<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, 1999
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, 3,872,034 shares outstanding as
February 7, 2000.
<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, 1999 and June 30,1999 ......................................................3
Consolidated Statements of Income for the three months ended and six months ended December 31, 1999 and 1998...............4
Consolidated Statement of Shareholders' Equity and Comprehensive Income for the six months ended December 31, 1999.........5
Consolidated Statements of Cash Flows for the six months ended December 31, 1999 and 1998 .................................6
Notes to Consolidated Financial Statements.................................................................................7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..............................8
Item 3. Quantitative and Qualitative Disclosures about Market Risk .......................................................12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................................................14
Item 2. Changes in Securities and Use of Proceeds ........................................................................14
Item 3. Defaults Upon Senior Securities...................................................................................14
Item 4. Submission of Matters to a Vote of Security Holders...............................................................14
Item 5. Other Information.................................................................................................14
Item 6. Exhibits and Reports on Form 8-K..................................................................................14
</TABLE>
<PAGE>
Item 1. Financial Statements
Crusader Holding Corporation and Subsidiary
Consolidated Balance Sheets
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<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
---- ----
(unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents $12,057,000 $6,056,000
Investment securities available-for-sale 20,578,000 20,454,000
Mortgage-backed securities available-for-sale 17,867,000 10,759,000
Loans held for sale (estimated market value
of $62,785,000 and $77,623,000 at December 31,1999
and June 30, 1999, respectively) 61,517,000 74,708,000
Loans receivable, net 237,554,000 187,696,000
Accrued interest receivable 2,305,000 2,379,000
Other real estate owned 902,000 315,000
Premises and equipment, net 1,079,000 1,068,000
Other assets 5,444,000 3,845,000
----------- -----------
Total Assets $359,303,000 $307,280,000
============ ============
LIABILITIES
Deposits $208,297,000 $189,106,000
Advances from Federal Home Loan Bank 111,200,000 80,300,000
Securities sold under agreements to repurchase 5,000,000 8,280,000
Other liabilities 5,329,000 2,028,000
----------- ----------
Total Liabilities 329,826,000 279,714,000
MINORITY INTEREST 220,000 230,000
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; 3,893,834 and 3,983,284
shares outstanding at December 31,
1999 and June 30, 1999, respectively 40,240 40,240
Additional paid-in capital 23,521,510 23,521,510
Retained earnings 8,115,250 4,627,250
Treasury stock, at cost (130,295 and 40,845 shares at
December 31, 1999 and June 30, 1999, respectively) (1,176,000) (368,000)
Accumulated other comprehensive loss (1,244,000) (485,000)
----------- -----------
Total Shareholders' Equity 29,257,000 27,336,000
----------- -----------
Total Liabilities and Shareholders' Equity $359,303,000 $307,280,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
Crusader Holding Corporation and Subsidiary
Consolidated Statements of Income (unaudited)
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<TABLE>
<CAPTION>
Three months Six months
ended December 31, ended December 31,
---------------------- ------------------
1999 1998 1999 1998
---- ---- ---- ----
INTEREST INCOME
<S> <C> <C> <C> <C>
Loans, including fees $6,694,000 $4,826,000 $12,914,000 $9,206,000
Short-term consumer loans, including fees 1,070,000 - 1,811,000 -
Investment and mortgage-backed securities 782,000 407,000 1,433,000 718,000
----------- ----------- ------------ -----------
Total interest income 8,546,000 5,233,000 16,158,000 9,924,000
----------- ----------- ------------ -----------
INTEREST EXPENSE
Deposits 2,437,000 1,995,000 4,741,000 3,673,000
Borrowed funds 1,638,000 803,000 2,970,000 1,646,000
---------- ----------- ------------ -----------
Total interest expense 4,075,000 2,798,000 7,711,000 5,319,000
---------- ----------- ------------ -----------
NET INTEREST INCOME 4,471,000 2,435,000 8,447,000 4,605,000
PROVISION FOR LOAN LOSSES
Short-term consumer loans 558,000 - 885,000 -
Other loans 350,000 250,000 650,000 350,000
----------- ----------- ------------ -----------
Total provision for loan losses 908,000 250,000 1,535,000 350,000
----------- ----------- ------------ -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,563,000 2,185,000 6,912,000 4,255,000
NON-INTEREST INCOME
Service charges on deposit accounts and
other fees 61,000 31,000 91,000 59,000
Conforming mortgage banking revenues (75,000) 272,000 (158,000) 448,000
Non-interest income from Crusader
Mortgage Corporation 303,000 860,000 741,000 1,841,000
Other 174,000 42,000 321,000 75,000
----------- ----------- ------------ -----------
Total non-interest income 463,000 1,205,000 995,000 2,423,000
NON-INTEREST EXPENSES
Employee compensation and benefits 463,000 371,000 880,000 726,000
Data processing 37,000 40,000 73,000 71,000
Federal insurance premiums 28,000 19,000 53,000 39,000
Occupancy and equipment 101,000 84,000 213,000 162,000
Professional fees 54,000 29,000 136,000 59,000
Crusader Mortgage Corporation expenses 339,000 598,000 764,000 1,236,000
Other operating 220,000 194,000 390,000 321,000
Goodwill amortization 21,000 21,000 42,000 42,000
Loss on fraudulent money orders - 950,000 - 950,000
----------- ----------- ------------ -----------
Total non-interest expenses 1,263,000 2,306,000 2,551,000 3,606,000
----------- ----------- ------------ -----------
INCOME BEFORE INCOME TAX EXPENSE 2,763,000 1,084,000 5,356,000 3,072,000
INCOME TAX EXPENSE 876,000 368,000 1,705,000 1,076,000
----------- ----------- ------------ -----------
Income before minority interest 1,887,000 716,000 3,651,000 1,996,000
Minority interest 85,000 36,000 163,000 65,000
----------- ----------- ------------ -----------
NET INCOME $ 1,802,000 $ 680,000 $ 3,488,000 $ 1,931,000
=========== =========== ============ ===========
Net income per share, basic and diluted $ .46 $ .17 $ .89 $ .48
=========== =========== ============ ===========
Basic and diluted weighted average shares outstanding 3,905,627 4,024,129 3,916,106 4,024,129
=========== =========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
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Crusader Holding Corporation and Subsidiary
Consolidated Statement of Shareholders' Equity and Comprehensive Income
For the six months ended December 31, 1999 (unaudited)
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<TABLE>
<CAPTION>
Accumulated
Additional other Total
Common paid-in Treasury Retained Comprehensive Shareholders' Comprehensive
stock capital stock earnings loss equity loss
----- ------- ----- -------- ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1999 $ 40,240 $23,521,510 ($368,000) $ 4,627,250 ($485,000) $27,336,000
Net unrealized loss on
securities available- for-sale - - - - (759,000) (759,000) ($759,000)
Purchase of treasury stock - - (808,000) - - (808,000)
Net income - - - 3,488,000 - 3,488,000 3,488,000
------------
Total comprehensive loss _______ __________ __________ __________ ____________ __________ $ 2,729,000
============
Balance at December 31, 1999 $ 40,240 $23,521,510 ($1,176,000) $8,115,250 ($1,244,000) $29,257,000
======== =========== ============ ============ ============= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
Crusader Holding Corporation and Subsidiary
Consolidated Statements of Cash Flows (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six months ended
December 31,
1999 1998
---- ----
OPERATING ACTIVITIES
<S> <C> <C>
Net income $3,488,000 $1,931,000
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Amortization of premiums and discounts on securities and loans, net 79,000 167,000
Amortization of goodwill 42,000 42,000
Provision for loan losses 1,535,000 350,000
Net gain on sale of loans held for sale (583,000) (272,000)
Depreciation and amortization of premises and equipment 132,000 110,000
Proceeds from sale of assets held for sale 71,969,000 145,912,000
Originations of loans held for sale (58,195,000) (171,908,000)
(Increase) decrease in accrued interest receivable 74,000 (177,000)
(Increase) decrease in deferred income taxes (431,000) 331,000
Other, net 778,000 (1,962,000)
--------------- ---------------
Net cash provided by (used in) operating activities 18,888,000 (25,476,000)
INVESTMENT ACTIVITIES
Net increase in loans (51,980,000) (31,008,000)
Purchase of investment securities available-for-sale (4,659,000) (4,122,000)
Purchase of mortgage-backed securities available-for-sale (3,769,000) -
Repayment of principal of investment securities available-for-sale - (1,123,000)
Repayment of principal of mortgage-backed securities available-for-sale 735,000 3,315,000
Proceeds from sale of property acquired through loan foreclosure actions 587,000 -
Purchase of premises and equipment (156,000) (120,000)
-------------- ---------------
Net cash used in investing activities (59,242,000) (33,058,000)
FINANCING ACTIVITIES
Net increase in deposits 19,191,000 41,597,000
Advances (repayments) from Federal Home Loan Bank, net 37,700,000 (14,150,000)
(Repayment) proceeds from long-term FHLB advances (6,800,000) 25,500,000
Repayment of securities sold under agreements to repurchase (3,280,000) 0
Increase in advance payments by borrowers for taxes and insurance 362,000 -
Purchase of treasury stock (808,000) -
Increase(decrease) in minority interest (10,000) 23,000
-------------- ----------------
Net cash provided by financing activities 46,355,000 52,970,000
Net increase (decrease) in cash and cash equivalents 6,001,000 ( 5,564,000)
Cash and cash equivalents at beginning of year 6,056,000 10,670,000
------------- -------------
Cash and cash equivalents at end of period $12,057,000 $ 5,106,000
=========== =============
</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,
1999 and 1998 is unaudited)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The unaudited consolidated financial statements as of December 31, 1999, and for
the three and six month periods ended December 31, 1999 and 1998 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, 1999 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 equivalent shares are stock options,
warrants and similar items. In converting the common equivalent shares 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 equivalent
shares are used to repurchase outstanding common 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 all stock dividends, including the 5% stock dividend paid October 14,
1999. Basic and diluted weighted average shares outstanding were 3,905,627 and
4,024,129 for the three months ended December 31, 1999, and December 31, 1998,
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. RECENT PRONOUNCEMENTS
None
5. RECENT LITIGATION
During October 1998, one of the Bank's deposit customers (the "Bank Depositor")
had deposited 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 had 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 proceeding
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. An order for relief under Chapter 7 of the Bankruptcy Code was
granted on March 8, 1999. On June 9, 1999 a permanent trustee was elected as
trustee in the Chapter 7 case (the "Chapter 7 Trustee"). The Bank has filed a
proof of claim in the Chapter 7 case for the deficiency in the Bank Depositor's
account. The Chapter 7 Trustee is investigating potential causes of action and
recoveries arising out of or relating to the stopped money orders for the
benefit of the Bank Depositor's creditors, including the Bank. 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
state court litigation has strong merit and that it can recover a substantial
portion of its claim in the Chapter 7 case; 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.
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 Annual Report on Form 10-K for the fiscal year
ended June 30, 1999. Unaudited results of operations for the three and six month
periods ended December 31, 1999 are compared to the unaudited results of
operations for the comparable periods ended December 31, 1998. Such information
is based upon the historical financial information available as of the dates
indicated. Results of operations for the three and six month periods ended
December 31, 1999 and are not necessarily indicative of results to be attained
for any other period.
Statements regarding the Company's expectations as to financial results and
other aspects of its business set forth herein or otherwise made in writing or
orally by the Company may constitute forward looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Although the
Company believes that its expectations are based on reasonable assumptions
within the bounds of its knowledge of its business and operations, there can be
no assurance that actual results will not differ materially from its
expectations. Factors that might cause or contribute to such differences
include, but are not limited to, uncertainty of future profitability, changing
economic conditions and monetary policies, uncertainty of interest rates, risks
inherent in banking transactions, the impact of recent action by the Office of
Thrift Supervision ("OTS") to limit the Bank's asset growth and any related
future OTS actions, competition, extent of government regulations, and delay in
or failure in obtaining regulatory approvals.
GENERAL
The Company is a holding company operating a federally chartered savings bank.
The Bank conducts community banking activities by accepting deposits from the
public and investing the proceeds in loans and investment securities. The
Company's lending products include conforming and nonconforming credit
residential mortgages, consumer and home equity loans, multi-family residential
and non-residential real
8
<PAGE>
estate loans, SBA loans, and secured property tax liens. In order to manage its
liquidity and interest rate risk, the Company maintains an investment portfolio
consisting of bonds and mortgage-backed securities, most of which are investment
quality. The Company'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 Company's investment securities. The
Company'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
Company's net income is impacted by its loan loss provision, non-interest income
(non-interest revenues realized by CMC in its nonconforming mortgage banking
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's
nonconforming mortgage operations).
FINANCIAL CONDITION
The Company's assets increased to $359.3 million at December 31, 1999 compared
to $307.3 million at June 30, 1999. The increase in assets primarily reflects
the deployment of proceeds from certificates of deposit and FHLB advances into
loans. At December 31, 1999, the loan portfolio aggregated $237.6 million
compared to $187.7 million at June 30, 1999, with the growth concentrated in
commercial real estate loans, including loans secured by apartment buildings and
mixed use properties, conforming adjustable rate residential mortgages and
short-term consumer loans. Loans held for sale decreased to $61.5 million at
December 31, 1999 compared to $74.7 million at June 30, 1999. This decrease
resulted primarily from a decrease in the volume of conforming mortgage
originations due to higher market interest rates and the elimination of the
Bank's National Chinese Mortgage and Crusader Mortgage Corporation of Delaware
mortgage banking operations. Nonconforming mortgage loans available for sale
aggregated $31.6 million at December 31, 1999, with the balance in conforming
loans available for sale. The Company has de-emphasized the origination of
nonconforming mortgage loans in the last year, and intends to further reduce the
existing portfolio of such loans. Cash and cash equivalents aggregated $12.1
million at December 31, 1999 compared to $6.1 million at June 30, 1999. Deposits
were $208.3 at December 31, 1999 as compared to $189.1 million at June 30, 1999
reflecting primarily an increase in certificates of deposit. FHLB advances
increased to $111.2 million at December 31, 1999 from $80.3 million at June 30,
1999 as these borrowings were utilized in part to fund asset growth.
Shareholders' equity increased by $1.9 million due primarily to net income
generated during the period, which was offset by $808,000 of stock repurchases
as well as a $759,000 increase in unrealized losses on securities available for
sale.
RESULTS OF OPERATIONS
Three months ended December 31, 1999 versus three months ended December 31,
1998. Net income increased to $1.8 million for the three months ended December
31, 1999 as compared to $1.3 million for the comparable prior period (before a
previously disclosed December 1998 one-time after-tax charge of $608,000). Net
interest income increased by $2.0 million, of which $1.0 million related to the
Company's new short-term consumer loan product. Excluding short-term consumer
loans, net interest income increased by $1.0 million or 40%, due primarily to a
$100.5 million growth in average earning assets, partially offset by a decrease
in the net yield on interest earning assets to 4.08% as compared to 4.18% in the
prior year period. The provision for loan losses was increased to $908,000 for
the three months ended December 31, 1999 as compared to $250,000 for the prior
year period, of which $558,000 related to the Company's new short-term consumer
loan product. Non-interest income decreased by $742,000 due primarily to a
decrease of 557,000 in CMC's nonconforming mortgage banking revenue and a
decrease in conforming mortgage banking revenues of $347,000, partially offset
by higher loan fees and other non-interest income. The reduction in CMC's
mortgage banking revenues is consistent with the Company's strategy to
de-emphasize the origination and resale of nonconforming loans in the current
year, while the reduction in conforming mortgage banking revenues relates
primarily to the elimination of the Bank's National Chinese Mortgage Corporation
and Crusader Mortgage Corporation of Delaware mortgage banking operations.
Non-interest expenses decreased to $1.3 million as compared to $1.4 million
(excluding the one-time charge in 1998). CMC's non-conforming expenses were
reduced by $259,000, offset primarily by an increase in core operating expenses
of $166,000 to accommodate the growth in assets.
9
<PAGE>
Six months ended December 31, 1999 versus six months ended December 31, 1998.
Net income increased to $3.5 million for the six months ended December 31, 1999
as compared to $2.5 million for the comparable prior period (before a previously
disclosed December 1998 one-time after-tax charge of $608,000). Net interest
income increased by $3.8 million, of which $1.8 million related to the Company's
new short-term consumer loan product. Excluding short-term consumer loans, net
interest income increased by $2.0 million or 44%, due primarily to a $103.4
million growth in average earning assets, partially offset by a decrease in the
net yield on interest earning assets to 4.10% as compared to 4.20% in the prior
year period. The provision for loan losses was increased to $1,535,000 for the
six months ended December 31, 1999 as compared to $350,000 for the prior year
period, of which $885,000 related to the Company's new short-term consumer loan
product. Non-interest income decreased by $1.4 million due primarily to a
decrease of $1.1 million in CMC's nonconforming mortgage banking revenues of
$606,000. The reduction in CMC's mortgage banking revenues is consistent with
the Company's strategy to de-emphasize the origination and resale of
nonconforming loans in the current year. Non-interest expenses decreased to $2.6
million as compared to $2.7 million (excluding the one-time charge in 1998).
CMC's nonconforming expenses were reduced by $472,000, offset primarily by an
increase in core operating expenses of $367,000 to accommodate the growth in
assets.
As disclosed in the Company's current Report on form 8-K filed on December 27,
1999, as a result of a recent examination by the OTS, the Bank will be required
to limit its ongoing quarterly asset growth based on the interest credited on
its liabilities each quarter and certain other factors. OTS officials have
indicated that the OTS will consider removing the asset growth restriction after
the Bank has appropriately addressed the specific OTS concerns identified in the
examination. However, there can be no assurance that the OTS will remove the
asset growth restriction in any particular time period.
Year 2000 Readiness
The Company has adopted a Year 2000 policy to address the "Year 2000" Issue
concerning the inability of certain information systems and automated equipment
to properly recognize and process dates containing the Year 2000 and beyond. If
not corrected, these systems and equipment could produce inaccurate or
unpredictable results commencing on January 1, 2000. The Company, similar to
most financial services providers, is particularly vulnerable to the potential
impact of the Year 2000 Issue due to the nature of financial information.
Potential impacts to the Company may arise from software, computer hardware, and
other equipment both within the Company's direct control and outside of the
Company's ownership, yet with which the Company electronically or operationally
interfaces.
In order 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 completed each of the phases of the plan for all of
its mission-critical systems prior to December 31, 1999. 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 has been and is
to work with Fiserv to test and certify their systems as Year 2000 compliant.
Fiserv has informed the Company that, based upon tests which it has conducted
prior to December 31, 1999, it believes its systems are Year 2000 compliant.
Other important segments of the Year 2000 plan are to identify those suppliers
and customers whose possible lack of Year 2000 preparedness might expose the
Company to financial loss, and to highlight any servicers of purchased loans or
securities which might present Year 2000 operating problems.
The Company has no internally generated programmed software coding to correct,
substantially all of the software utilized by the Company is purchased or
licensed from external providers. The Company has communicated 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 from 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 or thereafter.
10
<PAGE>
As of December 31, 1999, the Company's Year 2000 project cost, exclusive of any
costs associated with the implementation of its contingency plan did not exceed
the estimated cost of $100,000. At this time, no significant projects have been
delayed as a result of the Company's Year 2000 effort.
The Company did not experience any Year 2000 disruptions on January 1, 2000;
however, because Year 2000 issues may arise at any time subsequent to January 1,
2000, there can be no assurance that the Company will not experience Year 2000
disruptions in the future and that such disruptions would not have a material
adverse effect upon the Company's business, financial condition, results of
operations and business prospects.
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 compliance in order to
avoid major disruptions to the operations of financial institutions and the
country's financial systems on January 1, 2000. 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 conducted Year 2000 compliance examinations.
The Company and the Bank are subject to regulation and supervision by the OTS
which regularly conducts reviews of the safety and soundness of the Company's
operations, including the Company's progress in becoming Year 2000 compliant.
The OTS has established an examination procedure which contains three categories
of ratings: "Satisfactory", "Needs Improvement", and "Unsatisfactory".
Institutions that receive a Year 2000 rating of Unsatisfactory may be subject to
formal enforcement action, supervisory agreements, cease and desist orders,
civil money penalties, or the appointment of a conservator. In addition, federal
regulators reviewing applications may deny any application based on Year 2000
related issues. In its most recent Year 2000 compliance examination, the Bank
received a "Satisfactory" rating. 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.
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 and FHLB advances.
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.
The Bank's primary uses of funds are for the origination and acquisition of
loans, the funding of maturing deposits and the repayment of borrowings. 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.
<PAGE>
Net cash provided by operating activities for the six months ended December 31,
1999 was $18.9 million as compared to $25.5 million of net cash used in the
comparable prior year period. The change in net cash provided or used by
operating activities primarily relates to the change in the level of loans
available-for-sale. Net cash used in investing activities was $59.2 million and
$33.1 million for the six months ended December 31, 1999 and 1998, respectively.
During each period, 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"). The Bank's capital growth
during the period presented has come primarily from internally generated
earnings.
11
<PAGE>
The following table sets forth the Bank's regulatory capital levels at December
31, 1999.
<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 $30,702 8.54% $ 5,392 1.50% $17,975 5.00%
Core capital $30,702 8.54% $14,380 4.00 $21,569 5.00
Risk-based capital $33,342 14.47% $18,429 8.00 $23,037 10.00
</TABLE>
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 customarily priced 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. During the quarter ended December 31, 1999, the Bank began to
offer a competitively priced retail certificate of deposit with a maturity term
of two years. The program is monitored on an ongoing basis and will be managed
based upon the interest rate risk profile of the Bank and the overall market
interest rate environment. In order to hedge interest rate exposure, the Bank
entered into several interest rate swaps with the FHLB effective January 5, 2000
aggregating approximately $10 million. At December 31, 1999, approximately 88%
of the Bank's deposits were CDs.
12
<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 December 31, 1999, other than
the above referenced deposit swaps with the FHLB, the Bank did not have any
hedging transactions in place, such as 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.
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.
13
<PAGE>
PART II. OTHER INFORMATION
Item 1. 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.
During October 1998, one of the Bank's deposit customers (the "Bank Depositor")
had deposited 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 had 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 proceeding
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. An order for relief under Chapter 7 of the Bankruptcy Code was
granted on March 8, 1999. On June 9, 1999 a permanent trustee was elected as
trustee in the Chapter 7 case (the "Chapter 7 Trustee"). The Bank has filed a
proof of claim in the Chapter 7 case for the deficiency in the Bank Depositor's
account. The Chapter 7 Trustee is investigating potential causes of action and
recoveries arising out of or relating to the stopped money orders for the
benefit of the Bank Depositor's creditors, including the Bank. 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
state court litigation has strong merit and that it can recover a substantial
portion of its claim in the Chapter 7 case; 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.
Item 2. Changes in Securities and Use of Proceeds
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
incorporated herein by reference in accordance with the
provision of Rule 12b-32.
14
<PAGE>
Exhibit No.
27. Financial Data Schedule
(B) Reports on Form 8-K
On December 27, 1999, the Company filed an 8-K to report a
press release issued by the Company on December 17, 1999.
The press release announced that, as a result of a recently
concluded examination of its subsidiary Bank by the Office
of Thrift Supervision, the Bank will be required, among
other things to limit its asset growth at the end of each
calendar quarter to the net interest credited on its
liabilities during the quarter. In addition, the press
release announced the adoption by the Company of a Plan of
Strategic Reorganization.
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 14, 2000 By: /s/ Thomas J. Knox
-------------------
Thomas J. Knox
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: February 14, 2000 By: /s/ Dan A. Chila
-----------------
Dan A. Chila
Senior Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
16
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit
----------- -------
27 Financial Data Schedule
17
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-31-1999
<CASH> 0
<INT-BEARING-DEPOSITS> 9,408,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 38,445,000
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 0
<ALLOWANCE> 2,640,000
<TOTAL-ASSETS> 359,303,000
<DEPOSITS> 208,297,000
<SHORT-TERM> 62,500,000
<LIABILITIES-OTHER> 5,329,000
<LONG-TERM> 53,700,000
0
0
<COMMON> 40,000
<OTHER-SE> 29,217,000
<TOTAL-LIABILITIES-AND-EQUITY> 359,303,000
<INTEREST-LOAN> 14,725,000
<INTEREST-INVEST> 1,433,000
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 16,158,000
<INTEREST-DEPOSIT> 4,741,000
<INTEREST-EXPENSE> 7,711,000
<INTEREST-INCOME-NET> 8,447,000
<LOAN-LOSSES> 1,535,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,551,000
<INCOME-PRETAX> 5,356,000
<INCOME-PRE-EXTRAORDINARY> 5,356,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,488,000
<EPS-BASIC> .89
<EPS-DILUTED> .89
<YIELD-ACTUAL> 4.08
<LOANS-NON> 2,218,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,523,000
<CHARGE-OFFS> 418,000
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 2,640,000
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,640,000
</TABLE>
