Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
[ X ] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarter ended September 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: 0-14815
Progress Financial Corporation
(Exact name of registrant as specified in its charter)
Delaware 23-2413363
- -------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4 Sentry Parkway
Suite 200
Blue Bell, Pennsylvania 19422
- ----------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 825-8800
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 ($1.00 par value) 5,743,706
------------------------------ ------------------------------
Title of Each Class Number of Shares Outstanding
as of October 30, 2000
Progress Financial Corporation
Table of Contents
PART I - Interim Financial Information
Page
Item 1. Interim Financial Statements
Consolidated Interim Statements of Financial Condition as of
September 30, 2000 (unaudited) and December 31, 1999 (audited)........3
Consolidated Interim Statements of Operations for the
three and nine months ended September 30, 2000 and 1999 (unaudited)...4
Consolidated Interim Statements of Changes in Shareholders' Equity
and Comprehensive Income for the nine months ended
September 30, 2000 and 1999 (unaudited)...............................5
Consolidated Interim Statements of Cash Flows for the nine months
ended September 30, 2000 and 1999 (unaudited).........................6
Notes to Consolidated Interim Financial Statements (unaudited)........7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (unaudited)....................................12
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........18
PART II - Other Information
Item 1. Legal Proceedings....................................................19
Item 2. Changes in Securities................................................19
Item 3. Defaults upon Senior Securities......................................19
Item 4. Submission of Matters to a Vote of Security Holders..................19
Item 5. Other Information....................................................19
Item 6. Exhibits and Reports on Form 8-K.....................................19
Signatures...........................................................20
PART I- INTERIM FINANCIAL INFORMATION
Item 1. Interim Financial Statements
Consolidated Interim Statements of Financial Condition
(Dollars in thousands) September 30, December 31,
2000 1999
------------- -----------
(unaudited) (audited)
Assets Cash and due from banks:
Non-interest-earning $ 18,076 $ 15,648
Interest-earning 16,380 24,278
Trading securities -- 3,267
Investment and mortgage-backed securities [Note 5]:
Available for sale at fair value (amortized cost: $208,461 in 2000 and $147,529 in 1999) 203,518 149,518
Held to maturity at amortized cost (fair value: $32,031 in 2000 and $32,914 in 1999) 35,382 34,309
Loans and leases, net [Note 6] (net of reserves[Note 7]: $6,513 in 2000 and $5,927 in (1999) 555,630 497,738
Investments in unconsolidated entities [Note 8] 10,631 11,427
Premises and equipment, net 17,986 15,600
Other assets 20,691 15,968
Net assets of discontinued teleservices operations -- 1,188
-------- --------
Total assets $878,294 $768,941
======== ========
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Non-interest-bearing $ 77,558 $ 65,305
Interest-bearing 512,087 456,134
Short-term borrowings 93,689 50,767
Other liabilities 27,912 22,475
Long-term debt:
Federal Home Loan Bank advances 85,500 85,000
Other debt 10,000 24,000
Subordinated debt 3,000 3,000
-------- --------
Total liabilities 809,746 706,681
-------- --------
Corporation-obligated mandatorily redeemable capital securities of subsidiary trust
holding solely junior subordinated debentures of the Corporation [Note 9] 20,225 14,451
Commitments and contingencies [Note 10]
Shareholders' equity [Note 4]:
Serial preferred stock - $.01 par value;1,000,000 shares authorized but unissued -- --
Junior participating preferred stock - $.01 par value; 1,010 shares authorized but -- --
unissued
Common stock - $1 par value; 12,000,000 shares authorized: 5,822,000 and
5,680,000 shares issued and outstanding at September 30, 2000 and
December 31, 1999, respectively; including treasury shares of 48,000
and 152,000, and unallocated shares held by the Employee Stock Ownership
Plan of 0 and 14,000 at September 30, 2000 and December 31, 1999, respectively. 5,822 5,680
Other common shareholders' equity, net 45,831 40,895
Net accumulated other comprehensive income (loss) (3,330) 1,234
-------- --------
Total shareholders' equity 48,323 47,809
-------- --------
Total liabilities, Corporation-obligated mandatorily redeemable capital
securities and shareholders' equity $878,294 $768,941
======== ========
See Notes to Consolidated Interim Financial Statements.
Consolidated Interim Statements of Operations (unaudited)
(Dollars in thousands, except per share data)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
------ ------ ------ ------
Interest income:
Loans and leases, including fees $13,037 $10,464 $37,488 $30,092
Mortgage-backed securities 2,810 1,859 7,336 5,953
Investment securities 1,015 560 2,994 1,508
Other 308 285 894 645
------- ------- ------- -------
Total interest income 17,170 13,168 48,712 38,198
------- ------- ------- -------
Interest expense:
Deposits 6,318 4,303 17,159 11,951
Short-term borrowings 1,165 527 3,135 1,767
Long-term and subordinated debt 1,608 1,576 4,812 4,904
------- ------- ------- -------
Total interest expense 9,091 6,406 25,106 18,622
------- ------- ------- -------
Net interest income 8,079 6,762 23,606 19,576
Provision for loan and lease losses 517 658 2,750 2,323
------- ------- ------- -------
Net interest income after provision for loan and lease losses 7,562 6,104 20,856 17,253
------- ------- ------- -------
Non-interest income:
Service charges on deposits 493 572 1,722 1,513
Lease financing fees 372 256 1,036 925
Mutual fund, annuity and insurance commissions 1,056 713 2,895 1,767
Loan brokerage and advisory fees 591 522 1,653 1,697
Gain (loss) on sale of securities 373 (66) 263 (222)
Equity (loss) in unconsolidated entities 8 511 (1,989) 615
Client warrant income (loss) (103) 2,775 3,482 3,257
Fees and other 1,403 456 3,935 1,966
------- ------- ------- -------
Total non-interest income 4,193 5,739 12,997 11,518
------- ------- ------- -------
Non-interest expense:
Salaries and employee benefits 4,903 4,391 14,774 11,550
Occupancy 576 440 1,684 1,047
Data processing 239 338 875 818
Furniture, fixtures and equipment 556 389 1,584 1,042
Professional services 500 539 1,639 1,302
Capital securities expense 537 399 1,335 1,196
Other 1,866 2,620 5,622 5,634
-------- ------- ------- -------
Total non-interest expense 9,177 9,116 27,513 22,589
-------- ------- ------- -------
Income from continuing operations before income taxes 2,578 2,727 6,340 6,182
Income tax expense 841 905 2,109 2,107
-------- ------- ------- -------
Income from continuing operations 1,737 1,822 4,231 4,075
Discontinued operations (Note 2):
Gain on sale of discontinued teleservices operations, net of tax 6 -- 1,519 --
Income from discontinued teleservices operations, net of tax 9 435 123 635
------- ------- ------- -------
Net income $ 1,752 $ 2,257 $ 5,873 $ 4,710
======= ======= ======= =======
Basic income from continuing operations per common share $.30 $.31 $.73 $.71
===== ===== ===== ====
Diluted income from continuing operations per common share $.29 $.30 $.70 $.67
===== ===== ===== ====
Basic earnings per common share $.30 $.39 $1.01 $.82
===== ===== ===== ====
Diluted earning per common share $.29 $.37 $.97 $.77
===== ===== ===== ====
Dividends per common share $.06 $.04 $.15 $.12
===== ===== ===== ====
Basic average common shares outstanding 5,801,653 5,905,692 5,814,405 5,753,309
========= ========= ========= =========
Diluted average common shares outstanding 6,018,424 6,148,394 6,027,094 6,105,728
========= ========= ========= =========
See Notes to Consolidated Interim Financial Statements.
Consolidated Interim Statements of Changes in Shareholders' Equity and
Comprehensive Income (unaudited)
(Dollars in thousands)
Net
Unearned Accumulated
Unearned Compensation Other Total
Common Treasury ESOP Restricted Capital Retained Comprehensive Comprehensive Shareholders'
Stock Stock Shares Stock Surplus Earnings Income Income Equity
(Loss) (Loss)
----------------------------------------------------------------------------------------------
For the nine months ended September 30, 2000:
Balance at December 31, 1999 $5,680 $(1,963) $(64) $(1,051) $42,612 $1,361 $1,234 $47,809
Issuance of stock under employee
benefit plans (24,239 common shares;
6,154 treasury shares;
14,011 ESOP shares) 24 80 64 192 319 -- -- 679
Net income -- -- -- -- -- 5,873 -- $ 5,873 5,873
Other comprehensive loss,
net of tax (a) -- -- -- -- -- -- (4,564) (4,564) (4,564)
-------
Comprehensive income -- -- -- -- -- -- -- $ 1,309
=======
Purchase of treasury stock
(120,500 treasury shares) -- (1,383) -- -- -- -- -- (1,383)
Acquisition of subsidiary -- 800 -- -- -- -- -- 800
(60,000 treasury shares)
Cash dividend declared -- -- -- -- -- (891) -- (891)
Distribution of stock dividend
(118,190 common shares;
158,267 net treasury shares) 118 1,913 -- -- 1,546 (3,577) -- --
------ ------ ---- ----- ------- ------ ------- -------
Balance at September 30, 2000 $5,822 $ (553) $ -- $(859) $44,477 $2,766 $(3,330) $48,323
====== ======= ==== ===== ======= ====== ======= =======
For the nine months ended September 30, 1999:
- ---------------------------------------------
Balance at December 31, 1998 $5,263 $(2,287) $(114) $ -- $39,586 $ (399) $ (495) $41,554
Exercise of stock warrants
(125,971 common shares; 122,088
treasury shares) 126 1,666 -- -- (442) -- -- 1,350
Issuance of stock under employee
benefit plans (21,772 common shares;
107,709 treasury shares;
8,015 ESOP shares) 22 1,319 38 (1,067) 111 -- -- 423
Retirement of restricted stock
(197 common shares) -- -- -- 3 (3) -- -- --
Net income -- -- -- -- -- 4,710 -- $ 4,710 4,710
Other comprehensive loss,
net of tax (a) -- -- -- -- -- -- (1,062) (1,062) (1,062)
-------
Comprehensive income -- -- -- -- -- -- $ 3,648 --
=======
Purchase of treasury stock
(122,500 treasury shares) -- (1,656) -- -- -- -- -- (1,656)
Retirement of stock warrants -- -- -- -- (331) -- -- (331)
Cash dividend declared -- -- -- -- -- (683) -- (683)
Distribution of stock dividend
(269,667 common shares;
2,250 treasury shares;
799 ESOP shares) 270 -- -- -- 3,679 (3,949) -- --
------ ------- ----- ------- ------- ------ ======= -------
Balance at September 30, 1999 $5,681 $ (958) $ (76) $(1,064) $42,600 $ (321) $(1,557) $44,305
====== ======= ===== ======= ======= ====== ======= =======
(a) For the nine months ended September 30, 2000 1999
---- ----
Calculation of other comprehensive loss net of tax:
Unrealized holding losses arising during the period, net of tax $(4,390) $(1,209)
Less: Reclassification for gains (losses) included in net income, net of tax 174 (147)
------- -------
Other comprehensive loss, net of tax $(4,564) $(1,062)
======= =======
See Notes to Consolidated Interim Financial Statements
Consolidated Interim Statements of Cash Flows (unaudited)
(Dollars in thousands)
For the nine months ended September 30, 2000 1999
- ---------------------------------------- ---- ----
Cash flows from operating activities:
Income from continuing operations $4,231 $4,075
Add (deduct) items not affecting cash flows from operating activities:
Depreciation and amortization 2,069 1,315
Provision for loan and lease losses 2,750 2,323
Client warrant income (3,482) (3,257)
(Gain) loss on sale of securities available for sale (263) 222
(Gain) loss on sale of loans and leases (250) 34
Loss on sale of real estate owned 9 --
Accretion of deferred loan and lease fees and expenses (1,876) (1,809)
Amortization of premiums/accretion of discounts on securities 184 796
(Equity) loss in unconsolidated entities 1,989 (615)
Other, net 224 123
Proceeds from sales of loans held for sale -- 4,451
Originations of loans held for sale -- (11,365)
Repayments on loans held for sale -- 4,766
Net proceeds from sales of trading securities 996 --
(Increase) decrease in other assets 1,466 (362)
Increase (decrease) in other liabilities 7,765 (3,003)
--------- --------
Net cash flows provided by (used in) continuing operations 15,812 (2,306)
Net cash flows used in discontinued teleservices operations (1,917) (404)
---------- --------
Net cash flows provided by (used in) operating activities 13,895 (2,710)
Cash flows from investing activities:
Capital expenditures (3,990) (4,431)
Purchases of investments and mortgage-backed securities available for sale (73,212) (33,570)
Purchases of investment securities held to maturity (1,049) (6,846)
Repayments on investment and mortgage-backed securities available for sale 12,039 28,544
Proceeds from sales and calls of investment and mortgage-backed securities available for sale 3,481 16,130
Proceeds from sale of loans and leases 12,976 875
Proceeds from sale of discontinued teleservices operations 4,944 --
Investment in real estate owned (2,421) --
Proceeds from sale of real estate owned 4,622 --
Purchases of loans and leases -- (4,180)
Net increase in loans and leases (77,199) (37,200)
Net investment in unconsolidated entities (831) (3,524)
Other, net (375) (250)
--------- --------
Net cash flows used in investing activities (121,015) (44,452)
--------- --------
Cash flows from financing activities:
Net increase in demand, NOW and savings deposits 23,390 6,026
Net increase in time deposits 44,816 77,925
Net increase (decrease) in short-term borrowings 13,922 (30,623)
Proceeds from issuance of long-term debt 25,500 4,000
Repayment on call of long-term debt (10,000) --
Dividends paid (891) (683)
Purchase of treasury shares (1,383) (1,656)
Proceeds from exercise of stock warrants -- 1,350
Retirement of stock warrants -- (331)
Net proceeds from issuance of stock under employee benefit plans 296 283
Proceeds from issuance of capital securities 6,000 --
--------- -------
Net cash flows provided by financing activities 101,650 56,291
--------- -------
Net increase (decrease) in cash and cash equivalents (5,470) 9,129
Cash and cash equivalents:
Beginning of year 39,926 20,687
--------- -------
End of period $34,456 $29,816
========= =======
Supplemental disclosures:
Non-monetary transfers:
Treasury shares issued in purchase of subsidiary $ 800 $ --
========= =======
Transfer of loans held for sale to loans held in portfolio $ -- $18,177
========= =======
Transfer investments available for sale to investments held to maturity $ -- $ 9,464
========= =======
See Notes to Consolidated Interim Financial Statements.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
(1) Basis of Presentation
In the opinion of management, the financial information reflects all
adjustments necessary for a fair presentation of the financial
information as of September 30, 2000 and December 31, 1999 and for the
three and nine months ended September 30, 2000 and 1999 in conformity
with accounting principles generally accepted in the United States. These
interim financial statements should be read in conjunction with Progress
Financial Corporation's (the "Company") Annual Report on Form 10-K for
the year ended December 31, 1999. Operating results for the three and
nine months ended September 30, 2000 are not necessarily indicative of
the results that may be expected for any other interim period or the
entire year ending December 31, 2000. Earnings per share have been
adjusted to reflect all stock dividends and prior period amounts have
been reclassified when necessary to conform with current period
classification. The Company's principal subsidiaries are Progress Bank
(the "Bank"), Progress Capital, Inc., Progress Development Corp.,
Progress Capital Management, Inc., Progress Financial Resources, Inc. and
KMR Management, Inc. All significant intercompany transactions have been
eliminated.
(2) Discontinued Operations
During the second quarter of 2000, the Company decided to sell its
teleservicing assets to move toward focusing on its core financial
services competencies. Prior period presentation has been changed to
reflect the requirement of Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations," so that discontinued operations of
Procall Teleservices, Inc. are separated from the continued operations of
the Company as a whole.
On May 19, 2000, the Company sold the assets of Procall Teleservices,
Inc., its business-to-business teleservices subsidiary. The Company
recognized a gain on this sale of $2.5 million pretax ($1.5 million net
of tax of $1.0 million) or diluted earnings per share of $.25. Income
from discontinued teleservices operations for the nine months ended
September 30, 2000 amounted to $153,000 pre-tax ($123,000, net of taxes
of $30,000) compared to $1.1 million pre-tax ($635,000, net of taxes of
$446,000) for the nine months ended September 30, 1999.
(3) New Developments
On June 1, 2000, M-Corp., a corporation on which the Company held
warrants, was acquired by Ramesys Holdings Limited ("Ramesys"). The
warrants were obtained through the Company's Specialized Lending
Division, which provides customized financial services to leading edge
companies in technology, health care and insurance. The Company received
a cash distribution and a convertible note from Ramesys; a total value of
approximately $61,000 was recorded in client warrant income.
On March 22, 2000, EMAX Solutions Partners, Inc., ("EMAX"), a corporation
on which the Company held warrants, obtained through the Company's
Specialized Lending Division, announced that it was acquired by
SciQuest.com ("SQST"). The Company held warrants to purchase 15,600
common shares of EMAX at an average exercise price of $4.82 per share. In
accordance with the terms of the acquisition, the Company's warrants
could be exchanged into 7,598 warrants to purchase common shares of SQST
at an average exercise price of $2.35. During the second quarter of 2000
the Company sold its warrants on EMAX back to the company. Client warrant
income of $340,000 for the nine months ended September 30, 2000, was
recognized on these warrants.
In January 2000, the Company acquired KMR Management, Inc. ("KMR"); a
Pennsylvania based corporation which provides financial and operational
management consulting services for commercial clients. The acquisition
was accounted for under the purchase method of accounting. The purchase
price was $1.0 million, which included the issuance of 60,000 treasury
shares. Goodwill of $1.0 million was created in the transaction, which
will be amortized over a ten-year period.
(4) Shareholders' Equity
Stock Repurchase Program
------------------------
On October 27, 1999, the Company announced the authorization of a new
stock repurchase program to repurchase up to 280,000 shares, or five
percent, of its outstanding common stock. Under this new program 76,800
shares were repurchased during 1999 and 130,500 shares were repurchased
during the nine months ended September 30, 2000.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Earnings per Share
------------------
The following table presents a summary of per share data and amounts for
the periods included. All prior period information has been restated to
reflect the 5% stock dividend distributed to shareholders on August 11,
2000.
For the three months ended September 30,
(Dollars in thousands, except per share data) 2000 1999
-------------------------------- ---------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
------ --------- ------ ------ ------ ---------
Basic Earnings Per Share:
Income from continuing operations
available to common shareholders $1,737 5,801,653 $.30 $1,822 5,905,692 $.31
Income from discontinued operations 15 5,801,653 .00 435 5,905,692 .08
------- ---- ------ ----
Total income available to common shareholders 1,752 5,801,653 $.30 2,257 5,905,692 $.39
==== ====
Effect of Dilutive Securities:
Warrants -- -- -- -- -- --
Options -- 216,771 -- -- 242,702 --
--------- ---------
Diluted Earnings Per Share:
Income from continuing operations available
to common shareholders and assumed conversions 1,737 6,018,424 $.29 1,822 6,148,394 $.30
Income from discontinued operations 15 6,018,424 .00 435 6,148,394 .07
------ ---- ------ ----
Total income available to common shareholders
and assumed conversions $1,752 6,018,424 $.29 $2,257 6,148,394 $.37
====== ========= ==== ======= ========= ====
For the three months ended September 30,
(Dollars in thousands, except per share data) 2000 1999
-------------------------------- ---------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
------ --------- ------ ------ ------ ---------
Basic Earnings Per Share:
Income from continuing operations
available to common shareholders $4,231 5,814,405 $.73 $4,075 5,753,309 $.71
Income from discontinued operations 1,642 5,814,405 .28 635 5,753,309 .11
------ ---- ------ ----
Total income available to common shareholders 5,873 5,814,405 $1.01 4,710 5,753,309 $.82
===== ====
Effect of Dilutive Securities:
Warrants -- -- -- -- 101,022 --
Options -- 212,689 -- -- 251,397 --
--------- ---------
Diluted Earnings Per Share:
Income from continuing operations
available to common shareholders and
assumed conversions 4,231 6,027,094 $.70 4,075 6,105,728 $.67
Income from discontinued operations 1,642 6,027,094 .27 635 6,105,728 .10
----- ---- ------ ----
Total income available to common shareholders and
assumed conversions $5,873 6,027,094 $.97 $4,710 6,105,728 $.77
====== ========= ==== ====== ========= ====
Capital Resources
-----------------
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
specific capital categories were defined based on an institution's
capital ratios. To be considered "well capitalized," an institution must
generally have a tangible equity ratio of at least 2%, a Tier 1 or
leverage ratio of at least 5%, a Tier 1 risk-based capital ratio of at
least 6% and a total risk-based capital ratio of at least 10%.
At September 30, 2000, the Bank's tangible equity ratio was 6.42%, Tier 1
or leverage ratio was 6.42%, Tier 1 risk-based capital ratio was 9.23%,
and total risk-based capital ratio was 10.32%. As of September 30, 2000,
the Bank was classified as "well capitalized."
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(5) Investment and Mortgage-Backed Securities
The following table sets forth the amortized cost, gross unrealized gains
and losses, estimated fair value and carrying value of investment and
mortgage-backed securities at the dates indicated:
Gross Gross
(Dollars in thousands) Amortized Unrealized Unrealized Estimated Carrying
Cost Gains Losses Fair Value Value
--------- ---------- ---------- ---------- --------
At September 30, 2000
---------------------
Available for Sale:
Equity investments $ 6,503 $ 472 $2,448 $ 4,527 $ 4,527
U.S. Government Agencies 21,000 31 170 20,861 20,861
Corporate bonds 2,432 -- 262 2,170 2,170
Mortgage-backed securities 178,526 544 3,110 175,960 175,960
-------- ------ ------ -------- --------
Total available for sale $208,461 $1,047 $5,990 $203,518 $203,518
======== ====== ====== ======== ========
Held to Maturity:
Federal Home Loan Bank Stock $ 5,175 $ -- $ -- $ 5,175 $ 5,175
U.S. Government Agencies 15,379 -- 2,492 12,887 15,379
Municipal bonds 14,828 28 887 13,969 14,828
-------- ------ ------ -------- --------
Total held to maturity $ 35,382 $ 28 $3,379 $ 32,031 $ 35,382
======== ====== ====== ======== ========
Gross Gross
(Dollars in thousands) Amortized Unrealized Unrealized Estimated Carrying
Cost Gains Losses Fair Value Value
---------- ---------- ----------- ---------- --------
At December 31, 1999
Available for Sale:
Equity investments $ 4,564 $7,598 $ -- $ 12,162 $ 12,162
U.S. Government Agencies 17,107 -- 330 16,777 16,777
Corporate bonds 1,900 -- 207 1,693 1,693
Mortgage-backed securities 123,958 2 5,074 118,886 118,886
-------- ------ ------ -------- --------
Total available for sale $147,529 $7,600 $5,611 $149,518 $149,518
======== ====== ====== ======== ========
Held to Maturity:
Federal Home Loan Bank Stock $ 4,923 $ -- $ -- $ 4,923 $ 4,923
U.S. Government Agencies 14,581 30 356 14,255 14,581
Municipal bonds 14,805 1 1,070 13,736 14,805
-------- ------ ------ -------- --------
Total held to maturity $ 34,309 $ 31 $1,426 $ 32,914 $ 34,309
======== ====== ====== ======== ========
(6) Loans and Leases, Net
The following table depicts the composition of the Company's loan and
lease portfolio at the dates indicated:
(Dollars in thousands) September 30, 2000 December 31, 1999
------------------ -----------------
Amount Percent Amount Percent
------ ------- ------ -------
Commercial business $161,613 28.75% $119,807 23.79%
Commercial real estate 173,064 30.79 162,588 32.28
Construction, net of loans in process 54,508 9.69 58,813 11.68
Single family residential real estate 37,010 6.58 40,554 8.05
Consumer loans 38,659 6.88 34,918 6.93
Lease financing 115,412 20.53 103,536 20.56
Unearned income (18,123) (3.22) (16,551) (3.29)
-------- ------- -------- ------
Total loans and leases 562,143 100.00% 503,665 100.00%
======= ======
Allowance for loan and lease losses (6,513) (5,927)
-------- --------
Net loans and leases $555,630 $497,738
======== ========
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(7) Allowance for Loan and Lease Losses
The following table details changes in the Company's allowance for loan
and lease losses for the periods indicated:
(Dollars in thousands) For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
------ ------ ------ ------
Balance beginning of period $6,527 $4,984 $5,927 $4,490
Charge-offs:
Commercial business 449 -- 1,482 --
Single family residential real estate -- -- 52 58
Consumer loans -- -- -- 1
Lease financing 255 572 1,245 1,857
------ ------ ------ ------
Total charge-offs 704 572 2,779 1,916
------ ------ ------ ------
Recoveries:
Commercial business 49 3 120 16
Commercial real estate -- -- 7 --
Consumer loans 1 3 4 15
Lease financing 123 108 484 256
------ ------ ------ ------
Total recoveries 173 114 615 287
------ ------ ------ ------
Net charge-offs 531 458 2,164 1,629
Additions charged to operations 517 658 2,750 2,323
------ ------ ------ ------
Balance at end of period $6,513 $5,184 $6,513 $5,184
====== ====== ====== ======
(8) Investments in Unconsolidated Entities
Investments in Unconsolidated Entities at September 30, 2000 and
December 31, 1999 are detailed below:
(Dollars in thousands) September 30, 2000 December 31, 1999
-----------------------------------------------------------------------------------------------------------------------
Investment in Ben Franklin/Progress Capital Fund, L.P. (A) $ 3,111 $ 4,771
Other investments in unconsolidated entities 7,520 6,656
-----------------------------------------------------------------------------------------------------------------------
Total Investments in Unconsolidated Entities $10,631 $11,427
=======================================================================================================================
(A) The Company owns approximately 36% of the Ben Franklin/Progress
Capital Fund, L.P. ("Ben Franklin"), which was formed on December
30, 1997, and accounts for its investment under the equity method.
Condensed financial data of Ben Franklin follows:
Summary of Operations (Dollars in thousands)
-----------------------------------------------------------------------
For the nine months ended September 30, 2000 1999
------------------------------------------------------------------------------------------------------------------
Revenues $ 354 $ 275
Expenses 219 208
Net increase (decrease) in fair value of venture capital investments (4,109) 1,263
------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in partners' capital resulting from operations $(3,974) $ 1,330
==================================================================================================================
The Company's equity (loss) in Ben Franklin $(1,658) $ 482
==================================================================================================================
Balance Sheet Data (Dollars in thousands) September 30, 2000 December 31, 1999
------------------------------------------------------------------------------------------------------------------
Assets:
Venture capital investments, at fair value $4,739 $ 9,830
Cash and temporary investments 3,259 2,258
Other assets 182 100
------------------------------------------------------------------------------------------------------------------
Total assets $8,180 $12,188
==================================================================================================================
Liabilities and Partners' Capital:
Liabilities $ 1 $ 36
Partners' capital 8,179 12,152
------------------------------------------------------------------------------------------------------------------
Total liabilities and partners' capital $8,180 $12,188
==================================================================================================================
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(9) Capital Securities
In July 2000, the Company issued 6,000 shares, or $6.0 million, of
11.445% trust preferred securities, $1,000 liquidation amount per
security, due July 19, 2030 (the "Trust Preferred Securities"), in a
private offering managed by First Union Securities, Inc. The Trust
Preferred Securities represent undivided beneficial interests in Progress
Capital Trust II (the "Trust II"), a statutory business trust created
under the laws of Delaware, which was established by the Company for the
purpose of issuing the Trust Preferred Securities. The Company has fully,
irrevocably and unconditionally guaranteed all of the Trust II's
obligations under the Trust Preferred Securities. Net proceeds from the
sale of the securities were used for general purposes, including but not
limited to, capital contributions to the Bank to fund its growth and for
repurchases of the Company's common stock under its existing stock
repurchase program.
During 1997 the Company issued $15.0 million of 10.5% capital securities
due June 1, 2027 (the "Capital Securities"). The Capital Securities were
issued by the Company's recently formed subsidiary, Progress Capital
Trust I, a statutory business trust created under the laws of Delaware.
The Company is the owner of all of the common securities of the Trust
(the "Common Securities"). The Trust issued $15.0 million of 10.5%
Capital Securities (and together with the Common Securities, the "Trust
Securities"), the proceeds from which were used by the Trust, along with
the Company's $464,000 capital contribution for the Common Securities, to
acquire $15.5 million aggregate principal amount of the Company's 10.5%
Junior Subordinated Deferrable Interest Debentures due June 1, 2027 (the
"Debentures"), which constitute the sole assets of the Trust. The Company
has, through the Declaration of Trust establishing the Trust, Common
Securities and Capital Securities Guarantee Agreements, the Debentures
and a related Indenture, taken together, irrevocably and unconditionally
guaranteed all of the Trust's obligations under the Trust Securities.
(10) Commitments and Contingencies
At September 30, 2000, the Company had $217.6 million in loan commitments
to extend credit, including unused lines of credit, and $9.9 million in
letters of credit outstanding
(11) Segments
The following table sets forth selected financial information by business
segment for the periods indicated:
Equipment Real Estate
Banking Leasing Advisory Other Total
------- --------- ----------- ----- -----
(Dollars in thousands)
Assets of continuing operations at:
September 30, 2000 $761,554 $98,058 $1,979 $16,703 $878,294
December 31, 1999 659,750 85,159 2,380 20,464 767,753
Revenues from continuing operations for:
the three months ended
September 30, 2000 7,693 1,801 680 2,098 12,272
September 30, 1999 6,522 1,443 634 3,902 12,501
the nine months ended
September 30, 2000 22,783 5,201 1,870 6,749 36,603
September 30, 1999 19,461 4,283 2,301 5,049 31,094
Income from continuing operations for:
the three months ended
September 30, 2000 1,429 441 90 (223) 1,737
September 30, 1999 773 142 (64) 971 1,822
the nine months ended
September 30, 2000 3,170 1,072 146 (157) 4,231
September 30, 1999 3,420 353 (83) 385 4,075
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (unaudited)
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the Company's Consolidated
Financial Statements and accompanying notes and with the Company's Annual Report
on Form 10-K for the year ended December 31, 1999. Certain reclassifications
have been made to prior period data throughout the following discussion and
analysis for comparability with 2000 data.
When used in filings by the Company with the Securities and Exchange Commission,
in the Company's press releases or other public or shareholder communications,
or in oral statements made with the approval of an authorized executive officer,
the words or phrases "will likely result," "are expected to," "will continue,"
"is anticipated," "estimate," "project," or similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements are subject to certain
risks and uncertainties including changes in economic conditions in the
Company's market area, changes in policies by regulatory agencies, fluctuations
in interest rates, demand for loans in the Company's market area and competition
that could cause actual results to differ materially from historical earnings
and those presently anticipated or projected. The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements,
which speak only as of the date made, not undertake, and specifically disclaims
any obligation, to publicly release any revision which may be made to such
forward-looking statements to reflect events or circumstances after the date of
such statements. The Company wishes to advise readers that the factors listed
above could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements.
SUMMARY
The Company recorded net income of $1.8 million, or diluted earnings per share
of $.29, for the three months ended September 30, 2000 compared to $2.3 million,
or $.37, respectively, for the three months ended September 30, 1999. Income
from continuing operations amounted to $1.7 million, or diluted earnings per
share of $.29, for the three months ended September 30, 2000 compared to $1.8
million or $.30, respectively, for the three months ended September 30, 1999.
Return on average shareholders' equity was 14.33% and return on average assets
was .83% for the three months ended September 30, 2000 compared to 20.73% and
1.31%, respectively, for the three months ended September 30, 1999.
The Company recorded net income of $5.9 million, or diluted earnings per share
of $.97, for the nine months ended September 30, 2000 compared to $4.7 million,
or $.77, respectively, for the nine months ended September 30, 1999. Income from
continuing operations amounted to $4.2 million, or diluted earnings per share of
$.70, for the nine months ended September 30, 2000 compared to $4.1 million or
$.67, respectively, for the nine months ended September 30, 1999. During the
second quarter of 2000 the Company sold the assets of its teleservices
operations resulting in a gain of $2.5 million pretax, $1.5 million net of tax
or diluted earnings per share of $.25. Return on average shareholders' equity
was 16.48% and return on average assets was .97% for the nine months ended
September 30, 2000 compared to 14.80% and .94%, respectively, for the nine
months ended September 30, 1999.
Net interest income increased to $8.1 million from $6.8 million, and the net
interest margin decreased slightly to 4.18% from 4.24%, comparing the three
months ended September 30, 2000 and 1999. Despite numerous rate increases by the
Federal Reserve, the Company has sufficiently managed its increasing cost of
funds by deploying capital into higher yielding investments and variable rate
loans which resulted in a $1.4 million increase in tax equivalent net interest
income.
Net interest income increased to $23.6 million from $19.6 million, and the net
interest margin increased slightly to 4.24% from 4.22%, comparing the nine
months ended September 30, 2000 and 1999. The Company has effectively managed
its increasing cost of funds by deploying capital into higher yielding
investments and variable rate loans which resulted in a $4.2 million increase in
tax equivalent net interest income.
Non-interest income decreased $1.5 million for the three months ended September
30, 2000 compared to the same period in 1999 primarily due to a $2.9 million
decrease in client warrant income offset by an increase in financial services
fee income of $1.2 million. Non-interest expense, excluding non-recurring
charges of $1.1 million in the three months ended September 30, 1999, increased
by $1.0 million primarily due to growth in the Company's financial services
operations.
Non-interest income increased $1.5 million for the nine months ended September
30, 2000 compared to the same period in 1999 primarily due to a $3.5 million
increase financial services fee income offset by a $2.6 million decrease equity
in unconsolidated subsidiaries representing a partial reversal of unrealized
gains reported in the fourth quarter of 1999. The provision for loan and lease
losses increased $427,000 primarily due to a commercial loan charge-off during
the first quarter of 2000, a more aggressive leasing charge-off policy, which
was implemented in the second quarter of 1999, and loan and lease growth.
Non-interest expense, excluding nonrecurring expenses of $251,000 and $1.1
million for the nine-month periods ended September 30, 2000 and 1999,
respectively, increased $5.8 million primarily due to growth in the Company's
financial services operations.
Total assets increased to $878.3 million at September 30, 2000 from $768.9
million at December 31, 1999 primarily due to loan and lease growth of $58.5
million and an increase in mortgage-backed securities of $57.1 million. Total
deposits increased to $589.6 million at September 30, 2000 from $521.4 million
at December 31, 1999. Deposit growth was primarily the result of new commercial
business customer relationships and retail branch expansion.
FINANCIAL CONDITION
Liquidity and Funding
The Company must maintain sufficient liquidity to meet its funding requirements
for loan and lease commitments, scheduled debt repayments, operating expenses,
and deposit withdrawals. The Bank is the primary source of working capital for
the Company. At September 30, 2000, the Bank met all regulatory capital
liquidity requirements. Regulations currently in effect require the Bank to
maintain liquid assets of not less than 4% of its net withdrawable accounts plus
short-term borrowings. At September 30, 2000, the Bank's liquidity ratio of
10.22% was in excess of the current minimum requirement.
The Company's need for liquidity is affected by loan demand and net changes in
retail deposit levels. The Company can minimize the cash required during the
times of heavy loan demand by modifying its credit policies or reducing its
marketing efforts. Liquidity demand caused by net reductions in retail deposits
are usually caused by factors over which the Company has limited control. The
Company derives its liquidity from both its assets and liabilities. Liquidity is
derived from assets by receipt of interest and principal payments and
prepayments, by the ability to sell assets at market prices and by utilizing
unpledged assets as collateral for borrowings. Liquidity is derived from
liabilities by maintaining a variety of funding sources, including retail
deposits, FHLB borrowings and securities sold under agreement to repurchase.
The Company's primary sources of funds have historically consisted of deposits,
amortization and prepayments of outstanding loans, FHLB borrowings and
securities sold under agreement to repurchase and sales of investment and
mortgage-backed securities. During the nine months ended September 30, 2000, the
Company used its capital resources primarily to meet its ongoing commitments to
fund maturing savings certificates and deposit withdrawals, fund existing and
continuing loan commitments, and maintain its liquidity. For the nine months
ended September 30, 2000, cash was provided by operating activities. Cash was
used in investing activities primarily due to net origination of loans and
purchases of mortgage-backed securities. Cash was provided by financing
activities, primarily due to net increases in deposits and issuance of long-term
borrowings.
Non-Performing and Underperforming Assets
The following table details the Company's non-performing and underperforming
assets at the dates indicated:
September 30, December 31, September 30,
(Dollars in thousands) 2000 1999 1999
---- ---- ----
Loans and leases accounted for on a non-accrual basis $4,348 $5,701 $ 3,760
Other real estate owned, net of related reserves 3,536 66 --
------ ------ -------
Total non-performing assets 7,884 5,767 3,760
Accruing loans 90 or more days past due 2,015 2,336 7,282
------ ------ -------
Total underperforming assets $9,899 $8,103 $11,042
====== ====== =======
Non-performing assets as a percentage of net loans and leases
And other real estate owned 1.41% 1.16% .81%
====== ====== =======
Non-performing assets as a percentage of total assets .90% .75% .53%
====== ====== =======
Underperforming assets as a percentage of net loans and leases
And other real estate owned 1.77% 1.63% 2.39%
====== ====== =======
Underperforming assets as a percentage of total assets 1.13% 1.05% 1.57%
====== ====== =======
Allowance for loan and lease losses $6,513 $5,927 $5,184
====== ====== =======
Ratio of allowance for loan and lease losses to
Non-performing loans and leases at end of period 149.79% 103.96% 137.87%
====== ====== =======
Ratio of allowance for loan and lease losses to
Underperforming loans and leases at end of period 102.36% 73.75% 46.95%
====== ====== =======
Non-performing assets increased to $7.9 million at September 30, 2000 from $5.8
million at December 31, 1999, and from $3.8 million at September 30, 1999. The
increase in non-performing assets since December 31, 1999 was primarily related
to $5.7 million in residential real estate development projects, classified as
other real estate owned, acquired by the Company through deeds in lieu of
foreclosure. The Company has recorded these projects at management's estimate of
net realizable value at September 30, 2000. Management anticipates the
investment in these projects to be further reduced by year-end and eliminated by
the end of the first quarter of 2001. The $4.3 million of non-accrual loans at
September 30, 2000 consisted of $2.1 million of lease financing, $1.1 million of
loans secured by single family residential property, $310,000 of commercial
business loans, $565,000 of commercial mortgages and $351,000 in consumer loans.
Accruing loans 90 or more days past due decreased from $2.3 million at December
31, 1999 to $2.0 million at September 30, 2000. The $2.0 million of accruing
loans 90 or more days past due at September 30, 2000 consisted of $2.0 million
of commercial mortgages.
Delinquencies
The following table sets forth information concerning the principal balances and
percent of the total loan and lease portfolio represented by delinquent loans
and leases at the dates indicated:
September 30, 2000 December 31, 1999 September 30, 1999
------------------- ----------------- ------------------
(Dollars in thousands) Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Delinquencies:
30 to 59 days $1,821 .32% $ 7,488 1.49% $ 8,177 1.75%
60 to 89 days 553 .10 1,288 .26 1,151 .25
90 or more days 2,015 .36 2,336 .46 7,282 1.56
------ ----- ------- ----- ------- ------
Total $4,389 .78% $11,112 2.21% $16,610 3.56%
====== ===== ======= ===== ======= ======
RESULTS OF OPERATIONS
Net Interest Income
The following tables set forth, for the periods indicated, tax-equivalent
information regarding (i) the total dollar amount of interest income on average
interest-earning assets and the resultant average yield; (ii) the total dollar
amount of interest expense on average interest-bearing liabilities and the
resultant average cost; (iii) net interest income; (iv) interest rate spread;
and (v) net interest margin. Information is based on average daily balances
during the indicated periods. For the purposes of this table, non-accrual loans
have been included in the appropriate average balance category.
For the Three Months Ended September 30,
- ----------------------------------------
2000 1999
--------------------------- ---------------------------
(Dollars in thousands) Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ------ ------- -------- ------
Interest-earning assets:
Interest-earning deposits $ 18,630 $ 308 6.58% $ 21,726 $ 285 5.20%
Trading securities -- -- -- -- -- --
Investment securities(1) 63,672 1,093 6.83 38,621 608 6.25
Mortgage-backed securities (1) 155,086 2,810 7.21 113,832 1,859 6.48
Commercial business loans 149,579 3,618 9.62 105,225 2,220 8.37
Commercial real estate loans (5) 166,918 3,738 8.91 152,461 3,289 8.56
Construction loans 48,936 1,427 11.60 52,724 1,335 10.05
Single family residential real estate loans 38,866 760 7.78 44,109 804 7.23
Consumer loans 38,080 790 8.25 31,274 620 7.87
Lease financing 97,348 2,712 11.08 77,263 2,196 11.28
-------- ------ ----- -------- ------ -----
Total interest-earning assets 777,115 17,256 8.83 637,235 13,216 8.23
-------- ------ ----- -------- ------ -----
Non-interest-earning assets:
Cash 17,270 14,209
Allowance for loan and lease losses (6,651) (4,974)
Other assets 52,753 39,303
-------- --------
Total non-interest-earning assets 63,372 48,538
-------- --------
Total assets $840,487 $685,773
======== ========
Interest-bearing liabilities:
Interest-bearing deposits:
NOW and Super NOW $ 95,516 851 3.54 $ 79,027 546 2.74
Money market accounts 37,133 295 3.16 34,767 246 2.81
Passbook and statement savings 29,148 130 1.77 31,857 150 1.87
Time deposits 335,111 5,042 5.99 256,916 3,361 5.19
-------- ----- ----- -------- ------ -----
Total interest-bearing deposits 496,908 6,318 5.06 402,567 4,303 4.24
Short-term borrowings 75,315 1,165 6.15 27,906 527 7.49
Long-term debt 108,270 1,608 5.91 122,034 1,576 5.12
-------- ----- ----- -------- ------ -----
Total interest-bearing liabilities 680,493 9,091 5.31 552,507 6,406 4.60
-------- ----- ----- -------- ------ -----
Non-interest-bearing liabilities:
Non-interest-bearing deposits 70,700 57,660
Other liabilities 18,636 17,973
-------- --------
Total non-interest-bearing liabilities 89,336 75,633
-------- --------
Total liabilities 769,829 628,140
-------- --------
Capital securities 22,009 14,443
Shareholders' equity 48,649 43,190
-------- --------
Total liabilities, capital securities and $840,487 $685,773
shareholders' equity ======== ========
Net interest income: $ 8,165 $ 6,810
======= =======
Interest rate spread (2) 3.52 3.63
Effect of net interest-free funding sources(3) .66 .61
------ ------
Net interest margin (4) 4.18% 4.24%
====== ======
Average interest-earning assets to average 114.20% 115.34%
interest-bearing liabilities ====== ======
(1) Includes investment and mortgage-backed securities classified as available
for sale. Yield information does not give effect to changes in fair values
that are reflected as a component of shareholders' equity.
(2) Represents the difference between the weighted average yield on
interest-earning assets, and the weighted average cost of interest-bearing
liabilities.
(3) Represents the effect on the net interest margin of the difference between
non-interest earning assets and non-interest-bearing liabilities, capital
securities and shareholders equity.
(4) Represents net interest income divided by average interest-earning assets.
(5) Includes loans held for sale.
Net interest income, on a tax-equivalent basis, increased $1.4 million, and the
net interest margin decreased slightly to 4.18% from 4.24%, comparing the three
months ended September 30, 2000 and 1999, despite numerous rate increases by the
Federal Reserve. The Company's cost of funds increased 71 basis points, whereas
its rate on earning assets increased 60 basis points and the positive effect of
net interest-free funding sources increased 5 basis points in comparison with
the three months ended September 30, 1999.
For the Nine Months Ended September 30,
- ---------------------------------------
2000 1999
--------------------------- ---------------------------
(Dollars in thousands) Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ------ ------- -------- ------
Interest-earning assets:
Interest-earning deposits $ 19,127 $ 894 6.24% $ 17,115 $ 645 5.04%
Trading securities 351 -- -- -- -- --
Investment securities(1) 64,914 3,231 6.65 35,188 1,649 6.27
Mortgage-backed securities (1) 135,330 7,336 7.24 125,779 5,953 6.33
Commercial business loans 140,366 9,711 9.24 101,763 6,493 8.53
Commercial real estate loans (5) 168,840 11,148 8.82 144,124 9,291 8.62
Construction loans 53,229 4,279 10.74 48,595 3,654 10.05
Single family residential real estate loans 40,248 2,293 7.61 46,868 2,564 7.31
Consumer loans 36,592 2,207 8.06 30,153 1,781 7.90
Lease financing 93,629 7,874 11.23 74,955 6,309 11.25
-------- ------- ------ -------- ------- -----
Total interest-earning assets 752,626 48,973 8.69 624,540 38,339 8.21
-------- ------- ------ -------- ------- -----
Non-interest-earning assets:
Cash 16,307 14,443
Allowance for loan and lease losses (6,160) (4,705)
Other assets 50,057 33,469
-------- --------
Total non-interest-earning assets 60,204 43,207
-------- --------
Total assets $812,830 $667,747
======== ========
Interest-bearing liabilities:
Interest-bearing deposits:
NOW and Super NOW $ 90,612 2,266 3.34 $ 79,018 1,610 2.72
Money market accounts 36,393 842 3.09 35,180 722 2.74
Passbook and statement savings 30,434 403 1.77 31,924 457 1.91
Time deposits 317,797 13,648 5.74 235,870 9,162 5.19
-------- ------- ------ -------- ------- -----
Total interest-bearing deposits 475,236 17,159 4.82 381,992 11,951 4.18
Short-term borrowings 70,090 3,135 5.97 36,822 1,767 6.42
Long-term debt 111,381 4,812 5.77 123,234 4,904 5.32
-------- ------- ------ -------- ------- -----
Total interest-bearing liabilities 656,707 25,106 5.11 542,048 18,622 4.59
-------- ------- ------ -------- ------- -----
Non-interest-bearing liabilities:
Non-interest-bearing deposits 71,925 54,603
Other liabilities 19,600 14,118
-------- --------
Total non-interest-bearing liabilities 91,525 68,721
-------- --------
Total liabilities 748,232 610,769
-------- --------
Capital securities 16,984 14,438
Shareholders' equity 47,614 42,540
-------- --------
Total liabilities, capital securities and $812,830 $667,747
shareholders' equity ======== ========
Net interest income: $23,867 $19,717
======= ========
Interest rate spread (2) 3.58 3.62
Effect of net interest-free funding sources(3) .66 .60
------ ------
Net interest margin (4) 4.24% 4.22%
====== ======
Average interest-earning assets to average 114.61% 115.22%
interest-bearing liabilities ====== ======
(1) Includes investment and mortgage-backed securities classified as available
for sale. Yield information does not give effect to changes in fair values
that are reflected as a component of shareholders' equity.
(2) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets, and the weighted average cost of
interest-bearing liabilities.
(3) Represents the effect on the net interest margin of the difference between
non-interest earning assets and non-interest-bearing liabilities, capital
securities and shareholders equity.
(4) Net interest margin represents net interest income divided by average
interest-earning assets.
(5) Includes loans held for sale.
Net interest income, on a tax-equivalent basis, increased $4.2 million and the
net interest margin increased slightly to 4.24% from 4.22%, comparing the nine
months ended September 30, 2000 and 1999. The Company has effectively managed
its increasing cost of funds by deploying capital into higher yielding
investments and variable rate loans. Average loans and leases increased $86.4
million and investment securities increased $29.7 million comparing the nine
months ended September 30, 2000 to the same period in 1999. The Company's cost
of funds increased 52 basis points, whereas its rate on earning assets increased
48 basis points and the positive effect of net interest-free funding sources
increased 6 basis points in comparison with the nine months ended September 30,
1999.
Provision for Loan and Lease Losses
During the three months ended September 30, 2000, the Company recorded a
$517,000 provision for loan and lease losses; a decrease of $141,000 compared
with the same period in 1999. The decrease in the provision was the result of a
significant decrease in delinquencies, partially offset by a slight increase in
nonaccrual loans and leases and loan and lease growth compared to the three
months ended September 30, 1999.
During the nine months ended September 30, 2000, the Company recorded a $2.8
million provision for loan and lease losses compared with $2.3 million for the
comparable period in 1999. The increase of $427,000 was the result of a large
commercial business loan liquidation and partial charge-off during the first
quarter of 2000, loan and lease growth, and a more aggressive charge-off policy
implemented in the second quarter of 1999 for the lease portfolio.
At September 30, 2000, the allowance for loan and lease losses amounted to $6.5
million or 1.16% of total loans and leases and 149.79% of total non-performing
loans and leases. At December 31, 1999, the allowance for loan and lease losses
amounted to $5.9 million or 1.18% of total loans and leases and 103.96% of total
non-performing loans and leases.
Non-interest Income
Non-interest income for the three months ended September 30, 2000 amounted to
$4.2 million, compared to $5.7 million for the same period in 1999. The Company
recognized a $103,000 loss from client warrants during the 2000 period primarily
due a decrease in the market value of warrants held to acquire common stock
compared to a gain of $2.8 million in the same period of 1999 primarily the
result of the expiration of restrictions on the sale of warrants to acquire
common stock. Management fees increased $520,000, which were primarily generated
by the Company's subsidiary Progress Capital Management, Inc. ("PCM"), which
manages the mezzanine debt and venture capital funds. Mutual fund, annuity and
insurance commissions increased $343,000 over the three months ended September
30, 1999. Consulting fees of $193,000 were generated during the three months
ended September 30, 2000 by the Company's subsidiary KMR Management, Inc.
("KMR"), which provides financial and operational management consulting services
for commercial clients. These gains were partially offset by a net decrease of
$503,000 in the equity of unconsolidated subsidiaries primarily due to
unrealized gains in the mezzanine and venture capital funds during the third
quarter of 1999.
Non-interest income for the nine months ended September 30, 2000 amounted to
$13.0 million compared to $11.5 million for the same period in 1999. The Company
recognized $3.5 million of client warrant income during the 2000 period due to
the expiration of restrictions on the sale of warrants to acquire common stock
of Internet Capital Group, US Interactive, Inc., and EMAX Solutions Partners,
Inc. The Company recognized $3.3 million of client warrant income during the
1999 period due to the expiration of restrictions on the sale of warrants to
acquire common stock of Internet Capital Group. Management fees increased $1.3
million, which were primarily generated by the Company's subsidiary PCM, which
manages the mezzanine debt and venture capital funds. Mutual fund, annuity and
insurance commissions increased $1.1 million over the nine months ended
September 30, 1999. Consulting fees of $537,000 were generated during the nine
months ended September 30, 2000 by the Company's subsidiary KMR, which provides
financial and operational management consulting services for commercial clients.
Service charges on deposits increased $209,000 over the nine months ended
September 30, 1999. Other Bank related fees increased $254,000 over the nine
months ended September 30, 1999. These gains were partially offset by a net
decrease of $2.6 million in the equity of unconsolidated subsidiaries primarily
due to unrealized losses in the mezzanine and venture capital funds during the
nine months ended September 30, 2000. These losses represent a partial reversal
of unrealized gains reported in the third and fourth quarter of 1999.
Non-interest Expense
Total non-interest expense was $9.2 million for the three months ended
September 30, 2000 compared to $9.1 million for the three months ended September
30, 1999. Excluding non-recurring expenses of $1.1 million in the three months
ended September 30, 1999 associated with a leasing acquisition and unrelated
adjustments, non-interest expense increased $1.0 million. This increase was
primarily due to increases in salaries and employee benefits of $512,000 as a
result of additional employees to staff three new bank branches, the recent
acquisition of KMR, the staffing of PCM and from other new positions established
within the Company. Occupancy and furniture, fixtures and equipment expenses
increased $303,000 mainly due to a new operations center, bringing data
processing in-house and new branch openings. Capital securities expense
increased $138,000 due to the issuance of $6.0 million of 11.455% capital
securities in July 2000. Excluding non-recurring expenses, other non-interest
expense increased $346,000 primarily due to a $164,000 increase in advertising
expense, $77,000 increase in loan expense and a $62,000 increase in other real
estate owned expenses.
Total non-interest expense was $27.5 million for the nine months ended September
30, 2000 compared to $22.6 million for the nine months ended September 30,1999.
Excluding non-recurring expenses of $251,000 in the 2000 period related to
conversion costs and $1.1 million in the 1999 period associated with a leasing
acquisition and unrelated adjustments, non-interest expense increased $5.8
million. This increase in non-interest expense was primarily due to increases in
salaries and employee benefits of $3.2 million as a result of additional
employees to staff new bank branches, the recent acquisition of KMR, the
staffing of PCM and from other new positions established within the Company.
Occupancy and furniture, fixtures and equipment expenses increased $1.2 million
mainly due to a new operations center, bringing data processing in-house and new
branch openings. Data processing expense, excluding $74,000 in conversion
related expenses, decreased slightly due to bringing operations in-house.
Professional services expense, excluding $31,000 in conversion related expenses
in 2000, increased $306,000 primarily due to consulting costs associated with
the business generated by the Company's subsidiaries PCM and KMR; and legal
costs associated with aggressive collection efforts on charged-off loans and
leases. Capital securities expense increased $139,000 primarily due to the
issuance of $6.0 million of 11.455% capital securities in July 2000. Other
non-interest expense, excluding non-recurring conversion related expenses of
$111,000 in 2000 and non-recurring expenses in 1999 of $1.1 million associated
with a leasing acquisition and unrelated adjustments, increased $977,000. This
increase was mainly due to a $356,000 increase in advertising expense, a
$312,000 increase in loan expense, a $101,000 increase in state franchise and
capital stock taxes and a $71,000 increase in goodwill amortization as the
Company expanded its non-banking businesses, increased loan volume and opened
three new bank branches and a new operations center since September 30, 1999.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For information regarding market risk, see the Company's Annual Report on Form
10-K for the year ended December 31, 1999, Item A, filed with the Securities
and Exchange Commission on March 29, 2000. The market risk of the Company has
not experienced any significant changes as of September 30, 2000.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in routine legal proceedings occurring in the ordinary
course of business which management, after reviewing the foregoing actions with
legal counsel, is of the opinion that the liability, if any, resulting from such
actions will not have a material effect on the financial condition or results of
operations of the Company.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits
(27) Financial Data Schedule for the nine months ended September 30, 2000
(b) Reports on Form 8-K
On August 28, 2000, the Company filed a Current Report on Form 8-K with the
Securities and Exchange Commission reporting under Item 5 the announcement
that Stephen T. Zarrilli has joined the Board of Directors.
On August 28, 2000, the Company filed a Form 8-K reporting under Item 5 the
declaration and increase of its third quarter cash dividend to $.06 per
share and the declaration of a 5% stock dividend.
On August 28, 2000, the Company filed a Form 8-K reporting under Item 5 the
issuance of 6,000 shares of Trust Preferred Securities.
On August 29, 2000, the Company filed a Form 8-K reporting under Item 5 the
announcement of its second quarter earnings.
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.
Progress Financial Corporation
November 9, 2000 /s/ W. Kirk Wycoff
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Date W. Kirk Wycoff, Chairman, President and
Chief Executive Officer
November 9, 2000 /s/ Michael B. High
- --------------------------- --------------------------------------------
Date Michael B. High,
Executive Vice President and
Chief Financial Officer