10-Q 1 p311456.txt P311456.TXT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (Mark One) [ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission file number 23663 ----- CRUSADER HOLDING CORPORATION ------------------------------------------------ (Exact name of registrant as specified in its charter) Pennsylvania 23-2562545 ------------------------------- --------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 1230 Walnut Street, Philadelphia, PA 19107 ------------------------------------------------ (Address of principal executive offices) (Zip Code) (215) 893-1500 ------------------------------------------------ (Registrant's telephone number, including area code) ------------------------------------------------------------------------------- (Former name, former address and former fiscal year if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common Stock, par value $0.01 per share, 3,855,387 shares outstanding as of May 9, 2001. Crusader Holding Corporation Index to Form 10-Q Report

2 Item 1. Financial Statements Crusader Holding Corporation and Subsidiary Consolidated Balance Sheets --------------------------------------------------------------------------------

See accompanying notes to consolidated financial statements 3 Crusader Holding Corporation and Subsidiary Consolidated Statements of Income (Unaudited) --------------------------------------------------------------------------------

See accompanying notes to consolidated financial statements. 4 Crusader Holding Corporation and Subsidiary Consolidated Statement of Shareholders' Equity and Comprehensive Income For the nine months ended March 31, 2001 (Unaudited) --------------------------------------------------------------------------------

See accompanying notes to consolidated financial statements. 5 Crusader Holding Corporation and Subsidiary Consolidated Statements of Cash Flows (Unaudited) --------------------------------------------------------------------------------

See accompanying notes to consolidated financial statements. 6 Crusader Holding Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information as of and for the three and nine month periods ended March 31, 2001 and 2000 is unaudited) -------------------------------------------------------------------------------- 1. BASIS OF PRESENTATION The unaudited consolidated financial statements as of March 31, 2001, and for the three and nine month periods ended March 31, 2001 and 2000 include the accounts of Crusader Holding Corporation (the "Company") and its wholly-owned subsidiary, Crusader Savings Bank, FSB (the "Bank"), along with the Bank's wholly-owned and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The interim financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (including normal recurring accruals) necessary for fair presentation of results of operations for the interim periods included herein have been made. The results of operations for the three and nine month periods ended March 31, 2001 are not necessarily indicative of results to be anticipated for the full year. 2. NET INCOME PER SHARE Basic and diluted earnings per share are calculated using statement of Financial Accounting Standards ("SFAS") No. 128. Under SFAS No. 128, basic earnings per share is computed based upon the weighted average number of common shares outstanding during the period while diluted earnings per share is computed based upon the weighted average number of common shares and common equivalent shares outstanding during the period. Common equivalent shares are stock options, warrants and similar items. In converting the common equivalent shares to common shares, the Treasury Stock Method is utilized whereby it is assumed that the proceeds that would be received upon the exercise of the common stock equivalent shares are used to repurchase outstanding common shares at the average market price during the period. There was no difference between the Company's basic and diluted earnings per share. In determining the weighted average shares outstanding during the period in the computation of basic and diluted earnings per share, retroactive effect was given to all stock dividends, including the 5% stock dividend paid October 14, 1999. Basic and diluted weighted average shares outstanding were 3,856,000 and 3,876,000 for the three months ended March 31, 2001, and March 31, 2000, respectively. 3. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is established through a provision for possible loan losses charged to expenses. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb possible loan losses on existing loans that may become uncollectible based on evaluations of the collectibility of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, the status of specific problem loans and overall current economic conditions that may affect the ability of borrowers to repay their loans. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination processes, periodically review the Bank's allowance for loan losses based on their judgments about information available to them at the time of their examinations. 7 4. RECENT PRONOUNCEMENTS None 5. RECENT LITIGATION During October 1998, one of the Bank's deposit customers (the "Bank Depositor") had deposited approximately $1.3 million of dishonored money orders which resulted in its account being deficient by a similar amount. The Bank has initiated a lawsuit in the Court of Common Pleas of Philadelphia County against the money order company which placed the stop payments on the money orders issued by 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. At March 31, 2001 the Company has a remaining receivable of $275,000 related to this matter. The Company believes its litigation has strong merit. 8 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes appearing on the preceding pages as well as in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2000. Unaudited results of operations for the three and nine month periods ended March 31, 2001 are compared to the unaudited results of operations for the comparable periods ended March 31, 2000. Such information is based upon the historical financial information available as of the dates indicated. Results of operations for the three and nine month periods ended March 31, 2001 are not necessarily indicative of results to be attained for any other period. Statements regarding the Company's expectations as to financial results and other aspects of its business set forth herein or otherwise made in writing or orally by the Company may constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although the Company believes that its expectations are based on reasonable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results will not differ materially from its expectations. Factors that might cause or contribute to such differences include, but are not limited to, uncertainty of future profitability, changing economic conditions and monetary policies, uncertainty of interest rates, risks inherent in banking transactions, the impact of the action to limit the Bank's asset growth and any related future actions by the Office of Thrift Supervision ("OTS"), competition, extent of government regulations, and delay in or failure in obtaining regulatory approvals. GENERAL The Company is a holding company operating a federally chartered savings bank. The Bank conducts community banking activities by accepting deposits from the public and investing the proceeds in loans and investment securities. The Company's lending products include residential mortgages, home equity loans, multi-family residential and non-residential real estate loans, SBA loans, and secured property tax liens. As announced in December 2000, the Company has discontinued its short-term consumer lending business during the quarter. In order to manage its liquidity and interest rate risk, the Company maintains an investment portfolio consisting of bonds and mortgage-backed securities, most of which are investment quality. The Company's loan and investment portfolios are funded with deposits as well as borrowings from the Federal Home Loan Bank of Pittsburgh ("FHLB") or collateralized borrowings secured by the Company's investment securities. The Company's earnings are largely dependent upon its net interest income (the difference between what it earns on its loans and investments and what it pays on its deposits and borrowings). In addition to net interest income, the Company's net income is impacted by its loan loss provision, non-interest income (mortgage banking revenue and loan, deposit and ATM fees) and non-interest expenses (such as salaries and benefits, professional fees, occupancy cost, deposit insurance premiums and expenses related to mortgage operations). As previously disclosed, the Company entered into an agreement during the quarter pursuant to which Royal Bank of Pennsylvania will acquire substantially all of the Company's assests and assume its liabilities. The closing of the transaction, which is expected to occur prior to July 31, 2001, is subject to regulatory approval and certain other conditions, including shareholder approval, as set forth in the agreement. The Company anticipates that it will distribute the available proceeds, net of closing costs, as soon as is practicable following the settlement of the transaction. FINANCIAL CONDITION The Company's assets decreased to $384.9 million at March 31, 2001 compared to $393.7 million at June 30, 2000. The decrease in assets primarily reflects a $44.3 million decrease in loans receivable, partially offset by a $38.2 million increase in cash and cash equivalents. At March 31, 2001, the loan portfolio aggregated $276.6 million compared to $320.8 million at June 30, 2000. Loans held for sale decreased to $9.0 million at March 31, 2001 as compared to $9.7 million at June 30, 2000. Cash and cash equivalents aggregated $55.6 million at March 31, 2001 compared to $13.3 million at June 30, 2000. Deposits were $249.8 million at March 31, 2001 as compared to $243.3 million at June 30, 2000 reflecting primarily an increase in certificates of deposit. FHLB advances decreased to $85.5 million at March 31, 2001 from $95.2 million at June 30, 2000. Shareholders' equity increased by $9.4 million due primarily to net income generated during the period and a decrease of $1.0 million in unrealized losses on securities available for sale. These increases were offset by $75,000 of treasury stock purchases. 9 RESULTS OF OPERATIONS Three months ended March 31, 2001 versus three months ended March 31, 2000. Net income increased to $3.3 million for the three months ended March 31, 2001 as compared to $1.9 million for the comparable prior period. Net interest income increased by $1.4 million due to a $11.7 million increase in average earning assets and an increase in the net yield on interest-earning assets to 6.47% as compared to 5.14% in the prior year period. The increase in the net yield on interest-earning assets is primarily attributable to an increase in short-term consumer loan fees during the quarter. The provision for loan losses was $539,000 for the three months ended March 31, 2001 as compared to $795,000 for the prior period. Non-interest income decreased by $174,000 due primarily to a decrease in mortgage banking revenues. Non-interest expenses were $1.4 million in both the current and prior year periods. A reduction in mortgage banking expenses of $149,000 was offset by an increase in core operating expenses of $105,000. Nine months ended March 31, 2001 versus nine months ended March 31, 2000. Net income increased to $8.4 million for the nine months ended March 31, 2001 as compared to $5.4 million for the comparable prior period. Net interest income increased by $3.3 million due to a $38.4 million increase in average earning assets and an increase in the net yield on interest-earning assets to 5.84% as compared to 5.20% in the prior year period. The provision for loan losses increased to $2.6 million for the nine months ended March 31, 2001 as compared to $2.3 million for the prior year period. The increase relates to increased short-term consumer lending activity. Non-interest income decreased by $731,000 due primarily to a decrease in mortgage banking revenues. The reduction in mortgage banking revenues is consistent with the Company's strategy to de-emphasize the origination and resale of nonconforming loans in the current year. Non-interest expenses decreased to $4.0 million as compared to $4.4 million in the prior year period, due primarily to a $791,000 reduction in mortgage banking expenses, partially offset by a $366,000 increase in core operating expenses. As a result of the 1999 OTS examination, the Bank has entered into a supervisory agreement with the OTS effective April 26, 2000. Effective for 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. As a result of the OTS concens, the Bank has not originated any new commerical loans since October 2000. In addition, the Bank has curtailed its purchase of new tax lein certificates. The OTS has also expressed concern about and is investigating certain possible violations of lending practices, including those with respect to affiliates. There can be no assurance that the OTS will remove the asset growth restriction in any particular time period or that the OTS will not impose additional regulatory constraints on the Bank. Failure to comply with the provisions of the supervisory agreement could expose the Bank to futher regulatory sanctions that could have a material adverse effect on the Company. As previously disclosed, the Bank has discontinued its short-term consumer lending business. Income from this business segment for the quarters ended March 31, 2001 and 2000 was $1.5 million and $379,000, respectively, based upon the assumptions as set forth in the Company's "Segment Information" disclosure in its June 30, 2000 Annual Report on Form 10-K. 10 LIQUIDITY AND CAPITAL RESOURCES A major source of the Company's asset growth has been funded through deposits, mostly certificates of deposit ("CDs"), generated through the Bank's two branch offices and a network of financial planners and brokers and FHLB advances. The ability of the Bank to retain and attract deposits is dependent upon a number of factors, including interest rates offered on the Bank's products. Historically, most of the Bank's deposits have been in the form of CDs, which typically provide for a higher interest rate than other bank deposit products, such as checking and savings accounts. The Bank also funds its assets with secured borrowings from the FHLB and collateralized borrowings secured by its investment securities portfolio. These borrowings generally provide the Bank with greater flexibility in matching the duration of its liabilities with that of certain of its assets. Future availability of these funding sources is largely dependent upon the Bank having sufficient available eligible assets to collateralize these borrowings. The Bank's assets generally provide for scheduled principal and interest payments which provide the Bank with additional sources of funds. If required, additional funds could be obtained through the sale of either loans or investment securities which are classified as available-for-sale. The Bank has and will continue to utilize its investment securities portfolio to manage liquidity. The Bank's primary uses of funds are for the origination and acquisition of loans, the funding of maturing deposits and the repayment of borrowings. Based upon management's current business strategy, management believes that the Company's income from operations and existing funding sources will be adequate to meet its operating and growth requirements for the foreseeable future; however, there can be no assurance that such strategy will not change or that the implementation of the strategy will not require additional capital or funding sources. Net cash provided by operating activities for the nine months ended March 31, 2001 was $541,000 as compared to $27.1 million of net cash provided in the comparable prior year period. The decrease in net cash provided by operating activities primarily relates to the change in the level of loans available-for-sale. Net cash provided by investment activities was $46.3 million, as compared to $87.6 million used for the prior year period. The change primarily relates to the level of the Company's loan portfolio. Net cash used in financing activities was $8.7 million for the nine months ended March 31, 2000 compared with $63.9 million provided by financing activities for the comparable period last year. The change relates primarily to the change in Federal Home Loan Bank advances. The Bank monitors its capital level relative to its business operations and anticipated growth and has continually maintained it at a level which would allow it to be classified as "well-capitalized" under the Federal Deposit Insurance Corporation Improvement Act ("FDICIA"). The Bank's capital growth during the period presented has come primarily from internally generated earnings. The following table sets forth the Bank's regulatory capital levels at March 31, 2001. The Company is not subject to regulatory capital requirements.

11 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk. Interest rate risk is defined as the sensitivity of the Company's current and future earnings and capital to changes in the level of market interest rates. The Bank's exposure to interest rate risk results from, among other things, the difference in maturities on interest-earning assets and interest-bearing liabilities. Since the Bank's assets currently have a longer maturity than its liabilities, the Bank's earnings could be negatively impacted during a period of rising interest rates and conversely positively impacted during a period of falling interest rates. The relationship between the interest rate sensitivity of the Bank's assets and liabilities is continually monitored by management. In this regard, the Bank emphasizes the origination of adjustable rate assets for portfolio while originating longer term fixed rate assets for resale. Additionally, the origination level of fixed rate assets are continually monitored and if deemed appropriate, the Bank will enter into forward commitments for the sale of these assets to ensure the Bank is not exposed to undue interest rate risk. The Bank utilizes its investment and mortgage-backed portfolio in managing its liquidity and therefore generally seeks securities with a stated or estimated duration of less than five years. These securities are readily marketable and provide the Bank with a cash flow stream to fund asset growth or liability maturities. A significant portion of the Bank's assets have been funded with CDs, including jumbo CDs. Unlike other deposit products such as checking and savings accounts, CDs carry a high degree of interest rate sensitivity and therefore, their renewal will vary based on the competitiveness of the Bank's interest rates. The Bank has customarily priced its CDs to be competitive at the shorter maturities (i.e., maturities of less than one year) in order to better match the repricing characteristics of portfolio loans and the anticipated holding period for loans held for sale. The Bank utilizes borrowings from the FHLB and collateralized repurchase agreements in managing its interest rate risk and as a tool to augment deposits in funding asset growth. The Bank may utilize these funding sources to better match its longer term repricing assets (i.e., between one and five years). The nature of the Bank's current operations is such that it is not subject to foreign currency exchange or commodity price risk. Additionally, neither the Company nor the Bank owns any trading assets. At March 31, 2001, the Bank did not have any hedging transactions in place, such as caps or floors. Interest Rate Sensitivity Analysis. One measure of a bank's interest rate sensitivity is through the use of a GAP analysis. Using a GAP analysis, the Bank matches the extent to which its interest-earning assets and interest-bearing liabilities mature or reprice within specified time horizons. The interest rate sensitivity gap is defined as the excess of interest-earning assets maturing or repricing within a specific time period over the interest-bearing liabilities maturing or repricing within the same time period (a negative GAP for a specified time period would indicate there are more liabilities than assets maturing or repricing within that time period). 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. Management believes that the assumptions utilized in evaluating the vulnerability of the Company's earnings and capital to changes in interest rates approximate actual experience; however, the interest rate sensitivity of the Bank's assets and liabilities as well as the estimated effect of changes in interest rates on MVPE could vary substantially if different assumptions are used or actual experience differs from the experience on which the assumptions were based. 12 In the event the Bank should experience a mismatch in its desired GAP ranges or an excessive decline in its MVPE subsequent to an immediate and sustained change in interest rate, it has a number of options which it could utilize to remedy such mismatch. The Bank could restructure its investment portfolio through sale or purchase of securities with more favorable repricing attributes. It could also emphasize loan products with appropriate maturities or repricing attributes or it could attract deposits or obtain borrowings with desired maturities. 13 PART II. OTHER INFORMATION Item 1. Legal Proceedings There are various claims and lawsuits in which the Company or the Bank are periodically involved, such as claims to enforce liens, condemnation proceedings on properties in which the Bank holds security interests, claims involving the making and servicing of real property loans, and other issues incident to the Bank's business. In the opinion of management, there are no material pending claims or lawsuits. During October 1998, one of the Bank's deposit customers (the "Bank Depositor") had deposited approximately $1.3 million of dishonored money orders which resulted in its account being deficient by a similar amount. The Bank has initiated a lawsuit in the Court of Common Pleas of Philadelphia County against the money order company which placed the stop payments on the money orders issued by 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. At March 31, 2001 the Company has a remaining receivable of $275,000 related to this matter. The Company believes its litigation has strong merit. Item 2. Changes in Securities and Use of Proceeds None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (A) Exhibits Those exhibits previously filed with the Securities and Exchange Commission as required by Item 601 of Regulation S-K, are incorporated herein by reference in accordance with the provision of Rule 12b-32. (B) Reports on Form 8-K On March 13, 2001, the Company filed an 8-K to report that the Company executed an agreement pursuant to which Royal Bank of Pennsylvania, a wholly-owned subsidiary of Royal Bancshares of Pennsylvania, will acquire substantially all of the Company's assets and assume substantially all of its liabilities. 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Crusader Holding Corporation Date: May 11, 2001 By: /s/ Thomas J. Knox ---------------------------- Thomas J. Knox Chairman and Chief Executive Officer (Principal Executive Officer) Date: May 11, 2001 By: /s/ Robert C. Faix ----------------------------- Robert C. Faix Senior Vice President and Chief Financial Officer (Principal Accounting and Financial Officer) 15

CRUSADER HOLDING CORP 10-Q