PROGRESS FINANCIAL CORPORATION
believe
in
progress
[ARTWORK APPEARS HERE]
PROFILE
Progress Financial Corporation is a unitary thrift holding company headquartered
in Blue Bell, Pennsylvania. Our primary business, Progress Bank, is a federally
chartered stock savings bank serving consumers and businesses through
full-service offices in Bridgeport, Conshohocken, Jeffersonville, King of
Prussia, Lansdale, Norristown, Paoli, Plymouth Meeting, Rosemont and the Andorra
community of Philadelphia, Pennsylvania.
The Bank has active lending programs to meet the needs of businesses, real
estate investors and builders in its market area. Additionally, a specialized
lending division has been established to provide loans and venture capital to
venture-backed and emerging growth companies. The Bank also provides equipment
leasing for small and medium sized companies through its subsidiaries Quaker
State Leasing Company and The Equipment Leasing Company.
The Company conducts commercial mortgage banking and brokerage services,
property management, and asset management through its subsidiaries Progress
Realty Advisors, L.P., Alliance Realty Services, LLC and Progress Asset
Management Company.
Progress Financial Corporation's stock is traded on the NASDAQ Stock Market
under the symbol "PFNC."
MISSION STATEMENT
We will be a diversified banking company which strives to maximize shareholder
value by achieving excellent financial performance. We will distinguish
ourselves by providing outstanding service to customers. Our focus will be to
provide credit, investment and associated financial products to individuals and
small business in our targeted market areas. We will provide a challenging and
rewarding environment to our employees.
TABLE OF CONTENTS
Financial Highlights ...................................................... 1
Letter to Shareholders .................................................... 2
Progress Bank ............................................................. 4
Quaker State Leasing Company .............................................. 6
The Equipment Leasing Company ............................................. 7
Progress Realty Advisors, L.P. ............................................ 8
Progress Asset Management Company ......................................... 8
Selected Consolidated Financial Data ...................................... 9
Management's Discussion and Analysis ...................................... 10
Financial Statements and Notes ............................................ 19
Independent Accountants' Report ........................................... 38
Market Information ........................................................ 39
Information for Shareholders .............................................. 40
FINANCIAL HIGHLIGHTS
(In thousands)
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Income 1996 1995 Change
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Net interest income $ 13,439 $ 11,234 19.63%
Provision for possible loan and lease losses 687 625 9.92
Other income 4,859 2,265 114.53
Other expense* 13,783 12,071 14.18
Income before income taxes* 3,828 803 376.71
Net income 1,253 2,671 (53.09)
Per share
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Net income .32 .79 (59.49)%
Book value 5.33 5.00 6.60
Stock price
High 8 3/4 6 1/4
Low 5 1/4 4 1/4
Balances at December 31,
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Assets 383,649 345,394 11.08%
Earning assets 348,298 326,911 6.54
Loans and leases 251,562 221,650 13.50
Deposits 306,248 297,260 3.02
Stockholders' equity 19,954 16,407 21.62
Selected ratios
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Return on average assets* .68% .76%
Return on average stockholders' equity* 12.88 18.62
Net interest margin 3.99 3.37
Average stockholders' equity to average assets 5.29 4.08
Non-performing assets as a percentage of total assets .91 1.33
*Excludes 1996 SAIF assessment, which is discussed on page 10.
[BAR CHART APPEARS HERE]
(in thousands) 1994 1995 1996
Loans and Leases $205,771 $221,650 $251,562
Deposits $283,958 $297,260 $306,248
Fee Income $ 2,105 $ 2,598 $ 3,590
Net Interest Income $ 10,325 $ 11,234 $ 13,439
1
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To Our Shareholders
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[PICTURE OF W. KIRK WYCOFF APPEARS HERE]
I am delighted to report that in 1996, Progress Financial Corporation and
Progress Bank achieved the earnings levels projected in prior years, and
attained recognition as a full-service banking institution.
On a pre-tax, SAIF-adjusted basis, our income was $3.8 million in 1996, up from
$.8 million in 1995. Excluding the SAIF charge of $1.8 million, we earned $.63
per share. Reflecting this earnings performance, our stock appreciated by 48.9%
in 1996, and in July, the Company declared its first quarterly dividend in six
years. Sound reasons indeed to "Believe in Progress".
All of our employees have worked diligently to make our success possible.I would
like to thank each of them for their commitment and dedication to our company.
1996 was a year of expansion and innovation for Progress Financial Corporation.
To signify our strength and project a unified image of a multi-faceted financial
services group, the Corporation adopted the new logo you now see, which is
shared by all of its subsidiaries. In 1997, Progress Financial Corporation's
mission is to advance along the growth path of a diversified financial
institution. We continue to review opportunities to add to our growing non-bank
business lines, which now include equipment leasing, commercial mortgage
banking, asset management and venture capital.
To manage our growth and diversification, we added four key executives:
Frederick Schea, Senior VP and CFO; Steve Hobman, Senior VP of Specialized
Lending; Jeane Coyle, Senior VP of Consumer Banking; and Georgann McKenna, Vice
President of Human Resources. These veteran commercial bank officers join a
talented team that continues to make our success possible.
The rise of Progress Bank from a traditional savings and loan to a full-service
commercial bank is signified by the growth of our business loans and customer
accounts, the opening of a tenth full-service retail office in Lansdale PA, and
the launch of two state-of-the art cash management products: Progress
Connect(R), which lets individuals and businesses bank via computer, and a new
Progress Performance(R) account which delivers higher returns on business
checking accounts via automated fund transfers into highly competitive,
short-term investment vehicles.
Our successful business lending initiative resulted in 63 new full-service
customer relationships in 1996. Our construction division financed 231 new
homes. A new Specialized Lending Division now offers customized loans to
leading-edge companies in medicine, biotechnology, telecommunications, insurance
and other areas.
At Progress Bank, lending, new customer development and service remain our
central focus. Many new customers report frustration with recent bank mergers,
and come to us seeking more responsive service. The benefits of cultivating
personal relationships, entrepreneurial vision and a broad range of innovative
products are evident in our core deposit growth of 15.2% and our non-residential
loan growth of 45.0%. Expanded marketing and lending initiatives, and the
planned addition of new loan officers, should enable our lending group to reach
$100 million in new loans in 1997.
In addition, two new subsidiaries were formed by Progress Financial Corporation
in 1996 to further our goal of providing full lending, investment and investment
banking services to our customers:
Progress Asset Management Company (PAM), a newly formed Registered Investment
Advisor, began handling customers' short-term cash investment needs in late `96
under the direction of Terry J. Soffera. We look forward to adding additional
investment options to serve our customers in `97.
Progress Capital, Inc. (PCI) is the corporate general partner of our newly
announced $10 million venture fund, co-sponsored by the Ben Franklin Technology
Center of Southeastern PA. The fund will target early-stage Pennsylvania
companies with proven, innovative products. PCI will also develop investment
banking and capital markets expertise to
2
serve current and future bank clients. PCI is able to structure existing loan
facilities with the Bank and other financial institutions.
THE FUTURE IS NOW. Free market capitalism has given non-banks and Government
Sponsored Entities opportunities to deliver traditional banking products in a
low-cost environment, capturing our market share and stimulating radical changes
in the banking industry. We expect that Glass-Steagall reform will happen in
1997 or 1998, and the merger of banking and commerce will begin.
We are positioning Progress Financial Corporation to compete and win in that
environment. I expect banks and insurance companies to be bought by each other.
Securities firms as we now know them may become the consumer banks of the
future. For all these reasons, our strategy is to capitalize on our ability to
judge, accept and monitor credit risk coupled with the relationship selling
philosophy that appeals to middle-market businesses, individuals and
entrepreneurs.
We remain cautious about the trend toward bank consolidation. The cost to
customers, communities and employees is high while shareholder appreciation is
often a one-time event. Our goal for every stakeholder in Progress is to benefit
from using our products and services to help them progress in their lives and
businesses, which equal profits for shareholders. Our industry cannot continue
to grow earnings by cost-cutting and in-market expansion. Industry leaders must
steer toward the new financial services industry being created by the
marketplace, deregulation and technology. Technology and telecommunications
continue to have a profound effect on how we deliver financial products to our
niche customers. Progress is committed to implementing the latest technology in
order to improve customer service and lower costs, so that we can price our
products more attractively. New investments to upgrade the Bank's core systems
in 1997 will ensure that we can reach more ambitious targets in 1998.
Our goal is to make Progress the best place for our customer to bank or engage
in any number of financial transactions. That goal exists today for our many new
customers, and those whom we have yet to reach. For shareholders, that goal
translates into earnings, capital appreciation and customer satisfaction.
Lastly, we believe that the best is yet to come at Progress.
W. Kirk Wycoff,
Chairman
[PICTURE OF PROGRESS FINANCIAL CORPORATION BOARD OF DIRECTORS APPEARS HERE]
Progress Financial Corporation Board of Directors--
Sitting from left to right: William O. Daggett, Jr., W. Kirk Wycoff, Janet E.
Paroo, Charles J. Tornetta.
Standing from left to right: John E.F. Corson, William L. Mueller, H. Wayne
Griest, Joseph R. Klinger, Paul M. LaNoce.
Not present: Donald F.U. Goebert, A. John May, III.
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PROGRESS BANK
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COMMERCIAL BANKING
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The Commercial Banking division understands business so well because it is a
small business. Its entrepreneurial spirit is ideally suited to the needs of our
middle-market and small business clients. Our account executives work tirelessly
to understand the companies they serve, to customize lending, depository and
investment products to their needs, and to vigorously represent their interests
within the Bank. Such entrepreneurship fosters relationships that utilize the
full business and financial expertise of our lenders, adding value to our
products and building lasting "interactive" partnerships.
New in 1996 was "Progress Connect/(R)/," the on-line banking system which
enables business customers to manage their daily cash flow more effectively than
ever before. No other bank our size offers anything like it. A new Progress
Performance Account was also introduced to meet the sophisticated cash flow
needs of businesses. "Progress Performance" cash management maximizes returns on
business checking accounts by enabling corporate and institutional customers to
automatically transfer excess funds into highly competitive short-term
investments. For companies without the time to transfer money between accounts
or manage short-term investments, Progress Performance insures that money never
stands idle.
Last year was a time of real growth, with a total of $75 million in new loans
for working capital, real estate and new construction. Business checking
accounts swelled from $17 to $25 million. To meet equally ambitious goals for
1997, we plan to add more commercial loan officers to our team.
[PICTURE APPEARS HERE]
PROGRESS PCPAY AND TELEPAY, NEW FOR 1996, MAKE IT EASY TO PAY BILLS BY PERSONAL
COMPUTER OR TOUCHTONE PHONE. IN 1997, LOOK FOR SYSTEM ENHANCEMENTS TO GIVE
CUSTOMERS EVEN GREATER CONTROL OF THEIR MONEY.
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CONSUMER BANKING
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Progress Bank's 100 year tradition of personal involvement is now complemented
by a sophisticated array of financial services rarely found in smaller banks,
and by aggressive new product development.
In 1996 Progress Bank opened its tenth full-service office in Lansdale, PA. The
continued expansion of our retail network will better serve current customers
and attract new business. Also new for 1996 were Progress PCPay and TelePay.
PCPay makes it easy to pay bills by personal computer--even up to a year in
advance. TelePay gives customers the same flexibility with a touchtone phone.
Progress will also introduce a new VISA check card this year. Not a credit card,
purchases are drawn from a Progress Bank checking account and detailed on the
account statement. The check card is also a MAC (ATM) card, so you can use it to
get cash, make deposits, inquire about account information and make purchases.
To all those tired of banks changing names, Progress is more than a safe haven;
it is the bank you choose for life.
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SPECIALIZED LENDING DIVISION
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The Specialized Lending Division (SLD) was launched last year to meet the
distinctive financial needs of specific industries, including technology,
healthcare, medical devices, technology information and insurance. The dynamics
of these industries provide many opportunities for Progress to deliver a full
complement of financial products. Already, SLD has created $15 million of credit
relationships and more than $10 million in deposit relationships. The
Specialized Lending Division has engineered customized financing packages and
delivered integrated banking solutions for many venture-backed, emerging growth
companies such as ViroPharma, Inc., a newly public biotech firm and Quadritek
Systems, developers of software for corporate intranets.
[PICTURE OF PROGRESS BANK MANAGEMENT TEAM APPEARS HERE]
Progress Bank Management Team--
Seated from left to right: W. Kirk Wycoff, Eric J.Morgan, Steven D. Hobman.
Standing:Robert J.Bifolco, Jeane M. Coyle, Frederick E.Schea.
[PICTURE APPEARS HERE]
"OUR AMBITIOUS NEW MARKETING EFFORT HIGHLIGHTS OUR COMMITMENT TO INDEPENDENCE,
TO OUR CUSTOMERS AND COMMUNITIES, AND TO MAINTAINING THE BEST PRODUCTS
AVAILABLE--NOW AND IN THE FUTURE."
[PICTURE APPEARS HERE]
5
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LEASING
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QUAKER STATE LEASING COMPANY
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The success and rapid growth of Quaker State Leasing Company (QSLC) demonstrates
both the vitality of its sales team and the vigor of the $140 billion leasing
marketplace--the fastest growing segment of the business finance market. Leasing
is now a key financial tool for more than 70% of America's businesses. And last
year, Quaker State Leasing Company led the charge by completing 225 leases worth
$7.0 million. Further expansion and new business from loyal customers should
increase our 1997 production significantly.
Businesses, of every type and size, lease equipment to conserve working capital,
free lines of credit, sidestep obsolescence and reduce tax liability. QSLC
creates successful leasing terms for phone systems, furniture, computers,
landscaping and construction equipment, graphics systems and medical equipment,
as well as municipal leasing. That's a wealth of expertise. A promising synergy
between QSLC and the Commercial and Specialized Lending Divisions of Progress
Bank makes QSLC an attractive single source for working capital and leased
equipment.
QSLC's leases range from $5,000 to $1,000,000 with an average size of $50,000.
In this arena, where creative professionalism and responsive service mean more
than a quarter of a point, QSLC is a fierce competitor. QSLC supports local
businesses and regional firms, end users as well national and regional
manufacturers and distributors--such as U.S. Municipal Supply, a mid-Atlantic
supplier of construction equipment.
QSLC will continue to service retail and business customers, with a strong focus
on vendor financing--markets which place a premium on superior service. One new
market that satisfies this criteria is upscale auto leasing, and QSLC has
stepped in to support several Porsche, Mercedes, BMW and Audi dealerships.
LEASING CAPABILITIES GREW SIGNIFICANTLY IN 1996 THANKS TO AGGRESSIVE PORTFOLIO
GROWTH BY OUR SUBSIDIARY, QUAKER STATE LEASING COMPANY, AND BY THE ACQUISITION
OF THE EQUIPMENT LEASING COMPANY OF TIMONIUM, MD.
[PICTURE APPEARS HERE]
[PICTURE APPEARS HERE]
6
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THE EQUIPMENT LEASING COMPANY
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On October 1, 1996 the Bank acquired The Equipment Leasing Company (ELC).
Founded in 1969, ELC's customer base reaches from Pennsylvania to Florida, with
a recent expansion into Ohio and a strong presence in Atlanta's burgeoning
market. Repeat business comprises nearly 40% of ELC's $23 million portfolio,
which consists of 1,900 active customers ranging from small entrepreneurial
accounts to Fortune 500 companies. Average lease size is $13,000. A unique
telesales approach enables ELC to operate efficiently and produce results that
meet our corporate return on equity objectives. We anticipate healthy growth for
this new addition as it becomes fully integrated into the Progress family.
[PICTURE APPEARS HERE]
[PICTURE OF QSLC & ELC MANAGEMENT TEAM APPEARS HERE]
Sitting from left to right: H. Wayne Griest, Dennis M. Horner, Scott A. Wheeler.
Standing from left to right: Kenneth R. Collins Jr. and Donald P. Kennedy.
leasing
THE EQUIPMENT LEASING COMPANY BUILT A $23 MILLION PORTFOLIO BY PROVIDING LEASES
IN THE $10-50,000 RANGE TO SMALL BUSINESSES AND FORTUNE 500 COMPANIES. NEARLY
40% OF THE PORTFOLIO IS REPEAT BUSINESS.
[PICTURE APPEARS HERE]
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COMMERCIAL MORTGAGES
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PROGRESS REALTY ADVISORS, L.P.
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Despite the most competitive mortgage market in a decade, Progress Realty
Advisors, L.P., (PRA) our full-service commercial mortgage banking subsidiary,
again placed over $100 million in real estate financing in 1996. Among the
eighteen projects financed were the Concord Square Shopping Center, Wilmington
DE ($22.5 million), Seven Oaks Apartments in West Chester PA ($9.4 million) and
One Montgomery Office Building in Norristown PA ($12 million).
In 1996, Progress Realty Advisors also acquired Alliance Realty Services LLC, an
asset and property management firm. From its headquarters in Philadelphia's Land
Title Building, Alliance manages more than a million square feet of office and
retail property.
PRA's Healthcare Capital Group, founded in 1995 to help health care firms
select, structure and negotiate real estate financing, continued to expand its
market presence via financing for medical equipment, taxable and tax-exempt
bonds, medical accounts receivable and project financing for long-term and
senior care providers, hospitals and physician groups.
Anticipating strong construction and permanent mortgage activity in 1997, PRA
plans to expand our professional team into Central Pennsylvania and the Lehigh
Valley.
[PICTURE OF SEVEN OAKS APARTMENTS APPEARS HERE]
Established in 1993 to underwrite, structure and place commercial mortgage loans
on income-producing and owner-occupied properties throughout the Delaware
Valley, PRA also originates and services larger mortgages for outside
correspondents, particularly insurance companies.
[PICTURE OF PRA MANAGEMENT TEAM APPEARS HERE]
PRA Management Team--
Seated from left to right: H. Wayne Griest, Francis W. Ashmore
Standing: Robert A. Jacoby
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ASSET MANAGEMENT
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PROGRESS ASSET MANAGEMENT COMPANY
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In October, Progress Asset Management Company, a registered investment advisor,
was formed to provide short-term asset management services for corporate,
institutional and municipal clients. Through active management of customized
portfolios using a Total Return approach, the program provides significant
returns above traditional buy/hold strategies. Together with customized
reporting, complete portfolio accounting capabilities and performance
measurement, Progress Asset Management Company offers the sophistication of Wall
Street with the "user friendliness" of dealing with Progress. Expectations for
1997? New asset management products and a $100 million portfolio by the year's
end.
As a shareholder, you can help us grow by becoming a Customer, and by referring
Progress Bank and its related companies to family, friends and business
associates. We invite you to take full advantage of our excellent products and
services, so that you may truly "Believe in Progress."
[PICTURE APPEARS HERE]
8
Progress Financial Corporation
Selected Consolidated Financial Data
Tabular information is presented in thousands of dollars except for share and per share data.
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December 31, 1996 1995 1994 1993 1992
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Financial Condition
Investment securities:
Available for sale $ 3,462 $ 5,504 $ 4,627 $ - $ -
Held to maturity 1,937 2,149 12,867 4,632 5,260
Mortgage-backed securities:
Available for sale 42,738 36,842 9,103 8,893 25,072
Held to maturity 47,334 52,833 93,673 117,054 60,939
Loans and leases 251,562 221,650 205,771 158,268 153,734
Loans held for sale 599 3,153 351 16,744 2,761
Real estate owned, net 2,150 728 4,534 11,577 27,867
Total assets 383,649 345,394 348,189 333,209 291,542
Deposits 306,248 297,260 283,958 273,583 245,015
Borrowings 50,270 28,400 47,052 40,536 36,071
Stockholders equity 19,954 16,407 13,020 14,788 6,877
Results of Operations
Interest income $ 28,121 $ 26,569 $ 22,830 $ 20,824 $ 21,979
Interest expense 14,682 15,335 12,505 11,465 13,737
Net interest income 13,439 11,234 10,325 9,359 8,242
Provision for possible loan and lease losses 687 625 521 368 275
Net interest income after provision for possible
loan and lease losses 12,752 10,609 9,804 8,991 7,967
Other income 4,859 2,265 1,545 2,226 5,617
Other expense 15,596 12,071 12,065 11,568 12,232
Income (loss) before income taxes (benefit) 2,015 803 (716) (351) 1,352
Tax expense (benefit) 762 (1,868) -- (1,034) 74
Net income (loss) $ 1,253 $ 2,671 $ (716) $ 683 $ 1,278
Per Share Data
Net income (loss) $ .32 $ .79 $ (.22) $ .29 $ 1.27
Dividends .04 -- -- -- --
Book value 5.33 5.00 3.98 4.52 6.81
Operating Data
Return on average assets .35% .76% (.21)% .21% .42%
Return on average stockholders' equity 6.59 18.62 (5.24) 6.25 20.93
Average stockholders equity to average assets 5.29 4.08 4.01 3.42 1.99
Allowance for possible loan and lease losses to total
loans and leases 1.25 .76 .72 1.19 1.70
Non-performing assets as a percentage of total assets .91 1.33 2.61 5.29 11.95
Interest rate spread 3.60 3.07 3.04 3.26 3.47
Net interest margin 3.99 3.37 3.23 3.25 3.13
Dividends declared as a percent of net income per share 12.50 -- -- -- --
Branch Data
Number of full service branches 10 9 8 8 7
9
Progress Financial Corporation
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Management's Discussion and Analysis of Financial Condition
and Results of Operations
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This discussion and analysis should be read in conjunction with the Consolidated
Financial Statements and related notes.
Progress Financial Corporation (the "Company") is a unitary thrift holding
company that has four subsidiaries: Progress Bank (the "Bank"), Progress Realty
Advisors, L.P. ("PRA"), Progress Capital, Inc., ("PCI"), and Progress Asset
Management Company ("PAM"). On October 1, 1996 the Bank acquired all of the
outstanding stock of The Equipment Leasing Company, Timonium, Maryland. The
Equipment Leasing Company primarily leases computer and telecommunications
equipment.
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. Certain reclassifications have been
made to prior years' data throughout the following discussion and analysis for
comparability with 1996 data.
RESULTS OF OPERATIONS
The Company reported income before income taxes of $2.0 million for the year
ended December 31, 1996, in comparison with income before tax of $803,000 and a
loss of $716,000 for the years 1995 and 1994. The results for 1996 are after a
special one-time assessment for the Savings Association Insurance Fund ("SAIF")
of $1.8 million.
The Company reported net income of $1.3 million for the year ended December
31, 1996 in comparison with net income of $2.7 million and a net loss of
$716,000 for the years 1995 and 1994, respectively. The earnings per common
share were $.32 for 1996 in comparison with earnings per common share of $.79
for 1995, and a loss per common share of $.22 for 1994. Return on average
stockholder's equity was 6.59% and return on average assets was .35% for the
year ended December 31, 1996. Excluding the SAIF assessment, return on average
assets was .68% and return on average stockholders' equity was 12.88%. For 1995,
return on average stockholders' equity was 18.62% and return on average assets
was .76%. Loss on average stockholders' equity was 5.24% and loss on average
assets was .21% for 1994.
Results for 1996 reflect a higher net interest income of $13.4 million, in
comparison with $11.2 million and $10.3 million for 1995 and 1994, respectively.
Results for 1996 also include $687,000 in provision for possible loan and lease
losses in comparison with $625,000 and $521,000 for 1995 and 1994, respectively.
Other income amounted to $4.9 million for 1996, a $2.6 million increase over the
$2.3 million earned in 1995, and a $3.4 million increase over the $1.5 million
reported in 1994. Other income increased in 1996 in comparison with 1995,
primarily due to gains from the sales of mortgages and mortgage servicing
rights. Additionally, lease financing fees increased in comparison to 1995.
Other expense amounted to $15.6 million for 1996, a $3.5 million increase over
the $12.1 million reported in 1995 and 1994. The increase in 1996 is primarily
due to the special assessment of $1.8 million to capitalize SAIF. Deposit
insurance premiums in 1997 will be 6.48 cents per $100 of deposits, compared to
an average of 27.49 cents per $100 of deposits in 1996. Based on the Bank's
average deposits in 1996, deposit insurance savings will approximate $600,000 in
1997. The increase in salaries and benefits were due to the acquisition of The
Equipment Leasing Company and staffing additions to support the Bank's lending
initiative. Results for 1996 include income tax expense of $762,000 compared to
an income tax benefit of $1.9 million in 1995 and no income tax expense or
benefit in 1994.
Net Interest Income
Net interest income totalled $13.4 million, $11.2 million and $10.3 million
for the years ended December 31, 1996, 1995 and 1994, respectively. The $2.2
million increase in net interest income in 1996 compared to 1995 was due to a
$3.8 million increase in total average interest-earning assets, combined with a
$2.7 million decrease in total average interest-bearing liabilities. The
increase in total average interest-earning assets was primarily due to a $9.7
million, $8.9 million, and $8.8 million increase in construction loans,
commercial real estate loans and commercial business loans, respectively. In
addition, lease financing and consumer loans increased by $6.4 million and $1.8
million on average. These increases were partially offset by decreases of $18.0
million, $10.4 million, and $3.4 million in single-family residential loans,
investment securities, and mortgage-backed securities, respectively. The
Company's interest rate spread increased 53 basis points in 1996, compared to
1995 (with 100 basis points equaling 1.0%) due to a 37 basis point increase in
the rate on earning assets combined with a 16 basis point decline in the rate on
interest-bearing liabilities.
The $909,000 increase in net interest income in 1995 compared to 1994, was due
to a $13.5 million increase in total average interest-earning assets, which was
partially offset by a $7.7 million increase in total average interest-bearing
liabilities. The increase in total average interest-earning assets was primarily
due to a $17.6 million and $6.8 million increase in average mortgage loans and
average other loans, respectively, which were partially offset by a $13.4
million decrease in average mortgage-backed securities. The Company's interest
rate spread increased 3 basis points in 1995, compared to 1994, primarily due to
a 78 and 75 basis point increase in yield on mortgage loans and mortgage-backed
securities which were partially offset by a 70 and 137 basis point increase in
rates on deposits and FHLB advances, respectively.
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The following table sets forth, for the periods indicated, information
regarding (i) 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.
Distribution of Average Assets, Liabilities and Stockholders Equity
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For the years ended December 31, 1996 1995
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Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
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Interest-earning assets:
Investment securities and other
interest-earning assets (1) $ 8,964 $ 585 6.48% $ 19,364 $ 1,235 6.33%
Mortgage-backed securities (1) 96,959 6,443 6.60 100,377 6,598 6.55
Single family residential loan (2) 77,360 6,035 7.80 95,355 7,022 7.36
Commercial real estate loans 84,101 7,991 9.50 75,241 7,515 9.99
Construction loans 18,106 2,050 11.32 8,383 952 11.35
Commercial business loans 22,443 2,213 9.86 13,651 1,426 10.45
Lease financing (3) 6,419 846 13.18 -- -- --
Consumer loans 22,724 1,958 8.61 20,895 1,821 8.72
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Total interest-earning assets 337,076 28,121 8.34 333,266 26,569 7.97
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Non-interest-earning assets 22,872 18,274
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Total assets $359,948 $351,540
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Interest-bearing liabilities:
Interest-bearing deposits:
NOW and Super NOW $ 27,977 $ 594 2.12% $ 26,661 $ 716 2.69%
Money market accounts 33,781 1,023 3.03 33,577 1,042 3.10
Passbook and statement savings 28,258 806 2.85 27,290 783 2.87
Time deposits 178,677 9,597 5.37 177,972 9,712 5.46
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Total interest-bearing deposits 268,693 12,020 4.47 265,500 12,253 4.62
Advances from the FHLB 27,901 1,746 6.26 44,177 2,812 6.37
Other borrowings 13,425 916 6.82 3,000 270 9.00
- --------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 310,019 14,682 4.74 312,677 15,335 4.90
- --------------------------------------------------------------------------------------------------------------
Non-interest-bearing liabilities 30,897 24,516
- --------------------------------------------------------------------------------------------------------------
Total liabilities 340,916 337,193
Stockholders' equity 19,032 14,347
- --------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders equity $359,948 $351,540
- --------------------------------------------------------------------------------------------------------------
Net interest income:
Interest rate spread (4) $ 13,439 3.60 $11,234 3.07
- --------------------------------------------------------------------------------------------------------------
Net interest margin (5) 3.99% 3.37%
- --------------------------------------------------------------------------------------------------------------
Average interest-earning assets to
average interest-bearing liabilities 108.73% 106.58%
==============================================================================================================
- ------------------------------------------------------------------------------
1994
- ------------------------------------------------------------------------------
Average Yield/
Balance Interest Rate
Interest-earning assets:
Investment securities and other
interest-earning assets (1) $ 16,939 $ 1,029 6.00%
Mortgage-backed securities (1) 113,819 6,617 5.80
Single family residential loan (2) 84,508 6,201 7.34
Commercial real estate loans 72,277 6,042 8.36
Construction loans 4,554 449 9.87
Commercial business loans 10,658 1,036 9.72
Lease financing (3) -- -- --
Consumer loans 17,055 1,456 8.54
- ------------------------------------------------------------------------------
Total interest-earning assets 319,810 22,830 7.14
- ------------------------------------------------------------------------------
Non-interest-earning assets 20,304
- ------------------------------------------------------------------------------
Total assets $340,114
- ------------------------------------------------------------------------------
Interest-bearing liabilities:
Interest-bearing deposits:
NOW and Super NOW $ 21,932 $ 532 2.43%
Money market accounts 41,428 1,138 2.75
Passbook and statement savings 27,808 820 2.95
Time deposits 168,250 7,678 4.56
- ------------------------------------------------------------------------------
Total interest-bearing deposits 259,418 10,168 3.92
Advances from the FHLB 44,007 2,202 5.00
Other borrowings 1,508 135 8.95
- ------------------------------------------------------------------------------
Total interest-bearing liabilities 304,933 12,505 4.10
- ------------------------------------------------------------------------------
Non-interest-bearing liabilities 21,528
- ------------------------------------------------------------------------------
Total liabilities 326,461
Stockholders equity 13,653
- ------------------------------------------------------------------------------
Total liabilities and
stockholders equity $340,114
- ------------------------------------------------------------------------------
Net interest income:
Interest rate spread (4) $10,325 3.04%
- ------------------------------------------------------------------------------
Net interest margin (5) 3.23%
- ------------------------------------------------------------------------------
Average interest-earning assets to
average interest-bearing liabilities 104.88%
==============================================================================
(1) Includes investment and mortgage-backed securities classified as available
for sale. Yield information does not give effect to changes in fair value
that are reflected as a component of stockholders equity.
(2) Includes mortgage loans held for sale.
(3) Includes lease financing receivables of The Equipment Leasing Company, which
was acquired October 1, 1996. At December 31, 1996, the balance of lease
financing receivables was $25.9 million.
(4) Interest rate spread represents the difference between the weighted average
yield on interest-earnings assets, and the weighted average cost of
interest-bearing liabilities.
(5) Net interest margin represents net interest income divided by average
interest-earning assets.
11
Rate/Volume Analysis
The following table presents the degree to which changes in the Company's
interest income, interest expense and net interest income are attributable to
changes in the average amount of interest-earning assets and interest-bearing
liabilities outstanding and/or to changes in rates earned or paid thereon. The
net change attributable to both volume and rate have been allocated
proportionately. Amounts in brackets represent a decrease in interest income or
expense.
For the years ended December 31, 1996 vs. 1995 1995 vs. 1994
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
Interest-earning assets:
Investment securities and other
interest-earning assets $ (679) $ 29 $ (650) $ 148 $ 58 $ 206
Mortgage-backed securities (208) 53 (155) (825) 806 (19)
Single family residential (1,385) 398 (987) 799 22 821
Commercial real estate loans 855 (379) 476 248 1,225 1,473
Construction loans 1,101 (3) 1,098 413 90 503
Commercial business 871 (84) 787 308 82 390
Lease financing 846 -- 846 -- -- --
Consumer loans 158 (21) 137 334 31 365
Total 1,559 (7) 1,552 1,425 2,314 3,739
Interest-bearing liabilities:
Deposits 146 (379) (233) 243 1,842 2,085
Advances from the FHLB (1,020) (46) (1,066) 9 601 610
Other borrowings 726 (80) 646 134 1 135
Total (148) (505) (653) 386 2,444 2,830
Net interest income $ 1,707 $ 498 $ 2,205 $ 1,039 $ (130) $ 909
------- ------- ------- ------- ------- -------
Interest Income
Total interest income amounted to $28.1 million for 1996, an increase of $1.6
million or 5.8% when compared to 1995. Interest income on construction loans,
commercial business loans and commercial real estate loans increased $1.1
million, $787,000 and $476,000, respectively. The average volume on construction
loans, commercial business loans and commercial real estate loans increased $9.7
million, $8.8 million and $8.9 million, respectively. The average yield on these
loans decreased 3 basis points, 59 basis points and 49 basis points,
respectively. Interest income on lease financing increased $846,000, while
interest income on consumer loans increased $137,000. Interest income on single-
family residential loans decreased by $987,000 as the average volume decreased
$18.0 million. Interest income on investment securities and other interest-
earning assets decreased $650,000 as the average volume decreased $10.4 million.
Interest income on mortgage-backed securities decreased $155,000 in 1996, as the
average volume declined $3.4 million, which more than offset the 5 basis point
increase in average yield.
Total interest income amounted to $26.6 million for 1995, an increase of $3.7
million or 16.4% when compared to 1994. Interest income on commercial real
estate loans and single-family residential loans increased $1.5 million and
$821,000 in 1995, as the average volume on commercial real estate loans and
single-family residential loans increased $3.0 million and $10.8 million,
respectively. The average yield on commercial real estate loans increased 163
basis points while the average yield on single-family residential loans remained
relatively unchanged. Interest income on consumer and commercial business loans
in the aggregate increased $755,000 in 1995, as the average volume and yield
increased $6.8 million and 41 basis points, respectively. Interest income on
investment securities and other interest-earning assets increased $206,000 in
1995, as the average volume and yield increased $2.4 million and 33 basis
points, respectively. Additionally, interest income on mortgage-backed
securities decreased $19,000 in 1995, as the average volume on mortgage-backed
securities declined $13.4 million, which more than offset a 75 basis point
increase in average yield.
Interest Expense
Total interest expense amounted to $14.7 million for 1996, a decrease of
$653,000 or 4.3% when compared to 1995. Interest expense on deposits decreased
$233,000 in 1996, as the average rate on interest-bearing deposits decreased 15
basis points, which was partially offset by a $3.2 million increase in volume.
Interest expense on advances from the FHLB of Pittsburgh decreased by $1.1
million in 1996, as the average rate decreased 11 basis points and average
volume decreased $16.3 million. Interest expense on other borrowings increased
$646,000, due to an increase in volume of $10.4 million.
Rate/Volume Analysis
The following table presents the degree to which changes in the Company's
interest income, interest expense and net interest income are attributable to
changes in the average amount of interest-earning assets and interest-bearing
liabilities outstanding and/or to changes in rates earned or paid thereon. The
net change attributable to both volume and rate have been allocated
proportionately. Amounts in brackets represent a decrease in interest income or
expense.
- ------------------------------------------------------------------------------------------------------------------
For the years ended December 31, 1996 vs. 1995 1995 vs. 1994
- ------------------------------------------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total
- ------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Investment securities and other
interest-earning assets $ (679) $ 29 $ (650) $ 148 $ 58 $ 206
Mortgage-backed securities (208) 53 (155) (825) 806 (19)
Single family residential (1,385) 398 (987) 799 22 821
Commercial real estate loans 855 (379) 476 248 1,225 1,473
Construction loans 1,101 (3) 1,098 413 90 503
Commercial business 871 (84) 787 308 82 390
Lease financing 846 -- 846 -- -- --
Consumer loans 158 (21) 137 334 31 365
- ------------------------------------------------------------------------------------------------------------------
Total 1,559 (7) 1,552 1,425 2,314 3,739
- ------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits 146 (379) (233) 243 1,842 2,085
Advances from the FHLB (1,020) (46) (1,066) 9 601 610
Other borrowings 726 (80) 646 134 1 135
- ------------------------------------------------------------------------------------------------------------------
Total (148) (505) (653) 386 2,444 2,830
- ------------------------------------------------------------------------------------------------------------------
Net interest income $ 1,707 $ 498 $ 2,205 $ 1,039 $ (130) $ 909
- ------------------------------------------------------------------------------------------------------------------
Interest Income
Total interest income amounted to $28.1 million for 1996, an increase of $1.6
million or 5.8% when compared to 1995. Interest income on construction loans,
commercial business loans and commercial real estate loans increased $1.1
million, $787,000 and $476,000, respectively. The average volume on construction
loans, commercial business loans and commercial real estate loans increased $9.7
million, $8.8 million and $8.9 million, respectively. The average yield on these
loans decreased 3 basis points, 59 basis points and 49 basis points,
respectively. Interest income on lease financing increased $846,000, while
interest income on consumer loans increased $137,000. Interest income on
single-family residential loans decreased by $987,000 as the average volume
decreased $18.0 million. Interest income on investment securities and other
interest-earning assets decreased $650,000 as the average volume decreased $10.4
million. Interest income on mortgage-backed securities decreased $155,000 in
1996, as the average volume declined $3.4 million, which more than offset the 5
basis point increase in average yield.
Total interest income amounted to $26.6 million for 1995, an increase of
$3.7 million or 16.4% when compared to 1994. Interest income on commercial real
estate loans and single-family residential loans increased $1.5 million and
$821,000 in 1995, as the average volume on commercial real estate loans and
single-family residential loans increased $3.0 million and $10.8 million,
respectively. The average yield on commercial real estate loans increased 163
basis points while the average yield on single-family residential loans remained
relatively unchanged. Interest income on consumer and commercial business loans
in the aggregate increased $755,000 in 1995, as the average volume and yield
increased $6.8 million and 41 basis points, respectively. Interest income on
investment securities and other interest-earning assets increased $206,000 in
1995, as the average volume and yield increased $2.4 million and 33 basis
points, respectively. Additionally, interest income on mortgage-backed
securities decreased $19,000 in 1995, as the average volume on mortgage-backed
securities declined $13.4 million, which more than offset a 75 basis point
increase in average yield.
Interest Expense
Total interest expense amounted to $14.7 million for 1996, a decrease of
$653,000 or 4.3% when compared to 1995. Interest expense on deposits decreased
$233,000 in 1996, as the average rate on interest-bearing deposits decreased 15
basis points, which was partially offset by a $3.2 million increase in volume.
Interest expense on advances from the FHLB of Pittsburgh decreased by $1.1
million in 1996, as the average rate decreased 11 basis points and average
volume decreased $16.3 million. Interest expense on other borrowings increased
$646,000, due to an increase in volume of $10.4 million.
12
which conform to Federal agency standards for secondary market resale. The
ability to recognize gains from the sales of investment and mortgage-backed
securities and gains from mortgage banking activities is dependent on market and
economic conditions and, accordingly, there can be no assurance that gains
similar to those reported in prior periods will be experienced in the future or
that there will not be significant inter-period variation in the results of such
activities.
Net losses on properties sold amounted to $10,000 in 1996 compared to
$250,000 in 1995. The $240,000 decrease was due to net losses realized from the
Company's disposition of certain REO properties including a $280,000 loss on the
sale of a medical office building in New York during 1995. Fees and other income
includes $334,000 in property management fees, mainly generated by Alliance
Realty, a subsidiary of PRA.
Total other income amounted to $2.3 million in 1995, a $720,000 increase
over the $1.5 million earned in 1994. Mortgage origination and servicing income
increased $28,000 from $713,000 in 1994 to $741,000 in 1995, as total loans
serviced for others amounted to $297.1 million at December 31, 1995, an increase
of $56.3 million over the $240.8 million outstanding at December 31, 1994. In
1995, the Company sold $16.2 million of mortgage loans and purchased the
servicing rights on $67.2 million in mortgage loans for $1.1 million. Service
charges on deposits increased $160,000 in 1995 as compared to 1994 primarily due
to higher volumes of account transactions. Loan brokerage and advisory fees
increased $189,000 from $493,000 in 1994 to $682,000 in 1995, substantially due
to fees earned by the Company's subsidiary, PRA.
Losses from sales of securities amounted to $143,000 in 1995, a $179,000
decrease from the $322,000 of losses in 1994. The decrease was attributable to
improved market conditions in 1995. The securities available for sale portfolio
amounted to $42.3 million, net of $425,000 in net unrealized losses as of
December 31, 1995. Gains from mortgage banking activities amounted to $60,000 in
1995, a $236,000 increase from the $176,000 of losses in 1994.
Net losses on properties sold amounted to $250,000 in 1995 compared to a
loss of $62,000 in 1994. The $188,000 increase was due to losses realized from
the Company's disposition of certain REO properties. Other income increased
$58,000 to $126,000 in 1995 from $68,000 in 1994 primarily due to a $53,000
write-down on a property owned through a joint venture in 1994.
Other Expense
- ----------------------------------------------------------------
December 31, 1996 1995 1994
- ----------------------------------------------------------------
Other expense:
Salaries and employee benefits $ 6,645 $ 4,961 $ 4,363
Occupancy 1,306 1,383 1,292
Data processing 1,137 849 816
Furniture, fixtures,
and equipment 615 575 498
Deposit insurance premiums 2,579 813 820
Provision for real estate
owned, net 25 480 1,576
Loan and real estate
owned expenses, net 107 94 296
Professional services 761 918 809
Other 2,421 1,998 1,595
- ----------------------------------------------------------------
Total other expense $15,596 $12,071 $12,065
================================================================
Total other expense amounted to $15.6 million during 1996, an increase of
$3.5 million from the $12.1 million recognized during 1995. Excluding a special
one-time premium of $1.8 million to capitalize the Savings Association Insurance
Fund ("SAIF"), total other expense would have been $13.8 million, or a $1.7
million increase over 1995. In addition, expenses related to The Equipment
Leasing Company ("ELC"), which was acquired during 1996, or $328,000 are
included in total other expense. Salaries and employee benefits increased $1.7
million, primarily due to the staffing additions to support the Bank's lending
initiatives, and the additional staff increase resulting from the ELC
acquisition. Occupancy expenses decreased $77,000 to $1.3 million in 1996, from
$1.4 million in 1995. This was partially due to the Company relocating their
corporate headquarters during 1996, which resulted in a decrease in rental
expense. Furniture, fixtures, and equipment increased $40,000 to $615,000 in
1996 from $575,000 in 1995, primarily due to expenses resulting from the opening
of the Paoli branch in September 1995. Data processing expense increased
$288,000 during 1996 as the Company outsourced the processing of customer
checking accounts in the fourth quarter of 1995. Deposit insurance premiums
increased $1.8 million to $2.6 million during 1996, due to the special SAIF
assessment.
The provision for REO amounted to $25,000 during 1996, a decrease of
$455,000 from the $480,000 recognized during 1995. The provision for REO in 1995
included a $381,000 write-down on a medical office building in New York and
$56,000 on a Philadelphia property. Loan and REO expenses increased $13,000
primarily due to a negative cash flow from the operation of REO properties and
the expenses of maintaining these properties. Professional services expense,
which consists primarily of legal, accounting, tax and supervisory/examination
fees, decreased
14
$157,000 primarily due to legal expenses associated with an agreement to merge
with another depository institution in 1995. This agreement was subsequently
cancelled in November 1995. Other expenses increased $423,000 to $2.4 million in
1996, from $2.0 million in 1995. This includes increases in marketing and other
general and administrative expenses.
Total other expense amounted to $12.1 million during 1995, an increase of
$6,000 from the $12.1 million recognized during 1994. Salaries and employee
benefits increased $598,000 primarily due to staffing additions to support the
Bank's lending initiatives. Occupancy expenses increased $91,000 to $1.4 million
in 1995 from $1.3 million in 1994 primarily due to the expenses associated with
the Paoli branch office which was opened in September 1995. Furniture, fixtures,
and equipment expense increased $77,000, primarily due to higher system
maintenance costs. Deposit insurance premiums decreased $7,000 during 1995 while
data processing expense increased $33,000.
The provision for REO amounted to $480,000 during 1995, a decrease of $1.1
million, or 69.5% from the $1.6 million recognized during 1994. The provision
for REO in 1994 included a $1.1 million fair value write-down on the Company's
largest REO property, a medical office building in New York. Loan and REO
expenses decreased $202,000, primarily due to the lower level of non-performing
assets, and positive cash flow from the operation of certain REO properties.
Professional services expense increased $109,000, attributed to a terminated
agreement to merge with another depository institution. Other expense increased
$403,000 during 1995. This increase includes a higher level of marketing expense
for deposit and loan promotions and other general and administrative expenses.
Income Tax Expense (Benefit)
The Company recorded income tax expense of $762,000 in 1996 compared to an
income tax benefit of $1.9 million in 1995 and no income tax expense or benefit
in 1994. The deferred tax asset valuation allowance was eliminated in 1995 as a
result of management's determination of the outlook for future taxable income
and the reduction in non-performing assets offset by the potential for a
substantial special SAIF insurance assessment. Net operating loss carryforwards
available for use in future years approximate $6.8 million and expire in the
years 2007 to 2010.
Financial Condition
Asset Liability Management
The major objectives of the Bank's asset and liability management are to
manage exposure to changes in the interest rate environment, ensure adequate
liquidity and funding, preserve and build capital, and to maximize net interest
income opportunities. The Bank manages these objectives through its Asset
Liability and Investment Committees. Each Committee meets monthly to develop
strategies that affect the future level of net interest income, liquidity and
capital. The Committees utilize cash flow forecasts, consider current economic
conditions and anticipate the direction of interest rates, while managing the
Bank's risk to such changes.
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An institution is
considered to be liability sensitive, or as having a negative gap, when the
amount of its interest-bearing liabilities maturing or repricing within a given
time period exceeds the amount of its interest-earning assets also maturing or
repricing within that time period. Conversely, an institution is considered to
be asset sensitive, or as having a positive gap, when the amount of its
interest-bearing liabilities maturing or repricing is less than the amount of
its interest-earning assets also maturing or repricing during the same period.
Generally, in a falling interest rate environment, a negative gap should result
in an increase in net interest income, and in a rising interest rate
environment, a negative gap should adversely affect net interest income. The
converse would be true for a positive gap.
However, shortcomings are inherent in a simplified gap analysis that may
result in an institution with a nominally negative gap having interest rate
behavior associated with an asset sensitive balance sheet. For example, although
certain assets and liabilities may have a similar maturity or periods to
repricing, they may react in different degrees to changes in market interest
rates. Furthermore, repricing characteristics of certain assets and liabilities
may vary substantially within a given time period. In the event of a change in
interest rates, prepayment and early withdrawal levels could also deviate
significantly from those assumed in calculating gap.
Management believes that the simulation of net interest income in different
interest rate environments provides a more meaningful measure of interest rate
risk. Simulation analysis incorporates the potential of all assets and
liabilities to mature or reprice as well as the probability that they will do
so. Simulation in net interest income over a two year period also incorporates
the relative interest rate sensitivities of these items, and projects their
behavior over an extended period of time. Finally, simulation analysis permits
management to assess the probable effects on the balance sheet not only of
changes in interest rates, but also of proposed strategies for responding to
them.
The Bank's simulation model analyzes interest rate sensitivity by
projecting net interest income over the next twelve months in a flat rate
scenario. The flat rate model projects growth in the Bank's loan portfolio and
projects the mix of accounts within the loan portfolio. In addition, the Company
must also make certain assumptions regarding the movement of the rates on its
assets and liabilities, especially its deposit rates.
The Bank projects net interest income in a rising rate scenario of 200
basis points over a twelve month period as well as a 200 basis point decrease in
a declining rate scenario during this same period. The Bank then determines its
interest rate sensitivity by calculating the difference in net interest income
in the rising and declining rate scenarios versus the flat rate scenario. Based
on this analysis at December 31, 1996 the Bank would experience an approximate
.63% increase in net interest income over a one year period if rates rise 200
basis points in comparison to a flat rate scenario and an approximate 1.77%
decrease in net interest income if rates decline 200 basis points.
15
Interest Rate Sensitivity
The following table presents the anticipated maturities or repricing
of the Company's interest-earning assets and interest-bearing liabilities for
various time periods based on the information and the assumptions set forth in
the notes below.
Less than Three months to
December 31, 1996 three months one year One to five years Five to ten years Over ten years
- ------------------------------------------------------------------------------------------------------------------------------------
Yield/ Yield/ Yield/ Yield/ Yield/
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
Interest-earning assets (1)
Interest-earning deposits $ 666 5.27% $ -- --% $ -- --% $ -- --% $ -- --%
Investment securities 5,399 6.41 -- -- -- -- -- -- -- --
Mortgage-backed securities 43,241 7.69 4,527 8.05 32,331 7.83 9,973 8.28 -- --
Mortgage loans 43,715 9.47 24,419 8.72 75,153 8.61 6,680 8.56 24,518 7.62
Consumer loans 7,090 9.43 96 8.27 6,111 8.04 5,093 8.32 5,010 8.46
Commercial business 22,495 9.42 93 8.46 6,529 8.74 1,105 9.34 -- --
Lease financing 2,898 14.81 8,694 14.81 14,220 14.81 91 14.81 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $125,504 8.81% $ 37,829 10.04% $134,344 9.06% $ 22,942 8.45% $ 29,528 7.76%
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities: (2)
Money market deposits $ 2,526 3.19% $ -- --% $ 32,702 3.19% $ -- --% $ -- --%
NOW and Super NOW 2,928 2.06 -- -- 27,033 2.06 -- -- -- --
Passbook and
statement savings 1,711 2.72 -- -- 27,527 2.72 -- -- -- --
Time deposits 57,269 5.21 77,355 5.29 40,240 5.75 421 6.24 -- --
Advances from FHLB -- -- 5,000 7.65 13,000 6.99 -- -- -- --
Other borrowings 4,060 7.41 5,034 6.09 23,176 6.04 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities $ 68,494 5.07% $ 87,389 5.47% $163,678 4.26% $ 421 6.24% $ -- --%
- ------------------------------------------------------------------------------------------------------------------------------------
Excess (deficiency) of
interest-earning assets over
interest-bearing liabilities $ 57,010 $(49,560) $(29,334) $ 22,521 $ 29,528
====================================================================================================================================
Cumulative excess (deficiency)
of interest-earning assets
over interest-bearing
liabilities $ 57,010 $ 7,450 $(21,884) $ 637 $ 30,165
====================================================================================================================================
Cumulative excess (deficiency)
of interest-earning assets
over interest-bearing
liabilities as a percent of
total assets 14.86% 1.94% (5.70)% 0.17% 7.86%
====================================================================================================================================
(1) Adjustable and floating-rate assets are included in the period in which
interest rates are next scheduled to adjust rather than in the period in
which they are due, and fixed-rate loans are included in the periods in
which they are scheduled to be repaid. Balances have been reduced for
non-accrual loans, which amounted to $1.3 million at December 31, 1996.
Mortgage-backed securities and investment securities classified as available
for sale are classified as maturing or repricing in one year or less.
Balances are based on anticipated principal and interest payments with
average earned interest rate on the entire portfolio.
(2) Money market deposits, savings accounts and NOW accounts in the 30-day
period are estimates of deposits which are historically subject to immediate
withdrawal. Remaining balances are historically stable balances which are
placed in the one to five year period. Other borrowings consist of
securities sold under agreement to repurchase, the ESOPnote payable and
subordinated debt which is callable at the option of the Company at any time
after July 1, 1996, and therefore is presented as maturing in the three
month period. If not called, the subordinated debt matures June 30, 2004.
16
Liquidity and Funding
The Bank 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 December 31, 1996, the Bank met all regulatory capital
requirements.
The Bank's need for liquidity is affected by loan demand and net changes in
retail deposit levels. The Bank 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 Bank has limited control. The Bank
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, advances from the FHLB
of Pittsburgh and other borrowings.
The Bank's primary sources of funds have historically consisted of deposits,
amortization and prepayments of outstanding loans, borrowings from the FHLB and
sales of investment and mortgage-backed securities. During 1996, 1995, and 1994,
the Bank 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 year ended
December 31, 1996, cash was provided by operating activities as sales of loans
exceeded loan originations and purchases of loans held for sale. Cash was used
in the Bank's investment activities during 1996, as purchases of mortgage-backed
and investment securities, capital expenditures, and net originations of loans
exceeded repayments on mortgage-backed securities, maturities of investments,
proceeds from sales of mortgage-backed and investment securities, and net
proceeds from sales of real estate owned. Funds provided by financing activities
in 1996 partially offset the cash outflows from investment activities as cash
was provided by increased levels of deposits , increased borrowings and the sale
of 500,000 shares of common stock in January, 1996.
At December 31, 1996, the total of approved loan commitments amounted to
$58.4 million, and the Bank had $45.8 million of undisbursed loan funds. At
December 31, 1996, total FHLB borrowings which are scheduled to mature during
the 12 months ending December 31, 1997, total $5.0 million. At December 31,
1996, total other borrowings, which are scheduled to mature during the 12 months
ended December 31, 1997, totalled $6.1 million. At December 31, 1996, the amount
of time deposits that are scheduled to mature within 12 months total $134.6
million, a substantial portion of which management believes, on the basis of
prior experience, will remain in the Bank.
For the year ended December 31, 1995, cash was provided by operating
activities as sales of loans exceeded loan originations and purchases of loans
held for sale. Cash was used in the Bank's investment activities during 1995 as
purchases of mortgage-backed and investment securities, capital expenditures and
originations of loans classified as held for investment, exceeded repayments on
mortgage-backed and investment securities, maturities of investment securities,
proceeds from sales of mortgage-backed and investment securities, and net
proceeds from sales of real estate owned. The Bank used cash in its financing
activities in 1995, as the repayment of FHLB advances exceeded the increase in
deposits.
Under OTS regulations, the Bank is required to maintain a minimum regulatory
liquidity ratio. This ratio, defined as the average daily balance of liquid
assets to the average balance of net withdrawable accounts plus short term
borrowings, is currently set at 5%, but may be changed from time to time. The
Bank's policy has been to maintain a liquidity ratio no less than the regulatory
minimum. At December 31, 1996, the Bank's liquidity ratio of 5.8% was in excess
of the current minimum requirement.
The Bank's deposits are obtained primarily from residents near the Bank's
seven full-service offices in Montgomery County, one office in Rosemont,
Delaware County, one office in Paoli, Chester County, and one office in the
Andorra section of Philadelphia. The Bank does not use brokers to solicit
deposits on its behalf. The Bank has drive-up banking facilities at three of its
offices and has installed automated teller machines ("ATM's") at all of its
offices and at one additional location.
The Bank offers a wide variety of options to its customer base, including
consumer and commercial demand deposit accounts, negotiable order of withdrawal
("NOW") accounts, money market accounts, passbook accounts, certificates of
deposit and retirement accounts.
As a member of the FHLB of Pittsburgh, the Bank is required to own capital
stock in the FHLB of Pittsburgh and is authorized to apply for advances on the
security of such stock and certain of its home mortgages and other assets
(principally securities which are obligations of, or guaranteed by, the United
States), provided certain standards related to creditworthiness have been met.
Advances are made pursuant to several different credit programs. Each credit
program has its own interest rate and range of maturities. Depending on the
program, limitations on the amount of advances are based either on a fixed
percentage of a savings bank's assets or on the FHLB of Pittsburgh's assessment
of the savings bank's creditworthiness. The FHLB credit policies may change from
time to time at its discretion. The Bank's maximum borrowing authority from the
FHLB on December 31, 1996 was approximately $149.4 million.
Capital Resources
The Bank is required pursuant to FIRREA and OTS regulations promulgated
thereunder to have (i) tangible capital equal to 1.5% of adjusted total assets,
(ii) core capital equal to 3.0% of adjusted total assets, and (iii) total risk-
based capital equal to 8.0% of risk-weighted assets.
On January 31, 1996, the Company successfully completed the offering of
500,000 shares of common stock at a price of $5.25 per share.
At December 31, 1996, the Bank met all regulatory capital requirements. At
December 31, 1996, the Bank's leverage ratio was 4.93%, Tier 1 risk-based
capital ratio was 7.28%, total risk-based ratio was 8.51%, and tangible equity
ratio was 4.93%, based on leverage capital of $18.7 million, Tier 1 capital of
$18.7 million, total risk-based capital of $21.9 million, and tangible equity
capital of $18.7 million, respectively. At December 31, 1996, the Bank was
classified as "adequately capitalized" under the OTS regulations.
18
Progress Financial Corporation
Consolidated Statements of Financial Condition
(Dollars in thousands)
- -----------------------------------------------------------------------------------------------------------------------------
December 31, 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks:
Interest bearing $ 666 $ 4,780
Non-interest bearing 9,967 2,309
Investments:
Available for sale at fair value (amortized cost: $3,498 in 1996 and $5,527 in 1995) 3,462 5,504
Held to maturity at amortized cost (fair value: $1,937 in 1996 and $2,149 in 1995) 1,937 2,149
Mortgage-backed securities:
Available for sale at fair value (amortized cost: $42,939 in 1996 and $37,244 in 1995) 42,738 36,842
Held to maturity at amortized cost (fair value: $46,535 in 1996 and $52,090 in 1995) 47,334 52,833
Loans and leases 251,562 221,650
Loans held for sale (fair value: $600 in 1996 and $3,160 in 1995) 599 3,153
Real estate owned, net 2,150 728
Premises and equipment 7,725 2,182
Accrued interest receivable 2,156 2,280
Deferred income taxes 3,064 3,417
Other assets 10,289 7,567
- -----------------------------------------------------------------------------------------------------------------------------
Total assets $ 383,649 $ 345,394
=============================================================================================================================
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 306,248 $ 297,260
Advances from the Federal Home Loan Bank 18,000 25,400
Other borrowings 32,270 3,000
Advance payments by borrowers 4,628 2,312
Accrued interest payable 984 722
Other liabilities 1,565 293
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities 363,695 328,987
=============================================================================================================================
Commitments and contingencies (Note 14)
Stockholders' equity:
Serial preferred stock - 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; 6,000,000 shares authorized; 3,785,000 and 3,280,000 shares
issued and outstanding at December 31, 1996 and December 31, 1995, respectively 3,785 3,280
Capital surplus 17,715 15,706
Unearned Employee Stock Ownership Plan shares (214) --
Retained earnings (deficit) (1,134) (2,238)
Unrealized loss on securities available for sale, net of deferred income taxes (198) (341)
- -----------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 19,954 16,407
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 383,649 $ 345,394
=============================================================================================================================
See Notes to Consolidated Financial Statements.
19
Progress Financial Corporation
- --------------------------------------------------------------------------------
Consolidated Statements of Operations
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
- ------------------------------------------------------------------------------------------------------------------
For the years ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
Interest income:
Loans and leases, including fees $ 21,092 $ 18,737 $ 15,184
Mortgage-backed securities 6,443 6,598 6,617
Investment securities 395 1,055 960
Other 191 179 69
- ------------------------------------------------------------------------------------------------------------------
Total interest income 28,121 26,569 22,830
- ------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 12,020 12,253 10,168
Advances from the Federal Home Loan Bank 1,746 2,812 2,202
Other borrowings 916 270 135
- ------------------------------------------------------------------------------------------------------------------
Total interest expense 14,682 15,335 12,505
- ------------------------------------------------------------------------------------------------------------------
Net interest income 13,439 11,234 10,325
Provision for possible loan and lease losses 687 625 521
- ------------------------------------------------------------------------------------------------------------------
Net interest income after provision for possible loan and lease losses 12,752 10,609 9,804
- ------------------------------------------------------------------------------------------------------------------
Other income:
Mortgage origination and servicing 684 741 713
Service charges on deposits 979 991 831
Gain (loss) from mortgage banking activities 93 60 (176)
Gain from sales of mortgages 213 -- --
Gain on sale of mortgage servicing rights 924 -- --
Gain (loss) from sale of securities 49 (143) (322)
Loss on properties sold (10) (250) (62)
Loan brokerage and advisory fees 645 682 493
Lease financing fees 590 58 --
Fees and other 692 126 68
- ------------------------------------------------------------------------------------------------------------------
Total other income 4,859 2,265 1,545
- ------------------------------------------------------------------------------------------------------------------
Other expense:
Salaries and employee benefits 6,645 4,961 4,363
Occupancy 1,306 1,383 1,292
Data processing 1,137 849 816
Furniture, fixtures, and equipment 615 575 498
Deposit insurance premiums 2,579 813 820
Provision for real estate owned, net 25 480 1,576
Loan and real estate owned expenses, net 107 94 296
Professional services 761 918 809
Other 2,421 1,998 1,595
- ------------------------------------------------------------------------------------------------------------------
Total other expense 15,596 12,071 12,065
- ------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 2,015 803 (716)
Income tax expense (benefit) 762 (1,868) --
==================================================================================================================
Net income (loss) $ 1,253 $ 2,671 $ (716)
==================================================================================================================
Net income (loss) per share $ .32 $ .79 $ (.22)
==================================================================================================================
Dividends per share $ .04 $ -- $ --
==================================================================================================================
Average shares outstanding 3,888,632 3,385,727 3,275,000
==================================================================================================================
See Notes to Consolidated Financial Statements
20
Progress Financial Corporation
- --------------------------------------------------------------------------------
Consolidated Statements of Stockholders' Equity
- --------------------------------------------------------------------------------
(Dollars in thousands)
For the Years Ended December 31, 1996, 1995 and 1994
- ---------------------------------------------------------------------------------------------------------------------
Unearned Retained Total
Common Capital ESOP earnings Unrealized stockholders'
stock surplus shares (deficit) loss equity
- ---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 $ 3,275 $ 15,706 $ -- $ (4,193) $ -- $ 14,788
Cumulative effect of a change
in an accounting principle -- -- -- -- (61) (61)
Net loss -- -- -- (716) -- (716)
Change in unrealized loss on
securities available for sale -- -- -- -- (991) (991)
- ---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 3,275 15,706 -- (4,909) (1,052) 13,020
Issuance of common stock 5 -- -- -- -- 5
Net income -- -- -- 2,671 -- 2,671
Change in unrealized loss on
securities available for sale,
net of deferred income taxes -- -- -- -- 711 711
- ---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 3,280 15,706 -- (2,238) (341) 16,407
Issuance of common stock 505 2,000 -- -- -- 2,505
Net income -- -- -- 1,253 -- 1,253
Shares acquired for ESOP -- -- (250) -- -- (250)
Principal repayment of ESOP debt -- 9 36 -- -- 45
Cash dividend declared -- -- -- (149) -- (149)
Change in unrealized loss on
securities available for sale,
net of deferred income taxes -- -- -- -- 143 143
- ---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $ 3,785 $ 17,715 $ (214) $ (1,134) $ (198) $ 19,954
=====================================================================================================================
See Notes to Consolidated Financial Statements
Progress Financial Corporation
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
(Dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31, 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income (loss) $ 1,253 $ 2,671 $ (716)
Add (deduct) items not affecting cash flows from operating activities:
Depreciation and amortization 697 584 537
Provision for real estate owned 25 480 1,576
Provision for possible loan and lease losses 687 625 521
Deferred income tax (benefit) expense 661 (1,868) --
(Gain) loss from mortgage banking activities (1,017) (60) 176
Gain from sales of mortgages (213) -- --
(Gain) loss from sales of securities available for sale (49) 143 322
Loss on properties sold 10 250 62
Amortization of deferred loan fees (1,009) (553)
Amortization of premiums/accretion of discounts on securities 629 594 2,027
Originations and purchases of loans held for sale (12,065) (11,509) (17,603)
Sales of loans held for sale 21,105 16,261 33,849
(Increase) decrease in accrued interest receivable 125 (70) 305
(Increase) decrease in other assets (5,311) (703) 2,094
(Increase) decrease in other liabilities 1,273 (927) (126)
Increase in accrued interest payable 262 134 153
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash flows provided by operating activities 7,063 5,955 22,624
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investment activities:
Capital expenditures (3,091) (4,023) (579)
Purchases of mortgage-backed securities held to maturity (2,952) -- (13,368)
Purchases of mortgage-backed securities available for sale (49,848) (11,577) (13,187)
Purchase of investment securities held to maturity (1,401) (831) (11,132)
Purchase of investment securities available for sale (3,000) (2,998) (9,023)
Repayments on mortgage-backed securities held to maturity 8,022 11,216 23,347
Repayments on mortgage-backed securities available for sale 9,060 1,880 3,896
Sales of mortgage-backed securities available for sale 44,906 11,145 19,622
Sales of investments available for sale 5,049 6,918 4,889
Maturities of investments held to maturity 1,612 985 1,866
Maturities of investments available for sale -- 6,000 --
Proceeds from sales of real estate owned 618 1,654 7,256
Advances for construction of real estate owned (96) (634) (1,097)
Net increase in total loans and leases (27,699) (21,292) (48,214)
Net decrease in investments/advances to affiliates and joint ventures -- -- 251
Purchase of The Equipment Leasing Company (6,600) -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash flows used in investment activities (25,420) (1,557) (35,473)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in demand, NOW, and savings deposits 17,312 2,215 5,657
Net (decrease) increase in time deposits (8,325) 11,087 4,718
Net (decrease) increase of advances from the FHLB (7,400) (18,652) 3,516
Net (decrease) increase in advance payments by borrowers 2,317 (40) (170)
Net increase in other borrowings 15,845 -- 3,000
Dividends paid (149) -- --
Net proceeds from exercise of stock options 5 5 --
Net proceeds from issuance of common stock 2,296 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash flows (used in) provided by financing activities 21,901 (5,385) 16,721
- ----------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents 3,544 (987) 3,872
Cash and cash equivalents:
Beginning of year 7,089 8,076 4,204
- ----------------------------------------------------------------------------------------------------------------------------------
End of year $ 10,633 $ 7,089 $ 8,076
- ----------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures:
Loan charge-offs $ 177 $ 427 $ 1,318
- ----------------------------------------------------------------------------------------------------------------------------------
Loans to facilitate the sale of real estate owned $ -- $ 2,720 $ --
- ----------------------------------------------------------------------------------------------------------------------------------
Net conversion of loans receivable to real estate owned $ 1,967 $ 664 $ 743
- ----------------------------------------------------------------------------------------------------------------------------------
Securitization of mortgage loans into mortgage-backed securities $ 9,982 $ 241 $ 24,979
- ----------------------------------------------------------------------------------------------------------------------------------
Transfer of loans held in portfolio to held for sale $ 6,536 $ 8,425 $ --
- ----------------------------------------------------------------------------------------------------------------------------------
Transfer of mortgage-backed securities held to maturity to available for sale $ -- $ 32,740 $ 6,955
- ----------------------------------------------------------------------------------------------------------------------------------
Transfer of mortgage-backed securities available for sale to held to maturity $ -- $ 3,646 $ --
- ----------------------------------------------------------------------------------------------------------------------------------
Transfer of note receivable on property from fixed assets to other assets $ -- $ 3,166 $ --
- ----------------------------------------------------------------------------------------------------------------------------------
Transfer of property for Company use from other assets to premises and equipment $ 3,150 $ -- $ --
- ----------------------------------------------------------------------------------------------------------------------------------
Cash payments during the year for:
Income taxes $ 101 $ -- $ --
- ----------------------------------------------------------------------------------------------------------------------------------
Interest $ 14,477 $ 15,201 $ 12,363
- ----------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
22
Progress Financial Corporation
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(1) Summary of Significant Accounting Policies
Progress Financial Corporation and its subsidiaries (the "Company") follow
accounting principles and reporting practices which are in accordance with
generally accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheet,
and affect revenues and expenses for the period. Actual results could differ
from such estimates.
The material estimates relate to the determination of the
allowance for possible loan and lease losses, the deferred tax asset valuation
allowance, and the valuation of real estate acquired in connection with
foreclosures or in satisfaction of loans. In connection with the determination
of the allowance for possible loan and lease losses and real estate owned,
management obtains independent appraisals for significant properties.
The more significant accounting policies are summarized below. Certain
prior period amounts have been reclassified when necessary to conform with
current year classifications. Tabular information is presented in thousands of
dollars.
Basis of Presentation
The consolidated financial statements include the accounts of Progress
Financial Corporation, its principal wholly-owned subsidiary Progress Bank (the
"Bank"), and its other majority owned subsidiaries: Progress Realty Advisors,
L.P. ("PRA"), Progress Capital Inc. ("PCI"), and Progress Asset Management
Company ("PAM"). On October 1, 1996, the Company acquired The Equipment Leasing
Company ("ELC"). The transaction was accounted for under the purchase method of
accounting. Accordingly, the results of operations of ELC have been included
since the date of acquisition. All significant intercompany transactions and
balances have been eliminated.
Cash and Cash Equivalents
The Company's cash and due from banks are classified as cash and cash
equivalents, which have an original maturity of three months or less.
Investment and Mortgage-Backed Securities
The Company follows Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115").
SFAS 115 requires debt and equity securities to be classified in one of three
categories, as applicable, and to be accounted for as follows: debt securities
which the Company has the positive intent and ability to hold to maturity are
classified as "securities held to maturity" and are reported at amortized cost;
debt and equity securities that are bought and held principally for the purpose
of selling in the near term are classified as "trading securities" and are
reported at fair value with unrealized gains and losses included in earnings;
and debt and equity securities not classified as either held to maturity or
trading securities are classified as "securities available for sale" and are
reported at fair value with unrealized gains and losses excluded from earnings,
but reported as a separate component of stockholders' equity, net of deferred
income taxes.
Investment and mortgage-backed securities classified as available for sale
include such items that management intends to use as part of its asset-liability
strategy or that may be sold in response to changes in interest rates, changes
in prepayment risks, the need to increase regulatory capital or similar factors.
When an investment or mortgage-backed security is sold, any gain or loss is
recognized utilizing the specific identification method.
Real Estate Owned
Real estate acquired in partial or full satisfaction of loans are
classified as real estate owned ("REO"). Prior to transferring a real estate
loan to REO, it is written down to the lower of cost or estimated fair value
less estimated selling costs through a charge to the allowance for possible loan
and lease losses. Subsequently, valuations are periodically performed by
management, and any decline in estimated fair value is charged to operations.
Costs relating to the development and improvement of property are capitalized,
whereas costs relating to the holding of property are only capitalized when
carrying value does not exceed estimated fair value. The interest costs relating
to the development of real estate is capitalized. If a sale of real estate owned
results in a gain, such part of the gain that is not received in cash is
deferred and amortized to income in proportion to the reduction in the principal
balance of the sales contract. Losses on such sales are charged to operations as
incurred.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed based on the estimated useful lives of the assets using
the straight-line method. Gains and losses are recognized upon disposal of the
assets. Maintenance and repairs are recorded as expenses.
Federal Income Taxes
The Company files a consolidated Federal income tax return with its
subsidiaries. Certain items of income and expense (primarily net operating
losses, depreciation, excess servicing fees, provision for possible loan and
lease losses, and real estate owned losses) are reported in different periods
for tax purposes. Deferred taxes are provided on such temporary differences
existing between financial and income tax reporting subject to the deferred tax
asset realization criteria required under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109").
Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of aggregate cost or market value. Net unrealized losses
are charged to income in the period.
Deferred Loan Fees
Loan origination fees and related direct loan origination costs are
deferred and recognized over the life of the loan as an adjustment to yield. The
unamortized balance of such net loan origination fees is reported on the
Company's consolidated statements of financial condition as part of loans.
23
(1) Summary of Significant Accounting Policies (continued)
Allowance for Possible Loan and Lease Losses
An allowance for possible loan and lease losses is maintained at a level that
management considers adequate to provide for potential losses based upon an
evaluation of known and inherent risks in the related portfolio. Management's
periodic evaluation of the adequacy of the allowance is based upon examination
of the portfolio, past loss experience, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying collateral,
current economic conditions, the results of the most recent regulatory
examinations, and other relevant factors. While management uses the best
information available to make such evaluations, future adjustments to the
allowance may be necessary if economic conditions differ substantially from the
assumptions used in making the evaluations.
Earnings (Loss) Per Share
The per share results of operations were computed by dividing net income
(loss) by the weighted average number of shares outstanding during the period,
including the assumed exercise of dilutive stock options and warrants using the
treasury stock method. Such options would not have had a materially dilutive
impact on earnings per share in 1994 had they been exercised. The options were
dilutive in 1996 and 1995, and have been included in the weighted average number
of shares outstanding. Shares outstanding for 1996 do not include ESOP shares
that were purchased and unallocated during 1996 in accordance with SOP 93-6,
"Employers Accounting for Employees Stock Ownership Plans." Shares granted but
not yet issued under the Company's stock option plan are considered common stock
equivalents for earnings per share calculations. Earnings per share information
is not comparable for the years ended December 31, 1995 and 1994, as the Company
did not complete its stock offering until January 31, 1996. On April 25, 1990,
the Board of Directors of Progress Financial Corporation declared a dividend
distribution of one Right for each outstanding share of Common Stock of the
Company to stockholders of record at the close of business on May 11, 1990. Each
Right entitles the registered holder to purchase from the Company a unit
consisting of one one-hundredth of a share (a "Unit") of Series A Junior
Participating Preferred Stock, par value $.01 per share, at a purchase price of
$40.00 per Unit, subject to adjustment. The description and terms of the Rights
are set forth in a Rights Agreement, between the Company and American Stock
Transfer & Trust Company, as Rights Agent.
Loans and Leases
Loans are stated at the principal amount outstanding. Leases, gross, are
stated at principal outstanding including unearned interest. The Company uses
the direct finance method of accounting to record income from its leases, in
accordance with the Statement of Financial Accounting Standards, "Accounting for
Leases" ("SFAS 13"). Under this method, the excess of minimum rentals over the
cost of equipment plus estimated residual value is amortized to income over the
lease term and produces a constant periodic rate of return on the net investment
in finance leases.
In accordance with SFAS 91, "Accounting For Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases," loan and lease origination and commitment fees and related costs are
deferred and the amount is amortized as an adjustment to the related asset's
yield.
The accrual of interest on commercial loans and leases is discontinued when
they become 90 days past due and when, in management's judgment, it is
determined that a reasonable doubt exists as to their collectibility. The
accrual of interest is also discontinued on residential mortgage and consumer
loans when such loans become 90 days past due, except for those loans less than
180 days past due and in the process of collection which are secured by real
estate with a loan to value ratio less than 80%. When a loan is placed on non-
accrual, interest accruals cease and uncollected accrued interest is reversed
and charged against current income. Additional interest income on such loans is
recognized only when received.
Loan Servicing Rights
The cost of loan servicing rights purchased is amortized in proportion to,
and over the period of, estimated net servicing revenues utilizing prepayment
assumptions. When participating interests in loans sold have an average
contractual interest rate adjusted for normal servicing fees that differs from
the agreed upon yield to the purchaser, a gain or loss is recognized upon the
sale equal to the present value of the differential over the estimated remaining
life of such loans. Excess servicing fees receivable are amortized over the
estimated life of the related loans sold using a method that approximates the
level yield method. The carrying value of loan servicing rights purchased and
excess servicing fees receivable is periodically evaluated in relation to
estimated future net servicing revenues based on management's best estimate of
the remaining lives of the underlying loans being serviced. Effective January 1,
1996, the Company adopted Statement of Financial Accounting Standards No. 122,
"Accounting for Mortgage Servicing Rights" ("SFAS 122"). SFAS 122 requires the
recognition of separate assets relating to the rights to service mortgage loans
based on their fair value. The statement applies to transactions entered into in
1996 and had no material effect on earnings.
Other
SFAS 121 "Accounting for the Impairment of Long-lived Assets and for Long-
lived Assets to Be Disposed Of," was adopted January 1, 1996 and requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amounts of these assets may not be recovered. The adoption of SFAS 121
did not have a material effect on the Consolidated Financial Statements.
SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," was issued in June, 1996 and provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities. SFAS 125 applies to transactions
occurring after December 31, 1996. The adoption of SFAS 125 is not expected to
have a material effect on the Consolidated Financial Statements.
24
(2) Acquisition
On October 1, 1996, the Company purchased The Equipment Leasing Company
("ELC"), located in Timonium, Maryland, for a cash purchase price of $6.6
million. Fair value of assets acquired were $20.2 million and fair value of
liabilities assumed were $16.2 million. ELC primarily leases computer and
telecommunications equipment. Under the terms of the purchase agreement, ELC
became a wholly-owned subsidiary of Progress Bank. The transaction was accounted
for under the purchase method of accounting. Accordingly, the results of ELC
have been included since the date of acquisition. Under this method of
accounting, the purchase price is allocated to the respective assets acquired
and liabilities assumed based on their estimated fair values. Goodwill of $2.6
million was created in this transaction. Goodwill is being amortized to other
expense on a straight-line basis over 15 years.
A summary of unaudited pro forma combined financial information for the
Company and ELC as if the transaction had occurred on January 1, 1995 is as
follows:
- -----------------------------------------------------------------------------------
December 31, 1996 1995
- -----------------------------------------------------------------------------------
Net interest income $ 14,981 $ 13,013
Other income 5,509 2,988
Income before income taxes 2,727 1,437
Earnings per share $ .41 $ .89
Average shares outstanding 3,888,632 3,385,727
(3) Cash and Due From Banks
Progress Bank is required by the Federal Reserve Board to maintain reserves
based principally on deposits outstanding and are included in cash and due from
banks. At December 31, 1996 and 1995, required reserves were $2.3 million and
$1.5 million, respectively.
(4) Investment Securities
The Bank is required under current OTS regulations to maintain defined levels
of liquidity and utilizes certain investments that qualify as liquid assets. The
Bank utilizes deposits with the FHLB of Pittsburgh, bankers' acceptances, loans
to financial institutions whose deposits are insured by the FDIC, Federal funds
and United States government and agency obligations.
- ---------------------------------------------------------------------------------------------------------
December 31, 1996
- ---------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Held to Maturity: Cost Gains Losses Value Value
- ---------------------------------------------------------------------------------------------------------
FHLB of Pittsburgh stock, pledged $ 1,937 $-- $-- $1,937 $1,937
- ---------------------------------------------------------------------------------------------------------
$ 1,937 $-- $-- $1,937 $1,937
=========================================================================================================
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Available for Sale: Cost Gains Losses Value Value
- ---------------------------------------------------------------------------------------------------------
U.S. agency obligations $ 3,468 $-- $50 $3,418 $3,418
Equity investments 30 14 -- 44 44
- ---------------------------------------------------------------------------------------------------------
$ 3,498 $14 $50 $3,462 $3,462
=========================================================================================================
- ---------------------------------------------------------------------------------------------------------
December 1995
- ---------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Held to Maturity: Cost Gains Losses Value Value
- ---------------------------------------------------------------------------------------------------------
FHLB of Pittsburgh stock, pledged $ 2,149 $-- $-- $2,149 $2,149
- ---------------------------------------------------------------------------------------------------------
$ 2,149 $-- $-- $2,149 $2,149
=========================================================================================================
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Available for Sale: Cost Gains Losses Value Value
- ---------------------------------------------------------------------------------------------------------
U.S. agency obligations $ 5,497 $ 2 $25 $5,474 $5,474
Equity investments 30 -- -- 30 30
- ---------------------------------------------------------------------------------------------------------
$ 5,527 $ 2 $25 $5,504 $5,504
=========================================================================================================
25
(4) Investment Securities (continued)
At December 31, 1996, the Bank was required to maintain $1.9 million of
FHLB stock under current regulations.
The carrying value and estimated fair value of the Bank's investment
securities at December 31, 1996 by contractual maturity are shown below.
Expected maturities will differ from contractual maturities due to the right to
call or prepay such obligations with or without prepayment penalties.
- ------------------------------------------------------------------------------------
Amortized Estimated Fair Weighted
Held to Maturity: Cost Value Average Yield
- ------------------------------------------------------------------------------------
No stated maturity $1,937 $1,937 6.25%
====================================================================================
Amortized Estimated Fair Weighted
Available for Sale: Cost Value Average Yield
- ------------------------------------------------------------------------------------
Due before one year $ -- $ -- --%
Due one year through five years 1,000 986 5.57
Due five years through ten years 2,468 2,432 6.95
Due after ten years -- -- --
No stated maturity 30 44 2.95
- ------------------------------------------------------------------------------------
$3,498 $3,462 6.52%
====================================================================================
There were no sales of investment securities classified as available for
sale during 1996. Total realized losses in 1995 and 1994 on the sale of $7.0
million and $5.0 million in investment securities classified as available for
sale were $106,000 and $111,000 respectively. Additionally, $2.0 million in
investment securities classified as available for sale were called during 1996.
Accrued interest receivable on investment securities amounted to $86,000 and
$114,000 at December 31, 1996 and 1995, respectively.
(5) Mortgage-Backed Securities
The following tables detail the amortized cost, carrying value and estimated
fair value of the Company's mortgage-backed securities:
- ---------------------------------------------------------------------------------------------------
December 31, 1996
- ----------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Held to Maturity: Cost Gains Losses Value Value
- ----------------------------------------------------------------------------------------------------
GNMA $22,759 $ -- $ 542 $22,217 $22,759
FNMA 7,321 -- 102 7,219 7,321
FHLMC 17,254 42 197 17,099 17,254
- ----------------------------------------------------------------------------------------------------
$47,334 $ 42 $ 841 $46,535 $47,334
====================================================================================================
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Available for Sale: Cost Gains Losses Value Value
- ----------------------------------------------------------------------------------------------------
GNMA $21,770 $ 88 $ 19 $21,839 $21,839
FNMA 7,335 2 149 7,188 7,188
FHLMC 7,229 20 77 7,172 7,172
Collateralized mortgage obligations 3,000 -- 60 2,940 2,940
Non-agency pass through certificate 3,605 -- 6 3,599 3,599
- ----------------------------------------------------------------------------------------------------
$42,939 $ 110 $ 311 $42,738 $42,738
====================================================================================================
26
(5) Mortgage-Backed Securities(continued)
- ----------------------------------------------------------------------------------------------
December 31, 1995
- ----------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Held to Maturity: Cost Gains Losses Value Value
- ----------------------------------------------------------------------------------------------
GNMA $26,618 $-- $ 505 $26,113 $26,618
FNMA 8,620 2 93 8,529 8,620
FHLMC 17,595 8 155 17,448 17,595
- ----------------------------------------------------------------------------------------------
$52,833 $10 $ 753 $52,090 $52,833
==============================================================================================
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Available for Sale: Cost Gains Losses Value Value
- ----------------------------------------------------------------------------------------------
GNMA $ 168 $-- $ -- $ 168 $ 168
FNMA 8,801 9 179 8,631 8,631
FHLMC 19,040 34 211 18,863 18,863
Collateralized mortgage obligations 7,501 16 77 7,440 7,440
Non-agency pass through certificate 1,734 6 -- 1,740 1,740
- ----------------------------------------------------------------------------------------------
$37,244 $65 $ 467 $36,842 $36,842
==============================================================================================
Mortgage-backed securities mature over the life of the security through
regular principal payments and are subject to prepayment risk.
Total realized gains in 1996, 1995 and 1994 on the sale of $23.5 million, $3.5
million and $16.2 million in mortgage-backed securities classified as available
for sale were $288,000, $91,000 and $13,000, respectively. Total realized losses
in 1996, 1995 and 1994 on the sale of $21.3 million, $7.7 million and $3.6
million in mortgage-backed securities classified as available for sale were
$239,000, $128,000 and $224,000, respectively.
Accrued interest receivable on mortgage-backed securities amounted to $661,000
and $687,000 at December 31, 1996 and 1995, respectively.
On December 6, 1995 the Company took a one-time opportunity to reevaluate
securities classification under SFAS 115 and reclassified securities with an
amortized cost of $32.7 million from held to maturity to available for sale. The
unrealized loss at the time of transfer was $467,000. Additionally, securities
with an amortized cost of $3.7 million and an unrealized loss of $94,000 were
transferred from available for sale to held to maturity. Mortgage-backed
securities pledged under agreements to repurchase in connection with borrowings
amounted to $32.0 million at December 31, 1996.
(6) Loans and Leases
- ------------------------------------------------------------------------------------------------------------
December 31, 1996 1995
- ------------------------------------------------------------------------------------------------------------
Single-family residential real estate $ 63,660 $ 87,938
Commercial real estate 90,350 81,535
Construction (net of loans in process of $23,641 and $19,923 respectively) 20,692 14,230
Consumer loans 22,898 21,666
Credit card receivables 885 757
Commercial business 30,384 17,244
Lease financing 31,434 --
Unearned income (5,564) --
Allowance for possible loan and lease losses (3,177) (1,720)
- ------------------------------------------------------------------------------------------------------------
Total $ 251,562 $ 221,650
============================================================================================================
27
(6) Loans and Leases (continued)
The Company adopted Statements of Financial Accounting Standards Nos. 114
and 118 "Accounting by Creditors for Impairment of a Loan" ("SFAS 114 and 118")
during the first quarter of 1995. For the year ended December 31, 1996, the
average recorded investment in impaired loans was approximately $1.4 million. At
December 31, 1996, there were no impaired loans. At December 31, 1995, there was
one impaired loan with a principal balance of $2.3 million. During 1996, that
loan was transferred to real estate owned where it is carried at December 31,
1996. The Company recognized no interest on impaired loans during 1996 or 1995.
For the year ended December 31, 1995, the average recorded investment in
impaired loans was approximately $2.3 million.
At December 31, 1996, 1995, and 1994, the principal amount of outstanding
loans on a non-accrual basis was $1.3 million, $3.9 million, and $4.4 million,
respectively. Additional gross interest income that would have been recorded
during 1996, 1995, and 1994 if the Company's non-performing loans at the end of
such periods had been performing in accordance with their terms during such
periods was $193,000, $242,000, and $430,000, respectively. The amount of
interest income that was actually recorded during 1996, 1995, and 1994 with
respect to such non-performing loans amounted to approximately $114,000,
$174,000, and $23,000, respectively.
Accrued interest receivable on loans and leases amounted to $1.4 million at
December 31, 1996 and 1995.
The Company is a lessor of equipment and machinery under agreements expiring at
various dates through the year 2003. At December 31, 1996, the components of
lease financing are as follows:
1997 $13,785
1998 9,150
1999 5,264
2000 2,382
2001 784
2002 4
2003 65
- ------------------------------------------------
Total future minimum lease payments
receivable including estimated
residual values $31,434
Unearned income (5,564)
- ------------------------------------------------
Total $25,870
================================================
At December 31, 1996, 1995, and 1994, the Bank was servicing loans,
including participations sold, in the amounts of $416.8 million, $297.1 million,
and $240.8 million, respectively, for the benefit of others.
The following is a summary of the activity in the allowance for possible
loan and lease losses:
- ------------------------------------------------------------------------------
December 31, 1996 1995 1994
- ------------------------------------------------------------------------------
Balance at beginning of year $ 1,720 $ 1,503 $ 2,113
Provisions for possible loan and lease losses 687 625 521
Losses charged against the allowance (177) (427) (1,318)
Recoveries on charged-off loans 97 19 187
Allowance assumed through acquisition 850 -- --
- ------------------------------------------------------------------------------
Balance at end of year $ 3,177 $ 1,720 $ 1,503
==============================================================================
(7) Loans Held for Sale
At December 31, 1996, the Bank held $502,000 in 30 year fixed rate and
$97,000 in 15 year fixed rate residential mortgages that were classified as held
for sale and are carried at the lower of aggregate cost or market value. All of
these loans were under commitments of sale at December 31, 1996. At December 31,
1995, the Bank held $3.0 million in 30 year fixed rate residential mortgages and
$128,000 in one year adjustable rate residential mortgages that were classified
as held for sale.
The Bank had $642,000 and $1.8 million in commitments to originate agency
conforming residential mortgage loans at December 31, 1996 and December 31,
1995, respectively, of which $642,000 and $1.7 million were agency conforming
fixed rate residential loans. Loans sold totalled $13.7 million and $16.2
million for the years ended December 31, 1996 and 1995, respectively.
(8) Real Estate Owned, net
- ------------------------------------------------------------------
December 31, 1996 1995
- ------------------------------------------------------------------
Balance at beginning of year $ 728 $ 4,534
Real estate acquired in settlement of loans 1,967 664
Capitalized interest 2 --
Dispositions/sales (1) (522) (3,990)
Write-downs (25) (480)
- ------------------------------------------------------------------
Balance at end of year $ 2,150 $ 728
==================================================================
(1) Net of funds advanced for construction
The following table summarizes the activity in the allowance for possible
losses on real estate owned:
- ---------------------------------------------------------------
December 31, 1996 1995 1994
- ---------------------------------------------------------------
Balance at beginning of year $ -- $ -- $ --
Provision charged to income 25 480 (1,575)
Charge-offs, net of recoveries (25) (480) (1,575)
- ---------------------------------------------------------------
Balance at end of year $ -- $ -- $ --
===============================================================
28
(9) Premises and Equipment
Land, office buildings and equipment, at cost, are summarized by
major classification:
- --------------------------------------------------------------------------------
December 31, 1996 1995
- --------------------------------------------------------------------------------
Land $ 1,187 $ 230
Buildings and leasehold improvements 6,263 2,447
Furniture, fixtures and equipment 5,913 4,669
- --------------------------------------------------------------------------------
13,363 7,346
Accumulated depreciation (5,638) (5,164)
- --------------------------------------------------------------------------------
$ 7,725 $ 2,182
================================================================================
Depreciation expense for the years ended December 31, 1996, 1995 and 1994 was
$697,000, $584,000, and $537,000, respectively.
At December 31, 1996, the Company had leases on a number of its office
facilities and certain equipment. Minimum future non-cancelable rental
commitments under operating leases are as follows:
- --------------------------------------------------------------------------------
1997 $ 577
1998 559
1999 481
2000 440
2001 304
- --------------------------------------------------------------------------------
$2,361
================================================================================
Rental expense for the years ended December 31, 1996, 1995 and 1994 was
$719,000, $866,000 and $751,000, respectively.
(10) Other Assets
The following items are included in other assets:
- --------------------------------------------------------------------------------
December 31, 1996 1995
- --------------------------------------------------------------------------------
Mortgage servicing rights $ 4,843 $2,115
Excess servicing fees 157 547
Investment in property for
potential Company use -- 3,150
Accounts receivable 1,758 765
Goodwill 2,660 165
Other assets 871 825
- --------------------------------------------------------------------------------
$10,289 $7,567
================================================================================
(11) Deposits
- --------------------------------------------------------------------------------
December 31, 1996
- --------------------------------------------------------------------------------
Weighted
Average
Interest Rate Amount % of Total
- --------------------------------------------------------------------------------
Money market deposit
accounts 3.19% $ 35,228 11%
NOW and Super
NOW accounts 2.06 29,961 10
Savings accounts 2.72 29,238 10
Other time deposits 5.36 152,245 50
Time deposits of
$100,000 or more 5.40 23,040 7
- --------------------------------------------------------------------------------
Total interest bearing
deposits 4.43% 269,712 88
- --------------------------------------------------------------------------------
Non-interest bearing
deposits 36,536 12
- --------------------------------------------------------------------------------
Total deposits $306,248 100%
================================================================================
- --------------------------------------------------------------------------------
December 31, 1995
- --------------------------------------------------------------------------------
Weighted
Average
Interest Rate Amount % of Total
- --------------------------------------------------------------------------------
Money market deposit
accounts 3.06% $ 34,267 12%
NOW and Super
NOW accounts 2.16 27,226 9
Savings accounts 2.68 27,527 9
Other time deposits 5.48 161,255 54
Time deposits of
$100,000 or more 5.62 22,355 8
- --------------------------------------------------------------------------------
Total interest bearing deposits 4.57% 272,630 92
- --------------------------------------------------------------------------------
Non-interest bearing
deposits 24,630 8
- --------------------------------------------------------------------------------
Total deposits $297,260 100%
================================================================================
29
(11) Deposits (continued)
Other time deposits of less than $100,000 by date of maturity are as
follows:
1997 $111,648
1998 22,976
1999 8,172
2000 6,174
2001 2,853
2002 and thereafter 422
- --------------------------------------------------------------------------------
$152,245
================================================================================
Other time deposits of $100,000 or more by date of maturity are as follows:
1997 $20,913
1998 1,577
1999 139
2000 and thereafter 411
- --------------------------------------------------------------------------------
$23,040
================================================================================
Total deposits of $100,000 or more amounted to $53.1 million and $40.4
million at December 31, 1996 and 1995, respectively. Accrued interest payable on
deposits amounted to $602,000 and $581,000 at December 31, 1996 and 1995,
respectively.
Interest expense on deposits:
- --------------------------------------------------------------------------------
December 31, 1996 1995 1994
- --------------------------------------------------------------------------------
NOW accounts $ 595 $ 716 $ 532
Savings and money market
deposit accounts 1,829 1,825 1,958
Time deposits 9,596 9,712 7,678
- --------------------------------------------------------------------------------
Total $12,020 $12,253 $10,168
================================================================================
(12) Borrowings
Borrowings at December 31, 1996 and 1995 consist of the following:
- --------------------------------------------------------------------------------------------------------
December 31, 1996 1995
- --------------------------------------------------------------------------------------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
- --------------------------------------------------------------------------------------------------------
Short term:
FHLB advances $ 5,000 7.65% $12,400 5.36%
Securities sold under
agreements to repurchase 6,050 7.19 -- --
ESOP note payable 44 8.25 -- --
- --------------------------------------------------------------------------------------------------------
11,094 7.40 12,400 5.36
- --------------------------------------------------------------------------------------------------------
Long term:
FHLB advances (A) 13,000 6.99 13,000 7.63
Securities sold under agreements to repurchase (B) 23,000 6.02 -- --
ESOP note payable (C) 176 8.25 -- --
Subordinated debt (D) 3,000 8.25 3,000 8.25
- --------------------------------------------------------------------------------------------------------
39,176 6.52 16,000 7.75
- --------------------------------------------------------------------------------------------------------
Total $50,270 6.72% $28,400 6.70%
========================================================================================================
(A) Long term FHLB advances are detailed as follows:
- ----------------------------------------------------------------
December 31, 1996 1995
- ----------------------------------------------------------------
Amount Due Amount Due
- ----------------------------------------------------------------
$ 5,000 12/15/99 $ 5,000 08/14/97
3,000 06/02/00 5,000 12/15/99
5,000 08/06/01 3,000 06/02/00
- ----------------------------------------------------------------
$13,000 $13,000
================================================================
(B) Long term securities sold under agreements to repurchase are detailed
as follows:
- ----------------------------------------------------------------
December 31, 1996 1995
- ----------------------------------------------------------------
Amount Due Amount Due
- ----------------------------------------------------------------
$ 5,000 09/25/98 $ -- --
5,000 10/23/98 -- --
3,000 02/01/99 -- --
10,000 10/12/99 -- --
- ----------------------------------------------------------------
$23,000 $ --
=================================================================
(C) The ESOP note payable is due in quarterly installments ranging from
$10,000 to $15,000 through January 31, 2001.
(D) The subordinated debt consists of 12 units of $250,000 notes payable
June 30, 2004. The notes are redeemable at the Company's option at a price of
105% of par after July 1, 1996, declining annually thereafter to par on and
after July 1, 2003. Interest is paid quarterly.
Accrued interest payable on borrowings amounted to $384,000 and $133,000 at
December 31, 1996 and 1995, respectively.
- ---------------------------------------------------------------------
December 31, 1996 1995
- ---------------------------------------------------------------------
Average balance outstanding $41,092 $47,177
Maximum amount outstanding at
any month-end during the period 67,905 53,845
Weighted average interest rate
during the period (1) 6.47% 6.54%
=====================================================================
(1) Weighted average interest rate is calculated by dividing the actual interest
expense for the period by the average outstanding balances for the period.
As of December 31, 1996 and 1995, the Bank had a $35.0 million and $34.6
million line of credit available from the FHLB, respectively. The unused balance
on the line of credit was $35.0 million and $32.7 million at December 31, 1996
and 1995, respectively.
(13) Income Taxes
Income tax expense (benefit) consisted of the following:
- ---------------------------------------------------------
December 31, 1996 1995 1994
- ---------------------------------------------------------
Current:
State $ 38 $ -- $--
Federal 1,202 -- --
Deferred--Federal (478) (1,868) --
- ---------------------------------------------------------
$ 762 $(1,868) $--
=========================================================
30
(13) Income Taxes (continued)
On August 20, 1996, The Small Business Job Protection Act was signed into law
which repealed the favorable reserve method available to savings banks. The Bank
was required to change its tax bad debt method to the specific charge-off method
effective for the year ended December 31, 1996. The change in method resulted in
taxable income of approximately $1.6 million representing the excess of the
Bank's tax bad debt reserve at December 31, 1995 over the base year reserve
amount of $2.8 million that arose in tax years beginning before December 31,
1987. The income will be recognized for tax purposes ratably over a six year
period. Accordingly, the Company has not provided deferred income taxes of
approximately $951,000 for the Bank's tax return reserve for bad debts that
arose in tax years beginning before December 31, 1987. It is not expected that
this difference will reverse in the foreseeable future. A deferred tax liability
has been recognized for the portion of the tax bad debt reserves which arose in
1988 through 1995.
The provision for income taxes differs from the statutory rate due to the
following:
- -------------------------------------------------------------------------------
December 31, 1996 1995 1994
- -------------------------------------------------------------------------------
Tax (benefit) at statutory rate $ 685 $ 273 $ (243)
State tax, net of Federal effect 25 -- --
Tax free interest (11) (11) (10)
Change in valuation allowance (1) -- (2,156) 100
Other 63 26 153
- -------------------------------------------------------------------------------
$ 762 $(1,868) $ --
===============================================================================
(1) Excludes the change in the valuation allowance related to the unrealized
loss on securities available for sale, which was charged directly to
stockholders' equity.
Deferred income taxes reflect the impact of differences between the financial
statement and tax basis of assets and liabilities and available tax
carryforwards. The tax effects of temporary differences that give rise to
significant portions of deferred tax assets and deferred tax liabilities at
December 31, 1996, 1995, and 1994 are presented below:
- -----------------------------------------------------------------------------
December 31, 1996 1995 1994
- -----------------------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 2,297 $ 3,486 $ 2,474
Write-downs on real estate owned 22 27 1,037
Unrealized loss on securities
available for sale 102 176 357
Provision for possible loan and lease losses 634 49 154
Loan fees -- 9 54
Other 106 (93) 52
- -----------------------------------------------------------------------------
Total deferred tax assets 3,161 3,654 4,128
- -----------------------------------------------------------------------------
December 31, 1996 1995 1994
- -----------------------------------------------------------------------------
Deferred tax liabilities:
Excess servicing fees 61 95 130
Depreciation and amortization 4 -- 115
Deposit insurance premiums 32 142 --
- -----------------------------------------------------------------------------
Total deferred tax liabilities 97 237 245
- -----------------------------------------------------------------------------
Deferred tax assets in excess of
deferred tax liabilities
before valuation allowance 3,064 3,417 3,883
Valuation allowance -- -- (2,513)
- -----------------------------------------------------------------------------
Net deferred tax assets $ 3,064 $ 3,417 $ 1,370
=============================================================================
The deferred tax asset valuation allowance was eliminated in 1995 as a result
of a determination of the outlook for future taxable income and the reduction in
non-performing assets offset by the potential for a substantial SAIF insurance
assessment. The SAIF assessment of $1.8 million was paid in 1996.
Net operating loss carryforwards available for use in future years total
approximately $6.8 million. These loss carryforwards expire in 2007 ($718,000),
2008 ($279,000), 2009 ($770,000) and 2010 ($5.0 million).
(14) Commitments and Contingencies
Financial Instruments with Off Balance-Sheet Risk
The Company is a party to various financial instruments required in the normal
course of business to meet the financing needs of its customers, which are not
included in the Consolidated Statements of Financial Condition at December 31,
1996. Management does not expect any material losses from these transactions.
The Company's involvement in such financial instruments is summarized as
follows:
- -----------------------------------------------------------------------------
December 31, 1996 1995
- -----------------------------------------------------------------------------
Contract or
Notional Amount
- -----------------------------------------------------------------------------
Amounts representing credit risk:
Commitments to extend credit
(including unused lines of credit) $103,315 $59,318
Standby letters of credit, financial
guarantees and other letters of credit $ 850 $ 621
31
(14) Commitments and Contingencies (continued)
The Bank uses the same credit policies in extending commitments and letters of
credit as it does for on-balance sheet instruments. The Bank controls its
exposure to loss from these agreements through credit approval processes and
monitoring procedures. Letters of credit and commitments to extend credit are
generally issued for one year or less and may require payment of a fee. The
total commitment amounts do not necessarily represent future cash disbursements,
as many of the commitments expire without being drawn upon. The Bank may require
collateral in extending commitments, which may include cash, accounts
receivable, securities, real or personal property, or other assets. For those
commitments which require collateral, the value of the collateral generally
equals or exceeds the amount of the commitment.
The majority of the Company's commitments to extend credit and letters of
credit carry current market interest rates if converted to loans. Because
commitments to extend credit and letters of credit are generally unassignable by
either the Company or the borrower, they only have value to the Company and the
borrower. The estimated fair value approximates the recorded deferred fee
amounts. The Company's only derivative consisted of an interest rate cap with a
notional amount of $10.0 million, expiring January 30, 1997. The Company
purchased the cap to hedge against the repricing of certain deposit liabilities.
At December 31, 1996, the Company was party to a number of lawsuits. While any
litigation has an element of uncertainty, after reviewing these actions with
legal counsel, management is of the opinion that the liability, if any,
resulting from these actions will not have a material effect on the financial
condition or results of operations of the Company.
15) Benefit Plans
Savings Plan
The Company has a savings plan under Section 401(K) of the Internal Revenue
Code available to all full-time employees. The plan allows employees to
contribute part of their pretax or after-tax income according to specified
guidelines. The Company matches a percentage of the employee contributions up to
a certain limit. The expense amounted to $92,000, $55,000 and $47,000 for the
years 1996, 1995 and 1994, respectively.
Employee Stock Ownership Plan
The Company has an Employee Stock Ownership Plan ("ESOP"). The ESOP is a
defined contribution plan covering all full-time employees of the Company who
have one year of service and are age 21 or older. It is subject to the
provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"). The
Company follows the provisions of Statement of Position 93-6, "Employers'
Accounting for Employee Stock Ownership Plans" in accounting for the ESOP. In
January, 1996, the ESOP borrowed funds from a third party and purchased 50,000
shares of the Company's stock for the ESOP trust. Cash contributions to the ESOP
have been determined based on the ESOP's total debt service less dividends paid
on ESOP shares. Compensation expense of the ESOP was $45,000 and interest
expense on the borrowing was $18,000 for the year 1996. There was no ESOP
expense for 1995 or 1994. As of December 31, 1996, the Company had a remaining
guaranteed ESOP obligation of $220,000 included in other borrowing. Of the
50,000 shares, 9,317 have been allocated and the 40,683 unallocated shares are
reported as a reduction of stockholders equity. As of December 31, 1996, the
unallocated shares had a fair value of $341,000.
Employee Stock Purchase Plan
In April 1996, the Company established an Employee Stock Purchase Plan
("ESPP"). Employees can elect to purchase shares in the Company at 95% of the
market price of the Company's stock on certain dates throughout the year. On
January 2, 1997, 4,180 shares were issued to employees through their
participation in the ESPP. This transaction increased stockholders' equity
$26,000.
(16) Related Party Transactions
During 1994, Charles J. Tornetta and John E. Flynn Corson, Directors of the
Company, were limited partners in a partnership which beneficially owned a 49%
interest in the building from which the Company conducted business in Plymouth
Meeting, Pennsylvania. The Company paid approximately $215,000 in rental fees
during 1994 to the management company which handled the property on behalf of
the limited partnership. The lease was negotiated and signed prior to either
member being elected to the Board of Directors. As of December 31, 1994, Mr.
Tornetta and Mr. Corson no longer owned an interest in the building.
Charles J. Tornetta also serves as President and owns a 25% interest in
Commonwealth Insurance Agency, Inc. Total insurance premiums paid by the Company
to Commonwealth Insurance Agency, Inc. in 1996, 1995, and 1994, were $6,000,
$5,000, and $21,000, respectively.
Loans receivable from executive officers and directors, including loans to
related persons and entities, consisted of the following activity:
- -----------------------------------------------------------
December 31, 1996 1995 1994
- -----------------------------------------------------------
Balances at beginning of year $ 568 $ 228 $ 364
Additional loans granted 188 420 --
Repayments (114) (80) (136)
- -----------------------------------------------------------
Balances at end of year $ 642 $ 568 $ 228
===========================================================
(17) Stockholders' Equity
On January 31, 1996 the Company successfully completed the
offering of 500,000 shares of common stock at a price of $5.25 per share.
The Company completed the sale of $3.0 million in subordinated debentures in a
private placement on June 30, 1994. Twelve units were sold, with each unit
consisting of $250,000 in principal amount of 8.25% subordinated notes due in
2004 and warrants to purchase 25,000 shares of common stock. Each warrant
entitles the holder to purchase one share of the Company's common stock at an
exercise price of $6.00. The warrants are exercisable in whole or in part, at
any time prior to June 30, 1999. Interest on the subordinated debentures is
payable quarterly. The subordinated debentures are due June 30, 2004 and are
redeemable after July 1, 1996.
(17) Stockholders' Equity (continued)
In February 1993, the Board of Directors adopted a Stock Incentive Plan which
provides for the grant of incentive stock options, non-incentive or compensatory
stock options and stock appreciation rights to key employees. The per share
exercise price of an incentive stock option shall at least equal the fair market
value of a share of Common Stock on the date the option is granted, and the per
share exercise price of a compensatory stock option shall at least equal the
greater of par value or 85% of fair market value of a share of Common Stock on
the date the option is granted. Under this plan, 176,488 shares of common stock
were reserved for issuance of which 66,000, 15,000 and 127,500 shares were
granted in 1996, 1995 and 1993. There were no options granted under this plan in
1994. During 1996 and 1995, options for 10,000 and 35,000 shares granted in 1993
were forfeited and returned to the plan.
Under the Directors' Plan, which was also adopted in February 1993, each non-
employee Director of the Company at the time of the completion of the 1993
Common Stock Offering was granted compensatory options to purchase 5,000 shares
of Common Stock at the Subscription Price for a share of Common Stock in the
1993 Offering and thereafter at the end of each year commencing on December 31,
1993 for five years, until and including December 31, 1997, each non-employee
director of the Company will receive compensatory options to purchase 250 shares
(or such less number of shares as remain to be granted pursuant to the
Directors' Plan) with an exercise price equal to the fair market value of a
share of Common Stock on the date the option is granted. A total of 50,000
authorized but unissued shares of Common Stock have been reserved for issuance
pursuant to the Directors' Plan. In 1996, 6,500 shares were granted under this
plan. In 1995 and 1994, 2,000 shares were granted each year.
Under the Company's Stock Option Plan which was adopted in April 1984
and amended in April 1987, 95,955 shares of common stock were reserved for
issuance upon exercise of options or shares granted to officers and key
employees. The plan provides that the option price will be fixed by a committee
of the Board of Directors, but will not be less than 100% of the fair value of
the stock at the date of the grant. During 1996 and 1995, 5,000 options were
exercised each year at a price of $1.00 per share. In 1996, 6,000 shares were
forfeited and returned to the plan.
Options granted under each of the plans are exercisable during the period
specified in each option agreement and expire no later than the tenth
anniversary of the date the option was granted.
In October 1995, the FASB issued the Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which
is effective for the Company January 1, 1996. The Company adopted the
disclosure-only provision of SFAS 123 and continues to apply Accounting
Principles Board Opinion No. 25 and related interpretations in accounting for
its plans. Compensation expense was immaterial for 1996. If the Company had
elected to recognize compensation cost for the various Option Plans based on the
fair value at the grant dates for awards under those plans, consistent with the
method prescribed by SFAS 123, the net income and earnings per share for the
year ended December 31, 1996 would have been changed to the pro forma amounts
indicated below:
Net income: As reported $1,253
Pro forma $1,223
Earnings per share: As reported $ .32
Pro forma $ .31
The fair value of Company stock options used to compute proforma net income
and earnings per share disclosures is the estimated present value at grant date
using the Black-Scholes option-pricing model with the following weighted average
assumptions for 1996: no dividend yield; expected volatility of 28.24%; a risk
free interest rate of 5.79%; and an expected holding period of 10 years. Changes
in total options outstanding during 1996, 1995 and 1994 are as follows:
- --------------------------------------------------------------
December 31, 1996
- --------------------------------------------------------------
Shares Option
Under Price
Option Per Share
- --------------------------------------------------------------
Outstanding at
beginning of year 230,000 $1.00 to $13.61
Granted during year 72,500 $5.50 to $ 8.25
Exercised during year (5,000) $1.00
Forfeited during year (16,000) $3.50 to $15.00
- --------------------------------------------------------------
Outstanding at end of year 281,500 $1.00 to $11.38
==============================================================
Options exercisable
at end of year 210,250 $1.00 to $11.38
==============================================================
- --------------------------------------------------------------
December 31, 1995
- --------------------------------------------------------------
Shares Option
Under Price
Option Per Share
- --------------------------------------------------------------
Outstanding at
beginning of year 253,000 $1.00 to $13.61
Granted during year 17,000 $4.25 to $ 5.63
Exercised during year (5,000) $1.00
Forfeited during year (35,000) $3.50
- --------------------------------------------------------------
Outstanding at end of year 230,000 $1.00 to $13.61
==============================================================
Options exercisable
at end of year 194,250 $1.00 to $13.61
==============================================================
(17) Stockholders' Equity (continued)
- -------------------------------------------------------------------
December 31, 1994
- -------------------------------------------------------------------
Shares Option
Under Price
Option Per Share
- -------------------------------------------------------------------
Outstanding at
beginning of year 251,000 $ 1.00 to $13.61
Granted during year 2,000 $ 4.25
- -------------------------------------------------------------------
Outstanding at end of year 253,000 $ 1.00 to $13.61
- -------------------------------------------------------------------
Options exercisable
at end of year 194,750 $ 1.00 to $13.61
- -------------------------------------------------------------------
The weighted average price of options outstanding at December 31, 1996, 1995
and 1994 was $3.46, $3.05, and $3.36 per share, respectively.
(18) Regulatory Matters
FDICIA was signed into law on December 19, 1991; regulations implementing the
prompt corrective action provisions of FDICIA became effective on December 19,
1992. In addition to the prompt corrective action requirements, FDICIA includes
significant changes to the legal and regulatory environment for insured
depository institutions, including reductions in insurance coverage for certain
kinds of deposits, increased supervision by the federal regulatory agencies,
increased reporting requirements for insured institutions, and new regulations
concerning internal controls, accounting, and the operation department. The
prompt corrective action regulations defined specific capital categories based
on an institution's capital ratios. The capital categories, in declining order,
are "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized."
To be considered "adequately capitalized," an institution must generally have
a leverage ratio of at least 4%, a Tier 1 risk-based capital ratio of at least
4%, and a total risk-based capital ratio of at least 8%. An institution is
deemed to be "critically undercapitalized" if it has a tangible equity ratio of
2% or less.
At December 31, 1996 the Bank's leverage ratio was 4.93%, Tier 1 risk-based
ratio was 7.28%, total risk-based ratio was 8.51%, and tangible equity ratio was
4.93%, based on leverage capital of $18.7 million, Tier 1 capital of $18.7
million, total risk-based capital of $21.9 million and tangible equity capital
of $18.7 million, respectively. At December 31, 1996, the Bank is classified as
"adequately capitalized."
The following is a reconciliation of the Bank's capital determined in
accordance with generally accepted accounting principles ("GAAP") to regulatory
tangible, core, and risk-based capital at December 31, 1996:
- --------------------------------------------------------------------------------------------------------------------
Tangible Core Risk-Based
Capital % Capital % Capital %
- --------------------------------------------------------------------------------------------------------------------
Adjusted GAAP Capital $ 22,278 $ 22,278 $ 22,278
General valuation allowance -- -- 3,159
Unrealized loss on securities available for sale,
net of taxes 207 207 207
Goodwill (2,660) (2,660) (2,660)
Non-qualifying deferred tax assets (1,117) (1,117) (1,117)
- --------------------------------------------------------------------------------------------------------------------
Total 18,708 4.93% 18,708 4.93% 21,867 8.51%
- --------------------------------------------------------------------------------------------------------------------
Minimum capital requirement 5,691 1.50 11,382 3.00 20,554 8.00
- --------------------------------------------------------------------------------------------------------------------
Regulatory capital--excess $13,017 3.43% $ 7,326 1.93% $ 1,313 .51%
====================================================================================================================
Dividend Restrictions
The Bank's ability to pay dividends is restricted by certain regulations.
Under the current regulations, the Bank is not permitted to pay cash dividends
or repurchase any of its capital stock if such payment or repurchase would cause
its regulatory capital to be reduced below either the amount of the liquidation
account or the regulatory capital requirements applicable to it. An institution
that exceeds its fully phased in capital requirement could, after prior notice,
but without the approval of the OTS, make capital distributions during a
calendar year of up to 100% of its current net income plus the amount that would
reduce its "surplus capital ratio" (the excess capital over its fully phased-in
capital requirement) to less than one-half of its surplus capital ratio at the
beginning of the calendar year. Any additional capital distributions would
require prior regulatory approval. An institution that meets its regulatory
capital requirement, but not its fully phased-in capital requirement could make
capital distributions without prior OTS approval of between 25% and 75% of
current earnings. A savings institution that does not meet its minimum
regulatory capital requirements cannot make any capital distributions without
prior OTS approval. Because the Bank is the primary source of working capital
for the Company, the Company's ability to pay dividends is therefore limited.
The Company paid cash dividends of $.04 per share during 1996.
34
(19) Financial Instruments
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" ("SFAS 107") requires the estimation of so
called fair values of financial instruments as defined in SFAS 107.
Fair values for financial instruments were based on various assumptions and
estimates as of a specific point in time, represent liquidation values and may
vary significantly from amounts that will be realized in actual transactions. In
addition, certain financial instruments and all non-financial instruments were
excluded from the fair value disclosure requirements. Therefore, the fair values
presented above should not be construed as the underlying value of the Company.
The following methods and assumptions were used to estimate the fair value
of selected financial instruments at December 31, 1996 and 1995:
Cash and cash equivalents: Current carrying amounts reported in the statement of
financial condition for cash and short-term instruments approximate estimated
fair value.
Investment and mortgage-backed securities: Fair values for investment and
mortgage-backed securities were based on current quoted market prices.
Loans, excluding leases: For variable rate loans that reprice frequently and
have no significant credit risk, fair values are based on carrying values. The
estimated fair values for certain mortgage loans (e.g., one-to-four family
residential) and other consumer loans are based on quoted market prices of
similar loans sold in conjunction with securitization transactions, adjusted for
differences in loan characteristics. The fair value of non-accruing and
restructured loans were estimated using discounted cash flow analyses, with
incremental discount rates which consider credit risk and other relevant
factors. The fair values for all other loans were estimated using discounted
cash flow analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality. The carrying amount of
accrued interest approximates its fair value.
Mortgage servicing rights: Fair values were derived from a variety of sources
indicative of servicing values.
Interest receivable: Current carrying amounts reported in the statement of
financial condition for interest receivable approximate estimated fair value.
Deposits: Fair values disclosed for deposits with no stated maturity (checking,
NOW, savings, and money market accounts) are, by definition, equal to the amount
payable on demand at December 31, 1996 and 1995 (i.e., current carrying
amounts). Fair values for deposits with stated maturity dates (time deposits)
were estimated using a discounted cash flow calculation that uses current
interest rates offered in the Company's market area for deposits with comparable
terms and maturities.
Advances from the FHLB:
Short-term: Current carrying amounts of borrowings under repurchase
agreements and other short-term borrowings approximate estimated fair value.
Long-term: Fair value of long-term borrowings are estimated using a
discounted cash flow calculation that uses current borrowing rates for
advances with comparable terms and maturities.
Other borrowings: Fair value of other borrowings was estimated using a
discounted cash flow calculation using a current interest rate for debt with
comparable maturities and terms.
Other liabilities: Includes interest payable and advance payments by borrowers.
Current carrying amounts of interest payable and advance payments by borrowers
approximate estimated fair value.
Commitments to extend credit and letters of credit: The majority of the
Company's commitments to extend credit and letters of credit carry current
market interest rates if converted to loans. Because commitments to extend
credit and letters of credit are generally unassignable by either the Company or
the borrower, they only have value to the Company and the borrower. The
estimated fair value approximates the recorded deferred fee amounts.
The carrying amounts and fair values of the Company's financial instruments
were as follows:
- -------------------------------------------------------------------------------------------------------------
December 31, 1996 1995
- -------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
- -------------------------------------------------------------------------------------------------------------
Financial assets:
Cash and due from banks and interest-bearing deposits $ 10,633 $ 10,633 $ 7,089 $ 7,089
Investment and mortgage-backed securities 95,471 94,672 97,328 96,585
Loans, excluding leases 229,468 226,471 226,523 224,084
Interest receivable 2,156 2,156 2,280 2,280
Mortgage servicing rights 4,843 5,594 2,115 2,369
=============================================================================================================
Financial liabilities:
Deposits $306,248 $306,408 $297,260 $298,343
Advances from the FHLB 18,000 18,231 25,400 26,009
Other borrowings 32,270 32,552 3,000 3,467
Other financial liabilities 5,612 5,612 3,034 3,034
=============================================================================================================
35
(20) Selected Quarterly Consolidated Financial Data (unaudited)
The following table represents quarterly financial data for the periods
indicated. In the opinion of management, this information reflects all
adjustments (consisting solely of normal recurring adjustments) necessary for a
fair presentation of the results of operations for the periods indicated.
Reclassifications have been made to certain previously reported amounts to
conform with the 1996 classifications.
- --------------------------------------------------------------------------------------------------------------------------------
Dec. 31, Sept. 30, Jun. 30, Mar. 31, Dec. 31, Sept. 30, Jun. 30, Mar. 31,
1996 1996 1996 1996 1995 1995 1995 1995
- --------------------------------------------------------------------------------------------------------------------------------
Interest income $ 7,892 $ 6,993 $ 6,601 $ 6,635 $ 6,685 $ 6,726 $ 6,660 $ 6,498
Interest expense 4,049 3,742 3,380 3,511 3,842 3,935 3,904 3,654
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income 3,843 3,251 3,221 3,124 2,843 2,791 2,756 2,844
Provision for possible loan and lease losses 187 100 100 300 275 100 150 100
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
possible loan and lease losses 3,656 3,151 3,121 2,824 2,568 2,691 2,606 2,744
Other income 1,492 874 947 1,546 425 817 621 402
Other expense 4,007 4,943 3,363 3,283 3,324 3,054 2,925 2,768
- --------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 1,141 (918) 705 1,087 (331) 454 302 378
Income tax expense (benefit) 440 (299) 251 370 (1,868) -- --
- --------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 701 $ (619) $ 454 $ 717 $ 1,537 $ 454 $ 302 $ 378
================================================================================================================================
Net income (loss) per share $ 0.18 $ (0.17) $ 0.12 $ 0.19 $ 0.45 $ 0.13 $ 0.09 $ 0.12
================================================================================================================================
Dividends per share $ 0.02 $ 0.02 $ -- $ -- $ -- $ -- $ -- $ --
================================================================================================================================
(21) Condensed Financial Information of Progress Financial Corporation (Parent
Company Only)
Condensed Statements of Financial Condition
- -------------------------------------------------------------------------
December 31, 1996 1995
- -------------------------------------------------------------------------
Assets:
Cash on deposit with subsidiary $ 98 $ 27
Investments in subsidiaries 23,103 19,231
Equity investment 44 30
Accounts receivable from subsidiary 57 5
Other 137 114
- -------------------------------------------------------------------------
Total assets $ 23,439 $ 19,407
=========================================================================
Liabilities and stockholders' equity
Liabilities:
Other borrowings $ 3,000 $ 3,000
Employee Stock Ownership
Plan note payable 220 --
Other 265 --
- -------------------------------------------------------------------------
Total liabilities 3,485 3,000
- -------------------------------------------------------------------------
Stockholders' equity:
Serial preferred stock -- --
Common stock 3,785 3,280
Capital surplus 17,715 15,706
Retained earnings (deficit) (1,134) (2,238)
Unearned Employee Stock
Ownership Plan shares (214) --
Unrealized loss on securities
available for sale (198) (341)
- -------------------------------------------------------------------------
Total stockholders' equity 19,954 16,407
- -------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 23,439 $ 19,407
=========================================================================
Condensed Statements of Operations
- -----------------------------------------------------------------
For the years ended December 31, 1996 1995 1994
- -----------------------------------------------------------------
Dividends from equity investment $ 1 $ -- $ --
zaManagement fees from subsidiary 311 225 --
Equity in undistributed income
(loss) of subsidiaries 1,242 2,707 (627)
Miscellaneous income 1 -- --
- -----------------------------------------------------------------
Total income (loss) 1,555 2,932 (627)
- -----------------------------------------------------------------
Interest expense 291 270 135
Professional services -- 5 --
Amortization of goodwill 6 3 --
- -----------------------------------------------------------------
Total expense 297 278 135
- -----------------------------------------------------------------
Income (loss) before income taxes 1,258 2,654 (762)
Income tax expense (benefit) 5 (17) (46)
- -----------------------------------------------------------------
Net income (loss) $ 1,253 $ 2,671 $(716)
=================================================================
36
(21) Condensed Financial Information of Progress Financial Corporation (Parent
Company Only)
(continued)
Condensed Statements of Cash Flows
- --------------------------------------------------------------------------------
For the years ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 1,253 $ 2,671 $ (716)
Add (deduct) items not
affecting cash flow from
operating activities:
Equity in (income) loss
of subsidiaries (1,242) (2,707) 627
Amortization of deferred
debt issuance cost 25 4 10
Amortization of goodwill 6 3 --
Other 137 (22) (46)
- --------------------------------------------------------------------------------
Net cash flows provided by
(used in) operating activities 179 (51) (125)
- --------------------------------------------------------------------------------
Cash flows from investment activities:
Capital contributions and
additional investment
in subsidiaries (2,637) (23) (2,650)
Dividend from subsidiaries 157 -- --
Purchase of equity investment -- -- (30)
- --------------------------------------------------------------------------------
Net cash flows used in
investment activities (2,480) (23) (2,680)
- --------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from issuance of debt 220 -- 2,901
Net proceeds from issuance
of common stock 2,301 5 --
Dividends paid (149) -- --
- --------------------------------------------------------------------------------
Net cash flows provided by
financing activities 2,372 5 2,901
- --------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents 71 (69) 96
Cash and cash equivalents:
Beginning of year 27 96 --
- --------------------------------------------------------------------------------
End of year $ 98 $ 27 $ 96
- --------------------------------------------------------------------------------
These statements should be read in conjunction with the other notes to the
consolidated financial statements
(22) Significant Risks and Uncertainties
The earnings of the Company depend primarily upon the level of net interest
income, which is the difference between interest earned on its interest earning
assets, such as loans and leases and investments, and the interest paid on its
interest-bearing liabilities, such as deposits and borrowings. Accordingly, the
operations of the Company are subject to broad risks and uncertainties
surrounding its exposure to changes in the interest rate environment.
The financial statements of the Company are prepared in conformity with
generally accepted accounting principles that require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from these estimates.
Significant estimates are made by management in determining the allowance for
possible loan and lease losses and carrying values of real estate owned.
Consideration is given to a variety of factors in establishing these estimates
including current economic conditions, diversification of the loan portfolio,
delinquency statistics, results of internal loan reviews, borrowers' perceived
financial and managerial strengths, the adequacy of underlying collateral, if
collateral dependent, or present value of future cash flows and other relevant
factors. Since the allowance for possible loan and lease losses and carrying
value of real estate assets is dependent, to a great extent, on general and
other conditions that may be beyond the Bank's control, it is at least
reasonably possible that the Company's estimates of the allowance for possible
loan and lease losses and the carrying values of the real estate assets could
differ materially in the near term.
Concentrations of Credit Risk
The Company extends credit in the normal course of business to its customers,
substantially all of whom operate or reside within southeastern Pennsylvania and
surrounding business areas. The ability of its customers to meet contractual
obligations is, to some extent, dependent upon the conditions of this regional
economy.
In addition, certain groups of borrowers share characteristics which, given
current economic conditions may affect their ability to meet contractual
obligations. These customers and their credit extensions at December 31, 1996,
include: retail consumers that account for 38% of all credit extensions;
commercial mortgages and commercial real estate that account for 40%;
residential construction and land that account for 9%; and commercial business
that account for 13%.
37
- ----------------------------------------------
Report of Independent Accountants
- ----------------------------------------------
[LETTERHEAD OF COOPERS & LYBRAND APPEARS HERE]
To the Stockholders and Board of Directors of
Progress Financial Corporation:
We have audited the accompanying consolidated statements of financial
condition of Progress Financial Corporation as of December 31, 1996 and 1995 and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan
and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on test a basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Progress Financial Corporation as of December 31, 1996 and 1995 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
January 22, 1997
38
Progress Financial Corporation
- --------------------------------------------------------------------------------
Market Information
- --------------------------------------------------------------------------------
Progress Financial Corporation's common stock is traded on the National
Association Securities Dealers Automated Quotation Stock Market under the symbol
"PFNC." At December 31, 1996 the Company had approximately 1,500 holders of
record.
Payment of cash dividends is subject to regulatory restrictions as described in
Note 18 of Notes to Consolidated Financial Statements. In 1996, the Company paid
dividends of $.02 per share in the third and fourth quarters. Prior to 1996, the
Company did not pay a dividend since the second quarter of 1990.
The following table sets forth the high and low closing prices and trading
volumes for the periods described:
- --------------------------------------------------------------------------------
1996
- --------------------------------------------------------------------------------
Low High Volume
- --------------------------------------------------------------------------------
First Quarter $5 1/4 $7 1/4 583,000
Second Quarter 6 1/4 7 1/4 350,000
Third Quarter 5 3/4 6 3/4 388,000
Fourth Quarter 6 3/8 8 3/4 1,155,000
- --------------------------------------------------------------------------------
1995
- --------------------------------------------------------------------------------
Low High Volume
- --------------------------------------------------------------------------------
First Quarter $4 1/4 $5 364,000
Second Quarter 4 1/2 6 1/4 562,000
Third Quarter 5 6 1/4 484,000
Fourth Quarter 5 1/8 6 1/8 551,000
39
Progress Financial Corporation
- --------------------------------------------------------------------------------
Information For Shareholders
- --------------------------------------------------------------------------------
Progress Financial Corporation and Progress Bank
Directors
John E. F. Corson
Consultant and President
Corson Investments
William O. Daggett, Jr.
Managing Partner
Kistler-Tiffany Companies
Donald F. U. Goebert
Chairman of the Board
Adage Inc.
H. Wayne Griest*
Progress Realty Advisors, L.P.
Quaker State Leasing CompanyThe Equipment Leasing Company
Joseph R. Klinger
Principal
KMR Management, Inc.
Paul M. LaNoce
President
DAR Industrial Products, Inc.
A. John May, III, Esquire*
Attorney
Pepper, Hamilton & Scheetz
William L. Mueller, Esquire
Attorney
Brandt, Haughey, Penberthy, Lewis & Hyland
Janet E. Paroo
Vice President-Finance and Administration
Global Health Group, Inc.
Charles J. Tornetta
President
Tornetta Realty
W. Kirk Wycoff
Chairman, President and
Chief Executive Officer
Progress Financial Corporation
and Progress Bank
Principal Officers
Robert J. Bifolco**
Senior Vice President
Commercial Banking
Jeane M. Coyle**
Senior Vice President
Consumer Banking
Steven D. Hobman**
Senior Vice President
Specialized Lending
Eric J. Morgan
Senior Vice President
Credit and Administration
Frederick E. Schea
Senior Vice President and
Chief Financial Officer
W. Kirk Wycoff
Chairman, President and
Chief Executive Officer
Quaker State Leasing Company
Principal Officers
H. Wayne Griest
Chairman and Chief Executive Officer
Donald P. Kennedy
President
Kenneth R. Collins, Jr.
Vice President
The Equipment Leasing Company
Principal Officers
Dennis M. Horner
President
Scott A. Wheeler
Vice President
Progress Realty Advisors, L.P.
Principal Officers
H. Wayne Griest
Chairman and Chief Executive Officer
Robert A. Jacoby
President and Chief Operating Officer
Francis W. Ashmore
Senior Vice President
Progress Asset
Management Company
Principal Officer
Terry J. Soffera
Vice President
Community Board Members
H. Blair Anthony
Peter A. Barbone
Patricia A. Burns
Anthony F. Cianciulli
Nicholas A. DiRenzo, Sr.
John A. Foderaro
Frederick Marles
John S. Ondik, III
Cynthia M. Walsh
*Director of Company only
**Officer of Bank only
40