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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number 0-23663
CRUSADER HOLDING CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2562545
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1230 Walnut Street 19107
Philadelphia, PA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (215) 893-1500
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
---------------------------- -------------------------------------------
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss. 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of the registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon closing sale price as quoted on the NASDAQ Stock
Market on September 15, 2000: $33,764,824.
As of September 15, 2000, 3,858,837 shares of the registrant's Common
Stock were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for its Annual Meeting
of Stockholders to be filed not later than 120 days after the close of the
fiscal year are incorporated by reference in Part III of this Report on Form
10-K.
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Part I
Item 1. Business
General
Crusader Holding Corporation (the "Company"), a Pennsylvania corporation,
established in 1988 and headquartered in Philadelphia, Pennsylvania, is the
holding company for Crusader Savings Bank, FSB (the "Bank"), a federally
chartered savings bank. Substantially all of the Company's business activities
are conducted through the Bank. At June 30, 2000, the Company had total assets
of $393.7 million, total deposits of $243.3 million and total shareholders'
equity of $32.6 million. The Bank's deposits are federally insured by the
Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation ("FDIC") to the maximum extent permitted by law. As a savings and
loan holding company, the Company is subject to the supervision and regulation
of the Office of Thrift Supervision ("OTS").
The Bank provides community banking services through two branches and two
ATMs in Philadelphia, and has focused primarily on mortgage lending for
residential and multi-family housing and commercial real estate. The Company's
strategy is to identify and develop business lines and product niches where it
can utilize its Federal thrift charter, its access to low cost funds and its
core competencies in risk management to achieve superior risk-adjusted rates of
return. The Company's current business lines and product niches include
residential and commercial real estate lending, Small Business Administration
("SBA") lending, mortgage banking, short-term consumer lending and the
acquisition of secured property tax liens.
History
The Bank was founded in 1943 and acquired by the Company in 1989. Through
1995, the Bank operated primarily as a community savings bank, accepting
deposits from the public and investing the proceeds in investment securities
and loans, primarily adjustable rate conforming residential mortgage loans. The
Bank also originated fixed rate mortgages for resale in the secondary market,
earning a fee in connection with such resales, and offered ancillary
residential loan products, such as home equity lines of credit. In 1994, the
Bank opened its Center City, Philadelphia branch and, in 1995, began to focus
on the origination of commercial real estate loans.
The Company has grown its assets from $63.6 million as of June 30, 1995 to
$393.7 million as of June 30, 2000. During this period, the Company has grown
its core banking income by increasing its net interest income and controlling
its operating expenses. While increasing its net interest income from $1.4
million for fiscal year 1996 to $2.8 million for fiscal year 1997, $6.0 million
for fiscal year 1998, $10.0 million for fiscal year 1999, and $17.5 million for
fiscal year 2000, the Company contained the growth in its core non-interest
expenses (operating expenses exclusive of one-time charges and mortgage banking
expenses) from $1.6 million (2.47% of average assets) for fiscal year 1996 to
$1.7 million (1.70% of average assets) for fiscal year 1997, $2.1 million
(1.24% of average assets) for fiscal year 1998, $2.8 million (1.13% of average
assets) for fiscal year 1999 and $3.6 million (1.03% of average assets) for
fiscal year 2000.
A brief description of each of the Company's primary product lines and
services follows:
Business Lines and Product Niches
Residential Lending and Mortgage Banking
Generally, the Bank's current residential lending approach complies with
the Federal National Mortgage Association ("FNMA") underwriting standards with
respect to credit, debt ratios and documentation. Loans in excess of an 80%
loan-to-value ("LTV") ratio generally carry private mortgage insurance.
Generally, to avoid interest rate risk, fixed rate mortgages are originated for
resale in the secondary market, and the Bank earns a fee in connection with
such resale. Adjustable rate mortgages, depending upon size, are either sold or
retained in the Bank's portfolio. The Bank also offers a full line of single
family construction loans, rehabilitation loans and home equity lines of
credit.
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During the past several years, the Company also generated nonconforming
credit residential mortgage loans ("Nonconforming Mortgages"). In exchange for
the additional lender risk associated with these loans, nonconforming borrowers
generally are required to pay a higher interest rate than a conforming
borrower. At June 30, 2000, the Company had a portfolio of Nonconforming
Mortgages of $24.6 million with a weighted average interest rate of 11.54%. The
Company has substantially reduced its volume of Nonconforming Mortgage
production and is currently generating less than $1 million per month of such
loans, all of which are intended for resale and subject to purchase commitments
by designated investors. The Company intends to continue to reduce its
portfolio of Nonconforming Mortgages.
In November 1999, the Company adopted a Plan of Strategic Reorganization
(the "Plan") to simplify the operations of the Bank. As part of the Plan, the
Bank discontinued the businesses of its subsidiaries, National Chinese Mortgage
Corporation ("NCM"), Crusader Mortgage Corporation of Delaware ("CMCD") and
Crusader Mortgage Corporation ("CMC"). All of the mortgage banking activities
of the Bank were consolidated into the Bank's Philadelphia operations. In
connection with the consolidation, $42.2 million of loans (including the
aforementioned Nonconforming Mortgages) generated by these subsidiaries were
transferred from loans held for sale to the loan portfolio, and the Company
incurred pre-tax write-offs aggregating $436,000 with respect to NCM and
$402,000 with respect to CMCD.
With respect to loans originated for resale, the loans and their related
servicing rights are sold on a non-recourse basis pursuant to agreements
containing customary representations and warranties by the Bank regarding the
underwriting criteria and the origination process. However, absent a breach of
its representations and warranties or, if applicable, a first payment default,
the Bank has no exposure with respect to losses incurred by the purchaser with
respect to a default by the borrower. To date, the Bank has had minimal
repurchases of loans previously sold, although there is no assurance that this
will be the case in the future. Loans originated for resale are typically
approved by the intended third party investor pursuant to an automated
underwriting system supplied by the investor, and the Bank receives a
pre-approval on the loan prior to its closing.
The Bank does not have any exposure in its financial statements to "gain
on sale" securitization accounting. In addition, because the Bank sells its
loans with their related servicing rights, it does not retain any risk with
respect to the ongoing valuation of servicing rights. At June 30, 2000, the
Bank's residential loan portfolio aggregated $156.9 million.
Commercial Real Estate Lending
The Bank's Commercial Real Estate lending activities consist of loans
secured by apartment buildings, small office buildings, mixed use properties
and occasionally non-real estate collateral. The Bank believes these loans are
generally less risky than commercial real estate loans secured by a property
with a single business user, where the ability of the borrower to repay is
dependent upon the operations of the business. The Bank's Commercial Real
Estate loans are generally secured by real estate located principally in the
Philadelphia metropolitan area, and in certain cases, in southern and central
New Jersey and Delaware. The loans are underwritten in accordance with strict
debt service and LTV guidelines, generally with maximum LTVs of up to 75%. The
Bank typically requires personal guarantees on Commercial Real Estate loans.
The Bank will sometimes permit a borrower to supplement or substitute
marketable securities or other property as collateral for Commercial Real
Estate loans in accordance with prescribed guidelines. All Commercial Real
Estate loans are approved by the Loan Committee of the Bank's Board of
Directors (the "Bank Loan Committee").
The Bank has emphasized Commercial Real Estate loans ranging in size
between $500,000 and $3.0 million. The Bank believes this is an underserved
portion of the market that is not subject to the intense competition present
with respect to Commercial Real Estate loans in excess of $3.0 million. This
market has also benefited from the ongoing consolidation of banks in the
Philadelphia metropolitan area. This has allowed the Bank to generate an
adequate volume of Commercial Real Estate loans without generally varying from
its strict underwriting guidelines and its policy of requiring a personal
guarantee on all Commercial Real Estate loans.
The Bank's Commercial Real Estate loans provide primarily for fixed
interest rates during an initial period ranging from one year to five years. At
the end of the initial period, the interest rate adjusts to a specified margin
over the prevailing U.S. Treasury rate for the ensuing period. The Bank's
Commercial Real Estate loan portfolio has generally been priced to provide an
average spread of at least 300 basis points over comparable Treasury securities
at time of origination. At June 30, 2000, the Bank's Commercial Real Estate
Loan portfolio aggregated $125.9 million.
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Small Business Administration Lending
The Bank is an approved SBA lender. Under the SBA program, the SBA
guarantees up to 75% of the outstanding loan balance of an approved SBA loan.
Because the loans are generally collateralized by real estate or other assets,
the ultimate risk of loss is reduced substantially, as any collateral
recoveries are realized by the lending institution on a pro-rata basis in
accordance with the non-guaranteed percentage of the loan balance. Interest
rates on the Bank's SBA loans generally float based on the prime rate, with
typical average margins of 175 to 275 basis points above prime. Thus, the Bank
is able to earn above average interest rates on the full balance of the loans,
while generally limiting its exposure to a maximum of 25% of the outstanding
balance, which exposure is further reduced by its share of recoveries.
Because the guaranteed portion of an SBA loan is backed by the full faith
and credit of the U.S. Government, this portion can be sold as a security,
generating gains on sale of up to 7% of the guaranteed principal balances. The
sale of the guaranteed portion is generally without recourse and without
exposure with respect to prepayment of the loan.
Despite its reduced exposure, the Bank adheres to strict underwriting
guidelines with respect to its origination of SBA loans, including obtaining
personal guarantees from the borrower's principals. All SBA loans require the
approval of the Bank Loan Committee. The Bank utilizes the SBA program
primarily to make commercial loans to single business users of properties and
to make certain loans that do not fit into its traditional underwriting
criteria, such as lending to restaurants and new businesses.
Short-Term Consumer Lending
In April 1999, the Bank began making short-term consumer loans pursuant to
a Marketing and Servicing Agreement with NCAS of Pennsylvania, LLC ("NCAS"),
which in September 1999 became a subsidiary of Advance America, Cash Advance
Centers, Inc., an entity that has substantial experience with similar products.
In connection with these loans, the Bank advances up to $600, with the loan due
date coinciding with the borrower's next payday (or date of receipt of other
recurring payment), and charges the borrower an up-front finance charge equal
to 17% of the amount advanced. The borrower signs a promissory note,
arbitration agreement and a check payable to the Bank equal to the repayment
amount. The loans are marketed through approximately 70 NCAS locations in
Pennsylvania, all of which currently market only the Bank's loans.
As of June 30, 2000, the Company had $6.5 million of loans outstanding
(net of the allowance for short-term consumer loans) under this program. In
connection with ongoing consumer group concerns over this type of product, the
OTS and other federal banking agencies are conducting a policy analysis of
lending programs of this type and the appropriateness of banks and savings
institutions offering such products. As a result of this review, the Company
may be compelled or may choose to change or even discontinue this product in
the future, although it currently has no plans to do so. The Company had
approximately $2.1 million and $120,000, respectively, of net interest income
(after the provision for loan losses for short-term consumer loans) from this
program in fiscal years 2000 and 1999.
Secured Property Tax Liens/Certificates
The Company conducts its secured property tax lien business through
Crusader Servicing Corporation ("CSC"), a 60% owned subsidiary of the Bank that
commenced operations in August 1996. CSC acquires, at auction or through
assignment, delinquent property tax certificates in various jurisdictions that
sell such certificates. The procedures for the sale and purchase of property
tax certificates are defined by local law, but generally, in exchange for
paying the outstanding property taxes and penalties, the purchaser assumes a
lien position on the property that is superior to any mortgage lien. After a
specified holding period, the purchaser has the right to commence strict
foreclosure proceedings, under which the purchaser will receive title to the
property free and clear of any liens, regardless of the relationship between
the property value and the property tax lien. Prior to such strict foreclosure,
the property owner and/or junior lien holders have the right to redeem the
certificate by paying the amount expended by the tax certificate holder, plus
interest and/or penalties as defined by local statute. Since the outstanding
property taxes are generally a small percentage of the property value, there is
an incentive for a junior lien holder or property owner to redeem the
certificate prior to strict foreclosure, as they will not otherwise share in
the excess of the property value over the property tax lien amount.
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CSC is currently focusing its efforts in New Jersey, although it has also
purchased liens in Connecticut, Florida and Indiana. While the effective rate
of return (increase in redemption value) of each individual tax lien will vary,
CSC has on average been able to earn approximately a 14% yield with effective
LTVs significantly below the Bank's prevailing lending standards. In New
Jersey, by virtue of acquiring a tax lien, CSC also obtains the right to pay
any future unpaid delinquent property taxes, and, once paid, is statutorily
entitled to interest up to 18% annually on such future delinquent taxes.
Prior to bidding at any auctions, CSC conducts due diligence on available
properties in accordance with internal guidelines, such as the review of
property types, assessed values and lien searches and, depending upon size,
will physically inspect the property. As of June 30, 2000, CSC had a portfolio
of $27.2 million of delinquent property tax certificates.
Funding of Assets
The Bank has funded its assets through the generation of deposits at its
two branches, and through borrowings from the Federal Home Loan Bank ("FHLB")
and collateralized borrowings against its securities portfolio. Management
closely monitors rates and terms of competing sources of funds and attempts to
utilize the sources that are the most cost effective.
The Bank offers a full array of deposit products through its two branches
including checking accounts, certificates of deposit ("CDs"), money market
funds and statement savings accounts. The Bank also offers ancillary products
such as merchant credit card services, and has two full service Automated
Teller Machines.
Approximately 92% of the Bank's average deposits for the year were CDs,
primarily marketed through its branches and through financial planners and
brokers. While the Bank has attracted deposits by paying interest rates
slightly higher than generally offered in the retail market, this has allowed
the Company to focus on the implementation of its business strategy, including
the development of its lending business lines and product niches, and to
control its core non-interest expenses. For details of the Bank's deposits by
product type and maturity dates, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Deposits."
SUPERVISION AND REGULATION
General
The Bank is chartered as a federal savings bank under the Home Owners'
Loan Act, as amended (the "HOLA"), which is implemented by regulations adopted
and administered by the OTS. As a federal savings bank, the Bank is subject to
regulation, supervision and regular examination by the OTS. The OTS also has
extensive enforcement authority over all savings institutions and their holding
companies, including the Bank and the Company. Federal banking laws and
regulations control, among other things, the Bank's investments, loans,
required reserves, mergers and consolidations, payment of dividends and other
aspects of the Bank's operations. The deposits of the Bank are insured by the
SAIF administered by the FDIC to the maximum extent provided by law ($100,000
for each depositor). In addition, the FDIC has certain regulatory and
examination authority over OTS-regulated savings institutions and may recommend
enforcement actions against savings institutions to the OTS. The supervision
and regulation of the Bank is intended primarily for the protection of the SAIF
and the Bank's depositors rather than the Company or its shareholders.
As a result of a 1999 examination by the OTS, the Bank has entered into a
supervisory agreement with the OTS which was effective on April 26, 2000.
Effective with the quarter ended March 31, 2000, the Bank is required to limit
its ongoing quarterly asset growth based on the interest credited on its
deposits each quarter and certain other factors. The agreement also requires
the Bank to enhance its policies and procedures and its management, internal
control and audit functions. With a view to the eventual lifting of the asset
growth restrictions once the Bank has addressed the OTS examination concerns,
the agreement provides for the Bank to submit to the OTS updated prudent asset
growth and diversification policies. However, there can be no assurance that
the OTS will remove the asset growth restriction in any particular time period.
Failure to comply with the provisions of the supervisory agreement could expose
the Bank to further regulatory sanctions that could have a material adverse
effect on the Company.
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As a savings and loan holding company, the Company is registered with the
OTS and is subject to OTS regulation and supervision under the HOLA.
The following discussion is intended to be a summary of certain statutes,
rules and regulations affecting the Bank and the Company. A number of other
statutes and regulations have an impact on their operations. The following
summary of applicable statutes and regulations does not purport to be complete
and is qualified in its entirety by reference to relevant statutes and
regulations.
Regulation of the Bank
Business Activities. The Bank derives its lending and investment powers
from the HOLA and the regulations of the OTS thereunder. Under these laws and
regulations, the Bank may invest in mortgage loans secured by residential and
commercial real estate, commercial and consumer loans, certain types of
commercial paper and debt securities, and certain other assets. With FDIC and
OTS approval, the Bank may also establish service corporations that may engage
in activities reasonably related to the business of financial institutions but
not otherwise permissible for the Bank, including certain real estate equity
investments and securities and insurance brokerage. These investment powers are
subject to various limitations.
Branching. Subject to certain limitations, OTS regulations currently
permit a federally chartered savings institution like the Bank to establish
branches in any state of the United States, provided that the federal savings
institution qualifies as a "domestic building and loan association" under the
Internal Revenue Code of 1986, as amended (the "Code"), or is a "qualified
thrift lender" under HOLA. See " -- Qualified Thrift Lender Test." The Bank has
no current plans to establish any branch outside Pennsylvania although its
authority to establish interstate branches could facilitate a geographic
diversification in the future.
Regulatory Capital. The OTS has adopted capital adequacy regulations that
require savings institutions such as the Bank to meet three minimum capital
standards: a "core" capital requirement of 3% of adjusted total assets, a
"tangible" capital requirement of 1.5% of adjusted total assets, and a
"risk-based" capital requirement of 8% of total risk-based capital to total
risk-weighted assets. In addition, the OTS has adopted regulations imposing
certain restrictions on savings institutions that have a total risk-based
capital ratio of less than 8%, a ratio of Tier 1 capital to risk-weighted
assets of less than 4% or a ratio of Tier 1 capital to total assets of less
than 4% (or 3% if the institution is rated Composite 1 under the CAMEL
examination rating system). See "-- Prompt Corrective Regulatory Action."
The core capital, or "leverage ratio," requirement mandates that a savings
institution maintain core capital equal to at least 3% of its adjusted total
assets. "Core capital" includes common shareholders' equity (including retained
earnings), noncumulative perpetual preferred stock and related surplus,
minority interests in the equity accounts of fully consolidated subsidiaries
and certain nonwithdrawable accounts and pledged deposits. Core capital is
generally reduced by the amount of the savings institution's intangible assets,
with limited exceptions for permissible mortgage servicing rights ("MSRs"),
purchased credit card relationships and certain intangible assets arising from
prior regulatory accounting practices. Core capital is further reduced by the
amount of a savings institution's investments in and loans to subsidiaries
engaged in activities not permissible for national banks. At June 30, 2000, the
Bank had no such investments.
The risk-based capital standards of the OTS require maintenance of core
capital equal to at least 4% of risk-weighted assets and total capital equal to
at least 8% of risk-weighted assets. For purposes of the risk-based capital
requirement, "total capital" includes core capital plus supplementary capital
up to the amount of core capital. Supplementary capital includes preferred
stock that does not qualify as core capital, nonwithdrawable accounts and
pledged deposits to the extent not included in core capital, perpetual and
mandatory convertible subordinated debt and maturing capital instruments
meeting specified requirements and a portion of the institution's loan and
lease loss allowance.
The risk-based capital requirement is measured against risk-weighted
assets, which equal the sum of each asset and the credit-equivalent amount of
each off-balance sheet item after the dollar amount of each such asset and item
is multiplied by an assigned risk weight, which ranges from 0% to 100% as
assigned by the OTS capital regulations based on the risks the OTS believes are
inherent in the type of asset or off-balance sheet item.
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The OTS risk-based capital regulation also includes an interest rate risk
("IRR") component that requires savings institutions with greater than normal
IRR, when determining compliance with the risk-based capital requirements, to
maintain additional total capital. The OTS has, however, indefinitely deferred
enforcement of its IRR requirements.
Under the regulations, the OTS has the power to require Individual Minimum
Capital Requirements on institutions it deems as a higher risk than traditional
thrifts they regulate. In light of the OTS concerns resulting from its 1999
examination of the Bank, it is possible that the OTS could seek to establish an
Individual Minimum Capital Requirement for the Bank, although no such
requirement has been established to date.
Prompt Corrective Regulatory Action. Under the Federal Deposit Insurance
Corporation Improvement Act ("FDICIA"), the federal banking regulators are
required to take prompt corrective action in respect of depository institutions
that do not meet certain minimum capital requirements, including a leverage
limit and a risk-based capital requirement. All institutions, regardless of
their capital levels, are restricted from making any capital distribution or
paying any management fees that would cause the institution to become
undercapitalized. As required by FDICIA, banking regulators, including the OTS,
have issued regulations that classify insured depository institutions by
capital levels and provide that the applicable agency will take various prompt
corrective actions to resolve the problems of any institution that fails to
satisfy the capital standards.
Under the joint prompt corrective action regulations, a "well-capitalized"
institution is one that is not subject to any regulatory order or directive to
meet any specific capital level and that has or exceeds the following capital
levels: a total risk-based capital ratio of 10%, a Tier 1 risk-based capital
ratio of 6%, and a ratio of Tier 1 capital to total assets ("leverage ratio")
of 5%. An "adequately capitalized" institution is one that does not qualify as
"well capitalized" but meets or exceeds the following capital requirements: a
total risk-based capital of 8%, a Tier 1 risk-based capital ratio of 4%, and a
leverage ratio of either (i) 4% or (ii) 3% if the institution has the highest
composite examination rating. An institution not meeting these criteria is
treated as "undercapitalized," "significantly undercapitalized," or "critically
undercapitalized" depending on the extent to which its capital levels are below
these standards. An institution that falls within any of the three
"undercapitalized" categories will be subject to certain severe regulatory
sanctions required by FDICIA and the implementing regulations. As of June 30,
1999, the Bank was "well-capitalized" as defined by the regulations, with a
total risk-based capital ratio of 14.26%, a Tier 1 risk-based capital ratio of
8.81% and a leverage ratio of 8.81%.
Federal Deposit Insurance. The Bank is required to pay assessments, based
on a percentage of its insured deposits, to the FDIC for insurance of its
deposits by the SAIF.
Under the FDIC's risk-based deposit insurance assessment system, the
insurance assessment rate for an insured depository institution depends on the
assessment risk classification assigned to the institution. Institutions are
assigned by the FDIC to one of three capital groups -- well-capitalized,
adequately capitalized, or undercapitalized -- and, within each capital
category, to one of three supervisory subgroups. Unless permitted by the FDIC
or required by law, insured institutions may not state their assessment risk
classification in any advertisement or promotional material.
In order to recapitalize the SAIF and to equalize the deposit insurance
premiums paid by SAIF-insured institutions and institutions with deposits
insured by the Bank Insurance Fund ("BIF"), Congress enacted the Deposit
Insurance Funds Act of 1996 (the "1996 Act"), which authorized the FDIC to
impose a one-time special assessment on all institutions with SAIF-assessable
deposits in the amount necessary to recapitalize the SAIF to the statutorily
designated reserve ratio of 1.25% of insured deposits. Institutions were
assessed at the rate of 65.7 basis points per $100 of each institution's
SAIF-assessable deposits as of March 31, 1995. The 1996 Act provides that the
amount of the special assessment will be deductible for federal income tax
purposes for the taxable year in which the special assessment is paid.
As a result of the recapitalization of the SAIF by the 1996 Act, the FDIC
reduced the insurance assessment rate for SAIF-assessable deposits for periods
beginning October 1, 1996. For the first half of 1997, the FDIC set the
effective insurance assessment rates for SAIF-insured institutions, such as the
Bank, at zero to 27 basis points. In addition, SAIF-insured institutions will
be required, until December 31, 1999, to pay assessments to the FDIC at an
annual rate of between 6.0 and 6.5 basis points to help fund interest payments
on certain bonds issued by the Financing Corporation ("FICO"), an agency of the
federal government established to recapitalize
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the predecessor to the SAIF. During this period, BIF member banks will be
assessed for payment of the FICO obligations at one-fifth the annual rate
applicable to SAIF member institutions. After December 31, 1999, BIF and SAIF
members will be assessed at the same rate (currently estimated at approximately
2.4 basis points) to service the FICO obligations.
The 1996 Act also provides that the FDIC may not assess regular insurance
assessments for the SAIF unless required to maintain or to achieve the
designated reserve ratio of 1.25%, except for such assessments on those
institutions that are not classified as "well-capitalized" or that have been
found to have "moderately severe" or "unsatisfactory" financial, operational or
compliance weaknesses.
Qualified Thrift Lender Test. The HOLA and OTS regulations require all
savings institutions to satisfy one of two Qualified Thrift Lender ("QTL")
tests or to suffer a number of sanctions, including restrictions on activities.
To qualify as a QTL, a savings institution must either (i) be deemed a
"domestic building and loan association" under the Code by maintaining at least
60% of its total assets in specified types of assets, including cash, certain
government securities, loans secured by and other assets related to residential
real property, educational loans, and investments in premises of the
institution or (ii) satisfy the HOLA's QTL test by maintaining at least 65% of
"portfolio assets" in certain "Qualified Thrift Investments." For purposes of
the HOLA's QTL test, portfolio assets are defined as total assets less
intangibles, property used by a savings institution in its business and
liquidity investments in an amount not exceeding 20% of assets. Qualified
Thrift Investments consist of (a) loans or securities related to domestic
residential housing or manufactured housing, (b) loans to small businesses,
student loans and credit card loans and (c) subject to a limitation equal to
20% of portfolio assets, 50% of the dollar amount of residential mortgage loans
subject to sale under certain conditions, 100% of consumer loans (not described
above) and certain other assets, 200% of their investments in loans to finance
"starter homes" (with purchase prices not exceeding 60% of median value) and
loans for construction, development or improvement of housing and community
service facilities or for financing small business in "credit needy" areas.
A savings institution must maintain its status as a QTL on a monthly basis
in at least nine out of every 12 months. An initial failure to qualify as a QTL
results in a number of sanctions, including the imposition of certain operating
restrictions and a restriction on obtaining additional advances from its
Federal Home Loan Bank (as defined below). If a savings institution does not
requalify under the QTL test within the three-year period after it fails the
QTL test, it would be required to terminate any activity (and dispose of any
investment) not permissible for a national bank and repay as promptly as
possible any outstanding advances from its Federal Home Loan Bank. In addition,
the holding company of such an institution, such as the Company, would be
required to register as a bank holding company with the Federal Reserve Board.
At June 30, 2000, the Bank qualified as a QTL.
Safety and Soundness Standards. FDICIA, as amended by the Riegle Community
Development and Regulatory Improvement Act of 1994, requires the OTS, together
with the other federal bank regulatory agencies, to prescribe standards, by
regulation or guideline, relating to internal controls, information systems and
internal audit systems, loan documentation, credit underwriting, interest rate
risk exposure, asset growth, asset quality, earnings, stock valuation and
compensation, fees and benefits and such other operational and managerial
standards as the agencies deem appropriate. The OTS and the federal bank
regulatory agencies have adopted a set of guidelines prescribing safety and
soundness standards pursuant to the statute. In general, guidelines adopted by
the OTS require, among other things, appropriate systems and practices to
identify and manage the risks and exposures specified in the guidelines. The
guidelines prohibit excessive compensation as an unsafe and unsound practice
and describe compensation as excessive when the amounts paid are unreasonable
or disproportionate to the services performed by an executive officer,
employee, director or principal shareholder.
In addition, on July 10, 1995, the OTS and the federal bank regulatory
agencies proposed guidelines for asset quality and earnings standards. Under
the proposed standards, a savings institution would be required to maintain
systems commensurate with its size and the nature and scope of its operations,
to identify problem assets and prevent deterioration in those assets as well as
to evaluate and monitor earnings and ensure that earnings are sufficient to
maintain adequate capital and reserves. Management believes that the asset
quality and earnings standards, in the form proposed by banking agencies, if
adopted, would not have a material effect on the operations of the Bank.
Limitations on Capital Distributions. OTS regulations impose limitations
upon capital distributions by a savings institution, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments
7
<PAGE>
to shareholders of another institution in a cash-out merger and other
distributions charged against capital. A savings institution must give notice
to the OTS at least 30 days before a proposed capital distribution. A savings
institution that has capital in excess of all regulatory capital requirements
before and after a proposed capital distribution and that is not otherwise
restricted in making capital distributions, may, after prior notice but without
the approval of the OTS, make capital distributions during a calendar year
equal to the greater of (a) 100% of its net income to date during the calendar
year plus the amount that would reduce by one-half its "surplus capital ratio"
(the excess capital over its capital requirements) at the beginning of the
calendar year, or (b) 75% of its net income for the previous four quarters. Any
additional capital distributions would require prior OTS approval. In addition,
under the OTS's prompt corrective action regulations, the Bank would be
prohibited from paying dividends if the Bank were classified as
"undercapitalized" under such rules. See "-- Prompt Corrective Regulatory
Action." Finally, earnings of the Bank appropriated to bad debt reserves and
deducted for federal income tax purposes are not available for payment of
dividends or other distributions to the Company without payment of taxes at the
then current tax rate by the Bank on the amount of earnings removed from the
reserves for such distributions.
Community Reinvestment. Under the Community Reinvestment Act (the "CRA"),
as implemented by OTS regulations, a savings institution has a continuing and
affirmative obligation consistent with its safe and sound operation to help
meet the credit needs of its entire community, including low- and moderate-
income neighborhoods. The CRA does not establish specific lending requirements
or programs for financial associations nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best- suited to its particular community. The CRA requires the OTS, in
connection with its examination of a savings institution, to assess the
institution's record of meeting the credit needs of its community and to take
such record into account in evaluating certain applications by such
institution. The CRA also requires all associations to publicly disclose their
CRA rating. The Bank received a CRA rating of "satisfactory" in its most recent
examination.
Federal Home Loan Bank System. The FHLB System consists of 12 district
Federal Home Loan Banks subject to supervision and regulation by the Federal
Housing Finance Board ("FHFB"). The Federal Home Loan Banks provide a central
credit facility primarily for member institutions. As a member of the FHLB, the
Bank is required to acquire and hold shares of capital stock in the FHLB in an
amount at least equal to 1% of the aggregate unpaid principal of its home
mortgage loans, home purchase contracts, and similar obligations at the
beginning of each year, or 1/20 of its advances (borrowings) from the FHLB,
whichever is greater. At June 30, 2000, the Bank was in compliance with this
requirement. Long-term FHLB advances may only be made for the purpose of
providing funds for residential housing finance. At June 30, 2000, the Bank had
$95.2 million of total advances outstanding from the FHLB.
Federal Reserve System. Federal Reserve regulations require savings
associations to maintain non-interest earning reserves against their
transaction accounts (primarily regular checking and NOW accounts). The Bank is
in compliance with these regulations. The balances maintained to meet the
reserve requirements imposed by the Federal Reserve may be used to satisfy
liquidity requirements imposed by the OTS. Because required reserves must be
maintained in the form of vault cash, a non-interest-bearing account at a
Federal Reserve Bank or a pass-through account as defined by the Federal
Reserve, the effect of the reserve requirements is to reduce the Bank's
interest-earning assets. FHLB system members are also authorized to borrow from
the Federal Reserve, but applicable regulations require associations to exhaust
all FHLB sources before borrowing from a Federal Reserve Bank.
Other Laws and Regulations. The lending and deposit-taking activities of
the Bank are subject to a variety of federal and state consumer protection
laws, including the Equal Credit Opportunity Act (which prohibits
discrimination in all aspects of credit-granting), the Truth-in-Lending Act
(which principally mandates certain disclosures in connection with loans made
for personal, family or household purposes and imposes substantive restrictions
with respect to home equity lines of credit), the Truth-in-Savings Act (which
principally mandates certain disclosures in connection with deposit-taking
activities), the Fair Credit Reporting Act (which, among other things, requires
a lender to disclose the name and address of the credit bureau from whom a
lender obtains a report that resulted in a denial of credit), the Real Estate
Settlement Procedures Act (which, among other things, requires residential
mortgage lenders to provide loan applicants with closing cost information
8
<PAGE>
shortly after the time of application and prohibits referral fees in connection
with loan originations and other real estate settlement services), the
Electronic Funds Transfer Act (which, among other things, requires certain
disclosures in connection with electronic funds transactions) and the Expedited
Funds Availability Act (which, among other things, requires that deposited
funds be made available for withdrawal in accordance with a prescribed schedule
and that the schedule be disclosed to customers).
As a federal savings bank, the Bank is exempt from most state laws, other
than contract and commercial law; real property law; tort law and criminal law.
Also, federal law has permanently preempted all state usury laws on the Bank's
residential first mortgage loans in any state, including Pennsylvania, which
did not override that preemption. On other loans, the Bank is authorized to
charge the "interest" allowed by Pennsylvania usury laws for the "most favored
lender" for the loan in question, and is authorized to impose non-interest
charges without regard to state law limitations. Accordingly, the Bank makes
its short-term consumer loans under the authority of a Pennsylvania statute
which generally authorizes an 18% periodic rate of interest plus additional
charges in such amount as the agreement with the borrower provides, and it may
make its other loans under a variety of Pennsylvania usury laws and applicable
exceptions.
Under the privacy provisions of the Gramm-Leach-Bliley Act and OTS
regulations thereunder, effective July 1, 2001, the Bank will be required to
disclose certain information concerning its privacy practices and policies to
its customers at the inception of the customer relationship and annually
thereafter. It would also need to make disclosures to any consumers whose
nonpublic personal information the Bank intends to share with unaffiliated
third parties unless the information is shared for certain excepted purposes,
including a disclosure to effect, administer or enforce a transaction
authorized by the consumer or for certain joint marketing activities. Consumers
and customers must be allowed the opportunity to "opt out" from having their
nonpublic personal information disclosed without an excepted purpose. At
present, the Bank does not intend to make nonpublic personal information
available to unaffiliated third parties without an excepted purpose.
Regulation of the Company
The Company is a savings and loan holding company under the HOLA and, as
such, is subject to OTS regulation, supervision and examination. In addition,
the OTS has enforcement authority over the Company and its non-savings
institution subsidiaries and may restrict or prohibit activities that are
determined to represent a serious risk to the safety, soundness or stability of
the Bank or any other subsidiary savings institution.
Under the HOLA, a savings and loan holding company is required to obtain
the prior approval of the OTS before acquiring another savings institution or
savings and loan holding company. A savings and loan holding company may not
(i) acquire, with certain exceptions, more than 5% of a non-subsidiary savings
institution or a non-subsidiary savings and loan holding company; or (ii)
acquire or retain control of a depository institution that is not insured by
the FDIC. In addition, while the Bank generally may acquire a savings
institution by merger in any state without restriction by state law, the
Company could acquire control of an additional savings institution in a state
other than Pennsylvania only if such acquisition is permitted under the laws of
the target institution's home state. As a unitary savings and loan holding
company, the Company generally will not be subject to any restriction as to the
types of business activities in which it may engage, provided that the Bank
continues to satisfy the QTL test. See "-- Regulation of the Bank -- Qualified
Thrift Lender Test."
Upon any non-supervisory acquisition by the Company of another savings
institution that is held as a separate subsidiary, the Company would become a
multiple savings and loan holding company and would be subject to limitations
on the types of business activities in which it could engage. The HOLA limits
the activities of a multiple savings and loan holding company and its
non-insured institution subsidiaries primarily to activities permissible for
bank holding companies under the Bank Holding Company Act, subject to the prior
approval of the OTS, and to other activities authorized by OTS regulation.
Employees
At September 15, 2000, the Company employed 58 persons. The Company is not
subject to any collective bargaining agreements and believes that its
relationship with its employees is good.
9
<PAGE>
Item 2. Properties
The Company's headquarters are located at 1230 Walnut Street in
Philadelphia, Pennsylvania. The Bank operates from two branch offices, one of
which is located at the Company's headquarters and the other is located at 6526
Castor Avenue in Philadelphia. The Bank leases its Walnut Street and Castor
Avenue locations under lease agreements with terms expiring in 2014 and 2002,
respectively, assuming the Bank exercises all of its options to renew such
leases. The Walnut Street location is leased from Walnut Square Partners, a
partnership controlled by Ronald L. Caplan, a former director of the Company
and the Bank. In addition, the Bank leases space for its operations at a
building owned by 1334 Walnut Street Partners, a partnership controlled by Mr.
Caplan and Quest Holding Corporation ("QUEST "), a wholly-owned subsidiary of
the Bank.
Item 3. Legal Proceedings
There are various claims and lawsuits in which the Company or the Bank are
periodically involved, such as claims to enforce liens, condemnation
proceedings on properties in which the Bank holds security interests, claims
involving the making and servicing of real property loans, and other issues
incident to the Bank's business. In the opinion of management, there are no
material pending claims or lawsuits against the Company or the Bank.
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 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. 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. At June 30, 2000, the Company has a remaining
receivable of $275,000 related to this matter. 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.
Item 4. Submission of Matters to a Vote of Security Holders
None.
10
<PAGE>
Part II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company consummated an initial public offering of its Common Stock,
par value $0.01 per share, in February 1998 with underwriters exercising a 15%
over-allotment option in March 1998 (the "IPO"). The Company's Common Stock is
traded on the Nasdaq Stock Market under the symbol "CRSB". As of August 31,
2000, there were approximately 900 beneficial owners of the Company's Common
Stock. The following table sets forth, on a quarterly basis, the high and low
closing prices (as adjusted for stock dividends) for the Company's Common Stock
since consummation of the IPO. Historically, the Company has not paid cash
dividends on the Common Stock. The Company's Board of Directors does not
currently intend to pay cash dividends, and intends to retain all earnings to
fund the growth of the Company and the Bank. The Company paid a 5% stock
dividend in August 1998, and an additional 5% stock dividend in October 1999.
Quarter Ended High Low
------------- -------- -------
March 31, 1998 $ 14.06 $ 13.38
June 30, 1998 $ 17.01 $ 13.95
September 30, 1998 $ 15.65 $ 11.31
December 31, 1998 $ 11.90 $ 9.52
March 31, 1999 $ 10.60 $ 9.41
June 30, 1999 $ 11.43 $ 8.75
September 30, 1999 $ 10.24 $ 9.29
December 31, 1999 $ 10.00 $ 7.00
March 31, 2000 $ 7.88 $ 6.56
June 30, 2000 $ 8.25 $ 6.38
11
<PAGE>
Item 6. Selected Consolidated Financial Data
The following selected consolidated financial data with respect to the
Company's income statements for the fiscal years ended June 30, 1998, 1999 and
2000 and with respect to the Company's balance sheets at June 30, 1999 and 2000
are derived from the audited Consolidated Financial Statements of the Company
which are included elsewhere in this report and are qualified by reference to
such Consolidated Financial Statements and the related Notes thereto. Selected
Results of Operations data for the fiscal years ended June 30, 1996 and 1997
and Selected Balance Sheet data at June 30, 1996, 1997 and 1998 are derived
from Consolidated Financial Statements of the Company not included herein. This
selected consolidated financial data set forth below is qualified in its
entirety by, and should be read in conjunction with the Consolidated Financial
Statements, the related Notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
report.
<TABLE>
<CAPTION>
At or for the Year Ended June 30,
------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ------------ ------------ ----------- -----------
(In thousands, except per share amounts and ratios)
<S> <C> <C> <C> <C> <C>
Selected Results of Operations:
Interest income ....................................... $ 34,475 $ 21,896 $ 14,521 $ 7,919 $ 4,973
Interest expense ...................................... 16,962 11,589 8,485 5,130 3,559
Net interest income ................................... 17,513 10,307 6,036 2,789 1,414
Provision for loan losses:
Short-term consumer loans ........................... 2,017 228 0 0 0
Other loans ......................................... 1,300 713 385 58 42
Total non-interest income ............................. 2,522 4,584 5,013 1,585 417
Mortgage banking income ............................. 1,634 3,969 4,712 1,074 417
Total non-interest expenses ........................... 5,811 6,147 4,747 2,862 1,616
Core non-interest expenses .......................... 3,467 2,742 2,067 1,680 1,616
Mortgage banking expenses ........................... 2,259 2,371 2,628 886 0
Goodwill amortization ............................... 85 84 52 0 0
Loss on fraudulent money orders(1) .................. 0 950 0 0 0
SAIF special assessment(2) .......................... 0 0 0 296 0
Minority interest in earnings ......................... 369 180 72 12 0
Income tax expense(3) ................................. 3,343 2,657 2,109 480 61
Net income ............................................ 7,195 4,966 3,736 962 112
Net income, excluding one-time charges (1)(2) ......... 7,195 5,574 3,736 1,154 112
Per Share Data (Diluted):(3)
Net income per share .................................. 1.85 1.24 1.20 0.42 0.06
Net income per share, excluding one-time
charges(1)(2) ....................................... 1.85 1.39 1.20 0.50 0.06
Weighted average shares outstanding ................... 3,895 4,020 3,108 2,297 1,764
Selected Balance Sheet Data:
Total assets .......................................... $393,748 $307,280 $202,034 $117,093 $81,307
Investment and mortgage-backed securities ............. 40,705 31,213 17,551 22,343 22,097
Loans held for sale ................................... 9,735 74,708 48,389 6,244 1,659
Loans receivable, net ................................. 320,839 187,696 120,984 85,992 53,604
Deposits .............................................. 243,261 189,106 118,831 95,906 59,624
Borrowings ............................................ 104,233 88,580 57,430 14,730 16,651
Shareholders' notes ................................... 0 0 0 2,990 2,918
Shareholders' equity(4) ............................... 32,596 27,336 23,223 2,895 1,512
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
At or for the Year Ended June 30,
--------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(In thousands, except per share amounts and ratios)
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on average assets, excluding one-time
charges(1)(2) ................................... 2.08% 2.23% 2.24% 1.17% 0.17%
Return on average assets .......................... 2.08% 1.98% 2.24% 0.97% 0.17%
Return on average invested capital, excluding
one-time charges(1)(2)(5) ....................... 24.26% 22.49% 30.17% 19.61% 2.53%
Return on average invested capital(5) ............. 24.26% 20.03% 30.17% 16.35% 2.53%
Net yield on interest-earning assets .............. 5.11% 4.08% 3.70% 2.89% 2.23%
Non-interest expenses, excluding mortgage
banking expenses and one-time charges, to
average assets(2) ............................... 1.03% 1.13% 1.24% 1.70% 2.47%
Asset Quality Ratios:
Non-performing loans to total assets .............. 0.72% 0.93% 0.67% 0.94% 1.19%
Allowance for loan losses to total
non-performing loans(6) ......................... 95.97% 53.38% 63.39% 42.99% 44.28%
Allowance for loan losses to net loans(6) ......... 0.87% 0.81% 0.71% 0.55% 0.80%
Capital Ratios:
Company equity to assets .......................... 8.28% 8.90% 11.49% 2.45% 1.86%
Bank core capital ratio ........................... 8.81% 8.87% 11.00% 5.12% 5.79%
Bank risk-based capital ratio ..................... 14.26% 14.92% 21.09% 10.81% 12.72%
</TABLE>
------------
(1) In December 1998, the Company recorded a one-time charge for allegedly
fraudulent money orders deposited by a Bank customer. Net of related tax
effects, this reduced net income by $608,000 for the year ended June 30,
1999.
(2) In September 1996, the Company incurred a one-time SAIF assessment of
$296,000 to recapitalize the fund. Net of related tax effects, this
assessment reduced net income by $192,000 for the year ended June 30,
1997.
(3) Per share amounts have been adjusted to retroactively reflect prior stock
dividends, including the 5% stock dividend payable on October 14, 1999 and
the 5% stock dividend paid on August 28, 1998. The Company adopted the
provisions of SFAS No. 128, Earnings Per Share, which eliminates primary
and fully diluted earnings per share in conjunction with the disclosure of
the methodology used in computing earnings per share. Basic earnings per
share exclude dilution and are computed by dividing income available to
common shareholders by the weighted average common shares outstanding
during the period. Diluted earnings per share take into account the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised and converted into common stock. Prior
periods' earnings per share calculations have been restated to reflect the
adoption of SFAS No. 128.
(4) The Company completed an initial public offering on February 13, 1998
resulting in the issuance of 1,150,000 shares of common stock totaling
approximately $15.4 million, net of offering expenses.
(5) Invested capital is the sum of shareholders' notes and shareholders'
equity.
(6) Excludes the loan loss allowance of $702,000 and $228,000 attributable to
short-term consumer loans at June 30, 2000 and 1999, respectively, and net
consumer loans outstanding of $6.5 million and $5.6 million.
13
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion of the Company's consolidated financial condition
and results of operations and capital resources and liquidity should be read in
conjunction with the Consolidated Financial Statements and related Notes
included elsewhere herein. Statements regarding the Company's expectations as
to financial results and other aspects of its business set forth herein or
otherwise made in writing or orally by the Company may constitute forward
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. Although the Company believes that its expectations are
based on reasonable assumptions within the bounds of its knowledge of its
business and operations, there can be no assurance that actual results will not
differ materially from its expectations. Factors that might cause or contribute
to such differences include, but are not limited to, uncertainty of future
profitability, changing economic conditions and monetary policies, uncertainty
of interest rates, risks inherent in banking transactions, competition, the
impact of the OTS action to limit the Bank's asset growth, 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
Bank's lending products include single family residential mortgages, home
equity loans, short-term consumer loans, multi-family residential and
non-residential real estate (collectively, "Commercial Real Estate") loans, SBA
loans, and secured 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, most of which currently are U.S. Treasury
or U.S. Government Agency quality. The Bank's loan and investment portfolios
are funded with deposits as well as borrowings from the FHLB or collateralized
borrowings secured by the Bank's investment securities. The Bank's earnings are
largely dependent upon its net interest income (the difference between what it
earns on its loans and investments and what it pays on its deposits and
borrowings). In addition to net interest income, the Bank's net income is
impacted by its loan loss provision, non-interest income (such as mortgage
banking revenue from the sale of residential mortgage loans and loan, deposit
and ATM fees) and non-interest expenses (such as salaries and benefits,
professional fees, occupancy costs, deposit insurance premiums and expenses
related to mortgage banking operations).
Overview
Through 1995, the Bank primarily engaged in the origination and sale of
conforming residential mortgage loans (FNMA fixed rate mortgage loans) and the
origination of adjustable rate single family mortgages for its portfolio. The
Bank has established and seeks to continue developing a loan referral network
consisting of mortgage banking companies affiliated with local realty companies
and local realtors with no mortgage company affiliation, as well as smaller
mortgage bankers and brokers. In this business, the Bank attempts to
distinguish itself from its competition by providing efficient service and
offering specialized adjustable rate loan products. Since opening its Center
City, Philadelphia branch in 1994, the Bank has been developing a referral base
for Commercial Real Estate loans consisting of local realtors and real estate
investors and advisors, as well as repeat and referral business from existing
borrowers. In order to better monitor its loan portfolio, the Bank concentrates
its Commercial Real Estate lending in the Philadelphia metropolitan area,
consisting of Bucks, Chester, Delaware, Montgomery and Philadelphia counties,
as well as Central and Southern New Jersey and Northern Delaware. In order to
better compete in this business, the Bank attempts to provide its applicants
with quick responses by having the Board Loan Committee which meets on an as
needed basis to evaluate loan applications.
In the fiscal periods through June 30, 1996, the Company experienced
minimal returns on assets and equity since, in anticipation of future growth,
it maintained a high cost infrastructure relative to its then current asset
size. Non-interest expenses as a percentage of assets for fiscal years 1995 and
1996 were 2.48% and 2.47% respectively. In addition, during this period, the
Company grew its assets primarily by adding promotional rate adjustable
mortgages that were not profitable during the initial year of origination.
14
<PAGE>
In the latter part of 1995, management began to refocus the Company and
developed a plan designed to grow its assets and profitability. The Company's
strategy is to identify and develop business lines and product niches where it
can utilize its Federal thrift charter, its access to low cost funds and its
core competencies in risk management to achieve superior risk-adjusted rates of
return. The Company's business lines and product niches include residential and
Commercial Real Estate lending, SBA lending, mortgage banking, short-term
consumer lending and the acquisition of secured property tax liens.
In November 1999, the Company adopted a Plan of Strategic Reorganization.
The major elements of this Plan include: (1) simplification of operations and a
new focus on the Bank's four major business activities -- residential mortgage
banking and lending, commercial real estate lending, secured property tax liens
and short-term consumer lending; (2) discontinuation of the business of the
Bank's mortgage banking subsidiaries, NCM and CMCD and (3) addition of new
management resources. Over the past several years, the Bank has focused on
identifying and developing new business lines and product niches. The Bank has
now chosen to focus on its more desirable product lines and does not anticipate
entering into any new line of business for the foreseeable future.
From June 1995 through June 2000, the Company increased its asset base
from $63.6 million to $393.7 million, resulting in increased net interest
income. In addition, the Bank's new business lines have produced higher levels
of non-interest income. Despite the growth in its assets, the Company has
emphasized controlling its operating expenses. In this regard, the Company has
reduced its ratio of core non-interest expenses (operating expenses exclusive
of mortgage banking expenses and one-time charges) as a percentage of average
assets from 2.47% for fiscal year 1996 to 1.70% for fiscal year 1997, 1.24% for
fiscal year 1998, 1.13% for fiscal year 1999, and 1.03% for fiscal year 2000.
In light of the Company's reduced ongoing asset growth and its focus on adding
infrastructure and management resources, it is anticipated that the fiscal year
2000 ratio will not be sustained.
The increase in net interest income resulting from the growth in the
Company's asset base, the containment of core non-interest expenses and the
increases in non-interest income all have contributed to the Company's higher
levels of profitability in recent periods.
Results of Operations
Year ended June 30, 2000 versus year ended June 30, 1999. Net income
increased to $7.2 million for the year ended June 30, 2000 as compared to $5.6
million (before a one-time charge) for the prior year. Net interest income
increased by $7.2 million due primarily to a growth in average earning assets
and an increase in the Company's net yield on interest-earning assets.
Non-interest income decreased by $2.1 million due primarily to a decrease in
mortgage banking revenues. The reduction in mortgage banking revenues is
consistent with the Company's strategy in the current year to de-emphasize the
origination and resale of nonconforming mortgage loans and the discontinuation
of the business of the Company's mortgage banking subsidiaries. Non-interest
expenses (excluding the prior year one-time charge) increased by $614,000, due
primarily to a $725,000 increase in core non-interest expenses as the Company
expanded its staff and management resources, partially offset by a $112,000
decrease in mortgage banking expenses. Income tax expense increased by $686,000
as a result of the Company's increased profitability.
Year ended June 30, 1999 versus year ended June 30, 1998. Net income for
the year ended June 30, 1999 increased to $5.6 million before a one-time charge
( $5.0 million after the charge), as compared to $3.7 million for the prior
year. Net interest income increased by $4.3 million due primarily to growth in
average earning assets. Non-interest income decreased by $429,000 due primarily
to a $743,000 million reduction in mortgage banking revenues which was offset
by a $314,000 increase in deposit and loan fees. The reduction in mortgage
banking revenues was consistent with the Company's strategy to de-emphasize the
purchase and resale of nonconforming loan pools in the year, while the increase
in other non-interest income reflects the implementation of the Company's
initiatives to expand its other fee income. Non-interest expenses (excluding
the one-time charge) increased by $450,000, due primarily to an $707,000
increase in core non-interest expenses as the Company expanded its staff to
accommodate for the growth in assets, partially offset by a $257,000 reduction
in mortgage banking expenses. In December 1998, the Company recorded a one-time
charge of $950,000 ($608,000 after tax) for a series of allegedly fraudulent
money orders deposited by a Bank customer. Income tax expense increased by
$548,000 as a result of the increased profitability of the Bank.
15
<PAGE>
Net Interest Income
Net interest income is the difference between interest received on the
Company's loans and investment securities ("interest-earning assets") and
interest paid on deposits and borrowings ("interest-bearing liabilities"). It
is the most significant component of operating income and is largely dependent
upon the volume and rate earned on interest-earning assets and the volume and
rate paid on interest-bearing liabilities.
The following table sets forth a summary of average balances with
corresponding interest income and interest expense as well as average yield and
rate information for the periods presented. Average balances are derived from
daily balances during the indicated periods, except where noted otherwise.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------------------------
2000 1999
-------------------------------------- ------------------------------------
(Dollars in thousands)
Average Average
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------------- ---------- ----------- ------------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Average assets:
Loans receivable(1) ......................... $ 303,196 $31,400 10.36% $ 221,838 $20,335 9.17%
Investment and mortgage-backed
securities(2) .............................. 39,307 3,075 7.82 22,090 1,561 7.07
--------- ------- ----- --------- ------- ----
Total interest-earning assets ............... 342,503 34,475 10.07% 243,928 21,896 8.98%
------- ----- ------- ----
Non-interest-earning assets ................. 3,697 6,654
--------- ---------
Total assets ............................. $ 346,200 $ 250,582
========= =========
Average liabilities and
shareholders' equity:
Non-interest-bearing deposit accounts ....... $ 11,100 $ -- --% $ 3,806 $ -- --%
Interest-bearing deposit accounts ........... 195,622 11,121 5.68 153,284 8,171 5.33%
Borrowings .................................. 107,511 5,841 5.43 64,585 3,418 5.29%
Shareholders' notes ......................... -- -- -- -- -- --
--------- ------- ----- --------- ------- ----
Total deposits and interest-bearing
liabilities ................................ 314,233 16,962 5.40% 221,675 11,589 5.23%
------- ----- ------- ----
Other non-interest-bearing liabilities ...... 2,315 3,556
--------- ---------
Total liabilities ........................... 316,548 225,231
Shareholders' equity(3) ..................... 29,652 25,351
--------- ---------
Total liabilities and shareholders'
equity ..................................... $ 346,200 $ 250,582
========= =========
Net interest income ......................... $17,513 $10,307
======= =======
Interest rate spread ........................ 4.67% 3.75%
===== ====
Net yield on interest-earning assets (net
interest margin)(4) ........................ 5.11% 4.23%
===== ====
Ratio of interest-earning assets to
interest bearing liabilities ............... 109.00% 111.96%
========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------
1998
-------------------------------------
(Dollars in thousands)
Average
Average Yield/
Balance Interest Rate
------------- ---------- ----------
<S> <C> <C> <C>
Average assets:
Loans receivable(1) ......................... $ 141,298 $13,109 9.28%
Investment and mortgage-backed
securities(2) .............................. 21,837 1,412 6.47
--------- ------- ----
Total interest-earning assets ............... 163,135 14,521 8.90%
------- ----
Non-interest-earning assets ................. 3,651
Total assets ............................. $ 166,786
=========
Average liabilities and
shareholders' equity:
Non-interest-bearing deposit accounts ....... $ 2,663 $ -- --%
Interest-bearing deposit accounts ........... 123,038 6,913 5.62
Borrowings .................................. 26,060 1,465 5.62
Shareholders' notes ......................... 2,209 107 4.84
--------- ------- ----
Total deposits and interest-bearing
liabilities ................................ 153,970 8,485 5.51%
------- ----
Other non-interest-bearing liabilities ...... 2,642
---------
Total liabilities ........................... 156,612
Shareholders' equity(3) ..................... 10,174
---------
Total liabilities and shareholders'
equity ..................................... $ 166,786
=========
Net interest income ......................... $ 6,036
=======
Interest rate spread ........................ 3.39%
====
Net yield on interest-earning assets (net
interest margin)(4) ........................ 3.70%
====
Ratio of interest-earning assets to
interest bearing liabilities ............... 106.51%
=========
</TABLE>
------------
(1) Average balances include non-accrual loans, interest on which is recognized
on a cash basis, and loans held for sale.
(2) Yields are calculated based on the fair value of investment and
mortgage-backed securities. Includes interest-bearing deposits at the
FHLB.
(3) Averages were computed using month-end balances.
(4) Represents net interest income as a percentage of average interest-earning
assets.
16
<PAGE>
The following table sets forth certain information regarding changes in
interest income and interest expense for the periods indicated for each
category of interest-earning assets and interest-bearing liabilities.
Information is provided on changes attributable to (i) changes in volume
(changes in average volume multiplied by prior rate), (ii) changes in rate
(changes in average rate multiplied by prior average volume), and (iii) changes
in rate and volume (changes in average volume multiplied by change in average
rate).
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------------------
2000 versus 1999
------------------------------------------
Increase (Decrease)
Due to
------------------------------------------
(Dollars in thousands)
Rate/
Volume Rate Volume Total
-------- --------- --------- ----------
<S> <C> <C> <C> <C>
Interest income:
Loans receivable .................................. $7,461 $2,640 $ 964 $11,065
Investment and mortgage-backed securities ......... 1,219 166 129 1,514
------ ------ ------- -------
Total interest-earning assets ..................... 8,680 2,806 1,093 12,579
------ ------ ------- -------
Interest expense:
Deposit accounts .................................. 2,266 536 148 2,950
Borrowings ........................................ 2,292 71 60 2,423
Shareholders' notes ............................... 0 0 0 0
------ ------ ------- -------
Total interest-bearing liabilities ................ 4,558 607 208 5,373
------ ------ ------- -------
Increase in net interest income ................... $4,122 $2,199 $ 885 $ 7,206
====== ====== ======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------------------------
1999 versus 1998
-------------------------------------------
Increase (Decrease)
Due to
-------------------------------------------
(Dollars in thousands)
Rate/
Volume Rate Volume Total
---------- ---------- -------- ---------
<S> <C> <C> <C> <C>
Interest income:
Loans receivable .................................. $7,470 $ (155) $ (89) $7,226
Investment and mortgage-backed securities ......... 16 131 2 149
------ ------ ------ ------
Total interest-earning assets ..................... 7,486 (24) (87) 7,375
------ ------ ------ ------
Interest expense:
Deposit accounts .................................. 1,699 (354) (87) 1,258
Borrowings ........................................ 2,166 (86) (127) 1,953
Shareholders' notes ............................... (107) 0 0 (107)
------ ------ ------ ------
Total interest-bearing liabilities ................ 3,758 (440) (214) 3,104
------ ------ ------ ------
Increase in net interest income ................... $3,728 $ 416 $ 127 $4,271
====== ====== ====== ======
</TABLE>
Year ended June 30, 2000 versus year ended June 30,1999. Net interest
income increased by $7.2 million or 69.91% for the year ended June 30, 2000 as
compared to the prior year. Interest income increased by $12.6 million due
primarily to a rise in average outstanding interest-earning assets of $98.6
million and, to a lesser extent, a 1.09% higher average yield earned on
interest-earning assets. The higher yield resulted from higher market interest
rates as well as the impact of the Bank's short-term consumer loan program
which was in full effect during the current year. The program was started in
April 1999 and thus had little impact on the prior year. During the current
year, the Bank realized $4.1 million of net interest income (before loan
losses) on this program on average outstanding loan balances of $6.1 million.
Interest expense increased by $5.4 million due primarily to an increase in
average interest-bearing deposit and borrowings balances of $85.3 million.
Deposits and borrowings were the primary funding source of the loan growth. The
Company's aggregate cost of funds increased to 5.40% as compared to 5.23% for
the comparable prior year period. The Company's net yield on interest-earning
assets increased to 5.11% as compared to 4.23% for the prior year period. This
0.88% increase was due principally to the Bank's higher loan yields.
Year ended June 30, 1999 versus year ended June 30,1998. Net interest
income increased by $4.3 million or 70.76% for the year ended June 30, 1999 as
compared to the prior year. Interest income increased by $7.4 million due
primarily to a rise in average outstanding loan balances of $80.5 million and,
to a lesser extent, a 0.08% increase in the yield earned on interest-earning
assets. The loan growth occurred largely in Commercial Real Estate lending and
in conforming residential mortgages available for sale. Interest expense
increased by $3.1 million due primarily to an increase in average
interest-bearing deposit and borrowings balances of $66.6 million. Deposits and
borrowings were the primary funding source of the loan growth. The Company's
aggregate cost of funds decreased to 5.23% as compared to 5.51% for the
comparable prior year period. The Company's net yield on interest-earning
assets increased to 4.23% as compared to 3.70% for the prior year period. This
0.53% increase was due principally to the Bank's lower cost of funds and an
increase in the Company's average shareholders' equity balances resulting from
the IPO as well as from the growth in retained earnings.
Provision for Loan Losses
For the year ended June 30, 2000, the provision for loan losses was $3.3
million, of which $2.0 million related to short-term consumer loans and $1.3
million related to the Company's traditional loan portfolio. Excluding the
separate provision recorded for short-term consumer loans, the Company's loan
loss provision increased by $587,000 or 82.33% as compared to a provision of
$713,000 in the prior year. The Company's provision for loan losses was
$941,000 ($713,000 excluding the provision for short-term consumer loans) for
the
17
<PAGE>
year ended June 30, 1999 compared to $385,000 for the prior year. The provision
was increased due to the growth in the loan portfolio. On a quarterly basis,
the Company's Board of Directors and management perform a detailed analysis of
the adequacy of the allowance for loan losses, including with respect to
short-term consumer loans. This analysis includes an evaluation of credit risk
concentration, delinquency trends, past loss experience, current economic
conditions, composition of the loan portfolio, classified loans and other
relevant factors. The loan growth experienced by the Company has not resulted
in significant percentage increases in delinquencies or charge-offs incurred by
the Company. Excluding the short-term consumer loan portfolio, net charge-offs
for the fiscal years ended June 30, 2000, 1999 and 1998 were $86,000, $47,000
and $0, respectively. Charge-offs of short-term consumer loans for fiscal year
2000 were $1.6 million. Because the product was introduced in April 1999, there
were no charge-offs with respect to this product in prior periods. Short-term
consumer loans are generally charged-off when a payment has not been collected
within 75 days of the due date or when management believes that collectibility
is unlikely. The loan loss provision for short-term consumer loans is recorded
based on historical charge-off experience relative to loan volume, and the
resulting allowance is evaluated for adequacy each quarter relative to average
monthly charge-offs.
The Company will continue to monitor its allowance for loan losses and
make future adjustments to the allowance through the provision for loan losses
as conditions warrant. Although the Company believes that the allowance for
loan losses is adequate to provide for losses inherent in the loan portfolio,
there can be no assurance that future losses will not exceed the estimated
amounts or that additional provisions will not be required in the future.
The Bank is subject to periodic regulatory examination by the OTS. As part
of the examination, the OTS will assess the adequacy of the Bank's allowance
for loan losses and may include factors not considered by the Bank. In the
event that an OTS examination results in a conclusion that the Bank's allowance
for loan losses is not adequate, the Bank may be required to increase its
provision for loan losses.
Non-Interest Income
Non-interest income is derived primarily from mortgage banking revenues
and deposit and loan fees, including revenues generated from the Bank's ATMs.
For the year ended June 30, 2000, non-interest income decreased by $2.1
million or 44.98% as compared to the prior year. This resulted primarily from a
$2.3 million reduction in mortgage banking income which was partially offset by
a $273,000 increase in deposit and loan fees. The reduction in mortgage banking
income is consistent with the Company's strategy to de-emphasize the purchase
and resale of non-conforming mortgage loans and the discontinuation of the
business of the Company's mortgage banking subsidiaries.
For the year ended June 30, 1999, non-interest income decreased by
$429,000 or 8.56% as compared to the prior year. This resulted primarily from a
$743,000 reduction in mortgage banking revenues, which was partially offset by
a $314,000 increase in deposit and loan fees. The reduction in mortgage banking
revenues was consistent with the Company's strategy to de-emphasize the
purchase and resale of loan pools in the year, while the increase in other
non-interest income reflects the implementation of the Company's initiatives to
expand its other fee income.
Non-Interest Expenses
Non-interest expenses for the year ended June 30, 2000 decreased by
$336,000 as compared to the prior year. Excluding the $950,000 one-time charge
incurred in the prior year period and a $112,000 decrease in mortgage banking
expenses, non-interest expenses increased by $726,000 or 25.69%. The increase
is primarily due to the hiring of additional personnel and related overhead in
connection with the Company's growth in assets.
Non-interest expenses for the year ended June 30, 1999 (excluding the
one-time charge) increased by $450,000 as compared to the prior year. Excluding
a $257,000 decrease in mortgage banking expenses, non-interest expenses
increased by $707,000 or 33.36% as the Company geared up to handle its growth
in assets.
18
<PAGE>
Income Tax Expense
Income tax expense was $3.3 million for the year ended June 30, 2000, as
compared to $2.7 million and $2.1 million for the years ended June 30, 1999 and
June 30, 1998, respectively. The increases in income tax expense primarily
relate to the changes in income before taxes.
Liquidity and Capital Resources
A major source of the Company's asset growth has been funded through
deposits, mostly CDs, generated through the Bank's two branch offices and a
network of financial planners and brokers.
The ability of the Bank to retain and attract deposits is dependent upon a
number of factors, including interest rates offered on the Bank's products.
Historically, most of the Bank's deposits have been in the form of CDs which
typically provide for a higher interest rate than traditional bank savings
account products and tend to fluctuate more frequently than other deposits as a
result of changes in market interest rates. The Bank also funds its assets with
secured borrowings from the FHLB and collateralized borrowings secured by its
investment securities portfolio. These borrowings generally provide the Bank
with greater flexibility in matching the duration of its liabilities with that
of certain of its assets. Future availability of these funding sources is
largely dependent upon the Bank having sufficient available eligible assets to
collateralize these borrowings. The Bank's assets generally provide for
scheduled principal and interest payments which provide the Bank with
additional sources of funds. If required, additional funds could be obtained
through the sale of either loans or investment securities, which are classified
as available for sale. The Bank has and will continue to utilize its investment
securities portfolio to manage liquidity.
The Bank's primary uses of funds are the origination and acquisition of
loans, the funding of maturing deposits and the repayment of borrowings. The
Bank has experienced strong loan demand. Based upon management's current
business strategy, the Company believes that its income from its operations and
its existing funding sources, will be adequate to meet its operating and growth
requirements for the foreseeable future. However, there can be no assurance
that such strategy will not change or that the implementation of the strategy
will not require additional capital or funding sources.
Net cash provided by operating activities for the year ended June 30, 2000
was $43.4 million , while net cash used in operating activities for the years
ended June 30, 1999 and 1998 was $23.4 million and $37.1 million, respectively.
In fiscal year 2000, the cash provided primarily relates to a $24.3 million
cash generating reduction of loans held for sale. During the two prior years,
the amounts used related principally to growth in loans available for sale.
Net cash used in investing activities approximated $105.1, million, $82.3
million and $31.0 million during the years ended June 30, 2000, 1999 and 1998,
respectively. During each year, the primary uses of such funds were the funding
of the growth in the Bank's loan portfolio and, to a lesser extent, the
purchase of investments and mortgage-backed securities.
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 FDICIA. Well-capitalized
institutions are assessed lower deposit insurance premiums. The Company's
ongoing capital to support its asset growth has come from internally generated
earnings as well as from additional capital contributions by its shareholders
and the proceeds from the IPO. While a private company, the Company operated at
lower capital levels because the Company's shareholders had chosen to
contribute capital only when necessary to fund the Company's growth.
19
<PAGE>
The following table sets forth the Bank's regulatory capital levels at
June 30, 2000. The Company is not subject to regulatory capital requirements.
<TABLE>
<CAPTION>
To Be Well Capitalized
Required for Under Prompt
Capital Adequacy Corrective Action
Actual Purposes Provisions
--------------------------- -------------------------- ---------------------------
(Dollars in thousands)
Amount Ratio Amount Ratio Amount Ratio
-------------- ---------- ------------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Tangible capital ........... $34,524,000 8.81% $ 5,876,000 1.50% $19,588,000 5.00%
Core capital ............... 34,524,000 8.81% 15,670,000 4.00% 23,505,000 6.00%
Risk-based capital ......... 37,963,000 14.26% 21,299,000 8.00% 26,623,000 8.00%
</TABLE>
Asset and Liability Management
Managing Interest Rate Risk. Interest rate risk is defined as the
sensitivity of the Company's current and future earnings as well as its capital
to changes in the level of market interest rates. The Bank's exposure to
interest rate risk results from, among other things, the difference in
maturities on interest-earning assets and interest-bearing liabilities. Since
the Bank's assets currently have a longer maturity than its liabilities, the
Bank's earnings could be negatively impacted during a period of rising interest
rates and conversely positively impacted during a period of falling interest
rates. The relationship between the interest rate sensitivity of the Bank's
assets and liabilities is continually monitored by management. In this regard,
the Bank emphasizes the origination of adjustable rate assets for portfolio
while originating longer term fixed rate assets for resale. Additionally, the
origination level of fixed rate assets are continually monitored and if deemed
appropriate, the Bank will enter into forward commitments for the sale of these
assets to ensure the Bank is not exposed to undue interest rate risk.
The Bank utilizes its investment and mortgage-backed security portfolio in
managing its liquidity and therefore emphasizes securities with a stated or
estimated life of less than five years. These securities are readily marketable
and provide the Bank with a cash flow stream to fund asset growth or liability
maturities.
A significant portion of the Bank's assets have been funded with CDs,
including jumbo CDs. Unlike core deposits such as checking, savings and money
market accounts, CDs carry a high degree of interest sensitivity and therefore
retention will vary based on the competitiveness of the interest rates offered
by the Bank. The current market for CDs has favored the issuance by the Bank of
CDs at the shorter maturities (i.e., maturities of less than one year).
The Bank utilizes borrowings from the FHLB and collateralized repurchase
agreements in managing its interest rate risk and as a tool to augment deposits
in funding asset growth. The Bank may utilize these funding sources to better
match its longer term repricing assets (i.e., between one and five years).
The nature of the Bank's operations is such that it is not subject to
foreign currency exchange or commodity price risk. Additionally, neither the
Company nor the Bank owns any trading assets. During fiscal year 2000, the
Company entered into a series of interest rate swap transactions with the FHLB.
Interest rate swap transactions generally involve the exchange of fixed and
floating rate interest payment obligations without the exchange of the
underlying principal amounts. Under its swaps, the Company agreed to pay the
FHLB interest on a total of $50 million based on LIBOR (6.65% at June 30, 2000)
in exchange for interest payments by the FHLB on the same amount at fixed rates
ranging from 7.16% to 8.04%. In September 2000, the Company received a payment
of $366,000 from the FHLB to close out its swap positions. At June 30, 2000,
the Bank did not have any other hedging transactions in place such as interest
rate 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). At June
30, 2000, the Bank had negative one year and three year GAP positions equal to
26.18% and 15.07% of assets, respectively. This primarily results from the
Bank's maintaining a portfolio of three and five-year adjustable rate
residential and Commercial Real Estate mortgages, while current market
conditions available to the Bank have favored the utilization of shorter-term
liabilities.
20
<PAGE>
The following table summarizes the maturity and repricing of the Bank's
interest-earning assets and interest-bearing liabilities at June 30, 2000.
Adjustable rate loans are categorized by their repricing date while fixed rate
loans are categorized by the scheduled maturity as adjusted for historical
prepayment rates. Investment and mortgage-backed securities are categorized by
their scheduled maturities as adjusted for historical prepayment rates. Except
as noted in the footnotes, liabilities are categorized at the earlier of their
contractual maturity date or interest repricing date.
<TABLE>
<CAPTION>
Within Four to One to Two to
Three Twelve Two Three
Months Months Years Years
------------ -------------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Rate-sensitive assets:
Loans receivable(1) ................($) 93,795 84,138 36,292 26,068
.................................(Rate) 12.92% 9.32% 9.71% 8.68%
Investment securities(2)........... ($) 21,945 1,346 1,399 1,257
.................................(Rate) 7.10% 6.62% 6.50% 6.52%
-------- ---------- -------- --------
Total rate-sensitive assets ........($) $115,740 $ 85,484 $ 37,691 $ 27,325
Rate-sensitive liabilities:
Interest-bearing demand deposits ...($)
.................................(Rate)
Savings deposits(3).................($)
.................................(Rate)
Time certificates ..................($) 98,926 109,162 10,495 2,746
.................................(Rate) 6.25% 6.64% 6.38% 6.46%
FHLB advances(4) ...................($) 39,700 52,500 3,000
.................................(Rate) 7.06% 5.63% 4.81%
Other borrowings ...................($) 4,033 5,000
.................................(Rate) 8.65% 5.85%
-------- ---------- -------- --------
Total rate-sensitive liabilities ....... $142,659 $ 161,662 $ 13,495 $ 7,746
-------- ---------- -------- --------
Periodic gap ........................... (26,919) (76,178) 24,196 19,579
-------- ---------- -------- --------
Cumulative gap ......................... (26,919) (103,097) (78,901) (59,322)
-------- ---------- -------- --------
Cumulative gap ratio ................... (6.84%) (26.18%) (20.04%) (15.07%)
-------- ---------- -------- --------
Total Assets ........................... $393,748 $ 393,748 $393,748 $393,748
-------- ---------- -------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three to Four to Over
Four Five Five Fair
Years Years Years Total Value
------------- ------------ ----------- ------------ ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Rate-sensitive assets:
Loans receivable(1) ................($) 56,995 6,692 26,594 330,574 329,836
.................................(Rate) 8.01% 8.03% 8.35% 10.00%
Investment securities(2)........... ($) 3,132 946 23,526 53,551 53,551
.................................(Rate) 8.16% 6.48% 7.36% 7.22%
--------- -------- -------- -------- --------
Total rate-sensitive assets ........($) $60,127 $ 7,638 $ 50,120 $384,125 $383,387
Rate-sensitive liabilities:
Interest-bearing demand deposits ...($) 11,862 11,862 11,862
.................................(Rate) 4.03% 4.03%
Savings deposits(3).................($) 1,831 1,831 1,831
.................................(Rate) 2.90% 2.90%
Time certificates ..................($) 2,763 363 224,455 224,121
.................................(Rate) 6.56% 6.40% 6.45%
FHLB advances(4) ...................($) 95,200 95,200
.................................(Rate) 6.20%
Other borrowings ...................($) 9,033 9,033
.................................(Rate) 7.10%
--------- -------- -------- -------- --------
Total rate-sensitive liabilities ....... $ 2,763 $ 363 $ 13,693 $342,381 $342,047
-------- -------- -------- -------- --------
Periodic gap ........................... 57,364 7,275 36,427 41,744 41,340
-------- -------- -------- -------- --------
Cumulative gap ......................... (1,958) 5,317 41,744
-------- -------- --------
Cumulative gap ratio ................... (0.50%) 1.35% 10.60%
-------- -------- --------
Total Assets ........................... $393,748 $393,748 $393,748
--------- -------- --------
</TABLE>
--------
(1) Loans held for sale are included in loans receivable and are categorized
within three months as it is the intent to sell those assets within that
time frame.
(2) Includes mortgage-backed securities and interest-bearing deposits at the
FHLB.
(3) Historically, interest bearing demand deposits and savings deposits reflect
insignificant change in deposit trends and, therefore, the Bank classifies
these deposits as over five years.
(4) In prior years, long-term FHLB advances that were subject to conversion to
floating rate liabilities were classified as two to three years, while in
the current year they are assumed to reprice on the date on which they may
be converted by the FHLB. Under the Bank's current classification of FHLB
advances, the Bank's cumulative negative one year GAP position at June 30,
1999 would have been equal to 22.96% of assets.
(5) Does not give effect to the interest rate swap transactions that were
closed out in September 2000 as discussed previously in this section.
21
<PAGE>
GAP analysis is a useful measurement of asset and liability management,
however, it is difficult to predict the effect of changing interest rates based
solely on this measure. An additional analysis required by the OTS and
generated quarterly is the OTS Interest Rate Exposure Report. This report
forecasts changes in the Bank's market value of portfolio equity ("MVPE") under
alternative interest rate environments. The MVPE is defined as the net present
value of the Bank's existing assets, liabilities and off-balance sheet
instruments. The calculated estimates of change in MVPE at June 30, 2000 are as
follows:
MVPE
-------------------------------------------------------
Change in Interest Rate Amount % Change
------------------------- --------------- ---------
(In thousands)
+300 Basis Points $16,697 (55%)
+200 Basis Points $23,689 (37%)
+100 Basis Points $30,625 (18%)
Flat Rate $37,356 --
-100 Basis Points $43,625 17%
-200 Basis Points $49,197 32%
-300 Basis Points $54,753 47%
Management believes that the assumptions utilized in evaluating the
vulnerability of the Company's operations to changes in interest rates
approximate actual experience; however, the interest rate sensitivity of the
Bank's assets and liabilities as well as the estimated effect of changes in
interest rates on MVPE could vary substantially if different assumptions are
used or actual experience differs from the experience on which the assumptions
were based.
In the event the Bank should experience a mismatch in its desired GAP
ranges or an excessive decline in its MVPE subsequent to an interest rate
shock, it has a number of options which it could utilize to remedy such
mismatch. The Bank could restructure its investment portfolio through sale or
purchase of securities with more favorable repricing attributes. It could also
emphasize loan products with appropriate maturities or repricing attributes, or
it could attract deposits or obtain borrowings with desired maturities.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements of the Company and Notes thereto,
presented elsewhere herein, have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time and
due to inflation. The impact of inflation is reflected in the increased cost of
the Company's operations. Nearly all the assets and liabilities of the Company
are monetary. As a result, interest rates have a greater impact on the
Company's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the price of goods and services.
Financial Condition
General
The Company's assets have grown to $393.7 million at June 30, 2000 as
compared to $307.3 million and $202.0 million at June 30, 1999 and 1998,
respectively. The increase in assets primarily reflects the deployment of
proceeds from certificates of deposits and borrowings into loans, primarily
portfolio loans. At June 30, 2000, the loan portfolio aggregated $320.9 million
as compared to $187.7 million and $121.0 million, at June 30, 1999 and 1998,
respectively. The growth has been concentrated in Commercial Real Estate loans
and adjustable rate residential mortgages, as well as a transfer of $42.2
million of loans previously carried as held for sale to the loan portfolio.
Loans available for sale decreased to $9.7 million at June 30, 2000 as compared
to $74.7 million and $40.4 million at June 30, 1999 and 1998, respectively. The
current year decline is primarily due to the Bank's strategy to reduce its
nonconforming mortgage portfolio (including mortgages held for resale) as well
as the aforementioned transfer of loans to the loan portfolio. Deposits were
$243.3 million, $189.1 million and $118.80 million at June 30, 2000, June 30,
1999 and June 30,1998, respectively, while advances from the FHLB and other
borrowings aggregated $104.2 million, $88.6 million and $57.4, respectively.
22
<PAGE>
Loans
Net loans receivable increased to $320.8 million at June 30, 2000 as
compared to $187.7 million at June 30, 1999 and $121.0 million at June 30,
1998. These increases were due primarily to internally generated Commercial
Real Estate loans and conforming residential adjustable rate mortgages, as well
as the transfer of $42.2 million of loans held for sale to the loan portfolio.
At June 30, 2000, the Commercial Real Estate loan portfolio was $125.9 million
as compared to $98.0 million and $58.7 million at June 30, 1999 and 1998,
respectively. The residential mortgage loan portfolio, grew to $157.0 million
at June 30, 1999 compared to $77.8 and $59.6 million at June 30, 1999 and June
30, 1998, respectively. The Bank internally underwrites each of its loans to
comply with prescribed policies and approval levels established by its Board of
Directors.
The table below sets forth data relating to the composition of the Bank's
loan portfolio by type of loan on the dates indicated.
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------------------------
2000 1999 1998
------------------------- ------------------------- -------------------------
$ % $ % $ %
(Dollars in thousands)
Type of Loan
<S> <C> <C> <C> <C> <C> <C>
One-to-four family residential
real estate ....................... $156,879 48.90% $ 77,775 41.44% $ 59,597 49.26%
Multi-family residential real
estate ............................ 26,681 8.32 24,883 13.26 24,473 20.23
Construction one-to-four family
residential ....................... 2,234 0.70 4,775 2.54 1,210 1.00
Commercial and non-residential
real estate ....................... 99,207 30.92 59,964 31.94 29,767 24.61
Secured property tax liens ......... 27,160 8.46 13,153 7.01 4,468 3.69
Short term consumer ................ 7,203 2.24 5,802 3.09 -- --
Consumer--other .................... 4,308 1.34 3,176 1.69 2,496 2.06
Less allowance for loan losses ..... (3,439) (1.07) (1,751) (0.93) (857) (0.71)
Deferred fees ...................... 606 0.19 (81) (0.04) (170) (0.14)
-------- ------ -------- ------ -------- ------
Net loans .......................... $320,839 100.00% $187,696 100.00% $120,984 100.00%
======== ====== ======== ====== ======== ======
Type of Security
Residential real estate:
One-to-four family ................ 198,937 62.01% $ 90,797 48.37% $ 62,794 51.90%
Multi-family ...................... 26,681 8.32 24,883 13.26 22,421 18.53
Non-residential real estate ........ 83,724 26.09 39,903 21.26 27,216 22.50
Depository accounts ................ 119 0.04 503 0.27 511 0.42
Marketable securities .............. 6,003 1.87 13,068 6.96 -- --
Unsecured .......................... 7,203 2.24 5,802 3.09 -- --
Other .............................. 1,005 0.31 14,572 7.76 9,069 7.50
Less allowance for loan losses ..... (3,439) (1.07) (1,751) (0.93) (857) (0.71)
Deferred fees ...................... 606 0.19 (81) (0.04) (170) (0.14)
-------- ------ -------- ------ -------- ------
Net loans .......................... $320,839 100.00% $187,696 100.00% 120,984 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------
1997 1996
------------------------ ------------------------
$ % $ %
(Dollars in thousands)
Type of Loan
<S> <C> <C> <C> <C>
One-to-four family residential
real estate ....................... $54,493 63.37% $39,485 73.66%
Multi-family residential real
estate ............................ 13,244 15.41 5,357 9.99
Construction one-to-four family
residential ....................... 1,414 1.64 344 0.64
Commercial and non-residential
real estate ....................... 12,744 14.82 7,616 14.21
Secured property tax liens ......... 2,073 2.41 -- --
Short term consumer ................ -- -- -- --
Consumer--other .................... 2,375 2.76 1,285 2.40
Less allowance for loan losses ..... (472) (0.55) (430) (0.80)
Deferred fees ...................... 121 0.14 (53) (0.10)
------- ------ ------- ------
Net loans .......................... $85,992 100.00% $53,604 100.00%
======= ====== ======= ======
Type of Security
Residential real estate:
One-to-four family ................ $59,905 69.66% $40,673 75.88%
Multi-family ...................... 13,244 15.40 5,357 9.99
Non-residential real estate ........ 10,890 12.67 7,076 13.20
Depository accounts ................ 442 0.51 441 0.82
Marketable securities .............. 1,260 1.47 -- --
Unsecured .......................... -- -- -- --
Other .............................. 602 0.70 540 1.01
Less allowance for loan losses ..... (472) (0.55) (430) (0.80)
Deferred fees ...................... 121 0.14 (53) (0.10)
------- ------ ------- ------
Net loans .......................... 85,992 100.00% 53,604 100.00%
======= ====== ======= ======
</TABLE>
23
<PAGE>
The following table sets forth the estimated maturity of the Bank's loan
portfolio at June 30, 2000. The table does not include prepayments or scheduled
principal repayments. Adjustable-rate mortgage loans are shown as maturing on
their contractual maturities.
<TABLE>
<CAPTION>
Due Due Allowance
Within One Through Due After For
One Year Five Years Five Years Loan Losses Total
---------- ------------- ------------ ------------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
One-to-four family residential real
estate ........................... $ 0 $ 0 $157,485 $ (741) $156,744
Multi-family, commercial and non-
residential real estate .......... 16,569 1,821 107,498 (1,200) 124,688
Construction--one-to-four family
residential ...................... 2,234 -- -- (6) 2,228
Consumer .......................... 7,322 4,189 -- (713) 10,798
Secured Property tax .............. 27,160 -- -- (27) 27,133
Unassigned reserve ................ -- -- -- (752) (752)
------- ------ -------- --------- --------
Total ............................. $53,285 $6,010 $264,983 $(3,439) $320,839
======= ====== ======== ========= ========
</TABLE>
The following table sets forth the dollar amount of all loans due after
June 30, 2000 which have pre-determined interest rates and which have floating
or adjustable interest rates.
<TABLE>
<CAPTION>
Floating or
Adjustable
Fixed rates Rates Total
------------- ------------ ----------
(Dollars in thousands)
<S> <C> <C> <C>
One-to-four family residential real estate ........... $44,278 112,601 156,879
Multi-family, commercial and non-residential real
estate .............................................. 5,543 120,345 125,888
Construction--one-to-four family residential ......... -- 2,234 2,234
Secured Property tax liens ........................... 27,160 -- 27,160
Consumer ............................................. 7,203 4,308 11,511
------- ------- -------
Total ................................................ $84,184 $239,488 $323,672
======= ======== ========
</TABLE>
Non-Performing and Problem Assets
Loan Delinquencies
Collection procedures generally provide that after a loan is 15 days or
more past due, a late charge is added. The borrower is contacted by mail or
telephone and payment is requested. If a loan becomes 90 days or more
contractually delinquent, the Bank will usually institute foreclosure
proceedings. Additionally, all such loans are generally placed on non-accrual
status unless the credit is well secured and in the process of collection. If
collection of principal or interest is deemed doubtful at an earlier date, the
loan would be placed on non-accrual status.
Other Real Estate Owned
Real estate acquired by the Bank as a result of foreclosure on an
outstanding loan balance is classified as Other Real Estate Owned ("OREO")
until such time as the property is sold. Upon acquisition, the property is
recorded at the lower of the unpaid principal balance of the related loan or
its fair value less estimated disposal costs. Write-downs required at
acquisition are charged to the allowance for loan losses. Subsequent
write-downs of OREO are charged to operations. Real estate acquired by the Bank
as a result of foreclosure on a secured property tax lien is classified as OREO
until the property is sold and is recorded at the lower of cost or fair value
less disposal costs. Because the Bank purchases these liens at relatively low
loan to values, the cost is generally much less than the fair value less
disposal costs. In addition to the OREO generated with respect to secured tax
liens, OREO increased at June 30, 2000 due to the completion of foreclosure
actions with respect to certain of the Company's past due loans.
24
<PAGE>
The following table details the Bank's 90-day past due loans and OREO at
the dates indicated.
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis:
One-to-four family residential real estate .......... $ 2,685 $ 1,940 $ 1,154 $ 705 $ 553
Consumer ............................................ 40 73 64 40 40
Multi family, commercial and non-residential
real estate ........................................ -- -- 134 -- --
-------- -------- -------- -------- --------
Total non-accrual loans ............................. 2,725 2,013 1,352 745 593
-------- -------- -------- -------- --------
Accruing loans that are contractually past due
90 days or more:
One to four family mortgage ......................... 127 840 -- 353 378
-------- -------- -------- -------- --------
Total 90-day past-due loans ......................... 127 840 -- 353 378
-------- -------- -------- -------- --------
Total non-accrual and 90-day past due loans ......... 2,852 2,853 1,352 1,098 971
Other Real Estate Owned:
Secured Property Tax Liens ......................... 304 -- -- -- --
Other Loans ........................................ 845 315 -- -- 81
-------- -------- -------- -------- --------
Total Other Real Estate Owned ...................... 1,149 315 -- -- 81
-------- -------- -------- -------- --------
Total 90-day past due loans and OREO ............... $ 4,001 $ 3,168 $ 1,352 $ 1,098 $ 1,052
======== ======== ======== ======== ========
Non-accrual loans to net loans ..................... 0.85% 1.07% 1.12% 0.87% 1.11%
======== ======== ======== ======== ========
Total 90-day past due loans and OREO to
net loans ........................................ 1.28% 1.69% 1.12% 1.28% 1.96%
======== ======== ======== ======== ========
Total allowance for loan losses to total non-
accrual loans .................................... 126.20% 86.98% 63.39% 63.36% 72.51%
======== ======== ======== ======== ========
</TABLE>
Excluding the loan loss allowance attributable to short-term consumer loans,
the allowance as a percentage of non-accrual loans was 100.40% and 75.66% at
June 30, 2000 and 1999, respectively.
Allowance for Loan Losses
It is the policy of management and the Board of Directors of the Company
to provide for losses on both identified and unidentified losses inherent in
its loan portfolio. A provision for loan losses is charged to operations based
upon an evaluation of the potential losses in the loan portfolio. This
evaluation takes into account such factors as portfolio concentrations,
delinquency trends, trends of non-accrual and classified loans, economic
conditions, and other relevant factors. The following table sets forth activity
in the Bank's allowance for loan losses for the periods indicated.
25
<PAGE>
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ---------- ---------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses, beginning of period. $ 1,751 $ 857 $ 472 $ 430 $ 388
Charge-offs:
One-to-four family residential real estate ......... (87) (47) 0 (16) 0
Short-term consumer loans .......................... (1,542) 0 0 0 0
-------- ------ ------- ------ -------
Total charge-offs ................................... (1,629) (47) 0 (16) 0
-------- ------ ------- ------ -------
Provision for loan losses:
Short-term consumer loans .......................... 2,017 228 0 0 0
Other .............................................. 1,300 713 385 58 42
-------- ------ ------- ------ -------
Total Provision ..................................... 3,317 941 385 58 42
-------- ------ ------- ------ -------
Allowance for loan losses, end of period ............ $ 3,439 $1,751 $ 857 $ 472 $ 430
======== ====== ======= ====== =======
Allowance for loan losses to net loans(1) ........... 1.07% 0.81% 0.71% 0.55% 0.80%
======== ====== ======= ====== =======
Net loans charged-off as a percent of average
loans outstanding(1) ............................... 0.40% 0.02% -- 0.02% --
======== ====== ======= ====== =======
</TABLE>
------------
(1) Excluding short-term consumer loans, the allowance for loan losses at June
30, 2000 was 0.87% of net loans and net charge-offs for fiscal year 2000
were 0.03% of average loans outstanding.
The following table sets forth the allocation of the Bank's allowance for
loan losses by loan category at the dates indicated. The portion of the
allowance for loan losses allocated to each loan category does not represent
the total available for future losses that may occur within the loan category,
since the total loan loss allowance is a valuation reserve applicable to the
entire loan portfolio.
<TABLE>
<CAPTION>
June 30,
------------------------------------------------
2000 1999 1998 1997 1996
-------- --------- ------ ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at end of period applicable to:
One-to-four family residential real estate ......... $ 768 $ 266 $156 $129 $114
Multi-family residential real estate ............... 200 187 201 109 60
Construction one-to-four family
Residential ....................................... 6 12 3 4 1
Commercial and non-residential real estate ......... 1,000 656 277 154 166
Short-term consumer loans .......................... 703 -- -- -- --
Other consumer ..................................... 10 41 9 7 3
Unallocated ........................................ 752 361 211 69 86
------ ------ ---- ---- ----
Total allowance for loan losses .................... $3,439 $1,523 $857 $472 $430
====== ====== ==== ==== ====
</TABLE>
Investment Securities
The Company utilizes its investment securities portfolio to manage its
liquidity and interest rate risk. For this reason, the Company's investment
securities portfolio is classified as available for sale.
The investment policy of the Company and classification of securities are
established by its Board of Directors. It is based on its asset and liability
management goals and is designed to provide for a portfolio of high quality
liquid investments which optimize interest income. All or a portion of the
Company's investment securities portfolio may be utilized to collateralize
borrowings from the FHLB or repurchase agreements.
26
<PAGE>
The following table sets forth the carrying value of the Company's
investment and mortgage-backed securities ("MBS") portfolio at the dates
indicated.
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------------
2000 1999
--------------------------------------------------- -----------
Gross Gross Fair
Amortized Unrealized Unrealized Market Amortized
Cost Gains Losses Value Cost
----------- ------------ ------------ ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Available-for-sale:
FHLMC ...................... $ 650 -- $ (20) $ 630 $ 1,146
GNMA ....................... 2,428 -- (55) 2,373 752
FNMA ....................... 11,891 -- (501) 11,390 9,175
------- -- --------- ------- -------
Total MBS .................. 14,969 -- (576) 14,393 11,073
------- -- --------- ------- -------
US government & agency ..... 11,144 -- (719) 10,425 8,487
Other ...................... 10,193 -- (791) 9,402 7,932
FHLB stock ................. 6,485 -- -- 6,485 4,478
------- -- --------- ------- -------
Total securities
available-for-sale ....... $42,791 -- (2,086) $40,705 $31,970
======= == ========= ======= =======
<CAPTION>
At June 30,
---------------------------------------------------------------------------------------------
1999 1998
-------------------------------------- -----------------------------------------------------
Gross Gross Fair Gross Gross Fair
Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Gains Losses Value Cost Gains Losses Value
------------ ------------ ---------- ----------- ------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Available-for-sale:
FHLMC ...................... $ 3 $ (11) $ 1,138 $ 6,012 $11 $(13) $ 6,010
GNMA ....................... (10) 742 3,832 1 (6) 3,827
FNMA ....................... (296) 8,879 4,344 8 (1) 4,351
------ ------- ------- --- ------- --------
Total MBS .................. 3 (317) 10,759 14,188 20 (20) 14,188
--- ------ ------- ------- --- ------ --------
US government & agency ..... (267) 8,220 -- -- -- --
Other ...................... 40 (216) 7,756 1,000 -- -- 1,000
FHLB stock ................. 4,478 2,363 2,363
------- ------- --------
Total securities
available-for-sale ....... $43 $ (800) $31,213 $17,551 $20 $(20) $ 17.551
=== ====== ======= ======= === ====== ========
</TABLE>
27
<PAGE>
The following table sets forth certain information regarding the carrying
values, weighted average yields and maturities of the Company's investment
portfolio at June 30, 2000. All investment securities are classified as
available-for-sale, therefore the carrying value is the estimated market value.
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years
--------------------- --------------------- ----------------------
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
---------- --------- ---------- --------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities ......... -- -- 447 7.38% 293 7.28%
Other .............................. -- -- 2,865 11.00% 3,306 6.41%
FHLB stock(1) ...................... -- -- -- -- -- --
-- -- ----- ----- ----- ----
TOTAL ............................. -- -- $3,312 10.51% $3,599 6.48%
== == ====== ===== ====== ====
</TABLE>
<TABLE>
<CAPTION>
More than Ten Years Total
---------------------- -----------------------
Carrying Average Carrying Average
Value Yield Value Yield
---------- --------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage-backed securities ......... 13,653 6.66% 14,393 6.69%
Other .............................. 13,656 7.76% 19,827 8.00%
FHLB stock(1) ...................... 6,485 7.00% 6,485 7.00%
------ ---- ------ ----
TOTAL ............................. $33,794 7.17% $40,705 7.38%
======= ==== ======= ====
</TABLE>
------------
(1) FHLB stock has no stated maturity, however, it must be owned as long as the
Bank remains a member of the FHLB system. The Bank does not anticipate
that it will discontinue its membership and, therefore, the investment is
classified as more than ten years.
Deposits
Consumer and commercial retail deposits are attracted primarily at the
Bank's two branch locations by offering a broad selection of deposit products.
The Bank evaluates its interest rates and fees on deposit products through a
regular review of competing financial institutions and prevailing market
interest rates.
Competition for retail deposits is intense and the administrative and
operational costs of a retail branch can be high. Therefore, the Bank also
attracts deposits through a network of financial planners and brokers. The Bank
has utilized these deposits to fund a substantial portion of the asset growth
experienced in recent years. While the Bank has attracted deposits by paying
interest rates slightly higher than generally offered in the retail market,
this has allowed the Company to focus on the implementation of its business
strategy, including the development of its lending business lines and product
niches, and to control its core non-interest expenses.
Deposits at June 30, 2000 totaled $243.3 million compared to $189.1 and
$118.8 million at June 30, 1999 and June 30, 1998, respectively. While the Bank
has established a core level of retail deposits which include both transaction
type of accounts (checking, savings, money market) and CDs, the growth in the
deposit base is attributed primarily to jumbo CDs.
The following table sets forth average deposits by various types of demand
and time deposits.
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------------------------------------------------------
2000 1999 1998
------------------------ ------------------------ -----------------------
Deposits Avg. Yield Deposits Avg. Yield Deposits Avg. Yield
---------- ------------ ---------- ------------ ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing demand deposits ......... $ 11,100 -- $ 3,806 $ 2,663
Interest bearing demand deposits ............. 11,862 3.50% 18,981 3.95% 12,764 3.93%
Savings deposits ............................. 1,831 2.75 1,627 3.02 1,881 2.66
Certificates of deposit ...................... 181,929 5.85 132,676 5.56 108,393 5.86
-------- ---- -------- ---- -------- ----
Total ....................................... $206,722 5.38% $157,090 5.20% $125,701 5.50%
======== ==== ======== ==== ======== ====
</TABLE>
28
<PAGE>
The following table indicates the amount of CDs of $100,000 or more by
remaining maturity at June 30, 2000.
Remaining Maturity:
Three months or less ............................ $ 88,789
Over three months through six months ............ 52,143
Over six months through twelve months ........... 40,874
Over twelve months .............................. 1,882
--------
Total ........................................... $183,688
========
Borrowings
The Bank utilizes borrowings from the FHLB and collateralized repurchase
agreements in managing its interest rate risk and as a tool to augment deposits
in funding asset growth. FHLB borrowings totaled $95.2 million at June 30, 2000
as compared to $80.3 million at June 30, 1999 and $49.2 million at June 30,
1998. The $14.9 million increase during the year ended June 30, 2000 resulted
from proceeds being utilized to fund loan growth. Repurchase agreements totaled
$5.0 million at June 30, 2000 as compared to $8.3 million at June 30, 1999 and
$8.3 million at June 30, 1998.
The following table sets forth certain balance and rate information with
respect to FHLB borrowings and repurchase agreements for the periods indicated.
The table includes both short and long term maturities.
Federal Home Loan Bank Advances and Repurchase Agreements
<TABLE>
<CAPTION>
At June 30,
------------------------------------------
2000 1999 1998
------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C>
Advances outstanding at period end ................ $ 95,200 $ 80,300 $ 49,150
Interest rate at period end ....................... 6.13% 5.37% 5.40%
Approximate average amount outstanding ............ $100,071 $ 57,305 $ 16,113
Maximum month-end balance ......................... $123,200 $ 80,300 $ 49,150
Approximate weighted average rate ................. 5.51% 5.20% 5.48%
Repurchase agreements outstanding at end of period. $ 5,000 $ 8,280 $ 8,280
Interest rate ..................................... 5.85% 5.89% 5.89%
Approximate average amount outstanding ............ $ 6,201 $ 8,280 $ 9,947
Maximum month-end balance ......................... $ 8,280 $ 8,280 $ 10,780
Approximate weighted average rate ................. 5.85% 5.89% 5.85%
</TABLE>
The Bank is required to maintain certain eligible assets as collateral in
connection with FHLB borrowings and repurchase agreements.
Shareholders' Equity
At June 30, 2000, the Company had shareholders' equity of $32.6 million,
as compared to $27.3 million at June 30, 1999 and $23.2 million at June 30,
1998. The increase each year is attributed primarily to earnings which were
partially offset by treasury stock repurchases and unrealized losses on
securities available for sale.
Impact of New Financial Accounting Standards
Accounting for Derivative Instruments and Hedging Activity. In June 1998,
the FASB issued SFAS No. 133, establishing accounting and reporting standards
for derivative instruments, including certain derivative instruments imbedded
in other contracts, and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measures those instruments at fair value. If certain
conditions are met, a derivative may be specifically designated as a hedge. The
accounting for changes in the fair value of a derivative (gains and losses)
depends on the intended use of the derivative and resulting designation.
Subsequent to SFAS No. 133, the FASB issued SFAS No. 137, which amended the
effective date of SFAS No. 133 to be all fiscal quarters of fiscal years
beginning after June 15, 2000. In June 2000,
29
<PAGE>
the FASB issued SFAS No. 138 further amending SFAS No. 133 for the following
items: normal purchases and normal sales exception, hedging the benchmark
interest rate, hedging recognized foreign currency-denominated debt instuments
and hedging with intercompany derivatives. SFAS No. 138 is required to be
adopted concurrently with SFAS Nos. 133 and 137 on July 1, 2000. The fair
market value of derivatives held at June 30, 2000 was $92,000.
Year 2000
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.
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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
See Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Asset and Liability Management -- Interest Rate
Sensitivity Analysis.
Item 8. Financial Statements and Supplementary Data
The financial statements and financial statement schedules are set forth
beginning on page F-1 of this report.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
Part III
The information called for by Item 10, Directors and Executive Officers of
the Registrant; Item 11, Executive Compensation; Item 12, Security Ownership of
Certain Beneficial Owners and Management; and Item 13, Certain Relationships
and Related Transactions, is incorporated herein by reference to the
Registrant's definitive Proxy Statement for its Annual Meeting of Shareholders,
scheduled to be held in November 2000, which shall be filed with the Securities
and Exchange Commission within 120 days from the end of the Registrant's fiscal
year.
30
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) 1. Financial Statements of the Registrant
Consolidated Financial Statements of the Registrant and Report of
Independent Certified Public Accountants thereon
Consolidated Balance Sheets as of June 30, 2000 and 1999
Consolidated Statements of Income for the fiscal years ended June 30,
2000, 1999 and 1998
Consolidated Statement of Shareholders' Equity for the fiscal years ended
June 30, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the fiscal years ended June 30,
2000, 1999 and 1998
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
All financial statement schedules are omitted because they are not
applicable or not required, or because the required information is
included in the consolidated financial statements or the notes thereto.
3. Exhibits
See Exhibit Index included herein.
(b) Reports on Form 8-K.
None.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on September 28,
1999.
CRUSADER HOLDING CORPORATION
By: /s/ THOMAS J. KNOX
---------------------------------
Thomas J. Knox
Chairman (Chief Executive
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on September 28, 1999.
/s/ D. WALTER COHEN, D.D.S. /s/ THOMAS J. KNOX
-------------------------- ---------------------------------
D. Walter Cohen, D.D.S. Thomas J. Knox
Director Chairman (Chief Executive Officer)
/s/ LINDA R. KNOX /s/ BRUCE A. LEVY
-------------------------- ---------------------------------
Linda J. Knox Bruce A. Levy
Director President and Director
/s/ BRIAN McADAMS /s/ ROBERT C. FAIX
-------------------------- ---------------------------------
Brian McAdams Robert C. Faix
Director Senior Vice President
(Chief Financial Officer)
/s/ ROBERT S. MACAULAY
--------------------------
Robert S. Macaulay
Director
/s/ JOSEPH M. MATISOFF
--------------------------
Joseph M. Matisoff
Director
32
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
Crusader Holding Corporation
We have audited the accompanying consolidated balance sheets of Crusader
Holding Corporation and subsidiary as of June 30, 2000 and 1999, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended June 30, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing principles generally
accepted in the United States of America. Those principles require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Crusader
Holding Corporation and Subsidiary as of June 30, 2000 and 1999, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended June 30, 2000, in conformity with
accounting principles generally accepted in the United States of America.
/s/ GRANT THORNTON LLP
Philadelphia, Pennsylvania
September 7, 2000
F-1
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30,
-----------------------------------
2000 1999
---------------- ----------------
<S> <C> <C>
ASSETS
Cash and due from banks .................................................... $ 486,000 $ 790,000
Interest-earning deposits .................................................. 12,846,000 5,266,000
------------ ------------
Cash and cash equivalents ................................................ 13,332,000 6,056,000
------------ ------------
Loans held for sale (estimated market value of $9,850,000 and
$77,623,000 at June 30, 2000 and 1999, respectively)...................... 9,735,000 74,708,000
Investment securities available-for-sale ................................... 26,312,000 20,454,000
Mortgage-backed securities available-for-sale .............................. 14,393,000 10,759,000
Loans receivable, net ...................................................... 320,839,000 187,696,000
Accrued interest receivable ................................................ 2,326,000 2,379,000
Other real estate owned .................................................... 1,149,000 315,000
Premises and equipment, net ................................................ 773,000 1,068,000
Deferred income taxes ...................................................... 1,913,000 841,000
Goodwill, net .............................................................. 1,050,000 1,135,000
Other assets ............................................................... 1,926,000 1,869,000
------------ ------------
Total assets ............................................................. $393,748,000 $307,280,000
============ ============
LIABILITIES
Deposits ................................................................... $243,261,000 $189,106,000
Advances from Federal Home Loan Bank ....................................... 95,200,000 80,300,000
Securities sold under agreements to repurchase ............................. 5,000,000 8,280,000
Other borrowings ........................................................... 4,033,000 --
Advances from borrowers for taxes and insurance ............................ 696,000 505,000
Other liabilities .......................................................... 12,676,000 1,523,000
------------ ------------
Total liabilities ........................................................ 360,866,000 279,714,000
------------ ------------
MINORITY INTEREST ........................................................... 286,000 230,000
------------ ------------
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;
4,024,182 and 4,024,182 shares issued and 3,865,087 and 3,983,337
outstanding at June 30, 2000 and 1999, respectively ...................... 40,240 40,240
Class B common stock -- authorized, 500,000 shares of $0.01 par value;
none issued .............................................................. -- --
Additional paid-in capital ................................................. 23,521,510 23,521,510
Retained earnings .......................................................... 11,822,250 4,627,250
Treasury stock, 159,095 and 40,845 in 2000 and 1999 shares at cost ......... (1,390,000) (368,000)
Accumulated other comprehensive loss ....................................... (1,398,000) (485,000)
------------ ------------
Total shareholders' equity ............................................... 32,596,000 27,336,000
------------ ------------
Total liabilities and shareholders' equity ............................... $393,748,000 $307,280,000
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------
2000 1999 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
INTEREST INCOME
Loans, including fees ......................................... $ 27,265,000 $ 19,987,000 $ 13,109,000
Short-term consumer loans, including fees ..................... 4,135,000 348,000 --
Investment securities, mortgage-backed securities and
assets held for sale ........................................ 3,075,000 1,561,000 1,412,000
------------ ------------ ------------
Total interest income ....................................... 34,475,000 21,896,000 14,521,000
------------ ------------ ------------
INTEREST EXPENSE
Deposits ...................................................... 11,121,000 8,171,000 6,913,000
Borrowed funds -- short-term .................................. 1,946,000 623,000 598,000
Borrowed funds -- long-term ................................... 3,895,000 2,795,000 867,000
Shareholders' notes ........................................... -- -- 107,000
------------ ------------ ------------
Total interest expense ...................................... 16,962,000 11,589,000 8,485,000
------------ ------------ ------------
Net interest income ......................................... 17,513,000 10,307,000 6,036,000
PROVISION FOR LOAN LOSSES
Short-term consumer loans ..................................... 2,017,000 228,000 --
Other loans ................................................... 1,300,000 713,000 385,000
------------ ------------ ------------
Total provision for loan losses ............................. 3,317,000 941,000 385,000
------------ ------------ ------------
Net interest income after provision for loan losses ......... 14,196,000 9,366,000 5,651,000
------------ ------------ ------------
NON-INTEREST INCOME
Service charges and other fees on deposit accounts ............ 157,000 107,000 170,000
Mortgage banking revenue ...................................... 1,634,000 3,969,000 4,712,000
Other ......................................................... 731,000 508,000 131,000
------------ ------------ ------------
Total non-interest income ................................... 2,522,000 4,584,000 5,013,000
------------ ------------ ------------
NON-INTEREST EXPENSES
Employee compensation and benefits ............................ 1,655,000 1,276,000 1,076,000
Data processing ............................................... 150,000 150,000 109,000
Federal insurance premiums .................................... 96,000 88,000 63,000
Occupancy and equipment ....................................... 364,000 361,000 320,000
Professional fees ............................................. 373,000 196,000 102,000
Mortgage banking expenses ..................................... 2,259,000 2,371,000 2,628,000
Goodwill amortization ......................................... 85,000 84,000 52,000
Loss on fraudulent money orders ............................... -- 950,000 --
Other operating ............................................... 829,000 671,000 397,000
------------ ------------ ------------
Total non-interest expenses ................................. 5,811,000 6,147,000 4,747,000
------------ ------------ ------------
Income before income tax expense ............................ 10,907,000 7,803,000 5,917,000
INCOME TAX EXPENSE ............................................. 3,343,000 2,657,000 2,109,000
------------ ------------ ------------
Income before minority interest ............................. 7,564,000 5,146,000 3,808,000
Minority interest .............................................. 369,000 180,000 72,000
------------ ------------ ------------
NET INCOME .................................................. $ 7,195,000 $ 4,966,000 $ 3,736,000
============ ============ ============
Net income per share -- basic .................................. $ 1.85 $ 1.24 $ 1.21
============ ============ ============
Net income per share -- diluted ................................ $ 1.85 $ 1.24 $ 1.20
============ ============ ============
Weighted average shares outstanding -- basic ................... 3,895,000 4,016,000 3,095,000
============ ============ ============
Weighted average shares outstanding -- diluted ................. 3,895,000 4,020,000 3,108,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Retained
Additional earnings
Common paid-in (accumulated
stock capital deficit)
----------- -------------- --------------
<S> <C> <C> <C>
Balance at July 1, 1997 .......... $ 10,850 $ 2,065,900 $ 864,250
Net income ....................... -- -- 3,736,000
Contributions .................... 900 251,100 --
2--to--1 stock split ............. 11,750 -- (11,750)
Issuance of common stock
for minority interest
acquisition ..................... 1,500 888,500 --
Net proceeds of initial public
offering ........................ 12,000 15,392,000 --
5% stock dividend ................ 1,325 3,009,925 (3,011,250)
Other comprehensive
income, net of taxes ............ -- -- --
Total comprehensive income
-------- ----------- ------------
Balance at June 30, 1998 ......... 38,325 21,607,425 1,577,250
Purchase of treasury stock ....... -- -- --
Net income ....................... -- -- 4,966,000
Other comprehensive loss,
net of taxes .................... -- -- --
Total comprehensive income
5% stock dividend ................ 1,915 1,914,085 (1,916,000)
-------- ----------- ------------
Balance at June 30, 1999 ......... 40,240 23,521,510 4,627,250
Purchase of treasury stock ....... -- -- --
Net income ....................... -- -- 7,195,000
Other comprehensive loss,
net of taxes .................... -- -- --
Total comprehensive income
Balance at June 30, 2000 ......... $ 40,240 $23,521,510 $ 11,822,250
======== =========== ============
Accumulated
other Total
comprehensive Treasury shareholders' Comprehensive
income (loss) stock equity income
--------------- --------------- --------------- --------------
Balance at July 1, 1997 .......... $ (46,000) $ -- $ 2,895,000
Net income ....................... -- -- 3,736,000 $ 3,736,000
Contributions .................... -- -- 252,000
2--to--1 stock split ............. -- -- --
Issuance of common stock
for minority interest
acquisition ..................... -- -- 890,000
Net proceeds of initial public
offering ........................ -- -- 15,404,000
5% stock dividend ................ -- -- --
Other comprehensive
income, net of taxes ............ 46,000 -- 46,000 46,000
-----------
Total comprehensive income $ 3,782,000
------------ ------------ ------------ ===========
Balance at June 30, 1998 ......... -- -- 23,223,000
Purchase of treasury stock ....... -- (368,000) (368,000)
Net income ....................... -- -- 4,966,000 $ 4,966,000
Other comprehensive loss,
net of taxes .................... (485,000) -- (485,000) (485,000)
-----------
Total comprehensive income $ 4,481,000
===========
5% stock dividend ................ -- -- --
------------ ------------ ------------
Balance at June 30, 1999 ......... (485,000) (368,000) 27,336,000
Purchase of treasury stock ....... -- (1,022,000) (1,022,000)
Net income ....................... -- -- 7,195,000 $ 7,195,000
Other comprehensive loss,
net of taxes .................... (913,000) -- (913,000) (913,000)
-----------
Total comprehensive income $ 6,282,000
------------ ------------ ------------ ===========
Balance at June 30, 2000 ......... $ (1,398,000) $ (1,390,000) $ 32,596,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------
2000 1999 1998
---------------- ----------------- -----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income .................................................. $ 7,195,000 $ 4,966,000 $ 3,736,000
Adjustments to reconcile net income to net cash provided
by (used in) operating activities
Amortization of premiums and discounts on loans,
mortgage--backed securities and investments ............... (176,000) (48,000) 201,000
Provision for loan losses ................................... 3,317,000 713,000 385,000
Provisions for fraudulent money orders ...................... -- 950,000 --
Net gain on sale of loans held for sale ..................... (1,634,000) (3,969,000) (3,012,000)
Amortization of goodwill .................................... 85,000 84,000 52,000
Depreciation and amortization of premises and equipment 250,000 240,000 176,000
Proceeds from sale of loans held for sale ................... 69,028,000 291,299,000 195,892,000
Originations of loans held for sale ......................... (44,766,000) (313,649,000) (235,025,000)
Decrease (increase) in accrued interest receivable .......... 53,000 (1,007,000) (557,000)
Increase in deferred income taxes ........................... (1,072,000) (232,000) (130,000)
Increase (decrease) in other liabilities .................... 11,153,000 (500,000) 1,790,000
Other, net .................................................. (57,000) (2,287,000) (620,000)
-------------- -------------- --------------
Net cash provided by (used in) operating activities ....... 43,376,000 (23,440,000) (37,112,000)
-------------- -------------- --------------
INVESTING ACTIVITIES
Net increase in loans ....................................... (95,896,000) (67,740,000) (35,377,000)
Purchase of investment securities available--for--sale ...... (4,790,000) (18,151,000) (2,000,000)
Purchase of mortgage--backed securities available--for--
sale ...................................................... (6,505,000) (7,561,000) (4,661,000)
Repayments of principal on investment securities
available--for--sale ...................................... -- 1,000,000 3,527,000
Repayments of principal on mortgage--backed securities,
available--for--sale ...................................... 1,406,000 4,905,000 5,959,000
Proceeds from sale of mortgage--backed securities
available--for--sale ...................................... -- 5,287,000 1,915,000
Proceeds from sale of property acquired through loan
foreclosure actions ....................................... 935,000 273,000 111,000
Purchases of premises and equipment ......................... (283,000) (315,000) (472,000)
-------------- -------------- --------------
Net cash used in investing activities ..................... (105,133,000) (82,302,000) (30,998,000)
-------------- -------------- --------------
FINANCING ACTIVITIES
Net increase in deposits .................................... 54,155,000 70,275,000 22,925,000
Advances from Federal Home Loan Bank, net ................... 9,900,000 650,000 17,700,000
Proceeds from long--term FHLB advances ...................... 5,000,000 30,500,000 25,000,000
Increase in advance payments by borrowers for taxes and
insurance ................................................. 191,000 71,000 164,000
(Repayments) from notes payable ............................. -- -- (2,990,000)
Repayment of securities sold under agreements to
repurchase ................................................ (3,280,000) -- --
Proceeds from other borrowings .............................. 4,033,000 -- --
Purchase of treasury stock .................................. (1,022,000) (368,000) --
Increase (decrease) in minority interest .................... 56,000 -- --
Capital contributions ....................................... -- -- 252,000
Proceeds from initial public offering ....................... -- -- 15,404,000
-------------- -------------- --------------
Net cash provided by financing activities ................. 69,033,000 101,128,000 78,455,000
-------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents ...... 7,276,000 (4,614,000) 10,345,000
Cash and cash equivalents at beginning of year ............... 6,056,000 10,670,000 325,000
-------------- -------------- --------------
Cash and cash equivalents at end of year ..................... $ 13,332,000 $ 6,056,000 $ 10,670,000
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Crusader Holding Corporation (the Company) is the holding company for its
wholly-owned subsidiary, Crusader Savings Bank (the Bank), a federally
chartered savings bank. See note B for additional information regarding
majority and wholly-owned subsidiaries of the Bank. The Bank activities are
conducted primarily in the metropolitan Philadelphia area. Nonconforming credit
operations are conducted principally in the Eastern portion of the United
States while secured property tax lien activities are currently concentrated in
the states of New Jersey and Connecticut.
The Bank competes with other banking and financial institutions in its
primary market communities. Commercial banks, savings banks, savings and loan
associations, mortgage bankers and brokers, credit unions and money market
funds actively compete for savings and time deposits and for types of loans.
Such institutions, as well as consumer finance, mutual funds, insurance
companies, and brokerage and investment banking firms, may be considered
competitors of the Bank with respect to one or more of the services it renders.
The Bank is subject to regulations of certain state and federal agencies
and, accordingly, it is periodically examined by those regulatory authorities.
As a consequence of the extensive regulation of commercial banking activities,
the Bank's business is particularly susceptible to being affected by state and
federal legislation and regulations.
1. Basis of Financial Statement Presentation and Reporting Entity
The accounting and reporting policies of the Company conform with
generally accepted accounting principles and practices within the banking
industry, with respect to the Bank. All intercompany balances and transactions
have been eliminated. The accompanying consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiary, the Bank.
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the balance sheets and the reported amount of revenues and expenses during the
reported period. Therefore, actual results could differ from those estimates.
The principal estimates that are susceptible to significant change in the
near term relates to the allowance for loan losses and goodwill. The evaluation
of the adequacy of the allowance for loan losses includes an analysis of the
individual loans and overall risk characteristics and size of the different
loan portfolios, and takes into consideration current economic and market
conditions, the capability of specific borrowers to pay specific loan
obligations as well as current loan collateral values. However, actual losses
on specific loans, which also are encompassed in the analysis, may vary from
estimated losses.
The outstanding goodwill resulted from the purchase of the remaining
interest of Crusader Mortgage Corporation. If the anticipated benefits from
such purchase are not derived, estimated amortization may increase and/or
change for impairment may be recognized.
The Company follows the disclosure provisions of 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.
2. Financial Instruments
The FASB issued SFAS No. 107, Disclosures about Fair Value of Financial
Instruments, which requires all entities to disclose the estimated fair value
of their assets and liabilities considered to be financial instruments.
Financial instruments requiring disclosure consist primarily of investment
securities, mortgage-backed securities, loans, deposits and borrowings.
F-6
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
3. Loans Held for Sale
Included in loans held for sale are any loans which the Bank believes may
be involved in interest rate risk management or other decisions which might
reasonably result in such loans not being held until maturity. Any such
conforming loans are transferred to loans held for sale and valued at the lower
of aggregate cost or market, including considering of forward commitments to
sell, until ultimate disposition.
The FASB issued SFAS No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, as amended by SFAS No.
127, which provides accounting guidance on transfers of financial assets,
servicing of financial assets and extinguishments of liabilities occurring
after December 31, 1996. The adoption of SFAS No. 125 did not have a material
impact on the Company's consolidated financial position or results of
operations.
4. Investment and Mortgage-Backed Securities
Investments in securities are classified in one of two categories:
held-to-maturity and available-for-sale. Debt securities that the Bank has the
positive intent and ability to hold to maturity are classified as held-to-
maturity and are reported at amortized cost. As the Bank does not engage in
security trading, the balance of its debt securities and any equity securities
are classified as available-for-sale. Net unrealized gains and losses for such
securities, net of tax, are required to be recognized as a separate component
of shareholders' equity and excluded from the determination of net income.
Gains or losses on disposition are based on the net proceeds and cost of the
securities sold, adjusted for amortization of premiums and accretion of
discounts, using the specific identification method.
The Company entered into interest rate swap agreements to manage its
sensitivity to interest rate risk. For interest rate risk management swap
agreements, interest income or interest expense is accrued over the terms of
the agreements and transaction fees are deferred and amortized to interest
income or expense over the terms of the agreements. The fair value of interest
rate swap agreements used for interest rate risk management are not recognized
in the consolidated financial statements.
In June 1999, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activity. Subsequent to SFAS No. 133, the FASB issued
SFAS No. 137, which amended the effective date of SFAS No. 133 to be all fiscal
quarters of fiscal years beginning after June 15, 2000. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments imbedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value.
In June 2000, SFAS No. 138 Accounting for Certain Derivative Instruments
and Certain Hedging Activities an amendment of FASB Statement No. 133 was
issued. SFAS No. 138 amends SFAS No. 133 for the following items: normal
purchases and normal sales exception, hedging the benchmark interest rate,
hedging recognized foreign currency-denominated debt instruments and hedging
with intercompany derivatives. SFAS No. 138 is required to be adopted
concurrently with SFAS No. 133. The Company has reviewed the provisions of SFAS
No. 133, as amended by SFAS No. 137 and SFAS No. 138 and has determined that
the fair market value for derivatives held is approximately $91,600 at June 30,
2000
5. Loans and Allowance for Loan Losses
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are stated at the amount of
unpaid principal and reduced by an allowance for loan losses. Interest on loans
is accrued and credited to operations based upon the principal amounts
outstanding. The allowance for loan losses is established through a provision
for 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
F-7
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
loans that may become uncollectible based on evaluations of the collectibility
of loans and prior loan loss experience. The evaluations take into
consideration such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problem loans and
current economic conditions that may affect the borrower's ability to pay.
Management establishes reserves against interest accruals on loans when
principal and interest become 90 days or more past due and when management
believes, after considering economic and business conditions, collection
efforts and collateral, that the borrower's financial condition is such that
collection of interest is doubtful. Additionally, uncollectible interest on
loans that are contractually past due is charged off, or an allowance is
established based on management's periodic evaluation. The allowance is
established by a charge to interest income equal to all interest previously
accrued and income is subsequently recognized only to the extent that cash
payments are received until, in management's judgment, the borrower's ability
to make periodic interest and principal payments is back to normal, in which
case the loan is returned to accrual status.
The Bank follows SFAS No. 114, Accounting by Creditors for Impairment of a
Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment of a
Loan -- Income Recognition and Disclosures. This standard requires that a
creditor measure impairment based on the present value of expected future cash
flows discounted at the loan's effective interest rate, except that as a
practical expedient, a creditor may measure impairment based on a loan's
observable market price, or the fair value of the collateral if the loan is
collateral dependent. Regardless of the measurement method, a creditor must
measure impairment based on the fair value of the collateral when the creditor
determines that foreclosure is probable.
6. Loan Fees
The Bank defers loan fees, net of certain direct loan origination costs.
The balance is accreted into income as a yield adjustment over the life of the
loan using the interest method.
7. Short-term Consumer Loans
In April, 2000, the Bank began making short-term consumer loans pursuant
to a Marketing and Servicing Agreement with NCAS of Pennsylvania, LLC (NCAS)
which in September 1999 became a subsidiary of Advance America, Cash Advance
Centers, Inc., an entity that has substantial experience in originating
short-term consumer loans. In connection with these loans, the Bank advances up
to $600 with the loan due date coinciding with the borrower's next payday or
date of receipt of a recurring payment. A fee is collected for each advance.
This fee is recognized as interest at the time of the disbursement of the funds
to the borrower, net of fees to NCAS. The Bank records an allowance for
short-term loan losses which is established through a provision for short term
loan losses charged to expenses. Short-term consumer loans are generally
charged against the allowance when a payment has not been collected within 75
days of the due date or when management believes that the collectiblity is
unlikely. The provision recorded is based upon an established percentage of
actual charge-offs experience relative to loan volume. The outstanding balance
(net of the allowance for short-term loans of $702,000 and $228,000,
respectively) at June 30, 2000 and 1999 is $6,500,000 and $4,800,000,
respectively, and is included in loans receivable on the consolidated balance
sheet.
8. Other Real Estate Owned
Other real estate owned (OREO), representing property acquired through
foreclosure of loans or secured property tax liens, is recorded at the lower of
cost or estimated fair market value, less costs of disposal. When property is
acquired, the excess, if any, of the loan balance over fair market value is
charged to the allowance for possible loan losses. Periodically thereafter, the
asset is reviewed for subsequent declines in the estimated fair market value.
Subsequent declines, if any, and holding costs, as well as gains and losses on
subsequent sale, are included in the consolidated statements of operations.
F-8
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
9. Goodwill
Goodwill resulted from the acquisition of the minority interest of
Crusader Mortgage Corporation (CMC) and is being amortized on a straight-line
basis over approximately 15 years.
10. Premises and Equipment
Premises and equipment are carried at cost. Depreciation and amortization
are generally computed on the straight-line method over the estimated useful
lives of the assets.
The FASB issued, SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, which provides guidance on
when to recognize and how to measure impairment losses of long-lived assets and
certain identifiable intangibles and how to value long-lived assets to be
disposed of. At June 30, 2000 and 1999, the Company and the Bank had no such
long-lived assets.
11. Employee Benefit Plans
The Company has certain employee benefit plans covering substantially all
employees. The Company accrues such costs as incurred.
The Company accounts for its stock options under SFAS No. 123, Accounting
for Stock-Based Compensation, which contains a fair value-based method for
valuing stock-based compensation that entities may use, which measures
compensation cost at the grant date based on the fair value of the award.
Compensation is then recognized over the service period, which is usually the
vesting period. Alternatively, the standard permits entities to continue
accounting for employee stock options and similar equity instruments under APB
Opinion No. 25, Accounting for Stock Issued to Employees. Entities that
continue to account for stock options using APB Opinion No. 25 are required to
make pro forma disclosures of net income and EPS, as if the fair value-based
method of accounting defined in SFAS No. 123 had been applied. The Company's
stock option plan is accounted for under APB Opinion No. 25.
12. Income Taxes
The Bank and its subsidiaries are included in the consolidated federal
income tax return of the Company. The Company is a party to a tax sharing
agreement with the Bank. Under the terms of the agreement, the Bank's share of
consolidated tax is computed on a separate company basis.
Under the liability method specified by SFAS No. 109, deferred tax assets
and liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities as measured by the enacted
tax rates which will be in effect when these differences reverse. Deferred tax
expense is the result of changes in deferred tax assets and liabilities. The
principal types of differences between assets and liabilities for financial
statement and tax return purposes are the allowance for loan losses, deferred
loan fees and interest reserves. The Company's effective income tax rate
differs from the federal statutory rate primarily as a result of state income
taxes, net of federal benefit, lower rate brackets and tax-exempt income.
13. Net Income Per Share
The Company follows the provisions of SFAS No. 128, Earnings Per Share,
which eliminates primary and fully diluted earnings per share and requires
presentation of basic and diluted earnings per share in conjunction with the
disclosure of the methodology used in computing such earnings per share. Basic
earnings per share excludes dilution and is computed by dividing income
available to common shareholders by the weighted average common shares
outstanding during the period. Diluted earnings per share takes into account
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised and converted into common stock.
F-9
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
14. Supplemental Cash Flow Information
The Company and the Bank consider cash on hand, amounts due from banks and
federal funds sold as cash equivalents. Generally, federal funds are purchased
and sold for one-day periods. Other supplemental cash flow information is as
follows:
<TABLE>
<CAPTION>
June 30,
------------------------------------------------
2000 1999 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Cash payments for interest ................. $16,951,000 $11,684,000 $ 8,306,000
Cash payments for income taxes ............. 344,000 875,000 1,710,000
Transfer of loans into property acquired
through loan foreclosure actions ......... 1,670,000 315,000 111,000
Issuance of stock, for purchase of minority
interest ................................. -- -- 890,000
</TABLE>
15. Advertising Costs
It is the Company's policy to expense advertising costs in the period in
which they are incurred. Advertising expense for June 30, 2000, 1999 and 1998
was approximately $26,000, $26,000 and $25,000, respectively.
16. Reclassification
Certain prior year amounts have been reclassified to conform to the
current year presentation.
NOTE B -- BANK SUBSIDIARIES
The Bank has one majority-owned subsidiary and two wholly-owned
subsidiaries. They are as follows:
1. Crusader Mortgage Corporation
In July 1996, the Bank formed CMC for pursuing the origination and
acquisition for resale of non-conforming mortgages. Initially, the Bank
maintained a 51% controlling interest in CMC, which was subsequently increased
to 67.5% in September 1998 and 100% effective November 30, 1998. Effective
December 31, 2000, the mortgage banking activities of CMC were consolidated
into the Bank's mortgage banking business. The additional interest purchased in
September 1998 was purchased for $155,000. The remaining interest purchased in
November was exchanged for 150,000 shares of the common stock of the Company
and the payment of accrued compensation of $250,000 to the former minority
shareholder. These transactions were accounted for under the purchase method of
accounting. A total of $1,271,000 of goodwill was recorded and is being
amortized over a 15-year period. The agreement further requires that the
minority shareholder's shares of common stock be escrowed for three years, with
a portion of such shares released on each of three designated dates, and
provides for the granting of an irrevocable proxy pursuant to which the shares
will be voted in the same proportion as the other outstanding shares of common
stock are voted. The agreement also contains certain indemnities in favor of
the Company, the Bank, and CMC, and prohibits the minority shareholder from
competing with the Company for a period of three years.
2. Other
Crusader Servicing Corporation, a 60% owned subsidiary that commenced
operations in August 1996, acquires, through auction, delinquent property tax
liens in certain jurisdictions, assuming a lien position that is generally
superior to any mortgage liens on the property and obtaining certain
foreclosure rights as defined by local statute. Quest Holding Corporation, a
wholly-owned subsidiary, periodically holds title to the real estate
F-10
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
NOTE B -- BANK SUBSIDIARIES -- (Continued)
holdings of the Bank acquired through foreclosure, pending resale of such
property. Asset Investment Corporation, a wholly owned subsidiary, holds the
title to the Bank's multi-family and commercial loan portfolios. Crusader
Mortgage Corporation of Delaware (CMC of Delaware), a 51% owned subsidiary that
commenced operations in October 1998, had maintained a conforming and
nonconforming residential mortgage lending operation in Wilmington, Delaware.
National Chinese Mortgage (NCM), a 51% owned subsidiary that commenced
operations in December 1998, marketed loans on an affinity group basis to the
U.S. Chinese community. CMC of Delaware and NCM were closed in September of
2000 and all remaining operations were transferred into the Bank.
NOTE C -- LOANS HELD FOR SALE
Loans held for sale are as follows:
<TABLE>
<CAPTION>
June 30, 2000
-------------------------------------------------------------
Gross Gross
unrealized unrealized Fair
Cost gains losses value
-------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Residential mortgage loans ......... $ 9,735,000 $ 115,000 $ -- $ 9,850,000
=========== ========= ==== ===========
June 30, 1999
------------------------------------------------------------
Gross Gross
unrealized unrealized Fair
Cost gains losses value
-------------- -------------- ------------ --------------
Residential mortgage loans ......... $74,708,000 $2,915,000 $ -- $77,623,000
=========== =========== ==== ===========
</TABLE>
NOTE D -- INVESTMENT SECURITIES
The amortized cost, unrealized gains and losses, and fair market value of
the Bank's available-for-sale and mortgage-backed securities are as follows:
<TABLE>
<CAPTION>
June 30, 2000
----------------------------------------------------------------
Gross Gross
unrealized unrealized Fair
Cost gains losses value
-------------- ------------ --------------- --------------
<S> <C> <C> <C> <C>
Investment securities
U.S. Government agencies .......... $11,144,000 $ -- $ (719,000) $10,425,000
Other ............................. 10,193,000 -- (791,000) 9,402,000
FHLB stock ........................ 6,485,000 -- -- 6,485,000
----------- ---- ------------ -----------
27,822,000 -- (1,510,000) 26,312,000
Mortgage-backed securities ......... 14,969,000 -- (576,000) 14,393,000
----------- ---- ------------ -----------
$42,791,000 $ -- $ (2,086,000) $40,705,000
=========== ==== ============ ===========
</TABLE>
F-11
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
NOTE D -- INVESTMENT SECURITIES -- (Continued)
<TABLE>
<CAPTION>
June 30, 1999
----------------------------------------------------------------
Gross Gross
unrealized unrealized Fair
Cost gains losses value
-------------- ------------ --------------- --------------
<S> <C> <C> <C> <C>
Investment securities
U.S. Government agencies .......... $ 8,487,000 $ -- $ (267,000) $ 8,220,000
Other ............................. 7,932,000 40,000 (216,000) 7,756,000
FHLB stock ........................ 4,478,000 -- -- 4,478,000
----------- -------- ----------- -----------
20,897,000 40,000 (483,000) 20,454,000
Mortgage-backed securities ......... 11,073,000 3,000 (317,000) 10,759,000
----------- -------- ----------- -----------
$31,970,000 $ 43,000 $ (800,000) $31,213,000
=========== ======== =========== ===========
</TABLE>
The amortized cost and fair market value of investment and mortgage-backed
securities, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
June 30, 2000
-------------------------------
Available-for-sale
-------------------------------
Amortized Fair
cost value
-------------- --------------
<S> <C> <C>
Investment securities
Due after one year through five years .......... $ 2,886,000 $ 2,865,000
Due after five years through ten years ......... 3,493,000 3,306,000
Due after ten years ............................ 14,958,000 13,656,000
Mortgage-backed securities ...................... 14,969,000 14,393,000
FHLB stock ...................................... 6,485,000 6,485,000
----------- -----------
$42,791,000 $40,705,000
=========== ===========
</TABLE>
NOTE E -- MORTGAGE-BACKED SECURITIES
The amortized cost, unrealized gains and losses, and fair market values of
the Bank's available-for-sale securities are summarized as follows:
<TABLE>
<CAPTION>
June 30, 2000
--------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
------------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
Available-for-sale
FHLMC certificates ......... $ 650,000 $ -- $ (20,000) $ 630,000
GNMA certificates .......... 2,428,000 -- (55,000) 2,373,000
FNMA certificates .......... 11,891,000 -- (501,000) 11,390,000
----------- ---- ----------- -----------
$14,969,000 $ -- $ (576,000) $14,393,000
=========== ==== =========== ===========
</TABLE>
F-12
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
NOTE E -- MORTGAGE-BACKED SECURITIES -- (Continued)
<TABLE>
<CAPTION>
June 30, 1999
------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
-------------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
Available-for-sale
FHLMC certificates ......... $ 1,146,000 $ 3,000 $ (11,000) $ 1,138,000
GNMA certificates .......... 752,000 -- (10,000) 742,000
FNMA certificates .......... 9,175,000 -- (296,000) 8,879,000
----------- ------- ----------- -----------
$11,073,000 $ 3,000 $ (317,000) $10,759,000
=========== ======= =========== ===========
</TABLE>
Proceeds from the sale of mortgage-backed securities were $-0-, $5,287,000
and $1,915,000 at June 30, 2000, 1999 and 1998, respectively.
NOTE F -- LOANS RECEIVABLE
Loans receivable are as follows:
<TABLE>
<CAPTION>
June 30,
---------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
Residential one-to-four family mortgage loans ......... $156,879,000 $ 77,775,000
Multi-family mortgage loans ........................... 26,681,000 24,883,000
Construction loans .................................... 2,234,000 4,775,000
Commercial mortgage loans ............................. 99,207,000 59,964,000
Secured property tax liens ............................ 27,160,000 13,153,000
Short-term consumer loans ............................. 7,203,000 5,802,000
Consumer loans -- other ............................... 4,308,000 3,176,000
------------ ------------
Total loans ....................................... 323,672,000 189,528,000
Deferred loan fees and unearned discounts or
premiums ............................................ 606,000 (81,000)
Allowance for possible loan losses ................... (3,439,000) (1,751,000)
------------ ------------
Net loans ......................................... $320,839,000 $187,696,000
============ ============
</TABLE>
The Bank had loans outstanding which were secured by real estate and/or
deposit accounts to directors and officers of $7,245,000 and $2,949,000 at June
30, 2000 and 1999, respectively. During 2000, $4,862,000 of new loans were made
and repayments totaled $566,000. Management of the Bank is of the opinion that
these loans were made in the ordinary course of business and on substantially
the same terms as those prevailing at the same time for comparable transactions
with unrelated parties and do not involve more than normal risk of
collectibility or present other unfavorable features.
Included in loans receivable are non-accrual loans past due 90 days or
more in the amounts of $2,725,000 and $2,013,000 at June 30, 2000 and 1999,
respectively. If interest income had been recorded on all non-accrual loans had
they been current in accordance with their original terms, income would have
increased for the years ended June 30, 2000, 1999 and 1998 by approximately
$266,000, $157,000 and $57,000 respectively.
Also included in loans receivable are loans past due 90 days or more and
accruing in the amount of $127,000 and $840,000 at June 30, 2000 and 1999,
respectively, which have not been classified as non-accrual due to management's
belief that the loans are well-secured and in the process of collection.
There were no impaired loans at June 30, 2000 and 1999.
F-13
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
NOTE F -- LOANS RECEIVABLE -- (Continued)
Activity in the allowance for loan losses (including short-term consumer
loans) was as follows:
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------------------
2000 1999 1998
-------------- --------------- ------------
<S> <C> <C> <C>
Balance, beginning of year ......... $ 1,751,000 $ 857,000 $ 472,000
Provision for loan losses .......... 3,317,000 941,000 385,000
Charge-offs ........................ (1,629,000) (47,000) --
------------ ----------- ---------
Balance, end of year ............... $ 3,439,000 $ 1,751,000 $ 857,000
============ =========== =========
</TABLE>
NOTE G -- PREMISES AND EQUIPMENT
Premises and equipment are as follows:
<TABLE>
<CAPTION>
June 30,
Estimated -------------------------------
useful lives 2000 1999
--------------- -------------- --------------
<S> <C> <C> <C>
Furniture, fixtures and equipment ......... 5 to 10 years $ 1,250,000 $ 1,783,000
Less accumulated depreciation ............ (477,000) (715,000)
----------- -----------
$ 773,000 $ 1,068,000
=========== ===========
</TABLE>
Depreciation expense for the years ended June 30, 2000, 1999 and 1998 was
approximately $250,000, $240,000 and $176,000, respectively.
NOTE H -- DEPOSITS
Deposits are as follows:
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------
2000 1999
--------------------------- --------------------------
Weighted Weighted
interest interest
rate Amount rate Amount
---------- -------------- --------- --------------
<S> <C> <C> <C> <C>
Demand ................................. -- % $ 5,112,000 -- % $ 6,117,000
Money market NOW and Super NOW ......... 3.50 11,862,000 4.32 14,036,000
Passbook and statement savings ......... 2.75 1,831,000 2.75 1,427,000
------------ ------------
18,805,000 21,580,000
Time deposits .......................... 6.29 224,456,000 5.11 167,526,000
------------ ------------
$243,261,000 $189,106,000
============ ============
</TABLE>
At June 30, 2000, the scheduled maturities of time deposits are as
follows:
2001 .................................................. $160,568,000
2002 .................................................. 53,796,000
2003 .................................................. 5,740,000
2004 .................................................. 3,166,000
2005 and thereafter ................................... 1,186,000
------------
$224,456,000
============
Included in deposits as of June 30, 2000 and 1999 are deposits greater
than $100,000 of approximately $183,688,000 and $93,111,000, respectively.
F-14
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
NOTE I -- BORROWINGS
Advances from the Federal Home Loan Bank of Pittsburgh (FHLB), which
generally have maturities of less than one year, are as follows:
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------
2000 1999 1988
---------------- ---------------- ----------------
<S> <C> <C> <C>
Advances outstanding at end of period .......... $ 34,700,000 $ 24,800,000 $ 24,150,000
Interest rate at end of period ................. 7.08% 5.51% 5.68%
Approximate average amount outstanding ......... 42,604,000 12,149,000 14,253,000
Maximum month-end balance ...................... 67,700,000 44,700,000 43,500,000
Approximate weighted average rate .............. 6.15% 5.65% 5.89%
</TABLE>
At June 30, 2000 and 1999, long term advances from the FHLB totaled
$60,500,000 and $55,500,000, respectively. These advances are collateralized by
certain first mortgage loans and mortgage-backed securities. At June 30, 2000
and 1999, long-term securities sold under agreements to repurchase totaled
$5,000,000 and $8,280,000, respectively. These repurchase agreements are
collateralized by certain mortgage-backed securities.
At June 30, 2000, outstanding long-term securities sold under agreements
to repurchase and advances from the FHLB mature as follows:
Securities sold
under agreements FHLB
to repurchase advances
------------------ --------------
2001 ............... $ -- $ --
2002 ............... 5,000,000 --
2003 ............... -- 3,000,000
2004 ............... -- --
2005 ............... -- --
Thereafter ......... -- 57,500,000
----------- -----------
$ 5,000,000 $60,500,000
=========== ===========
Other borrowings at June 30, 2000 consist of $1,433,000 under an
open-ended line of credit secured by certain marketable securities and
$2,600,000 under a $3.5 million line of credit that matures on June 16, 2003.
The interest rate on the open-ended line of credit was 7.75% at June 30, 2000,
which fluctuates with changes in the broker call rate. The interest rate on the
$3.5 million line of credit is at prime minus 1/2%, and at June 30, 2000 was
9.00%.
F-15
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
NOTE J -- INCOME TAXES
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------------------
2000 1999 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Current
Federal .................. $ 3,966,000 $ 2,743,000 $ 2,034,000
State and local .......... 39,000 146,000 228,000
----------- ----------- -----------
Total current .......... 4,005,000 2,889,000 2,262,000
----------- ----------- -----------
Deferred
Federal .................. (662,000) (232,000) (153,000)
----------- ----------- -----------
Total deferred ......... (662,000) (232,000) (153,000)
----------- ----------- -----------
$ 3,343,000 $ 2,657,000 $ 2,109,000
=========== =========== ===========
</TABLE>
The reconciliation of the statutory federal income tax provision to the
actual tax provision is as follows:
<TABLE>
<CAPTION>
Years ended June 30,
------------------------------------------------
2000 1999 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Statutory federal income tax ............................ $ 3,634,000 $ 2,592,000 $ 1,987,000
State and local income taxes, net of federal impact ..... 26,000 96,000 165,000
Tax-exempt income ....................................... (139,000) (77,000) (25,000)
Goodwill amortization ................................... 29,000 29,000 18,000
Other, net .............................................. (207,000) 17,000 (36,000)
----------- ----------- -----------
Income tax provision ................................... $ 3,343,000 $ 2,657,000 $ 2,109,000
=========== =========== ===========
</TABLE>
Deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
June 30,
-----------------------------
2000 1999
-------------- ------------
<S> <C> <C>
Deferred tax assets
Interest reserve ......................................... $ 97,000 $ 104,000
Provision for loan losses ................................ 1,128,000 492,000
Unrealized loss on securities available-for-sale ......... 688,000 278,000
Basis of property and equipment .......................... -- (33,000)
----------- ---------
Net deferred tax asset ................................. $ 1,913,000 $ 841,000
=========== =========
</TABLE>
NOTE K -- SHAREHOLDERS' EQUITY
On September 14, 1999, the Company declared a 5% stock dividend payable
October 14, 1999 to shareholders of record on October 6, 1999. On September 22,
1999, the Company approved a stock repurchase plan for up to 100,000 shares of
common stock. Repurchases can be from time to time in open market transactions,
block purchases, privately registered transactions or otherwise at prevailing
market prices. No time limit has been set for the completion of this program.
The Company had previously completed a stock repurchase plan for 107,900 shares
that was approved on April 9, 1999. At June 30, 2000 and 1999, the Company had
repurchased a total of 159,095 and 40,845 shares at a cost of $1,390,000 and
$368,000, respectively.
F-16
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
NOTE K -- SHAREHOLDERS' EQUITY -- (Continued)
On July 28, 1998, the Company declared a 5% stock dividend payable August
28, 1998 to shareholders of record on August 21, 1998.
The Company completed its initial public offering on February 13, 1998
(March 11, 1998 with respect to the over-allotment shares) aggregating
1,150,000 shares (the Shares) of common stock, $0.01 par value. The initial
public offering price of the Shares was $15.00 ($13.61 as adjusted for
subsequent stock dividends). The net proceeds received by the Company in
connection with the public offering were approximately $15,404,000. Total
offering costs approximated $1,800,000, including underwriting discounts.
On December 8, 1997, the Company declared a two for one stock split
effected in the form of a 100% stock dividend. The Company also amended and
restated its Articles of Incorporation whereby the Company is authorized to
issue 20,000,000 shares of capital stock, par value $0.01 per share and
5,000,000 shares of preferred stock, par value $0.01 per share. Under the
Company's amended Articles of Incorporation, the Board of Directors of the
Company may, from time to time, authorize the shares of preferred stock, in one
or more series.
NOTE L -- EARNINGS PER SHARE
The Company's calculation of earnings per share in accordance with SFAS
No. 128 is as follows:
<TABLE>
<CAPTION>
Year ended June 30, 2000
--------------------------------------------
Income Shares Per share
(numerator) (denominator) amount
------------- --------------- ----------
<S> <C> <C> <C>
Basic earnings per share
Net income available to common shareholders ......... $ 7,195,000 3,895,000 $ 1.85
Effect of dilutive securities
Options ............................................. -- -- --
----------- --------- -------
Diluted earnings per share
Net income available to common shareholders plus
assumed conversions ............................... $ 7,195,000 3,895,000 $ 1.85
=========== ========= =======
</TABLE>
Options to purchase 130,312 shares of common stock from $7.75 to $13.61
per share were outstanding during 2000. They were not included in the
computation of diluted earnings per share because the option exercise price was
greater than the average market price.
<TABLE>
<CAPTION>
Year ended June 30, 1999
--------------------------------------------
Income Shares Per share
(numerator) (denominator) amount
------------- --------------- ----------
<S> <C> <C> <C>
Basic earnings per share
Net income available to common shareholders ......... $ 4,966,000 4,016,000 $ 1.24
Effect of dilutive securities
Options ............................................. -- 4,000 --
----------- --------- -------
Diluted earnings per share
Net income available to common shareholders plus
assumed conversions ............................... $ 4,966,000 4,020,000 $ 1.24
=========== ========= =======
</TABLE>
Options to purchase 85,113 shares of common stock from $11.31 to $13.61
per share were outstanding during 1999. They were not included in the
computation of diluted earnings per share because the option exercise price was
greater than the average market price.
F-17
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
NOTE L -- EARNINGS PER SHARE -- (Continued)
<TABLE>
<CAPTION>
Year ended June 30, 1998
--------------------------------------------
Income Shares Per share
(numerator) (denominator) amount
------------- --------------- ----------
<S> <C> <C> <C>
Basic earnings per share
Net income available to common shareholders ......... $ 3,736,000 3,095,000 $ 1.21
Effect of dilutive securities
Options ............................................. -- 13,000 ( 0.01)
----------- --------- --------
Diluted earnings per share
Net income available to common shareholders plus
assumed conversions ............................... $ 3,736,000 3,108,000 $ 1.20
=========== ========= ========
</TABLE>
NOTE M -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS
OF CREDIT RISK
The Bank is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments include commitments to extend credit. Those instruments
involve, to varying degrees, elements of credit and interest rate risk in
excess of the amount recognized in the consolidated balance sheet. The contract
amounts of those instruments reflect the extent of the Bank's involvement in
particular classes of financial instruments. The Bank's exposure to credit loss
in the event of non-performance by the other party to the financial instrument
for commitments to extend credit is represented by the contractual amounts of
these instruments. The Bank uses the same credit policies in making commitments
and conditional obligations as it does for on-balance-sheet instruments. Unless
noted otherwise, the Bank does not require collateral or other security to
support financial instruments with credit risk.
Financial instruments, the contract amounts of which represent credit
risk, include commitments to originate loans of $5,962,000 and $8,239,000 at
June 30, 2000 and 1999, respectively, as follows:
<TABLE>
<CAPTION>
2000 1999
------------------------------- -------------------------------
Fixed Variable Fixed Variable
rate rate rate rate
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
First mortgage loans .............................. $ 3,158,000 $ 1,632,000 $ 1,417,000 $ 1,447,000
Commercial real estate and multi-family mortgages.. 176,000 960,000 -- 5,375,000
----------- ----------- ----------- -----------
$ 3,334,000 $ 2,592,000 $ 1,417,000 $ 6,822,000
=========== =========== =========== ===========
</TABLE>
Fees received in connection with these commitments have not been
recognized in income.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since some of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount of the
collateral obtained, if it is deemed necessary by the Bank upon extension of
credit, is based on management's credit evaluation of the borrower. Collateral
held generally includes residential and some commercial property.
The Bank loan portfolio consists primarily of one-to-four family
residential and commercial real estate loans in the metropolitan Philadelphia
area, primarily Delaware, Montgomery, Philadelphia, Bucks and Chester counties
in Pennsylvania, as well as southern New Jersey and northern Delaware. The Bank
offers both fixed and adjustable rates of interest on these loans which have
amortization terms ranging to 30 years. The loans are generally originated on
the basis of up to an 80% loan-to-value ratio, which has historically provided
the Bank
F-18
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
NOTE M -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS
OF CREDIT RISK -- (Continued)
with more than adequate collateral coverage in the event of default.
Nevertheless, the Bank, as with any lending institution, is subject to the risk
that residential real estate values in the primary lending area will
deteriorate, thereby potentially impairing collateral values. However,
management believes that residential real estate values are presently stable in
its primary lending area and that loan loss allowances have been provided for
in amounts commensurate with its current perception of the foregoing risks in
the portfolio.
Interest rate swap transactions generally involve the exchange of fixed
and floating rate interest payment obligations without the exchange of the
underlying principal amounts. The Company uses swaps as part of its asset and
liability management process with the objective during the past year of
converting fixed rate certificates of deposit into LIBOR based floating rate
liabilities. This strategy generally will result in a higher cost of funds in
rising rate environment and a lower cost of funds if rates should fall. In
2000, the interest rate swaps had the effect of increasing the Company's net
interest income by $274,000 as compared to what would have been realized had
the Company not entered into the swap agreements.
NOTE N -- COMMITMENTS AND CONTINGENCIES
1. Lease Commitments
The Bank has entered into non-cancelable operating lease agreements for
both branch banking facilities and office space. The lease terms range from 5
to 10 years. The approximate minimum annual rental payments at June 30, 2000,
under these leases are as follows:
2001 ......................................................... $ 71,000
2002 ......................................................... 58,000
2003 ......................................................... 48,000
2004 ......................................................... 32,000
---------
$ 209,000
=========
Rental expense amounted to $180,000, $177,000 and $202,000 for the years
ended June 30, 2000, 1999 and 1998, respectively
2. Other
The Bank is party to certain claims and litigation arising in the ordinary
course of business. In the opinion of management, the resolution of such claims
and litigation will not materially affect the Bank's consolidated financial
position or results of operations.
During October 1998, one of the Bank's deposit customers (the 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 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. 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. At June 30, 2000, the Company had a remaining
receivable of $275,000 related to this matter. 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.
F-19
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
NOTE N -- COMMITMENTS AND CONTINGENCIES -- (Continued)
3. Employment Contracts
The Company has a five-year employment agreement with its President. Under
the terms of the agreement, he will devote substantially all of his time and
effort to conducting the business activities of the Company as President and
will receive an annual salary of $150,000 for each of the five years of the
agreement. His employment is terminable by the Company for cause as defined in
the agreement, and is terminable by him upon written notice to the Company.
Upon termination, he is not permitted to compete with the Company or any
subsidiary or affiliate of the Company by soliciting its employees or
soliciting business from its customers or suppliers for a period of one year
following such termination.
On December 8, 1997, the Bank's Board of Directors approved an employment
agreement with its President. Under the terms of the three-year agreement, he
will devote substantially all of his time and effort to conducting the business
activities of the Bank as President thereof and will receive an annual salary
of $100,000 with an 8% increase as of July 1, 2000. In addition, he is eligible
for an annual bonus of up to 30% of his annual compensation. Upon termination
from the Bank, he is not permitted to compete with the Bank in any of its
businesses in the relevant market areas for such businesses for a specific
period following such termination. The President resigned from the Bank
effective September 2000 and no severance payment is due to him from the Bank.
NOTE O -- EMPLOYEE BENEFIT PLAN
The Bank has a 401(k) defined contribution plan covering all employees, as
defined under the plan document. Employees may contribute up to 15% of
compensation, as defined under the plan document. The Bank can make
discretionary contributions. The Bank contributed $22,000, $11,000 and $7,000
for the years ended June 30, 2000, 1999 and 1998, respectively.
NOTE P -- STOCK OPTION PLAN
The Board of Directors and shareholders adopted a Directors' Stock Option
Plan (the Directors' Plan). Certain directors are eligible to receive, at no
cost to them, options under the Directors' Plan. Options granted under the
Directors' Plan are non-qualified stock options. Options granted under the
Directors' Plan are five-year options at the fair market value of the common
stock at the time of the grant. Options vest in accordance with the terms of
the grant. Upon termination from the Company, except in cases of death, the
option shares expire after 30 days. Option shares may be paid in cash, shares
of the common stock, or a combination of both. An aggregate of 110,250 shares
of common stock have been reserved under the Directors' Plan. At June 30, 2000,
63,657 options were outstanding.
The Board of Directors and shareholders adopted an Employee Stock Option
Plan (the Employee Plan). Employees are eligible to receive, at no cost to
them, options under the Employee Plan. Options granted under the Employee Plan
are non-qualified stock options. These options are five-year options at the
fair market value of the common stock at the time of the grant. Options vest in
accordance with the terms of the grant. Upon termination from the Company,
except in cases of death, the option shares expire after 30 days. Option shares
may be paid in cash, shares of the common stock, or a combination of both. An
aggregate of 200,000 shares of common stock have been reserved under the
Employee Plan. At June 30, 2000, 66,655 options were outstanding under the
Employee Plan.
F-20
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
NOTE P -- STOCK OPTION PLAN -- (Continued)
Had compensation cost for the plans been determined based on the fair
value of the options at the grant dates consistent with SFAS No. 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below.
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------------------------
2000 1999 1998
---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net income .............................. As reported $ 7,195,000 $ 4,966,000 $ 3,736,000
Pro forma 7,110,000 4,891,000 3,711,000
Net income per share -- basic ........... As reported $ 1.85 $ 1.24 $ 1.21
Pro forma 1.83 1.22 1.20
Net income per share -- diluted ......... As reported $ 1.85 $ 1.24 $ 1.20
Pro forma 1.83 1.22 1.19
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes options-pricing model with the following weighted
average assumptions used for grants: dividend yield of 0% in both 2000 and
1999; expected volatility of 22%, 32% and 22% in 2000, 1999 and 1998,
respectively; risk-free interest rates of 5.65% in 2000, 4.97 % in 1999 and
5.64% in 1998; and expected lives of five years for all years.
A summary of the status of the Company's stock option plans as of June 30,
2000, 1999 and 1998 is presented below:
<TABLE>
<CAPTION>
2000 1999 1998
-------------------------- ------------------------- -----------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
------------ ------------ ----------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year ............... 128,107 $ 12.61 109,919 $ 13.06 $ --
Granted ...................................... 26,684 8.60 20,944 10.38 109,919 13.06
Forfeited .................................... (24,479) 11.98 (2,756) 13.61 -- --
Exercised .................................... -- -- -- -- -- --
------- ------- --------
Outstanding, end of year ..................... 130,312 $ 11.91 128,107 $ 12.61 109,919 $ 13.06
======= ======= ========
Options exercisable at year-end .............. 84,954 78,222 --
======= ======= ========
Weighted average fair value of options granted
during the year ............................. $ 2.68 $ 4.04 $ 4.54
========= ========= ========
</TABLE>
The following table summarizes information about options outstanding at
June 30, 2000:
<TABLE>
<CAPTION>
Options outstanding Option exercisable
------------------------------------------------------------------ --------------------------------
Weighted Weighted
Number average Weighted Number average
outstanding at remaining average outstanding at remaining
Range of June 30, contractual exercise June 30, contractual
exercise prices 2000 life (years) price 2000 life (years)
----------------- ---------------- -------------- ---------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
$7.75 - 11.25 54,228 3.60 $ 9.75 14,241 2.90
11.26 - 13.61 76,084 2.72 13.45 70,713 2.73
------ ------
130,312 84,954
</TABLE>
NOTE Q -- SEGMENT INFORMATION
In 1998, the Company adopted SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. SFAS No. 131 supercedes SFAS No. 14,
Financial Reporting for Segments of a Business Enterprise, replacing the
"industry segment" approach with the "management" approach. The management
approach
F-21
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
NOTE Q -- SEGMENT INFORMATION -- (Continued)
focuses on internal financial information that is used by management to assess
performance and to make operating decisions. SFAS No. 131 also requires
disclosures about products, services, geographic areas, and major customers.
The adoption of SFAS No. 131 had no effect on the Company's results of
operations or financial position.
The Company's reportable segments have been determined based upon internal
profitability reporting systems, which are organized by its strategic business
units. The Company's reportable segments are the (1) Bank, which for purpose of
this Note consists principally of residential and commercial portfolio lending,
consumer lending and branch operations; (2) mortgage banking; (3) short-term
consumer lending; and (4) secured property tax liens.
The financial information of the Company's reportable segments have been
compiled utilizing the accounting policies described in Note A with the
exception that the Company allocates interest expense for the funding of the
assets applicable to each segment at internally developed rates which generally
approximate the prime lending rate, and in turn credits the Bank segment with
such interest. The provision for loan losses is allocated to each segment based
largely on management's estimates of loss exposure. In contrast, the level of
the consolidated provision is determined by methodologies as described in Note
A to assess the overall adequacy for the Company as a whole. Certain types of
administrative and corporate expenses are generally not allocated to the
segments but instead are included under the Bank. Income tax expense is
allocated to the segments based upon the pre-tax income of each segment
multiplied by the Company's effective tax rate. Deferred taxes are not
allocated to segments. The management accounting policies and processes
utilized in compiling segment financial information are highly subjective and,
unlike financial accounting, are not based on authoritative guidance similar to
generally accepted accounting principles. As a result, reported segment results
are not necessarily comparable with similar information reported by other
financial institutions.
<TABLE>
<CAPTION>
Short-term Secured
Mortgage consumer property
Bank banking lending tax liens Total
--------------- --------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
For the year ended June 30, 2000:
Net interest income ................ $ 12,067,000 $ -- $ 4,135,000 $ 1,311,000 $ 17,513,000
Provision for loan losses .......... 1,267,000 -- 2,017,000 33,000 3,317,000
Noninterest income ................. 839,000 1,634,000 -- 49,000 2,522,000
Noninterest expenses ............... 2,905,000 2,344,000 125,000 437,000 5,811,000
------------ ----------- ----------- ----------- ------------
Income (loss) before taxes ......... 8,734,000 (710,000) 1,993,000 890,000 10,907,000
Income taxes ....................... 2,771,000 (225,000) 632,000 165,000 3,343,000
Minority interest .................. -- -- -- 369,000 369,000
------------ ----------- ----------- ----------- ------------
Net income (loss) .................. 5,963,000 (485,000) 1,361,000 356,000 7,195,000
------------ ----------- ----------- ----------- ------------
Balance at June 30, 2000:
Interest earning assets ............ 340,131,000 9,735,000 7,582,000 27,163,000 384,611,000
Other assets ....................... 6,348,000 1,050,000 1,087,000 652,000 9,137,000
------------ ----------- ----------- ----------- ------------
Total assets ....................... $346,479,000 $10,785,000 $ 8,669,000 $27,815,000 $393,748,000
============ =========== =========== =========== ============
</TABLE>
F-22
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
NOTE Q -- SEGMENT INFORMATION -- (Continued)
<TABLE>
<CAPTION>
Short-term Secured
Mortgage consumer property
Bank banking lending tax liens Total
-------------- -------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
For the year ended June 30, 1999:
Net interest income ............... $ 9,299,000 $ -- $ 348,000 $ 660,000 $ 10,307,000
Provision for loan losses ......... 689,000 -- 228,000 24,000 941,000
Noninterest income ................ 615,000 3,969,000 -- -- 4,584,000
Noninterest expenses .............. 3,717,000 2,189,000 30,000 211,000 6,147,000
------------ ----------- ----------- ----------- ------------
Income before taxes ............... 5,508,000 1,780,000 90,000 425,000 7,803,000
Income taxes ...................... 1,920,000 621,000 31,000 85,000 2,657,000
Minority interest ................. -- -- -- 180,000 180,000
------------ ----------- ----------- ----------- ------------
Net income ........................ 3,588,000 1,159,000 59,000 160,000 4,966,000
------------ ----------- ----------- ----------- ------------
Balance at June 30, 1999:
Interest earning assets ........... 243,627,000 36,661,000 5,574,000 13,811,000 299,673,000
Other assets ...................... 3,654,000 2,650,000 914,000 389,000 7,607,000
------------ ----------- ----------- ----------- ------------
Total assets ...................... $247,281,000 $39,311,000 $ 6,488,000 $14,200,000 $307,280,000
============ =========== =========== =========== ============
Secured
Mortgage property
Bank banking tax liens Total
-------------- -------------- -------------- --------------
For the year ended June 30, 1998:
Net interest income ............... $ 5,817,000 $ -- $ 219,000 $ 6,036,000
Provision for loan losses ......... 379,000 -- 6,000 385,000
Noninterest income ................ 301,000 4,712,000 -- 5,013,000
Noninterest expenses .............. 2,027,000 2,680,000 40,000 4,747,000
------------ ----------- ----------- ------------
Income before taxes ............... 3,712,000 2,032,000 173,000 5,917,000
Income taxes ...................... 1,339,000 733,000 37,000 2,109,000
Minority interest ................. -- -- 72,000 72,000
------------ ----------- ----------- ------------
Net income ........................ 2,373,000 1,299,000 64,000 3,736,000
------------ ----------- ----------- ------------
Balance at June 30, 1998:
Interest earning assets ........... 158,305,000 34,300,000 4,468,000 197,073,000
Other assets ...................... 519,000 4,439,000 3,000 4,961,000
------------ ----------- ----------- ------------
Total assets ...................... $158,824,000 $38,739,000 $ 4,471,000 $202,034,000
============ =========== =========== ============
</TABLE>
The Bank activities are conducted primarily in the metropolitan
Philadelphia area. Mortgage banking operations have been conducted principally
in the Eastern portion of the United States while secured property tax lien
activities are currently concentrated in the states of New Jersey and
Connecticut.
NOTE R -- FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 requires disclosure of the estimated fair value of an
entity's assets and liabilities considered to be financial instruments. For the
Bank, as for most financial institutions, the majority of its assets and
liabilities are considered to be financial instruments as defined in SFAS No.
107. However, many such instruments lack an available trading market as
characterized by a willing buyer and seller engaging in
F-23
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
NOTE R -- FAIR VALUE OF FINANCIAL INSTRUMENTS -- (Continued)
an exchange transaction. Therefore, the Bank had to use significant estimations
and present value calculations to prepare this disclosure, as required by SFAS
No. 107. Accordingly, the information presented below does not purport to
represent the aggregate net fair value of the Bank.
Changes in assumptions or methodologies used to estimate fair values may
materially affect the estimated amounts. Also, management is concerned that
there may not be reasonable comparability between institutions due to the wide
range of permitted assumptions and methodologies in the absence of active
markets. This lack of uniformity gives rise to a high degree of subjectivity in
estimating financial instrument fair values.
Estimated fair values have been determined by the Bank using the best
available data and an estimation methodology suitable for each category of
financial instrument. The estimation methodologies used, the estimated fair
values, and recorded book balances at June 30, 2000 and 1999 are outlined
below.
For cash and due from banks and interest-earning deposits, the recorded
book value of approximately $13,332,000 and $6,056,000 approximates fair value
at June 30, 2000 and 1999, respectively. The estimated fair values of loans
held for sale, investment securities and mortgage-backed securities are based
on quoted market prices, if available. Estimated fair values are based on
quoted market prices of comparable instruments if quoted market prices are not
available.
The fair values of loans are estimated based on a discounted cash flow
analysis using interest rates currently offered for loans with similar terms to
borrowers of similar credit quality. The carrying value of accrued interest
approximates fair value.
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------------
2000 1999
-------------------------------- --------------------------------
Carrying Estimated fair Carrying Estimated fair
amount value amount value
-------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Loans held for sale ....................... $ 9,735,000 $ 9,850,000 $ 74,708,000 $ 77,623,000
Investment and mortgage-backed securities.. 40,705,000 40,705,000 31,213,000 31,213,000
Loans ..................................... 320,839,000 319,986,000 187,696,000 191,163,000
</TABLE>
The estimated fair values of demand deposits (i.e., interest and
non-interest bearing checking accounts, passbook savings and certain types of
money market accounts) are, by definition, equal to the amount payable on
demand at the reporting date (i.e., their carrying amounts). The carrying
amounts of variable rate, fixed-term money market accounts and certificates of
deposit approximate their fair values at the reporting date. The fair values of
fixed-rate certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered to a schedule
of aggregated expected monthly time deposit maturities. The carrying amount of
accrued interest payable approximates its fair value.
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------------------------
2000 1999
--------------------------------- --------------------------------
Carrying Estimated fair Carrying Estimated fair
amount value amount value
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Time deposits ......... $224,456,000 $224,121,000 $167,526,000 $167,309,000
</TABLE>
The fair values of advances from the FHLB and securities sold under
agreements to repurchase and other borrowing totalling $95,200,000 and
$8,003,000, respectively, at June 30, 2000 and $80,300,000 and $8,289,000,
respectively, at June 30, 1999, are estimated to approximate their recorded
book balances.
There was no material difference between the contract amount and the
estimated fair value of off-balance-sheet items which totalled approximately
$45,926,000 and $8,239,000 at June 30, 2000 and 1999, respectively, and
primarily comprise unfunded loan commitments and interest rate swap agreements
which are generally priced at market at the time of funding.
F-24
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
NOTE S -- REGULATORY MATTERS
1. Dividends
The payment of dividends by the Bank to the Company is prohibited unless
the Bank meets specific capital and earning requirements. In general, the
regulation divides savings banks into three tiers, according to their ability
to meet the current minimum capital requirements.
2. Regulatory Capital
The results of an examination conducted by The Office of Thrift
Supervision (OTS), dated July 12, 1999 resulted in the Bank entering into a
Supervisory Agreement with the OTS on April 26, 2000. Provisions of this
Agreement require the Bank to, among other items, adhere to the following: (1)
comply with specific federal laws and regulations listed in the Agreement (2)
improve the Bank's Board of Director's oversight over the operations of the
Bank; (3) hire a Chief Executive Officer of the Bank; (4) adopt and implement
policies and procedures for its internal audit and internal loan review
functions; (5) designate an independent audit committee of no less than three
members; (6) adopt and implement written policies and procedures on internal
controls and information systems; (7) limit asset growth in any quarter to an
amount not to exceed net interest credited on deposit liabilities during the
quarter; (8) adopt and implement policies and procedures for credit
administration and loan documentation including the identification of problem
assets; (9) each Bank subsidiary should comply with laws and regulations.
Failure to comply with the provisions included in the Supervisory Agreement
would expose the Bank to further regulatory sanctions that may include further
restrictions on the Bank's operations.
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory -- and possible additional
discretionary -- actions by regulators that, if undertaken, could have a direct
material effect on the Bank's consolidated financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities and certain off-balance sheet items
as calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and core capital (as defined in the regulations) to
risk-weighted assets, and of core capital to adjusted assets. Management
believes, as of June 30, 2000, that the Bank meets all capital adequacy
requirements to which it is subject.
As of June 30, 2000, the most recent notification from the Office of
Thrift Supervision categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, core risk-based
and core leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
F-25
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
NOTE S -- REGULATORY MATTERS -- (Continued)
A summary of the Bank's capital amounts and ratios as of June 30, 2000
follows:
<TABLE>
<CAPTION>
To be well capitalized
Minimum under prompt
for capital corrective action
Actual adequacy purposes provisions
---------------------------- -------------------------- --------------------------
Ratio Amount Ratio Amount Ratio Amount
---------- --------------- --------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Shareholders' equity and ratio to
total assets ....................... 8.71% $ 34,120,000
Unrealized loss on investment
securities, net of taxes ........... 1,168,000
Goodwill ............................ (1,050,000)
Minority interest ................... 286,000
------------
Tangible capital and ratio to
adjusted total assets .............. 8.81 $ 34,524,000 1.5% $ 5,876,000
============ ===========
Core capital and ratio to adjusted
total assets ....................... 8.81 $ 34,524,000 4.0 $15,670,000 5.0% $19,588,000
============ =========== ===========
Core capital and ratio to risk-
weighted assets .................... 12.97 $ 34,524,000 6.0 $23,505,000
============ ===========
Allowance for loan and lease losses 3,439,000
------------
Supplementary capital ............... 3,439,000
------------
Total risk-based capital and ratio to
risk-weighted assets (1) ........... 14.26 $ 37,963,000 8.0 $21,299,000 10.0 $26,623,000
============ =========== ===========
Total assets ........................ $391,032,000
============
Adjusted total assets ............... $391,753,000
============
Risk-weighted assets ................ $266,232,000
============
</TABLE>
(1) Does not reflect the interest rate risk component to the risk-based capital
requirement, the effective date of which has been postponed.
F-26
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
NOTE S -- REGULATORY MATTERS -- (Continued)
A summary of the Bank's capital amounts and ratios as of June 30, 1999
follows:
<TABLE>
<CAPTION>
To be well capitalized
Minimum under prompt
for capital corrective action
Actual adequacy purposes provisions
---------------------------- -------------------------- --------------------------
Ratio Amount Ratio Amount Ratio Amount
---------- --------------- --------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Shareholders' equity and ratio to
total assets ....................... 8.97% $ 27,604,000
Unrealized loss on investment
securities, net of taxes ........... 508,000
Goodwill ............................ (1,135,000)
Minority interest ................... 230,000
------------
Tangible capital and ratio to
adjusted total assets .............. 8.87 $ 27,207,000 1.5% $ 4,599,000
============ ===========
Core capital and ratio to adjusted
total assets ....................... 8.87 $ 27,207,000 4.0 $12,263,000 5.0% $15,328,000
============ =========== ===========
Core capital and ratio to risk-
weighted assets .................... 14.13 $ 27,207,000 6.0 $18,394,000
============ ===========
Allowance for loan and lease losses 1,523,000
------------
Supplementary capital ............... 1,523,000
------------
Total risk-based capital and ratio to
risk-weighted assets (1) ........... 14.92 $ 28,730,000 8.0 $15,402,000 10.0 $19,252,000
============ =========== ===========
Total assets ........................ $307,704,000
============
Adjusted total assets ............... $306,569,000
============
Risk-weighted assets ................ $192,519,000
============
</TABLE>
(1) Does not reflect the interest rate risk component to the risk-based capital
requirement, the effective date of which has been postponed.
F-27
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
NOTE T -- CONDENSED FINANCIAL INFORMATION -- PARENT COMPANY ONLY
The condensed financial information of the Company is as follows:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
------------------------------
2000 1999
-------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks -- non-interest bearing ...... $ 316,000 $ 67,000
Investment securities available for sale ............. 2,894,000 2,986,000
Investment in subsidiaries ........................... 34,120,000 27,627,000
Other assets ......................................... 266,000 120,000
----------- -----------
Total assets ....................................... $37,596,000 $30,800,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable ........................................ $ 4,469,000 $ 3,336,000
Other liabilities .................................... 531,000 128,000
Shareholders' equity ................................. 32,596,000 27,336,000
----------- -----------
Total liabilities and shareholders' equity ......... $37,596,000 $30,800,000
=========== ===========
</TABLE>
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------------------
2000 1999 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Income
Equity in undistributed net income of subsidiary ..... $ 7,178,000 $ 4,887,000 $ 3,730,000
Interest ............................................. 371,000 199,000 --
Management fee ....................................... 222,000 222,000 222,000
----------- ----------- -----------
7,771,000 5,308,000 3,952,000
Expenses
Interest ............................................. 339,000 113,000 --
Compensation ......................................... 229,000 218,000 --
Other ................................................ 8,000 11,000 216,000
----------- ----------- -----------
576,000 342,000 216,000
----------- ----------- -----------
Net income ......................................... $ 7,195,000 $ 4,966,000 $ 3,736,000
=========== =========== ===========
</TABLE>
F-28
<PAGE>
CRUSADER HOLDING CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements -- (Continued)
NOTE T -- CONDENSED FINANCIAL INFORMATION -- PARENT COMPANY ONLY
-- (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
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Year ended June 30,
--------------------------------------------------
2000 1999 1998
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Cash flows from operating activities
Net income ............................................ $ 7,195,000 $ 4,966,000 $ 3,736,000
Adjustments to reconcile net income to net cash
(used in) provided by operating activities
Decrease (increase) in other assets ................. (146,000) (107,000) 28,000
(Decrease) increase in other liabilities ............ 402,000 52,000 (17,000)
Other ............................................... 119,000 (7,000) 49,000
Equity in undistributed (income) loss of
subsidiary ......................................... (7,178,000) (4,887,000) (3,730,000)
------------ ------------ -------------
Net cash (used in) provided by operating
activities ....................................... 392,000 17,000 66,000
------------ ------------ -------------
Cash flows from investing activities
Investment in subsidiary .............................. -- -- (12,668,000)
Purchase of investment securities available for sale (254,000) (2,989,000) --
------------ ------------ -------------
Net cash used in investing activities ............... (254,000) (2,989,000) (12,668,000)
------------ ------------ -------------
Cash flows from financing activities
Proceeds from notes payable to shareholders ........... -- -- (2,990,000)
Proceeds from note payable ............................ 1,133,000 3,336,000 --
Capital contributions ................................. -- -- 252,000
Purchase of treasury stock ............................ (1,022,000) (368,000) --
Proceeds from initial public offering ................. -- -- 15,404,000
------------ ------------ -------------
Net cash provided by financing activities .......... 111,000 2,968,000 12,666,000
------------ ------------ -------------
Net increase (decrease) in cash and cash
equivalents ...................................... 249,000 (4,000) 64,000
Cash and cash equivalents at beginning of year ......... 67,000 71,000 7,000
------------ ------------ -------------
Cash and cash equivalents at end of year ............... $ 316,000 $ 67,000 $ 71,000
============ ============ =============
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F-29
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EXHIBIT INDEX
The following exhibits are incorporated in this report, as indicated.
Except as otherwise noted, the exhibit has previously been filed as an exhibit
to the Company's Registration Statement on Form S-1, File No. 333-42215 (the
"Registration Statement"), and is incorporated by reference herein. The exhibit
numbers shown below for exhibits incorporated by reference correspond to those
shown in the Registration Statement.
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Exhibit No. Description
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3.1 Amended and Restated Articles of Incorporation of the Registrant.
3.2 Amended and Restated Bylaws of the Registrant.
4.1 Form of certificate evidencing Common Stock of the Registrant.
4.2(a) Subscription and Shareholders' Agreement, dated as of March 1, 1996, by and among the
Registrant, Thomas J. Knox and Bruce A. Levy.
4.2(b) Amendment of Shareholders' Agreement, dated January 31, 1997, among the Registrant,
Thomas J. Knox, Bruce A. Levy, Daniel DiLella, Joel S. Lawson III, Brian McAdams and
Ronald Caplan.
4.2(c) Joinder among the Registrant and D. Walter Cohen, dated January 31, 1997, to Subscription
and Shareholders' Agreement dated March 1, 1996, as amended by Amendment of
Shareholders' Agreement dated January 31, 1997.
4.2(d) Second Amendment of Shareholders' Agreement, dated as of January 9, 1998, among the
Registrant, Thomas J. Knox, Bruce A. Levy, Daniel DiLella, Joel S. Lawson III, Brian
McAdams, Ronald Caplan and D. Walter Cohen, Jeffrey K. Rafsky and Satellite Mortgage
Corporation.
4.3 Amended and Restated Promissory Note, dated as of March 1, 1996, issued to Thomas J.
Knox.
4.4 Amended and Restated Promissory Note, dated as of March 1, 1996, issued to Bruce A.
Levy.
4.5 Exchangeable Promissory Note, dated as of January 31, 1997, issued to Daniel DiLella.
4.6 Exchangeable Promissory Note, dated as of September 30, 1997, issued to Thomas J. Knox.
4.7 Exchangeable Promissory Note, dated as of September 30, 1997, issued to Bruce A. Levy.
10.1 Directors' Stock Option Plan.+
10.2 Employees' Stock Option Plan.+
10.3 Employment Agreement, dated as of March 1, 1996, between the Registrant and Bruce A.
Levy.+
10.4 Employment Agreement, dated as of December 11, 1997, between Crusader Savings Bank,
FSB and Joseph T. Crowley.+
10.5 Management Agreement, dated as of March 1, 1996, between the Registrant and Crusader
Savings Bank, FSB.
10.6 Lease Agreement and Indenture of Lease, dated as of April 30, 1994, by Walnut Square
Partners and Crusader Savings Bank, FSB.
10.7 Lease Agreement, dated as of July 1, 1984, by Goldie Sabel and Crusader Savings Bank,
FSB.
10.8(a) Agreement, dated as of November 30, 1997, among the Registrant, Crusader Savings Bank,
FSB, Crusader Mortgage Corporation and Jeffrey K. Rafsky.
10.8(b) First Amendment to Agreement, dated as of February 9, 1998, among the Registrant,
Crusader Savings Bank, FSB, Crusader Mortgage Corporation and Jeffrey K. Rafsky.
10.9(a) Letter Agreement, dated as of July 8, 1996, among Crusader Savings Bank, FSB and Robert
W. Stein.
10.9(b) Letter Agreement, dated as of September 13, 1996, among Crusader Savings Bank, FSB and
Gary Snyder.
10.9(c) Shareholders' Agreement, dated as of October 2, 1996, by and among Crusader Savings
Bank, FSB, Robert H. Stein, Gary Snyder and Crusader Servicing Corporation.
10.10(a) Letter Agreement, dated as of July 31, 1997, among Crusader Savings Bank, FSB and
Michael D. Kushner and Gregory K. Kushner.
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10.10(b) Subscription and Shareholders' Agreement, dated as of September 16, 1997, by and among
Crusader Savings Bank, FSB, Michael D. Kushner, Gregory K. Kushner and Crusader
Mortgage Corporation of Delaware.
10.11(a) Letter Agreement, dated as of November 7, 1997, among Crusader Savings Bank, FSB and
Haiching Zhao, Ph.D.
10.11(b) Subscription and Shareholders' Agreement, dated as of December 11, 1997, by and among
Crusader Savings Bank, FSB, Haiching Zhao, Ph.D. and National Chinese Mortgage
Corporation.
10.12 Partnership Agreement, dated as of December 19, 1996 by and between Ronald L. Caplan
and Quest Holding Company.
10.13 Supervisory Agreement dated April 26, 2000 by and between the Bank and the OTS.*
21 Subsidiaries of the Registrant.
23 Consent of Grant Thornton LLP*
27 Financial Data Schedule.*
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+ Constitutes a management contract or compensatory plan.
* Filed herewith.
