,405
------- --- ------ -------
Total MBS ............... 16,732 65 (42) 16,755
------- --- ------ -------
US government &
agency ................. 3,302 -- (3) 3,299
SBA pool ................ -- -- -- --
FHLB stock .............. 786 -- -- 786
------- --- ------ -------
Total securities
available-for-sale ..... $20,820 $65 $(45) $20,840
======= === ====== =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At June 30,
1997 1996
--------------------------------------------------- ---------------------------------------
Gross Gross Fair Gross Gross
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized
Cost Gains Losses Value Cost Gains Losses
----------- ------------ ------------ ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Available-for-sale:
FHLMC ................... $ 7,601 $14 $ (47) $ 7,568 $ 6,572 $ 4 $(122)
GNMA .................... 6,305 23 (15) 6,313 9,462 -- (133)
FNMA .................... 2,189 1 (27) 2,163 2,398 -- (54)
------- --- ----- ------- ------- --- -----
Total MBS ............... 16,095 38 (89) 16,044 18,432 4 (309)
------- --- ----- ------- ------- --- -----
US government &
agency ................. 4,375 -- (11) 4,364 1,971 -- (30)
SBA pool ................ 1,119 -- (7) 1,112 1,556 -- (2)
FHLB stock .............. 823 -- -- 823 475 -- --
------- --- ------- ------- ------- --- -------
Total securities
available-for-sale ..... $22,412 $38 $(107) $22,343 $22,434 $ 4 $(341)
======= === ======= ======= ======= === =======
Fair
Market
Value
----------
Available-for-sale:
FHLMC ................... $ 6,454
GNMA .................... 9,329
FNMA .................... 2,344
-------
Total MBS ............... 18,127
-------
US government &
agency ................. 1,941
SBA pool ................ 1,554
FHLB stock .............. 475
-------
Total securities
available-for-sale ..... $22,097
=======
</TABLE>
35
<PAGE>
The following table sets forth certain information regarding the carrying
values, weighted average yields and maturities of the Bank's investment
portfolio at September 30, 1997. All investment securities are classified as
available-for-sale, therefore the carrying value is the estimated market value.
<TABLE>
<CAPTION>
One Year or Less One to Five Years
--------------------- ---------------------
Carrying Average Carrying Average
Value Yield Value Yield
---------- --------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
US government agencies ..... $597 5.35% $2,702 6.81%
MBS ........................ -- -- -- --
FHLB stock(1) .............. -- -- -- --
---- ------
Total ...................... $597 5.35% $2,702 6.81%
==== ======
Five to Ten Years More than Ten Years Total
--------------------- --------------------- ----------------------
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
---------- --------- ---------- --------- ---------- ----------
US government agencies ..... -- -- -- -- $ 3,299 6.61%
MBS ........................ $1,848 7.20% $14,907 6.96% 16,755 6.99
FHLB stock(1) .............. -- -- 786 6.50 786 6.50
------ ------- -------
Total ...................... $1,848 7.20% $15,693 6.94% $20,840 6.91%
====== ======= =======
</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 September 30, 1997 totaled $110.6 million compared to $95.9 and
$59.6 million at June 30, 1997 and June 30, 1996, respectively. While the Bank
has established a core level of retail deposits which include both transaction
type of accounts (checking, savings, money market) and CDs, the growth in the
deposit base is attributed primarily to jumbo CDs.
The following table sets forth average deposits by various types of demand
and time deposits.
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------------------------
Three Months
Ended September 30, 1997 1997 1996
------------------------- ------------------------- ------------------------
Deposits Avg. Yield Deposits Avg. Yield Deposits Avg. Yield
---------- ------------ ---------- ------------ ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing demand
deposits ................. $ 2,063 -- $ 1,794 -- $ 812 --
Interest-bearing demand
deposits ................. 10,336 4.02% 9,605 3.92% 6,027 3.78%
Savings deposits .......... 1,799 2.89 1,908 2.80 2,203 2.95
CDs ....................... 93,594 5.80 62,890 5.64 43,128 5.88
-------- ------- -------
Total ..................... $107,792 5.47% $76,197 5.22% $52,170 5.42%
======== ======= =======
</TABLE>
36
<PAGE>
The following table indicates the amount of CDs of $100,000 or more by
remaining maturity at September 30, 1997.
(Dollars in thousands)
Remaining Maturity:
Three months or less ........................ $12,627
Over three months through six months ........ 3,082
Over six months through twelve months ....... 4,138
Over twelve months .......................... 1,042
-------
Total ....................................... $20,889
=======
Borrowings
The Bank utilizes borrowings from the FHLB and collateralized repurchase
agreements in managing its interest rate risk and as a tool to augment deposits
in funding asset growth. FHLB borrowings totaled $4.4 million at September 30,
1997 as compared to $9.0 million at June 30, 1997 and $9.5 million at June 30,
1996. The $4.6 million decline resulted from repayment from proceeds of a
repurchase agreement for which the Bank was able to secure a favorable rate as
compared to rates offered by the FHLB at the time. Repurchase agreements totaled
$10.8 million at September 30, 1997 as compared to $5.8 million at June 30, 1997
and $7.2 million at June 30, 1996. During the quarter ended September 30, 1997,
the Bank obtained a longer term repurchase agreement borrowing to better match
the repricing characteristics of the growth it experienced in its Commercial
Real Estate loan portfolio.
The following table sets forth certain balance and rate information with
respect to FHLB borrowings and repurchase agreements for the periods indicated.
Federal Home Loan Bank Advances and Repurchase Agreements
<TABLE>
<CAPTION>
At June 30,
At September 30, ---------------------------
1997 1997 1996
------------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C>
Advances outstanding at period end ................ $ 4,350 $ 8,950 $ 9,500
Interest rate at period end ....................... 5.71% 5.70% 5.55%
Approximate average amount outstanding ............ $ 8,207 $ 8,344 $ 6,694
Maximum month-end balance ......................... $ 9,000 $ 17,450 $ 11,000
Approximate weighted average rate ................. 5.95% 5.56% 5.80%
Repurchase agreements outstanding at end of period. $ 10,780 $ 5,780 $ 7,151
Interest rate ..................................... 5.85% 5.90% 5.85%
Approximate average amount outstanding ............ $ 8,065 $ 8,923 $ 2,647
Maximum month-end balance ......................... $ 10,780 $ 10,431 $ 7,151
Approximate weighted average rate ................. 5.85% 5.95% 5.85%
</TABLE>
In connection with FHLB borrowings and repurchase agreements, the Bank is
required to maintain certain eligible assets as collateral.
Shareholders' Notes and Shareholders' Equity
At September 30, 1997, the Company had outstanding shareholders' notes and
shareholders' equity of $3.2 million and $3.9 million, respectively, as compared
to $3.0 million and $2.9 million at June 30, 1997 and $2.9 million and $1.5
million at June 30, 1996. The Company has utilized the issuance of notes as well
as the Common Stock to raise money from its shareholders, because the proceeds
from both the notes and the Common Stock can be contributed as capital to the
Bank and be included in the calculation of capital for regulatory purposes.
Since July 1, 1995, in addition to earnings retained in the Company, the
Company's shareholders have contributed an additional $2.1 million of notes and
capital to allow the Company to pursue its significant growth.
37
<PAGE>
Impact of New Financial Account Standards
Accounting For Earnings Per Share. In February 1997, the Financial
Accounting Standards Board (the "FASB") issued Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 establishes
standards for computing and presenting Earnings Per Share (EPS) and applies to
entities with publicly held common stock or potential common stock. This
statement simplifies the standards for computing earnings per share previously
found in APB Opinion No. 15, "Earnings per share," and makes them comparable to
international EPS standards. It replaces the presentation of primary EPS with a
presentation of basic EPS and requires dual presentation of basic and diluted
EPS on the face of the income statement for all entities with complex capital
structures. It also requires a reconciliation of the numerator and denominator
of the basic EPS computation to the numerator and denominator of the diluted EPS
computation.
SFAS 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods; earlier application is not
permitted. This statement requires restatement of all prior-period EPS data
presented. The Company will adopt the statement effective for the fiscal year
ending June 30, 1998. Basic and diluted earnings per share under SFAS 128 would
be identical to earnings per share as presented in the financial statements and,
therefore, will not have any material effect on the Company.
Reporting of Comprehensive Income. In June 1997, the FASB issued Statement
of Financial Accounting Standards No. 130, "Reporting of Comprehensive Income"
("SFAS 130"), which establishes standards for the reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of financial statements. This statement also requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
This statement is effective for fiscal years beginning after December 15,
1997. Earlier application is permitted. Reclassification of financial statements
for earlier periods provided for comparative purposes is required. The Company
does not anticipate that preparation of disclosure to comply with SFAS 130 will
have a material effect on the Company's financial statements.
Disclosure about Segments and Related Information. In June 1997, the FASB
issued Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"), which
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that such enterprises report selected information about operating segments in
interim financial reports issued to shareholders.
This statement also establishes standards for related disclosures about
products and services, geographic areas, and major customers. This statement
requires the reporting of financial and descriptive information about an
enterprise's reportable operating segments. This statement is effective for
financial statements for periods beginning after December 15, 1997. In the
initial year of application, comparative information for earlier years is to be
restated. The Company does not anticipate that the preparation of disclosure to
comply with SFAS 131 will have a material effect on the Company's financial
statements.
Year 2000 Compliance
The Company is assessing the potential impact of what is commonly referred
to as the "Year 2000" issue, concerning the inability of certain information
systems and automated equipment to properly recognize and process dates
containing the Year 2000 and beyond. If not corrected, these systems and
equipment could fail or create erroneous results. The Company is in the process
of determining which of its systems and equipment, if any, may present Year 2000
issues, the magnitude of these issues and the steps that may be necessary to
correct them. The majority of the Company's data processing is outsourced
pursuant to an agreement with Fiserv Solutions, Inc. ("Fiserv"), a provider of
data processing services to the banking industry. Fiserv has informed the
Company that it has implemented changes to accommodate maturity and expiration
dates beyond 1999 and that all of Fiserv's national products and systems are
and/or will be Year 2000 compliant. Although the Company will continue to
monitor Fiserv's progress in addressing Year 2000 compliance issues, there can
be no assurance that Fiserv will be successful in addressing such issues.
Therefore, the potential liabilities and costs associated with Year 2000
compliance cannot be estimated with certainty at this time. Regardless of the
Year 2000 compliance
38
<PAGE>
of the Company's systems, there can be no assurance that the Company will not be
adversely affected by the failure of others to become Year 2000 compliant. Such
risks may include potential losses related to loans made to third parties whose
businesses are adversely affected by the Year 2000 issue, the contamination or
inaccuracy of data provided by non-Year 2000 compliant third parties and
business disruption caused by the failure of service providers, such as security
and data processing companies, to become Year 2000 compliant. Because of these
uncertainties, there can be no assurance that the Year 2000 issue will not have
a material financial impact in any future period.
39
<PAGE>
BUSINESS
General
The Company, a Pennsylvania corporation established in 1988 and
headquartered in Philadelphia, Pennsylvania, is the holding company for the
Bank, a federally chartered savings bank. Currently, all of the Company's
business activities are conducted through the Bank. At September 30, 1997, the
Company had total assets of $134.5 million, total deposits of $110.6 million and
total shareholders' equity of $3.9 million. The Bank's deposits are federally
insured by the SAIF of the FDIC to the maximum extent permitted by law. As a
savings and loan holding company, the Company is subject to the supervision and
regulation of the OTS.
The Bank provides community banking services through two branches and two
ATMs in Philadelphia, and has focused primarily on mortgage lending for
residential and multi-family housing and commercial real estate. In the latter
part of 1995, management began to refocus the Company and developed a plan
designed to expand its operations and grow its assets and profitability. The
Company's strategy is to maintain a core banking operation that provides a
growing stream of income enhanced by engaging in various specialty lending and
product niche activities designed to provide the Company with significantly
higher risk-adjusted rates of return. These activities currently include the
origination and acquisition for resale of Nonconforming Mortgages, the
origination of loans guaranteed by the SBA and the acquisition of delinquent
property tax liens.
The Company intends to monitor on an ongoing basis the risk/reward
characteristics of each of its specialty lending and product niche activities in
order to determine whether to expand, maintain or discontinue such activity. The
Company may also elect to pursue additional specialty lending and product niche
activities.
History
The Bank was founded in 1943 and acquired by the Company in 1989. Through
1995, the Bank operated exclusively as a community savings bank, accepting
deposits from the public and investing the proceeds in investment securities and
loans, primarily adjustable rate conforming residential mortgage loans. The Bank
also originated fixed rate mortgages for resale in the secondary market, earning
a fee in connection with such resales, and offered ancillary residential loan
products such as home equity lines of credit. In 1994, the Bank opened its
Center City, Philadelphia branch and, in 1995, began to focus on the origination
of Commercial Real Estate loans.
The Company has grown its assets from $63.6 million as of June 30, 1995 to
$134.5 million as of September 30, 1997. During this period of growth, the
Company has controlled its operating expenses. While increasing its net interest
income from $1.4 million for fiscal year 1996 to $2.8 million for fiscal year
1997 and to $1.1 million for the quarter ended September 30, 1997, the Company
contained the growth in its core non-interest expenses (operating expenses
exclusive of the SAIF assessment and CMC Nonconforming Mortgage banking
expenses) from $1.6 million (2.47% of average assets) for fiscal year 1996 to
$1.7 million (1.70% of average assets) for fiscal year 1997 and $449,000 for the
quarter ended September 30, 1997 (1.37% of average assets).
The Subsidiaries
The Bank's approach to developing certain of its specialty lending and
product niche activities has been to establish and expand them through
majority-owned subsidiaries, with minority interests issued to one or more
individuals with significant experience in the business. This allows the
subsidiary to combine the Bank's financial resources and competitive advantages,
with the experience and knowledge of the minority owner-operator. Under the
typical arrangement, the Bank owns at least 51% of the subsidiary and funds the
loans the subsidiary generates at a cost to the subsidiary equal to the Bank's
cost of funds plus 250 basis points. The minority shareholder does not receive
any monetary benefit from the subsidiary until such time as the subsidiary's
results of operations reflect a profit. This approach allows the Bank to enter a
new business line with an experienced manager who is incented to maximize the
subsidiary's profitability. The Bank closely monitors the operations and
activities of each subsidiary, in turn providing management, accounting, back
office and marketing support to the subsidiary. The Bank, in concert with the
minority shareholders, has developed strict underwriting and operating
guidelines for each subsidiary, and closely monitors compliance with such
guidelines through the review of loans prior to funding.
40
<PAGE>
Currently, the Bank's operating subsidiaries are as follows:
Crusader Servicing Corporation ("CSC") is a 60% owned subsidiary that
commenced operations in August 1996, and acquires, through auction,
delinquent property tax liens in various jurisdictions, assuming a lien
position that is generally superior to any mortgage liens on the property,
and obtaining certain foreclosure rights as defined by local statute.
Crusader Mortgage Corporation of Delaware ("CMCD") is a 51% owned
subsidiary formed in October 1997 in conjunction with the shareholder of
Merit Financial Corporation, a licensed mortgage broker operating principally
in Delaware, to assume the operations previously conducted by Merit. CMCD
will maintain a conforming and nonconforming residential mortgage lending
operation in Wilmington, Delaware.
National Chinese Mortgage Corporation ("NCM") is a 51% owned subsidiary
formed in December 1997 in conjunction with Dr. Haiching Zhao, the sole
shareholder of National Chinese Service Corporation ("NCSC"), a company that
focuses on marketing financial services products to the U.S. Chinese
community. NCM markets residential mortgage loans on an affinity group basis
to the U.S. Chinese community.
CMC was originally a 51% owned subsidiary that commenced operations in July
1996, for which the Bank originates and acquires nonconforming residential
mortgage loans and services such loans until they are sold in larger pools,
typically within 90 days. The Bank increased its ownership position in CMC to
67.5% in September 1997 and to 100% effective in November 1997. See
"Prospectus Summary -- Recent Developments."
The Bank also has a wholly-owned subsidiary, Quest Holding Corporation
("QUEST"), that periodically holds title to the real estate holdings of the
Bank acquired through foreclosure, pending resale of such property. In
addition, QUEST is a 50% owner of an office building purchased in December
1996 for $410,000 that includes the offices of CMC, with the other 50% owned
by Ronald L. Caplan, who is a director of the Company and of the Bank. See
"Certain Relationships and Related Transactions."
A brief description of each of the Bank's primary product lines and
services follows:
Core Banking Activities
Conforming Credit Residential Lending
Generally, the Bank's conforming residential lending approach has complied
with the Federal National Mortgage Association ("FNMA") underwriting standards
with respect to credit, debt ratios and documentation. Loans in excess of an 80%
loan-to-value ("LTV") ratio carry private mortgage insurance. Generally, to
avoid interest rate risk, all fixed rate mortgages are originated for resale in
the secondary market, and the Bank earns a fee in connection with such resale.
Adjustable rate mortgages, depending upon size, are either sold or retained in
the Bank's portfolio. The Bank also offers a full line of single family
construction loans, rehabilitation loans and home equity lines of credit. During
the past two fiscal years, the Bank originated an average of approximately $42
million of conforming residential real estate loans annually, although in the
future this volume is likely to fluctuate based on a variety of factors,
including, among other things, housing purchase activity and interest rates.
During the past two years, 71.45% of the Bank's originations were for home
purchases, making it less dependent on interest rate reductions than many of its
competitors which focus more on refinancings. The Bank's portfolio of conforming
residential real estate loans was $59.7 million as of September 30, 1997. The
Bank does not retain servicing on loans sold.
The Bank has recently developed several initiatives in an attempt to grow
and enhance the profitability of its conforming mortgage banking operations. In
August 1997, the Bank negotiated a higher fee for the sale of servicing rights
on its fixed rate loans. In October 1997, the Bank formed CMCD to generate
retail loan production in Delaware and to market conforming mortgage products to
the network of brokers established by CMC for its Nonconforming Mortgage
products. In December 1997, the Bank formed NCM to market residential mortgage
loans on an affinity group basis to the U.S. Chinese community in conjunction
with Dr. Haiching Zhao. The Bank, through NCM, has obtained certain underwriting
concessions from FNMA in recognition of the needs of NCM's target population.
The Bank expects to begin generating loan activity through NCM during the latter
part of the quarter ending March 31, 1998.
41
<PAGE>
Commercial Real Estate Lending
The Bank's Commercial Real Estate lending activities consist of loans
secured by apartment buildings, small office buildings and mixed use properties
and occasionally commercial loans secured by non-real estate collateral. The
Bank believes these loans are generally less risky than commercial real estate
loans secured by a property with a single business user, where the ability of
the borrower to repay is dependent upon the operations of the business. The
Bank's Commercial Real Estate loans are generally secured by real estate located
principally in the Philadelphia metropolitan area, and in certain cases, in
southern and central New Jersey and Delaware. The loans are underwritten in
accordance with strict debt service and LTV guidelines, generally with maximum
LTVs of up to 75%. The Bank typically requires personal guarantees on Commercial
Real Estate loans. The Bank will sometimes permit a borrower to supplement or
substitute marketable securities or other property as collateral for Commercial
Real Estate loans in accordance with prescribed guidelines. All Commercial Real
Estate loans are approved by the Loan Committee of the Bank's Board of Directors
(the "Bank Loan Committee").
The Bank has emphasized Commercial Real Estate loans ranging in size
between $500,000 and $1.2 million. The Bank believes this is an underserved
portion of the market, and not subject to the intense competition present with
respect to Commercial Real Estate loans in excess of $1.2 million. This has
allowed the Bank to generate an adequate volume of Commercial Real Estate loans
without generally varying from its strict underwriting guidelines and its policy
of requiring a personal guarantee on all Commercial Real Estate loans.
The Bank's Commercial Real Estate loans provide primarily for fixed
interest rates during an initial period ranging from one year to five years. At
the end of the initial period, the interest rate adjusts to a specified margin
over the prevailing U.S. Treasury rate for the ensuing period. The Bank's
Commercial Real Estate loan portfolio has been priced to provide an average
spread of at least 300 basis points over the comparable Treasury securities at
time of origination. The Bank originated $23.5 million of Commercial Real Estate
loans during the year ended June 30, 1997, and as of September 30, 1997, had an
aggregate outstanding balance of Commercial Real Estate loans of $30.8 million.
Small Business Administration Lending
In 1996, the Bank became an approved SBA lender. Under this program, the
SBA guarantees up to 75% (80% for loans under $100,000) of the outstanding loan
balance of an approved SBA loan. Because the loans are generally collateralized
by real estate or other assets, the ultimate risk of loss is reduced
substantially, as any collateral recoveries are realized by the lending
institution on a pro-rata basis in accordance with the non-guaranteed percentage
of the loan balance. Interest rates on the Bank's SBA loans generally float
based on the prime rate, with typical average margins above prime of 175 to 275
basis points. Thus, the Bank is able to earn above average interest rates on the
full balance of the loans, while generally limiting its exposure to a maximum of
20% to 25% of the outstanding balance, which exposure is further reduced by its
share of recoveries.
Because the guaranteed portion of an SBA loan is backed by the full faith
and credit of the U.S. Government, this portion can be sold as a security, often
generating gains on sale of up to 10% of the guaranteed principal balances. The
sale of the guaranteed portion is generally without recourse and without
exposure with respect to prepayment of the loan. Any gain on the sale of the
guaranteed portion further reduces the Bank's exposure with respect to the loan.
Despite its reduced exposure, the Bank adheres to strict underwriting
guidelines with respect to its origination of SBA loans, including obtaining
personal guarantees from the borrower's principals. All SBA loans require the
approval of the Bank Loan Committee. The Bank utilizes the SBA program primarily
to make commercial loans to single business users of properties and to make
certain loans that do not fit into its traditional underwriting criteria, such
as lending to restaurants and new businesses.
As of September 30, 1997, the Bank had $619,000 of SBA loans outstanding
and received signed commitment letters on an additional $675,000 that were
funded in October 1997.
Investment and Mortgage-Backed Securities
The Bank maintains an investment securities portfolio in order to provide
liquidity and manage interest rate risk. Securities in the portfolio are all
U.S. Treasury or U.S. Agency quality. The Bank's investment securities
42
<PAGE>
portfolio as of September 30, 1997 was $20.8 million, including $16.8 million of
mortgage-backed securities. The Bank's current investment policy allows it to
purchase bonds, mortgage-backed securities, and preferred stock with an "A"
rating or better by Moody's Investor Services, Inc. For details of the Bank's
investment securities portfolio, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Funding of Assets
The Bank has funded its assets through the generation of deposits at its
two branches, and through borrowings from the Federal Home Loan Bank ("FHLB")
and collateralized borrowings against its securities portfolio. Management
closely monitors rates and terms of competing sources of funds on a regular
basis and attempts to utilize the sources that are the most cost effective. As
of September 30, 1997, the Bank had $110.6 million of outstanding deposits and
$15.1 million of borrowings.
The Bank offers a full array of deposit products through its two branches
including checking accounts, certificates of deposit, money market funds and
statement savings accounts. The Bank also offers ancillary products such as
merchant credit card services, and has two full service Automated Teller
Machines.
Approximately 87% of the Bank's deposits are represented by CDs, primarily
marketed through its branches and through financial planners and brokers. The
Bank currently does not intend to open additional branches. While the Bank has
attracted deposits by paying interest rates slightly higher than generally
offered in the retail market, this has allowed the Company to focus on the
implementation of its business strategy, including the development of its
specialty lending and product niche activities, and to control its core
non-interest expenses. For details of the Bank's deposits by product type and
maturity dates, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Deposits."
Specialty Lending and Product Niche Activities
Nonconforming Credit (B/C) Residential Mortgage Lending
The Bank originates and acquires nonconforming credit mortgage loans for
subsequent resale on behalf of CMC. Nonconforming credit loans are those that
generally do not conform to agency underwriting guidelines, whether due to poor
credit histories, the absence of a credit history, excessive debt-to-income
ratios, inability to verify the borrower's income, refinance cash-out exceptions
or a variety of other agency guideline exceptions. In exchange for the
additional lender risk associated with these loans, nonconforming borrowers
generally are required to pay a higher interest rate, and depending upon the
severity of the credit history, a lower LTV may be required than for a
conforming borrower.
The Bank generally originates and acquires nonconforming loans with the
intention of holding the loans for up to 90 days and in turn selling them in
larger pools to institutional investors. In connection with such sales, the Bank
earns a cash premium on the unpaid principal balance of the loans, generally
equal to a designated multiple of the excess of the weighted average interest
rate of the loan pool over the interest rate required by the institutional
investor for the mix of loans delivered.
Currently, all loans and their related servicing rights are sold on a
non-recourse basis pursuant to agreements containing customary representations
and warranties by the Bank regarding the underwriting criteria and the
origination process. The Bank, therefore, could be required to repurchase a loan
in the event of a breach of its representations and warranties. In addition, in
certain of its agreements, the Bank is required to repurchase a loan in the
event of a default on the first monthly payment due the purchaser, and to refund
a portion of the premium received with respect to a loan if the loan is prepaid
in full during the first year after it is sold (such portion declines ratably to
zero by the end of the year). However, absent a breach of its representations
and warranties or, if applicable, a first payment default, the Bank has no
exposure with respect to losses incurred by the purchaser with respect to a
default by the borrower. To date, the Bank has not been required to repurchase a
nonconforming loan, although there is no assurance that it will not be required
to do so in the future.
Historically, the Bank has favored whole loan sales over securitizations
because it realizes cash revenues on the sale of its loans and retains no risks,
other than as described above, with respect to the loans sold. A company that
securitizes its loans generally obtains its "premium" in the form of a retained
interest in certain future revenues of the securitization trust, and generally
recognizes a receivable for the estimated present value of such
43
<PAGE>
future revenues. However, the realization of such receivable is subject to the
actual payment experience of the loan pool. While the securitizer's loans are
eliminated from its balance sheet upon securitization, typically the securitizer
retains a level of default and prepayment risk on the outstanding loans it is
servicing. Some securitizers have incurred substantial write-downs of their
securitization receivables due to adverse default and prepayment experience. The
Bank does not retain these risks and, since it sells its loans with their
related servicing rights, it does not retain any risk with respect to the
ongoing valuation of servicing rights. The Bank from time to time monitors and
evaluates the economics and relative risk/reward characteristics of whole loan
sales and securitizations.
The Bank offers a wide array of nonconforming mortgage products in
accordance with its own internal underwriting guidelines, including fixed rate
first and second mortgages, various types of adjustable rate products, high LTV
products, reduced documentation loans and loans secured by non-owner occupied
properties. The Bank has originated its loans primarily through its own mortgage
originators and through a network of independent mortgage brokerage and banking
firms meeting the Bank's approval criteria ("Brokers"). The Bank believes that
the utilization of small independent Brokers represents the most cost effective
approach for the Bank. By offering a more comprehensive array of products,
excellent service and quick approval and documentation turn-around, the Bank
strives to be the sole or dominant origination source for each of its Brokers.
The Bank, through CMC, employs six regional account executives who market to
Brokers, and whose compensation packages are heavily incentive oriented based on
the dollar volume of loans originated on behalf of their Brokers. The Bank has
agreements with approximately 125 Brokers located primarily in the Mid-Atlantic
and Southeastern parts of the country.
As of November 30, 1997, the Bank, through CMC, had a staff of 24
underwriters, processors, loan closers, funders and quality reviewers who are
responsible for the various processes involved in the origination and sale of a
loan. In addition, the Bank makes extensive use of computer technology in its
processing of loans. All files are computerized so that information can be
accessed by all appropriate individuals. The Bank generally prepares its own
documents on all loans it originates, thereby reducing its dependence on the
Brokers for proper documentation. It also closely monitors compliance issues and
re-discloses broker compensation and other required disclosure matters on every
loan it originates. The Bank typically charges a processing and underwriting fee
averaging $450 on each loan it originates.
During the quarters ended June 30 and September 30, 1997, the Bank
originated or acquired $10 million and $25.6 million, respectively, of
nonconforming loans. Upon achieving this higher volume level, the Bank was able
to generate larger gains from the sale of its nonconforming loans by dividing
the loans into various homogenous pools that are more valuable to purchasers
seeking the type of product in the pool (e.g., fixed rate, adjustable rate,
higher credit grade pool, higher LTV pool).
In October 1997, the Bank began to purchase loans from mortgage banking
firms in pools generally ranging from $500,000 to $3 millon. By purchasing loan
pools, the Bank incurs reduced underwriting and processing costs, since it does
not have to provide pre-approvals on individual loans and can underwrite a group
of loans more efficiently. In connection with the Bank's purchase of loan pools,
the Bank enters into agreements with the sellers that for the most part mirror
the provisions of the agreements the Bank has with purchasers of its loans.
Because of the larger volume of loans it is producing, the Bank has sometimes
utilized forward pricing commitments on its fixed rate loans generally lasting
up to 40 days.
In addition to the revenues derived from the sale of nonconforming loans,
the Bank also earns net interest income on the loans until their subsequent
sale. As of September 30, 1997, the weighted average interest rate on the Bank's
nonconforming loan portfolio available for sale was 11.34%. This resulted in an
annualized spread of approximately 570 basis points on the nonconforming loan
portfolio pending sale.
In an attempt to further accelerate its growth in the origination of
nonconforming loans, CMC hired a Vice President - National Sales on December 1,
1997. The Bank and CMC are also pursuing additional loan pool purchase
relationships.
44
<PAGE>
Delinquent Property Tax Liens/Certificates
Through its 60% owned subsidiary, CSC, the Bank acquires, at auction or
through assignment, delinquent property tax certificates in various
jurisdictions that sell such certificates. The procedures for the sale and
purchase of property tax certificates are defined by local law, but generally,
in exchange for paying the outstanding property taxes and penalties, the
purchaser assumes a lien position on the property that is superior to any
mortgage lien. After a specified holding period, the purchaser has the right to
commence strict foreclosure proceedings, under which the purchaser will receive
title to the property free and clear of any liens, regardless of the
relationship between the property value and the property tax lien. Prior to such
strict foreclosure, the property owner and/or junior lien holders have the right
to redeem the certificate by paying the amount expended by the tax certificate
holder, plus interest and/or penalties as defined by local statute. Since the
outstanding property taxes are generally a small percentage of the property
value, there is an incentive for a junior lien holder or property owner to
redeem the certificate prior to strict foreclosure, as they will not otherwise
share in the excess of the property value over the property tax lien amount.
CSC is currently focusing its efforts in New Jersey and Connecticut,
although it is exploring other states. While the effective rate of return
(increase in redemption value) of each individual tax lien will vary, CSC has on
average been able to earn approximately a 14% yield with effective LTVs
significantly below the Bank's prevailing lending standards. In New Jersey, by
virtue of acquiring a tax lien, CSC also obtains the right to pay any future
unpaid delinquent property taxes, and, once paid, is statutorily entitled to
interest up to 18% annually on such future delinquent taxes.
Prior to bidding at any auctions, CSC conducts due diligence on available
properties in accordance with internal guidelines, such as the review of
property types, appraised values and lien searches and, depending upon size,
will physically inspect the property. As of September 30, 1997, CSC had a
portfolio of $1.9 million of delinquent property tax certificates.
Properties
The Company's headquarters are located at 1230 Walnut Street in
Philadelphia, Pennsylvania. The Bank operates from two branch offices, one of
which is located at the Company's headquarters and the other is located at 6526
Castor Avenue in Philadelphia. The Bank leases its Walnut Street and Castor
Avenue locations under lease agreements with terms expiring in 2014 and 1999,
respectively, assuming the Bank exercises all of its options to renew such
leases. The Walnut Street location is leased from Walnut Square Partners, a
partnership controlled by Ronald L. Caplan, a director of the Company and the
Bank. In addition, CMC leases space at a building owned by 1334 Walnut Street
Partners, which is a partnership controlled by Mr. Caplan and QUEST, a
wholly-owned subsidiary of the Bank. See "Certain Relationships and Related
Transactions."
Personnel
At November 30, 1997, the Company, including the Bank and its subsidiaries,
had 70 full-time and four part-time employees, of which 22 were employed by the
Bank and 50 were employed by the Bank's subsidiaries. The Company's only
employees were the Chairman and the President. The Company's and the Bank's
employees are not represented by a collective bargaining group. The Company and
the Bank believe that their relationship with their respective employees is
good.
Legal Proceedings
There are various claims and lawsuits in which the Company or the Bank are
periodically involved, such as claims to enforce liens, condemnation proceedings
on properties in which the Bank holds security interests, claims involving the
making and servicing of real property loans, and other issues incident to the
Bank's business. In the opinion of management, there are no material pending
claims or lawsuits.
45
<PAGE>
SUPERVISION AND REGULATION
General
The Bank is chartered as a federal savings bank under the Home Owners' Loan
Act, as amended (the "HOLA"), which is implemented by regulations adopted and
administered by the OTS. As a federal savings bank, the Bank is subject to
regulation, supervision and regular examination by the OTS. The OTS also has
extensive enforcement authority over all savings institutions and their holding
companies, including the Bank and the Company. Federal banking laws and
regulations control, among other things, the Bank's investments, loans, required
reserves, mergers and consolidations, payment of dividends and other aspects of
the Bank's operations. The deposits of the Bank are insured by the SAIF
administered by the FDIC to the maximum extent provided by law ($100,000 for
each depositor). In addition, the FDIC has certain regulatory and examination
authority over OTS-regulated savings institutions and may recommend enforcement
actions against savings institutions to the OTS. The supervision and regulation
of the Bank is intended primarily for the protection of the SAIF and the Bank's
depositors rather than the Company or its shareholders.
As a savings and loan holding company, the Company is registered with the
OTS and subject to OTS regulation and supervision under the HOLA. The Company
also will be required to file certain reports with, and otherwise comply with
the rules and regulations of, the Commission under the federal securities laws.
The following discussion is intended to be a summary of certain statutes,
rules and regulations affecting the Bank and the Company. A number of other
statutes and regulations have an impact on their operations. The following
summary of applicable statutes and regulations does not purport to be complete
and is qualified in its entirety by reference to relevant statutes and
regulations.
Regulation of the Bank
Business Activities. The Bank derives its lending and investment powers
from the HOLA and the regulations of the OTS thereunder. Under these laws and
regulations, the Bank may invest in mortgage loans secured by residential and
commercial real estate, commercial and consumer loans, certain types of
commercial paper and debt securities, and certain other assets. The Bank may
also establish service corporations that may engage in activities reasonably
related to the business of financial institutions but not otherwise permissible
for the Bank, including certain real estate equity investments and securities
and insurance brokerage. These investment powers are subject to various
limitations.
Branching. Subject to certain limitations, OTS regulations currently permit
a federally chartered savings institution like the Bank to establish branches in
any state of the United States, provided that the federal savings institution
qualifies as a "domestic building and loan association" under the Internal
Revenue Code of 1986, as amended (the "Code"), or is a "qualified thrift lender"
under HOLA. See " -- Qualified Thrift Lender Test." The Bank has no current
plans to establish any branch outside Pennsylvania although its authority to
establish interstate branches could facilitate a geographic diversification in
the future.
Regulatory Capital. The OTS has adopted capital adequacy regulations that
require savings institutions such as the Bank to meet three minimum capital
standards: a "core" capital requirement of 3% of adjusted total assets, a
"tangible" capital requirement of 1.5% of adjusted total assets, and a
"risk-based" capital requirement of 8% of total risk-based capital to total
risk-weighted assets. In addition, the OTS has adopted regulations imposing
certain restrictions on savings institutions that have a total risk-based
capital ratio of less than 8%, a ratio of Tier 1 capital to risk-weighted assets
of less than 4% or a ratio of Tier 1 capital to total assets of less than 4% (or
3% if the institution is rated Composite 1 under the CAMEL examination rating
system). See "-- Prompt Corrective Regulatory Action."
The core capital, or "leverage ratio," requirement mandates that a savings
institution maintain core capital equal to at least 3% of its adjusted total
assets. "Core capital" includes common shareholders' equity (including retained
earnings), noncumulative perpetual preferred stock and related surplus, minority
interests in the equity accounts of fully consolidated subsidiaries and certain
nonwithdrawable accounts and pledged deposits. Core capital is generally reduced
by the amount of the savings institution's intangible assets, with limited
exceptions for permissible mortgage servicing rights ("MSRs"), purchased credit
card relationships and certain intangible
46
<PAGE>
assets arising from prior regulatory accounting practices. Core capital is
further reduced by the amount of a savings institution's investments in and
loans to subsidiaries engaged in activities not permissible for national banks.
At September 30, 1997, the Bank had no such investments.
The risk-based capital standards of the OTS require maintenance of core
capital equal to at least 4% of risk- weighted assets and total capital equal to
at least 8% of risk-weighted assets. For purposes of the risk-based capital
requirement, "total capital" includes core capital plus supplementary capital up
to the amount of core capital. Supplementary capital includes preferred stock
that does not qualify as core capital, nonwithdrawable accounts and pledged
deposits to the extent not included in core capital, perpetual and mandatory
convertible subordinated debt and maturing capital instruments meeting specified
requirements and a portion of the institution's loan and lease loss allowance.
The risk-based capital requirement is measured against risk-weighted
assets, which equal the sum of each asset and the credit-equivalent amount of
each off-balance sheet item after the dollar amount of each such asset and item
is multiplied by an assigned risk weight, which ranges from 0% to 100% as
assigned by the OTS capital regulations based on the risks the OTS believes are
inherent in the type of asset or off-balance sheet item.
The OTS risk-based capital regulation also includes an interest rate risk
("IRR") component that requires savings institutions with greater than normal
IRR, when determining compliance with the risk-based capital requirements, to
maintain additional total capital. The OTS has, however, indefinitely deferred
enforcement of its IRR requirements.
The following table sets forth the Bank's compliance with its regulatory
capital requirements at September 30, 1997.
<TABLE>
<CAPTION>
Capital
Bank Capital Requirements Excess Capital
-------------------- -------------------- ---------------------
Amount Percent Amount Percent Amount Percent
-------- --------- -------- --------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital ................. $7,158 5.29% $2,030 1.50% $5,128 3.79%
Core capital ..................... 7,158 5.29 5,413 4.00 1,745 1.29
Total risk-based capital ......... 7,645 10.26 5,960 8.00 1,685 2.26
</TABLE>
Prompt Corrective Regulatory Action. Under FDICIA, the federal banking
regulators are required to take prompt corrective action in respect of
depository institutions that do not meet certain minimum capital requirements,
including a leverage limit and a risk-based capital requirement. All
institutions, regardless of their capital levels, are restricted from making any
capital distribution or paying any management fees that would cause the
institution to become undercapitalized. As required by FDICIA, banking
regulators, including the OTS, have issued regulations that classify insured
depository institutions by capital levels and provide that the applicable agency
will take various prompt corrective actions to resolve the problems of any
institution that fails to satisfy the capital standards.
Under the joint prompt corrective action regulations, a "well-capitalized"
institution is one that is not subject to any regulatory order or directive to
meet any specific capital level and that has or exceeds the following capital
levels: a total risk-based capital ratio of 10%, a Tier 1 risk-based capital
ratio of 6%, and a ratio of Tier 1 capital to total assets ("leverage ratio") of
5%. An "adequately capitalized" institution is one that does not qualify as
"well capitalized" but meets or exceeds the following capital requirements: a
total risk-based capital of 8%, a Tier 1 risk-based capital ratio of 4%, and a
leverage ratio of either (i) 4% or (ii) 3% if the institution has the highest
composite examination rating. An institution not meeting these criteria is
treated as "undercapitalized," "significantly undercapitalized," or "critically
undercapitalized" depending on the extent to which its capital levels are below
these standards. An institution that falls within any of the three
"undercapitalized" categories will be subject to certain severe regulatory
sanctions required by FDICIA and the implementing regulations. As of September
30, 1997, the Bank was "well-capitalized" as defined by the regulations, with a
total risk-based capital ratio of 10.26%, a Tier 1 risk-based capital ratio of
9.61% and a leverage ratio of 5.29%.
Federal Deposit Insurance. The Bank is required to pay assessments, based
on a percentage of its insured deposits, to the FDIC for insurance of its
deposits by the SAIF.
Under the FDIC's risk-based deposit insurance assessment system, the
insurance assessment rate for an insured depository institution depends on the
assessment risk classification assigned to the institution. Institutions
47
<PAGE>
are assigned by the FDIC to one of three capital groups -- well-capitalized,
adequately capitalized, or undercapitalized -- and, within each capital
category, to one of three supervisory subgroups. Unless permitted by the FDIC or
required by law, insured institutions may not state their assessment risk
classification in any advertisement or promotional material.
In order to recapitalize the SAIF and to equalize the deposit insurance
premiums paid by SAIF-insured institutions and institutions with deposits
insured by the Bank Insurance Fund, Congress enacted the Deposit Insurance Funds
Act of 1996 (the "1996 Act"), which authorized the FDIC to impose a one-time
special assessment on all institutions with SAIF-assessable deposits in the
amount necessary to recapitalize the SAIF to the statutorily designated reserve
ratio of 1.25% of insured deposits. Institutions were assessed at the rate of
65.7 basis points per $100 of each institution's SAIF-assessable deposits as of
March 31, 1995. The 1996 Act provides that the amount of the special assessment
will be deductible for federal income tax purposes for the taxable year in which
the special assessment is paid. Based on the foregoing, the Bank paid a special
assessment of $296,000 on November 26, 1996. Net of related tax effects, this
reduced reported earnings by $192,000 for the three months ended September 30,
1996 and the year ended June 30, 1997.
As a result of the recapitalization of the SAIF by the 1996 Act, the FDIC
reduced the insurance assessment rate for SAIF-assessable deposits for periods
beginning October 1, 1996. For the first half of 1997, the FDIC set the
effective insurance assessment rates for SAIF-insured institutions, such as the
Bank, at zero to 27 basis points. In addition, SAIF-insured institutions will be
required, until December 31, 1999, to pay assessments to the FDIC at an annual
rate of between 6.0 and 6.5 basis points to help fund interest payments on
certain bonds issued by the Financing Corporation ("FICO"), an agency of the
federal government established to recapitalize the predecessor to the SAIF.
During this period, BIF member banks will be assessed for payment of the FICO
obligations at one-fifth the annual rate applicable to SAIF member institutions.
After December 31, 1999, BIF and SAIF members will be assessed at the same rate
(currently estimated at approximately 2.4 basis points) to service the FICO
obligations.
The 1996 Act also provides that the FDIC may not assess regular insurance
assessments for the SAIF unless required to maintain or to achieve the
designated reserve ratio of 1.25%, except for such assessments on those
institutions that are not classified as "well-capitalized" or that have been
found to have "moderately severe" or "unsatisfactory" financial, operational or
compliance weaknesses. The Bank is classified as "well-capitalized" and has not
been found by the OTS to have such supervisory weaknesses.
Qualified Thrift Lender Test. The HOLA and OTS regulations require all
savings institutions to satisfy one of two Qualified Thrift Lender ("QTL") tests
or to suffer a number of sanctions, including restrictions on activities. To
qualify as a QTL, a savings institution must either (i) be deemed a "domestic
building and loan association" under the Code by maintaining at least 60% of its
total assets in specified types of assets, including cash, certain government
securities, loans secured by and other assets related to residential real
property, educational loans, and investments in premises of the institution or
(ii) satisfy the HOLA's QTL test by maintaining at least 65% of "portfolio
assets" in certain "Qualified Thrift Investments." For purposes of the HOLA's
QTL test, portfolio assets are defined as total assets less intangibles,
property used by a savings institution in its business and liquidity investments
in an amount not exceeding 20% of assets. Qualified Thrift Investments consist
of (a) loans or securities related to domestic residential housing or
manufactured housing, (b) loans to small businesses, student loans and credit
card loans and (c) subject to a limitation equal to 20% of portfolio assets, 50%
of the dollar amount of residential mortgage loans subject to sale under certain
conditions, 100% of consumer loans (not described above) and certain other
assets, 200% of their investments in loans to finance "starter homes" (with
purchase prices not exceeding 60% of median value) and loans for construction,
development or improvement of housing and community service facilities or for
financing small business in "credit needy" areas.
A savings institution must maintain its status as a QTL on a monthly basis
in at least nine out of every 12 months. An initial failure to qualify as a QTL
results in a number of sanctions, including the imposition of certain operating
restrictions and a restriction on obtaining additional advances from its Federal
Home Loan Bank. If a savings institution does not requalify under the QTL test
within the three-year period after it fails the QTL test, it would be required
to terminate any activity (and dispose of any investment) not permissible for a
national bank and repay as promptly as possible any outstanding advances from
its Federal Home Loan Bank. In addition, the holding company of such an
institution, such as the Company, would be required to register as a bank
holding company with the Federal Reserve Board. At September 30, 1997, the Bank
qualified as a QTL.
48
<PAGE>
Loans to One Borrower. Under HOLA, savings associations are generally
subject to the national bank limits on loans to one borrower. Generally, a
savings institution may not make a loan or extend credit to a single or related
group of borrowers in excess of 15% of the institution's unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if such loan is fully secured by readily marketable collateral,
which is defined to include certain securities and bullion, but generally does
not include real estate.
Enforcement. Under the Federal Deposit Insurance Act (the "FDI Act"), the
OTS has primary enforcement responsibility over savings associations such as the
Bank and has the authority to bring enforcement action against all
"institution-related parties," including shareholders, attorneys, appraisers,
and accountants who knowingly or recklessly participate in wrongful action that
caused or is likely to cause more than a minimal financial loss to, or a
significant adverse effect on, an insured depository institution. Civil
penalties cover a wide range of violations and actions and range up to $25,000
per day unless a finding of reckless disregard is made, in which case fines of
up to $1 million per day are permitted. Criminal penalties for most financial
institution crimes include fines of up to $1 million and imprisonment for up to
30 years. In addition, regulators have substantial discretion to take
enforcement action against an institution that fails to comply with its
regulatory requirements, particularly with respect to the capital requirements.
Possible enforcement action ranges from the imposition or the termination of
deposit insurance. Under the FDI Act, the FDIC has the authority to recommend to
the director of the OTS that enforcement action be taken with respect to a
particular savings institution. If action is not taken by the director, the FDIC
has authority to take such action under certain circumstances. The Bank is not
presently subject to any of the foregoing enforcement actions.
Safety and Soundness Standards. FDICIA, as amended by the Riegle Community
Development and Regulatory Improvement Act of 1994, requires the OTS, together
with the other federal bank regulatory agencies, to prescribe standards, by
regulation or guideline, relating to internal controls, information systems and
internal audit systems, loan documentation, credit underwriting, interest rate
risk exposure, asset growth, asset quality, earnings, stock valuation, and
compensation, fees and benefits and such other operational and managerial
standards as the agencies deem appropriate. The OTS and the federal bank
regulatory agencies have adopted a set of guidelines prescribing safety and
soundness standards pursuant to the statute. In general, guidelines adopted by
the OTS require, among other things, appropriate systems and practices to
identify and manage the risks and exposures specified in the guidelines. The
guidelines prohibit excessive compensation as an unsafe and unsound practice and
describe compensation as excessive when the amounts paid are unreasonable or
disproportionate to the services performed by an executive officer, employee,
director or principal shareholder.
In addition, on July 10, 1995, the OTS and the federal bank regulatory
agencies proposed guidelines for asset quality and earnings standards. Under the
proposed standards, a savings institution would be required to maintain systems,
commensurate with its size and the nature and scope of its operations, to
identify problem assets and prevent deterioration in those assets as well as to
evaluate and monitor earnings and ensure that earnings are sufficient to
maintain adequate capital and reserves. Management believes that the asset
quality and earnings standards, in the form proposed by banking agencies, would
not have a material effect on the operations of the Bank.
Limitations on Capital Distributions. OTS regulations impose limitations
upon capital distributions by a savings institution, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. A savings institution must give notice to the OTS at least 30
days before a proposed capital distribution. A savings institution that has
capital in excess of all regulatory capital requirements before and after a
proposed capital distribution and that is not otherwise restricted in making
capital distributions, may, after prior notice but without the approval of the
OTS, make capital distributions during a calendar year equal to the greater of
(a) 100% of its net income to date during the calendar year plus the amount that
would reduce by one-half its "surplus capital ratio" (the excess capital over
its capital requirements) at the beginning of the calendar year, or (b) 75% of
its net income for the previous four quarters. Any additional capital
distributions would require prior OTS approval.
Under OTS regulations, the Bank would not be permitted to pay dividends on
its capital stock if its regulatory capital would thereby be reduced below the
amount then required for the liquidation account established
49
<PAGE>
for the benefit of certain depositors of the Bank at the time of the
Conversion. 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."
In addition to the foregoing, earnings of the Bank appropriated to bad
debt reserves and deducted for federal income tax purposes are not available
for payment of dividends or other distributions to the Company without payment
of taxes at the then current tax rate by the Bank on the amount of earnings
removed from the reserves for such distributions. See "Taxation."
Consumer Credit Regulation. The Bank's mortgage lending activities are
subject to the provisions of various federal and state statutes, including,
among others, the Truth in Lending Act, the Equal Credit Opportunity Act, the
Real Estate Settlement Procedures Act, the Fair Housing Act, statutes limiting
loan fees and charges, and the regulations promulgated thereunder. These
statutes and regulations, among other provisions, prohibit discrimination,
prohibit unfair and deceptive trade practices, require the disclosure of certain
basic information to mortgage borrowers concerning credit terms and settlement
costs, prohibit the payment or receipt of money or other valuable consideration
for a referral of real estate settlement services (including the origination of
mortgage loans) and otherwise regulate terms and conditions of credit and the
procedures by which credit is offered and administered. Failure to comply (or
perceived failure to comply) with these requirements can lead to administrative
enforcement actions, class action lawsuits and demands for restitution or loan
rescission. In recent years, consumer litigation (including class action
litigation) has become increasingly prevalent in the Bank's market area.
Transactions with Affiliates. The Bank is subject to restrictions imposed
by Sections 23A and 23B of the Federal Reserve Act on extensions of credit to,
and certain other transactions with, the Company and other affiliates, and on
investments in the stock or other securities thereof. Such restrictions prevent
the Company and such other affiliates from borrowing from the Bank unless the
loans are secured by specified collateral at specified levels (equal to or
greater than 100% of the loan amount), and require such transactions to have
terms comparable to terms of arms-length transactions with third persons.
Further, such secured loans and other transactions and investments by the Bank
are generally limited in amount as to the Company or any other affiliate to 10%
of the Bank's capital and surplus and as to the Company and all other affiliates
to an aggregate of 20% of the Bank's capital and surplus. These restrictions may
limit the Company's ability to obtain funds from the Bank for its cash needs,
including funds for acquisitions and for payment of dividends, interest and
operating expenses.
Loans to Directors, Executive Officers and Principal Shareholders. The
Bank's ability to extend credit to the directors, executive officers and 10%
shareholders of the Bank and the Company, as well as to entities controlled by
such persons, is governed by the requirements of Sections 22(g) and 22(h) of the
Federal Reserve Act and Regulation O of the Federal Reserve Board thereunder.
Among other things, these provisions require that an institution's extensions of
credit to these insiders (a) be made on terms that are substantially the same
as, and follow credit underwriting procedures that are not less stringent than,
those prevailing for comparable transactions with unaffiliated persons and that
do not involve more than the normal risk of repayment or present other
unfavorable features and (b) not exceed certain limitations on the amount of
credit extended to such persons, individually and in the aggregate, which limits
are based, in part, on the amount of the institution's capital. In addition,
extensions of credit in excess of certain limits must be approved by the
institution's Board of Directors.
Reserve Requirements. Pursuant to regulations of the Federal Reserve Board,
all FDIC-insured depository institutions must maintain average daily reserves
against their transaction accounts. No reserves are required to be maintained on
the first $4.4 million of transaction accounts, and reserves equal to 3% must be
maintained on the next $49.3 million of transaction accounts, plus reserves
equal to 10% on the remainder. These percentages are subject to adjustment by
the Federal Reserve Board. Because required reserves must be maintained in the
form of vault cash or in a non-interest-bearing account at a Federal Reserve
Bank, the effect of the reserve requirement is to reduce the amount of the
institution's interest-earning assets. As of September 30, 1997, the Bank met
its reserve requirements.
Liquidity Requirements. The Bank is required to maintain sufficient
liquidity to insure its safe and sound operation. In addition, for each
calendar quarter, the Bank is required to maintain an average daily balance of
50
<PAGE>
liquid assets (cash, savings accounts and certain time deposits, bankers'
acceptances, highly rated corporate debt and commercial paper, securities of
certain mutual funds, and specified United States government, state or federal
agency obligations with maturities not exceeding specified lengths) equal to not
less than 4% of the average daily balance or ending balance of its net
short-term withdrawable savings deposits plus short-term borrowings for the
prior calendar quarter.
Classification of Assets. Savings institutions are required to classify
their assets on a regular basis, establish appropriate allowances for losses and
report the results of such classification quarterly to the OTS. A savings
institution is also required to set aside adequate valuation allowances and
establish liabilities for off-balance sheet items, such as letters of credit,
when a loss becomes probable and estimable. The OTS has the authority to review
the institution's classification of its assets and to determine whether
additional assets must be classified or the institution's valuation allowances
must be increased.
Community Reinvestment. Under the Community Reinvestment Act (the "CRA"),
as implemented by OTS regulations, a savings institution has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low- and moderate-income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial associations nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best-suited to its particular community. The CRA requires the OTS, in connection
with its examination of a savings institution, to assess the institution's
record of meeting the credit needs of its community and to take such record into
account in evaluating certain applications by such institution. The CRA also
requires all associations to publicly disclose their CRA rating. The Bank
received a CRA rating of "satisfactory" in its most recent examination.
Federal Home Loan Bank System. The FHLB System consists of 12 district
Federal Home Loan Banks subject to supervision and regulation by the Federal
Housing Finance Board ("FHFB"). The Federal Home Loan Banks provide a central
credit facility primarily for member institutions. As a member of the FHLB, the
Bank is required to acquire and hold shares of capital stock in the FHLB in an
amount at least equal to 1% of the aggregate unpaid principal of its home
mortgage loans, home purchase contracts, and similar obligations at the
beginning of each year, or 1/20 of its advances (borrowings) from the FHLB,
whichever is greater. At September 30, 1997, the Bank was in compliance with
this requirement, with an investment in FHLB stock of $786,000. Long-term FHLB
advances may only be made for the purpose of providing funds for residential
housing finance. At September 30, 1997, the Bank had $4.4 million of total
advances outstanding from the FHLB.
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 this
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.
Proposed Legislation. Legislation currently pending before the United
States Congress would, if enacted, require all federal savings institutions
(such as the Bank) to convert to a national bank or a state bank or savings bank
charter. If the pending legislation were to be adopted in its current form, it
would eliminate certain advantages now enjoyed by federal savings institutions
over their commercial bank counterparts, such as unrestricted interstate
branching authority and broader preemption of restrictive state laws.
As the proposed legislation is part of a larger financial services bill and
is in early stages of consideration, the Company cannot predict whether or in
what form the legislation will be enacted. However, based upon the provisions of
the currently pending legislation, the management of the Company does not
believe that the enactment of such legislation would have a material adverse
effect on its financial condition or results of operations. The 1996 legislation
repealed the percentage of taxable income method of calculating the bad debt
reserve. The Bank historically elected to use the percentage of taxable income
method and has been required by the 1996 legislation to recapture the excess
portion of post-1997 reserves over a six year period.
51
<PAGE>
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 and Supervision of the Bank -- Qualified Thrift Lender Test."
Upon any non-supervisory acquisition by the Company of another savings
institution that is held as a separate subsidiary, the Company would become a
multiple savings and loan holding company and would be subject to limitations on
the types of business activities in which it could engage. The HOLA limits the
activities of a multiple savings and loan holding company and its non-insured
institution subsidiaries primarily to activities permissible for bank holding
companies under the Bank Holding Company Act, subject to the prior approval of
the OTS, and to other activities authorized by OTS regulation.
TAXATION
General
The Company files a consolidated federal income tax return with the Bank
and its subsidiaries that are more than 80% owned based on its fiscal year.
Consolidated returns have the effect of deferring gain or loss on intercompany
transactions and allowing companies included within the consolidated return to
offset income against losses under certain circumstances. Subsidiaries which are
less than 80% owned by the Company are not permitted to be included in the
Company's consolidated federal income tax return.
Federal Income Taxation
Thrift institutions are subject to the provisions of the Code in the same
general manner as other corporations. Prior to 1996 legislation, institutions
such as the Bank which met certain definitional tests and other conditions
prescribed by the Code benefited from certain favorable provisions regarding
their deductions from taxable income for annual additions to their bad debt
reserve. The bad debt reserve deduction with respect to qualifying real property
loans could be based upon actual loss experience (the "experience method") or a
percentage of taxable income determined without regard to such deduction (the
"percentage of taxable income method").
Earnings appropriated to the Bank's pre-1988 bad debt reserve are not
available for distribution to shareholders (including distributions made on
dissolution or liquidation), unless the amount of such earnings is included in
the Bank's taxable income, along with the amount deemed necessary to pay the
resulting federal income tax. For information regarding additions to the tax bad
debt reserves, see Note K to Financial Statements.
The Company's federal corporate income tax returns for the years ended June
30, 1993 and June 30, 1994 have been examined by the Internal Revenue Service.
No changes were made to the Company's reported taxable income as a result of
such examinations.
52
<PAGE>
MANAGEMENT
Directors and Executive Officers
The Board of Directors of the Company is currently composed of ten members,
each of whom serves for a term of one year. The Board of Directors of the Bank
is composed of the same individuals. Executive officers are elected annually by
the Board and serve at the Board's discretion subject to the terms of employment
agreements with certain of its officers.
The following table sets forth information with respect to the directors
and executive officers of the Company.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Thomas J. Knox ................... 56 Chairman and Chief Executive Officer
Bruce A. Levy .................... 43 President and Director
Joseph T. Crowley ................ 35 Director, Vice President, Secretary and Treasurer
Paul Bachow ...................... 45 Director
Ronald L. Caplan ................. 49 Director
D. Walter Cohen, D.D.S. .......... 70 Director
Daniel DiLella ................... 46 Director
Linda R. Knox .................... 52 Director
Joel S. Lawson III ............... 50 Director
Brian McAdams .................... 51 Director
</TABLE>
Biographical Information
Directors and Executive Officers of the Company
The principal occupation for at least the last five years of each executive
officer and director of the Company, as well as certain other information, is
set forth below.
Thomas J. Knox. Mr. Knox has served as Chairman and Chief Executive Officer
of the Company since 1988 and Chairman of the Bank since 1993. From 1989 to
1993, Mr. Knox was President of the Board of Directors of the Bank. From 1993 to
1995, Mr. Knox served as Special Deputy Rehabilitator and Chief Executive
Officer of Fidelity Mutual Life Insurance Company, a $7.5 billion life insurance
company placed in rehabilitation by the Pennsylvania Insurance Department. From
1992 to 1993, he served as Deputy Mayor of the City of Philadelphia overseeing
the Office of Management and Productivity. He serves as a director of the City
of Philadelphia Productivity Bank, which he chaired from 1992 to 1993,
Vice-Chairman of the Philadelphia Airport Advisory Board, Chairman of the
Concerto Soloist Orchestra and Chairman of the Sunday Serenade. Mr. Knox is a
past director of Independence Blue Cross, the Medical College of Pennsylvania,
St. Christopher's Hospital for Children and the Visiting Nurses Association.
Bruce A. Levy. Mr. Levy has served as President and a director of the
Company and a director of the Bank since 1996. From 1994 to 1996, Mr. Levy was
a private investor and an independent consultant. From 1992 until its sale in
1994, he was the sole shareholder of Philadelphia Benefits Corporation, a
health benefits consulting and marketing firm. From 1981 to 1992, Mr. Levy
served as President and was a shareholder of Preferred Benefits Corporation, a
401(k) consulting and administration firm he co-founded. From 1975 to 1981, he
served in various capacities with Ernst & Young. Mr. Levy is a graduate of the
Wharton School of the University of Pennsylvania.
Joseph T. Crowley. Mr. Crowley has served as Vice-President, Secretary,
Treasurer and a director of the Company since 1993, President of the Bank since
1993 and was Chief Financial Officer of the Bank from 1992 to 1993. From 1988
to 1992, Mr. Crowley was Senior Vice President of Hansen Savings Bank. From
1985 to 1988, he was an auditor with KPMG Peat Marwick, specializing in the
banking industry. Mr. Crowley is a graduate of Widener University.
53
<PAGE>
Paul Bachow. Mr. Bachow became a director of the Company in 1997 and has
served as director of the Bank since 1993. Since 1985, Mr. Bachow has been
Senior Managing Director and President of Bachow & Associates, Inc. Mr. Bachow
received a B.A. in Accounting and Finance from American University, a Master's
degree in Tax Law from New York University and a Juris Doctor from Rutgers Law
School. Mr. Bachow is a Certified Public Accountant.
Ronald L. Caplan. Mr. Caplan became a director of the Company in 1997 and
has been a director of the Bank since 1995. Mr. Caplan is the President of
Philadelphia Management Corporation, which he founded in 1982. He is also the
founder and President of Roosevelts' Incorporated. Since 1975, Mr. Caplan has
been actively engaged in acquiring, financing, renovating and managing
residential and commercial real estate in the Greater Philadelphia area, with
his activities largely concentrated in Center City Philadelphia. Mr. Caplan is
a graduate of Northeastern University.
D. Walter Cohen, D.D.S. Dr. Cohen became a director of the Company in 1997
and has served as a director of the Bank since 1994. Since 1993, Dr. Cohen has
been Chancellor of the Allegheny University of the Health Sciences. From 1986
to 1993, Dr. Cohen was President of the Medical College of Pennsylvania. Dr.
Cohen is also a partner in a periodontal practice in Philadelphia. Dr. Cohen is
a graduate of the University of Pennsylvania and earned his D.D.S. from its
School of Dental Medicine.
Daniel DiLella. Mr. DiLella became a director of the Company in 1997 and
has served as a director of the Bank since 1991. Mr. DiLella has been President
and CEO of Berwind Property Group since 1983. From 1973 to 1983, Mr. DiLella
was Vice President of Girard Bank. Mr. DiLella is a graduate of Villanova
University and received his MBA from Saint Joseph's University.
Linda R. Knox. Ms. Knox became a director of the Company in 1997, and has
served as President of the Board of Directors of the Bank since 1993 and a
director of the Bank since 1989. Prior to 1993, Ms. Knox was a realtor
specializing in the sale of historical and architecturally significant
properties in the Philadelphia area. Ms. Knox attended Rider University and is
a graduate of the Temple University Real Estate Institute. Ms. Knox is the wife
of Mr. Knox.
Joel S. Lawson III. Mr. Lawson became a director of the Company in 1997
and has served as a director of the Bank since 1994. Mr. Lawson is the Managing
Partner and CEO of Howard, Lawson & Co., an investment banking and corporate
finance firm in Philadelphia, a position he has held since 1980. Mr. Lawson is
also a director of Urban Outfitters, Inc. and several privately-held companies.
He is a graduate of Yale University and received his MBA from the Wharton
School of the University of Pennsylvania.
Brian McAdams. Mr. McAdams became a director of the Company in 1997 and
has served as a director of the Bank since 1989. Mr. McAdams is Chairman and
CEO of STRATVIS Advisement, Chairman of McAdams, Richman & Ong, an advertising
and design firm, and Chairman of Back Health Centers, Inc. Mr. McAdams served
as Chairman and CEO of National Media Corporation from 1994 to 1996, and
continues to serve as a director of that company.
Executive Officers of the Bank's Subsidiaries
Robert N. Morro, age 37. Mr. Morro has served as Executive Vice President
of CMC since 1996. From 1995 to 1996, Mr. Morro was Vice President-Wholesale
Lending for Freedom Mortgage Corporation. From 1993 to 1995, Mr. Morro was
Director of Operations for DSB Funding, a division of Delaware Savings Bank,
and from 1990 to 1993, he was Assistant Vice President of American Financial
Corporation located in Tampa. Mr. Morro is a graduate of Stockton State
College.
Robert W. Stein, age 30. Mr. Stein has served as President of CSC since
1996. From 1995 to 1996, Mr. Stein was an associate with the law firm of Pepper
Hamilton & Scheetz LLP. From 1994 to 1995, Mr. Stein was a law clerk for the
late John F. Gerry, then Chief Judge of the District Court for the District of
New Jersey. Mr. Stein is a graduate of the University of Chicago and received
his law degree from the Rutgers University School of Law.
54
<PAGE>
Michael D. Kushner, age 32. Mr. Kushner has served as President of CMCD
since 1997. Since 1990, Mr. Kushner has been President and the sole shareholder
of Merit Financial Corporation, a licensed mortgage broker. Mr. Kushner is a
graduate of George Washington University.
Haiching Zhao, Ph.D., age 41. Dr. Zhao has served as President of NCM
since 1997. Since 1993, Dr. Zhao has served as President and sole shareholder
of NCSC, a company that markets financial services products to the U.S. Chinese
community. Dr. Zhao is President of the National Council on Chinese Affairs.
Dr. Zhao is a graduate of Peking University and received an M.S. in
Biochemistry and a Ph.D. in Biophysics from the University of Connecticut.
Committees of the Board of Directors
The Board of Directors of the Company recently established Executive,
Audit, Nominating and Compensation Committees. A brief description of these
committees is set forth below.
The Executive Committee is generally responsible to act on behalf of the
Board of Directors on all matters between regular and special meetings of the
Board. Currently, the members of this Committee are Mr. Knox, Mr. Levy and Mr.
Lawson.
The Audit Committee reviews and advises the Board of Directors with
respect to reports by the Company's independent auditors and monitors the
Company's compliance with laws and regulations applicable to the Company's
financial statements. Currently, the members of this Committee are Mr. Levy,
Mr. McAdams and Dr. Cohen.
The Nominating Committee is responsible for considering potential nominees
to the Board of Directors. In its deliberations, the Nominating Committee
considers the candidate's knowledge of the banking business and involvement in
community, business and civic affairs, among other factors. Currently, the
members of this Committee are Mr. Knox, Mr. Levy and Ms. Knox.
The Compensation Committee handles personnel and compensation matters
relating to the executive officers of the Company. Currently, the members of
this Committee are Mr. McAdams and Dr. Cohen.
The Bank has a Loan Committee which reviews all Commercial Real Estate
loans, SBA loans and certain other loans. Currently, the members of this
Committee are Mr. Knox, Ms. Knox, Mr. Levy, Mr. Crowley, Mr. Caplan and Mr.
DiLella.
Compensation Committee Interlocks and Insider Participation
Determinations regarding compensation of the Company's executive officers
are made by the Company's Compensation Committee. Mr. McAdams and Dr. Cohen
currently serve on the Compensation Committee. The Bank extended Mr. McAdams a
$60,000 personal line of credit in September 1997. Amounts outstanding under the
line of credit accrue interest at the prime rate as reported in the Wall Street
Journal ("Prime") minus 0.5% and outstanding amounts are secured by certain
marketable securities. The Bank has also extended a term loan in the amount of
$280,000 to Bastille Associates, L.P., a partnership of which Mr. McAdams is a
general partner. Amounts outstanding under the term loan accrue interest at a
rate of Prime plus 1.5% (adjusted annually) and outstanding amounts are secured
by certain assets of the partnership. Mr. McAdams personally guaranteed 50% of
the loan. The Bank extended Dr. Cohen a $125,000 business line of credit in
March 1996. Amounts outstanding under the line of credit accrue interest at a
rate of Prime plus 0.75% and outstanding amounts are secured by certain assets
of Dr. Cohen's dental practice as well as his personal guarantee. Dr. Cohen is
also a limited partner in Bastille Associates, L.P. Each of these loans has been
current throughout its term and was made on substantially the same terms,
including interest rates and collateral requirements, as those prevailing at the
time for comparable transactions with unrelated persons.
55
<PAGE>
Remuneration of Executive Officers
Summary Compensation Table
The following table sets forth compensation paid to the Chairman and Chief
Executive Officer, President and Vice President of the Company in fiscal year
1997. Except as set forth below, no executive officer of the Company was paid
salary and bonus during the fiscal year that exceeded $100,000 for services
rendered in all capacities to the Company.
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
-------------------------------------- -------------
Securities
Name and Underlying All Other
Principal Position Year Salary Bonus Options(#) Compensation
- --------------------------- ------ ---------------- ---------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Thomas J. Knox(1) ......... 1997 $ --(1) $ -- -- $ --
Chairman and Chief
Executive Officer
Bruce A. Levy(1) .......... 1997 $ 93,000(1) $ -- -- $ --
President
Joseph T. Crowley ......... 1997 $ 88,000 $12,000 -- (2) $ 6,000(3)
Vice President
</TABLE>
- ------------
(1) Mr. Knox received no compensation from the Company and its subsidiary during
the year ended June 30, 1997. Following the Offering, Mr. Knox will be paid
annual compensation of $61,800 and Mr. Levy will be paid compensation in
accordance with his employment agreement. See "-- Employment Agreements."
Mr. Knox and Mr. Levy received interest payments in connection with certain
notes to the Company. See "Certain Relationships and Related Transactions."
(2) In December 1997, the Company granted Mr. Crowley options to purchase 20,000
shares of Common Stock at an exercise price of $12 per share and options to
purchase 8,000 shares of Common Stock at the public offering price.
(3) Represents automobile allowance of $6,000.
Stock Option Plans
Employee Plan. The Employee Stock Option Plan (the "Employee Plan") was
adopted by the Board and approved by the Company's shareholders in December
1997. The Employee Plan permits the Company to grant non-qualified stock options
to officers, employees and consultants of the Company and its subsidiaries.
The Employee Plan is administered by the Board, which has the authority to
determine the plan's participants and the terms and conditions of the options
granted under the plan, including the number of shares subject to each option
grant, the exercise price, the option term (which may not exceed ten years) and
vesting and termination provisions. The per share exercise price cannot be less
than 100% of the fair market value of a share of Common Stock on the date of
grant and is payable to the Company in full upon exercise. Payment may be made
in cash or, if approved by the Board, in shares of Common Stock or by reduction
in the number of shares of Common Stock issuable upon exercise of the option.
The particular terms and conditions of each option will be set forth in a
separate agreement. Options generally will terminate when a participant ceases
to be an employee or consultant of the Company or its subsidiaries, except that
options that were exercisable on the date of such termination may be exercised
for a period of 30 days, or one year in the case of a termination due to a
participant's disability. If a participant dies, all options will become fully
exercisable and may be exercised for a period of one year. All options will
become immediately exercisable upon a change of control (as defined in the
plan).
The maximum aggregate number of shares of Common Stock that may be issued
under the Employee Plan is 200,000 shares. As of December 8, 1997, options to
purchase a total of 20,000 shares of Common Stock at
56
<PAGE>
an exercise price of $12.00 per share had been granted under the Employee Plan,
which options will become exercisable in four equal annual installments and will
expire on the fifth anniversary of the date of grant. The Board has also
approved the grant of options to purchase an additional 8,000 shares at an
exercise price equal to the initial public offering price. These options will be
granted on the date on which the Registration Statement is declared effective
and will become exercisable six months after such date. Options that expire,
terminate or are cancelled or forfeited will again be available for grant under
the Employee Plan. The Board, in its discretion, may at any time amend,
discontinue or terminate the Employee Plan, provided that the rights of a
participant with respect to any outstanding option may not be diminished or
impaired without the participant's consent.
Directors Plan. The Director Stock Option Plan (the "Director Plan") was
adopted by the Board and approved by the Company's shareholders in December
1997. The Director Plan is administered by the Board and provides for the grant
to non-employee directors of Replacement Stock Options and Annual Stock Options
(as described below).
Replacement Stock Options will be granted to each non-employee director on
the date on which the Registration Statement is declared effective in exchange
for the surrender by each such director of the phantom stock options previously
granted under the Company's Phantom Stock Option Plan. In the aggregate, such
Replacement Options will give such non-employee Directors the right to purchase
54,200 shares of Common Stock at an exercise price per share equal to the
initial public offering price. All Replacement Stock Options become exercisable
six months after the date of grant and terminate five years after the date of
grant.
Annual Stock Options will be granted to each non-employee director on the
date on which the Registration Statement is declared effective and each year
thereafter on the date of the Company's Annual Meeting of Shareholders. In the
initial grant, each non-employee director who serves on one or more committees
of the Board will receive Annual Stock Options to purchase 1,000 shares of
Common Stock and each non-employee director who does not serve on any committee
of the Board will receive Annual Stock Options to purchase 500 shares. In each
subsequent grant, the number of shares of Common Stock subject to the Annual
Stock Option will be determined by dividing $15,000 (or $7,500 in the case of a
non-employee director who does not serve on any committee of the Board) by the
fair market value of a share of Common Stock on the date of grant, and rounding
up to the next higher whole number. The exercise price for the initial grant of
Annual Stock Options will be the initial public offering price; the exercise
price for all subsequent grants will be 100% of the fair market value of a share
of Common Stock on the date of grant. All Annual Stock Options become
exercisable one year after the date of grant and expire five years after the
date of grant.
The particular terms and conditions of each option will be set forth in a
separate agreement. Upon exercise of an option, the exercise price must be paid
to the Company in full in cash or, if approved by the Board, in shares of Common
Stock or by reduction in the number of shares of Common Stock issuable upon such
exercise. If a participant ceases to be a director of the Company, all
Replacement Stock Options and Annual Stock Options that were exercisable on such
date may be exercised for a period of 30 days (except that, if a participant
ceases to be a director because of death or disability, all options will become
immediately exercisable and may be exercised for a period of one year). All
options will become immediately exercisable upon a change of control (as defined
in the plan).
The maximum aggregate number of shares of Common Stock that may be issued
under the Director Plan is 100,000 shares. Options that expire, terminate or are
cancelled or forfeited will again be available for grant under the Director
Plan. The Board, in its discretion, may at any time amend, discontinue or
terminate the Director Plan, provided that the rights of a participant with
respect to any outstanding option may not be diminished or impaired without the
participant's consent.
Directors' Compensation
In fiscal years 1996 and 1997, grants of options to purchase 27,100 shares
were made to certain directors (other than Mr. Knox, Mr. Levy, Mr. Crowley and
Ms. Knox) under a phantom stock option plan. In December 1997, such directors
renounced their rights to such phantom options and received options to purchase
an aggregate of 54,200 shares of Common Stock at the Offering price per share.
Mr. Bachow, Mr. Caplan, Dr. Cohen, Mr. DiLella, Mr. Lawson and Mr. McAdams
received options to purchase 3,800, 14,000, 10,200, 7,200, 11,600 and 7,400
shares, respectively.
57
<PAGE>
Each member of the Board of Directors, except for Mr. Knox, Mr. Levy, Mr.
Crowley and Ms. Knox, will be granted the option to purchase 1,000 shares on the
effective date of the Offering (500 if a director does not serve on a
committee). In addition, on each anniversary thereafter, each such member of the
Board shall receive grants to purchase that number of shares having an aggregate
value of $15,000 ($7,500 if a director does not serve on a committee) determined
by dividing the aggregate amount by the price per share of the Common Stock on
the date the options are granted.
Employment Agreements
The Company has a five-year employment agreement, dated March 1, 1996,
with Bruce A. Levy. Under the terms of the agreement, Mr. Levy devotes
substantially all of his time and efforts to conducting the business activities
of the Company as President. Following the Offering, Mr. Levy will receive an
annual salary of $150,000. Mr. Levy's employment is terminable by the Company
for cause as defined in the agreement, and is terminable by Mr. Levy upon
written notice to the Company. Upon termination, Mr. Levy is not permitted to
compete with the Company or any subsidiary or affiliate of the Company by
soliciting its employees or soliciting business from its customers or suppliers
for a period of one year following such termination.
The Bank has a three-year employment agreement, dated December 11, 1997
with Joseph T. Crowley. Under the terms of the agreement, Mr. Crowley will
devote substantially all of his time and effort to conducting the business
activities of the Bank as President thereof and will receive an annual salary of
$100,000 with an eight percent increase as of July 1, 1999. In addition, Mr.
Crowley is eligible for an annual bonus as determined by the Bank's Board of
Directors. Upon termination, Mr. Crowley is not permitted to compete with the
Bank in any of its businesses in the relevant market areas for such businesses
for varying periods following termination depending upon the reason therefor. If
Mr. Crowley's employment is prematurely terminated by the Bank without cause,
Mr. Crowley is eligible to receive a severance payment equal to two times his
annual salary if such termination occurs in the initial year of the employment
agreement, and a severance payment equal to his annual salary if such
termination occurs during the second or third year of the employment agreement.
58
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to a Management Agreement dated March 1, 1996, between the Company
and the Bank, the Company provides certain services to the Bank, including the
services of an officer of the Company as Chairman of the Board of Directors of
the Bank, the services of another officer of the Company as a member of the
Board of Directors of the Bank, the services of one or more of the Company's
officers as members of the Bank's Loan, Compensation or any other committees
created by the Board of Directors of the Bank and the provision of advisory
services to the Bank. As compensation for these services, the Bank pays the
Company a management fee of $18,500 each month. The Bank paid a management fee
to the Company of $222,000 for each of the years ended June 30, 1997 and 1996.
The Company is indebted to certain of its existing shareholders in the
aggregate principal amount of $3.2 million. Such debts are evidenced by
promissory notes, which are dated March 1, 1996, January 31, 1997 or September
30, 1997 and which accrue interest at a rate of six percent per annum. Thomas J.
Knox and Bruce A. Levy hold notes for the principal amounts of $2,218,228 and
$950,670, respectively, and each of Ronald L. Caplan, D. Walter Cohen, Daniel
DiLella, Joel S. Lawson III and Brian McAdams hold notes for $13,800. The funds
obtained in exchange for the issuance of the notes were contributed as capital
to the Bank. Interest on each of the Notes is payable quarterly, provided,
however, that such interest payments are due only to the extent that such sums
are available for payment pursuant to all applicable federal banking
regulations. With the exception of Mr. Knox and Mr. Levy, the shareholders to
whom the Company is indebted have not received and will not receive any interest
on their respective notes upon repayment. Aggregate interest payments have been
made to Mr. Knox and Mr. Levy since the issuance of the Notes in the amounts of
$97,850 and $88,775, respectively. The notes dated March 1, 1996 are due March
1, 2006, the notes dated January 31, 1997 are due December 31, 2006 and the
notes dated September 30, 1997 are due September 30, 2007. These notes will be
repaid upon consummation of the Offering. There is no premium or penalty for
early repayment of these notes.
The Bank's headquarters and Center City Philadelphia branch, located at
1230 Walnut Street, are leased from Walnut Square Partners, a partnership
controlled by Ronald L. Caplan, a director of the Company and the Bank. The
lease covers approximately 6,000 square feet of space on the first and second
floors of the property. The lease expires in 2014, assuming the Bank exercises
its option to renew the lease for two additional terms of five years each. The
base rent under the lease is $48,000 per annum for the initial ten year term.
The base rent increases to $60,000 and $72,000 per annum for the first and
second optional renewal terms, respectively. The terms of the lease were reached
through arms length negotiations and are comparable to the terms the Company
could have obtained from a third party.
QUEST, a wholly-owned subsidiary of the Bank, has formed a partnership with
Ronald L. Caplan, a director of the Company, through which the partnership
acquired an office building located at 1334-36 Walnut Street for a total price
of $410,000. CMC leases approximately 3,600 square feet of space in this
building at an annual rent of $36,000, and beginning January 1998, CMC intends
to lease an additional 2,400 square feet of space in this building at an annual
rent of $24,000. The terms of CMC's lease were reached through arms length
negotiations and are comparable to the terms the Company could have obtained
from a third party.
The Bank has made loans to or to entities controlled by officers, directors
and employees of the Company and the Bank. All such loans were made in the
ordinary course of the Bank's business, were made on substantially the same
terms, including interest rates and collateral requirements, as those prevailing
at the time for comparable transactions with unrelated persons and, in the
opinion of management, do not involve more than the normal risk of
collectibility or present other unfavorable features.
Effective November 30, 1997, the Company, the Bank and CMC entered into an
agreement with Jeffrey Rafsky, currently the holder of 6% of the Common Stock,
and the Minority Shareholder Corporation. The agreement provided for the Bank's
acquisition of the entire interest in CMC held by Mr. Rafsky in exchange for
150,000 shares of the Common Stock, and for the payment of accrued compensation
of $250,000. In addition, for a three year period from the effective date of the
agreement, the Minority Shareholder Corporation shall receive a monthly payment
of $6,250.
59
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth, as of December 1, 1997, the shares of
Common Stock beneficially owned by (i) each person who was a beneficial owner of
more than five percent of the outstanding Common Stock; (ii) each director and
executive officer of the Company; and (iii) all executive officers and directors
of the Company as a group.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percent of Class Percent of Class
Beneficial Owner(1) Beneficial Ownership(2) Before Offering After Offering
- ------------------------------------- ------------------------- ------------------ -----------------
<S> <C> <C> <C>
Thomas J. Knox(3) ................... 1,484,000 59.36% 42.40%
Bruce A. Levy ....................... 690,000 27.60 19.71
Joseph T. Crowley ................... -- -- --
Paul Bachow ......................... -- -- --
Ronald L. Caplan .................... 10,000 * *
D. Walter Cohen ..................... 10,000 * *
Daniel DiLella ...................... 10,000 * *
Linda R. Knox(4) .................... 126,000 5.04 3.60
Joel S. Lawson III .................. 10,000 * *
Brian McAdams ....................... 10,000 * *
Jeffrey K. Rafsky ................... 150,000 6.00 4.29
All directors and officers as a group
(10 persons) ....................... 2,350,000 94.00% 67.14%
</TABLE>
- ------------
* Constitutes less than 1%.
(1) Unless otherwise indicated, the address of all beneficial owners other than
Mr. Rafsky is in care of the Company. Mr. Rafsky's address is 1110
Centennial Road, Narberth, Pennsylvania 19072.
(2) Unless otherwise indicated, includes shares held directly by the individual
as well as by such individual's spouse, shares held in trust and in other
forms of indirect ownership over which shares the individual effectively
exercises sole voting and investment power and shares which the named
individual has a right to acquire pursuant to the exercise of stock options
within sixty days of December 1, 1997.
(3) Excludes 126,000 shares of Common Stock held by Linda R. Knox in trust for
the children of Linda R. and Thomas J. Knox, as to which he disclaims
beneficial ownership.
(4) All shares of Common Stock held in trust for the children of Linda R. and
Thomas J. Knox. Does not include 1,484,000 shares beneficially owned by her
husband, Thomas J. Knox, as to which shares she disclaims beneficial
ownership.
60
<PAGE>
CERTAIN RESTRICTIONS ON ACQUISITION OF
THE COMPANY AND THE BANK
Federal laws and regulations contain a number of provisions which govern
the acquisition of insured institutions such as the Bank and savings and loan
holding companies such as the Company. The Change in Bank Control Act provides
that no person, acting directly or indirectly or through or in concert with one
or more persons, may acquire control of a savings association unless the OTS has
been given 60 days' prior written notice and the OTS does not issue a notice
disapproving the proposed acquisition. In addition, certain provisions of the
HOLA provide that no company may acquire control of a thrift without the prior
approval of the OTS. Any company that acquires such control becomes a "savings
and loan holding company" subject to registration, examination and regulation by
the OTS.
Pursuant to applicable regulations, control of a savings association is
conclusively deemed to have been acquired by, among other things, the
acquisition of more than 25% of any class of voting stock of a savings
association or the ability to control the election of a majority of the
directors of an institution. Moreover, control is presumed to have been
acquired, subject to rebuttal, upon the acquisition of more than 10% of any
class of voting stock, or more than 25% of any class of stock, of a savings
association, where one or more enumerated "control factors" are also present in
the acquisition. The OTS may prohibit an acquisition of control if it finds,
among other things, that (i) the acquisition would result in a monopoly or
substantially lessen competition, (ii) the financial condition of the acquiring
person might jeopardize the financial stability of the savings association, or
(iii) the competence, experience or integrity of the acquiring person indicates
that it would not be in the interest of the depositors or the public to permit
the acquisition of control by such person. The foregoing restrictions do not
apply to the acquisition of the Company's capital stock by one or more
tax-qualified employee stock benefit plans, provided that the plan or plans do
not have beneficial ownership in the aggregate of more than 25% of any class of
equity security.
CERTAIN ANTI-TAKEOVER PROVISIONS IN
THE ARTICLES OF INCORPORATION AND BYLAWS
The Company is incorporated under the laws of the Commonwealth of
Pennsylvania. The Pennsylvania Business Corporation Law of 1988, as amended (the
"1988 BCL"), includes certain shareholder protection provisions, some of which
apply to the Company and four of which, relating to "Disgorgement by Certain
Controlling Shareholders," "Control Share Acquisitions," "Control Transactions"
and "Business Combinations," the Company has specifically opted out of pursuant
to an amendment to its Articles of Incorporation. In addition, the Company has
adopted other shareholder protection provisions in its Bylaws.
While the Boards of Directors of the Bank and the Company are not aware of
any effort that might be made to obtain control of the Company, the Board of
Directors, as discussed below, believes that it is appropriate to include
certain provisions as part of the Company's Articles of Incorporation to protect
the interests of the Company and its shareholders from hostile takeovers which
the Board of Directors might conclude are not in the best interests of the Bank,
the Company or the Company's shareholders. These provisions may have the effect
of discouraging a future takeover attempt which is not approved by the Board of
Directors but which individual shareholders may deem to be in their best
interests or in which shareholders may receive a substantial premium for their
shares over then current market prices. As a result, shareholders who might
desire to participate in such a transaction may not have an opportunity to do
so. Such provisions will also render the removal of the current Board of
Directors or management of the Company more difficult.
The following discussion is a general summary of the material provisions of
the Articles of Incorporation, Bylaws and 1988 BCL that apply to the Company and
that may be deemed to have such an "anti-takeover" effect. The description of
these provisions is necessarily general and reference should be made in each
case to the Articles of Incorporation and Bylaws of the Company and the 1988
BCL. For information regarding how to obtain a copy of these documents without
charge, see "Available Information."
Action by Written Consent of Shareholders
The Company's Articles of Incorporation and Bylaws allow a majority of its
shareholders to act by written consent, without a meeting, on any matter
required or permitted to be taken at a meeting of the shareholders with prompt
notice of such action given to those shareholders who have not consented.
61
<PAGE>
Board Consideration of Certain Nonmonetary Factors in the Event of an Offer by
Another Party
The 1988 BCL permits the Board of Directors, committees of the Board of
Directors and individual directors, in evaluating a business combination or a
tender or exchange offer, to consider, in addition to the adequacy of the amount
to be paid in connection with any such transaction, certain specified factors
and any other factors the Board deems relevant, including (i) the effects of any
action upon shareholders, employees, suppliers, customers and creditors of the
corporation, (ii) the short-term and long-term interests of the corporation,
including benefits that may accrue to the corporation from its long-term plans
and the possibility that these interests may be best served by the continued
independence of the corporation, (iii) the resources, intent and conduct (past,
stated and potential) of any person seeking to acquire control of the
corporation and (iv) all other pertinent factors. Further, the Board of
Directors, committees of the Board and individual directors are not required, in
considering the best interests of the corporation or the effects of any action,
to regard any corporate interest or the interests of any particular group
affected by such action as a dominant or controlling interest or factor. The
consideration of the foregoing factors does not constitute a violation of the
applicable standard of care. Such provisions in the 1988 BCL, may put the Board
of Directors in a stronger position to oppose any proposed business combination,
tender or exchange offer if the Board concludes that the transaction would not
be in the best interest of the Company, even if the price offered is
significantly greater than the then market price of any equity security of the
Company.
Authorization of Preferred Stock
The Company's Articles of Incorporation authorize the issuance of up to
5,000,000 shares of preferred stock, which conceivably would represent an
additional class of stock required to approve any proposed acquisition. The
Company is authorized to issue preferred stock from time to time in one or more
series subject to applicable provisions of law, and the Board of Directors is
authorized to fix the designations, powers, preferences, dividends and relative
participating, optional and other special rights of such shares, including
voting rights (which could be multiple or as a separate class) and conversion
rights. Issuance of the preferred stock could adversely affect the relative
voting rights of holders of the Common Stock. In the event of a proposed merger,
tender offer or other attempt to gain control of the Company that the Board of
Directors does not approve, it might be possible for the Board of Directors to
authorize the issuance of a series of preferred stock with rights and
preferences that would impede the completion and, therefore, may deter such a
transaction. The Board of Directors has no present plans or understandings for
the issuance of any preferred stock and does not intend to issue any preferred
stock, except on terms which the Board of Directors deems to be in the best
interests of the Company and its shareholders. This preferred stock, none of
which has been issued by the Company, together with authorized but unissued
shares of Common Stock (the Articles of Incorporation authorize the issuance of
up to 20,000,000 shares of Common Stock), also could represent additional
capital required to be purchased by the acquiror.
Procedures for Shareholder Nominations
The Company's Bylaws provide that any shareholder desiring to make a
nomination for the election of directors at an annual meeting of shareholders
must submit written notice to the Chairman of the Board no later than 270 days
in advance of the anniversary date of the Company's proxy statement for the
Company's annual meeting of shareholders in the previous calendar year.
Amendment of Bylaws
The Company's Bylaws may only be amended by a majority vote of the
Company's Board of Directors with respect to those matters that are not by
statute committed expressly to the shareholders. The Company's Bylaws contain
numerous provisions concerning the Company's governance, such as fixing the
number of directors and determining the number of directors constituting a
quorum. By reducing the ability of a potential corporate raider to make changes
in the Company's Bylaws and to reduce the authority of the Board of Directors,
these provisions could have the effect of discouraging a tender offer or other
takeover attempt where the ability to make fundamental changes through Bylaw
amendments is an important element of the takeover strategy of the acquiror.
62
<PAGE>
The Purpose of Anti-Takeover Provisions of the Company's Articles of
Incorporation and Bylaws
The Board of Directors of the Company believes that the provisions
described above reduce the Company's vulnerability to takeover attempts and
certain other transactions which have not been negotiated with and approved by
its Board of Directors. These provisions will also assist the Company in the
orderly deployment of the net proceeds of the Offering into productive assets.
The Board of Directors of the Company believe these provisions are in the best
interest of the Company and its shareholders. In the judgment of the Board of
Directors of the Company, it is in the best position to consider all relevant
factors and to negotiate for what is in the best interests of the shareholders
and the Company's other constituents. Accordingly, the Board of Directors of the
Company believes that it is in the best interest of the Company and its
shareholders to encourage potential acquirors to negotiate directly with the
Company's Board of Directors and that these provisions will encourage such
negotiations and discourage non-negotiated takeover attempts. It is also the
view of the Board of Directors that these provisions should not discourage
persons from proposing a merger or other transaction at prices reflective of the
true value of the Company and which is in the best interests of all
shareholders.
Attempts to acquire control of financial institutions and their holding
companies have become increasingly common. Takeover attempts which have not been
negotiated with and approved by the Board of Directors present to shareholders
the risk of a takeover on terms which may be less favorable than might otherwise
be available. A transaction which is negotiated and approved by the Board of
Directors, on the other hand, can be carefully planned and undertaken at an
opportune time in order to obtain maximum value for the Company and
shareholders, with due consideration given to matters such as the management and
business of the acquiring corporation and maximum strategic development of the
Company's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause great expense. Although a tender offer or
other takeover attempt may be made at a price substantially above then current
market prices, such offers are sometimes made for less than all the outstanding
shares of a target company. As a result, shareholders may be presented with the
alternative of partially liquidating their investment at a time that may be
disadvantageous, or retaining their investment in an enterprise which is under
different management and whose objectives may not be similar to those of the
remaining shareholders.
Despite the belief of the Company as to the benefits to shareholders of
these provisions of its Articles of Incorporation and Bylaws, these provisions
may also have the effect of discouraging a future takeover attempt which would
not be approved by the Company's Board, but pursuant to which the shareholders
may receive a substantial premium for their shares over then current market
prices. As a result, shareholders who might desire to participate in such a
transaction may not have any opportunity to do so. Such provisions will also
render the removal of the Company's Board of Directors and management more
difficult and may tend to depress the Company's stock price, thus limiting gains
which might otherwise be reflected in price increases due to a potential merger
or acquisition. The Board of Directors, however, has concluded that the
potential benefits of these provisions outweigh the possible disadvantages.
Pursuant to applicable regulations, at any annual or special meeting of its
shareholders after the Offering, the Company may adopt additional Articles of
Incorporation provisions regarding the acquisition of its equity securities that
would be permitted to a Pennsylvania corporation.
63
<PAGE>
DESCRIPTION OF THE CAPITAL STOCK
The Company is authorized to issue 5,000,000 shares of preferred stock,
$0.01 par value per share, and 20,000,000 shares of Common Stock, $0.01 par
value per share. There were 2,350,000 shares of Common Stock outstanding on
September 30, 1997, as adjusted to give effect to the two-for-one split of the
Common Stock effected in the form of a stock dividend. There were nine holders
of record of the Company's Common Stock as of December 31, 1997. There are no
outstanding shares of preferred stock.
Common Stock
Dividends
The Company can pay dividends out of statutory surplus or from certain net
profits if, as and when declared by its Board. The payment of dividends by the
Company is subject to limitations which are imposed by law and applicable
regulation. See "Dividends" and "Supervision and Regulation." The holders of
Common Stock will be entitled to receive and share equally in such dividends as
may be declared by the Board out of funds legally available therefor. If the
Company issues preferred stock, the holders thereof may have a priority over the
holders of the Common Stock with respect to dividends.
Voting Rights
Each share of Common Stock has the same relative rights and is identical in
all respects to every other share of Common Stock. The holders of Common Stock
possess exclusive voting rights in the Company, except to the extent that shares
of preferred stock issued in the future may have voting rights, if any. Each
holder of Common Stock is entitled to one vote for each share held of record on
all matters submitted to a vote of holders of Common Stock and is not permitted
to cumulate votes in the election of the Company's directors.
Liquidation
In the event of liquidation, dissolution or winding up of the Company, the
holders of its Common Stock would be entitled to receive, after payment or
provision for payment of all its debts and liabilities, all of the assets of the
Company available for distribution. If preferred stock is issued, the holders
thereof may have a priority over the holders of the Common Stock in the event of
liquidation or dissolution.
Preferred Stock
Under the Company's Articles of Incorporation, the Board of Directors of
the Company may, from time to time, authorize the issuance of up to 5,000,000
shares of preferred stock, in one or more series, with such provisions as to
voting rights, dividend rates and preferences, redemption and convertibility,
and such preferences, privileges and powers, and relative, participating,
optional or other special rights, and qualifications, limitations or
restrictions of such series of preferred stock, as shall be stated in the
resolution of the Board of Directors providing for the issuance of the preferred
stock. The preferred stock may rank prior to Common Stock as to dividend rights
or liquidation preferences, or both, and may have super, limited or any other
voting rights. No preferred stock is currently outstanding nor will any be
issued in the Offering.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Common Stock is StockTrans, Inc.
64
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The Company's Articles of Incorporation authorize the issuance of 5,000,000
shares of preferred stock and 20,000,000 shares of Common Stock. Upon completion
of the Offering, there will be no outstanding shares of preferred stock and
3,500,000 shares of Common Stock (3,650,000 shares if the Underwriters'
over-allotment option is exercised in full).
All shares of Common Stock issued in the Offering will be available for
resale in the public market without restriction or further registration under
the Securities Act. As of December 1, 1997, there were 2,500,000 shares of the
Company's Common Stock outstanding, of which approximately 2,350,000 shares will
be eligible for sale 90 days after the date of this Prospectus pursuant to Rule
144 under the Securities Act, subject to volume, notice and manner of sale
limitations in that rule. In addition, an aggregate of 2,350,000 shares of
Common Stock are beneficially owned by the Company's executive officers and
directors. All of the Company's executive officers and directors have agreed
that for a period of 180 days from the date of this Prospectus, they will not
sell, offer for sale or take any action that may constitute a transfer of shares
of Common Stock. There are also 20,000 shares subject to outstanding options.
Although the sale of the shares issued upon exercise of options will be
restricted under Rule 144, the sale of any number of shares of Common Stock in
the public market following the Offering could have an adverse impact on the
then prevailing market price of the shares.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including a person who may be deemed to be an
"affiliate" of the Company as that term is defined under the Securities Act, is
entitled to sell, within any three-month period, a number of restricted shares
as to which at least one year has elapsed from the later of the acquisition of
such shares from the Company or an affiliate of the Company in an amount that
does not exceed the greater of (i) one percent of the then outstanding shares of
Common Stock (35,000 shares based upon 3,500,000 shares to be outstanding
immediately after the Offering), or (ii) if the Common Stock is quoted on the
Nasdaq National Market or a stock exchange, the average weekly trading volume of
the Common Stock during the four calendar weeks preceding such sale. Sales under
Rule 144 are also subject to certain requirements as to the manner of sale,
notice, and the availability of current public information about the Company.
However, a person who is not deemed to have been an affiliate of the Company
during the 90 days preceding a sale by such person and who has beneficially
owned shares as to which at least two years has elapsed from the latter of the
acquisition of such shares from the Company or an affiliate of the Company, is
entitled to sell them without regard to the volume, manner of sale, or notice
requirements of Rule 144.
65
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement (the
"Underwriting Agreement") dated February , 1998, between the Company and Advest,
Inc., as the Representative of the several underwriters named therein (the
"Underwriters"), the Company has agreed to sell to the Underwriters, and the
Underwriters have severally agreed to purchase from the Company, the following
respective number of shares of Common Stock at the public offering price less
the underwriting discounts and commissions set forth on the cover page of this
Prospectus:
Number of Shares:
Underwriter: ------------------
Advest, Inc. ....................
Total ...........................
1,000,000
=========
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all of the Common Stock offered hereby if any of such
Common Stock is purchased.
The Company has been advised by the Representative that the Underwriters
propose to offer the shares of Common Stock to the public at the public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession not in excess of $ per share. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of $ per share
to certain other dealers. After the Offering, the public offering price,
concession and reallowance to dealers may be changed by the Representative. No
such change shall affect the amount of proceeds to be received by the Company as
set forth on the cover page of this Prospectus. In addition, the Company has
agreed to pay a financial advisory fee of $75,000 to the Representative.
The Company has granted to the Underwriters an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to an
additional 150,000 shares of Common Stock at the public offering price. To the
extent that the Underwriters exercise such option, the Company will be
obligated, pursuant to the option, to sell such Common Stock to the
Underwriters. The Underwriters may exercise such option only to cover
over-allotments made in connection with the sale of the Common Stock offered
hereby. If purchased, the Underwriters will offer such additional shares of
Common Stock on the same terms as those on which the 1,000,000 shares are being
offered.
The Company and its officers and directors (who beneficially own an
aggregate of 2,350,000 shares of Common Stock, or 67.14% of the outstanding
Common Stock after giving effect to the Offering) have agreed for a period of
180 days after the date of this Prospectus not to, without the prior written
consent of the Representative, directly or indirectly offer, sell, contract to
sell or otherwise dispose of, any shares of Common Stock or enter into any swap
or other agreement or any transaction that transfers, in whole or in part, the
economic consequences of ownership of shares of Common Stock, whether any such
swap or other agreement is to be settled by delivery of shares of Common Stock,
other securities, cash or otherwise; except for the issuance of shares of Common
Stock upon the exercise of stock options or warrants or the conversion of
convertible securities outstanding on the date of the Underwriting Agreement to
the extent such stock options, warrants and convertible securities are disclosed
herein and except for the grant to employees of stock options to purchase shares
of Common Stock which are not exercisable within 180 days after the date of this
Prospectus.
The initial public offering price of the shares of Common Stock offered
hereby has been determined by negotiations between the Company and the
Representative based on certain factors, in addition to prevailing
66
<PAGE>
market conditions, including the history and prospects for the industry in which
the Company competes, an assessment of the Company's management, the prospects
for the Company, an evaluation of the Company's assets, comparisons of the
relationships between market prices and book values of other financial
institutions of a similar size and asset quality, and other factors that were
deemed relevant. Such determination was not based upon any actual trading market
for the Common Stock; accordingly, there can be no assurance that shares of
Common Stock may be resold at or above the price to public.
The Representative intends to make a market in the Common Stock, as
permitted by applicable laws and regulations. The Representative is not,
however, obligated to make a market in the Common Stock, and any such
market-making activities may be discontinued at any time in the sole discretion
of the Representative.
The Representative has informed the Company that the Underwriters do not
expect to confirm sales of shares of the Common Stock offered hereby to any
accounts over which they exercise discretionary authority.
In connection with the Offering, certain Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may overallot the Offering,
creating a syndicate short position. In addition, the Underwriters may bid for
and purchase the Common Stock in the open market to cover syndicate short
positions or to stabilize the price of the Common Stock. Finally, the
underwriting syndicate may reclaim selling concessions from syndicate members if
the syndicate repurchases previously distributed Common Stock in syndicate
covering transactions, in stabilization transactions or otherwise. Any of these
activities may stabilize or maintain the market price of the Common Stock above
independent market levels. The Underwriters are not required to engage in these
activities and may end any of these activities at any time.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
The Representative and certain of the other Underwriters may in the future
perform various services for the Company, including investment banking services,
for which they may receive customary fees.
VALIDITY OF SECURITIES
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Ballard Spahr Andrews & Ingersoll, Philadelphia,
Pennsylvania. Certain legal matters will be passed upon for the Underwriters by
Wolf, Block, Schorr and Solis-Cohen LLP, Philadelphia, Pennsylvania.
EXPERTS
The Consolidated Financial Statements as of June 30, 1997 and 1996 and for
each of the three fiscal years in the period ended June 30, 1997, included in
this Prospectus and in the Registration Statement, of which this Prospectus
forms a part, have been audited by Grant Thornton LLP, independent certified
public accountants, whose report thereon appears herein and in the Registration
Statement. Such financial statements are included in reliance upon the report of
Grant Thornton LLP, given upon the authority of such firm as experts in
accounting and auditing.
67
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1 (the
"Registration Statement") under the Securities Act, with respect to the shares
of Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement, including the exhibits and
schedules thereto. For further information with respect to the Company and the
shares of Common Stock offered hereby, reference is made to the Registration
Statement, including the exhibits and schedules thereto. Statements contained in
this Prospectus as to the contents of any contract or other document are not
necessarily complete and, in each instance where such contract or document is
filed as an exhibit to the Registration Statement, reference is made to the copy
of such contract or document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. The
Company will furnish to its shareholders annual reports containing audited
financial statements and will make available copies of quarterly reports for the
first three quarters of each fiscal year containing unaudited interim financial
information. Copies of the Registration Statement, including exhibits and
schedules thereto, filed therewith, may be inspected without charge at the
public reference facilities of the Commission at Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the Commission
located at 7 World Trade Center, Suite 1300, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such material can also be obtained at prescribed rates by writing to
the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Such material also may be accessed electronically by
means of the Commission's home page on the World Wide Web at http://www.sec.gov.
68
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Report of Independent Certified Public Accountants ....................................... F-2
Consolidated Balance Sheet as of September 30, 1997 (Unaudited), and June 30, 1997 and
1996 ................................................................................... F-3
Consolidated Statements of Operations for the Three Months Ended September 30, 1997 and
1996 (Unaudited) and the Years Ended June 30, 1997, 1996 and 1995 ....................... F-4
Consolidated Statement of Shareholders' Equity for the Three Months Ended September 30,
1997 (Unaudited) and the Years Ended June 30, 1997, 1996 and 1995 ....................... F-5
Consolidated Statements of Cash Flows for the Three Months Ended September 30, 1997 and
1996 (Unaudited) and the Years Ended June 30, 1997, 1996 and 1995 ....................... F-6
Notes to Consolidated Financial Statements ............................................... F-7
</TABLE>
F-1
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
Crusader Holding Corporation
We have audited the accompanying consolidated balance sheets of Crusader
Holding Corporation and Subsidiary as of June 30, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended June 30, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Crusader
Holding Corporation and Subsidiary as of June 30, 1997 and 1996, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended June 30, 1997, in conformity with
generally accepted accounting principles.
/s/ Grant Thornton LLP
Philadelphia, Pennsylvania
December 9, 1997
F-2
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30,
September 30, --------------------------------
1997 1997 1996
--------------- --------------- --------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents .............................. $ 684,000 $ 325,000 $ 1,197,000
Loans held for sale (estimated market value of
$16,870,000, $6,338,000 and $1,683,000 at
September 30, 1997, June 30, 1997 and 1996,
respectively) ........................................ 16,767,000 6,244,000 1,659,000
Investment securities available-for-sale ............... 4,085,000 6,299,000 3,970,000
Mortgage-backed securities available-for-sale .......... 16,755,000 16,044,000 18,127,000
Loans receivable, net .................................. 93,857,000 85,992,000 53,604,000
Accrued interest receivable ............................ 834,000 815,000 574,000
Other real estate owned ................................ 105,000 -- 81,000
Premises and equipment, net ............................ 890,000 880,000 411,000
Deferred income taxes .................................. -- 201,000 262,000
Other assets ........................................... 561,000 293,000 1,422,000
------------ ------------ -----------
Total assets ......................................... $134,538,000 $117,093,000 $81,307,000
============ ============ ===========
LIABILITIES
Deposits ............................................... $110,625,000 $ 95,906,000 $59,624,000
Advances from Federal Home Loan Bank ................... 4,350,000 8,950,000 9,500,000
Securities sold under agreements to repurchase ......... 10,780,000 5,780,000 7,151,000
Shareholders' notes .................................... 3,238,000 2,990,000 2,918,000
Advances from borrowers for taxes and insurance 315,000 270,000 346,000
Other liabilities ...................................... 1,295,000 233,000 209,000
------------ ------------ -----------
Total liabilities .................................... 130,603,000 114,129,000 79,748,000
------------ ------------ -----------
MINORITY INTEREST ....................................... 64,000 69,000 47,000
------------ ------------ -----------
SHAREHOLDERS' EQUITY
Preferred stock -- authorized, 5,000,000 shares of
$0.01 par value; none outstanding .................... -- -- --
Common stock -- authorized, 20,000,000 shares
of $0.01 par value; 2,350,000, 2,170,000 and 2,000,000
shares issued and outstanding at September 30, 1997
and June 30, 1997 and 1996, respectively ............. 23,500 10,850 10,000
Additional paid-in capital ............................. 2,317,000 2,065,900 1,814,750
Retained earnings (accumulated deficit) ................ 1,517,500 864,250 (97,750)
Net unrealized gains (losses) on securities
available-for-sale ................................... 13,000 (46,000) (215,000)
------------ ------------ -----------
Total shareholders' equity ........................... 3,871,000 2,895,000 1,512,000
------------ ------------ -----------
Total liabilities and shareholders' equity ........... $134,538,000 $117,093,000 $81,307,000
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Consolidated Statements of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months
ended September 30, Year ended June 30,
-------------------------------- -----------------------------------------------
1997 1996 1997 1996 1995
--------------- --------------- --------------- --------------- -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees .................. $ 2,415,000 $ 1,264,000 $ 6,413,000 $ 3,903,000 $2,724,000
Investment securities, mortgage-
backed securities and loans held
for sale ............................. 403,000 402,000 1,506,000 1,070,000 1,049,000
----------- ----------- ----------- ----------- ----------
Total interest income ................ 2,818,000 1,666,000 7,919,000 4,973,000 3,773,000
----------- ----------- ----------- ----------- ----------
INTEREST EXPENSE
Deposits ............................... 1,473,000 839,000 3,978,000 2,825,000 1,881,000
Borrowed funds ......................... 240,000 234,000 995,000 543,000 665,000
Shareholder notes ...................... 38,000 38,000 157,000 191,000 135,000
----------- ----------- ----------- ----------- ----------
Total interest expense ............... 1,751,000 1,111,000 5,130,000 3,559,000 2,681,000
----------- ----------- ----------- ----------- ----------
Net interest income .................. 1,067,000 555,000 2,789,000 1,414,000 1,092,000
PROVISION FOR LOAN LOSSES ............... 15,000 11,000 58,000 42,000 30,000
----------- ----------- ----------- ----------- ----------
Net interest income after provision
for loan losses .................... 1,052,000 544,000 2,731,000 1,372,000 1,062,000
----------- ----------- ----------- ----------- ----------
NON-INTEREST INCOME
Service charges on deposit accounts
and other fees ....................... 46,000 18,000 112,000 114,000 41,000
Conforming mortgage banking revenues ... 108,000 77,000 309,000 272,000 107,000
Non-interest income from Crusader
Mortgage Corporation ................. 833,000 177,000 1,074,000 -- --
Other .................................. 14,000 36,000 90,000 31,000 51,000
----------- ----------- ----------- ----------- ----------
Total non-interest income ............ 1,001,000 308,000 1,585,000 417,000 199,000
----------- ----------- ----------- ----------- ----------
NON-INTEREST EXPENSES
Employee compensation and benefits ..... 234,000 201,000 799,000 802,000 560,000
Data processing ........................ 26,000 18,000 93,000 55,000 53,000
Federal insurance premiums ............. 13,000 327,000 375,000 112,000 81,000
Occupancy and equipment ................ 75,000 69,000 294,000 268,000 242,000
Professional fees ...................... 16,000 14,000 86,000 71,000 91,000
Management fee to shareholders ......... -- -- -- -- 24,000
Crusader Mortgage Corporation
expenses ............................. 562,000 118,000 886,000 -- --
Other operating ........................ 85,000 51,000 329,000 308,000 295,000
----------- ----------- ----------- ----------- ----------
Total non-interest expenses .......... 1,011,000 798,000 2,862,000 1,616,000 1,346,000
----------- ----------- ----------- ----------- ----------
Income (loss) before income tax
expense (benefit) ................... 1,042,000 54,000 1,454,000 173,000 (85,000)
INCOME TAX EXPENSE (BENEFIT) ............ 358,000 19,000 480,000 61,000 (20,000)
----------- ----------- ----------- ----------- ----------
Income (loss) before minority
interest ............................ 684,000 35,000 974,000 112,000 (65,000)
Minority interest ....................... 19,000 -- 12,000 -- --
----------- ----------- ----------- ----------- ----------
NET INCOME (LOSS) .................... $ 665,000 $ 35,000 $ 962,000 $ 112,000 $ (65,000)
=========== =========== =========== =========== ==========
Net income (loss) per share ............. $ 0.31 $ 0.02 $ 0.46 $ 0.07 $ (0.05)
=========== =========== =========== =========== ==========
Weighted average shares outstanding ..... 2,170,000 2,000,000 2,083,333 1,600,000 1,400,000
=========== =========== =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY Consolidated Statement of
Shareholders' Equity Three months ended September 30, 1997 (unaudited) and years
ended June 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retained Net unrealized
earnings gains (losses) on Total
Common Additional (accumulated securities shareholders'
stock paid-in capital deficit) available-for-sale equity
---------- ----------------- -------------- -------------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at July 1, 1994 ............... $ 250 $1,375,750 $ (138,000) $ -- $1,238,000
Net loss .............................. -- -- (65,000) -- (65,000)
Net unrealized gain on securities
available-for-sale ................... -- -- -- 24,000 24,000
------- ---------- ----------- ---------- ----------
Balance at June 30, 1995 .............. 250 1,375,750 (203,000) 24,000 1,197,000
Issuance of Common Stock .............. 3,000 439,000 -- -- 442,000
28 for 1 stock split .................. 6,750 -- (6,750) -- --
Net income ............................ -- -- 112,000 -- 112,000
Net unrealized loss on securities
available-for-sale ................... -- -- -- (239,000) (239,000)
------- ---------- ----------- ---------- ----------
Balance at June 30, 1996 .............. 10,000 1,814,750 (97,750) (215,000) 1,512,000
Issuance of Common Stock .............. 850 251,150 -- -- 252,000
Net income ............................ -- -- 962,000 -- 962,000
Net unrealized gain on securities
available-for-sale ................... -- -- -- 169,000 169,000
------- ---------- ----------- ---------- ----------
Balance at June 30, 1997 .............. 10,850 2,065,900 864,250 (46,000) 2,895,000
Net income ............................ -- -- 665,000 -- 665,000
Issuance of Common Stock .............. 900 251,100 -- -- 252,000
2 for 1 stock split ................... 11,750 -- (11,750) -- --
Net unrealized gain on securities
available-for-sale ................... -- -- -- 59,000 59,000
------- ---------- ----------- ---------- ----------
Balance at September 30, 1997 ......... $23,500 $2,317,000 $ 1,517,500 $ 13,000 $3,871,000
======= ========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months
ended September 30,
---------------------------------
1997 1996
---------------- ---------------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ............................... $ 665,000 $ 35,000
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating
activities Amortization of premiums and
discounts on loans, mortgage-backed secu-
rities and investments ......................... 77,000 127,000
Provision for loan losses ...................... 15,000 11,000
Net gain on sale of loans held for sale ........ (105,000) (77,000)
Depreciation and amortization of premises
and equipment ................................. 34,000 29,000
Proceeds from sale of loans held for sale ...... 20,431,000 8,080,000
Originations of loans held for sale ............ (30,849,000) (7,872,000)
Increase in accrued interest receivable ........ (19,000) (42,000)
Decrease (increase) in deferred income
taxes ......................................... 127,000 45,000
Other, net ..................................... 259,000 1,407,000
-------------- -------------
Net cash (used in) provided by
operating activities ....................... (9,365,000) 1,743,000
-------------- -------------
INVESTING ACTIVITIES
Net increase in loans ........................... (7,760,000) (9,086,000)
Purchase of investment securities available-
for-sale ....................................... -- (1,000,000)
Purchase of mortgage-backed securities
available-for-sale ............................. (3,255,000) --
Repayments of principal on investment secu-
rities available-for-sale ...................... 80,000 152,000
Repayments of principal on mortgage-backed
securities available-for-sale .................. 936,000 776,000
Repayments of principal on mortgage-backed
securities held-to-maturity .................... -- --
Proceeds from sale of mortgage-backed secu-
rities available-for-sale ...................... 3,978,000 --
Proceeds from sale of property acquired
through loan foreclosure actions ............... 105,000 77,000
Purchases of premises and equipment ............. (24,000) (47,000)
-------------- -------------
Net cash used in investing activities ....... (5,940,000) (9,128,000)
-------------- -------------
FINANCING ACTIVITIES
Net increase in deposits ........................ 14,719,000 6,757,000
Advances from Federal Home Loan Bank,
net ............................................ 400,000 50,000
Increase (decrease) in advance payments by
borrowers for taxes and insurance .............. 45,000 (65,000)
Proceeds from shareholder's notes ............... 248,000 --
Proceeds from issuance of Common Stock .......... 252,000 --
-------------- -------------
Net cash provided by financing
activities ................................. 15,664,000 6,742,000
-------------- -------------
Net increase (decrease) in cash and
cash equivalents ........................... 359,000 (643,000)
Cash and cash equivalents at beginning of year.... 325,000 1,197,000
-------------- -------------
Cash and cash equivalents at end of year ......... $ 684,000 $ 554,000
============== =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ............................... $ 962,000 $ 112,000 $ (65,000)
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating
activities Amortization of premiums and
discounts on loans, mortgage-backed secu-
rities and investments ......................... 222,000 92,000 48,000
Provision for loan losses ...................... 58,000 42,000 30,000
Net gain on sale of loans held for sale ........ (309,000) (272,000) (107,000)
Depreciation and amortization of premises
and equipment ................................. 127,000 112,000 105,000
Proceeds from sale of loans held for sale ...... 39,592,000 19,874,000 20,588,000
Originations of loans held for sale ............ (43,868,000) (19,735,000) (21,317,000)
Increase in accrued interest receivable ........ (241,000) (38,000) (151,000)
Decrease (increase) in deferred income
taxes ......................................... 74,000 (24,000) 20,000
Other, net ..................................... 1,172,000 (1,001,000) (179,000)
-------------- -------------- --------------
Net cash (used in) provided by
operating activities ....................... (2,211,000) (838,000) (1,028,000)
-------------- -------------- --------------
INVESTING ACTIVITIES
Net increase in loans ........................... (32,725,000) (10,110,000) (19,210,000)
Purchase of investment securities available-
for-sale ....................................... (3,348,000) (1,000,000) (2,688,000)
Purchase of mortgage-backed securities
available-for-sale ............................. (2,596,000) (14,027,000) (3,428,000)
Repayments of principal on investment secu-
rities available-for-sale ...................... 1,014,000 3,267,000 225,000
Repayments of principal on mortgage-backed
securities available-for-sale .................. 2,728,000 2,725,000 4,000
Repayments of principal on mortgage-backed
securities held-to-maturity .................... -- -- 1,974,000
Proceeds from sale of mortgage-backed secu-
rities available-for-sale ...................... 1,936,000 3,192,000 --
Proceeds from sale of property acquired
through loan foreclosure actions ............... 337,000 59,000 56,000
Purchases of premises and equipment ............. (596,000) (25,000) (269,000)
-------------- -------------- --------------
Net cash used in investing activities ....... (33,250,000) (15,919,000) (23,336,000)
-------------- -------------- --------------
FINANCING ACTIVITIES
Net increase in deposits ........................ 36,260,000 12,088,000 20,350,000
Advances from Federal Home Loan Bank,
net ............................................ (1,921,000) 4,554,000 2,695,000
Increase (decrease) in advance payments by
borrowers for taxes and insurance .............. (75,000) (229,000) 310,000
Proceeds from shareholder's notes ............... 73,000 876,000 1,090,000
Proceeds from issuance of Common Stock .......... 252,000 442,000 --
-------------- -------------- --------------
Net cash provided by financing
activities ................................. 34,589,000 17,731,000 24,445,000
-------------- -------------- --------------
Net increase (decrease) in cash and
cash equivalents ........................... (872,000) 974,000 81,000
Cash and cash equivalents at beginning of year.... 1,197,000 223,000 142,000
-------------- -------------- --------------
Cash and cash equivalents at end of year ......... $ 325,000 $ 1,197,000 $ 223,000
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Crusader Holding Corporation (the Company) is the holding company for its
wholly-owned subsidiary, Crusader Savings Bank (the Bank), a federally chartered
savings bank. See note B for additional information regarding majority and
wholly-owned subsidiaries of the Bank. The Bank provides banking services to
individual and corporate customers through its two branches in Philadelphia
County, Pennsylvania.
The Bank competes with other banking and financial institutions in its
primary markets. Commercial banks, savings banks, savings and loan associations,
mortgage bankers and brokers, credit unions and money market funds actively
compete for deposits and loans. Such institutions, as well as consumer finance,
mutual funds, insurance companies, and brokerage and investment banking firms,
may be considered competitors of the Bank with respect to one or more of the
services it renders.
The Bank is subject to regulations of certain state and federal agencies
and, accordingly, it is periodically examined by those regulatory authorities.
As a consequence of the extensive regulation of commercial banking activities,
the Bank's business is particularly susceptible to being affected by state and
federal legislation and regulations.
1. Basis of Financial Statement Presentation and Reporting Entity
The accounting and reporting policies of the Company conform with generally
accepted accounting principles and practices within the banking industry, with
respect to the Bank. All intercompany balances and transactions have been
eliminated. The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiary, the Bank.
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the balance sheets and the reported amount of revenues and expenses during the
reported period. Therefore, actual results could differ from those estimates.
The principal estimate that is susceptible to significant change in the
near term relates to the allowance for loan losses. The evaluation of the
adequacy of the allowance for loan losses includes an analysis of the individual
loans and overall risk characteristics and size of the different loan
portfolios, and takes into consideration current economic and market conditions,
the capability of specific borrowers to pay specific loan obligations as well as
current loan collateral values. However, actual losses on specific loans, which
also are encompassed in the analysis, may vary from estimated losses.
The consolidated financial statements as of September 30, 1997 and for the
three months ended September 30, 1997 and 1996 are unaudited. In the opinion of
management, all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation of the financial position and results of
operations have been included. The results of operations for the three months
ended September 30, 1997 and 1996 are not necessarily indicative of the results
that may be attained for an entire fiscal year.
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting of
Comprehensive Income," which establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of financial statements. This statement also requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. This statement
is effective for fiscal years beginning after December 15, 1997. Earlier
application is permitted. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. The Company does not
anticipate that adoption of SFAS No. 130 will have a material impact on the
Company.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosure about Segments of an Enterprise and Related Information"
(SFAS No. 131), which establishes standards for the way that
F-7
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
- --------------------------------------------------------------------------------
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
public business enterprises report information about operating segments in
annual financial statements and requires that such enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. This statement also establishes standards for related disclosures
about products and services, geographic areas, and major customers. This
statement requires the reporting of financial and descriptive information about
the enterprise's reportable operating segments. This statement is effective for
financial statements for periods beginning after December 15, 1997. In the
initial year of application, comparative information for earlier years is to be
restated. The Company does not anticipate that the adoption of SFAS No. 131 will
have a material impact on the Company's financial statements.
2. Financial Instruments
The FASB issued SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments," which requires all entities to disclose the estimated fair value
of their assets and liabilities considered to be financial instruments.
Financial instruments requiring disclosure consist primarily of investment
securities, mortgage-backed securities, loans, deposits and borrowings.
3. Loans Held for Sale
Included in loans held for sale are any loans which the Bank believes may
be involved in interest rate risk management or other decisions which might
reasonably result in such loans not being held until maturity. Any such
conforming loans are transferred to loans held for sale and valued at the lower
of aggregate cost or market, including considering of forward commitments to
sell, until ultimate disposition.
The FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," as amended by SFAS No.
127, which provides accounting guidance on transfers of financial assets,
servicing of financial assets and extinguishments of liabilities occurring after
December 31, 1996. The adoption of SFAS No. 125 did not have a material impact
on the Company's consolidated financial position or results of operations.
4. Investment and Mortgage-Backed Securities
Investments in securities are classified in one of two categories:
held-to-maturity and available-for-sale. Debt securities that the Bank has the
positive intent and ability to hold to maturity are classified as held-to-
maturity and are reported at amortized cost. As the Bank does not engage in
security trading, the balance of its debt securities and any equity securities
are classified as available-for-sale. Net unrealized gains and losses for such
securities, net of tax, are required to be recognized as a separate component of
shareholders' equity and excluded from the determination of net income. Gains or
losses on disposition are based on the net proceeds and cost of the securities
sold, adjusted for amortization of premiums and accretion of discounts, using
the specific identification method.
5. Loans and Allowance for Loan Losses
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are stated at the amount of
unpaid principal and reduced by an allowance for loan losses. Interest on loans
is accrued and credited to operations based upon the principal amounts
outstanding. The allowance for loan losses is established through a provision
for possible loan losses charged to expenses. Loans are charged against the
allowance for loan losses when management believes that the collectibility of
the principal is unlikely. The allowance is an amount that management believes
will be adequate to absorb possible loan losses on existing loans that may
become uncollectible based on evaluations of the collectibility of loans and
prior loan loss experience. The evaluations take into consideration such factors
as changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans and current economic conditions that
may affect the borrower's ability to pay.
F-8
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
- --------------------------------------------------------------------------------
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
Management establishes reserves against interest accruals on loans when
principal and interest become 90 days or more past due and when management
believes, after considering economic and business conditions, collection efforts
and collateral, that the borrower's financial condition is such that collection
of interest is doubtful. Additionally, uncollectible interest on loans that are
contractually past due is charged off, or an allowance is established based on
management's periodic evaluation. The allowance is established by a charge to
interest income equal to all interest previously accrued and income is
subsequently recognized only to the extent that cash payments are received
until, in management's judgment, the borrower's ability to make periodic
interest and principal payments is back to normal, in which case the loan is
returned to accrual status.
The Bank adopted SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan," as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosures," on July 1, 1995. This new standard
requires that a creditor measure impairment based on the present value of
expected future cash flows discounted at the loan's effective interest rate,
except that as a practical expedient, a creditor may measure impairment based on
a loan's observable market price, or the fair value of the collateral if the
loan is collateral dependent. Regardless of the measurement method, a creditor
must measure impairment based on the fair value of the collateral when the
creditor determines that foreclosure is probable. The adoption of SFAS No. 114,
as amended by SFAS No. 118, did not have a material impact on the Bank's
financial condition or results of operations.
6. Loan Fees
The Bank defers loan fees, net of certain direct loan origination costs.
The balance is accreted into income as a yield adjustment over the life of the
loan using the interest method.
7. Other Real Estate Owned
Other real estate owned (OREO), representing property acquired through
foreclosure, is recorded at the estimated fair market value, less costs of
disposal. When property is acquired, the excess, if any, of the loan balance
over fair market value is charged to the allowance for possible loan losses.
Periodically thereafter, the asset is reviewed for subsequent declines in the
estimated fair market value. Subsequent declines, if any, and holding costs, as
well as gains and losses on subsequent sale, are included in the consolidated
statements of operations.
8. Premises and Equipment
Premises and equipment are carried at cost. Depreciation and amortization
are generally computed on the straight-line method over the estimated useful
lives of the assets.
The FASB issued a new standard, SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
which provides guidance on when to recognize and how to measure impairment
losses of long-lived assets and certain identifiable intangibles and how to
value long-lived assets to be disposed of. At June 30, 1997, the Company and the
Bank had no such long-lived assets.
9. Income Taxes
The Bank and its subsidiaries are included in the consolidated federal
income tax return of the Company. The Company is a party to a tax sharing
agreement with the Bank. Under the terms of the agreement, the Bank's share of
consolidated tax is computed on a separate company basis.
Under the liability method specified by SFAS No. 109, deferred tax assets
and liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities as measured by the enacted tax
rates which will be in effect when these differences reverse. Deferred tax
expense is the result of changes in deferred tax assets and liabilities. The
principal types of differences between assets and liabilities for
F-9
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
- --------------------------------------------------------------------------------
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
financial statement and tax return purposes are the allowance for loan losses,
deferred loan fees and interest reserves. The Company's effective income tax
rate differs from the federal effective rate primarily as a result of state
income taxes, net of federal benefit, lower rate brackets and tax-exempt income.
10. Net Income (Loss) Per Share
Net income (loss) per share is computed based on the weighted average
number of common and common equivalent shares outstanding during each year. All
weighted average actual share or per share information in the financial
statements has been adjusted retroactively for the effect of stock dividends.
Supplemental earnings per share would have been $0.29 and $.47 for the quarter
ended September 30, 1997 and the year ended June 30, 1997, respectively,
assuming that a sufficient number of shares of Common Stock were issued at an
assumed public offering price of $15 per share to permit the Company to repay
the debt to shareholders outstanding during the respective periods with the
proceeds from the sale of such shares. In February 1997, the FASB issued SFAS
No. 128, "Earnings per Share." SFAS No. 128 establishes standards for computing
and presenting earnings per share (EPS) and applies to entities with publicly
held common stock or potential common stock. This statement simplifies the
standards for computing EPS previously found in Accounting Principles Board
(APB) Opinion No. 15, "Earnings per share," and makes them comparable to
international EPS standards. It replaces the presentation of primary EPS with a
presentation of basic EPS and requires dual presentation of basic and diluted
EPS on the face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the diluted EPS
computation. SFAS No. 128 is effective for financial statements issued for
periods endings after December 15, 1997, including interim periods; earlier
application is not permitted. This statement requires restatement of all prior
period EPS and diluted EPS under SFAS No. 128 and will not have a material
impact on the Company.
11. Supplemental Cash Flow Information
The Company and the Bank consider cash on hand, amounts due from banks and
federal funds sold as cash equivalents. Generally, federal funds are purchased
and sold for one-day periods. Other supplemental cash flow information is as
follows:
<TABLE>
<CAPTION>
September 30, June 30,
----------------------------- ---------------------------------------------
1997 1996 1997 1996 1995
------------- ------------- ------------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash payments for interest ......... $1,711,000 $1,066,000 $5,041,000 $3,292,000 $2,594,000
Cash payments for income taxes ..... 160,000 19,000 -- 82,000 --
Transfer of loans into property
acquired through loan
foreclosure actions ............... 105,000 -- 337,000 81,000 59,000
Transfer of investment securities to
available-for-sale ................ -- -- -- 2,032,000 451,000
Transfer of mortgage-backed
securities held-to-maturity to
mortgage-backed securities
available-for-sale ................ -- -- -- 7,106,000 1,353,000
</TABLE>
12. Advertising Costs
It is the Company's and the Bank's policy to expense advertising costs in
the period in which they are incurred. Advertising expense for both the three
months ended September 30, 1997 and 1996 was approximately $6,000, and for the
years ended June 30, 1997, 1996 and 1995 was approximately $25,000, $24,000 and
$34,000, respectively.
F-10
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
- --------------------------------------------------------------------------------
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
13. Reclassification
Certain prior year amounts have been reclassified to conform to the current
year presentation.
NOTE B -- BANKING SUBSIDIARIES
The Bank has four majority-owned subsidiaries and two wholly-owned
subsidiaries. They are as follows:
1. Crusader Mortgage Corporation
In July 1996, the Bank formed Crusader Mortgage Corporation (CMC) for
pursuing the origination and acquisition for resale of non-conforming mortgages.
Initially, the Bank maintained a 51% controlling interest in CMC, which was
subsequently increased to 67.5% in September 1997 and 100% effective November
1997.
The total revenue, income before income taxes and total assets for this
segment of the business is as follows:
<TABLE>
<CAPTION>
Bank CMC Consolidated
--------------- ------------ --------------
<S> <C> <C> <C>
Three months ended September 30, 1997 (unaudited)
Total interest income and non-interest income ......... $ 2,879,000 $ 940,000 $ 3,819,000
Income before income taxes ............................ 664,000 378,000 1,042,000
Total assets, end of period ........................... 133,773,000 765,000 134,538,000
Three months ended September 30, 1996 (unaudited)
Total interest income and non-interest income ......... 1,777,000 197,000 1,974,000
Income before income taxes ............................ (25,000) 79,000 54,000
Total assets, end of period ........................... 88,518,000 185,000 88,703,000
Year ended June 30, 1997
Total interest income and non-interest income ......... 8,322,000 1,182,000 9,504,000
Income before income taxes ............................ 1,058,000 396,000 1,454,000
Total assets, end of year ............................. 116,744,000 349,000 117,093,000
</TABLE>
2. Other
Crusader Servicing Corporation, a 60% owned subsidiary that commenced
operations in August 1996, acquires, through auction, delinquent property tax
liens in various jurisdictions throughout the country, assuming a lien position
that is generally superior to any mortgage liens on the property and obtaining
certain foreclosure rights as defined by local statute. Quest Holding
Corporation, a wholly-owned subsidiary, periodically holds title to the real
estate holdings of the Bank acquired through foreclosure, pending resale of such
property. Asset Investment Corporation , a wholly-owned subsidiary, holds the
title to the Bank's multi-family and commercial loan portfolios. Crusader
Mortgage Corporation of Delaware, a 51% owned subsidiary that commenced
operations in October 1997, maintains a conforming and nonconforming residential
mortgage lending operation in Wilmington, Delaware. National Chinese Mortgage, a
51% owned subsidiary that commenced operations in December 1997, markets loans
on an affinity group basis to the U.S. Chinese community.
F-11
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
- --------------------------------------------------------------------------------
NOTE C -- LOANS HELD FOR SALE
Loans held for sale are as follows:
<TABLE>
<CAPTION>
September 30, 1997
-------------------------------------------------------------
Gross Gross Fair
unrealized unrealized market
Cost gains losses value
-------------- ------------ ------------ --------------
(unaudited)
<S> <C> <C> <C> <C>
Residential mortgage loans ......... $16,767,000 $103,000 $-- $16,870,000
=========== ======== === ===========
June 30, 1997
-----------------------------------------------------------
Gross Gross Fair
unrealized unrealized market
Cost gains losses value
------------- ------------ ------------ -------------
Residential mortgage loans ......... $6,244,000 $94,000 $-- $6,338,000
========== ======= === ==========
June 30, 1996
-----------------------------------------------------------
Gross Gross Fair
unrealized unrealized market
Cost gains losses value
------------- ------------ ------------ -------------
Residential mortgage loans ......... $1,659,000 $24,000 $-- $1,683,000
========== ======= === ==========
</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>
September 30, 1997
-----------------------------------------------------------
Gross Gross Fair
Amortized unrealized unrealized market
Cost gains losses value
------------- ------------ ------------ -------------
(unaudited)
<S> <C> <C> <C> <C>
Investment securities
U.S. Government agencies .......... $ 3,302,000 $ -- $ 3,000 $ 3,299,000
FHLB stock ........................ 786,000 --- -- 786,000
----------- ------- ------- -----------
4,088,000 -- 3,000 4,085,000
Mortgage-backed securities ......... 16,732,000 65,000 42,000 16,755,000
----------- ------- ------- -----------
$20,820,000 $65,000 $45,000 $20,840,000
=========== ======= ======= ===========
June 30, 1997
-----------------------------------------------------------
Gross Gross Fair
Amortized unrealized unrealized market
Cost gains losses value
------------- ------------ ------------ -------------
Investment securities ..............
U.S. Government agencies .......... $ 4,375,000 $ -- $ 11,000 $ 4,364,000
SBA pools ......................... 1,119,000 -- 7,000 1,112,000
FHLB stock ........................ 823,000 -- -- 823,000
----------- ------- -------- -----------
6,317,000 -- 18,000 6,299,000
Mortgage-backed securities ......... 16,095,000 38,000 89,000 16,044,000
----------- ------- -------- -----------
$22,412,000 $38,000 $107,000 $22,343,000
=========== ======= ======== ===========
</TABLE>
F-12
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
- --------------------------------------------------------------------------------
NOTE D -- INVESTMENT SECURITIES -- (Continued)
<TABLE>
<CAPTION>
June 30, 1996
-----------------------------------------------------------
Gross Gross Fair
Amortized unrealized unrealized market
Cost gains losses value
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Investment securities
U.S. Government agencies .......... $ 1,971,000 $ -- $ 30,000 $ 1,941,000
SBA pools ......................... 1,556,000 -- 2,000 1,554,000
FHLB stock ........................ 475,000 -- -- 475,000
----------- ------ -------- -----------
4,002,000 -- 32,000 3,970,000
Mortgage-backed securities ......... 18,432,000 4,000 309,000 18,127,000
----------- ------ -------- -----------
$22,434,000 $4,000 $341,000 $22,097,000
=========== ====== ======== ===========
</TABLE>
The amortized cost and fair market value of investment and mortgage-backed
securities, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
September 30, 1997 June 30, 1997
----------------------------- ------------------------------
Available-for-sale Available-for-sale
----------------------------- ------------------------------
Fair Fair
Amortized market Amortized market
cost value cost value
------------- ------------- ------------- --------------
(unaudited)
<S> <C> <C> <C> <C>
Investment securities ...........................
Due in one year or less ........................ $ 600,000 $ 597,000 $ -- $ --
Due after one year through five years .......... 2,702,000 2,702,000 4,375,000 4,364,000
Due after five years through ten years ......... -- -- 1,119,000 1,112,000
----------- ----------- ----------- -----------
3,302,000 3,299,000 5,494,000 5,476,000
Mortgage-backed securities ...................... 16,732,000 16,755,000 16,095,000 16,044,000
FHLB stock ..................................... 786,000 786,000 823,000 823,000
----------- ----------- ----------- -----------
$20,820,000 $20,840,000 $22,412,000 $22,343,000
=========== =========== =========== ===========
</TABLE>
On November 15, 1995, the FASB issued a Special Report entitled "A Guide to
Implementation of Statement No. 115 on Accounting for Certain Investments in
Debt and Equity Securities." This guide allows enterprises to reassess the
appropriateness of the classification of all securities held. A one-time
reassessment can be made on one day between November 15, 1995 and December 31,
1995. Reclassifications from the held-to-maturity category that result from this
one-time reassessment will not call into question the intent of an enterprise to
hold other debt and equity securities to maturity in the future.
Based on this Special Report, on December 31, 1995, management of the Bank
reclassified approximately $7,106,000 of investment and mortgage-backed
securities from the held-to-maturity category to the available-for-sale
category. The transfer was made to satisfy asset/liability management objectives
and provide an additional source of liquidity to originate and purchase loans in
1996. The transfer was made at fair value and resulted in an estimated net
unrealized loss of approximately $41,000 and a decrease in retained earnings of
approximately $26,000, net of income taxes, based on current market values.
F-13
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
- --------------------------------------------------------------------------------
NOTE E -- MORTGAGE-BACKED SECURITIES
The amortized cost, unrealized gains and losses, and fair market values of
the Bank's available-for-sale securities are summarized as follows:
<TABLE>
<CAPTION>
September 30, 1997
-------------------------------------------------------------
(unaudited)
Gross Gross Fair
Amortized unrealized unrealized market
cost gains losses value
-------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Available-for-sale
FHLMC certificates ......... $ 7,257,000 $47,000 $ 8,000 $ 7,296,000
GNMA certificates .......... 4,039,000 18,000 3,000 4,054,000
FNMA certificates .......... 5,436,000 -- 31,000 5,405,000
----------- ------- ------- -----------
$16,732,000 $65,000 $42,000 $16,755,000
=========== ======= ======= ===========
June 30, 1997
-------------------------------------------------------------
Gross Gross Fair
Amortized unrealized unrealized market
cost gains losses value
-------------- ------------ ------------ --------------
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
=========== ======= ======== ===========
June 30, 1996
-------------------------------------------------------------
Gross Gross Fair
Amortized unrealized unrealized market
cost gains losses value
-------------- ------------ ------------ --------------
Available-for-sale
FHLMC certificates ......... $ 6,572,000 $ 4,000 $122,000 $ 6,454,000
GNMA certificates .......... 9,462,000 -- 133,000 9,329,000
FNMA certificates .......... 2,398,000 -- 54,000 2,344,000
----------- ------- -------- -----------
$18,432,000 $ 4,000 $309,000 $18,127,000
=========== ======= ======== ===========
</TABLE>
Proceeds from the sale of mortgage-backed securities at September 30, 1997
were $3,978,000, and $1,936,000 and $3,192,000 at June 30, 1997 and 1996,
respectively. Gross gains realized on those sales for the three months ended
September 30, 1997 were $-0-, and for the years ended June 30, 1997 and 1996
were $20,000 and $50,000, respectively. There were no sales of mortgage-backed
securities for the three months ended September 30, 1996 and for the year ended
June 30, 1995.
F-14
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
- --------------------------------------------------------------------------------
NOTE F -- LOANS RECEIVABLE
Loans receivable are as follows:
<TABLE>
<CAPTION>
June 30,
September 30, -------------------------------
1997 1997 1996
--------------- -------------- --------------
(unaudited)
<S> <C> <C> <C>
Residential one-to-four family mortgage loans $59,665,000 $54,493,000 $39,485,000
Multi-family mortgage loans ....................... 13,973,000 13,244,000 5,357,000
Construction loans ................................ 1,997,000 2,188,000 608,000
Commercial mortgage loans ......................... 16,827,000 14,817,000 7,616,000
Consumer loans .................................... 2,516,000 2,375,000 1,285,000
----------- ----------- -----------
Total loans .................................... 94,978,000 87,117,000 54,351,000
Loans in process (construction loans) ............. (617,000) (774,000) (264,000)
Deferred loan fees and unearned discounts ......... (17,000) 121,000 (53,000)
Allowance for possible loan losses ................ (487,000) (472,000) (430,000)
----------- ----------- -----------
Net loans ...................................... $93,857,000 $85,992,000 $53,604,000
=========== =========== ===========
</TABLE>
The Bank had loans outstanding which were secured by real estate and/or
deposit accounts to directors and officers of $2,460,000 and $1,176,000 at June
30, 1997 and 1996, respectively. Management of the Bank is of the opinion that
these performing loans were made in the ordinary course of business and on
substantially the same terms as those prevailing at the same time for comparable
transactions with unrelated parties and do not involve more than normal risk of
collectibility or present other unfavorable features.
Included in loans receivable are non-accrual loans past due 90 days or more
in the amounts of $621,000 at September 30, 1997 and $745,000 and $593,000 at
June 30, 1997 and 1996, respectively. If interest income had been recorded on
all non-accrual loans had they been current in accordance with their original
terms, income would have increased for the three months ended September 30, 1997
and 1996 by approximately $20,000 and $14,000, respectively, and for the years
ended June 30, 1997, 1996 and 1995 by approximately $57,000, $60,000 and
$43,000, respectively.
Also included in loans receivable are loans past due 90 days or more and
accruing in the amount of $353,000 at September 30, 1997 and $353,000 and
$378,000 at June 30, 1997 and 1996, respectively, which have not been classified
as non-accrual due to management's belief that the loans are well-secured and in
the process of collection.
There are no impaired loans at September 30, 1997 and June 30, 1997 and
1996.
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
Three months ended
September 30, Year ended June 30,
------------------------- ---------------------------------------
1997 1996 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Balance, beginning of year ......... $472,000 $430,000 $ 430,000 $388,000 $ 368,000
Provision for loan losses .......... 15,000 11,000 58,000 42,000 30,000
Charge-offs ........................ -- (1,000) (16,000) -- (10,000)
-------- -------- --------- -------- ---------
Balance, end of year ............... $487,000 $440,000 $ 472,000 $430,000 $ 388,000
======== ======== ========= ======== =========
</TABLE>
F-15
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
- --------------------------------------------------------------------------------
NOTE G -- PREMISES AND EQUIPMENT
Premises and equipment are as follows:
<TABLE>
<CAPTION>
June 30,
Estimated September 30, -----------------------------
useful lives 1997 1997 1996
--------------- --------------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Furniture, fixtures and equipment ......... 5 to 10 years $1,389,000 $1,341,000 $ 869,000
Less accumulated depreciation ............ (499,000) (461,000) (458,000)
---------- ---------- ----------
$ 890,000 $ 880,000 $ 411,000
========== ========== ==========
</TABLE>
Depreciation expense for the three months ended September 30, 1997 and 1996
was approximately $34,000 and $29,000, respectively, and for the years ended
June 30, 1997, 1996 and 1995 was approximately $127,000, $112,000 and $105,000,
respectively.
NOTE H -- DEPOSITS
Deposits are as follows:
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------
September 30, 1997 1997 1996
-------------------------- -------------------------- -------------------------
Weighted Weighted Weighted
interest interest interest
rate Amount rate Amount rate Amount
---------- -------------- ---------- -------------- --------- --------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Demand ........................ --% $ 2,433,000 --% $ 2,123,000 --% $ 1,283,000
Money market NOW and Super
NOW .......................... 4.02 9,883,000 3.92 9,994,000 4.36 7,744,000
Passbook and statement savings 2.89 1,776,000 2.80 1,689,000 2.19 2,010,000
------------ ----------- -----------
14,092,000 13,806,000 11,037,000
Time deposits ................. 5.80 96,533,000 5.70 82,100,000 5.63 48,587,000
------------ ----------- -----------
$110,625,000 $95,906,000 $59,624,000
============ =========== ===========
</TABLE>
At September 30, 1997, the scheduled maturities of time deposits are as
follows (unaudited):
1997 $47,546,000
1998 39,763,000
1999 6,422,000
2000 1,303,000
2001 1,299,000
2002 and thereafter 200,000
-----------
$96,533,000
===========
Included in deposits as of September 30, 1997 and June 30, 1997 and 1996
are deposits greater than $100,000 of approximately $20,889,000, $10,857,000 and
$5,963,000, respectively.
F-16
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
- --------------------------------------------------------------------------------
NOTE I -- BORROWINGS
Advances from the Federal Home Loan Bank of Pittsburgh (FHLB), which
generally have maturities of less than one year, are as follows:
<TABLE>
<CAPTION>
June 30,
September 30, -----------------------------------
1997 1997 1996
--------------- ---------------- ----------------
(unaudited)
<S> <C> <C> <C>
Advances outstanding at end of
period ................................ $ 4,350,000 $ 8,950,000 $ 9,500,000
Interest rate at end of period ......... 5.71% 5.70% 5.55%
Approximate average amount out-
standing .............................. 8,207,000 8,344,000 6,694,000
Maximum month-end balance .............. 9,000,000 17,450,000 11,000,000
Approximate weighted average rate 5.95% 5.56% 5.80%
</TABLE>
Securities sold under agreements to repurchase are as follows:
<TABLE>
<CAPTION>
June 30,
September 30, -----------------------------------
1997 1997 1996
--------------- ---------------- ----------------
(unaudited)
<S> <C> <C> <C>
Repurchase agreements outstand-
ing at end of period .................. $ 10,780,000 $ 5,780,000 $ 7,151,000
Interest rate at end of period ......... 5.85% 5.90% 5.85%
Approximate average amount out-
standing .............................. 8,065,000 8,923,000 2,647,000
Maximum month-end balance .............. 10,780,000 10,431,000 7,151,000
Approximate weighted average rate 5.85% 5.95% 5.85%
</TABLE>
At September 30, 1997, outstanding long-term borrowings mature as follows
(unaudited):
1998 ............................ 6,850,000
1999 ............................ 3,280,000
2000 ............................ --
2001 ............................ --
2002 ............................ 5,000,000
---------
15,130,000
==========
NOTE J -- SHAREHOLDERS' NOTES
Shareholders' Notes consisted of loans payable to the Company's
shareholders as follows:
<TABLE>
<CAPTION>
June 30,
September 30, ------------------------------
1997 1997 1996
--------------- ------------- --------------
(unaudited)
<S> <C> <C> <C>
Note payable in monthly interest only payments at
6% at September 30, 1997 and June 30, 1997 and
8.25% at June 30, 1996; the remaining principal
plus accrued interest is due and payable on
July 1, 1998, unless otherwise extended by the
shareholder ....................................... $ 3,238,000 $2,990,000 $ 2,918,000
=========== ========== ===========
</TABLE>
Additionally, the Company paid a management fee to its shareholder totaling
$24,000 for the year ended June 30, 1995. There were no management fees paid to
its shareholders for the three months ended September 30, 1997 and 1996 and for
the years ended June 30, 1997 and 1996.
F-17
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
- --------------------------------------------------------------------------------
NOTE K -- INCOME TAXES
The provision (benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
Three months ended
September 30, Year ended June 30,
------------------------ ------------------------------------------
1997 1996 1997 1996 1995
----------- ---------- ----------- ------------ -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Current
Federal .................. $194,000 $12,000 $ 500,000 $ 62,000 $ (42,000)
State .................... 30,000 2,000 17,000 23,000 2,000
-------- ------- --------- --------- ---------
Total current .......... 224,000 14,000 517,000 85,000 (40,000)
-------- ------- --------- --------- ---------
Deferred
Federal .................. 134,000 5,000 (37,000) (24,000) 21,000
State .................... -- -- -- -- (1,000)
-------- ------- --------- --------- ---------
Total deferred ......... 134,000 5,000 (37,000) (24,000) 20,000
-------- ------- --------- --------- ---------
$358,000 $19,000 $ 480,000 $ 61,000 $ (20,000)
======== ======= ========= ========= =========
</TABLE>
The reconciliation of the statutory federal income tax provision to the
actual tax provision is as follows:
<TABLE>
<CAPTION>
Three months ended
September 30, Year ended June 30,
------------------------ ------------------------------------------
1997 1996 1997 1996 1995
----------- ---------- ----------- ------------ -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Statutory federal income tax ........ $ 354,000 $ 18,000 $ 494,000 $ 59,000 $ (29,000)
State income taxes, net of federal
impact ............................. 30,000 2,000 11,000 15,000 1,000
Low-rate brackets ................... -- -- -- (7,000) --
Tax-exempt income ................... (5,000) -- (13,000) (11,000) (14,000)
Other, net .......................... (21,000) (1,000) (12,000) 5,000 22,000
--------- -------- --------- --------- ---------
Income tax provision (benefit) ..... $ 358,000 $ 19,000 $ 480,000 $ 61,000 $ (20,000)
========= ======== ========= ========= =========
</TABLE>
Deferred tax assets and liabilities consist of the following:
June 30,
September 30, ----------------------
1997 1997 1996
--------------- ----------- ----------
(unaudited)
Deferred tax assets
Deferred loan fees ................ $ -- $ 13,000 $ 17,000
Interest reserve .................. 29,000 31,000 19,000
Provision for loan losses ......... 129,000 123,000 106,000
Unrealized loss on securities
available-for-sale .............. -- 23,000 121,000
Basis of property and equipment -- 11,000 --
--------- -------- --------
158,000 201,000 263,000
--------- -------- --------
Deferred tax liabilities
Unrealized gain on securities
available-for-sale .............. 7,000 -- --
Basis of property and equipment 9,000 -- 1,000
Deferred loan fees ................ 149,000 -- --
--------- -------- --------
165,000 -- 1,000
--------- -------- --------
Net deferred tax (liability)
asset .......................... $ (7,000) $201,000 $262,000
========= ======== ========
F-18
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
- --------------------------------------------------------------------------------
NOTE L -- SHAREHOLDERS' EQUITY
On December 8, 1997, the Company's Board of Directors declared a two for
one stock split effected in the form of a stock dividend.
On December 8, 1997, the Company amended and restated its Articles of
Incorporation whereby the Company is authorized to issue 20,000,000 shares of
capital stock, par value $0.01 per share and 5,000,000 shares of preferred
stock, par value $0.01 per share.
Under the Company's amended Articles of Incorporation, the Board of
Directors of the Company may, from time to time, authorize the shares of
preferred stock, in one or more series, with such provisions as to voting
rights, dividend rates and preferences, redemption and convertibility, and such
preferences, privileges and powers, and relative, participating, optional or
other special rights, and qualifications, limitations or restrictions of such
series of preferred stock, as shall be stated in the resolution of the Board of
Directors providing for the issuance of the preferred stock. The preferred stock
may rank prior to common stock as to dividend rights or liquidation preferences,
or both, and may have full or limited voting rights. No preferred stock is
currently outstanding nor will any be issued in the Offering.
On March 1, 1996, the Company's Board of Directors declared a twenty-eight
for one stock split effected in the form of a stock dividend.
NOTE M -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND
CONCENTRATIONS OF CREDIT RISK
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers and
to reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated statements of financial condition. The
contract amounts of those instruments reflect the extent of the Bank's
involvement in particular classes of financial instruments. The Bank's exposure
to credit loss in the event of non-performance by the other party to the
financial instrument for commitments to extend credit is represented by the
contractual amounts of these instruments. The Bank uses the same credit policies
in making commitments and conditional obligations as it does for
on-balance-sheet instruments. Unless noted otherwise, the Bank does not require
collateral or other security to support financial instruments with credit risk.
Financial instruments, the contract amounts of which represent credit risk,
include commitments to originate loans of $7,560,000 and $9,027,000 at June 30,
1997 and 1996, respectively, as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------- -------------------------------
Fixed Variable Fixed Variable
rate rate rate rate
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
First mortgage loans .............................. $ 3,115,000 $ 3,194,000 $ 6,040,000 $ 1,647,000
Residential construction .......................... -- 100,000 -- 136,000
Commercial real estate and multi-family mortgages . -- 1,151,000 -- 1,204,000
----------- ----------- ----------- -----------
$ 3,115,000 $ 4,445,000 $ 6,040,000 $ 2,987,000
=========== =========== =========== ===========
</TABLE>
Fees received in connection with these commitments have not been recognized
in income.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since some of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank
F-19
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
- --------------------------------------------------------------------------------
NOTE M -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND
CONCENTRATIONS OF CREDIT RISK -- (Continued)
evaluates each customer's creditworthiness on a case-by-case basis. The amount
of the collateral obtained, if it is deemed necessary by the Bank upon extension
of credit, is based on management's credit evaluation of the borrower.
Collateral held generally includes residential and some commercial property.
The Bank's loan portfolio primarily consists of one-to-four family
residential real estate loans in the suburban Philadelphia area, primarily
Delaware, Montgomery, Philadelphia, Bucks and Chester counties in Pennsylvania,
as well as southern New Jersey and northern Delaware. The Bank offers both fixed
and adjustable rates of interest on these loans which have amortization terms
ranging to 30 years. The loans are generally originated on the basis of up to
80% loan-to-value ratio, which has historically provided the Bank with more than
adequate collateral coverage in the event of default. Nevertheless, the Bank, as
with any lending institution, is subject to the risk that residential real
estate values in the primary lending will deteriorate, thereby potentially
impairing collateral values in the primary lending area. However, management
believes that residential real estate values are presently stable in its primary
lending area and that loan loss allowances have been provided for in amounts
commensurate with its current perception of the foregoing risks in the
portfolio.
NOTE N -- COMMITMENTS AND CONTINGENCIES
1. Lease Commitments
The Bank has entered into non-cancellable operating lease agreements for
both branch banking facilities. The lease terms range from 5 to 10 years. The
approximate minimum annual rental payments at June 30, 1997 under these leases
are as follows:
1998 ............................ $ 65,000
1999 ............................ 65,000
2000 ............................ 65,000
2001 ............................ 65,000
2002 ............................ 48,000
Thereafter ...................... 88,000
---------
$ 396,000
=========
Rental expense amounted to $17,000 for the three months ended September 30,
1997 and 1996 and $67,000 for the years ended June 30, 1997, 1996 and 1995.
2. Other
The Bank is party to certain claims and litigation arising in the ordinary
course of business. In the opinion of management, the resolution of such claims
and litigation will not materially impact the Bank's consolidated financial
position or results of operations.
3. Employment Contracts
The Company has a five year employment agreement with its President as of
March 1, 1996. Under the terms of the agreement, he will devote substantially
all of his time and effort to conducting the business activities of the Company
as President and will receive an annual salary of $150,000 for each of the five
years of the agreement. His employment is terminable by the Company for cause as
defined in the agreement, and is terminable by him upon written notice to the
Company. Upon termination, he is not permitted to compete with the Company or
any subsidiary or affiliate of the Company by soliciting its employees or
soliciting business from its customers or suppliers for a period of one year
following such termination.
F-20
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
- --------------------------------------------------------------------------------
NOTE N -- COMMITMENTS AND CONTINGENCIES -- (Continued)
On December 8, 1997, the Bank's Board of Directors approved an employment
agreement with its President. Under the terms of the three-year agreement, he
will devote substantially all of his time and effort to conducting the business
activities of the Bank as President thereof and will receive an annual salary of
$100,000 with an 8% increase as of July 1, 1999. In addition, he is eligible for
an annual bonus of up to 30% of his annual compensation. Upon termination from
the Bank, he is not permitted to compete with the Bank in any of its businesses
in the relevant market areas for such businesses for a specific period following
such termination. If his employment is prematurely terminated by the Bank
without cause, he is eligible to receive a severance payment equal to two times
his annual salary if such termination occurs in the initial year of the
employment agreement, and a severance payment equal to his annual salary if such
termination occurs during the second or third year of the employment agreement.
He received options to purchase 20,000 shares in December 1997 at a price of
$12.00 per share and options to purchase 8,000 shares at the public offering
price.
NOTE O -- EMPLOYEE BENEFIT PLAN
The Bank has a 401(k) defined contribution plan covering all employees, as
defined under the plan document. Employees may contribute up to 15% of
compensation, as defined under the plan document. The Bank can make
discretionary contributions. The Bank contributed $4,000 and $3,000 for the
three months ended September 30, 1997 and 1996, respectively, $5,000 for the
years ended June 30, 1997 and 1996 and $4,000 for the year ended June 30, 1995.
NOTE P -- STOCK OPTION PLAN
In fiscal years 1996 and 1997, grants of phantom options to purchase 31,100
shares were made to an officer and certain directors under a phantom stock
option plan, which plan only provided for a current payout upon a sale or
disposition of the Company. No compensation expense was recorded under the plan.
In December, 1997, the officer and directors renounced their right to such
phantom options and received options to purchase an aggregate of 62,200 shares
of Common Stock at the Offering Price. (note U).
The Company has adopted only the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." In accordance with SFAS No. 123, it
has elected to apply APB Opinion No. 25 and related interpretations in
accounting for its plan and thus does not recognize compensation expense. Had
compensation expense for the plan been determined based on the fair value of the
options at the grant date consistent with SFAS No. 123, the Company's net income
for the years ended June 30, 1997 and 1996 would have been reduced from $962,000
to $955,000 and from $112,000 to $104,000, respectively and net income per share
remained unchanged at $0.46 and $0.07 for both periods. The fair values of the
options are estimated on the dates of grant using the Black-Scholes
option-pricing model assuming 15% volatility, a five year life and risk-free
interest rates of 6.56% and 6.53% in fiscal 1997 and 1996, respectively. In
fiscal 1996, options for 18,000 shares were granted at an exercise price of
$2.33 per share, with an estimated fair value of $0.69 per option. In fiscal
1997, options for 13,100 shares were granted at an exercise price of $2.73 per
share, with an estimated fair value of $0.81 per option. All of the options
remained outstanding at June 30, 1997.
NOTE Q -- FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 requires disclosure of the estimated fair value of an entity's
assets and liabilities considered to be financial instruments. For the Bank, as
for most financial institutions, the majority of its assets and liabilities are
considered to be financial instruments as defined in SFAS No. 107. However, many
such instruments lack an available trading market as characterized by a willing
buyer and seller engaging in an exchange transaction. Therefore, the Bank had to
use significant estimations and present value calculations to prepare this
disclosure, as required by SFAS No. 107. Accordingly, the information presented
below does not purport to represent the aggregate net fair value of the Bank.
F-21
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
- --------------------------------------------------------------------------------
NOTE Q -- FAIR VALUE OF FINANCIAL INSTRUMENTS -- (Continued)
Changes in assumptions or methodologies used to estimate fair values may
materially affect the estimated amounts. Also, management is concerned that
there may not be reasonable comparability between institutions due to the wide
range of permitted assumptions and methodologies in the absence of active
markets. This lack of uniformity gives rise to a high degree of subjectivity in
estimating financial instrument fair values.
Estimated fair values have been determined by the Bank using the best
available data and an estimation methodology suitable for each category of
financial instrument. The estimation methodologies used, the estimated fair
values, and recorded book balances at September 30, 1997 and June 30, 1997 and
1996 are outlined below.
For cash and due from banks and federal funds sold, the recorded book value
of approximately $684,000, $325,000 and $1,197,000 approximates fair value at
September 30, 1997, June 30, 1997 and 1996, respectively. The estimated fair
values of loans held for sale, investment securities and mortgage-backed
securities are based on quoted market prices, if available. Estimated fair
values are based on quoted market prices of comparable instruments if quoted
market prices are not available.
The fair values of loans are estimated based on a discounted cash flow
analysis using interest rates currently offered for loans with similar terms to
borrowers of similar credit quality. The carrying value of accrued interest
approximates fair value.
<TABLE>
<CAPTION>
September 30, 1997
--------------------------------
Carrying Estimated Fair
amount value
-------------- ----------------
(unaudited)
<S> <C> <C>
Loans held for sale ......... $16,767,000 $16,870,000
Investment and mortgage-
backed securities .......... 20,840,000 20,840,000
Loans ....................... 94,978,000 96,088,000
June 30,
-----------------------------------------------------------------
1997 1996
-------------------------------- -------------------------------
Carrying Estimated fair Carrying Estimated fair
amount value amount value
-------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C>
Loans held for sale ......... $ 6,244,000 $ 6,338,000 $ 1,659,000 $ 1,683,000
Investment and mortgage-
backed securities .......... 22,343,000 22,343,000 22,097,000 22,097,000
Loans ....................... 87,117,000 88,266,000 54,351,000 55,994,000
</TABLE>
<PAGE>
The estimated fair values of demand deposits (i.e., interest and
non-interest bearing checking accounts, passbook savings and certain types of
money market accounts) are, by definition, equal to the amount payable on demand
at the reporting date (i.e., their carrying amounts). The carrying amounts of
variable rate, fixed-term money market accounts and certificates of deposit
approximate their fair values at the reporting date. The fair values of
fixed-rate certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered to a schedule of
aggregated expected monthly time deposit maturities. The carrying amount of
accrued interest payable approximates its fair value.
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------------------------------------------------
September 30, 1997 1997 1996
-------------------------------- -------------------------------- -------------------------------
Carrying Estimated Fair Carrying Estimated fair Carrying Estimated fair
amount value amount value amount value
-------------- ---------------- -------------- ---------------- -------------- ---------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Time deposits ......... $96,533,000 $96,611,000 $82,100,000 $81,103,000 $48,587,000 $49,004,000
</TABLE>
The fair values of advances from the FHLB and securities sold under
agreements to repurchase totalling $4,350,000 and $10,780,000, respectively, at
September 30, 1997, $8,950,000 and $5,780,000, respectively, at June 30, 1997,
and $9,500,000 and $7,151,000, respectively, at June 30, 1996 are estimated to
approximate their recorded book balances.
There was no material difference between the contract amount and the
estimated fair value of off-balance-sheet items which totalled approximately
$5,475,000, $7,560,000 and $9,027,000 at September 30, 1997, June 30, 1997 and
1996, respectively, and primarily comprise unfunded loan commitments which are
generally priced at market at the time of funding.
F-22
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
- --------------------------------------------------------------------------------
NOTE R -- REGULATORY MATTERS
1. Dividends
The payment of dividends by the Bank to the Company is prohibited unless
the Bank meets specific capital and earning requirements. In general, the
regulation divides savings banks into three tiers, according to their ability to
meet the current minimum capital requirements.
2. Regulatory Capital
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory - and possible additional discretionary - actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's consolidated financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and core capital (as defined in the regulations) to
risk-weighted assets, and of core capital to adjusted assets. Management
believes, as of September 30, 1997, that the Bank meets all capital adequacy
requirements to which it is subject.
As of September 30, 1997 and June 30, 1997, the most recent notification
from the Office of Thrift Supervision categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized, the Bank must maintain minimum total risk-based, core
risk-based and core leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category.
F-23
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
- --------------------------------------------------------------------------------
NOTE R -- REGULATORY MATTERS -- (Continued)
A summary of the Bank's capital amounts and ratios as of September 30, 1997
follows:
<TABLE>
<CAPTION>
Actual
-----------------------------
Ratio Amount
---------- -----------------
<S> <C> <C>
Shareholders' equity and ratio to total
assets ..................................... 5.25% $ 7,107,000
Unrealized gain on available-for sale
securities, net of tax ..................... (13,000)
Minority interest ........................... 64,000
-------------
Tangible capital and ratio to adjusted
total assets ............................... 5.29 $ 7,158,000
=============
Core capital and ratio to adjusted total
assets ..................................... 5.29 $ 7,158,000
=============
Core capital and ratio to risk-weighted
assets ..................................... 9.61 $ 7,158,000
-------------
Allowance for loan and lease losses ......... 487,000
-------------
Supplementary capital ....................... 487,000
-------------
Total risk-based capital and ratio to
risk-weighted assets(1) .................... 10.26 $ 7,645,000
=============
Total assets ................................ $ 135,336,000
=============
Adjusted total assets ....................... $ 135,324,000
=============
Risk-weighted assets ........................ $ 74,496,000
=============
To be well capitalized
Minimum under prompt
for capital corrective action
adequacy purposes provisions
-------------------------- --------------------------
Ratio Amount Ratio Amount
---------- -------------- ---------- --------------
(unaudited)
<S> <C> <C> <C> <C>
Shareholders' equity and ratio to total
assets .....................................
Unrealized gain on available-for sale
securities, net of tax .....................
Minority interest ...........................
Tangible capital and ratio to adjusted
total assets ............................... 1.50% $ 2,030,000
===========
Core capital and ratio to adjusted total
assets ..................................... 4.00 $ 5,413,000 5.00% $ 6,766,000
=========== ===========
Core capital and ratio to risk-weighted
assets ..................................... 6.00 $ 4,470,000
===========
Allowance for loan and lease losses .........
Supplementary capital .......................
Total risk-based capital and ratio to
risk-weighted assets(1) .................... 8.00 $ 5,960,000 10.00 $ 7,450,000
=========== ===========
Total assets ................................
Adjusted total assets .......................
Risk-weighted assets ........................
</TABLE>
- ------------
(1) Does not reflect the interest rate risk component to the risk-based capital
requirement, the effective date of which has been postponed.
F-24
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
- --------------------------------------------------------------------------------
NOTE R -- REGULATORY MATTERS -- (Continued)
A summary of the Bank's capital amounts and ratios as of June 30, 1997
follows:
<TABLE>
<CAPTION>
To be well capitalized
Minimum under prompt
for capital corrective action
Actual adequacy purposes provisions
---------------------------- -------------------------- --------------------------
Ratio Amount Ratio Amount Ratio Amount
---------- ---------------- ---------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Shareholders' equity and ratio to total
assets ................................. 5.03% $ 5,885,000
Unrealized loss on available-for sale
securities, net of tax ................. 46,000
Minority interest ....................... 69,000
-------------
Tangible capital and ratio to adjusted
total assets ........................... 5.12 $ 6,000,000 1.50% $ 1,757,000
============= ===========
Core capital and ratio to adjusted
total assets ........................... 5.12 $ 6,000,000 4.00 $ 4,685,000 5.00% $ 5,856,000
============= =========== ===========
Core capital and ratio to
risk-weighted assets ................... 10.02 $ 6,000,000 6.00 $ 3,594,000
------------- ===========
Allowance for loan and lease losses ..... 472,000
-------------
Supplementary capital ................... 472,000
-------------
Total risk-based capital and ratio to
risk-weighted assets(1) ................ 10.81 $ 6,472,000 8.00 $ 4,791,000 10.00 $ 5,989,000
============= =========== ===========
Total assets ............................ $ 117,072,000
=============
Adjusted total assets ................... $ 117,118,000
=============
Risk-weighted assets .................... $ 59,892,000
=============
</TABLE>
- ------------
(1) Does not reflect the interest rate risk component to the risk-based capital
requirement, the effective date of which has been postponed.
F-25
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
- --------------------------------------------------------------------------------
NOTE R -- REGULATORY MATTERS -- (Continued)
A summary of the Bank's capital amounts and ratios as of June 30, 1996
follows:
<TABLE>
<CAPTION>
To be well capitalized
Minimum under prompt
for capital corrective action
Actual adequacy purposes provisions
-------------------------- -------------------------- --------------------------
Ratio Amount Ratio Amount Ratio Amount
---------- -------------- ---------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Shareholders' equity and ratio to total
assets ................................. 5.45% $ 4,433,000
Unrealized loss on available-for sale
securities, net of tax ................. 215,000
Minority interest ....................... 49,000
------------
Tangible capital and ratio to adjusted
total assets ........................... 5.79 $ 4,697,000 1.50% $ 1,216,000
============ ===========
Core capital and ratio to adjusted
total assets ........................... 5.79 $ 4,697,000 4.00 $ 3,243,000 5.00% $ 4,054,000
============ =========== ===========
Core capital and ratio to risk-
weighted assets ........................ 12.72 $ 4,697,000 6.00 $ 2,215,000
------------ ===========
Allowance for loan and lease losses ..... 430,000
------------
Supplementary capital ................... 430,000
------------
Total risk-based capital and ratio to
risk-weighted assets(1) ................ 13.89 $ 5,127,000 8.00 $ 2,953,000 10.00 $ 3,692,000
============ =========== ===========
Total assets ............................ $ 81,302,000
============
Adjusted total assets ................... $ 81,087,000
============
Risk-weighted assets .................... $ 36,915,000
============
</TABLE>
- ------------
(1) Does not reflect the interest rate risk component to the risk-based capital
requirement, the effective date of which has been postponed.
NOTE S -- FINAL SAIF LEGISLATION
On September 30, 1996, the Deposit Insurance Funds Act of 1996 (the Funds
Act) was signed into law which, among other things, imposed a special one-time
assessment to recapitalize the Savings Association Insurance Fund (SAIF). As
required by the Funds Act, the Federal Deposit Insurance Corporation (FDIC)
imposed a special assessment on SAIF-assessable deposits held on March 31, 1995,
payable November 27, 1996. The special assessment was recognized as a
tax-deductible expense in 1997. The Bank recorded a special after-tax charge of
$192,000 ($296,000 before-tax) as a result of the FDIC special assessment.
F-26
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
- --------------------------------------------------------------------------------
NOTE T -- CONDENSED FINANCIAL INFORMATION -- PARENT COMPANY
ONLY
The condensed financial information of the Company is as follows:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
-------------------------------
September 30,
1997 1997 1996
-------------- -------------- --------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Cash and due from banks -- non-interest bearing ...... $ 30,000 $ 7,000 $ 29,000
Investment in subsidiaries ........................... 7,094,000 5,930,000 4,432,000
Other assets ......................................... -- 41,000 23,000
----------- ----------- -----------
Total assets ....................................... $ 7,124,000 $ 5,978,000 $ 4,484,000
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Shareholders Notes ................................... $ 3,238,000 $ 2,990,000 $ 2,918,000
Other liabilities .................................... 15,000 93,000 54,000
Shareholders' equity ................................. 3,871,000 2,895,000 1,512,000
----------- ----------- -----------
Total liabilities and shareholders' equity ......... $ 7,124,000 $ 5,978,000 $ 4,484,000
=========== =========== ===========
</TABLE>
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months
ended September 30, Year ended June 30,
-------------------------- --------------------------------------------
1997 1996 1997 1996 1995
------------ ----------- ------------ ------------ --------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Income
Equity in undistributed net
income (loss) of subsidiary ......... $ 663,000 $ 35,000 $ 988,000 $ 198,000 $ (10,000)
Non-interest income ................... 56,000 56,000 236,000 292,000 174,000
--------- -------- --------- --------- ----------
719,000 91,000 1,224,000 490,000 164,000
Other expenses ......................... 54,000 56,000 262,000 378,000 229,000
--------- -------- --------- --------- ----------
Net income (loss) .................... $ 665,000 $ 35,000 $ 962,000 $ 112,000 $ (65,000)
========= ======== ========= ========= ==========
</TABLE>
F-27
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
- --------------------------------------------------------------------------------
NOTE T -- CONDENSED FINANCIAL INFORMATION -- PARENT COMPANY
ONLY -- (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three months
ended September 30, Year ended June 30,
-------------------------- -----------------------------------------------
1997 1996 1997 1996 1995
------------ ----------- ------------ --------------- --------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net income (loss) ......................... $ 665,000 $ 35,000 $ 962,000 $ 112,000 $ (65,000)
Adjustments to reconcile net income
(loss) to net cash (used in)
provided by operating activities
Decrease (increase) decrease in
other assets ........................... 41,000 19,000 (18,000) 31,000 (4,000)
(Decrease) increase in other
liabilities ............................ (78,000) 2,000 39,000 4,000 (69,000)
Other ................................... 58,000 (17,000) (17,000) 74,000 24,000
Equity in undistributed (income)
loss of subsidiary ..................... (663,000) (35,000) (988,000) (198,000) 10,000
---------- --------- ---------- ------------ ------------
Net cash (used in) provided by
operating activities ................. 23,000 4,000 (22,000) 23,000 (104,000)
---------- --------- ---------- ------------ ------------
Cash flows from investing activities
Investment in subsidiary .................. (500,000) -- (325,000) (1,318,000) (1,090,000)
---------- --------- ---------- ------------ ------------
Net cash used in investing
activities ........................... (500,000) -- (325,000) (1,318,000) (1,090,000)
---------- --------- ---------- ------------ ------------
Cash flows from financing activities
Proceeds from shareholders' notes ......... 248,000 -- 73,000 876,000 1,090,000
Proceeds from issuance of Common
Stock ................................... 252,000 252,000 442,000 --
---------- ---------- ------------ ------------
Net cash provided by (used in)
financing activities ................. 500,000 -- 325,000 1,318,000 1,090,000
---------- --------- ---------- ------------ ------------
Net increase (decrease) in cash
and cash equivalents ................. 23,000 4,000 (22,000) 23,000 (104,000)
Cash and cash equivalents at beginning
of year ................................... 7,000 29,000 29,000 6,000 110,000
---------- --------- ---------- ------------ ------------
Cash and cash equivalents at end of
year ...................................... $ 30,000 $ 33,000 $ 7,000 $ 29,000 $ 6,000
========== ========= ========== ============ ============
</TABLE>
F-28
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
- --------------------------------------------------------------------------------
NOTE U -- PROPOSED PUBLIC OFFERING (UNAUDITED)
The Company anticipates a public offering in January 1998 of 1,000,000
shares (the Shares) of common stock, $0.01 value per share. The Shares may be
purchased separately and will be separately tradable immediately upon issuance.
The Company has granted to the underwriters of such offering a 30-day option to
purchase up to an additional 150,000 shares of common stock on the same terms
and conditions as set forth above solely to cover overallotments.
On December 8, 1997, the Board of Directors and shareholders have adopted a
Directors' Stock Option Plan (the Directors' Plan). Certain directors are
eligible to receive, at no cost to them, options under the Directors' Plan.
Options granted under the Directors' Plan are non-qualified stock options
(options that do not afford favorable tax treatment to recipients upon
compliance with certain restrictions pursuant to Section 422 of the Internal
Revenue Code but that normally result in tax deductions to the Company). Options
granted under the Directors' Plan are five-year options at the fair market value
of the common stock at the time of the grant. Options vest in accordance with
the terms of the grant. Upon termination from the Company, except in cases of
death, the option shares expire after 30 days. Option shares may be paid in
cash, shares of the common stock, or a combination of both. An aggregate of
100,000 shares of common stock have been reserved under the Directors' Plan.
On December 8, 1997, the Board of Directors and shareholders have adopted
an Employee Stock Option Plan (the Employee Plan). Employees are eligible to
receive, at no cost to them, options under the Employee Plan. Options granted
under the Employee Plan are non-qualified stock options (options that do not
afford favorable tax treatment to recipients upon compliance with certain
restrictions pursuant to Section 422 of the Internal Revenue Code but that
normally result in tax deductions to the Company). Options granted under the
Employee Plan are five-year options at the fair market value of the common stock
at the time of the grant. Options vest in accordance with the terms of the
grant. Upon termination from the Company, except in cases of death, the option
shares expire after 30 days. Option shares may be paid in cash, shares of the
common stock, or a combination of both. An aggregate of 200,000 shares of common
stock have been reserved under the Employee Plan. On December 8, 1997, the
Company granted options to acquire an aggregate of 20,000 shares of common stock
at an exercise price of $12.00 per share to the President of the Bank.
F-29
<PAGE>
==============================================================================
No dealer, salesperson or other individual has been authorized to give
any information or to make any representations not contained in this Prospectus
in connection with the Offering covered by this Prospectus. If given or made,
such information or representations must not be relied upon as having been
authorized by the Company or the Underwriters. This Prospectus does not
constitute an offer to sell or a solicitation of any offer to buy any
securities offered hereby to any person to whom it is unlawful to make such
offer or solicitation in such jurisdiction. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
an implication that there has not been any change in the affairs of the Company
since the date hereof.
-----------------------------------
TABLE OF CONTENTS
Page
----
Prospectus Summary .................................. 3
Risk Factors ........................................ 10
Use of Proceeds ..................................... 15
Dividends ........................................... 15
Capitalization ...................................... 16
Dilution ............................................ 17
Selected Consolidated Financial Data ................ 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ....................................... 20
Business ............................................ 40
Supervision and Regulation .......................... 46
Taxation ............................................ 52
Management .......................................... 53
Certain Relationships and Related
Transactions ..................................... 59
Security Ownership of Certain Beneficial
Owners and Management ............................ 60
Certain Restrictions on Acquisition of the
Company and the Bank ............................. 61
Certain Anti-Takeover Provisions in the
Articles of Incorporation and Bylaws ............. 61
Description of the Capital Stock .................... 64
Shares Eligible for Future Sale ..................... 65
Underwriting ........................................ 66
Validity of Securities .............................. 67
Experts ............................................. 67
Available Information ............................... 68
Index to Consolidated Financial Statements .......... F-1
Until , 1998 (25 days after the date of this Prospectus), all dealers
effecting transactions in the Common Stock, whether or not participating in this
distribution, may be required to deliver a Prospectus. This is in addition to
the obligations of dealers to deliver a Prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
==============================================================================
<PAGE>
==============================================================================
1,000,000 Shares
[GRAPHIC OMITTED]
CRUSADER
HOLDING
CORPORATION
Common Stock
------------
PROSPECTUS
------------
Advest, Inc.
February , 1998
==============================================================================
<PAGE>
PART II -- INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated amount of various expenses in
connection with the sale and distribution of the securities being registered:
SEC registration fee ...................... $ 5,428
NASD filing fee ........................... 2,340
Nasdaq National Market filing fee ......... 23,250
Printing and engraving expenses ........... 85,000
Legal fees and expenses
(including blue sky fees and expenses) ... 150,000
Accounting fees and expenses .............. 75,000
Transfer agent fees ....................... 5,000
Miscellaneous ............................. 53,982
--------
Total ..................................... $400,000
========
Item 14. Indemnification of Directors and Officers.
The Pennsylvania Business Corporation Law of 1988 authorizes the Company to
grant indemnities to directors and officers in terms sufficiently broad to
permit indemnification of such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act of 1933. The Company's Bylaws include the following provisions:
Article VII
7.1 INDEMNIFICATION OF DIRECTORS, OFFICERS, AND OTHER PERSONS. The
Corporation shall indemnify any director, officer, employee or agent of the
Corporation or any of its subsidiaries who was or is an "authorized
representative" of the Corporation (which shall mean, for the purpose of this
Article, a director or officer of the Corporation, or a person serving at the
request of the Corporation as a director, officer, partner, fiduciary or trustee
of another corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise) and who was or is a "party" (which shall include for
purposes of this Article the giving of testimony or similar involvement) or is
threatened to be made a party to any "proceeding" (which shall mean for purposes
of this Article any threatened, pending or completed action, suit, appeal or
other proceeding of any nature, whether civil, criminal, administrative or
investigative, whether formal or informal, and whether brought by or in the
right of the Corporation, its shareholders or otherwise) by reason of the fact
that such person was or is an authorized representative of the Corporation to
the fullest extent permitted by law, including without limitation
indemnification against expenses (which shall include for purposes of this
Article attorneys' fees and disbursements), damages, punitive damages,
judgments, penalties, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such proceeding unless the
act or failure to act giving rise to the claim is finally determined by a court
to have constituted willful misconduct or recklessness. If an authorized
representative is not entitled to indemnification in respect of a portion of any
liabilities to which such person may be subject, the Corporation shall
nonetheless indemnify such person to the maximum extent for the remaining
portion of the liabilities.
7.2 ADVANCEMENT OF EXPENSES. The Corporation shall pay the expenses
(including attorneys' fees and disbursements) actually and reasonably incurred
in defending a proceeding on behalf of any person entitled to indemnification
under Section 7.1 in advance of the final disposition of such proceeding upon
receipt of an undertaking by or on behalf of such person to repay such amount if
it shall ultimately be determined that such person is not entitled to be
indemnified by the Corporation as authorized in this Article and may pay such
expenses in advance on behalf of any employee or agent on receipt of a similar
undertaking. The financial ability of such authorized representative to make
such repayment shall not be prerequisite to the making of an advance.
II-1
<PAGE>
7.3 EMPLOYEE BENEFIT PLANS. For purposes of this Article, the Corporation
shall be deemed to have requested an officer, director, employee or agent to
serve as fiduciary with respect to an employee benefit plan where the
performance by such person of duties to the Corporation also imposes duties on,
or otherwise involves services by, such person as a fiduciary with respect to
the plan; excise taxes assessed on an authorized representative with respect to
any transaction with an employee benefit plan shall be deemed "fines"; and
action taken or omitted by such person with respect to an employee benefit plan
in the performance of duties for a purpose reasonably believed to be in the
interest of the participants and beneficiaries of the plan shall be deemed to be
for a purpose which is not opposed to the best interests of the Corporation.
7.4 SECURITY FOR INDEMNIFICATION OBLIGATIONS. To further effect, satisfy or
secure the indemnification obligations provided herein or otherwise, the
Corporation may maintain insurance, obtain a letter of credit, act as
self-insurer, create a reserve, trust, escrow, cash collateral or other fund or
account, enter into indemnification agreements, pledge or grant a security
interest in any assets or properties of the Corporation, or use any other
mechanism or arrangement whatsoever in such amounts, at such costs, and upon
such other terms and conditions as the Board of Directors shall deem
appropriate.
7.5 RELIANCE UPON PROVISIONS. Each person who shall act as an authorized
representative of the Corporation shall be deemed to be doing so in reliance
upon the rights of indemnification provided by this Article.
7.6 AMENDMENT OR REPEAL. All rights of indemnification under this Article
shall be deemed a contract between the Corporation and the person entitled to
indemnification under this Article pursuant to which the Corporation and each
such person intend to be legally bound. Any repeal, amendment or modification
hereof shall be prospective only and shall not limit, but may expand, any rights
or obligations in respect of any proceeding whether commenced prior to or after
such change to the extent such proceeding pertains to actions or failures to act
occurring prior to such change.
7.7 SCOPE OF ARTICLE. The indemnification, as authorized by this Article,
shall not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any statute,
agreement, vote of shareholders or disinterested directors or otherwise, both as
to action in an official capacity and as to action in any other capacity while
holding such office. The indemnification and advancement of expenses provided
by, or granted pursuant to, this Article shall continue as to a person who has
ceased to be an officer, director, employee or agent in respect of matters
arising prior to such time, and shall inure to the benefit of the heirs,
executors and administrators of such person.
The Company maintains a policy of directors' and officers' liability
insurance.
Item 15. Recent Sales of Unregistered Securities.
Since December 1, 1994, the Registrant has issued and sold the following
unregistered securities:
1. On March 1, 1996, the Company issued an amended and restated promissory
note in the principal amount of $2,044,622 and issued 675,000 shares of Common
Stock to Thomas J. Knox, Chairman of the Board and Chief Executive Officer of
the Company. Such shares were issued in connection with a twenty-eight-for-one
split of the Common Stock, effected in the form of a stock dividend.
2. On March 1, 1996, the Company issued an amended and restated promissory
note in the principal amount of $876,267 and issued 300,000 shares of Common
Stock to Bruce A. Levy, President and a director of the Company, for an
aggregate price of $1,318,000.
3. On December 31, 1996, the Company issued 42,000 shares of Common Stock
to Thomas J. Knox, for an aggregate price of $140,000.
4. On December 31, 1996, the Company issued 18,000 shares of Common Stock
to Bruce A. Levy, for an aggregate price of $60,000.
5. On January 31, 1997, the Company issued five exchangeable promissory
notes, each in the principal amount of $13,800, and issued 5,000 shares of
Common Stock, to each of Ronald L. Caplan, D. Walter Cohen, D.D.S., Daniel
DiLella, Joel S. Lawson III and Brian McAdams, each of whom is a director of the
Company. The aggregate price received by the Registrant from each such director
was $25,000.
II-2
<PAGE>
6. On September 30, 1997, the Company issued a promissory note in the
principal amount of $173,606 and issued 63,000 shares of Common Stock to Thomas
J. Knox, for an aggregate price of $350,000 and the Company issued a promissory
note in the principal amount of $74,403 and issued 27,000 shares of Common Stock
to Bruce A. Levy, for an aggregate price of $150,000.
7. Effective November 30, 1997, the Company issued 150,000 shares of its
Common Stock to Jeffrey K. Rafsky in exchange for 50 shares of CMC stock.
8. On December 8, 1997, the Company granted options to purchase an
aggregate of 20,000 shares of Common Stock at an exercise price of $12.00 per
share to Joseph T. Crowley, President of the Bank.
The Company believes that the transactions described above were exempt from
registration under Sections 3(a)(9), 3(b) or 4(2) of the Securities Act because
the subject securities were, respectively, either (i) exchanged by the issuer
with its existing security holders exclusively, with no commission or other
remuneration being paid or given directly or indirectly for soliciting such
exchange; (ii) issued pursuant to a compensatory benefit plan pursuant to Rule
701 under the Securities Act; or (iii) sold to a limited group of persons, each
of whom was believed to have been a sophisticated investor or had a pre-existing
business or personal relationship with the Company or its management and was
purchasing for investment without a view to further distribution. Restrictive
legends were placed on stock certificates evidencing the shares and/or
agreements relating to the right to purchase such shares described above.
Item 16. Exhibits and Financial Statement Schedules.
<TABLE>
<CAPTION>
Exhibit
No. Exhibit
- ------------- -----------------------------------------------------------------------------------------------------
<S> <C>
1 Form of Underwriting Agreement.
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 Shareholders'
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, 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.*
5 Opinion of Ballard Spahr Andrews & Ingersoll, LLP regarding legality of securities being
registered.
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
Partners and Crusader Savings Bank, FSB.*
10.7 Lease Agreement, dated as of July 1, 1984, by Goldie Sabel and Crusader Savings Bank,
FSB.*
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.8 Agreement, dated as of November 30, 1997, 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.*
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 Mortgage
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.*
21 Subsidiaries of the Registrant.*
23.1 Consent of Grant Thornton LLP.
23.2 Consent of Ballard Spahr Andrews & Ingersoll, LLP (included in Exhibit 5).
24 Power of Attorney (included in signature page).*
27 Financial Data Schedule.*
</TABLE>
- ---------------------
+Constitutes a management contract or compensatory plan.
*Previously filed.
Item 17. Undertakings.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The Registrant hereby undertakes to provide to the underwriter at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names required by the underwriter to permit
prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized in the City of
Philadelphia, Commonwealth of Pennsylvania, on January 23, 1998.
CRUSADER HOLDING CORPORATION
By: /s/ Bruce A. Levy
-------------------------------
Bruce A. Levy
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ Bruce A. Levy President and Director January 23, 1998
- --------------------- (principal executive officer)
Bruce A. Levy
* Chairman and Director January 23, 1998
- --------------------- (principal executive officer)
Thomas J. Knox
* Vice President, Secretary and January 23, 1998
- --------------------- Treasurer (principal financial
Joseph T. Crowley and accounting officer)
* Director January 23, 1998
- ---------------------
Paul Bachow
* Director January 23, 1998
- ---------------------
Ronald L. Caplan
* Director January 23, 1998
- ---------------------
D. Walter Cohen
* Director January 23, 1998
- ---------------------
Daniel DiLella
* Director January 23, 1998
- ---------------------
Linda R. Knox
* Director January 23, 1998
- ---------------------
Joel S. Lawson III
* Director January 23, 1998
- ---------------------
Brian McAdams
*By /s/ Bruce A. Levy
------------------
Bruce A. Levy
Attorney-in-Fact
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description Page
- ------------- ------------- ----
<S> <C> <C>
1 Form of Underwriting Agreement.
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 Shareholders'
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, 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.*
5 Opinion of Ballard Spahr Andrews & Ingersoll, LLP regarding legality of securities being
registered.
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
Partners and Crusader Savings Bank, FSB.*
10.7 Lease Agreement, dated as of July 1, 1984, by Goldie Sabel and Crusader Savings Bank,
FSB.*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.8 Agreement, dated as of November 30, 1997, 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.*
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 Mortgage
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.*
21 Subsidiaries of the Registrant.*
23.1 Consent of Grant Thornton LLP.
23.2 Consent of Ballard Spahr Andrews & Ingersoll, LLP (included in Exhibit 5).
24 Power of Attorney (included in signature page).*
27 Financial Data Schedule.*
</TABLE>
- ---------------------
+Constitutes a management contract or compensatory plan.
*Previously filed.
<PAGE>
1,000,000 Shares
(plus 150,000 Shares to cover over-allotments, if any)
CRUSADER HOLDING CORPORATION
COMMON STOCK, PAR VALUE $0.01 PER SHARE
UNDERWRITING AGREEMENT
February , 1998
ADVEST, INC.
As Representative (the "Representative")
of the Several Underwriters
Named in Schedule I hereto
c/o Advest, Inc.
One Rockefeller Plaza, 20th Floor
New York, New York 10020
Dear Sirs and Mesdames:
Crusader Holding Corporation, a Pennsylvania corporation (the
"Company"), proposes, subject to the terms and conditions stated herein, to sell
to the several Underwriters named in Schedule I hereto (the "Underwriters"), an
aggregate of 1,000,000 shares (the "Firm Shares") of the Company's common stock,
$0.01 par value (the "Common Stock").
In addition, in order to cover over-allotments in the sale of the Firm
Shares, the Underwriters may, at the Underwriters' election and subject to the
terms and conditions stated herein, purchase ratably, in proportion to the
amounts set forth opposite their respective names in Schedule I hereto, up to
150,000 additional shares of Common Stock from the Company (such additional
shares of Common Stock, the "Optional Shares"). The Firm Shares and the Optional
Shares are referred to collectively as the "Shares."
The Company, intending to be legally bound, hereby confirms its
agreement with the Underwriters as follows:
1. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, each of the Underwriters that:
(a) A registration statement on Form S-1 (File No.
333-42215) with respect to the Shares, including a prospectus subject to
completion, has been filed by the Company with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"Act"), and one or more amendments to such
-1-
<PAGE>
registration statement may have been so filed. After the execution of this
Agreement, the Company will file with the Commission either (i) if such
registration statement, as it may have been amended, has become effective under
the Act and information has been omitted therefrom in accordance with Rule 430A
under the Act, a prospectus in the form most recently included in an amendment
to such registration statement (or, if no such amendment shall have been filed,
in such registration statement) with such changes or insertions as are required
by Rule 430A or permitted by Rule 424(b) under the Act and as have been provided
to and approved by the Representative, or (ii) if such registration statement,
as it may have been amended, has not become effective under the Act, an
amendment to such registration statement, including a form of prospectus, a copy
of which amendment has been provided to and approved by the Representative prior
to the execution of this Agreement. As used in this Agreement, the term
"Registration Statement" means such registration statement, as amended at the
time when it was or is declared effective, including (A) all financial
statements, schedules and exhibits thereto, (B) all documents (or portions
thereof) incorporated by reference therein, and (C) any information omitted
therefrom pursuant to Rule 430A under the Act and included in the Prospectus (as
hereinafter defined); the term "Preliminary Prospectus" means each prospectus
subject to completion included in such registration statement or any amendment
or post-effective amendment thereto (including the prospectus subject to
completion, if any, included in the Registration Statement at the time it was or
is declared effective), including all documents (or portions thereof)
incorporated by reference therein; and the term "Prospectus" means the
prospectus first filed with the Commission pursuant to Rule 424(b) under the Act
or, if no prospectus is required to be so filed, such term means the prospectus
included in the Registration Statement, in either case, including all documents
(or portions thereof) incorporated by reference therein. As used herein, any
reference to any statement or information as being "made," "included,"
"contained," "disclosed" or "set forth" in any Preliminary Prospectus, a
Prospectus or any amendment or supplement thereto, or the Registration Statement
or any amendment thereto (or other similar references) shall refer both to
information and statements actually appearing in such document as well as
information and statements incorporated by reference therein.
(b) No order preventing or suspending the use of any
Preliminary Prospectus has been issued and no proceeding for that purpose has
been instituted or threatened by the Commission or the securities authority of
any state or other jurisdiction. If the Registration Statement has become
effective under the Act, no stop order suspending the effectiveness of the
Registration Statement or any part thereof has been issued and no proceeding for
that purpose has been instituted or threatened or, to the knowledge of the
Company, contemplated by the Commission or the securities authority of any state
or other jurisdiction.
(c) When any Preliminary Prospectus was filed with
the Commission it contained all statements required to be stated therein in
accordance with, and complied in all material respects with the requirements of,
the Act and the rules and regulations of the Commission thereunder. When the
Registration Statement or any amendment thereto was or is declared effective,
and at each Time of Delivery (as hereinafter defined), it (i) contained and will
contain all statements required to be stated therein in accordance with, and
complied or will comply in all material respects with the requirements of, the
Act and the rules and
-2-
<PAGE>
regulations of the Commission thereunder and (ii) did not and will not include
any untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein not misleading. When the Prospectus or
any amendment or supplement thereto is filed with the Commission pursuant to
Rule 424(b) (or, if the Prospectus or such amendment or supplement is not
required to be so filed, when the Registration Statement or the amendment
thereto containing such amendment or supplement to the Prospectus was or is
declared effective) and at each Time of Delivery, the Prospectus, as amended or
supplemented at any such time, (i) contained and will contain all statements
required to be stated therein in accordance with, and complied or will comply in
all material respects with the requirements of, the Act and the rules and
regulations of the Commission thereunder and (ii) did not and will not include
any untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The foregoing
provisions of this paragraph (c) do not apply to statements or omissions made in
the Registration Statement or any amendment thereto or the Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through you specifically
for use therein. It is understood that the statements set forth in the
Registration Statement or any amendment thereto or the Prospectus or any
amendment or supplement thereto (W) in the last paragraph of the cover page of
the Prospectus, (X) on the inside cover page with respect to stabilization, and
(Y) in the third and fifth paragraphs and the list of Underwriters under the
section entitled "Underwriting," constitute the only written information
furnished to the Company by or on behalf of any Underwriter through you
specifically for use in the Registration Statement or any amendment thereto or
the Prospectus and any amendment or supplement thereto, as the case may be.
(d) There are no legal or governmental proceedings
pending or threatened to which the Company or any of its directly or indirectly
held subsidiaries, as listed on Exhibit A hereto (the "Subsidiaries"), is a
party or to which any of the properties of the Company or any Subsidiary is
subject that are required to be described in the Registration Statement or the
Prospectus and are not so described or any statutes, regulations, contracts or
other documents that are required to be described in the Registration Statement
or the Prospectus or to be filed as exhibits to the Registration Statement that
are not described or filed as required.
(e) Each of the Company and the Subsidiaries has
been duly incorporated, is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation and has full power and
authority (corporate and other) to own or lease its properties and conduct its
business as described in the Prospectus. The Company has full power and
authority (corporate and other) to enter into this Agreement and to perform its
obligations hereunder. Each of the Company and the Subsidiaries is duly
qualified to transact business as a foreign corporation and is in good standing
under the laws of each other jurisdiction in which it owns or leases properties,
or conducts any business, so as to require such qualification, except where the
failure to so qualify would not have a material adverse effect on the financial
position, results of operations or business of the Company and the Subsidiaries
taken as a whole. The Company does not own or lease any property, or conduct any
business, in any jurisdiction (other than the state in which it is organized)
other than
-3-
<PAGE>
__________________ (collectively, the "Designated Company States"). None of the
Subsidiaries owns or leases any property, or conducts any business, in any
jurisdiction (other than the state in which it is organized) other than
_________________ (collectively, the "Designated Subsidiary States").
(f) The Company's authorized, issued and outstanding
capital stock is as disclosed in the Prospectus. All of the issued shares of
capital stock of the Company, have been duly authorized and validly issued, are
fully paid and nonassessable and conform to the descriptions of the Common Stock
contained in the Prospectus. None of the issued shares of capital stock of the
Company or any of the Subsidiaries has been issued or is owned or held in
violation of any statutory (or to the knowledge of the Company, any other)
preemptive rights of shareholders, and no person or entity (including any holder
of outstanding shares of capital stock of the Company or the Subsidiaries) has
any statutory (or to the knowledge of the Company, any other) preemptive or
other rights to subscribe for any of the Shares. None of the capital stock of
the Company has been issued in violation of applicable federal or state
securities laws.
(g) All of the issued shares of capital stock of
each Subsidiary have been duly authorized and validly issued, are fully paid and
nonassessable and the number, class and percentage of shares of capital stock of
each Subsidiary identified on Exhibit A hereto as being owned by the Company or
one of the Subsidiaries are owned beneficially by the Company or such
Subsidiary, free and clear of all liens, security interests, pledges, charges,
encumbrances, defects, shareholders' agreements (other than those shareholders'
agreements identified in the Prospectus), voting agreements, proxies, voting
trusts, equities or claims of any nature whatsoever. Other than the Subsidiaries
and the equity securities held in the investment portfolios of the Company and
the Subsidiaries (the composition of which is not materially different than as
contained in the Prospectus as of specific dates), the Company does not own,
directly or indirectly, any capital stock or other equity securities of any
other corporation or any ownership interest in any partnership, joint venture or
other association.
(h) Except as disclosed in the Prospectus, there are
no outstanding (i) securities or obligations of the Company or any of the
Subsidiaries convertible into or exchangeable for any capital stock of the
Company or any of the Subsidiaries, (ii) warrants, rights or options to
subscribe for or purchase from the Company or any of the Subsidiaries any such
capital stock or any such convertible or exchangeable securities or obligations
or (iii) obligations of the Company or any of the Subsidiaries to issue any
shares of capital stock, any such convertible or exchangeable securities or
obligations, or any such warrants, rights or options.
(i) Since the respective dates as of which
information is given in the Registration Statement and the Prospectus, (i)
neither the Company nor any of the Subsidiaries has incurred any liabilities or
obligations, direct or contingent, or entered into any transactions, not in the
ordinary course of business, that are material to the Company and the
Subsidiaries, (ii) the Company has not purchased any of its outstanding capital
stock or declared, paid or otherwise made any dividend or distribution of any
kind on its capital stock, (iii) there has not been any change in the capital
stock, long-term debt or short-term debt of the Company or any
-4-
<PAGE>
of the Subsidiaries, and (iv) there has not been any material adverse change, or
any development involving a prospective material adverse change, in or affecting
the financial position, results of operations or business of the Company and the
Subsidiaries, in each case other than as disclosed in or contemplated by the
Prospectus.
(j) There are no contracts, agreements or
understandings between the Company and any person granting such person the right
to require the Company to file a registration statement under the Act with
respect to any securities of the Company owned or to be owned by such person or,
requiring the Company to include such securities in the securities registered
pursuant to the Registration Statement (or any such right has been effectively
waived) or requiring the registration of any securities pursuant to any other
registration statement filed by the Company under the Act. Neither the filing of
the Registration Statement nor the offering or sale of Shares as contemplated by
this Agreement gives any security holder of the Company any rights for or
relating to the registration of any shares of Common Stock or any other capital
stock of the Company, except such as have been satisfied or waived.
(k) Neither the Company nor any of the Subsidiaries
is, or with the giving of notice or passage of time or both would be, in
violation of its articles of incorporation or bylaws or other organizational
documents or in default under any indenture, mortgage, deed of trust, loan
agreement, lease or other agreement or instrument to which the Company or any of
the Subsidiaries is a party or to which any of their respective properties or
assets are subject.
(l) The Company and the Subsidiaries have good and
marketable title in fee simple to all real property, if any, and good title to
all personal property owned by them, in each case free and clear of all liens,
security interests, pledges, charges, encumbrances, mortgages and defects,
except such as are disclosed in the Prospectus or such as would not have a
material adverse effect on the financial position, results of operations or
business of the Company and the Subsidiaries taken as a whole and do not
interfere with the use made or proposed to be made of such property by the
Company and the Subsidiaries; and any real property and 7uildings held under
lease by the Company or any of the Subsidiaries are held under valid, subsisting
and enforceable leases, with such exceptions as are disclosed in the Prospectus
or are not material and do not interfere with the use made or proposed to be
made of such property and buildings by the Company or any Subsidiary.
(m) The Company does not require any consent,
approval, authorization, order or declaration of or from, or registration,
qualification or filing with, any court or governmental agency or body
(including, without limitation, the OTS or the FDIC (as each is defined below))
in connection with the sale of the Shares or the consummation of the
transactions contemplated by this Agreement, except the registration of the
Shares under the Act (which, if the Registration Statement is not effective as
of the time of execution hereof, shall be obtained as provided in this
Agreement) and of the Common Stock under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and such as may be required by the National
Association of Securities Dealers, Inc. (the "NASD") or under state
-5-
<PAGE>
securities or blue sky laws in connection with the offer, sale and distribution
of the Shares by the Underwriters.
(n) Other than as disclosed in the Prospectus, there
is no litigation, arbitration, claim, proceeding (formal or informal) or
investigation (including without limitation, any banking regulatory proceeding)
pending or, to the Company's knowledge, threatened in which the Company or any
of the Subsidiaries is a party or of which any of their respective properties or
assets are the subject which, if determined adversely to the Company or any
Subsidiary, would individually or in the aggregate have a material adverse
effect on the financial position, results of operations or business of the
Company and the Subsidiaries taken as a whole. Neither the Company nor any
Subsidiary is in violation of, or in default with respect to, any law, statute,
rule, regulation, order, judgment or decree, except as described in the
Prospectus or such as do not and will not individually or in the aggregate have
a material adverse effect on the financial position, results of operations or
business of the Company and the Subsidiaries taken as a whole, and neither the
Company nor any Subsidiary is required to take any action in order to avoid any
such violation or default.
(o) Grant Thornton LLP, which has certified certain
financial statements of the Company and its consolidated Subsidiaries included
in the Registration Statement and the Prospectus, are independent public
accountants as required by the Act, the Exchange Act and the respective rules
and regulations of the Commission thereunder.
(p) The consolidated financial statements and
schedules (including the related notes) of the Company and its consolidated
Subsidiaries included or incorporated by reference in the Registration
Statement, the Prospectus and/or any Preliminary Prospectus were prepared in
accordance with generally accepted accounting principles consistently applied
throughout the periods involved and fairly present the financial position and
results of operations of the Company and the Subsidiaries, on a consolidated
basis, at the dates and for the periods presented. The selected financial data
set forth under the captions "Summary Consolidated Financial Data," "Selected
Consolidated Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Prospectus fairly present,
on the basis stated in the Prospectus, the information included therein, and
have been compiled on a basis consistent with that of the audited financial
statements included in the Registration Statement. The supporting notes and
schedules included in the Registration Statement, the Prospectus and/or any
Preliminary Prospectus fairly state in all material respects the information
required to be stated therein in relation to the financial statements taken as a
whole. The unaudited interim consolidated financial statements included or
incorporated by reference in the Registration Statement comply as to form in all
material respects with the applicable accounting requirements of Rule 10-01 of
Regulation S-X under the Act.
(q) This Agreement has been duly authorized,
executed and delivered by the Company and, assuming due execution by the
Representative of the Underwriters, constitutes the valid and binding agreement
of the Company, enforceable against the Company in accordance with its terms,
subject, as to enforcement, to applicable bankruptcy, insolvency, reorganization
and moratorium laws and other laws relating to or affecting the enforcement of
creditors' rights generally and to general equitable principles and except as
the enforceability
-6-
<PAGE>
of rights to indemnity and contribution under this Agreement may be limited
under applicable securities laws or the public policy underlying such laws.
(r) The sale of the Shares and the performance of
this Agreement and the consummation of the transactions herein contemplated will
not (with or without the giving of notice or the passage of time or both) (i)
conflict with or violate any term or provision of the articles of incorporation
or bylaws or other organizational documents of the Company or any Subsidiary,
(ii) result in a breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust, loan
agreement, lease or other agreement or instrument to which the Company or any
Subsidiary is a party or to which any of their respective properties or assets
is subject, (iii) conflict with or violate any law, statute, rule or regulation
or any order, judgment or decree of any court or governmental agency or body
having jurisdiction over the Company or any Subsidiary or any of their
respective properties or assets or (iv) result in a breach, termination or lapse
of the corporate power and authority of the Company or any Subsidiary to own or
lease and operate their respective assets and properties and conduct their
respective business as described in the Prospectus.
(s) When the Shares to be sold by the Company
hereunder have been duly delivered against payment therefor as contemplated by
this Agreement, the Shares will be validly issued, fully paid and nonassessable,
and the holders thereof will not be subject to personal liability solely by
reason of being such holders. The certificates representing the Shares are in
proper legal form under, and conform in all respects to the requirements of, the
Pennsylvania Business Corporation Law of 1988, as amended, and the requirements
of The Nasdaq Stock Market, Inc.
(t) The Company has not distributed and will not
distribute any offering material in connection with the offering and sale of the
Shares other than the Registration Statement, a Preliminary Prospectus, the
Prospectus and other material, if any, permitted by the Act.
(u) Neither the Company nor any of its officers,
directors or affiliates has (i) taken, directly or indirectly, any action
designed to cause or result in, or that has constituted or might reasonably be
expected to constitute, the stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Shares or (ii)
since the filing of the Registration Statement (A) sold, bid for, purchased or
paid anyone any compensation for soliciting purchases of, the Shares or (B) paid
or agreed to pay to any person any compensation for soliciting another to
purchase any other securities of the Company.
(v) The operations of the Company and the
Subsidiaries with respect to any real property currently leased or owned or by
any means controlled by the Company or any Subsidiary (the "Real Property") are
in compliance in all material respects with all federal, state, and local laws,
ordinances, rules, and regulations relating to occupational health and safety
and the environment (collectively, "Laws"), and the Company and the Subsidiaries
have not violated any Laws in a way which would have a material adverse effect
on the financial position, results of operations or business of the Company and
the Subsidiaries taken as a
-7-
<PAGE>
whole. Except as disclosed in the Prospectus, there is no pending or, to the
Company's knowledge, threatened claim, litigation or any administrative agency
proceeding, nor has the Company or any Subsidiary received any written or oral
notice from any governmental entity or third party, that: (i) alleges a
violation of any Laws by the Company or any Subsidiary or (ii) alleges the
Company or any Subsidiary is a liable party under the Comprehensive
Environmental Response, Compensation, and Liability Act, 42 U.S.C. ss. 9601 et
seq. or any state superfund law.
(w) Neither the Company nor any Subsidiary owns or
has the right to use patents, patent applications, trademarks, trademark
applications, trade names, service marks, copyrights, franchises, trade secrets,
proprietary or other confidential information and intangible properties and
assets (collectively, "Intangibles"), the loss of any of which would have a
material adverse effect on the financial position, results of operations or
business of the Company and the Subsidiaries taken as a whole; and, to the best
knowledge of the Company, neither the Company nor any Subsidiary has infringed
or is infringing, and neither the Company nor any Subsidiary has received notice
of infringement with respect to, asserted Intangibles of others.
(x) Each of the Company and the Subsidiaries makes
and keeps accurate books and records reflecting its assets and maintains
internal accounting controls which provide reasonable assurance that (i)
transactions are executed in accordance with management's authorization, (ii)
transactions are recorded as necessary to permit preparation of the Company's
consolidated financial statements in accordance with generally accepted
accounting principles and to maintain accountability for the assets of the
Company, (iii) access to the assets of the Company and each of the Subsidiaries
is permitted only in accordance with management's authorization, and (iv) the
recorded accountability for assets of the Company and each of the Subsidiaries
is compared with existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
(y) The Company and the Subsidiaries have filed all
foreign, federal, state and local tax returns that are required to be filed by
them and have paid all taxes shown as due on such returns as well as all other
taxes, assessments and governmental charges that are due and payable; and no
material deficiency with respect to any such return has been assessed or
proposed.
(z) Except for such plans that are expressly
disclosed in the Prospectus, the Company and the Subsidiaries do not maintain,
contribute to or have any material liability with respect to any employee
benefit plan, profit sharing plan, employee pension benefit plan, employee
welfare benefit plan, equity-based plan or deferred compensation plan or
arrangement ("Plans") that are subject to the provisions of the Employee
Retirement Income Security Act of 1974, as amended, or the rules and regulations
thereunder ("ERISA"). All Plans are in compliance in all material respects with
all applicable laws, including but not limited to ERISA and the Internal Revenue
Code of 1986, as amended (the "Code"), and have been operated and administered
in all material respects in accordance with their terms. No Plan is a defined
benefit plan or multi employer plan. The Company does not provide retiree life
and/or retiree health benefits or coverage for any employee or any
-8-
<PAGE>
beneficiary of any employee after such employee's termination of employment,
except as required by Section 4980B of the Code or under a Plan which is
intended to be "qualified" under Section 401(a) of the Code. No material
liability has been, or could reasonably be expected to be, incurred under Title
IV of ERISA or Section 412 of the Code by any entity required to be aggregated
with the Company or any of the Subsidiaries pursuant to Section 4001(b) of ERISA
and/or Section 414(b) or (c) of the Code (and the regulations promulgated
thereunder) with respect to any "employee pension benefit plan" which is not a
Plan. As used in this subsection, the terms "defined benefit plan," "employee
benefit plan," "employee pension benefit plan," "employee welfare benefit plan"
and "multi employer plan" shall have the respective meanings assigned to such
terms in Section 3 of ERISA.
(aa) No material labor dispute exists with the
Company's or any Subsidiary's employees, and no such labor dispute is
threatened. The Company has no knowledge of any existing or threatened labor
disturbance by the employees of any of its principal agents, suppliers,
contractors or customers that would have a material adverse effect on the
financial position, results of operations or business of the Company and the
Subsidiaries taken as a whole.
(bb) The Company and the Subsidiaries have received
all permits, licenses, franchises, authorizations, registrations, qualifications
and approvals (collectively, "Permits") of governmental or regulatory
authorities (including, without limitation, state and/or other banking
regulatory authorities) as may be required of them to own their properties and
conduct their businesses in the manner described in the Prospectus, subject to
such qualifications as may be set forth in the Prospectus; and the Company and
the Subsidiaries have fulfilled and performed all of their material obligations
with respect to such Permits, and no event has occurred which allows or, after
notice or lapse of time or both, would allow revocation or termination thereof
or result in any other material impairment of the rights of the holder of any
such Permit, subject in each case to such qualification as may be set forth in
the Prospectus; and, except as described in the Prospectus, such Permits contain
no restrictions that materially affect the ability of the Company and the
Subsidiaries to conduct their businesses and no banking regulatory agency or
body has issued any order or decree impairing, restricting or prohibiting the
payment of dividends by any of the Subsidiaries to the Company.
(cc) The Company and each of the Subsidiaries has
filed, or has had filed on its behalf, on a timely basis, all materials,
reports, documents and information, including but not limited to annual reports
and reports of examination with each applicable banking regulatory authority,
board or agency, which are required to be filed by it, except where the failure
to have timely filed such materials, reports, documents and information would
not have a material adverse effect on the financial position, results of
operations or business of the Company and the Subsidiaries taken as a whole.
(dd) Neither the Company, nor any Subsidiary is an
"investment company" or a company "controlled" by an investment company as such
terms are defined in Sections 3(a) and 2(a)(9), respectively, of the Investment
Company Act of 1940, as amended (the "Investment Company Act"), and, if the
Company or any Subsidiary conducts its business
-9-
<PAGE>
as set forth in the Registration Statement and the Prospectus, will not become
an "investment company" and will not be required to register under the
Investment Company Act.
(ee) The Company and each of the Subsidiaries are
conducting their respective businesses in compliance in all material respects
with all applicable federal, state and local laws, rules, regulations,
decisions, directives and orders (including without limitation, the rules,
regulations, decisions, directives and orders of the Office of Thrift
Supervision (the "OTS") and the Federal Deposit Insurance Corporation (the
"FDIC") and the laws governing consumer lending activities of the Company and
the Subsidiaries).
(ff) Crusader Savings Bank, FSB (the "Bank") is duly
chartered as a federal savings bank and is in good standing under the laws of
the United States. The deposit accounts and investment certificates of the Bank
are duly insured by the FDIC to the fullest extent permitted by law. The Bank is
a member in good standing with the Federal Home Loan Bank of Pittsburgh (the
"FHLB"). No charge, investigation or proceeding for the termination or
revocation of such charter, FHLB membership, good standing or FDIC insurance is
pending or, to the Company's knowledge, threatened.
(gg) The Company is a "savings and loan holding
company" within the meaning of the Home Owners Loan Act, as amended.
(hh) Neither the Company nor the Bank nor any other
Subsidiary is subject to any cease-and-desist order, civil money penalty,
supervisory agreement, memorandum of understanding, consent cease-and-desist
order or other regulatory action of the OTS, the FDIC or any other federal or
state regulatory agency.
(ii) The Bank is in compliance with all applicable
regulatory capital requirements, is "well-capitalized" as defined in the OTS
regulations and is not, to the Company's knowledge, threatened with or being
considered for receivership or any special supervision by the OTS or the FDIC.
(jj) The Company and each of the Subsidiaries have
in place and effective such policies of insurance, with limits of liability in
such amounts, as are normal and prudent in the ordinary scope of business
similar to that of the Company and each of the Subsidiaries in the respective
jurisdictions in which they conduct business.
(kk) The Common Stock is qualified for listing on
the Nasdaq National Market and, upon notice to The Nasdaq Stock Market, Inc. of
issuance of the Shares, the Shares will be included thereon.
2. Purchase and Sale of Shares.
(a) Subject to the terms and conditions herein set
forth, the Company agrees to sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Company, at
a purchase price of Dollars and
-10-
<PAGE>
cents ($ ) per share (the "Per Share Price"), the number of
Firm Shares (to be adjusted by you so as to eliminate fractional shares)
determined by multiplying the aggregate number of Firm Shares to be sold by the
Company as set forth in the first paragraph of this Agreement by a fraction, the
numerator of which is the aggregate number of Firm Shares to be purchased by
such Underwriter as set forth opposite the name of such Underwriter in Schedule
I hereto, and the denominator of which is the aggregate number of Firm Shares to
be purchased by the several Underwriters hereunder.
(b) The Company hereby grants to the Underwriters
the right to purchase at their election in whole or in part from time to time up
to 150,000 Optional Shares, at the Per Share Price, for the sole purpose of
covering over-allotments in the sale of the Firm Shares. Any such election to
purchase Optional Shares may be exercised by written notice from the
Representative to the Company, given from time to time within a period of 30
calendar days after the date of this Agreement and setting forth the aggregate
number of Optional Shares to be purchased and the date on which such Optional
Shares are to be delivered, as determined by you but in no event earlier than
the First Time of Delivery (as hereinafter defined) or, unless the
Representative otherwise agrees in writing, earlier than two or later than ten
business days after the date of such notice. In the event the Underwriters elect
to purchase all or a portion of the Optional Shares, the Company agrees to
furnish or cause to be furnished to the Representative the certificates, letters
and opinions, and to satisfy all conditions, set forth in Section 7 hereof at
each Subsequent Time of Delivery (as hereinafter defined).
(c) In making this Agreement, each Underwriter is
contracting severally, and not jointly, and except as provided in Sections 2(b)
and 9 hereof, the agreement of each Underwriter is to purchase only that number
of shares specified with respect to that Underwriter in Schedule I hereto. No
Underwriter shall be under any obligation to purchase any Optional Shares prior
to an exercise of the option with respect to such Shares granted pursuant to
Section 2(b) hereof.
3. Offering by the Underwriters. Upon the authorization by the
Representative of the release of the Shares, the several Underwriters propose to
offer the Shares for sale upon the terms and conditions disclosed in the
Prospectus.
4. Delivery of Shares; Closing. Certificates in definitive
form for the Shares to be purchased by each Underwriter hereunder, and in such
denominations and registered in such names as the Representative may request
upon at least 48 hours' prior notice to the Company, shall be delivered by or on
behalf of the Company to the Representative for the account of such Underwriter,
against payment by such Underwriter on its behalf of the purchase price therefor
by wire transfer of immediately available funds to such accounts as the Company
shall designate in writing. The closing of the sale and purchase of the Shares
shall be held at the offices of Wolf, Block, Schorr and Solis-Cohen LLP, Twelfth
Floor Packard Building, 111 South 15th Street, Philadelphia, PA 19102-2678,
except that physical delivery of such certificates shall be made at the office
of The Depository Trust Company, 55 North Water Street, New York, New York
10041. The time and date of such delivery and payment shall be, with respect to
the Firm Shares: (i) at 10:00 a.m., New York, New York time, on the
-11-
<PAGE>
third (3rd) full business day after this Agreement is executed, or (ii) in the
event that pricing of the Firm Shares occurs after 4:30 p.m. on the day on which
this Agreement is executed, at 10:00 a.m., New York, New York time, on the
fourth (4th) full business day after this Agreement is executed, or (iii) at
such other time and date as the Representative and the Company may agree upon in
writing, and, with respect to the Optional Shares, at 10:00 a.m., New York, New
York time, on the date specified by the Representative in the written notice
given by the Representative of the Underwriters' election to purchase all or
part of such Optional Shares or at such other time and date as the
Representative and the Company may agree upon in writing. Such time and date for
delivery of the Firm Shares is herein called the "First Time of Delivery," such
time and date for delivery of any Optional Shares, if not the First Time of
Delivery, is herein called a "Subsequent Time of Delivery," and each such time
and date for delivery is herein called a "Time of Delivery." The Company will
make such certificates available for checking and packaging at least 24 hours
prior to each Time of Delivery at the office of The Depository Trust Company, 55
North Water Street, New York, New York 10041 or at such other location specified
by you in writing at least 48 hours prior to such Time of Delivery.
5. Covenants of the Company. The Company covenants and agrees
with each of the Underwriters that:
(a) The Company will use its best efforts to cause
the Registration Statement, if not effective prior to the execution and delivery
of this Agreement, to become effective. If the Registration Statement has been
declared effective prior to the execution and delivery of this Agreement, the
Company will file the Prospectus with the Commission pursuant to and in
accordance with subparagraph (1) (or, if applicable and if consented to by you,
subparagraph (4)) of Rule 424(b) within the time period required under Rule
424(b) under the Act. The Company will advise you promptly of any such filing
pursuant to Rule 424(b). For five years from the date hereof, the Company will
file timely all reports and any definitive proxy or information statements
required to be filed by the Company with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act.
(b) The Company will not file with the Commission
the Prospectus or the amendment referred to in Section 1(a) hereof, any
amendment or supplement to the Prospectus or any amendment to the Registration
Statement unless you have received a reasonable period of time to review any
such proposed amendment or supplement and consented to the filing thereof and
will use its best efforts to cause any such amendment to the Registration
Statement to be declared effective as promptly as possible. Upon the request of
the Representative or counsel for the Underwriters, the Company will promptly
prepare and file with the Commission, in accordance with the rules and
regulations of the Commission, any amendments to the Registration Statement or
amendments or supplements to the Prospectus that may be necessary or advisable
in connection with the distribution of the Shares by the several Underwriters
and will use its best efforts to cause any such amendment to the Registration
Statement to be declared effective as promptly as possible. If required, the
Company will file any amendment or supplement to the Prospectus with the
Commission in the manner and within the time period required by Rule 424(b)
under the Act. The Company will advise the Representative, promptly after
receiving notice thereof, of the time when the
-12-
<PAGE>
Registration Statement or any amendment thereto has been filed or declared
effective or the Prospectus or any amendment or supplement thereto has been
filed and will provide evidence to the Representative of each such filing or
effectiveness.
(c) The Company will advise the Representative
promptly after receiving notice or obtaining knowledge of (i) when any
post-effective amendment to the Registration Statement is filed with the
Commission, (ii) the receipt of any comments from the Commission concerning the
Registration Statement, (iii) when any post-effective amendment to the
Registration Statement becomes effective, or when any supplement to the
Prospectus or any amended Prospectus has been filed, (iv) the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or any part thereof or any order preventing or suspending the use of
any Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, (v) the suspension of the qualification of the Shares for offer or sale
in any jurisdiction or of the initiation or threatening of any proceeding for
any such purpose, (vi) any request made by the Commission or any securities
authority of any other jurisdiction for amending the Registration Statement, for
amending or supplementing the Prospectus or for additional information. The
Company will use its best efforts to prevent the issuance of any such stop order
or suspension and, if any such stop order or suspension is issued, to obtain the
withdrawal thereof as promptly as possible.
(d) If the delivery of a prospectus relating to the
Shares is required under the Act at any time prior to the expiration of nine
months after the date of the Prospectus and if at such time any events have
occurred as a result of which the Prospectus as then amended or supplemented
would include an untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading, or if for any
reason it is necessary during such same period to amend or supplement the
Prospectus, the Company will promptly notify the Representative and upon their
request (but at the Company's expense) prepare and file with the Commission an
amendment or supplement to the Prospectus that corrects such statement or
omission or effects such compliance and will furnish without charge to each
Underwriter and to any dealer in securities as many copies of such amended or
supplemented Prospectus as the Representative may from time to time reasonably
request.
(e) The Company promptly from time to time will take
such action as the Representative may reasonably request to qualify the Shares
for offering and sale under the securities or blue sky laws of such
jurisdictions as the Representative may request and will continue such
qualifications in effect for as long as may be necessary to complete the
distribution of the Shares, provided that in connection therewith the Company
shall not be required to qualify as a foreign corporation or to file a general
consent to service of process in any jurisdiction. The Company will file such
statements and reports as may be required by the laws of each jurisdiction in
which the Shares have been qualified as above provided.
(f) The Company will promptly provide the
Representative, without charge, (i) two manually executed copies of the
Registration Statement as originally filed with the Commission and of each
amendment thereto, including all exhibits and all documents or information
incorporated by reference therein, (ii) for each other Underwriter, a conformed
-13-
<PAGE>
copy of the Registration Statement as originally filed and of each amendment
thereto, without exhibits but including all documents or information
incorporated by reference therein and (iii) so long as a prospectus relating to
the Shares is required to be delivered under the Act, as many copies of each
Preliminary Prospectus or the Prospectus or any amendment or supplement thereto
as the Representative may reasonably request.
(g) As soon as practicable, but not later than the
Availability Date (as defined below), the Company will make generally available
to its security holders an earnings statement of the Company and the
Subsidiaries, if any, covering a period of at least 12 months beginning after
the effective date of the Registration Statement (which need not be audited)
complying with Section 11(a) of the Act and the rules and regulations
thereunder. "Availability Date" means the forty-fifth (45th) day after the end
of the fourth fiscal quarter following the fiscal quarter in which the
Registration Statement went effective, except that if such fourth fiscal quarter
is the last quarter of the Company's fiscal year, "Availability Date" means the
ninetieth (90th) day after the end of such fourth fiscal quarter.
(h) During the period beginning from the date hereof
and continuing to and including the date 180 days after the date of the
Prospectus, the Company will not, and will cause its officers and directors not
to, without the prior written consent of the Representative, directly or
indirectly (i) offer, sell, contract to sell or otherwise dispose of, any shares
of Common Stock or securities convertible into or exercisable or exchangeable
for shares of Common Stock or (ii) enter into any swap or other agreement or any
transaction that transfers, in whole or in part, the economic consequences of
ownership of shares of Common Stock whether any such swap or other agreement is
to be settled by delivery of shares of Common Stock, other securities, cash or
otherwise; except for the sale of the Shares hereunder and except for the
issuance of Common Stock upon the exercise of stock options or warrants or the
conversion of convertible securities outstanding on the date of this Agreement
to the extent that such stock options, warrants and convertible securities are
disclosed in the Prospectus or except for the grant to employees and directors
of options to purchase Common Stock which are not exercisable within such 180
days.
(i) During the period of five years after the
effective date of the Registration Statement, the Company will furnish to the
Representative and, upon request, to each of the other Underwriters, without
charge, (i) copies of all reports or other communications (financial or other)
furnished to shareholders and (ii) as soon as they are available, copies of any
reports and financial statements furnished to or filed with the Commission, the
NASD or any national securities exchange.
(j) Prior to the termination of the underwriting
syndicate contemplated by this Agreement, neither the Company nor any of its
officers, directors or affiliates will (i) take, directly or indirectly, any
action designed to cause or to result in, or that might reasonably be expected
to cause or result in, the stabilization or manipulation of the price of any
security of the Company or (ii) sell, bid for, purchase or pay anyone any
compensation for soliciting purchases of, the Shares.
-14-
<PAGE>
(k) In case of any event, at any time within the
period during which a prospectus is required to be delivered under the Act, as a
result of which any Preliminary Prospectus or the Prospectus, as then amended or
supplemented, would contain an untrue statement of a material fact, or omit to
state any material fact necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading, or, if it
is necessary at any time to amend any Preliminary Prospectus or the Prospectus
to comply with the Act or any applicable securities or blue sky laws, the
Company promptly will prepare and file with the Commission, and any applicable
state securities commission, an amendment, supplement or document that will
correct such statement or omission or effect such compliance and will furnish to
the several Underwriters such number of copies of such amendment(s),
supplement(s) or document(s) as the Representative may reasonably request. For
purposes of this subsection (k), the Company will provide such information to
the Representative, the Underwriters' counsel and counsel to the Company as
shall be necessary to enable such persons to consult with the Company with
respect to the need to amend or supplement the Registration Statement, any
Preliminary Prospectus or the Prospectus or file any document, and shall furnish
to the Representative and the Underwriters' counsel such further information as
each may from time to time reasonably request.
(l) The Company will use its best efforts to obtain,
and thereafter maintain, the qualification of the Common Stock for listing on
the Nasdaq National Market and the inclusion thereon of the Shares.
6. Expenses.
(a) The Company will pay all costs and expenses
incident to the performance of the obligations of the Company under this
Agreement, whether or not the transactions contemplated hereby are consummated
or this Agreement is terminated pursuant to Section 10 hereof, including,
without limitation, all costs and expenses incident to (i) the printing of and
mailing expenses associated with the Registration Statement, the Preliminary
Prospectus and the Prospectus and any amendments or supplements thereto except
as provided in Section 9(a) hereof, this Agreement, the Agreement among
Underwriters, the Underwriters' Questionnaire submitted to each of the
Underwriters by the Representative in connection herewith, the power of attorney
executed by each of the Underwriters in favor of the Representative in
connection herewith, the Dealer Agreement and related documents (collectively,
the "Underwriting Documents") and the preliminary Blue Sky memorandum relating
to the offering prepared by Wolf, Block, Schorr and Solis-Cohen LLP, counsel to
the Underwriters (collectively with any supplement thereto, the "Preliminary
Blue Sky Memorandum"); (ii) the fees, disbursements and expenses of the
Company's counsel and accountants in connection with the registration of the
Shares under the Act and all other expenses in connection with the preparation
and, if applicable, filing of the Registration Statement (including all
amendments thereto), any Preliminary Prospectus, the Prospectus and any
amendments and supplements thereto, the Underwriting Documents and the
Preliminary Blue Sky Memorandum; (iii) the delivery of copies of the foregoing
documents to the Underwriters; (iv) the filing fees of the Commission and the
NASD relating to the Shares; (v) the preparation, issuance and delivery to the
Underwriters of any certificates evidencing the Shares, including transfer
agent's and registrar's fees; (vi) the qualification of the Shares for
-15-
<PAGE>
offering and sale under state securities and blue sky laws, including filing
fees and fees and disbursements of counsel for the Underwriters (and local
counsel therefor) relating thereto; (vii) any listing of the Shares on the
Nasdaq National Market; (viii) any expenses for travel, lodging and meals
incurred by the Company and any of its officers, directors and employees in
connection with any meetings with prospective investors in the Shares; (ix) the
costs of advertising the offering, including, without limitation, with respect
to the placement of "tombstone" advertisements in publications selected by the
Representative; and (x) all other costs and expenses reasonably incident to the
performance of the Company's obligations hereunder that are not otherwise
specifically provided for in this Section 6.
(b) The Representative and the Underwriters will pay
their own expenses, including the fees of their counsel (except as provided in
Section 6(a)(vi) hereof), public advertisement of the offering, and their own
marketing and due diligence expenses.
(c) At the First Time of Delivery, the Company shall
pay to the Representative the sum of Seventy Five Thousand Dollars ($75,000) as
a financial advisory fee.
7. Conditions of the Underwriters' Obligations. The
obligations of the Underwriters hereunder to purchase and pay for the Shares to
be delivered at each Time of Delivery shall be subject, in their discretion, to
the accuracy of the representations and warranties of the Company contained
herein as of the date hereof and as of such Time of Delivery, to the accuracy of
the statements of the Company's officers made pursuant to the provisions hereof,
to the performance by the Company of its covenants and agreements hereunder, and
to the following additional conditions precedent:
(a) If the registration statement as amended to date
has not become effective prior to the execution of this Agreement, such
registration statement shall have been declared effective not later than 11:00
a.m., New York, New York time, on the date of this Agreement or such later date
and/or time as shall have been consented to by you in writing. If required, the
Prospectus and any amendment or supplement thereto shall have been filed with
the Commission pursuant to Rule 424(b) within the applicable time period
prescribed for such filing and in accordance with Section 5(a) of this
Agreement; no stop order suspending the effectiveness of the Registration
Statement or any part thereof shall have been issued and no proceedings for that
purpose shall have been instituted, threatened or, to the knowledge of the
Company and the Representative, contemplated by the Commission; and all requests
for additional information on the part of the Commission shall have been
complied with to your reasonable satisfaction.
(b) The Representative shall have received a copy of
an executed lock-up agreement from the Company and each of the Company's
officers and directors and certain shareholders of Common Stock.
(c) You shall have received an opinion, dated such
Time of Delivery, of Ballard Spahr Andrews & Ingersoll, LLP counsel for the
Company, in form and substance satisfactory to you and your counsel, to the
effect that:
-16-
<PAGE>
(i) The Company has been duly
incorporated, is validly subsisting as a corporation under the laws of the
Commonwealth of Pennsylvania and has the corporate power and authority to own or
lease its properties and conduct its business as described in the Registration
Statement and the Prospectus and to enter into this Agreement and perform its
obligations hereunder. Based solely on certificates of officials of the
Designated Company States, the Company is duly qualified to transact business as
a foreign corporation and is in good standing under the laws of each Designated
Company State.
(ii) Each of the Subsidiaries is
validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation and has the corporate power and authority to own
or lease its properties and conduct its business as described in the
Registration Statement and the Prospectus. Based solely on certificates of
officials of the Designated Subsidiary States, each Subsidiary is duly qualified
to transact business as a foreign corporation and is in good standing under the
laws of each Designated Subsidiary State in which it owns any property or
conducts any business.
(iii) The Company's authorized,
issued and outstanding capital stock is as disclosed in the Prospectus. All of
the issued shares of capital stock of the Company have been duly authorized and
validly issued, are fully paid and nonassessable and conform to the description
of the Common Stock contained in the Prospectus. None of the issued shares of
Common Stock of the Company or capital stock of any of the Subsidiaries has been
issued or, to the extent owned or held by the Company or any of the
Subsidiaries, is owned or held in violation of any statutory (or, to the
knowledge of such counsel, any other) preemptive rights of shareholders, and no
person or entity (including any holder of outstanding shares of Common Stock of
the Company or capital stock of the Subsidiaries) has any statutory (or, to the
knowledge of such counsel, any other) preemptive or other rights to subscribe
for any of the Shares.
(iv) All of the issued shares of
capital stock of each of the Subsidiaries have been duly authorized and validly
issued, are fully paid and nonassessable, and, to such counsel's knowledge, the
number, class and percentage of shares of capital stock of each Subsidiary
identified on Exhibit A hereto as being owned by the Company or one of the
Subsidiaries are owned beneficially by the Company or such Subsidiary, free and
clear of all security interests created under Article 9 of the Uniform
Commercial Code, shareholders' agreements known to such counsel (other than
those shareholders' agreements identified in the Prospectus), voting agreements,
proxies, voting trusts, or defects, equities or claims known to such counsel of
any nature whatsoever, any indenture, mortgage, deed of trust, loan agreement,
lease or other agreement known by such counsel to have been entered into by the
Company or the Subsidiaries. To such counsel's knowledge, other than the
Subsidiaries and the equity securities held in the investment portfolios of the
Company and the Subsidiaries, the Company does not own, directly or indirectly,
any capital stock or other equity securities of any other corporation or any
ownership interest in any partnership, joint venture or other association.
(v) Except as disclosed in the
Prospectus, there are, to such counsel's knowledge, no outstanding (A)
securities or obligations of the Company or any of the Subsidiaries convertible
into or exchangeable for any capital stock of the Company or
-17-
<PAGE>
any Subsidiary, (B) warrants, rights or options to subscribe for or purchase
from the Company or any of the Subsidiaries any such capital stock or any such
convertible or exchangeable securities or obligations or (C) obligations of the
Company or any of the Subsidiaries to issue any shares of capital stock, any
such convertible or exchangeable securities or obligations, or any such
warrants, rights or options.
(vi) When the Shares to be sold by
the Company have been duly delivered against payment therefor as contemplated by
this Agreement, the Shares will be duly authorized, validly issued and fully
paid and nonassessable, the holders thereof will not be subject to personal
liability solely by reason of being such holders and the Shares will conform to
the description of the Common Stock contained in the Prospectus; the
certificates evidencing the Shares will comply with all applicable requirements
of Pennsylvania law.
(vii) There are no contracts,
agreements or understandings known to such counsel between the Company and any
person granting such person the right to require the Company to file a
registration statement under the Act with respect to any securities of the
Company owned or to be owned by such person or, requiring the Company to include
such securities in the securities registered pursuant to the Registration
Statement (or any such right has been effectively waived) or requiring the
registration of any securities pursuant to any other registration statement
filed by the Company under the Act.
(viii) To such counsel's knowledge,
neither the Company nor any of the Subsidiaries is, or with the giving of notice
or passage of time or both, would be, in violation of its articles of
incorporation or bylaws or other organizational documents, in each case as
amended to date.
(ix) The sale of the Shares being
sold at such Time of Delivery and the performance of this Agreement and the
consummation of the transactions herein contemplated will not conflict with or
violate any provision of the articles of incorporation or bylaws or other
organizational documents of the Company or any of the Subsidiaries, in each case
as amended to date, or to such counsel's knowledge, any existing law, statute,
rule or regulation of the Commonwealth of Pennsylvania or the United States, or
in any material respect, conflict with, or (with or without the giving of notice
or the passage of time or both) result in a breach or violation of any of the
terms or provisions of, or constitute a default under, any indenture, mortgage,
deed of trust, loan agreement, lease or other agreement or instrument known to
such counsel to which the Company or any of the Subsidiaries is a party or to
which any of their respective properties or assets is subject, or, conflict with
or violate any order, judgment or decree known to such counsel, of any court or
governmental agency or body of the Commonwealth of Pennsylvania or the United
States having jurisdiction over the Company or any of the Subsidiaries or any of
their respective properties or assets.
(x) To such counsel's knowledge, no
consent, approval, authorization, order or declaration of or from, or
registration, qualification or filing with, any court or governmental agency or
body is required for the sale of the Shares or the
-18-
<PAGE>
consummation of the transactions contemplated by this Agreement, except such as
have been or will have been obtained and are or will be in effect, and except
the registration of the Shares under the Act, of Common Stock under the Exchange
Act and such as may be required by the NASD or under state securities or blue
sky laws in connection with the offer, sale and distribution of the Shares by
the Underwriters.
(xi) Such counsel confirms that to
its knowledge, other than as disclosed in or contemplated by the Prospectus,
there is no litigation, arbitration, claim, proceeding (formal or informal) or
investigation pending or threatened, in which the Company or any of the
Subsidiaries is a party or of which any of their respective properties or assets
is the subject, that is required to be disclosed in the Registration Statement.
(xii) The statements in the
Prospectus under "Prospectus Summary," "Dividends," "Business," "Supervision and
Regulation," "Certain Restrictions on Acquisition of the Company and the Bank,"
"Certain Anti-Takeover Provisions in the Articles of Incorporation and Bylaws,"
"Description of the Capital Stock" and "Shares Eligible for Future Sale" have
been reviewed by such counsel, and insofar as they refer to statements of law,
descriptions of statutes, licenses, rules or regulations, or legal conclusions,
are correct in all material respects.
(xiii) This Agreement has been duly
authorized, executed and delivered by the Company and, assuming due execution by
the Representative of the Underwriters, constitutes the valid and binding
agreement of the Company, enforceable against the Company in accordance with its
terms, subject, as to enforcement, to applicable bankruptcy, insolvency,
reorganization and moratorium laws and other laws relating to or affecting the
enforcement of creditors' rights generally and to general equitable principles
and except as the enforceability of rights to indemnity and contribution under
this Agreement may be limited under applicable securities laws or the public
policy underlying such laws.
(xiv) Neither the Company nor any of
the Subsidiaries is an "investment company" or a company "controlled" by an
investment company as such terms are defined in Sections 3(a) and 2(a)(9),
respectively, of the Investment Company Act.
(xv) To such counsel's knowledge,
the Company and the Subsidiaries have received all permits, licenses,
franchises, authorizations, registrations, qualifications and approvals
(collectively, "permits") of governmental or regulatory authorities (including,
without limitation, bank, savings and loan, state, and/or other regulatory
authorities) as may be required of them to own their properties and to conduct
their businesses in the manner described in the Prospectus, subject to such
qualification as may be set forth in the Prospectus; to such counsel's
knowledge, the Company and the Subsidiaries have fulfilled and performed all of
their material obligations with respect to such permits and no event has
occurred which allows, or after notice or lapse of time or both would allow,
revocation or termination thereof or result in any other material impairment of
the rights of the holder of any such permits, subject in each case to such
qualifications as may be set forth in the Prospectus; and other than as
described in the Prospectus, such permits contain no restrictions that
materially affect the ability of the Company and the Subsidiaries to conduct
their businesses.
-19-
<PAGE>
(xvi) The Common Stock is qualified
for listing on the Nasdaq National Market and, upon notice to The Nasdaq Stock
Market, Inc. of issuance of the Shares, the Shares will be included thereon.
(xvii) The Registration Statement
and the Prospectus and each amendment or supplement thereto (other than the
financial statements, the notes and schedules thereto and other financial data
included therein, to which such counsel need express no opinion), as of their
respective effective or issue dates, complied as to form in all material
respects with the requirements of the Act and the respective rules and
regulations thereunder. The descriptions in the Registration Statement and the
Prospectus of contracts and other documents are accurate and fairly present the
information required to be shown; and such counsel do not know of any contracts
or documents of a character required to be described in the Registration
Statement or Prospectus or to be filed as exhibits to the Registration Statement
which are not described and filed as required.
(xviii) Based on the advice of the
Division of Corporate Finance of the Commission, the Registration Statement was
declared effective under the Act as of the date and time specified in such
opinion and, to such counsel's knowledge and information, based on the advice of
the Office of the Secretary of the Commission, no stop order suspending the
effectiveness of the Registration Statement has been issued under the Act and no
proceedings therefor have been initiated or threatened by the Commission.
(xix) The Bank is duly chartered as
a federal savings bank and is in good standing under the laws of the United
States. The deposit accounts and investment certificates of the Bank are duly
insured by the FDIC to the fullest extent permitted by law. The Bank is a member
in good standing with the FHLB. To the knowledge of such counsel, no charge,
investigation or proceeding for the termination or revocation of such charger,
FHLB membership, good standing or FDIC insurance is pending or, to the Company's
knowledge, threatened.
(xx) The Company is a "savings and
loan holding company" within the meaning of the Home Owners Loan Act, as
amended.
(xxi) To the knowledge of such
counsel, neither the Company nor the Bank nor any other Subsidiary is subject to
any cease-and-desist order, civil money penalty, supervisory agreement,
memorandum of understanding, consent cease-and-desist order or other regulatory
action of the OTS, the FDIC or any other federal or state regulatory agency.
Such counsel shall also state that they have participated in
the preparation of the Registration Statement and the Prospectus and in
conferences with officers and other representatives of the Company,
representatives of the independent public accountants for the Company, and
representatives of and counsel to the Underwriters at which the contents of the
Registration Statement, the Prospectus and related matters were discussed and,
although such counsel has not passed upon or assumed any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectus, and
-20-
<PAGE>
although such counsel has not undertaken to verify independently the accuracy or
completeness of the statements in the Registration Statement or the Prospectus,
nothing has come to such counsel's attention to lead them to believe that the
Registration Statement, or any further amendment thereto made prior to such Time
of Delivery, on its effective date and as of such Time of Delivery, contained or
contains any untrue statement of a material fact or omitted or omits to state
any material fact required to be stated therein or necessary to make the
statements therein, not misleading, or that the Prospectus, or any amendment or
supplement thereto made prior to such Time of Delivery, as of its issue date and
as of such Time of Delivery, contained or contains any untrue statement of a
material fact or omitted or omits to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading (provided that such counsel need express no belief
regarding the financial statements, the notes and schedules thereto and other
financial data contained in the Registration Statement, any amendment thereto,
or the Prospectus, or any amendment or supplement thereto).
In rendering any such opinion, such counsel may rely, as to
matters of fact, to the extent such counsel deem proper, on certificates of
officers of the Company, public officials and letters from officials of the
NASD. Copies of such certificates of officers of the Company and other opinions
shall be addressed and furnished to the Underwriters and furnished to counsel
for the Underwriters.
(d) Wolf, Block, Schorr and Solis-Cohen LLP, counsel
for the Underwriters, shall have furnished to you such opinion or opinions,
dated such Time of Delivery, with respect to the incorporation of the Company,
the validity of the Shares being delivered at such Time of Delivery, the
Registration Statement, the Prospectus, and other related matters as you may
reasonably request, and the Company shall have furnished to such counsel such
documents as they request for the purpose of enabling them to pass upon such
matters.
(e) The Representative shall have received, on each
of the date hereof and the First Time of Delivery, as the case may be, in form
and substance satisfactory to the Representative, from Grant Thornton LLP,
independent public accountants, a letter or letters, as the case may be,
containing statements and information of the type ordinarily included in
accountants' "comfort letters" to Underwriters with respect to the financial
statements and certain financial information contained in the Registration
Statement and Prospectus; provided that the letter or letters, as the case may
be, delivered on the First Time of Delivery shall use a "cut-off date" not
earlier than the date hereof.
(f) Since the date of the latest audited financial
statements included in the Prospectus, neither the Company nor any of the
Subsidiaries shall have sustained any change, or any development involving a
prospective change (including, without limitation, a change in management or
control of the Company), in or affecting the position (financial or otherwise),
results of operations, net worth or business prospects of the Company and the
Subsidiaries, otherwise than as disclosed in or contemplated by the Prospectus,
the effect of which, in either such case, in your sole judgment makes it
impracticable or inadvisable to
-21-
<PAGE>
proceed with the purchase, sale and delivery of the Shares being delivered at
such Time of Delivery as contemplated by the Registration Statement, as amended
as of the date hereof.
(g) Subsequent to the date hereof, there shall not
have occurred any of the following: (i) any suspension or limitation in trading
in securities generally on the New York Stock Exchange, and/or the American
Stock Exchange or any setting of minimum prices for trading on such exchange, or
in the Common Stock of the Company by the Commission or the Nasdaq National
Market; (ii) a moratorium on commercial banking activities in New York,
Pennsylvania or Connecticut declared by either federal or state authorities; or
(iii) any outbreak or escalation of hostilities involving the United States,
declaration by the United States of a national emergency or war or any other
national or international calamity or emergency if the effect of any such event
specified in this clause (iii) in your sole judgment makes it impracticable or
inadvisable to proceed with the purchase, sale and delivery of the Shares being
delivered at such Time of Delivery as contemplated by the Registration
Statement, as amended as of the date hereof.
(h) The Company shall have furnished to you at such
Time of Delivery certificates of the chief executive and chief financial
officers of the Company satisfactory to you, as to the accuracy of the
respective representations and warranties of the Company herein at and as of
such Time of Delivery with the same effect as if made at such Time of Delivery,
as to the performance by the Company of all of its respective obligations
hereunder to be performed at or prior to such Time of Delivery, and as to such
other matters as you may reasonably request, and the Company shall have
furnished or caused to be furnished certificates of such officers as to such
matters as you may reasonably request.
(i) The representations and warranties of the
Company in this Agreement and in the certificates delivered by the Company
pursuant to this Agreement shall be true and correct in all material respects
when made and on and as of each Time of Delivery as if made at such time, and
the Company shall have performed all covenants and agreements and satisfied all
conditions contained in this Agreement required to be performed or satisfied by
the Company at or before such Time of Delivery.
(j) The Common Stock shall continue to qualify for
listing on the Nasdaq National Market and the Shares shall continue to be listed
thereon.
8. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold
harmless each Underwriter against any losses, claims, damages or liabilities,
joint or several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon: (i) any untrue statement or
alleged untrue statement made by the Company in Section 1 of this Agreement;
(ii) any untrue statement or alleged untrue statement of any material fact
contained in (A) the Registration Statement or any amendment thereto, any
Preliminary Prospectus or the Prospectus or any amendment or supplement thereto,
or (B) any application or other document, or amendment or supplement thereto,
executed by the Company or based upon written
-22-
<PAGE>
information furnished by or on behalf of the Company filed in any jurisdiction
in order to qualify the Shares under the securities or blue sky laws thereof or
filed with the Commission or any securities association or securities exchange
(each an "Application"); or (iii) the omission of or alleged omission to state
in the Registration Statement or any amendment thereto, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto, or any
Application of a material fact required to be stated therein or necessary to
make the statements therein not misleading; and will reimburse each Underwriter
for any legal or other expenses reasonably incurred by such Underwriter in
connection with investigating, defending against or appearing as a third-party
witness in connection with any such loss, claim, damage, liability or action;
provided, however, that the Company shall not be liable in any such case to the
extent that any such loss, claim, damage, liability or action arises out of or
is based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in the Registration Statement or any amendment thereto,
any Preliminary Prospectus, the Prospectus or any amendment or supplement
thereto or any Application in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through you expressly
for use therein (which information is solely as set forth in Section 1(c)
hereof). The Company will not, without the prior written consent of the
Representative of the Underwriters, settle or compromise or consent to the entry
of any judgment in any pending or threatened claim, action, suit or proceeding
(or related cause of action or portion thereof) in respect of which
indemnification may be sought hereunder (whether or not any Underwriter is a
party to such claim, action, suit or proceeding), unless such settlement,
compromise or consent includes an unconditional release of each Underwriter from
all liability arising out of such claim, action, suit or proceeding (or related
cause of action or portion thereof).
(b) Each Underwriter, severally but not jointly,
agrees to indemnify and hold harmless the Company against any losses, claims,
damages or liabilities to which the Company may become subject under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the Registration Statement or
any amendment thereto, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto, or any Application or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
in each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Company by such
Underwriter through you expressly for use therein (which information is solely
as set forth in Section 1(c) hereof); and will reimburse the Company for any
legal or other expenses reasonably incurred by the Company in connection with
investigating or defending any such loss, claim, damage, liability or action.
(c) Promptly after receipt by an indemnified party
under subsection (a) or (b) above of notice of the commencement of any action,
such indemnified party shall, if a claim in respect thereof is to be made
against the indemnifying party under such subsection, notify the indemnifying
party in writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve the indemnifying party from any liability
which it may have to any indemnified party otherwise than under such subsection
(a) or (b). In case
-23-
<PAGE>
any such action shall be brought against any indemnified party and it shall
notify the indemnifying party of the commencement thereof, the indemnifying
party shall be entitled to participate therein and, to the extent that it shall
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel satisfactory to such indemnified party (who
shall not, except with the consent of the indemnified party, be counsel to the
indemnifying party); provided, however, that if the defendants in any such
action include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be one or more
legal defenses available to it or other indemnified parties which are different
from or additional to those available to the indemnifying party, the
indemnifying party shall not have the right to assume the defense of such action
on behalf of such indemnified party and such indemnified party shall have the
right to select separate counsel to defend such action on behalf of such
indemnified party. After such notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof and approval
by such indemnified party of counsel appointed to defend such action, the
indemnifying party will not be liable to such indemnified party under this
Section 8 for any legal or other expenses, other than reasonable costs of
investigation, subsequently incurred by such indemnified party in connection
with the defense thereof. Nothing in this Section 8(c) shall preclude an
indemnified party from participating at its own expense in the defense of any
such action so assumed by the indemnifying party.
(d) If the indemnification provided for in this
Section 8 is unavailable to or insufficient to hold harmless an indemnified
party under subsection (a) or (b) above in respect of any losses, claims,
damages or liabilities (or actions in respect thereof) referred to therein, then
each indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and the Underwriters
on the other hand from the offering of the Shares. If, however, the allocation
provided by the immediately preceding sentence is not permitted by applicable
law or if the indemnified party failed to give the notice required under
subsection (c) above, then each indemnifying party shall contribute to such
amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company on the one hand and the Underwriters on the other hand in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities (or actions in respect thereof), as well as any
other relevant equitable considerations. The relative benefits received by the
Company on the one hand and the Underwriters on the other hand shall be deemed
to be in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company bear to the total underwriting
discounts and commissions received by the Underwriters. The relative fault shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company on the one hand
or the Underwriters on the other hand and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company and the Underwriters agree that it would not
be just and equitable if contributions pursuant to this subsection (d) were
determined by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which does not
-24-
<PAGE>
take account of the equitable considerations referred to above in this
subsection (d). The amount paid or payable by an indemnified party as a result
of the losses, claims, damages or liabilities (or actions in respect thereof)
referred to above in this subsection (d) shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (d), no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at which
the Shares underwritten by it and distributed to the public were offered to the
public exceeds the amount of any damages which such Underwriter has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this subsection (d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
(e) The obligations of the Company under this
Section 8 shall be in addition to any liability which the Company may otherwise
have and shall extend, upon the same terms and conditions, to each officer,
director and employee of the Underwriters and to each person, if any, who
controls any Underwriter within the meaning of the Act or the Exchange Act; and
the obligations of the Underwriters under this Section 8 shall be in addition to
any liability which the respective Underwriters may otherwise have and shall
extend, upon the same terms and conditions, to each officer, trustee and
director of the Company and to each person, if any, who controls the Company
within the meaning of the Act or the Exchange Act.
9. Default of Underwriters.
(a) If any Underwriter defaults in its obligation to
purchase Shares at a Time of Delivery, you may in your discretion arrange for
you or another party or other parties to purchase such Shares on the terms
contained herein within thirty-six (36) hours after such default by any
Underwriter. In the event that, within the respective prescribed period, you
notify the Company that you have so arranged for the purchase of such Shares,
you shall have the right to postpone a Time of Delivery for a period of not more
than seven (7) days in order to effect whatever changes may thereby be made
necessary in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Company agrees to file promptly any
amendments to the Registration Statement or the Prospectus that in your opinion
may thereby be made necessary. The cost of preparing, printing and filing any
such amendments shall be paid for by the Underwriters. The term "Underwriter" as
used in this Agreement shall include any person substituted under this Section
with like effect as if such person had originally been a party to this Agreement
with respect to such Shares.
(b) If, after giving effect to any arrangements for
the purchase of the Shares of a defaulting Underwriter or Underwriters by you as
provided in subsection (a) above, if any, the aggregate number of such Shares
which remains unpurchased does not exceed one-eleventh (1/11) of the aggregate
number of Shares to be purchased at such Time of Delivery, then the Company
shall have the right to require each non-defaulting Underwriter to
-25-
<PAGE>
purchase the number of Shares which such Underwriter agreed to purchase
hereunder at such Time of Delivery and, in addition, to require each
non-defaulting Underwriter to purchase its pro rata share (based on the number
of Shares which such Underwriter agreed to purchase hereunder) of the Shares of
such defaulting Underwriter or Underwriters for which such arrangements have not
been made.
10. Termination.
(a) This Agreement may be terminated in the sole
discretion of the Representative by notice to the Company given prior to the
First Time of Delivery or any Subsequent Time of Delivery, respectively, in the
event that (i) any condition to the obligations of the Underwriters set forth in
Section 7 hereof has not been satisfied, or (ii) the Company shall have failed,
refused or been unable to deliver such party's respective Shares or the Company
shall have failed, refused or been unable to perform all obligations and satisfy
all conditions on its respective part to be performed or satisfied hereunder at
or prior to such Time of Delivery, in either case other than by reason of a
default by any of the Underwriters. If this Agreement is terminated pursuant to
this Section 10(a), the Company will reimburse the Underwriters severally upon
demand for all out-of-pocket expenses (including counsel fees and disbursements)
that shall have been incurred by them in connection with the proposed purchase
and sale of the Shares.
(b) If, after giving effect to any arrangements for
the purchase of the Shares of a defaulting Underwriter or Underwriters by you as
provided in Section 9(a), the aggregate number of such Shares which remains
unpurchased exceeds one-eleventh (1/11) of the aggregate number of Shares to be
purchased at such Time of Delivery, then this Agreement (or, with respect to a
Subsequent Time of Delivery, the obligations of the Underwriters to purchase and
of the Company to sell the Optional Shares) shall thereupon terminate, without
liability on the part of any non-defaulting Underwriter or the Company, except
for the expenses to be borne by the Company and the Underwriters as provided in
Section 6 hereof and the indemnity and contribution agreements in Section 8
hereof; but nothing herein shall relieve a defaulting Underwriter from liability
for its default.
11. Survival. The respective indemnities, agreements,
representations, warranties and other statements of the Company, its officers
and the several Underwriters, as set forth in this Agreement or made by or on
behalf of them, respectively, pursuant to this Agreement, shall remain in full
force and effect, regardless of any investigation (or any statement as to the
results thereof) made by or on behalf of any Underwriter or any controlling
person referred to in Section 8(e) or the Company, or any officer, trustee or
director or controlling person of the Company referred to in Section 8(e), and
shall survive delivery of and payment for the Shares. The respective agreements,
covenants, indemnities and other statements set forth in Sections 6 and 8 hereof
shall remain in full force and effect, regardless of any termination or
cancellation of this Agreement.
12. Notices. All communications hereunder shall be in writing
and, if sent to any of the Underwriters, shall be mailed, delivered or
telegraphed and confirmed in writing to you in care of Advest, Inc., One
Rockefeller Plaza, 20th Floor, New York, New York
-26-
<PAGE>
10020, Attention: Stephen J. Gilhooly (with a copy to Wolf, Block, Schorr and
Solis-Cohen LLP, Twelfth Floor Packard Building, 111 South 15th Street,
Philadelphia, Pennsylvania 19102, Attention: Mark K. Kessler, Esquire); if to
the Company shall be sufficient in all respects if mailed, delivered or
telegraphed and confirmed in writing to Crusader Holding Corporation, 1230
Walnut Street, Philadelphia, Pennsylvania 19102, Attention: Bruce A. Levy (with
a copy to Ballard Spahr Andrews & Ingersoll, LLP, 1735 Market Street, 51st
Floor, Philadelphia, Pennsylvania 19103, Attention: Justin P. Klein, Esquire).
13. Binding Effect. This Agreement shall be binding upon, and
inure solely to the benefit of, the Underwriters, the Company, and to the extent
provided in Sections 8 and 10 hereof, the officers, trustees, directors and
employees and controlling persons referred to therein and their respective
heirs, executors, administrators, successors and assigns, and no other person
shall acquire or have any right under or by virtue of this Agreement. No
purchaser of any of the Shares from any Underwriter shall be deemed a successor
or assign by reason merely of such purchase.
14. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York without giving
effect to any provisions regarding conflicts of laws.
15. Counterparts. This Agreement may be executed by any one or
more of the parties hereto in any number of counterparts, each of which shall be
deemed to be an original, but all such counterparts shall together constitute
one and the same instrument.
-27-
<PAGE>
If the foregoing is in accordance with your understanding of
our agreement, please sign and return to us one of the counterparts hereof, and
upon the acceptance hereof by Advest, Inc., on behalf of each of the
Underwriters, this letter will constitute a binding agreement among the
Underwriters and the Company. It is understood that your acceptance of this
letter on behalf of each of the Underwriters is pursuant to the authority set
forth in the Agreement among Underwriters, a copy of which shall be submitted to
the Company for examination, upon request, but without warranty on your part as
to the authority of the signers thereof.
Very truly yours,
CRUSADER HOLDING CORPORATION
By:
------------------------------
Name:
Title:
The foregoing Agreement is hereby confirmed and accepted as of the date first
written above at New York, New York.
ADVEST, INC.
By: ADVEST, INC.
By:
--------------------------------
Name:
Title:
On behalf of each of the Underwriters.
-28-
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Number of Optional
Total Number of Shares to be Purchased if
Underwriter Firm Shares to be Purchased Maximum Option Exercised
----------- --------------------------- ------------------------
<S> <C> <C> <C>
Advest, Inc.
---------- --------
Total 1,000,000 150,000
========== ========
</TABLE>
-29 -
<PAGE>
EXHIBIT A
SUBSIDIARIES
<TABLE>
<CAPTION>
Class of Number of Percentage
Subsidiary Shares Held Shares Held Ownership
---------- ----------- ----------- ---------
<S> <C> <C> <C>
Crusader Bank, FSB 100%
Crusader Mortgage Corporation * 100%
Crusader Servicing Corporation * 60%
Asset Investment Corporation * 100%
Quest Holding Corporation * 100%
Crusader Mortgage Corporation of
Delaware * 51%
National Chinese Mortgage Corporation * 51%
- ---------------------------------------
* Shares owned by Crusader Bank, FSB
</TABLE>
<PAGE>
EXHIBIT 4.1
NUMBER SHARES
CRUSADER HOLDING CORPORATION
INCORPORATED UNDER THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA
20,000,000 SHARES COMMON STOCK
Par Value $.01 Per Share
CUSIP 228840 10 4
SEE REVERSE FOR CERTAIN DEFINITIONS
THIS CERTIFIES THAT _________________________ is the owner of
______________________________ FULLY PAID AND NON-ASSESSABLE SHARES OF THE
COMMON STOCK OF CRUSADER HOLDING CORPORATION (the "Corporation"), transferable
only on the books of the Corporation by the holder hereof in person or by
Attorney upon surrender of this Certificate properly endorsed.
This Certificate is not valid unless countersigned and
registered by the Transfer Agent and Registrar.
IN WITNESS WHEREOF, Crusader Holding Corporation has caused
this Certificate to be signed by its duly authorized officers and its Corporate
Seal to be hereunto affixed.
Dated:
_________________________ [SEAL] _____________________________
Secretary President
Countersigned and Registered:
StockTrans, Inc.
Transfer Agent and Registrar
7 E. Lancaster Ave.
Ardmore, PA 19003
By: Authorized Officer
<PAGE>
The Corporation will furnish without charge to each
shareholder who so requests a statement of the powers, designations, preferences
and relative, participating, optional, or other special rights of each class of
shares or series thereof and the qualifications, limitations or restrictions of
such preferences and/or rights.
The following abbreviations, when used in the inscription on
the face of this Certificate, shall be construes as though they were written out
in full according to applicable laws or regulations:
TEN COM--as tenants in common UNIF GIFT MIN ACT-- ... Custodian ... under
TEN ENT--as tenants by the (Cust) (Minor)
entireties
JT TEN--as joint tenants with Uniform Gifts to Minors Act ............
right of survivorship (State)
and not as tenants
in common
Additional abbreviations may also be used
though not in the above list.
For value received, ____________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER OF ASSIGNEE
_____________________________________________ Shares of the Common Stock
represented by the within Certificate, and do hereby irrevocably constitute and
appoint ____________________ Attorney to transfer the said shares on the books
of the within-named Corporation with full power of substitution in the premises.
Dated: ____________________
- --------------------------------------------------
NOTE: The signature of this assignment must correspond with the name as written
upon the face of the Certificate, in every particular, without alteration or
enlargement, or any change whatever.
Signature(s) Guaranteed:
- --------------------------------------------------
THIS SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN,
MUTILATED OR DESTROYED, THE CORPORATION WILL REQUIRE A BOND OF
INDEMNITY AS A CONDITION TO THE ISSUANCE OF A REPLACEMENT
CERTIFICATE.
2
<PAGE>
SECOND AMENDMENT OF SHAREHOLDERS' AGREEMENT
THIS AMENDMENT is made as of this 9th day of January, 1998,
by and among CRUSADER HOLDING CORPORATION, a Pennsylvania corporation ("CHC"),
THOMAS J. KNOX ("Knox"), BRUCE A. LEVY ("Levy"), DANIEL DILELLA ("DiLella"),
JOEL S. LAWSON III ("Lawson"), BRIAN MCADAMS ("McAdams"), RONALD CAPLAN
("Caplan"), D. WALTER COHEN ("Cohen"), JEFFREY K. RAFSKY ("Rafsky") and
SATELLITE MORTGAGE CORPORATION ("Satellite").
Background
CHC, Knox and Levy (Knox and Levy sometimes, individually, an
"Initial Shareholder" and collectively, the "Initial Shareholders") entered into
a subscription and shareholders' agreement dated as of March 1, 1996 (the
"Shareholders' Agreement") pursuant to the terms of which, inter alia, CHC was
recapitalized, shares of CHC's class A common stock, par value $.01 per share
(the "Class A Common Stock") were issued to the Initial Shareholders and
promissory notes executed by CHC were issued to the Initial Shareholders, all as
more particularly described therein.
On January 31, 1997, the Initial Shareholders, CHC and
DiLella, Lawson, McAdams and Caplan (each an "Additional Shareholder") entered
into an Amendment to the Shareholder Agreement (the "Amendment") pursuant to the
terms of which shares of Class A Common Stock were issued to DiLella, Lawson,
McAdams and Caplan and promissory notes executed by CHC were issued to DiLella,
Lawson, McAdams and Caplan, all as more particularly described therein.
On January 31, 1997, Cohen (an "Additional Shareholder")
entered into a Joinder Agreement, pursuant to the terms of which Cohen agreed to
be bound by the Shareholders' Agreement and the Amendment thereto.
As of November 30, 1997, Rafsky (an "Additional Shareholder"
and, together with DiLella, Lawson, McAdams, Caplan and Cohen, the "Additional
Shareholders") and Satellite entered into a Joinder Agreement, pursuant to the
terms of which Rafsky agreed to be bound by the Shareholders' Agreement and the
Amendment thereto.
The Initial Shareholders and the Additional Shareholders are sometimes
individually referred to herein as a "Shareholder" and collectively as the
"Shareholders."
The Shareholders and CHC now wish to amend the Shareholders'
Agreement to permit termination of the Shareholders' Agreement upon the closing
on an initial public offering.
Agreement
NOW THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, and intending to be
legally bound hereby, the parties hereto agree as follows:
<PAGE>
1. The Additional Shareholders hereby agree to be bound by all
of the terms and provisions of the Shareholders' Agreement and the Amendment, as
further amended hereby, as though they executed the Shareholders' Agreement as
of the date thereof. Hereafter, (a) all references in the Shareholders'
Agreement to "Shareholders" shall be deemed to refer to the Initial Shareholders
and the Additional Shareholders and (b) all references in the Shareholders'
Agreement to "Shares" shall be deemed to include the shares of CHC's Class A
Common Stock purchased by the Additional Shareholders. The definitions of
Initial Shareholder, Initial Shareholders, Additional Shareholder and Additional
Shareholders are hereby incorporated into the terms and provisions of the
Shareholders' Agreement. For purposes of this Amendment, the term "Additional
Shareholder" shall also include any other person who subsequently becomes a
shareholder of CHC.
2. Paragraph 14 of the Shareholders' Agreement is hereby
deleted in its entirety and replaced by the following:
14. Term of Agreement. This Agreement shall terminate
upon the first to occur of the following events:
(a) the written agreement by all of the Shareholders
of CHC who are, at that time, bound by the terms of this Agreement;
(b) the closing of the sale of shares of Class A
Common Stock, or such other shares of common stock with attributes
substantially similar to those of the Class A Common Stock, in a
initial public offering, which shall mean an underwritten public
offering (whether on a "best efforts" or "firm commitment" basis) for
the account of CHC of Class A Common Stock or securities convertible
into Class A Common Stock, where the aggregate sale price of the
securities included in such sale (after deduction of the underwriting
commissions, discounts and concessions) is at least $10,000,000;
(c) the dissolution, bankruptcy, or receivership of
CHC; or
(d) the cessation of CHC's business, whether by sale
of assets, liquidation, or otherwise.
(e) In the event that CHC ceases to do business due
to liquidation, the Shareholders agree that the net proceeds of
liquidation remaining after payment of all liabilities to third parties
of CHC shall be distributed as follows:
2
<PAGE>
(i) First, to repay in full the Notes;
(ii) Then, to redeem the common stock of
CHC.
3. This Amendment may be executed in one or more counterparts
with the same effect as if all parties hereto had signed the same document. All
counterparts shall be construed together and shall constitute one Amendment.
4. All other terms and provisions of the Shareholders'
Agreement shall remain unchanged and in full force and effect.
5. This Amendment shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, personal
representatives, successors and assigns.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment as of the day and year first above written.
CRUSADER HOLDING CORPORATION, a
Pennsylvania corporation
By: /s/ Thomas J. Knox /s/ Ronald Caplan
----------------------- -----------------------
Thomas Knox, Chairman RONALD CAPLAN
DATE: 1/9/98
/s/ Thomas J. Knox
----------------------- /s/ D. Walter Cohen
THOMAS J. KNOX -----------------------
DATE: 1/9/98 D. WALTER COHEN
DATE: 1/9/98
/s/ Bruce A. Levy
----------------------- /s/ Jeffrey K. Rafsky
BRUCE A. LEVY -----------------------
DATE: 1/9/98 JEFFREY K. RAFSKY
DATE: 1/9/98
/s/ Daniel DiLella
-----------------------
DANIEL DILELLA SATELLITE MORTGAGE CORPORATION
DATE: 1/20/98
By: /s/ Jeffrey K. Rafsky
----------------------------
/s/ Joel S. Lawson III JEFFREY K. RAFSKY
----------------------- TITLE: President
JOEL S. LAWSON III DATE: 1/9/98
DATE: 1/12/98
/s/ Brian McAdams
-----------------------
BRIAN MCADAMS
DATE: 1/21/98
4
<PAGE>
[LETTERHEAD OF BALLARD SPAHR ANDREWS & INGERSOLL]
January 23, 1998
Crusader Holding Corporation
1230 Walnut Street
Philadelphia, PA 19107
Re: Crusader Holding Corporation
Registration Statement on Form S-1
(Registration No. 333-42215)
------------------------------------
Gentlemen:
We have acted as counsel to Crusader Holding Corporation, a
Pennsylvania corporation (the "Company"), in connection with the preparation of
the Registration Statement, as amended to the date hereof, filed on Form S-1
(the "Registration Statement") with the Securities and Exchange Commission (the
"Commission") in connection with the registration under the Securities Act of
1933, as amended, of 1,150,000 shares (including up to 150,000 shares of Common
Stock, subject to an over-allotment option granted by the Company to the
underwriters) of the Company's common stock, $.01 par value per share (the
"Common Stock"), being sold by the Company.
We are familiar with the proceedings taken and proposed to be
taken by the Company in connection with the proposed authorization, issuance and
sale of the Common Stock. In this connection, we have examined and relied upon
such corporate records and other documents, instruments and certificates and
have made such other investigation as we deemed appropriate as the basis for the
opinion set forth below. In our examination, we have assumed legal capacity of
all natural persons, the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
documents submitted to us as certified, conformed or photostatic copies and the
authenticity of such original documents.
<PAGE>
Crusader Holding Corporation
January 23, 1998
Page 2
The opinion expressed below is based on the assumption that
the Registration Statement will become effective.
Based upon the foregoing, we are of the opinion that the
shares of Common Stock to be sold by the Company have been duly authorized and,
when issued, delivered and paid for in accordance with the terms of the
Underwriting Agreement, the form of which is filed as Exhibit 1 to the
Registration Statement, and upon satisfaction of all conditions contained
therein, will be legally issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as Exhibit 5
to the Registration Statement and to the reference to this firm under the
caption "Legal Matters" in the Prospectus forming a part thereof.
/s/ Ballard Spahr Andrews & Ingersoll
<PAGE>
AGREEMENT
AGREEMENT (the "Agreement") dated as of November 30, 1997 (the
"Effective Date"), between Crusader Holding Corporation (the "Company"),
Crusader Savings Bank, FSB and its subsidiaries (the "Bank"), and Crusader
Mortgage Corporation ("Mortgage") (collectively "Crusader"), on the one hand,
and Jeffrey K. Rafsky (the "Executive") and Satellite Mortgage Corporation
("Satellite"), on the other hand.
WHEREAS, the Executive has been employed as President of Mortgage since
1996 and is the owner of 50 shares of common stock of Mortgage (the "Shares");
WHEREAS, Crusader and the Executive mutually desire to have the
employment of the Executive by Mortgage terminated as of the Effective Date and
to provide for an orderly transfer of Executive's responsibilities;
WHEREAS, Executive desires to sell to the Bank and the Bank desires to
purchase from Executive the Shares; and
WHEREAS, the parties wish to settle their mutual rights and obligations
arising from, or related to, the termination of the Executive's employment with
Crusader and to effectuate the purchase and sale of the Shares.
NOW THEREFORE, in consideration of the mutual promises and agreements
set forth herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Crusader and the Executive agree
as follows:
Section 1. Payment. The Executive agrees that he will resign from
Crusader as of the Effective Date. Subject to the last sentence of this Section
1, Mortgage agrees to pay Satellite the sum of Two Hundred Fifty Thousand
Dollars ($250,000) on May 31, 1998. Such payment shall be in lieu, and in
complete discharge, of all obligations owed by Crusader to the Executive and
Satellite including but not limited to all payments of base salary, bonus,
profit sharing and all other compensation and benefits, as an employee of
Mortgage, except as set forth herein.
Section 2. Purchase and Sale of Stock. Following the execution of this
Agreement, Executive agrees to deliver to the Bank a certificate representing
the Shares with all required stock powers in return for which the Bank will
deliver to Executive a certificate representing 150,000 shares (assuming the two
for one stock split effected as a 100% stock dividend) of fully paid
non-assessable shares of Common Stock of the Company (the "Company Shares").
Executive hereby agrees that the Company Shares shall be placed in escrow with
an escrow agent selected by Crusader. Subject to the conditions set forth in
<PAGE>
Subsections (a) and (b) of this Section 2, the Company Shares shall be released
to Executive as follows: (i) one-half promptly after net income has been
determined for Mortgage for the twelve months ended December 31, 1998 ("Net
Income") but no later than February 15, 1999; (ii) one-third of the Company
Shares remaining in escrow on the second anniversary of the Effective Date; and
(iii) the balance of the Company Shares on the third anniversary of the
Effective Date.
(a) In the event that there is a claim for indemnification
pursuant to the terms of the indemnification agreement attached hereto as
Exhibit B, which has not been satisfied by Executive, Crusader is authorized to
retain in escrow that number of Company Shares having the value of such
unsatisfied claim until such time as such claim is resolved by a tribunal or by
agreement of the parties; and
(b) In the event that Net Income, as determined in accordance
with Generally Accepted Accounting Principles and the Company's current
accounting practices (except that any Crusader management fee, net of the
related tax effect, will be added back), of Mortgage is less than $1 million,
the number of Company Shares to which Executive shall be entitled, subject to
the escrow provisions, shall be equal to that number determined by multiplying
150,000 by a fraction the numerator of which is the actual net income of
Mortgage for calendar year 1998 and the denominator of which is $1 million. Any
shares in excess of that number shall be promptly returned to the Company. In
the event that Executive disagrees with the calculation of Net Income, Executive
shall provide to the Company a written notice setting forth an amount which he
believes is Net Income. Upon receipt of such notice, the Company shall direct
its independent auditors to perform an audit for the purpose of determining Net
Income. The determination of the Company's independent auditors shall be final
and binding upon the parties. In the event that the auditors determine that Net
Income is equal to or greater than the amount set forth in the notice provided
by Executive, the cost of such audit shall be borne by Crusader. Otherwise, the
cost of such audit shall be borne by Executive.
Section 3. Consulting. In addition to the payments set forth in Section
1 hereof, Crusader shall also pay to Satellite $225,000 payable in thirty-six
equal monthly installments of $6,250. From December 1, 1997 until November 30,
2000, Executive shall, upon request and if permitted by regulatory agencies and
applicable statutes, rules and regulation, provide consulting services to
Crusader, its directors, officers and employees.
Section 4. Resignation from Offices. The Executive agrees that as of
the Effective Date he shall be deemed to have resigned from all offices and
positions with Crusader, except as provided in Section 3 above.
Section 5. No further Obligations of Crusader. Except as provided in
Sections 1 through 3 and 9 hereof, Crusader shall have no further obligations
2
<PAGE>
whatsoever to the Executive, including any obligations under the Subscription
and Shareholders Agreement dated June 24, 1996 among Executive, Douglas C.
Campanell, RACA, LLC, the Bank and Mortgage.
Section 6. Conditions of Benefits. Crusader shall provide to the
Executive and Satellite the rights, payments and benefits set forth in Sections
1 through 3 hereof as consideration for and contingent upon (i) the execution by
Executive and Satellite, non-revocation and honoring of a release of claims and
covenant not to sue in favor of Crusader in the forms attached hereto as
Exhibits A and A-1, (ii) the continued compliance by Executive and Satellite
with the provisions of Sections 7, 8, 9, 10 and 11A hereof, (iii) the entering
into an indemnification agreement in the form attached hereto as Exhibit B by
Executive and Satellite, and (iv) the Executive executing a Shareholders
Agreement, a copy of which is attached hereto as Exhibit C. In the event that
Executive or Satellite breach any of the foregoing provisions, in addition to
any other remedies available, Crusader may set off any damages incurred by
Crusader resulting from such breach against the Company Shares held in escrow
and may terminate its obligations under Sections 2 and 3 above.
Section 7. Nondisclosure. The Executive and Satellite hereby agree that
neither shall, at any time following the Effective Date, disclose or use for any
purpose confidential information or proprietary data of Crusader (or any of its
subsidiaries), except as required by applicable law or legal process; provided,
however, that confidential information shall not include any information known
generally to the public or ascertainable from public or published sources (other
than as a result of unauthorized disclosure by Executive or Satellite) or any
information of a type not otherwise considered confidential by persons engaged
in the same business or a business similar to that conducted by Crusader.
Executive and Satellite acknowledge and agree that Crusader will suffer
irreparable injury in the event of any material breach of this Section 7, that
damages resulting from such injury will be incapable of being precisely
measured, and that Crusader will not have an adequate remedy at law to redress
the harm which such violation shall cause. Therefore, Executive and Satellite
agree that Crusader shall have the rights and remedies of specific performance
and injunctive relief, in addition to any other rights or remedies that may be
available at law or in equity or under this Agreement, in respect of any
failure, or threatened failure, on the part of the Executive and Satellite to
comply with the provisions of this Section 7, including, but not limited to,
temporary restraining orders and temporary injunctions to restrain any violation
or threatened violation of this Section 7 by Executive and Satellite.
Section 8. Return of Crusader Property. The Executive acknowledges that
all records, files, documents and equipment, all information relating to
employees and suppliers, and any other materials that in any way relate to the
business of Crusader which the Executive has accumulated during his employment
by Crusader, other than information and documents publicly known or
3
<PAGE>
disseminated, are the property of Crusader, including all duplicates and copies
of any of the foregoing, and that all such property shall be returned to the
sole possession of Crusader promptly following the execution of this Agreement.
Section 9. Business Goodwill. At all times following date hereof, the
Executive shall and Executive shall instruct Satellite, its officers, directors,
agents and employees to make no comments or take any other actions, direct or
indirect, that will reflect adversely on Crusader or its officers, directors,
employees or agents in such capacity or adversely affect their business
reputation or goodwill. At all times following the date hereof, the Board of
Directors, each director and each officer of Crusader shall make no comments or
take any other actions, direct or indirect, that will reflect adversely on the
Executive or Satellite or adversely affect their business reputation or
goodwill, except for information which is publicly available. The Executive
hereby agrees that for a period of three years following the Termination Date,
he shall reasonably cooperate with Crusader in providing information that
Crusader reasonably requests and in taking such other action as Crusader may
reasonably request. The Executive acknowledges that it will be difficult to
determine the appropriate level of damages to be paid by the Executive and
Satellite in the event of a breach of the first sentence of this Section 9.
Section 10. Non-Compete and Anti-Raiding. For a period of three years
following Effective Date, Executive and Satellite agree not (a) to engage in any
business or become an officer, director, employee or consultant to an entity
whose business competes with the business of Mortgage, the Company or the Bank
or any subsidiary or affiliate of either of them, (b) to counsel or attempt to
induce any person who is currently in the employ of Crusader to leave the employ
of Crusader or employ or attempt to employ any such person or persons who at any
time during the preceding six months was in the employ of Crusader or (c) to
counsel or attempt to induce such person who is currently a mortgage banker or
broker of Crusader or who at any time during the preceding six months was a
broker or banker of Crusader to terminate its relationship with Crusader or to
direct loans to another lender that could have been referred to Crusader.
Section 11. Representations and Warranties.
A. Executive and Satellite hereby represent and warrants to
the Company, the Bank and Mortgage as follows:
1. Each is authorized to enter into this Agreement.
2. The execution of this Agreement by each will not
violate any statute, rule or regulation applicable to him.
3. Executive owns the Shares free and clear of all
pledges, liens, mortgages and encumbrances.
4
<PAGE>
4. All loans originated by Mortgage during
Executive's employment were lawfully originated and were in compliance
with all applicable rules, regulations and statutes and the policies of
Mortgage.
5. Executive has made no commitments to any employee
of Mortgage, other than as disclosed in writing to Crusader as an
exhibit to this Agreement.
6. Executive has made no commitments to any mortgage
broker, mortgage banker or finder with respect to the business of the
Company, the Bank or Mortgage, other than as disclosed in writing to
Crusader as an exhibit to this Agreement.
7. Executive has made no misrepresentation of a
material fact or omitted to state a material fact necessary to make any
statement in light of the circumstances under which they were made, not
misleading with respect to the business of the Company, the Bank or
Mortgage.
8. While employed by Mortgage, Executive complied
with all rules, regulations and statutes and the policies of the
Company, the Bank and Mortgage, other than as disclosed to Crusader.
B. The Company, the Bank and Mortgage hereby represent and
warrant to the Executive as follows:
1. Each of the Company, the Bank and Mortgage are
authorized to enter into this Agreement.
2. The execution of this Agreement by the Company,
the Bank and Mortgage will not violate any statute, rule or regulation
applicable to any of them.
3. The Company Shares when issued will be fully paid
and non-assessable.
4. Mortgage has adequate resources to fund its
obligations under Section 1 hereof.
Section 12. Miscellaneous.
5
<PAGE>
A. Complete Agreement. This Agreement constitutes the entire
agreement between the parties and cancels and supersedes all other agreements
and understandings, whether written or oral, between the parties which may have
related to the subject matter contained in this Agreement.
B. Modification; Agreement; Waiver. No modification, amendment
or waiver of any provisions of this Agreement shall be effective unless approved
in writing by both parties. The failure at any time to enforce any of the
provisions of this Agreement shall in no way be construed as a waiver of such
provisions and shall not affect the right of either party thereafter to enforce
each and every provision hereof in accordance with its terms.
C. Governing Law; Jurisdiction. This Agreement and performance
under it, and all proceedings that may ensue from its breach, shall be construed
in accordance with and under the laws of the Commonwealth of Pennsylvania, and
the parties submit to the jurisdiction of the courts of the Commonwealth of
Pennsylvania located in Philadelphia for purposes of any actions or proceedings
that may be required to enforce this Agreement.
D. Severability. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be held to be
prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Agreement.
E. Assignment. The rights and obligations of the parties under
this Agreement shall be binding upon and inure to the benefit of their
respective successors, assigns, executors, administrators and heirs, provided,
however, that neither Crusader nor the Executive may assign any duties under
this Agreement without the prior written consent of the other.
F. Notices. All notices and other communications under this
Agreement shall be in writing and shall be given in person or by telegraph,
telefax or first class mail, certified or registered with return receipt
requested, and shall be deemed to have been duly given when delivered personally
or three days after mailing or one day after transmission of a telegram or
telefax, as the case may be, to the respective persons named below:
If to Crusader: Crusader Holding Corporation
1230 Walnut Street
Philadelphia, PA 19107
Attn: Secretary
6
<PAGE>
If to the Executive Jeffrey K. Rafsky
or 1110 Centennial Road
Satellite: Narberth, PA 19072
G. Advice of Counsel. The Executive acknowledges that he has
consulted with his own legal counsel with respect to the subject matter and the
terms of this Agreement and that this Agreement is the product of negotiations
between Crusader and its counsel on the one hand and the Executive and Satellite
and their counsel on the other.
7
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
CRUSADER: CRUSADER HOLDING CORPORATION
By /s/ Bruce A. Levy
-----------------------------------
Its President
----------------------------------
CRUSADER SAVINGS BANK, FSB
By /s/ Joseph T. Crowley
-----------------------------------
Its President
----------------------------------
CRUSADER MORTGAGE CORPORATION
By /s/ Bruce A. Levy
-----------------------------------
Its President
----------------------------------
EXECUTIVE: /s/ Jeffrey K. Rafsky
--------------------------------------
Jeffrey K. Rafsky
SATELLITE MORTGAGE CORPORATION
By /s/ Jeffrey K. Rafsky
-----------------------------------
Its President
----------------------------------
8
<PAGE>
JOINDER
The undersigned for himself and for Satellite Mortgage Corporation
("Satellite"), in connection with the execution and performance of an agreement
dated as of November 30, 1997 between Crusader Holding Corporation, Crusader
Savings Banks FSB and Crusader Mortgage Corporation, on the one hand, and the
undersigned and Satellite, on the other hand, hereby agrees to be bound by the
terms of the Subscription and Shareholders' Agreement dated March 1, 1996 by and
among the Company and the then shareholders of the Company, as amended, on
January 31, 1997 and December 8, 1997.
Witness:
/s/ Bruce A. Levy /s/ Jeffrey K. Rafsky
- ------------------------- ----------------------------------
Bruce A. Levy Jeffrey K. Rafsky
/s/ Jeffrey K. Rafsky
----------------------------------
Satellite Mortgage Corporation
By: Jeffrey K. Rafsky
<PAGE>
EXHIBIT A
GENERAL RELEASE AGREEMENT
I, JEFFREY K. RAFSKY, for myself, my heirs, executors, administrators
and assigns, if any, for and in consideration of the rights, payments and
benefits under the Agreement between Jeffrey K. Rafsky and Satellite
Corporation, on one hand and Crusader Holding Corporation, Crusader Savings
Bank, FSB, and Crusader Mortgage Corporation (collectively "Crusader"), on the
other hand, dated as of November 30, 1997 (the "Agreement") hereby agrees as
follows:
1. I waive, release and forever discharge Crusader, and its
subsidiaries and affiliates, and each of their directors, officers and employees
and each of their successors and assigns (hereinafter the "Released Parties"),
of and from any and all past, present or future causes of action, suits,
agreements or other claims which I have against the Released Parties upon or by
reason of any matter, cause or thing whatsoever, including, without limitation,
claims for any alleged violation of the Civil Rights Acts of 1964 and 1991, the
Equal Pay Act of 1963, the Age Discrimination in Employment Act of 1967, the
Rehabilitation Act of 1973, the Older Workers Benefit Protection Act of 1990,
the Americans with Disabilities Act of 1990, the Family and Medical Leave Act of
1993, the Pennsylvania Human Relations Act and any other federal or state law,
regulation or ordinance, or public policy, contract or tort law having any
bearing whatsoever on the terms and conditions of employment or termination of
employment, and I promise not to file a lawsuit to assert any such claims;
provided, however, that this release shall not apply to the payments, benefits
and other obligations set forth in the Agreement.
2. I acknowledge that I have carefully read and fully understand the
provisions of this General Release Agreement, that I have had twenty-one (21)
days from the date I received a copy of this General Release Agreement in which
to consider entering into this General Release Agreement that if I sign and
return this General Release Agreement before the end of that twenty-one (21) day
period then I will have voluntarily waived my right to consider the Agreement
for the full twenty-one (21) days and that I have executed this General Release
Agreement voluntarily and with full knowledge of its significance, meaning and
binding effect. I also acknowledge that Crusader has advised me in writing to
consult with an attorney of my own choosing with regard to entering into this
General Release Agreement and that I have done so.
<PAGE>
3. I acknowledge that I may revoke this General Release Agreement
within seven (7) days of my execution of this document by submitting a written
notice of my revocation to The Secretary of Crusader at Crusader. I also
understand that this General Release Agreement shall not become effective or
enforceable until the expiration of that seven (7) day period.
4. I acknowledge that in my decision to enter into this General Release
Agreement, I have not relied on any representations, promises or agreements of
any kind, including oral statements by representatives of Crusader.
IN WITNESS WHEREOF, and with the intention of being legally bound
hereby, I have executed this General Release Agreement on the 12th day of
December, 1997.
/s/ Jeffrey K. Rafsky
-------------------------------
JEFFREY K. RAFSKY
Sworn to and subscribed
before me this 12th day
of December, 1997
/s/ Jacqueline Maria Whyte
- -----------------------------
Notary Public
[NOTARIAL SEAL]
<PAGE>
EXHIBIT A-1
GENERAL RELEASE AGREEMENT
SATELLITE MORTGAGE CORPORATION ("Satellite"), its affiliates and
assigns, if any, for and in consideration of the rights, payments and benefits
under the Agreement between Jeffrey K. Rafsky and Satellite Corporation, on one
hand and Crusader Holding Corporation, Crusader Savings Bank, FSB, and Crusader
Mortgage Corporation (collectively "Crusader"), on the other hand, dated as of
November 30, 1997 (the "Agreement") hereby agrees as follows:
Satellite hereby waives, releases and forever discharges Crusader, and
its subsidiaries and affiliates, and each of their directors, officers and
employees and each of their successors and assigns (hereinafter the "Released
Parties"), of and from any and all past, present or future causes of action,
suits, agreements or other claims which Satellite has or may in the future have
against the Released Parties upon or by reason of any matter, cause or thing
whatsoever; provided, however, that this release shall not apply to the
payments, benefits and other obligations set forth in the Agreement.
IN WITNESS WHEREOF, and with the intention of being legally bound
hereby, Satellite has executed this General Release Agreement on the 12th day of
December, 1997.
SATELLITE MORTGAGE CORPORATION
Sworn to and subscribed By: /s/ Jeffrey K. Rafsly
before me this 12th day ------------------------------
of December, 1997 Its: President
----------------------------
/s/ Jacqueline Maria Whyte
- -------------------------------------
Notary Public
[NOTARIAL SEAL]
<PAGE>
EXHIBIT B
INDEMNIFICATION AGREEMENT
I, JEFFREY K. RAFSKY, for myself, my heirs, executors, administrators
and assigns, if any, and Satellite Mortgage Corporation ("Satellite") for itself
and its assigns for and in consideration of the rights, payments and benefits
under the Agreement between Jeffrey K. Rafsky and Satellite, on one hand and
Crusader Holding Corporation, Crusader Savings Bank, FSB, and Crusader Mortgage
Corporation (collectively "Crusader"), on the other hand dated as of
November 30, 1997 (the "Agreement") hereby agrees as follows:
1. We hereby agree to indemnify and hold harmless Crusader, its
subsidiaries and affiliates, and each of their directors, officers and employees
and each of their successors and assigns from and against all losses, claims,
damages or liabilities to which such indemnified parties or any of them may be
subject as a result of (a) any action or failure to act on the part of Rafsky as
an employee of Crusader or (b) any breach of a representation or warranty
contained in the Agreement. However, with respect to the representation
contained in Section 11(A)(4) of the Agreement, Executive shall be liable for
one-half of the damages incurred if he had no knowledge with respect to such
breach.
2. Each party indemnified under the provision above agrees that, upon
the service of a summons or other initial legal process upon it in any action or
suit instituted against it or upon its receipt of written notification of the
commencement of any investigation or inquiry of, or proceeding against it in
respect of which indemnity may be sought on account of any indemnity agreement
contained in such paragraph, it will promptly give written notice (herein called
the Notice) of such service or notification to the indemnifying party or
parties. The timely omission to notify the indemnifying party or parties of such
service or notification shall not relieve the indemnifying party or parties from
any liability which he or they may have to the indemnified party for
contribution or otherwise than on account of such indemnity agreement. The
indemnifying party or parties shall be entitled at its or their own expense to
participate in the defense of any action, suit or proceeding against, or
investigation or inquiry of, an indemnified party. The indemnifying party or
parties shall be entitled, if he or they so elect within a reasonable time after
receipt of the Notice by giving written notice (herein called the Notice of
Defense) to the indemnified party or parties, to assume (alone or in
<PAGE>
conjunction with any other indemnifying party or parties) the entire defense of
such action, suit, investigation, inquiry or proceeding, in which event such
defense shall be conducted, at the expense of the indemnifying party or parties,
by counsel chosen by such indemnifying party or parties and reasonably
satisfactory to the indemnified party or parties; provided, however, that (i) if
the indemnified party or parties reasonably determines that there may be a
conflict between the positions of the indemnifying party or parties and of the
indemnified party or parties in conducting the defense of such action, suit,
investigation, inquiry or proceeding or that there may be legal defenses
available to such indemnified party or parties different from or in addition to
those available to the indemnifying party or parties, then counsel for the
indemnified party or parties shall be entitled to conduct the defense to the
extent reasonably determined by such counsel to be necessary to protect the
interests of the indemnified party or parties and (ii) in any event, the
indemnified party or parties shall be entitled to have counsel chosen by such
indemnified party or parties participate in, but not conduct, the defense. If,
within a reasonable time after receipt of the Notice, an indemnifying party
gives a Notice of Defense and the counsel chosen by the indemnifying party is
reasonably satisfactory to the indemnified party or parties, the indemnifying
party or parties will not be liable for any legal or other expenses subsequently
incurred by the indemnified party or parties in connection with the defense of
the action, suit, investigation, inquiry or proceeding, except that (A) the
indemnifying party or parties shall bear the legal and other expenses incurred
in connection with the conduct of the defense as referred to in clause (i) of
the proviso to the proceeding sentence and (B) the indemnifying party or parties
shall bear such other expenses as he or they have authorized to be incurred by
the indemnified party or parties. If, within a reasonable time after receipt of
the Notice, no Notice of Defense has been given, the indemnifying party or
parties shall be responsible for any legal or other expenses incurred by the
indemnified party or parties in connection with the defense of the action, suit,
investigation, inquiry or proceeding.
3. No indemnifying party or parties will, without the prior written
consent of the indemnified party or parties, settle or compromise or consent to
the entry of any judgment in any pending or threatened claim, action, suit or
proceeding in respect of which indemnification may be sought hereunder unless
such settlement, compromise or consent includes an unconditional release of such
indemnified party or parties and each controlling person from all liability
arising out of such claim, action, suit or proceeding.
2
<PAGE>
IN WITNESS WHEREOF, and with the intention of being legally bound
hereby, I have executed this Indemnification Agreement on the 12th day of
December, 1997.
/s/ Jeffrey K. Rafsky
-----------------------------------
JEFFREY K. RAFSKY
SATELLITE MORTGAGE CORPORATION
BY: /s/ Jeffrey K. Rafsky
-------------------------------
ITS: President
------------------------------
Sworn to and subscribed
before me this 12th day
of December, 1997
/s/ Jacqueline Maria Whyte
- ------------------------------
Notary Public
[NOTARIAL SEAL]
3
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated December 9, 1997 accompanying the
consolidated financial statements of Crusader Holding Corporation and Subsidiary
contained in Amendment No. 1 to the Registration Statement and Prospectus (File
No. 333-42215). We consent to the use of the aforementioned report in the
Registration Statement and Prospectus, and to the use of our name as it appears
under the caption "Experts."
GRANT THORNTON LLP
Philadelphia, Pennsylvania
January 21 , 1998
