<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31,1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____ to _____
Commission file number 23663
CRUSADER HOLDING CORPORATION
-----------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2562545
------------ ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1230 Walnut Street, Philadelphia, PA 19107
------------------------------------------
(Address of principal executive offices)
(Zip Code)
(215) 893-1500
--------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Common Stock, par value $0.01 per share, 3,832,500 shares of outstanding as of
February 12, 1998
<PAGE>
Crusader Holding Corporation
Index to Form 10-Q Report
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1998 and June 30,1998............................3
Consolidated Statements of Income and Comprehensive Income for the three months ended and
six months ended December 31, 1998 and 1997.....................................................4
Consolidated Statement of Shareholders' Equity as of December 31,1998...........................5
Consolidated Statements of Cash Flows for the six months ended
December 31, 1998 and 1997......................................................................6
Notes to Consolidated Financial Statements......................................................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...................................................9
Item 3. Quantitative and Qualitative Disclosures about Market Risk.............................13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................................15
Item 2. Changes in Securities and Use of Proceeds..............................................15
Item 3. Defaults Upon Senior Securities........................................................15
Item 4. Submission of Matters to a Vote of Security Holders....................................15
Item 5. Other Information......................................................................15
Item 6. Exhibits and Reports on Form 8-K.......................................................15
</TABLE>
2
<PAGE>
Item 1. Financial Statements
Crusader Holding Corporation and Subsidiary
Consolidated Balance Sheets
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<TABLE>
<CAPTION>
December 31 June 30,
1998 1998
---- ----
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 5,106,000 $ 10,670,000
Loans held for sale (estimated market value
of $74,800,000 and 49,599,000 at December 31,1998
and June 30, 1998, respectively) 74,657,000 48,389,000
Investment securities available-for-sale 7,485,000 3,363,000
Mortgage-backed securities available-for-sale 12,293,000 14,188,000
Loans receivable, net 151,519,000 120,984,000
Accrued interest receivable 2,182,000 1,372,000
Other real estate owned 123,000 --
Premises and equipment, net 996,000 986,000
Other assets 2,575,000 2,082,000
------------ ------------
Total Assets $256,936,000 $202,034,000
============ ============
LIABILITIES
Deposits $160,428,000 $118,831,000
Advances from Federal Home Loan Bank 60,500,000 49,150,000
Securities sold under agreements to repurchase 8,280,000 8,280,000
Other liabilities 2,458,000 2,457,000
------------ ------------
Total Liabilities 231,666,000 178,718,000
MINORITY INTEREST 116,000 93,000
SHAREHOLDERS' EQUITY
Preferred stock - authorized, 5,000,000 shares of
$0.01 par value; none outstanding -- --
Common stock - authorized, 20,000,000 shares of
$0.01 par value; 3,832,500 and 3,650,000
shares issued and outstanding at December 31,
1998 and June 30, 1998 respectively 39,000 39,000
Additional paid in capital 21,607,000 21,607,000
Retained earnings 3,508,000 1,577,000
Net unrealized gains (losses) on securities
available-for -sale -- --
------------ ------------
Total Shareholders' Equity 25,154,000 23,223,000
------------ ------------
Total Liabilities and Shareholders' Equity $256,936,000 $202,034,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
Crusader Holding Corporation and Subsidiary
Consolidated Statements of Income and Comprehensive Income (Unaudited)
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<TABLE>
<CAPTION>
Three months Six months
ended December 31, ended December 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $4,826,000 $3,156,000 $9,206,000 $5,571,000
Investment and mortgage-backed securities 407,000 367,000 718,000 770,000
---------- ---------- ---------- ----------
Total interest income 5,233,000 3,523,000 9,924,000 6,341,000
---------- ---------- ---------- ----------
INTEREST EXPENSE
Deposits 1,995,000 1,738,000 3,673,000 3,211,000
Borrowed funds 803,000 400,000 1,646,000 640,000
Shareholder notes -- 52,000 -- 90,000
---------- ---------- ---------- ----------
Total interest expense 2,798,000 2,190,000 5,319,000 3,941,000
---------- ---------- ---------- ----------
NET INTEREST INCOME 2,435,000 1,333,000 4,605,000 2,400,000
PROVISION FOR LOAN LOSSES 250,000 170,000 350,000 185,000
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,185,000 1,163,000 4,255,000 2,215,000
NON-INTEREST INCOME
Service charges on deposit accounts and
other fees 31,000 43,000 59,000 89,000
Conforming mortgage banking revenues 272,000 91,000 448,000 199,000
Non-interest income from Crusader
Mortgage Corporation 860,000 1,311,000 1,841,000 2,144,000
Other 42,000 15,000 75,000 29,000
---------- ---------- ---------- ----------
Total non-interest income 1,205,000 1,460,000 2,423,000 2,461,000
NON-INTEREST EXPENSES
Employee compensation and benefits 371,000 204,000 726,000 438,000
Data processing 40,000 27,000 71,000 53,000
Federal insurance premiums 19,000 15,000 39,000 28,000
Occupancy and equipment 84,000 74,000 162,000 149,000
Professional fees 29,000 21,000 59,000 37,000
Crusader Mortgage Corporation expenses 598,000 730,000 1,236,000 1,292,000
Other operating 194,000 111,000 341,000 196,000
Goodwill amortization 21,000 -- 42,000 --
Loss on Fraudulent Money Orders 950,000 -- 950,000 --
---------- ---------- ---------- ----------
Total non-interest expenses 2,342,000 1,182,000 3,606,000 2,193,000
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAX EXPENSE 1,084,000 1,441,000 3,072,000 2,483,000
INCOME TAX EXPENSE 368,000 507,000 1,076,000 865,000
---------- ---------- ---------- ----------
INCOME BEFORE MINORITY INTEREST 716,000 934,000 1,996,000 1,618,000
Minority interest 36,000 8,000 65,000 27,000
---------- ---------- ---------- ----------
NET INCOME $ 680,000 $ 926,000 $1,931,000 $1,591,000
========== =========== ========== ==========
Unrealized gain (loss) on securities, net of tax 18,000 -- -- --
---------- ---------- ---------- ----------
Comprehensive income $ 698,000 $ 926,000 $1,931,000 $1,591,000
========== =========== ========== ==========
Net income per share, basic and diluted $ 0.18 $ 0.39 $ 0.50 $ 0.70
========== =========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
Crusader Holding Corporation and Subsidiary Consolidated Statement of
Shareholders' Equity For the six months ended December 31, 1998 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net unrealized
gain (loss)
Additional on securities
Common paid-in Retained available-
stock capital earnings for-sale Total
------ ---------- -------- --------------- -----
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1998 $39,000 $21,607,000 $1,577,000 $ -- $23,223,000
Net unrealized loss on
securities available-for-sale -- -- -- -- --
Net income -- -- 1,931,000 -- 1,931,000
------- ---------- ---------- ---------- -----------
Balance at September 30, 1998 $39,000 $21,607,000 $3,508,000 -- $25,154,000
======= ========== ========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
Crusader Holding Corporation and Subsidiary
Consolidated Statements of Cash Flows (unaudited)
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<TABLE>
<CAPTION>
Six months ended
--------------------------------------
December 30, December 31,
1998 1997
--------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,931,000 $ 1,591,000
Adjustments to reconcile net income to net cash used in operating activities:
Amortization of premiums and discounts on securities and loans net 167,000 96,000
Amortization of goodwill 42,000 --
Provision for loan losses 350,000 185,000
Net gain on sale of loans held for sale (272,000) (196,000)
Depreciation and amortization of premises and equipment 110,000 69,000
Proceeds from sale of assets held for sale 145,912,000 76,926,000
Originations of loans held for sale (171,908,000) (100,102,000)
Increase in accrued interest receivable (177,000) (169,000)
(Increase) decrease in deferred income taxes 331,000 201,000
Other, net (1,962,000) 366,000
------------- -------------
Net cash used in operating activities (25,476,000) (21,033,000)
INVESTMENT ACTIVITIES
Net increase in loans (31,008,000) (14,711,000)
Purchase of investment securities available-for-sale (4,122,000) --
Purchase of mortgage-backed securities available-for-sale -- (3,402,000)
Repayment of principal of investment securities available-for-sale (1,123,000) 3,087,000
Repayment of principal of mortgage-backed securities available-for-sale 3,315,000 1,831,000
Proceeds from sale of mortgage-backed securities available-for-sale -- 1,915,000
Proceeds from sale of property acquired through loan foreclosure actions -- --
Purchase of minority share in subsidiary -- (890,000)
Purchase of premises and equipment (120,000) (140,000)
------------- -------------
Net cash used in investing activities (33,058,000) (12,310,000)
FINANCING ACTIVITIES
Net increase in deposits 41,597,000 44,751,000
Advances and other borrowings, net 11,350,000 (3,950,000)
Proceeds from shareholders' note, net -- 248,000
Change in net unrealized loss on securities -- (52,000)
Capital contributions -- 1,142,000
Increase in Minority Interest 23,000 --
------------- -------------
Net cash provided by financing activities 52,970,000 42,139,000
Net increase in cash and cash equivalents (5,564,000) 8,796,000
Cash and cash equivalents at beginning of year 10,670,000 325,000
------------- -------------
Cash and cash equivalents at end of year 5,106,000 9,121,000
============= =============
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
6
<PAGE>
Crusader Holding Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of and for the three and six month periods ended December 31,
1998 and 1997 is unaudited)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The unaudited consolidated financial statements as of December 31, 1998, and for
the three and six month periods ended December 31, 1998 and 1997 include the
accounts of Crusader Holding Corporation (the "Company") and its wholly-owned
subsidiary, Crusader Savings Bank FSB (the "Bank"), along with the Bank's wholly
owned and majority owned subsidiaries, including Crusader Mortgage Corporation
("CMC"). All significant intercompany accounts and transactions have been
eliminated.
The interim financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (including normal recurring accruals) necessary
for fair presentation of results of operations for the interim periods included
herein have been made. The results of operations for the three and six month
periods ended December 31, 1998 and 1997 are not necessarily indicative of
results to be anticipated for the full year.
2. NET INCOME PER SHARE
Basic and diluted earnings per share are calculated using statement of Financial
Accounting Standards ("SFAS") No. 128. Under SFAS No. 128, basic earnings per
share is computed based upon the weighted average number of common shares
outstanding during the period while diluted earnings per share is computed based
upon the weighted average number of common shares and common equivalent shares
outstanding during the period. Common stock equivalents are stock options,
warrants and similar items. In converting the common stock equivalents to common
shares, the Treasury Stock Method is utilized whereby it is assumed that the
proceeds that would be received upon the exercise of the common stock
equivalents are used to repurchase outstanding shares at the average market
price during the period. There was no difference between the Company's basic and
diluted earnings per share.
In determining the weighted average shares outstanding during the period in the
computation of basic and diluted earnings per share, retroactive effect was
given to the December 8, 1997 two for one stock split effected in the form of a
stock dividend and the 5% stock dividend paid on August 28, 1998. Basic and
diluted weighted average shares outstanding were 3,833,000 and 2,520,000 for the
three months ended December 31, 1998, and December 31, 1997, respectively.
3. ALLOWANCE FOR LOAN LOSSES
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, the
status of specific problem loans and overall current economic conditions that
may affect the ability of borrowers to repay their loans. While management uses
available information to recognize losses on loans, future additions to the
allowance may be necessary based on changes in economic conditions. In addition,
various regulatory agencies, as an integral part of their examination processes,
periodically review the Bank's allowance for loan losses based on their
judgments about information available to them at the time of their examinations.
7
<PAGE>
4. COMPREHENSIVE INCOME
During the quarter ended March 31, 1998, the Company adopted 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 was effective
for interim periods and fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The adoption of SFAS No. 130 did not have a
material impact on the Company.
5. RECENT PRONOUNCEMENTS
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 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 results of operations.
6. RECENT LITIGATION
During October 1998, one of the Bank's deposit customers ("Bank Depositor") had
approximately $1.3 million of dishonored money orders which resulted in its
account being deficient by a similar amount. The Bank has initiated a lawsuit in
the Court of Common Pleas of Philadelphia County against the money order company
which placed the stop payments on the money orders issued, and the Bank
Depositor; alleging, among other things, that the money orders were improperly
stopped and the Bank was a holder in due course and is therefore entitled to
reimbursement. The Bank is seeking reimbursement in the lawsuit. The Bank has
also initiated an involuntary bankruptcy proceedings against the Bank Depositor
in the United States Bankruptcy Court for the Eastern District of Pennsylvania.
The Bank is seeking to have a trustee preserve the assets of the Bank Depositor
in order that the Bank may receive partial reimbursement. In December 1998, the
Company recorded a pre-tax provision of $950,000 to provide for its potential
exposure with respect to the money orders. The Company believes its litigation
has strong merit; however, the provision was recorded because of the length of
time likely to transpire before the litigation is finalized and the potential
uncertainty associated therewith.
8
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and related notes appearing on the preceding
pages as well as in the Company's Registration Statement on Form S-1,
Registration No. 333-42215. Results of unaudited operations for the three and
six month periods ended December 31, 1998 are compared to the unaudited results
of operations for the three and six month periods ended December 31, 1997. Such
information is based upon the historical financial information available as of
the date indicated. Results of operations for the three and six month periods
ended December 31, 1998 and 1997 are not necessarily indicative of results to be
attained for any other period.
Certain statements contained in this report are "forward-looking" as defined in
Section 27A(i)(1) of the Securities Act of 1933, as amended and Section
21E(i)(i) of the Securities Exchange Act of 1934, as amended.. Examples of
forward-looking statements include, but are not limited to (a) statements of
plans and objectives of the Company, its management or its Board of Directors,
(b) statements of future economic performances and (c) statements of assumptions
underlying other statements and statements about the Company or its business.
The Company's management believes that its expectations are based on reasonable
assumptions within the bounds of its knowledge of its business and operations.
However, there can be no assurance that actual results will not differ
materially from its expectations. For a discussion of important factors that
could cause actual results to differ materially from those in the forward
looking statement, see the risk factors set forth in the Company's Registration
Statement on Form S-1,Registration No. 333-42215.
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, home equity loans, multi-family residential and
non-residential real estate loans and Small Business Administration loans, the
Bank originates or acquires nonconfoming 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 are investment
quality. The Bank's loan and investment portfolios are funded with deposits as
well as borrowings from the Federal Home Loan Bank of Pittsburgh ("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
(non-interest revenues realized by CMC in its nonconforming mortgage
operation,conforming mortgage banking revenue and loan, deposit and ATM fees)
and non-interest expenses (such as salaries and benefits, professional fees,
occupancy cost, deposit insurance premiums and expenses related to CMC
nonconforming mortgage operations).
FINANCIAL CONDITION
The Company's assets increased to $256.9 million at December 31, 1998, as
compared to $202.0 million at June 30, 1998. The increase in assets primarily
reflects the deployment of proceeds from certificates of deposit and FHLB
advances into loans, including portfolio loans and loans held for sale. At
December 31, 1998, the loan portfolio aggregated $151.5 million as compared to
$121.0 million at June 30, 1998 with the growth concentrated in commercial real
estate loans, including loans secured by apartment buildings and mixed use
properties, and conforming adjustable rate residential mortgages. Loans held for
sale increased to $74.7 million at December 31, 1998 as compared to $48.4
million at June 30, 1998. This increase resulted primarily from an increase in
the volume of conforming mortgage originations, due to lower market interest
rates. Nonconforming mortgage loans available for sale aggregated $40.9 million
at December 31, 1998, with the balance in conforming loans available for sale.
Cash and cash equivalents aggregated $5.1 million at December 31, 1998 as
compared to $10.7 at June 30, 1998. This decrease resulted primarily from a
higher level of proceeds recieved on loan pool sales at June 30, 1998 as
compared to December 31,1998. Deposits were $160.4 million at December 31, 1998
as compared to $118.8 million at June 30, 1998 reflecting primarily an increase
in certificates of deposits. FHLB advaces increased to approximately $60.5 from
$49.2 million as these borrowings were utilized in part to fund the asset
growth. Shareholders' equity increased by $2.0 million due primarily to net
income generated during the period.
9
<PAGE>
RESULTS OF OPERATIONS
Three months ended December 31, 1998 versus three months ended December 31,
1997. Net income decreased to $680,000 for the three months ended December 31,
1998 as compared to $926,000 for the comparable prior year period due primarily
to a loss on fraudulent money orders recorded in December 1998 in the amount of
$950,000 ($608,000 after tax) (See Item 6. Recent Litigation). Excluding this
item, net income increased to $1,288,000 or 39.09% as compared to the prior year
period. Net interest income increased by $1.1 million or 82.67% due primarily to
a growth in average earning assets of $73.7 million and an increase in the net
yield on interest-earning assets to 4.22% as compared to 3.49% in the prior year
period. The provision for loan losses was increased by $80,000 to $250,000 for
the current year period due to a growth in the loan portfolio. There were no
actual charge-offs of loans in either period. Non-interest income decreased by
$255,000 due primarily to a decrease in CMC nonconforming mortgage banking
income to $860,000 as compared to $1,311,000 for the prior year period. This
decrease was offset in part by an increase in conforming mortgage banking
revenues of $181,000. Excluding the above noted loss on fraudulent money orders
of $950,000, non-interest expenses increased by $202,000 due primarily to an
increase in employee compensation and benefits of $167,000 due to expansion of
the Bank's staff to accommodate the growth in assets. Income tax expense was
$139,000 lower due to the reduced profitability.
Six months ended December 31, 1998 versus six months ended December 31, 1997.
Net income increased to $1,931,000 for the six months ended December 31, 1998 as
compared to $1,591,000 for the comparable prior year period. Excluding a loss on
fraudulent money orders recorded in December 1998 in the amount of $950,000
($608,000 after tax) (See Item 6. Recent Litigation), net income increased to
$2,539,000 or 59.59% as compared to the prior year period. Net interest income
increased by $2.2 million or 91.88% due primarily to a growth in average earning
assets of $75.4 million and an increase in the net yield on interest-earning
assets to 4.20% as compared to 3.40% in the prior year period. The provision for
loan losses was increased by $165,000 to $350,000 for the current year period
due to a growth in the loan portfolio. There were no actual charge-offs of loans
in either period. Non-interest income decreased by $38,000 due primarily to a
decrease in CMC nonconforming mortgage banking income to $1,844,000 as compared
to $2,144,000 for the prior year period. This decrease was offset in part by an
increase in conforming mortgage banking revenues of $249,000. Excluding the
above noted loss on fraudulent money orders of $950,000, non-interest expenses
increased by $463,000 due primarily to an increase in employee compensation and
benefits of $288,000 due to expansion of the Bank's staff to accommodate the
growth in assets. Income tax expense was $211,000 due to the increased
profitability.
LIQUIDITY AND CAPITAL RESOURCES
A major source of the Company's asset growth has been funded through deposits,
mostly certificates of deposit ("CDs"), generated through the Bank's two branch
offices and a network of financial planners and brokers.
The ability of the Bank to retain and attract deposits is dependent upon a
number of factors, including interest rates offered on the Bank's products.
Historically, most of the Bank's deposits have been in the form of CDs, which
typically provide for a higher interest rate than other bank deposit products,
such as checking and savings accounts. 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.
10
<PAGE>
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, management believes that the Company's income from operations and
existing funding sources will be adequate to meet its operating and growth
requirements for the foreseeable future; however, there can be no assurance that
such strategy will not change or that the implementation of the strategy will
not require additional capital or funding sources.
Net cash used by operating activities for the six months ended December 31, 1998
was $25.5 million as compared to $21.0 million in the comparable prior year
period. The uses in both periods related primarily to growth in loans available
for sale.
Net cash used in investing activities approximated $33.1 million and $12.3
million during the six months ended December 31, 1998 and 1997, 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 Bank's capital to support its
asset growth has come from internally generated earnings, additional capital
contributions by its shareholders and proceeds from the Initial Public Offering
consummated in February 1998. Prior to February 1998, 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 tables set forth the Bank's regulatory capital levels at December
31, 1998. The Company is not subject to regulatory capital requirements.
<TABLE>
<CAPTION>
Required for To Be Well Capitalized
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 $24,056 9.41% $ 3,835 1.50% $12,784 5.00%
Core capital 24,056 9.41% 10,227 4.00 $12,784 5.00
Risk-based capital 25,261 16.87% 11,978 8.00 $14,973 10.00
</TABLE>
Year 2000 Compliance
The Company has adopted a Year 2000 policy to address the "Year 2000"
Issue concerning the inability of certain information systems and automated
equipment to properly recognize and process dates containing the Year 2000 and
beyond. If not corrected, these systems and equipment could produce inaccurate
or unpredictable results commencing on January 1, 2000. The Company, similar to
most financial services providers, is particularly vulnerable to the potential
impact of the Year 2000 Issue due to the nature of financial information.
Potential impacts to the Company may arise from software, computer hardware, and
other equipment both with the Company's direct control and outside of the
Company's ownership, yet with which the Company electronically or operationally
interfaces.
11
<PAGE>
In order to address the Year 2000 Issue, the Company has developed and
implemented a five phase compliance plan divided into the following major
components: (1) Awareness; (2) Assessment; (3) Renovation; (4) Validation and
Testing; and (5) Implementation. the company has completed the first three
phases of the plan for all of its mission-critical systems and is currently
working on the final two phases. Because the Company outsources the majority of
its data processing operations to Fiserv Solutions, Inc. ("Fiserv"), a provider
of data processing services to the financial services industry, a significant
component of the Year 2000 plan is to work with Fiserv to test and certify their
systems as Year 2000 compliant. Fiserv has informed the Company that, based upon
test which is has conducted and is currently conducting, it believes its systems
are Year 2000 compliant. The Company anticipates that all mission-critical
systems will complete testing by Spring of 1999. Other important segments of the
Year 2000 plan are to identify those suppliers an customers whose possible lack
of Year 2000 preparedness might expose the Company to financial loss, and to
highlight any servicers of purchased loans or securities which might present
Year 2000 operating problems.
The Company has no internally generated programmed software coding to
correct, as substantially all of the software utilized by the Company is
purchased or licensed from external providers. The Company has initiated
communications with all of its significant suppliers to determine the extent to
which the Company is vulnerable to those third parties' failure to remediate
their own Year 2000 issues. The Company has received assurances by these third
party vendors of mission-critical products or services that they will be Year
2000 compliant. The Company has developed a contingency plan in the event their
systems malfunction at the change of the Century. At this time, the Company
cannot estimate the cost, if any, that might be required to implement such
contingency plans.
The Company anticipates that its total Year 2000 project cost, exclusive
of any costs associated with the implementation of its contingency plan, will
not exceed $100,000. This estimated project cost is based upon currently
available information and includes expenses for the review and testing by third
parties, including government entities. However, their can be no guarantee that
the hardware, software, and systems of such third parties will be free of
unfavorable Year 2000 issues and therefor not present a material adverse impact
upon the Company. The aforementioned Year 2000 project cost estimate also may
change as the Company progresses in its Year 2000 program and obtains additional
information associated with and conducts further testing concerning third
parties. At this time, no significant projects have been delayed as a result of
the Company's Year 2000 effort.
Financial institution regulators have intensively focused upon Year 2000
exposures, issuing guidance concerning the responsibilities of senior management
and directors. year 2000 testing and certification is being addressed as a key
safety and soundness issue in conjunction with regulatory exams. In May 1997,
the Federal Financial Institutions Examination Council ("FFIEC") issued an
interagency statement to the chief executive officers of all federally
supervised financial institutions regarding Year 2000 project management
awareness. The FFIEC has highly prioritized Year 2000 compliance in order to
avoid major disruptions to the operations of financial institutions and the
country's financial systems when the new century begins. The FFIEC statement
provides guidance to financial institutions, providers of data services, and all
examining personnel of the federal banking agencies regarding the Year 2000
Issue.
The federal banking agencies have been conducting Year 2000 compliance
examinations. The failure to implement an adequate Year 2000 program can be
identified as an unsafe and unsound banking practice. The Company and the Bank
are subject to regulation and supervision by the OTS which regularly conducts
review of the safety and soundness of the Company's operations, including the
Company's progress in becoming Year 2000 compliant. The OTS has established an
examination procedure which contains three categories of ratings:
"Satisfactory", "Needs Improvement", and "Unsatisfactory". Institutions that
receive a Year 2000 rating of Unsatisfactory may be subject to formal
enforcement action, supervisory agreements, cease and sesist orders, civil money
penalties, or the appointment of a conservator. In addition, federal reviewing
applications and may deny an application based on Year 2000 related issues.
Failure by the Company to adequately prepare for Year 2000 issues could
negatively impact the Company's banking operations, including the imposition of
restrictions upon its operations by the OTS.
12
<PAGE>
Despite the Company's activities in regards to the Year 2000 Issue,
there can be no assurance that pertial or total systems interuptions or the
costs necessary to update hardware and software would not have a material
adverse effect upon the Company's business, financial condition, results of
operations, and business prospects.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk. Interest rate risk is defined as the sensitivity of the
Company's current and future earnings and capital to changes in the level of
market interest rates. The Bank's exposure to interest rate risk results from,
among other things, the difference in maturities on interest-earning assets and
interest-bearing liabilities. Since the Bank's assets currently have a longer
maturity than its liabilities, the Bank's earnings could be negatively impacted
during a period of rising interest rates and conversely positively impacted
during a period of falling interest rates. The relationship between the interest
rate sensitivity of the Bank's assets and liabilities is continually monitored
by management. In this regard, the Bank emphasizes the origination of adjustable
rate assets for portfolio while originating longer term fixed rate assets for
resale. Additionally, the origination level of fixed rate assets are continually
monitored and if deemed appropriate, the Bank will enter into forward
commitments for the sale of these assets to ensure the Bank is not exposed to
undue interest rate risk.
The Bank utilizes its investment and mortgage-backed portfolio in managing its
liquidity and therefore generally seeks securities with a stated or estimated
duration 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.
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 December 31, 1998, the Bank did
not have any hedging transactions in place, such as interest rate swaps, caps or
floors.
Interest rate Sensitivity Analysis. One measure of a bank's interest rate
sensitivity is through the use of a GAP analysis. Using a GAP analysis, the Bank
matches the extent to which its interest-earning assets and interest-bearing
liabilities mature or reprice within specified time horizons. The interest rate
sensitivity gap is defined as the excess of interest-earning assets maturing or
repricing within a specific time period over the interest-bearing liabilities
maturing or repricing within the same time period (a negative GAP for a
specified time period would indicate there are more liabilities than assets
maturing or repricing within that time period). The Bank attempts to maintain
its one and three year GAP positions within +/- 10% and +/- 15% of assets,
respectively.
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 Office of Thrift
Supervision ("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.
13
<PAGE>
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.
14
<PAGE>
Part II Other Information
Item 1. Legal Proceedings
During October 1998, one of the Bank's deposit customers ("Bank Depositor") had
approximately $1.3 million of dishonored money orders which resulted in its
account being deficient by a similar amount. The Bank has initiated a lawsuit in
the Court of Common Pleas of Philadelphia County against the money order company
which placed the stop payments on the money orders issued, and the Bank
Depositor; alleging, among other things, that the money orders were improperly
stopped and the Bank was a holder in due course and is therefore entitled to
reimbursement. The Bank is seeking reimbursement in the lawsuit. The Bank has
also initiated an involuntary bankruptcy proceedings against the Bank Depositor
in the United States Bankruptcy Court for the Eastern District of Pennsylvania.
The Bank is seeking to have a trustee preserve the assets of the Bank Depositor
in order that the Bank may receive partial reimbursement. In December 1998, the
Company recorded a pre-tax provision of $950,000 to provide for its potential
exposure with respect to the money orders. The Company believes its litigation
has strong merit; however, the provision was recorded because of the length of
time likely to transpire before the litigation is finalized and the uncertainty
associated therewith.
Item 2. Changes in Securities and Use of Proceeds
A. Recent Sales of Unregistered Securities
None
B. Use of Proceeds from Registered Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
(A) Exhibits
Those exhibits previously filed with the Securities and
Exchange Commission as required by Item 601 of Regulation
S-K, are incorprorated herein by reference in accordance with the
provision of Rule 12b-32
Exhibit No.
27. Financial Data Schedule
(B) Reports on Form 8-K
None
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Crusader Holding Corporation
Date: February 16, 1998 By: /s/ Thomas J. Knox
----------------------------------------
Thomas J. Knox
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: February 16, 1998 By: /s/ Joseph T. Crowley
----------------------------------------
Joseph T. Crowley
Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
16
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit
- ----------- -------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 0
<INT-BEARING-DEPOSITS> 5,106,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 19,778,000
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 0
<ALLOWANCE> 1,205,000
<TOTAL-ASSETS> 256,936,000
<DEPOSITS> 160,428,000
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,458,000
<LONG-TERM> 68,780,000
0
0
<COMMON> 39,000
<OTHER-SE> 25,115,000
<TOTAL-LIABILITIES-AND-EQUITY> 256,936,000
<INTEREST-LOAN> 9,206,000
<INTEREST-INVEST> 718,000
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 9,924,000
<INTEREST-DEPOSIT> 3,673,000
<INTEREST-EXPENSE> 5,319,000
<INTEREST-INCOME-NET> 4,605,000
<LOAN-LOSSES> 350,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,606,000
<INCOME-PRETAX> 3,072,000
<INCOME-PRE-EXTRAORDINARY> 3,072,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,931,000
<EPS-PRIMARY> 0.50
<EPS-DILUTED> 0.50
<YIELD-ACTUAL> 4.20
<LOANS-NON> 2,544,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 855,000
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,205,000
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,205,000
</TABLE>
