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Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
Annual Report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 for the
fiscal year ended December 31, 1999
Commission File Number: 0-14815
PROGRESS FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 23-2413363
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4 Sentry Parkway - Suite 200
P. O. Box 3036
Blue Bell, Pennsylvania 19422-0764
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 825-8800
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Securities registered pursuant to Section 12(b) of the Act: Non applicable
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock, held by non-affiliates of the
Registrant as a group, was $56,941,107 as of March 3, 2000, based upon the
closing price of $11.3125 per share of the Registrant's common stock on March 3,
2000 as reported by the Nasdaq Stock Market.
As of March 3, 2000, there were 5,554,085 issued and outstanding shares of the
Registrant's Common Stock.
Documents Incorporated By Reference:
(1) Portions of the definitive proxy statement for the 2000 Annual Meeting
of Shareholders are incorporated into Part III, Items 10 through 13 of
this Form 10-K.
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PROGRESS FINANCIAL CORPORATION
Table of Contents
PART I
Page
Item 1. Business..................................................................... 3
Item 2. Properties................................................................... 10
Item 3. Legal Proceedings............................................................ 10
Item 4. Submission of Matters to a Vote of Security Holders.......................... 10
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.... 10
Item 6. Selected Consolidated Financial Data......................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 12
Item 7A. Quantitative and Qualitative Disclosure about Market Risk.................... 24
Item 8. Financial Statements and Supplementary Data.................................. 26
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..................................................... 49
PART III
Item 10. Directors and Executive Officers of the Registrant........................... 49
Item 11. Executive Compensation....................................................... 49
Item 12. Security Ownership of Certain Beneficial Owners and Management............... 49
Item 13. Certain Relationships and Related Transactions............................... 49
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............. 50
Signatures................................................................... 52
2
PART I
Item 1. Business
General
Progress Financial Corporation (the "Company"), headquartered in Blue
Bell, Pennsylvania, is a diversified financial services company incorporated
under the laws of the State of Delaware. The Company owns all of the outstanding
stock of Progress Bank (the "Bank"), a federally chartered savings bank. The
Company is a registered unitary thrift holding company and is authorized as a
Delaware corporation to engage in any activity permitted by the Delaware General
Corporation Law and federal law and regulation. The holding company structure
permits the Company to expand the size and scope of the financial services
offered beyond those that the Bank is permitted to offer.
The Company's current business strategy is to operate as a diversified
financial services company providing a full range of banking services with an
emphasis on commercial business loans and leases to small- and medium-sized
businesses, commercial real estate loans, and to a lesser scope, residential
construction and consumer lending, funded primarily by customer deposits. As a
complement to this core business, the Company has expanded its business
activities to include: real estate advisory; insurance and financial planning;
asset management, managing funds which provide subordinated debt financing and
equity funding primarily to technology companies in the Mid-Atlantic region; and
communications and telemarketing, which provide a steady source of fee income.
Banking. The Bank conducts its business through nine full-service banking
offices located in Montgomery County, one full-service banking office in Bucks
County, one full-service banking office in Delaware County, two full-service
banking offices in Chester County and one full-service banking office in the
Andorra section of Philadelphia, in southeastern Pennsylvania.
Historically, the principal business of the Company consisted of
attracting deposits from the general public through the Bank's branch office
network and using such deposits to originate loans secured by first mortgage
liens on existing single-family residential, multi-family residential and
commercial real estate as well as to originate construction loans. Beginning in
1995, the Company's emphasis shifted to commercial business, commercial real
estate, construction lending and equipment leasing, with a focus on providing
such banking services to small- and medium-sized businesses, including companies
in the technology sector.
The Company also invests in mortgage-backed securities, including
securities which are insured or guaranteed by the U.S. Government and agencies
thereof, and other similar investments permitted by applicable laws and
regulations. In addition, the Bank is periodically involved in real estate
development and related activities, through its subsidiaries, primarily to
facilitate the completion and sale of certain property held as real estate
owned.
Commercial Business Lending. The Bank's commercial banking division provides
customized loan, deposit and investment products, as well as cash management
services to small- and middle-market businesses. Through the Bank, the Company
originates secured or unsecured loans for commercial, corporate, business and
agricultural purposes, which include the issuance of letters of credit.
As a result of acquisitions of small- and medium-sized financial
institutions by large bank holding companies in southern Pennsylvania in recent
years, a growing number of small- and middle-market commercial customers have
sought the full range of commercial banking services that the Bank offers due to
the personalized service the Bank provides. The Company believes it has an
opportunity to expand further its commercial lending relationships and increase
its commercial deposits due to the willingness to tailor its products to the
small- and middle-market businesses. In addition, this consolidation has
resulted in the availability of experienced commercial lenders.
In recent years, the Bank has increased significantly its commercial
business lending. At December 31, 1999, the Bank's commercial business loan
portfolio had an aggregate principal balance of $71.5 million as compared to
$57.9 million at December 31, 1998. Most commercial loan customers are small- to
middle-market businesses located in the Bank's primary market area. Generally,
commercial business loans are between $100,000 and $2.5 million and the largest
commercial loan as of December 31, 1999 was $2.2 million.
As a federally chartered savings bank, the Bank is subject to certain
lending restrictions including a limit on commercial loans of 20% of assets.
Under federal regulations certain lease transactions are treated as the
functional equivalent of loans and are accordingly classified as commercial,
consumer or agricultural loans based upon the
3
underlying collateral or personal property. The Company is actively engaged in
the leasing business, particularly equipment leasing, through a subsidiary of
the Bank. Historically, the Company has viewed its leasing activities as
separate from the Bank's commercial business lending and, as such, subject to a
separate 10% of assets limitation. However, since the leases are primarily
finance leases provided in connection with the acquisition of business
equipment, much of the leasing portfolio must be aggregated with the Bank's
commercial business loan portfolio to determine compliance with the 20% of
assets limitation. As of December 31, 1999, the Bank's investment in commercial
business loans and leases exceeded the regulatory limitation by approximately
$56.0 million. As a result, the Company is currently developing a plan to bring
the Bank into compliance and to maintain compliance in the future with this
limitation.
Specialized Lending. The Bank established the Specialized Lending Division in
1996, in order to provide customized financial services to companies in the
technology, healthcare and insurance industries. The Specialized Lending
Division primarily focuses on lending to technology-based companies in the
greater Philadelphia geographic area from Princeton, New Jersey to Richmond,
Virginia and west to Harrisburg, Pennsylvania. The division seeks to develop
relationships with emerging technology-based companies which have already
received initial venture capital and have annual revenues of at least $1.0
million. The Specialized Lending Division is comprised of five senior lending
officers with experience in the emerging business markets and operates out of
its office in Blue Bell, Pennsylvania. In December 1997, the Bank and the
Eastern Technology Council of Greater Philadelphia, a non-profit
technology-oriented trade group, entered into a three-year agreement providing
for the Bank to serve as the council's preferred provider of financial services
to be known as "TechBanc." Through this alliance, the Bank now has access to
over 700 member organizations of the council to provide lending and banking
services.
During 1999 and 1998, the Bank originated approximately $51.0 million
and $37.5 million of loans, respectively, through the Specialized Lending
Division. These included loans to approximately 30 companies engaged in the
software, electronics and healthcare services industries. Generally, such loans
are originated with a balance of between $100,000 and $5.0 million. As of
December 31, 1999, the Bank had 157 loans outstanding originated through the
Specialized Lending Division with an aggregate outstanding balance of $48.6
million.
In addition to providing financing, the Company often obtains an equity
position in the borrower in the form of warrants to purchase common stock of the
borrower. At December 31, 1999, the Company held warrants to purchase common
stock of 32 companies that are customers of the Specialized Lending Division.
The Company generally recognizes client warrant income on such investments when
such common stock is publicly traded and any applicable restriction or lock-up
period on the sale of the warrants or the common stock expires. There can be no
assurance that the common stock of any of these companies will become publicly
traded or that the common stock will trade at or above the warrant exercise
price. As an incentive, 20% to 25% of the aggregate warrants issued by each
customer to the Company are issued directly to executive officers and employees
of the Bank.
During 1999, the Company recognized $4.2 million of client warrant
income due to the expiration of restrictions on the sale of warrants to acquire
common stock of customers of the Specialized Lending Division. The Company
exercised 99,924 warrants (adjusted for 2 for 1 split) of VerticalNet on a net
issue basis which resulted in the receipt of 94,068 shares of common stock.
During the year, the Company disposed of 74,148 shares and held 19,920 shares in
a trading account at December 31, 1999. As a result, the Company realized $3.7
million of client warrant income during 1999 from the sale and market value
adjustments of these shares for the twelve months ended December 31, 1999. The
Company also sold 60,024 common shares of IQEplc which were acquired from the
exercise of warrants and realized $513,000 of client warrant income during the
twelve months ended December 31, 1999.
4
The following is a brief description of each company in which the
Company held warrants at December 31, 1999 for which the underlying common stock
was publicly traded:
Internet Capital Group, Inc. ("ICGE"), located in Wayne, Pennsylvania,
is a business-to-business e-commerce company which identifies,
acquires interests in, operates and manages early to mid-stage
e-commerce companies. The Company provided a line of credit and
received warrants to purchase 25,500(1) shares of common stock of
ICGE, with an exercise price of $5.00(1) and an expiration of seven
years from date of issuance. The Company also owns 49,412(1) shares of
common stock which it acquired through an investment in a convertible
note of ICGE made by its venture capital subsidiary. The Company's
carrying cost of this investment is $250,000. ICGE went public at an
initial offering price of $6.00(1) per share of common stock on August
4, 1999. The trading of this stock, like many e-commerce companies, is
very volatile. At March 3, 2000 the closing price of a share of ICGE
common stock was $119.06. Because the warrants and underlying
25,500(1) shares of common stock are not registered under the
Securities Act, the Company is restricted from selling these shares
prior to April 29, 2000. Also, the 49,412(1) shares of common stock
acquired through the convertible note are not registered under the
Securities Act and therefore, the Company is restricted from selling
these shares prior to May 10, 2000.
Ravisent Technologies, Inc. ("Ravisent") is a DVD hardware and software
company located in Malvern, Pennsylvania. The Company holds warrants to
purchase 50,000 shares of Ravisent common stock with an exercise price
of $3.56 per share and an expiration of seven years from the date of
issue. Ravisent went public at an initial offering price of $12.00 per
share of common stock on July 16, 1999. The trading of this stock, like
many Internet companies, is very volatile. At March 3, 2000 the closing
price of a share of Ravisent common stock was $15.94. The Company is
prohibited from selling or otherwise disposing of the warrants or the
underlying common stock for a period of 180 days from July 16, 1999.
US Interactive, Inc. is an internet professional services firm located
in King of Prussia, Pennsylvania. The Company provided a line of credit
and term loan and received warrants to purchase 52,000 shares of common
stock of US Interactive, with an exercise price of $3.50 and an
expiration of ten years from the date of issuance. US Interactive went
public at an initial offering price of $10.00 per share of common stock
on August 9, 1999. The trading of this stock, like many Internet
companies, is very volatile. At March 3, 2000 the closing price of a
share of US Interactive common stock was $44.56. The Company is
prohibited from selling or otherwise disposing of the warrants or the
underlying common stock for a period of 180 days from August 9, 1999.
Commercial Real Estate Lending. The Bank originates mortgage loans secured by
multi-family residential and commercial real estate. Commercial real estate
loans originated by the Bank are primarily secured by office buildings, retail
stores, warehouses and general-purpose industrial space. Commercial real estate
loans also include multi-family residential loans, substantially all of which
are secured by apartment buildings. A significant portion of such loans are
secured by owner-occupied properties and relate to borrowers which have an
existing banking relationship with the Bank.
At December 31, 1999, the Bank's commercial real estate loan portfolio
consisted of approximately 275 loans with an aggregate principal balance of
approximately $162.8 million and the Bank's largest commercial real estate loan
customer had an outstanding balance of $13.0 million which includes
participations with other financial institutions of $9.7 million. Although terms
vary, commercial real estate loans secured by existing properties generally have
maturities of ten years or less and interest rates which adjust every one, three
or five years in accordance with a designated index.
At December 31, 1999, substantially all of the Bank's commercial real
estate loan portfolio was secured by properties located within its primary
market area. Loan-to-value ratios on the Bank's commercial real estate loans are
limited to 80% or lower, except in certain limited circumstances. In addition,
as part of the criteria for underwriting permanent commercial real estate loans,
the Bank generally imposes a debt service coverage ratio (the ratio of net cash
from operations before payment of debt service to debt service) of at least
1.2x. It is also the Bank's general policy to obtain personal guarantees of its
commercial real estate loans from the principals of the borrower.
(1) Adjusted for 2 for 1 split.
5
Commercial real estate lending is generally considered to involve a
higher degree of risk than single-family residential lending. Such lending
typically involves large loan balances concentrated in a single borrower or
groups of related borrowers. In addition, the payment experience on loans
secured by income-producing properties is typically dependent on the successful
operation of the related real estate project and thus may be subject to a
greater extent to adverse conditions in the real estate market or in the economy
generally. The Bank generally attempts to offset the risks associated with
commercial real estate lending by, among other things, lending primarily in its
market area, periodically inspecting each property, using conservative
loan-to-value ratios in the underwriting process and obtaining financial
statements and rent rolls from all commercial and multi-family borrowers on at
least an annual basis.
Construction Lending. Through the Bank, the Company also offers both residential
construction loans and, to a lesser extent, commercial construction loans. At
December 31, 1999, the Company's construction loan portfolio consisted of
approximately 44 loans with an aggregate principal balance of approximately
$59.2 million and the Company's largest construction loan had an outstanding
balance of $5.0 million.
Construction loans generally offer higher yields and afford the Company
the opportunity to increase the interest rate sensitivity of its loan portfolio.
Construction financing is generally considered to involve a higher degree of
risk of loss than long-term financing on improved, owner-occupied real estate.
Risk of loss on a construction loan is dependent in large part upon the accuracy
of the initial estimate of the property's value at completion of construction or
development, the estimated cost (including interest) of construction and the
financial strength of the borrower. During the construction phase, a number of
factors could result in delays and cost overruns. If the estimate of
construction costs proves to be inaccurate, the Company may be required to
advance funds beyond the amount originally committed to permit completion of the
development. If the estimate of value proves to be inaccurate, the Company may
be confronted, at or prior to the maturity of the loan, with a project having a
value which is insufficient to assure full repayment, in which case the Company
would have to rely upon the borrower's financial ability.
The Company generally attempts to address the additional risks
associated with construction lending by, among other things, lending primarily
in its market area, periodically inspecting each property during the
construction period, using conservative loan-to-value ratios in the underwriting
process and generally requiring personal guarantees. At December 31, 1999, all
of the Company's construction loans were secured by properties located within
the Company's primary market area. In addition, residential construction loans
are generally made for 75% or less of the appraised value of the property upon
completion. For owner-occupied construction/permanent loans, the Bank will lend
up to 80% of the lesser of the full appraised value or the land plus costs.
Moreover, the Company does not originate loans for the construction of
speculative (or unsold) residential properties. Prior to making a commitment to
fund a construction loan, the Company requires both an appraisal of the property
by independent appraisers approved by the Board of Directors and a study of the
feasibility of the proposed project.
Construction loans, including land loans, generally have maturities of
12 to 24 months (up to three years in the case of land loans). Interest rates on
construction loans generally adjust in accordance with a designated index.
Advances are generally made to cover actual construction costs, and generally
include a reserve for paying the stated interest due on the loan during the life
of the loan. Loan proceeds are disbursed as inspections of construction progress
warrants and as pre-construction sale and leasing requirements generally imposed
by the Company are met.
Consumer Lending. Subject to restrictions contained in applicable federal laws
and regulations, the Bank is authorized to make loans for a wide variety of
personal or consumer purposes. At December 31, 1999 the Bank's consumer loan
portfolio consisted of approximately 1,950 loans with an outstanding balance of
$34.9 million.
The Bank has been emphasizing a variety of consumer loans in recent
years in order to provide a full range of financial services to its customers
and because such loans generally have shorter terms and higher interest rates
than traditional first mortgage loans. The consumer loans offered by the Bank
include home equity loans and lines of credit, deposit account secured loans and
loans that are secured by personal property, including automobiles.
Home equity loans are originated by the Bank for up to 90% of the
appraised value, less the amount of any existing prior liens on the property.
The Bank also offers home equity lines of credit in amounts up to 90% of the
appraised value, less the amount of any existing prior liens. Home equity loans
have a maximum term of 15 years, and the interest rate is dependent upon the
term of the loan. The Bank secures the loan with a mortgage on the property
(generally a second mortgage) and will originate the loan even if another
institution holds the first mortgage.
6
Consumer loans generally have shorter terms and higher interest rates
than mortgage loans but generally involve more credit risk than mortgage loans
because of the type and nature of the collateral and, in certain cases, the
absence of collateral. In addition, consumer lending collections are dependent
on the borrower's continuing financial stability, and thus are more likely to be
adversely effected by job loss, divorce, illness and personal bankruptcy. In
most cases, any repossessed collateral for a defaulted consumer loan will not
provide an adequate source of repayment of the outstanding loan balance. The
Company believes that the generally higher yields earned on consumer loans
compensate for the increased credit risk associated with such loans and that
consumer loans are important to its efforts to increase rate sensitivity,
shorten the average maturity of its loan portfolio and provide a full range of
services to its customers.
Equipment Leasing. As part of the strategy to be a full-service commercial
lender, the Company acquired an equipment leasing company in 1996 in order to
provide diversified equipment leasing services to small- and middle-market
business companies. In January and November 1998, the Company further expanded
its leasing capacity through the acquisition of two additional leasing
companies. At December 31, 1999, the Bank's lease financing portfolio consisted
of approximately 4,830 leases with an outstanding balance of $87.0 million.
Equipment lease financing is provided through the Bank's subsidiary,
Progress Leasing Company ("PLC"), formerly The Equipment Leasing Company
("ELC"), also doing business as Quaker State Leasing Company ("QSL"). PLC has
two divisions, one located in Blue Bell, Pennsylvania and another in Baltimore,
Maryland. Through this network, the Company provides lease financing throughout
the mid-Atlantic region with a current concentration on Pennsylvania, New York,
New Jersey, Maryland and Virginia. The Company provides leasing either directly
to the business customer or through regional vendor sponsored programs.
The Company provides lease financing for a wide variety of business
equipment, including computer systems, telephone systems, furniture, landscaping
and construction equipment, medical equipment, dry cleaning equipment and
graphic systems equipment.
For many of the Company's leases, the Company may retain the leased
property upon expiration of the lease based on the residual value. In the event
that the residual value is less than provided for in the lease, the Company may
have a loss related to the disposition of such property. However, because a
majority of the Company's leases are bought out or extended at the end of their
terms, the Company has not experienced any material losses in aggregate residual
values to date.
Real Estate Advisory. The Company conducts commercial mortgage banking and
brokerage services through Progress Realty Advisors, Inc. ("PRA"), a subsidiary
of the Company formed in September of 1993, and its divisions. PRA was formed as
a complement to the Bank's commercial lending activities in order to provide
lending services for borrowers where borrowing needs are not consistent with the
Bank's lending operations due to, among other things, the amount of financing
required, geographic location of the borrower, recourse provisions and
business/banking relationships. PRA specializes in originating, underwriting and
closing commercial real estate financing for residential, multi-family and
commercial properties for other financial institutions, insurance and finance
companies for a brokerage fee.
Teleservices. Procall Teleservices, Inc. ("PTI"), a subsidiary of the Company,
is an interactive communications and marketing firm, which provides a full range
of business-to-business teleservices, including customer service, market
research and telesales. PTI, which was formed and began operations in the second
quarter of 1997, provides marketing support to a variety of businesses, from
start-up ventures to Fortune 500 companies as well as the subsidiaries of the
Company. PTI also manages the call center for the Bank.
Other Activities. Progress Capital, Inc. ("PCI"), a subsidiary of the Company
was formed in 1996 and is the corporate general partner of the Ben
Franklin/Progress Capital Fund, L.P. ("Ben Franklin"), a $9.1 million fund
managed by Progress Capital Management, Inc. ("PCM"), also a subsidiary of the
Company, which commenced operations in December 1997 and provides subordinated
debt financing to early-stage Mid-Atlantic based technology companies with
innovative products and an existing revenue stream. In addition, Ben Franklin
generally receives warrants to purchase equity of the borrowers in connection
with such lending. PCM also manages the newly formed NewSpring Ventures, L.P.
("NewSpring") which provides growth capital for emerging companies. New Spring
expects to raise $30.0 million in private placements of institutional and
individual investors and, once licensed as a Small Business Investment Company,
to use participating securities leverage of up to $60.0 million for a total fund
amount of $90.0 million. The Company earns fees for managing Ben Franklin and
NewSpring through its subsidiary PCM as well as maintaining an equity interest.
PCI also invests in middle market companies that are prospects or customers of
the Company and companies who have demonstrated a superior track record in their
area of expertise.
7
In February 1998, the Company formed Progress Development Corp ("PDC"),
to invest in a joint venture partnership, Progress Development I LP, which
acquired an interest in NewSeasons Assisted Living Communities ("NewSeasons")
with Independence Blue Cross. NewSeasons owns, acquires, develops and operates
assisted living residences for the elderly. In addition to owning an equity
interest in NewSeasons, Progress Development I LP will provide fee based
development, construction management and financial services to NewSeasons.
In January 1999, the Company's newest subsidiary Progress Financial
Resources, Inc. ("PFR") commenced operations. PFR, a Delaware corporation, is
headquartered in Philadelphia, Pennsylvania, and sells investment and insurance
products, employee benefits and financial planning services to individuals and
businesses. PFR offers securities through AXA Advisors, LLC (New York, New York)
and insurance products, primarily but not exclusively, through the Equitable
Life Assurance Society of the United States.
Financial Information by Business Segment
The Company has four principal activities: banking, equipment leasing,
real estate advisory and teleservices. The measurement of the performance of
these business segments is based on the Company's current management structure
and is not necessarily comparable with similar information for any other
financial institution. The information presented is also not necessarily
indicative of each segments' financial condition and results of operations if
they were independent entities. The following selected financial information by
business segment is presented in thousands of dollars:
Equipment Real Estate
Banking Leasing Advisory Teleservices Other Total
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Assets at:
December 31, 1999 $659,750 $85,159 $2,380 $1,715 $16,530 $765,534
December 31, 1998 562,086 71,416 3,184 740 9,387 646,813
Revenues for the year ended:
December 31, 1999 26,701 5,799 3,148 3,880 8,207 47,735
December 31, 1998 22,663 4,881 2,534 1,600 (139) 31,539
December 31, 1997 18,501 4,764 1,265 662 53 25,245
Net income for the year ended:
December 31, 1999 4,278 112 (19) 639 1,661 6,671
December 31, 1998 4,464 1,199 192 111 (986) 4,980
December 31, 1997 3,411 522 58 (15) (509) 3,467
Recent Development
In January 2000, the Company acquired KMR Management, Inc. ("KMR"), a
Pennsylvania based corporation. KMR will operate as a wholly owned subsidiary of
the Company and will provide financial and operational management consulting
services for commercial clients.
Competition
The Company faces strong competition both in attracting deposits and
making loans. As a provider of a wide range of financial services, the Company
competes with national and state banks, savings and loan associations,
securities dealers, brokers, mortgage bankers, finance and insurance companies,
and other financial service companies. The ability of the Company to attract and
retain deposits depends on its ability to generally provide a rate of return,
liquidity and risk comparable to that offered by competing investment
opportunities. The Company competes for loans principally through the interest
rates and loan fees it charges and the efficiency and quality of services it
provides borrowers.
8
REGULATION AND SUPERVISION
General
The Company, as a unitary thrift holding company, is subject to
comprehensive examination, supervision and regulation by the Office of Thrift
Supervision ("OTS"). As a subsidiary of a unitary thrift holding company, the
Bank is subject to certain restrictions in its dealings with the Company and
affiliates thereof. Four of the Company's non-banking subsidiaries (PRA, PTI,
PCM and PDC) are subject to the laws of the Commonwealth of Pennsylvania. PCI
and PFR are Delaware corporations.
The Bank
Insurance of Deposits
The Bank's deposits are insured by the Savings Association Insurance
Fund ("SAIF") to a maximum of $100,000 for each depositor. The Federal Deposit
Insurance Corporation ("FDIC") requires an annual audit by independent
accountants and may also examine the Bank.
Federal law requires that the FDIC maintain the reserve level of each
of the SAIF and the Bank Insurance Fund ("BIF") at 1.25% of insured deposits.
The BIF reached this level during 1995. Deposit insurance premiums in 1999,
averaged 5.925 cents per $100 of deposits, compared to 6.22 cents per $100 of
deposits in 1998, and an average 7.89 cents per $100 of deposits in 1997.
Deposit insurance is payable on a quarterly basis.
Qualified Thrift Lender Test
All savings associations are required to meet a qualified thrift lender
("QTL") test set forth in Section 10(m) of the Home Owners' Loan Act ("HOLA")
and regulations of the OTS thereunder to avoid certain restrictions on their
operations. Currently, the QTL test requires that 65% of an institution's
"portfolio assets" (as defined) consist of certain housing, small business, and
consumer related assets on a monthly average basis in 9 out of every 12 months.
The Bank complied with this test for 1999. At December 31, 1999,
approximately 65.81% of the Bank's assets were invested in qualified thrift
investments, which was in excess of the percentage required to qualify under the
QTL test.
Federal Home Loan Bank System
The Bank is a member of the Federal Home Loan Bank of Pittsburgh
("FHLB"), which administers the home financing credit function and serves as a
source of liquidity for member savings associations and commercial banks within
its assigned region. It makes loans to members (i.e., advances) in accordance
with policies and procedures established by its Board of Directors. As of
December 31, 1999, the Bank's advances from the FHLB amounted to $88.0 million.
As a member, the Bank is required to purchase and maintain stock in the
FHLB in an amount equal to the greater of 1% of its mortgage related assets or
.3% of total assets. At December 31, 1999, the Bank had $4.9 million in FHLB
stock, which was in compliance with this requirement.
Federal Limitations on Transactions with Affiliates
Transactions between savings associations and any affiliate are
governed by Section 23A and 23B of the Federal Reserve Act. In addition to the
restrictions imposed, no savings association may (i) loan or otherwise extend
credit to an affiliate, except for any affiliate which engages only in
activities which are permissible for bank holding companies, or (ii) purchase or
invest in any stocks, bonds, debentures, notes, or similar obligations of any
affiliate, except for affiliates which are subsidiaries of the savings
association.
In addition, Section 12 CRF-215 (Regulation O) of the Code of Federal
Regulations places restrictions on loans by savings associations to executive
officers, directors, and principal shareholders of the Company and the Bank. At
December 31, 1999, the Bank was in compliance with this regulation.
9
Employees
As of December 31, 1999, the Company had a total of 316 full-time
equivalent employees. Employment at the Company's individual subsidiaries was as
follows: The Bank and its leasing companies had 241 full-time equivalent
employees; PRA had 22 full-time equivalent employees; PTI had 22 full-time
equivalent employees and also utilizes personnel obtained through an employment
services agency; PDC had 3 full-time equivalent employees; PFR had 21 full-time
equivalent employees and PCM had 7 full-time equivalent employees.
Item 2. Properties
The Company's and the Bank's executive offices are located at 4 Sentry
Parkway, Suite 200, Blue Bell, Pennsylvania. The Bank conducts business from
fourteen Pennsylvania branch offices in Bridgeport, Plymouth Meeting, East
Norriton, Conshohocken, King of Prussia, Lansdale, Norristown, Jeffersonville,
Paoli, Lionville, Southampton, Trappe, Rosemont and the Andorra community of
Philadelphia; three of which are owned and eleven are leased. PLC conducts
equipment-leasing business in leased facilities in Baltimore, MD, and Blue Bell,
PA. PRA has leased locations in Blue Bell, PA; Richmond, VA; Woodbridge, NJ;
Chesapeake, VA, and Wilmington, DE. PFR leases its location in Philadelphia, PA.
PTI leases its location in Blue Bell, PA. PCM leases office space in
Conshohocken, PA.
Item 3. Legal Proceedings
The Company is involved in routine legal proceedings occurring in the
ordinary course of business which management, after reviewing the foregoing
actions with legal counsel, is of the opinion that the liability, if any,
resulting from such actions will not have a material effect on the financial
condition or results of operations of the Company.
Item 4. Submissions of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Progress Financial Corporation's common stock is traded on The Nasdaq
Market(R) under the symbol "PFNC." At December 31, 1999 the Company had
approximately 2,000 holders of record.
Payment of cash dividends is subject to regulatory restrictions as
described in Note 19 of Notes to Consolidated Financial Statements. The Company
paid cash dividends of $.17 per share during 1999 and $.13 per share during
1998.
The following table sets forth the high and low closing prices and
trading volumes for the periods described. Prior periods have been restated to
reflect the 5% stock dividend distributed to shareholders on August 31, 1999.
1999 1998
-------------------------------------- --------------------------------------
Low High Volume Low High Volume
-------------------------------------- --------------------------------------
First Quarter $11 27/64 $15 1/8 1,036,000 $13 53/64 $16 25/32 561,000
Second Quarter 13 37/64 16 27/64 982,000 16 3/32 20 41/64 1,362,000
Third Quarter 12 5/8 15 1/16 569,000 12 9/64 17 51/64 700,000
Fourth Quarter 12 1/8 13 1/4 963,000 10 61/64 14 11/64 1,182,000
10
Item 6. Selected Consolidated Financial Data
Tabular information is presented in thousands of dollars except for share and
per share data. This data should be read in conjunction with the Notes to
Consolidated Financial Statements.
December 31, 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
Financial Condition
Investment and mortgage-backed securities:
Available for sale $149,518 $164,368 $ 50,913 $ 46,200 $ 42,346
Held to maturity 34,309 12,401 53,472 49,271 54,982
Loans and leases, net 497,738 394,246 339,903 265,968 236,025
Loans held for sale -- 25,250 373 599 3,153
Real estate owned, net 66 -- 380 2,150 728
Total assets 765,534 646,813 507,460 398,679 360,660
Deposits 521,439 408,162 340,761 306,248 297,260
Borrowings and subordinated debt 162,767 167,416 84,247 63,403 40,626
Capital securities 14,451 14,431 14,400 -- --
Shareholders' equity 47,809 41,554 25,362 20,594 16,957
Results of Operations
Interest income $ 52,174 $ 45,329 $ 36,497 $ 30,114 $ 27,052
Interest expense 25,432 22,450 17,894 15,820 15,600
Net interest income 26,742 22,879 18,603 14,294 11,452
Provision for loan and lease losses 3,548 959 1,509 781 641
Net interest income after provision for loan and lease 23,194 21,920 17,094 13,513 10,811
losses
Non-interest income 20,993 8,660 6,642 5,100 2,331
Non-interest expense 33,973 22,676 18,047 16,466 12,273
Income before income taxes and cumulative effect of
accounting change 10,214 7,904 5,689 2,147 869
Tax expense (benefit) 3,543 2,878 2,222 804 (1,851)
Income before cumulative effect of accounting change 6,671 5,026 3,467 1,343 2,720
Cumulative effect of accounting change, net of tax
benefit -- (46) -- -- --
Net income 6,671 4,980 3,467 1,343 2,720
Per Share Data
Basic income per common share before cumulative effect
of accounting change $ 1.21 $ .98 $ .78 $ .31 $ .70
Diluted income per common share before cumulative effect
of accounting change 1.15 .89 .72 .30 .68
Basic net income per common share 1.21 .97 .78 .31 .70
Diluted net income per common share 1.15 .88 .72 .30 .68
Dividends .17 .13 .09 .03 --
Book value 8.67 7.82 5.62 4.67 4.38
Operating Data
Return on average assets .98% .89% .80% .36%* .77%
Return on average shareholders' equity 15.47 13.78 15.22 6.83 * 18.78
Average shareholders' equity to average assets 6.33 6.42 5.23 5.24 4.08
Allowance for loan and lease losses to total loans and 1.18 1.06 1.12 1.39 .96
leases
Non-performing assets as a percentage of total assets .75 .57 .50 .96 1.33
Interest rate spread 3.63 3.66 3.98 3.66 3.09
Net interest margin 4.24 4.32 4.58 4.06 3.40
Dividends declared as a percent of net income per share 14.05 13.40 11.54 9.68 --
Branch Data
Number of full service branches 14 11 10 10 9
*Excluding the 1996 one-time SAIF assessment, return on average assets was .68%
and return on average equity was 12.92%.
11
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Progress Financial Corporation (the "Company") is a unitary thrift
holding company that has seven subsidiaries: Progress Bank (the "Bank"),
Progress Realty Advisors, Inc. ("PRA"), Progress Capital, Inc. ("PCI"), Procall
Teleservices, Inc. ("PTI"), Progress Development Corp. ("PDC"), Progress
Financial Resources, Inc. ("PFR") and Progress Capital Management, Inc. ("PCM").
The Bank's primary subsidiary is Progress Leasing Company ("PLC"), formerly The
Equipment Leasing Company ("ELC"), also doing business as Quaker State Leasing
Company ("QSL").
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 1999 data.
When used in filings by the Company with the Securities and Exchange
Commission, in the Company's press releases or other public or shareholder
communications, or in oral statements made with the approval of an authorized
executive officer, the words or phrases "will likely result", "are expected to",
"will continue", "is anticipated", "estimate", "project", or similar expressions
are intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject to
certain risks and uncertainties including changes in economic conditions in the
Company's market area, changes in policies by regulatory agencies, fluctuations
in interest rates, demand for loans in the Company's market area and competition
that could cause actual results to differ materially from historical earnings
and those presently anticipated or projected. The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements,
which speak only as of the date made. The Company wishes to advise readers that
the factors listed above could affect the Company's financial performance and
could cause the Company's actual results for future periods to differ materially
from any opinions or statements expressed with respect to future periods in any
current statements.
Results of Operations
The Company reported net income of $6.7 million for the year ended
December 31, 1999, in comparison with $5.0 million and $3.5 million for the
years 1998 and 1997, respectively. The basic net income per common share was
$1.21 for 1999, $.97 for 1998 in comparison with $.78 for 1997. Fully diluted
net income per common share was $1.15 for 1999, $.88 for 1998 and $.72 for 1997,
respectively. Return on average shareholders' equity was 15.47% and return on
average assets was .98% for the year ended December 31, 1999. For 1998 return on
average shareholders' equity was 13.78% and return on average assets was .89%.
Return on average shareholders' equity was 15.22% and return on average assets
was .80% for 1997.
Net Interest Income
Net interest income increased to $26.7 million for 1999, in comparison
with $22.9 million for 1998. This was primarily due to a $13.2 million increase
in the positive variance between average interest-earning assets and average
interest-bearing liabilities resulting from higher volumes in commercial real
estate loans, construction loans, commercial business loans, lease financing
receivables and investment securities partially offset by increased deposit
volume. The net interest margin was 4.24% for 1999 compared to 4.32% for 1998;
the slight decline was primarily due to higher yields on commercial business
loans and lease financing in 1998 partially offset by higher deposit rates in
1998.
Net interest income increased to $22.9 million in 1998 compared to
$18.6 million in 1997. The increase was primarily due to a $22.6 million
increase in the positive variance between average interest-earning assets and
average interest-bearing liabilities. This was the result of higher volumes of
commercial real estate loans, commercial business loans, lease financing
mortgage-backed securities, partially offset by increased deposit and short- and
long-term borrowings volume. The net interest margin decreased to 4.32% in 1998
from 4.58% in 1997 due to higher yields on lease financing, commercial real
estate loans and mortgage-backed securities in 1997, partially offset by a
higher borrowing rate in 1997.
12
Provision for Loan and Lease Losses
The provision for loan and lease losses represents the charge against
earnings that is required to fund the allowance for loan and lease losses. The
level of the allowance is determined by known and inherent risks within the
Bank's loan and lease portfolio. Management's periodic evaluation is based upon
an examination of the portfolio, past loss experience, current economic
conditions and other relevant factors.
The provision for loan and lease losses amounted to $3.5 million in
1999 compared to $959,000 in 1998. The increase was due to increases in the loan
and lease portfolio and non-performing loans and leases, an additional charge of
$1.1 million as a result of a new charge-off policy at PLC, and a charge of
$250,000 due to the deterioration of a commercial manufacturing customer's
credit.
For the years ended December 31, 1998 and 1997, the provision for loan
and lease losses amounted to $959,000 and $1.5 million, respectively. The
provision for loan and lease losses during 1998 and 1997 was an amount
considered necessary by management to maintain the allowance at an adequate
level after it was reduced by net charge-offs of $332,000 and $1.4 million,
during such respective years.
The ratio of the allowance for loan and lease losses to total
non-performing loans and leases was 103.96%, 121.91% and 177.28% at December 31,
1999, 1998 and 1997, respectively.
Although management utilizes its best judgment in providing for loan
and lease losses, there can be no assurance that the Bank will not have to
increase its provision for loan and lease losses in the future as a result of
adverse market conditions for real estate in the Bank's primary market area,
future increases in non-performing loans and leases, or for other reasons. Any
such increase could adversely affect the Bank's results of operations. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowance for loan and lease losses and
the carrying value of its other non-performing assets. Such agencies may require
the Bank to recognize additions to its allowance for losses based on their
judgements of information available to them at the time of their examination.
The Company and the Bank were most recently examined by the Office of Thrift
Supervision ("OTS") as of June 30, 1999.
Non-interest Income
Non-interest income increased to $21.0 in 1999 compared to $8.7 million
in 1998. This increase was partially due to an increase in fee based income of
$5.8 million as the Company continues to grow its non-bank business. The Company
earned $2.7 million in mutual fund, annuity and insurance commissions in 1999
and teleservices fee income increased $2.4 million over 1998 due to new inbound
clients. In addition, service charges on deposits increased by $434,000 in 1999.
During 1999, the Company recognized $4.2 million of client warrant
income due to the expiration of restrictions on the sale of warrants to acquire
common stock of customers of the Specialized Lending Division. The Company
exercised 99,924 warrants (adjusted for 2 for 1 split) of VerticalNet on a net
issue basis which resulted in the receipt of 94,068 shares of common stock.
During the year, the Company disposed of 74,148 shares and held 19,920 shares in
a trading account at December 31, 1999. As a result, the Company realized $3.7
million of client warrant income during 1999 from the sale and market value
adjustments of these shares for the twelve months ended December 31, 1999. The
Company also sold 60,024 common shares of IQEplc which were acquired from the
exercise of warrants and realized $513,000 of client warrant income during the
twelve months ended December 31, 1999.
The Company has obtained rights to acquire stock (in the form of
warrants) in certain clients as part of negotiated credit facilities. The
receipt of warrants does not change the loan convenants or other collateral
control techniques employed by the Company to mitigate the risk of a loan
becoming nonperforming, and collateral requirements on loans with warrants are
similar to lending arrangements where warrants are not obtained. The timing and
amount of income from the disposition of client warrants typically depends upon
factors beyond the control of the Company, including the general condition of
the public equity markets and restrictions on sales as well as the merger and
acquisition environment. Therefore, income from the disposition of client
warrants cannot be predicted with any degree of accuracy and is likely to vary
materially from period to period. As opportunities present themselves in future
periods, the Company may continue to reinvest some or all of the income realized
form the disposition of client warrants in furthering its business strategies.
Additional information on warrants held by the Company can be found under
"Business--Banking--Specialized Lending."
13
Equity in unconsolidated entities of $2.5 million in 1999 represents an
increase of $2.3 million over 1998 primarily due to the Company's equity
investment in the Ben Franklin/Progress Capital Fund, L.P. The increase in
equity investment is primarily due to the unrealized appreciation of investments
in Internet Capital Group, Inc. and VerticalNet, Inc. held by Ben
Franklin/Progress Capital Fund, L.P.
During 1999, securities were sold for a loss of $347,000 primarily as
part of a restructuring of investments to higher interest rates as compared to a
gain on sale of securities of $533,000 in 1998.
Total non-interest income amounted to $8.7 million in 1998 compared to
$6.6 million in 1997. Service charges on deposits increased $212,000 from the
$1.5 million earned in 1997 primarily due to increased automated teller machine
transaction fees. Loan brokerage and advisory fees increased $1.3 million and
teleservices fee income increased $371,000 in 1998. Gains from sales of
securities amounted to $533,000 in 1998, in comparison to gains of $226,000
during 1997. This increase was attributable to continued favorable market
conditions during 1998. During the first quarter of 1997 the Company sold $347.4
million of mortgage servicing rights which resulted in a gain of $978,000.
During 1998 the Company recorded gains on the sale of loan and lease receivables
of $418,000 compared to $176,000 in 1997. Gains on sale of real estate owned
were $203,000 in 1998 in comparison to a loss of $10,000 in 1997.
Non-interest Expense
Non-interest expense increased to $34.0 million in 1999 in comparison
with $22.7 million for 1998. This increase was partially due to a $6.3 million
increase in salaries and employee benefits relating to employees of acquired and
newly formed companies and new positions within the Company. Professional
services increased by $1.1 million mainly due to the increased usage of an
interactive voice response system in handling new inbound clients at PTI, the
outsourcing of the internal audit function, consulting fees for Year 2000
systems testing and increased tax services. Occupancy and furniture, fixtures
and equipment expenses increased $864,000 due to new branch openings and recent
acquisitions. Other non-interest expense for 1999 included one-time charges of
$1.1 million associated with a leasing acquisition and unrelated other
adjustments and a $313,000 loss on the sale of equipment at PLC from the
liquidation of leased property.
Non-interest expense for 1998 amounted to $22.7 million compared to
$18.0 million in 1997. Salaries and employee benefits increased $2.7 million,
primarily due to increased staffing needs at the Bank and the recognition of
additional staffing cost related to prior year acquisitions. Occupancy and
furniture, fixtures and equipment expense increased $396,000 in 1998 primarily
attributable to the prior year acquisitions of two new off-sight locations for
PRA in Virginia and New Jersey and a new Bank branch. Capital Securities expense
totaled $1.6 million for 1998 compared to $925,000 for 1997, an increase of
$668,000. The expense for 1998 represents a full year of interest incurred on
$15.0 million of Corporation-obligated mandatory redeemable securities, the
prior year was only obligated to account for seven months of Capital Security
interest expense. Other expenses increased by $668,000 due to increases in
advertising, amortization of goodwill and other general and administrative
expense.
Income Tax Expense
The Company recorded income tax expense of $3.5 million during 1999
compared to $2.9 million in 1998, gross of the tax benefit of $26,000 due to the
cumulative effect of accounting change, and $2.2 million in 1997. The increases
are primarily due increases in taxable income.
14
Liquidity and Funding
The Company must maintain sufficient liquidity to meet its funding
requirements for loan and lease commitments, scheduled debt repayments,
operating expenses, and deposit withdrawals. The Bank is the primary source of
working capital for the Company. At December 31, 1999, the Bank met all
regulatory capital liquidity requirements.
The Bank is required under applicable federal regulations to maintain
specified levels of "liquid" investments in qualifying types of United States
Treasury, federal agency and obligations of the Federal National Mortgage
Association, Government National Mortgage Association, and Federal Home Loan
Mortgage Corporation. Regulations currently in effect require the Bank to
maintain liquid assets of not less than 4% of its net withdrawable accounts plus
short-term borrowings. These levels are changed from time to time by the Office
of Thrift Supervision ("OTS") to reflect economic conditions. The Bank's policy
has been to maintain a liquidity ratio no less than the regulatory minimum. At
December 31, 1999, the Bank's liquidity ratio of 9.28% was in excess of the
current minimum requirement. In addition the Bank is subject to restrictions on
the amount of dividends it can pay to the Company.
The Company's need for liquidity is affected by loan demand and net
changes in retail deposit levels. The Company can minimize the cash required
during the times of heavy loan demand by modifying its credit policies or
reducing its marketing efforts. Liquidity demand caused by net reductions in
retail deposits are usually caused by factors over which the Company has limited
control. The Company derives its liquidity from both its assets and liabilities.
Liquidity is derived from assets by receipt of interest and principal payments
and prepayments, by the ability to sell assets at market prices and by utilizing
unpledged assets as collateral for borrowings. Liquidity is derived from
liabilities by maintaining a variety of funding sources, including retail
deposits, FHLB borrowings and securities sold under agreement to repurchase.
At December 31, 1999, the total of approved loan commitments amounted
to $92.2 million, and the Company had $131.7 million of undisbursed loan funds.
At December 31, 1999, total FHLB borrowings which are scheduled to mature during
the 12 months ending December 31, 2000, totaled $3.0 million. At December 31,
1999, total securities purchased under agreement to resell which are scheduled
to mature during the 12 months ended December 31, 2000, totaled $47.1 million.
At December 31, 1999, the amount of time deposits that are scheduled to mature
within 12 months totaled $229.2 million, a substantial portion of which
management believes, on the basis of prior experience, will remain in the
Company.
Deposits are obtained primarily from residents near the Bank's nine
full-service offices in Montgomery County, one full-service office in Rosemont,
Delaware County, two full-service offices in Chester County, one full-service
office in Southampton, Bucks County, and one full-service office in the Andorra
section of Philadelphia. The Bank has drive-up banking facilities at seven of
its offices and has installed ATM's at all of its offices and at two additional
locations. 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, the Bank is required to own capital stock in
the FHLB 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'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, 1999 was approximately
$152.4 million.
The Company's primary sources of funds have historically consisted of
deposits, amortization and prepayments of outstanding loans, FHLB borrowings and
securities sold under agreement to repurchase and sales of investment and
mortgage-backed securities. During 1999 and 1998, the Company used its capital
resources primarily to meet its ongoing commitments to fund maturing savings
certificates and deposit withdrawals, fund existing and continuing loan
commitments, and maintain its liquidity. For the year ended December 31, 1999,
cash was provided by operating activities. Cash was used in investing activities
primarily due to net origination of loans. Cash provided by financing
activities, primarily due to increases in time deposits, offset the outflows
from investments activities. For the year ended December 31, 1998, cash was used
by operating activities primarily due to the increase in loans held for sale.
Cash was used in the Company's investment activities during 1998, as purchases
of mortgage-backed and investment securities, and net originations of loans
exceeded repayments on mortgage-backed securities, maturities of investments,
proceeds from
15
sales of mortgage-backed and investment securities. Funds provided by financing
activities in 1998 offset the cash outflows from investment activities as cash
was provided by increased levels of deposits and borrowings.
For the year ended December 31, 1997, cash was provided by operating
activities. Cash was used in the Company's investment activities during 1997 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 1997 partially offset the cash outflows from investment
activities as cash was provided by increased levels of deposits and borrowings
and the issuance of capital securities.
Capital Resources
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") was signed into law on December 19, 1991; regulations implementing
the prompt corrective action provision of FDICIA became effective on December
19, 1992. In addition to the prompt corrective action requirements, FDICIA
includes significant changes to the legal and 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 operations. 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 "well capitalized," an
institution must generally have a tangible equity ratio of at least 2%, a Tier 1
or leverage capital ratio of at least 5%, a Tier 1 risk-based capital ratio of
at least 6%, and a total risk-based capital ratio of at least 10%. An
institution is deemed to be "critically undercapitalized" if it has a tangible
equity ratio of 2% or less.
At December 31, 1999, the Bank met all regulatory capital requirements.
At December 31, 1999, the Bank's leverage capital ratio was 6.30%, Tier 1
risk-based capital ratio was 8.90%, total risk-based ratio was 10.01% and
tangible equity ratio was 6.30%, based on leverage capital of $47.1 million,
Tier 1 risk-based capital of $47.1 million, total risk-based capital of $53.0
million, and tangible capital of $47.1 million, respectively. As of December 31,
1999, the Bank is classified as "well capitalized."
During 1997 the Company issued $15.0 million of 10.5% capital
securities due June 1, 2027 (the "Capital Securities"). The Capital Securities
were issued by the Company's recently formed subsidiary, Progress Capital Trust
I, a statutory business trust created under the laws of Delaware. The Company is
the owner of all of the common securities of the Trust (the "Common
Securities"). The Trust issued $15.0 million of 10.5% Capital Securities (and
together with the Common Securities, the "Trust Securities"), the proceeds from
which were used by the Trust, along with the Company's $464,000 capital
contribution for the Common Securities, to acquire $15.5 million aggregate
principal amount of the Company's 10.5% Junior Subordinated Deferrable Interest
Debentures due June 1, 2027 (the "Debentures"), which constitute the sole assets
of the Trust. The Company has, through the Declaration of Trust establishing the
Trust, Common Securities and Capital Securities Guarantee Agreements, the
Debentures and a related Indenture, taken together, fully irrevocably and
unconditionally guaranteed all of the Trust's obligations under the Trust
Securities. The Company contributed approximately $6.0 million of the net
proceeds to Progress Bank, to increase its regulatory capital ratios and support
the growth of the expanded lending operations. Net proceeds retained by the
Company will be used for general purposes, including investments in other
subsidiaries and potential future acquisitions.
Year 2000
The Year 2000 issue concerns the potential impact of historic computer
software code that utilizes only two digits to represent the calendar year (i.e.
"98" for "1998"). Software so developed, and not corrected, could produce
inaccurate or unpredictable results commencing upon January 1, 2000, when
current and future dates present a lower two digit number than dates from the
prior century. The Company, similar to most financial service providers, is
significantly subject to the potential impact of the Year 2000 issue due to the
nature of financial information. Potential impacts to the Company may arise from
software, computer hardware, and other equipment both within the Company's
direct control and outside of the Company's ownership, yet with which the
Company electronically or operationally interfaces. Financial institution
regulators have intensively focused upon Year 2000 exposures, issuing guidance
concerning the responsibilities of senior management and directors. Year 2000
testing and certification has been addressed as a key safety and soundness issue
in conjunction with regulatory exams.
16
In order to address the Year 2000 issue, the Company developed and
implemented a five-phase plan divided into the following major components: 1)
awareness; 2) assessment; 3) renovation; 4) validation; and 5) implementation.
The Company divided these phases into the following three categories: 1)
internal; 2) vendors; and 3) customers.
The company completed all five phases for all three categories. Because
the Company outsources its data processing and item processing operations, a
significant component of the Year 2000 plan was to work with external vendors to
test and certify their systems as Year 2000 compliant.
The Company established a Year 2000 committee which met bi-weekly and
reported at least quarterly to the Board of Directors on the progress toward
achieving and certifying Year 2000 compliance.
The Company has no internally generated programmed software coding to
correct, as all of the software utilized by the Company is purchased or licensed
from external providers. The Company determined that it has little or no
exposure to contingencies related to Year 2000 issues for products it has sold.
The Company initiated formal communications with all of its significant
suppliers and customers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
issues. The Company requested that third party vendors represent their products
and services to be Year 2000 compliant and that they have a program to test for
that compliance. The response of certain third parties, however, was beyond the
control of the Company. To the extent that adequate responses were not received,
the Company prepared contingency plans.
The Company's total Year 2000 project cost included expenses for the
review and testing related to third parties, including government entities.
However, there can be no guarantee that the hardware, software, and systems of
such third parties will be without unfavorable Year 2000 impact and therefore
present a material adverse impact upon the Company.
Year 2000 compliance costs incurred during 1999 totaled approximately
$85,000 in conjunction with changes to and testing of technological aspects of
its delivery structure. Costs incurred during fiscal 1998 have totaled
approximately $56,000, the majority of which is related to software upgrades for
ATM's and telephone systems. These costs are exclusive of internal costs related
with non-dedicated personnel which are not tracked separately.
Despite the Company's activities with regard to the Year 2000 issue,
there can be no assurance that partial or total systems interruptions or the
costs necessary to update hardware and software would not have a material
adverse effect upon the Company's business, financial condition, results of
operations, and business prospects during the Year 2000. As of March 3, 2000,
the Company has not experienced any disruptions.
17
Statistical Information
Statistical information is furnished pursuant to the requirements of
Guide 3 (Statistical Disclosure by Bank Holding Companies) promulgated under the
Securities Act of 1933. Tabular information is provided in thousands of dollars
except for share and per share data.
Distribution of Average Assets, Liabilities and Shareholders' Equity
The following table sets forth, for the periods indicated,
tax-equivalent information regarding (i) the total dollar amount of interest
income on average interest-earning assets and the resultant average yield; (ii)
the total dollar amount of interest expense on average interest-bearing
liabilities and the resultant average cost; (iii) net interest income; (iv)
interest rate spread; and (v) net interest margin. Information is based on
average daily balances during the indicated periods. For the purposes of this
table, non-accrual loans have been included in the appropriate average balance
category.
For the years ended December 31, 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
---------------------------------------------------------------------------------------------
Interest-earning assets:
Deposits at other financial
institutions $16,907 $ 868 5.13% $ 3,990 $ 158 3.96% $ 3,082 $ 178 5.78%
Trading securities 86 -- -- -- -- -- -- -- --
Investment securities(1) 40,195 2,550 6.34 18,030 1,017 5.64 7,797 447 5.73
Mortgage-backed securities (1) 123,786 8,008 6.47 134,528 8,686 6.46 88,937 6,065 6.82
Single family residential loans(2) 45,656 3,329 7.29 54,890 4,193 7.64 61,084 4,875 7.98
Commercial real estate loans (2) 146,784 12,652 8.62 123,113 10,868 8.83 95,353 8,774 9.20
Construction loans 50,161 5,062 10.09 31,611 3,432 10.86 27,371 3,038 11.10
Commercial business loans 103,934 8,862 8.53 77,268 7,487 9.69 49,515 4,833 9.76
Lease financing 76,861 8,600 11.19 60,446 7,298 12.07 47,933 6,198 12.93
Consumer loans 31,083 2,449 7.88 26,217 2,190 8.35 24,796 2,089 8.42
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-earning assets 635,453 52,380 8.24 530,093 45,329 8.55 405,868 36,497 8.99
-------- ------- ----- -------- ------- ----- -------- ------- -----
Non-interest-earning assets:
Cash 14,091 10,093 8,573
Allowance for loan and lease
losses (4,924) (4,339) (3,887)
Other assets 36,237 26,708 24,856
-------- -------- --------
Total non-interest earning assets 45,404 32,462 29,542
-------- -------- --------
Total assets $680,857 $562,555 $435,410
======== ======== ========
Interest-bearing liabilities:
Interest-bearing deposits:
NOW and Super NOW $ 79,206 2,195 2.77 $ 51,515 1,384 2.69 $ 31,688 679 2.14
Money market accounts 35,649 993 2.79 33,722 999 2.96 37,199 1,181 3.17
Passbook and statement savings 31,763 603 1.90 31,314 725 2.32 29,698 810 2.73
Time deposits 248,866 12,968 5.21 206,158 11,358 5.51 177,860 9,687 5.45
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-bearing
deposits 395,484 16,759 4.24 322,709 14,466 4.48 276,445 12,357 4.47
Short-term borrowings 35,340 2,199 6.22 53,836 3,164 5.88 29,806 2,266 7.60
Long-term debt 120,400 6,474 5.38 82,534 4,820 5.84 51,209 3,271 6.39
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-bearing
liabilities 551,224 25,432 4.61 459,079 22,450 4.89 357,460 17,894 5.01
-------- ------- ----- -------- ------- ----- -------- ------- -----
Non-interest-bearing liabilities:
Non-interest bearing deposits 57,514 41,517 35,292
Other liabilities 14,547 11,397 11,123
-------- -------- --------
Total non-interest bearing
liabilities 72,061 52,914 46,415
-------- -------- --------
Total liabilities 623,285 511,993 403,875
Capital securities 14,441 14,422 8,750
Shareholders' equity 43,131 36,140 22,785
-------- -------- --------
Total liabilities, capital
securities and
shareholders' equity $680,857 $562,555 $435,410
======== ======== ========
Net interest income $26,948 $22,879 $18,603
======= ======= =======
Interest rate spread (3) 3.63% 3.66% 3.98%
====== ====== ======
Net interest margin (4) 4.24% 4.32% 4.58%
====== ====== ======
Average interest-earning assets to
average interest-bearing
liabilities 115.28% 115.47% 113.54%
====== ====== ======
(1) Includes investment and mortgage-backed securities classified as available
for sale. Yield information does not give effect to changes in fair values
that are reflected as a component of shareholders' equity.
(2) Includes loans held for sale.
(3) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average
interest-earning assets
18
Rate/Volume Analysis
The following table presents the degree to which changes in the
Company's tax-equivalent 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, 1999 vs. 1998 1998 vs. 1997
------------------------------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total
--------------------------------------------------------------
Interest-earning assets:
Deposits at other financial
institutions $ 650 $ 60 $ 710 $ 44 $ (64) $ (20)
Trading securities -- -- -- -- -- --
Investment securities 1,392 141 1,533 577 (7) 570
Mortgage-backed securities (690) 12 (678) 2,957 (336) 2,621
Single family residential (680) (184) (864) (480) (202) (682)
Commercial real estate loans 2,048 (264) 1,784 2,460 (366) 2,094
Construction loans 1,888 (258) 1,630 461 (67) 394
Commercial business 2,354 (979) 1,375 2,689 (35) 2,654
Lease financing 1,866 (564) 1,302 1,534 (434) 1,100
Consumer loans 388 (129) 259 118 (17) 101
------------------------------------------------------------------------------------------------------
Total 9,216 (2,165) 7,051 10,360 (1,528) 8,832
------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits 3,111 (818) 2,293 2,081 28 2,109
Short-term borrowings (1,140) 175 (965) 1,502 (604) 898
Long-term debt 2,062 (408) 1,654 1,852 (303) 1,549
------------------------------------------------------------------------------------------------------
Total 4,033 (1,051) 2,982 5,435 (879) 4,556
------------------------------------------------------------------------------------------------------
Net interest income $5,183 $(1,114) $4,069 $4,925 $ (649) $4,276
======================================================================================================
Investment and Mortgage-Backed Securities
Investment and mortgage-backed securities are comprised of the
following at December 31, 1999, 1998 and 1997:
Held to Maturity Available for Sale
--------------------------------------------------
Amortized Estimated Amortized Estimated
December 31, 1999 Cost Fair Value Cost Fair Value
--------------------------------------------------------------------------------------------------
FHLB stock $ 4,923 $ 4,923 $ -- $ --
U.S. agency obligations 14,581 14,255 17,107 16,777
Corporate bonds -- -- 1,900 1,693
Municipal bonds 14,805 13,736 -- --
Equity investments -- -- 4,564 12,162
Mortgage-backed securities -- -- 123,958 118,886
--------------------------------------------------------------------------------------------------
Total investment and mortgage-backed
securities $34,309 $32,914 $147,529 $149,518
==================================================================================================
Held to Maturity Available for Sale
--------------------------------------------------
Amortized Estimated Amortized Estimated
December 31, 1998 Cost Fair Value Cost Fair Value
--------------------------------------------------------------------------------------------------
FHLB stock $ 4,923 $ 4,923 $ -- $ --
U.S. agency obligations 7,478 7,624 2,000 2,001
Corporate bonds -- -- 1,895 1,630
Municipal bonds -- -- 9,599 9,591
Equity investments -- -- 4,714 4,687
Mortgage-backed securities -- -- 146,910 146,459
--------------------------------------------------------------------------------------------------
Total investment and mortgage-backed
securities $12,401 $12,547 $165,118 $164,368
==================================================================================================
19
Held to Maturity Available for Sale
--------------------------------------------------
Amortized Estimated Amortized Estimated
December 31, 1997 Cost Fair Value Cost Fair Value
--------------------------------------------------------------------------------------------------
FHLB stock $ 1,728 $ 1,728 $ -- $ --
U.S. agency obligations 2,323 2,342 3,000 3,001
Equity investments -- -- 2,924 3,394
Mortgage-backed securities 49,421 49,094 44,246 44,518
--------------------------------------------------------------------------------------------------
Total investment and mortgage-backed
securities $53,472 $53,164 $50,170 $50,913
==================================================================================================
The following table sets forth the contractual maturities of the
investment and mortgage-backed securities at December 31, 1999 by investment
type and the weighted average yield for each range of maturities. The yield on
municipal bonds is calculated on a tax-equivalent basis.
US Government Business Weighted
Agencies Corporations Municipalities Total Average Yield
--------------------------------------------------------------------------------------------------------------
Available for sale:
Due one year or less $ 1,107 $ -- $ -- $ 1,107 4.08%
Due after one year through 5 years 970 -- -- 970 6.16
Due after 5 years through 10 years 14,700 -- -- 14,700 7.68
Due after 10 years -- 1,693 -- 1,693 7.37
Mortgage-backed securities 118,886 -- -- 118,886 6.90
Equity securities -- 12,162 -- 12,162 1.49
--------------------------------------------------------------------------------------------------------------
Total available for sale $135,663 $13,855 $ -- $149,518 6.51%
==============================================================================================================
Held to maturity:
Due after 10 years $ 14,581 $ -- $14,805 $ 29,386 7.27%
FHLB stock 4,923 -- -- 4,923 6.75
--------------------------------------------------------------------------------------------------------------
Total held for sale $ 19,504 $ -- $14,805 $ 34,309 7.19%
==============================================================================================================
Loan and Lease Portfolio
The principal categories in the Company's loan and lease portfolio are
residential real estate loans, which are secured by single-family (one to four
units) residences; commercial real estate loans, which are secured by
multi-family (over five units), residential and commercial real estate; loans
for the construction of single-family, multi-family and commercial properties,
including land acquisition and development loans; commercial business loans,
lease financing and consumer loans. Substantially all of the Company's mortgage
loan portfolio consists of conventional mortgage loans, which are loans that are
neither insured by the Federal Housing Administration nor partially guaranteed
by the Department of Veterans Affairs.
The Company's net loan and lease portfolio, including loans held for
sale, totaled $497.7 million at December 31, 1999 or 65.0% of its total assets,
an increase of $78.2 million or 18.7% from the $419.5 million outstanding at
December 31, 1998.
20
The following table depicts the composition of the Company's loan and lease
portfolio, net of unearned income, at December 31 for the years indicated:
At December 31, 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
--------------------------------------------------------------------------------------------------------
Single family
residential
mortgage (1) $ 40,554 8.05% $ 50,086 11.81% $ 56,565 16.44% $ 64,259 23.77% $ 91,091 37.72%
Commercial mortgage(2) 162,588 32.28 134,380 31.69 109,938 31.94 90,350 33.42 81,535 33.77
Construction 58,813 11.68 44,546 10.51 26,695 7.76 20,692 7.65 14,230 5.89
Commercial business 119,807 23.79 92,737 21.87 69,312 20.14 30,384 11.24 17,244 7.14
Lease financing 86,985 17.27 73,499 17.34 56,072 16.29 40,867 15.12 14,965 6.20
Consumer loans 34,918 6.93 28,738 6.78 25,557 7.43 23,783 8.80 22,423 9.28
- --------------------------------------------------------------------------------------------------------------------------------
Total loans and
leases 503,665 100.00% 423,986 100.00% 344,139 100.00% 270,335 100.00% 241,488 100.00%
====== ====== ====== ====== ======
Allowance for loan and
lease losses (5,927) (4,490) (3,863) (3,768) (2,310)
- --------------------------------- -------- -------- -------- --------
Net loans and
leases $497,738 $419,496 $340,276 $266,567 $239,178
================================= ======== ======== ======== ========
(1) Includes $373,000, $599,000, $3.2 million, and $351,000 of loans classified
as held for sale at December 31, 1998, 1997, 1996 and 1995, respectively.
(2) Includes $25.3 million of loans classified as held for sale at December 31,
1998.
The following table sets forth the scheduled contractual maturities of
the Company's commercial loans at December 31, 1999. The following table also
sets forth the dollar amount of commercial loans scheduled to mature after one
year which have fixed or adjustable rates.
-------------------------------------------------------------------------------------------------
Commercial Commercial
At December 31, 1999 Mortgage Construction Business
-------------------------------------------------------------------------------------------------
Amounts due:
One year or less $ 14,845 $42,405 $64,053
After one year through five years 44,862 16,408 45,221
Beyond five years 102,881 -- 10,533
-------------------------------------------------------------------------------------------------
Total $162,588 $58,813 $119,807
=================================================================================================
Interest rate terms on amounts due after one year:
Fixed $ 64,078 $ 2,330 $ 34,724
-------------------------------------------------------------------------------------------------
Adjustable $ 83,665 $14,078 $ 21,030
-------------------------------------------------------------------------------------------------
Scheduled contractual principal repayments do not reflect the actual
maturities of commercial loans. The average maturity of commercial loans is less
than their average contractual terms because of prepayments and refinancings.
The average life of mortgage loans tends to increase when current mortgage loan
rates are higher than rates on existing mortgage loans and, conversely, decrease
when rates on existing mortgages are lower than current mortgage loan rates (due
to refinancing of adjustable-rate and fixed rate loans at lower rates). Under
the circumstances, the weighted average yield on loans decreases as higher
yielding loans are paid or refinanced at lower rates.
Risk Elements
The following table details the Company's underperforming assets at December 31:
- -----------------------------------------------------------------------------------------------------------------------
At December 31, 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
Loans and leases accounted for on a non-accrual $5,701 $3,683 $2,179 $1,689 $4,075
basis REO, net of related reserves 66 -- 380 2,150 728
- -----------------------------------------------------------------------------------------------------------------------
Total non-performing assets 5,767 3,683 2,559 3,839 4,803
Accruing loans 90 or more days past due 2,336 4,030 2,721 4,077 --
- -----------------------------------------------------------------------------------------------------------------------
Total underperforming assets $8,103 $7,713 $5,280 $7,916 $4,803
- -----------------------------------------------------------------------------------------------------------------------
Non-performing assets as a percentage of total
loans and leases and real estate owned 1.16% .88% .75% 1.43% 2.00%
- -----------------------------------------------------------------------------------------------------------------------
Non-performing assets as a percentage of total
assets .75% .57% .50% .96% 1.33%
- -----------------------------------------------------------------------------------------------------------------------
Underperforming assets as a percentage of total
loans and leases and real estate owned 1.63% 1.84% 1.55% 2.95% 2.00%
- -----------------------------------------------------------------------------------------------------------------------
Underperforming assets as a percentage of total
assets 1.06% 1.19% 1.04% 1.99% 1.33%
- -----------------------------------------------------------------------------------------------------------------------
21
Gross interest income that would have been recorded during 1999, 1998,
and 1997 if the Company's non-accrual loans and leases at the end of such
periods had been performing in accordance with their terms during such periods
was $637,000, $252,000 and $190,000, respectively. The amount of interest income
that was actually recorded during 1999, 1998, and 1997 with respect to such
non-accrual loans and leases amounted to approximately $426,000, $112,000 and
$148,000, respectively.
The $5.7 million of non-accrual loans and leases at December 31, 1999
consists of $1.2 million of loans secured by single-family residential property,
$178,000 of loans secured by commercial property, $2.7 million of commercial
business loans, $233,000 of consumer loans and $1.4 million of lease financing.
The accrual of interest on commercial loans, mortgage loans and leases
is generally discontinued when the loans and leases become 90 days past due and
when, in management's judgement, it is determined that a reasonable doubt exists
as to collectibility. The accrual of interest is also discontinued on
residential and consumer loans when such loans become 90 days past due, except
for those loans in the process of collection which are secured by cash
collateral or by real estate with a loan to value less than 75% for first
mortgage loans and less than 60% for second mortgage loans. When a loan is
placed on non-accrual status, 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. A loan remains on
non-accrual status until the factors which indicate doubtful collectibility no
longer exist, or the loan is liquidated, or when the loan is determined to be
uncollectible and is charged-off against the allowance for loan losses.
All loans and leases are reviewed on a regular basis and are placed on
non-accrual status when, in the opinion of management, the collection of
additional interest is deemed insufficient to warrant further accrual.
The following table sets forth information concerning the principal
balances and percent of the total loan and lease portfolio represented by
delinquent loans and leases at the dates indicated:
- ------------------------------------------------------------------------------------------------------------------------
At of December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
Delinquencies:
30 to 59 days $ 7,488 1.49% $ 7,305 1.72% $ 6,167 1.79%
60 to 89 days 1,288 .26 3,337 .79 1,934 .56
90 or more days 2,336 .46 4,030 .95 2,721 .79
- ------------------------------------------------------------------------------------------------------------------------
Total $11,112 2.21% $14,672 3.46% $10,822 3.14%
========================================================================================================================
Concentrations of Credit Risk
The Company extends credit through loans and leases in the normal
course of business to its customers, a significant number 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, 1999,
include: retail consumers that account for 15% of all credit extensions;
commercial mortgages and construction that account for 36%; residential
construction that account for 8%; and commercial business that accounts for 41%.
22
Summary of Loan and Lease Loss Experience
The following table details the allocation of the allowance for loan
and lease losses to the various categories at the dates indicated. The
allocation is not necessarily indicative of the categories in which future
losses will occur, and the entire allowance is available to absorb losses in any
category of loans or leases.
- ------------------------------------------------------------------------------------------------------------------------------
At December 31, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
to Total to Total to Total to Total to Total
Loans Loans Loans Loans Loans
and and and and and
Amount Leases Amount Leases Amount Leases Amount Leases Amount Leases
- ------------------------------------------------------------------------------------------------------------------------------
Residential mortgage $ 436 8.05% $ 116 11.81% $ 127 16.44% $ 129 23.77% $ 148 37.72%
Commercial mortgage 1,384 32.28 1,134 31.69 1,120 31.94 1,620 33.42 1,045 33.77
Construction 885 11.68 652 10.51 290 7.76 257 7.65 286 5.89
Commercial business 1,256 23.79 930 21.87 749 20.14 387 11.24 166 7.14
Lease financing 1,927 17.27 1,619 17.34 1,446 16.29 1,221 15.12 590 6.20
Consumer 39 6.93 39 6.78 131 7.43 154 8.80 75 9.28
- ------------------------------------------------------------------------------------------------------------------------------
Total $5,927 100.00% $4,490 100.00% $3,863 100.00% $3,768 100.00% $2,310 100.00%
==============================================================================================================================
The following table details the Company's allowance for loan and lease
losses for the periods indicated:
- ---------------------------------------------------------------------------------------------------------------------
For the years ended December 31, 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
Average loans and leases outstanding $454,479 $373,545 $306,052 $246,076 $217,266
- ---------------------------------------------------------------------------------------------------------------------
Balance beginning of period $4,490 $3,863 $3,768 $2,310 $1,503
Charge-offs:
Residential real estate 79 -- 3 25 20
Commercial real estate -- -- 394 -- --
Real estate construction -- -- -- -- 100
Commercial business -- 2 291 7 281
Lease financing 2,473 681 879 309 74
Consumer 2 72 100 80 26
- ---------------------------------------------------------------------------------------------------------------------
Total charge-offs 2,554 755 1,667 421 501
- ---------------------------------------------------------------------------------------------------------------------
Recoveries:
Residential real estate -- 1 -- 2 --
Commercial real estate -- 5 -- 30 --
Real estate construction -- 2 -- -- 1
Commercial business 18 128 20 26 3
Lease financing 409 275 214 171 41
Consumer 16 12 19 19 15
- ---------------------------------------------------------------------------------------------------------------------
Total recoveries 443 423 253 248 60
- ---------------------------------------------------------------------------------------------------------------------
Net charge-offs 2,111 332 1,414 173 441
Provision for loan and lease losses 3,548 959 1,509 781 641
Allowances assumed through acquisitions (1) -- -- -- 850 607
- ---------------------------------------------------------------------------------------------------------------------
Total additions 3,548 959 1,509 1,631 1,248
- ---------------------------------------------------------------------------------------------------------------------
Balance at end of period $5,927 $4,490 $3,863 $3,768 $2,310
=====================================================================================================================
Ratio of net chargeoffs during the period to
average loans and leases outstanding during the
period .46% .09% .46% .07% .20%
=====================================================================================================================
Ratio of allowance for loan and lease losses to
non-performing loans and leases at end of period 103.96% 121.91% 177.28% 223.09% 56.69%
=====================================================================================================================
Ratio of allowance for loan and lease losses to
under-performing loans and leases at end of
period(2) 73.75% 58.21% 78.84% 65.35% 56.69%
=====================================================================================================================
(1) Allowance assumed through acquisitions represents, The Equipment Leasing
Company in 1996, and First Valley Leasing, Inc., a subsidiary of UJB
Financial, in 1995.
(2) Includes loans 90 or more days delinquent and still accruing.
23
An allowance for 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 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 such evaluations.
Deposits
Certificates of deposit in amounts of $100,000 or more were $116.9
million, $56.9 million and $44.7 million at December 31, 1999, 1998 and 1997,
including brokered certificates of deposits of $25.0 million, $20.0 million and
$10.0 million, respectively.
The following table presents the remaining maturity of certificates of
deposits of $100,000 or more at December 31, 1999:
-------------------------------------------------------------------------------------------------------------------
Remaining Maturity > 3 months > 6 months > 12 months
At December 31, 1999 3 months or less through 6 months through 12 months
-------------------------------------------------------------------------------------------------------------------
Certificates of Deposit $100,000 or more $73,771 $13,646 $12,632 $16,846
===================================================================================================================
Short-Term Borrowings
The following table presents certain information regarding short-term
securities sold under agreement to repurchase:
- ---------------------------------------------------------------------------------------------------------
For the years ended December 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------
Balance outstanding at end of period $47,145 $40,150 $21,546
Weighted average interest rate at end of period 5.51% 5.63% 5.92%
Average balance outstanding $28,162 $39,461 $10,653
Weighted average interest rate during the period 5.72% 5.70% 6.17%
Maximum amount outstanding at any month-end during the period $47,145 $60,003 $21,546
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
Asset Liability Management
The major objectives of the Company'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 Company manages these objectives through its
Asset Liability and Investment Committee. The Committee meets monthly to develop
strategies that affect the future level of net interest income, liquidity and
capital. The Committee utilizes cash flow forecasts, considers current economic
conditions and the direction of interest rates, and manages 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.
24
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 Company's simulation model analyzes interest rate sensitivity by
projecting net interest income over the next 24 months in a flat rate scenario.
The flat rate model projects growth in the 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 Company projects net interest income in a rising rate scenario of
200 basis points over a 24-month period as well as a 200 basis point decrease in
a declining rate scenario during this same period. The Company 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, 1999 the Company would experience an
approximate 3.45% 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 2.33% decrease in net interest income if rates decline 200 basis
points.
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 Three months to One to five Five to ten
months one year years years Over ten years
At December 31, 1999 Amount Yield/Rate Amount Yield/Rate Amount Yield/Rate Amount Yield/Rate Amount Yield/Rate
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-earnings assets(1)
Deposits at other
financial institutions $ 24,278 5.25% $ -- --% $ -- --% $ -- --% $ -- --%
Investment securities 19,456 4.36 16,885 7.34 13,982 7.30 10,824 7.53 -- --
Mortgage-backed
securities 2,904 6.76 14,754 6.78 46,935 6.75 31,959 6.75 27,406 6.75
Single family residential 5,280 7.77 14,241 7.66 14,931 7.35 3,931 7.46 1,071 7.64
Commercial real estate
loans 15,649 8.90 25,045 8.71 99,656 8.31 19,689 8.24 3,096 7.95
Construction Loans 48,227 9.14 7,036 8.34 3,979 8.70 -- -- -- 0.00
Consumer loans 8,858 9.05 2,743 7.55 12,191 7.62 7,220 7.90 3,451 7.98
Commercial business 81,830 9.50 8,197 7.86 22,928 8.17 3,962 7.81 -- --
Lease financing 3,093 11.01 15,440 11.01 64,963 11.01 -- -- -- --
------------------------------------------------------------------------------------------------------
Total interest-earning
assets $209,575 8.32% $104,341 8.29% $279,565 8.54% $77,585 7.43% $35,024 7.00%
======================================================================================================
Interest-bearing
liabilities: (2)
Money market deposits $ 1,168 2.90% $ 5,840 2.90% $ 17,508 2.90% $ 7,003 2.90% $ 3,496 2.90%
NOW and Super NOW 6,095 3.00 12,850 3.00 41,998 3.00 15,427 3.00 3,715 3.00
Passbook and Statement
Savings 526 1.80 2,630 1.80 17,334 1.80 7,879 1.80 3,148 1.80
Time deposits 115,569 4.94 113,669 5.15 79,930 5.75 330 7.08 18 4.88
Short-term borrowings 12,766 5.68 38,000 5.53 -- -- -- 0.00 -- --
Long-term debt 5,000 5.97 45,000 5.38 54,000 5.44 8,000 6.31 -- --
------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities $141,124 4.93% $217,989 5.04% $210,770 4.56% $38,639 3.46% $10,377 2.61%
======================================================================================================
Excess (deficiency) of
interest-earning assets
over interest-bearing
liabilities $ 68,451 $(113,648) $ 68,795 $38,946 $24,647
======================================================================================================
Cumulative excess
(deficiency) of
interest-earning assets
over interest-bearing
liabilities $ 68,451 $ (45,197) $ 23,598 $62,544 $87,191
======================================================================================================
Cumulative excess
(deficiency) of
interest-earning assets
over interest-bearing
liabilities as a percent
of total assets 8.94% (5.90)% 3.08% 8.17% 11.39%
======================================================================================================
(1) Adjustable and floating-rate items are included in the period in which
interest rates are next scheduled to reprice rather than in the period in
which they are due, and fixed rate loans are included in period in which
they are scheduled to be repaid or are estimated to prepay. Loan balances
have been reduced for non-accrual loans, which amounted to $5.7 million at
December 31, 1999. Interest earning assets do not include loan loss
reserves, deferred loan fees, and mark-to market adjustment on available for
sale securities.
(2) Money market deposits, savings accounts, and NOW accounts are estimated in
terms of repricing and balance sensitivity; the estimates are necessarily
subjective due to the indeterminate maturity of the accounts.
25
Item 8. Financial Statements and Supplementary Data
Consolidated Statements of Financial Condition
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------
At December 31, 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
Assets:
Cash and due from other financial institutions:
Interest bearing $ 24,278 $ 6,498
Non-interest bearing 15,648 14,189
Trading securities 3,267 --
Investments and mortgage-backed securities:
Available for sale at fair value (amortized cost: $147,529 in 1999 and $165,118 in 1998) 149,518 164,368
Held to maturity at amortized cost (fair value: $32,914 in 1999 and $12,547 in 1998) 34,309 12,401
Loans and leases (net of reserves: $5,927 in 1999 and $4,490 in 1998) 497,738 394,246
Loans held for sale (fair value: $25,326 in 1998) -- 25,250
Investments in unconsolidated entities 11,427 5,538
Premises and equipment, net 16,443 10,707
Accrued interest receivable 4,162 3,245
Net deferred income tax assets (liabilities) (1,506) 277
Other assets 10,250 10,094
-------- --------
Total assets $765,534 $646,813
======== ========
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Non-interest-bearing $ 65,305 $ 54,934
Interest-bearing 456,134 353,228
Securities sold under agreement to repurchase:
Short-term 47,145 40,150
Long-term 24,000 35,000
Other short-term borrowings 3,622 5,791
Other long-term debt 85,000 83,475
Subordinated debt 3,000 3,000
Payable for securities purchased 4,892 5,844
Accrued interest payable 2,936 2,260
Other liabilities 11,240 7,146
-------- --------
Total liabilities 703,274 590,828
-------- --------
Corporation-obligated mandatorily redeemable capital securities of subsidiary trust holding
solely junior subordinated debentures of the Corporation 14,451 14,431
Commitments and contingencies (Note 15)
Shareholders' equity:
Serial preferred stock--$.01 par value; 1,000,000 shares authorized but unissued -- --
Junior participating preferred stock--$.01 par value; 1,010 shares authorized but unissued -- --
Common stock--$1 par value; 12,000,000 shares authorized; 5,680,000 and 5,263,000 shares
issued and outstanding at December 31, 1999 and December 31, 1998, respectively 5,680 5,263
Treasury stock (152,000 and 177,000 shares at December 31, 1999 and December 31, 1998,
respectively) (1,963) (2,287)
Unearned Employee Stock Ownership Plan shares (14,000 and 24,000 shares at December 31,
1999 and December 31, 1998, respectively) (64) (114)
Unearned compensation--restricted stock awards (1,051) --
Capital surplus 42,612 39,586
Retained earnings (deficit) 1,361 (399)
Net accumulated other comprehensive income (loss) 1,234 (495)
-------- --------
Total shareholders' equity 47,809 41,554
-------- --------
Total liabilities, Corporation-obligated mandatorily redeemable capital securities
and shareholders' equity $765,534 $646,813
======== ========
See Notes to Consolidated Financial Statements.
26
Consolidated Statements of Income
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
Interest income:
Loans and leases $40,952 $35,468 $29,807
Mortgage-backed securities 8,008 8,686 6,065
Investment securities 2,346 1,017 447
Other 868 158 178
------- -------- --------
Total interest income 52,174 45,329 36,497
------- -------- --------
Interest expense:
Deposits 16,759 14,466 12,357
Short-term borrowings 2,199 3,164 2,266
Long-term debt 6,474 4,820 3,271
------- -------- --------
Total interest expense 25,432 22,450 17,894
------- -------- --------
Net interest income 26,742 22,879 18,603
Provision for loan and lease losses 3,548 959 1,509
------- -------- --------
Net interest income after provision for loan and lease losses 23,194 21,920 17,094
------- -------- --------
Non-interest income:
Service charges on deposits 2,097 1,663 1,451
Lease financing fees 1,531 1,414 1,352
Teleservices fee income 3,406 1,034 663
Mutual fund, annuity and insurance commissions 2,669 -- --
Loan brokerage and advisory fees 2,385 2,108 842
Client warrant income 4,188 -- --
Equity in unconsolidated entities 2,524 222 --
Gain on sale of mortgage servicing rights -- -- 978
Gain (loss) from sale of securities (347) 533 226
Gain (loss) on sale of loan and lease receivables (20) 418 176
Other 2,560 1,268 954
------- -------- --------
Total non-interest income 20,993 8,660 6,642
------- -------- --------
Non-interest expense:
Salaries and employee benefits 17,586 11,272 8,554
Occupancy 1,606 1,280 1,127
Data processing 1,175 1,073 1,067
Professional services 2,222 1,117 1,026
Furniture, fixtures and equipment 1,623 1,085 842
Loan and real estate owned expenses, net 720 592 510
Capital securities expense 1,595 1,593 925
Other 7,446 4,664 3,996
------- -------- --------
Total non-interest expense 33,973 22,676 18,047
------- -------- --------
Income before income taxes and cumulative effect of accounting change 10,214 7,904 5,689
Income tax expense 3,543 2,878 2,222
------- -------- --------
Income before cumulative effect of accounting change 6,671 5,026 3,467
Cumulative effect of accounting change (net of tax benefit of $26) -- (46) --
------- -------- --------
Net income $ 6,671 $ 4,980 $ 3,467
======= ======== ========
Basic income per common share before cumulative effect of accounting change $ 1.21 $ .98 $ .78
Diluted income per common share before cumulative effect of accounting change 1.15 .89 .72
Basic net income per common share 1.21 .97 .78
Diluted net income per common share 1.15 .88 .72
Dividends per share .17 .13 .09
Average common shares outstanding 5,503,259 5,124,681 4,447,141
Diluted average common shares outstanding 5,810,089 5,627,588 4,809,070
See Notes to Consolidated Financial Statements.
27
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive
Income
(Dollars in thousands)
For the years ended December 31, 1999, 1998 and 1997
- -------------------------------------------------------------------------------------------------------------------------------
Unearned
Compensation Net Accumulated
Unearned Restricted Other
Common Treasury ESOP Stock Capital Retained Comprehensive
Stock Stock Shares Awards Surplus Earnings Income (Loss)
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $3,847 $-- $(214) $ -- $18,154 $(995) $(198)
Issuance of common stock under
employee benefit plans (35,005
common shares; 9,825 ESOP shares) 35 -- 50 -- 112 -- --
Net income -- -- -- -- -- 3,467 --
Other comprehensive loss, net
of tax (a) -- -- -- -- -- -- 658
Net comprehensive income
Acquisition of subsidiaries
(53,097 common shares) 53 -- -- -- 747 35 --
Cash dividend declared -- -- -- -- -- (389) --
Distribution of stock dividend
(190,636 common shares;
2,034 ESOP shares) 191 -- -- -- 1,937 (2,128) --
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 4,126 -- (164) -- 20,950 (10) 460
Issuance of common stock in stock
offering (792,800 common shares) 793 -- -- -- 13,468 -- --
Issuance of stock under employee
benefit plans (47,774 common
shares; 10,525 ESOP shares) 48 -- 50 -- 334 -- --
Exercise of stock warrants (26,250 26 -- -- -- 124 -- --
common shares)
Net income -- -- -- -- -- 4,980 --
Other comprehensive loss, net of
tax (a) -- -- -- -- -- -- (955)
Net comprehensive income -- -- -- -- -- --
Purchase of treasury stock
(231,000 treasury shares) -- (3,098) -- -- -- -- --
Acquisition of subsidiary
(54,003 treasury shares) -- 811 -- -- (61) -- --
Investment in unconsolidated
subsidiary (21,153 common shares) 21 -- -- -- 309 -- --
Cash dividend declared -- -- -- -- -- (658) --
Distribution of stock dividend
(249,653 common shares;
300 treasury shares;
1,644 ESOP shares) 249 -- -- -- 4,462 (4,711) --
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 5,263 (2,287) (114) -- 39,586 (399) (495)
Issuance of stock under employee
benefit plans (21,772 common
shares; 107,709 treasury shares;
10,799 ESOP shares) 22 1,319 50 (1,066) 134 -- --
Retirement of restricted stock
awards (1,300 common shares) (1) -- -- 15 (14) -- --
Exercise of stock warrants
(125,971 common shares;
122,088 treasury) 126 1,666 -- -- (442) -- --
Early retirement of warrants -- -- -- -- (331) -- --
Net income -- -- -- -- -- 6,671 --
Other comprehensive income, net
of tax (a) -- -- -- -- -- -- 1,729
Net comprehensive income
Purchase of treasury stock
(202,500 treasury shares) -- (2,661) -- -- -- -- --
Cash dividend declared -- -- -- -- -- (962) --
Distribution of stock dividend
(269,997 common shares; 2,250
treasury shares; 799 ESOP shares) 270 -- -- -- 3,679 (3,949) --
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $5,680 $(1,963) $ (64) $(1,051) $42,612 $ 1,361 $1,234
===============================================================================================================================
- ---------------------------------------------------------------------
Total
Comprehensive Shareholders'
Income Equity
- --------------------------------------------------------------------
Balance at December 31, 1996 $20,594
Issuance of common stock under
employee benefit plans (35,005
common shares; 9,825 ESOP shares) 197
Net income $3,467 3,467
Other comprehensive loss, net
of tax (a) 658 658
------
Net comprehensive income $4,125
======
Acquisition of subsidiaries
(53,097 common shares) 835
Cash dividend declared (389)
Distribution of stock dividend
(190,636 common shares;
2,034 ESOP shares) --
- --------------------------------------- ------------
Balance at December 31, 1997 25,362
Issuance of common stock in stock
offering (792,800 common shares) 14,261
Issuance of stock under employee
benefit plans (47,774 common
shares; 10,525 ESOP shares) 432
Exercise of stock warrants (26,250 150
common shares)
Net income $4,980 4,980
Other comprehensive loss, net of
tax (a) (955) (955)
------
Net comprehensive income $4,025
======
Purchase of treasury stock
(231,000 treasury shares) (3,098)
Acquisition of subsidiary
(54,003 treasury shares) 750
Investment in unconsolidated
subsidiary (21,153 common shares) 330
Cash dividend declared (658)
Distribution of stock dividend
(249,653 common shares;
300 treasury shares;
1,644 ESOP shares) --
- --------------------------------------- ------------
Balance at December 31, 1998 41,554
Issuance of stock under employee
benefit plans (21,772 common
shares; 107,709 treasury shares;
10,799 ESOP shares) 459
Retirement of restricted stock
awards (1,300 common shares) --
Exercise of stock warrants
(125,971 common shares;
122,088 treasury) 1,350
Early retirement of warrants (331)
Net income $6,671 6,671
Other comprehensive income, net
of tax (a) 1,729 1,729
------
Net comprehensive income $8,400
======
Purchase of treasury stock
(202,500 treasury shares) (2,661)
Cash dividend declared (962)
Distribution of stock dividend
(269,997 common shares; 2,250
treasury shares; 799 ESOP shares) --
- --------------------------------------- ------------
Balance at December 31, 1999 $47,809
======================================= ============
(a) Calculation of other comprehensive income
(loss) net of tax: 1999 1998 1997
- ---------------------------------------------------------------------------------------------------
Unrealized holding gains (losses) arising during $1,500 $(603) $ 807
the period, net of tax
Less: Reclassification adjustment for gains(losses) included
in net income, net of tax (229) 352 149
------ ----- -----
Other comprehensive income (loss), net of tax $1,729 $(955) $ 658
====== ===== =====
See Notes to Consolidated Interim Financial Statements.
28
Consolidated Statements of Cash Flows
(Dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------------------
For the years ended December 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 6,671 $ 4,980 $ 3,467
Add (deduct) items not affecting cash flows from operating activities:
Depreciation and amortization 1,587 1,483 1,187
Provision for loan and lease losses 3,548 959 1,509
Deferred income tax expense 893 13 1,681
Gain from mortgage banking activities -- -- (978)
Gain from sale of loans held for sale (14) -- --
(Gain) loss from sales of loans and leases 34 (418) (176)
(Gain) loss from sales of securities available for sale 347 (533) (226)
Realized loss on transfer of mortgage-backed securities -- 72 --
(Gain) loss on sale of ORE properties -- (203) 10
Amortization of deferred loan fees (2,747) (1,657) (1,047)
Amortization of premiums/accretion of discounts on securities 903 1,076 693
Client warrant income (4,188) -- --
Equity in unconsolidated entities (2,524) (222) --
Other, net 351 170 67
Originations and purchases of loans held for sale (11,365) (25,250) --
Proceeds from sales of loans held for sale 9,476 -- 105
Repayments on loans held for sale 4,766 -- --
Increase in accrued interest receivable (917) (517) (572)
(Increase) decrease in other assets (203) 21,946 2,269
Increase (decrease) in other liabilities 880 (28,029) 3,749
Increase in accrued interest payable 676 634 516
--------- --------- ---------
Net cash flows provided by (used in) operating activities 8,174 (25,496) 12,254
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures (6,828) (2,455) (2,448)
Purchases of investments and mortgage-backed securities available for sale (40,273) (168,637) (20,479)
Purchases of investment and mortgage-backed securities held to maturity (12,428) (8,350) (12,988)
Repayments on investment and mortgage-backed securities available for sale 32,902 28,440 8,767
Repayments on investment and mortgage-backed securities held to maturity -- 8,788 8,409
Proceeds from sales and calls of investment and mortgage-backed securities
available for sale 17,132 65,241 16,969
Maturities of investments available for sale -- -- 2,268
Proceeds from sales of real estate owned -- 583 5,888
Proceeds from sales of loan and lease receivables 875 28,343 3,418
Purchases of loans and lease receivables (4,180) (10,079) --
Net increase in total loans and leases (78,701) (67,765) (81,615)
Net investments in unconsolidated entities (3,365) (5,144) (172)
Other, net (375) 41
--------- --------- ---------
Net cash flows used in investing activities (95,241) (130,994) (71,983)
--------- --------- ---------
Cash flows from financing activities:
Net increase in demand, NOW and savings deposits 11,038 49,796 15,037
Net increase in time deposits 102,795 14,044 17,392
Net (decrease) increase in short-term borrowings (14,205) (6,927) 844
Proceeds from issuance of long-term debt 9,000 90,000 20,000
Dividends paid (962) (656) (389)
Proceeds from stock offerings and exercise of warrants 1,350 14,411 --
Retirement of warrants (331) -- --
Proceeds from issuance of stock under employee benefit plans 282 221 100
Purchase of treasury stock (2,661) (3,098) --
Proceeds from issuance of capital securities -- -- 15,000
--------- --------- ---------
Net cash flows provided by financing activities 106,306 157,791 67,984
--------- --------- ---------
Net increase in cash and cash equivalents 19,239 1,301 8,255
Cash and cash equivalents:
Beginning of year 20,687 19,386 11,131
--------- --------- ---------
End of year $ 39,926 $ 20,687 $ 19,386
========= ========= =========
Supplemental disclosures:
Net conversion of loans receivable to real estate owned $ 66 $ -- $ 4,055
Transfer of loans held for sale to portfolio 22,305 -- --
Transfer of investment securities available for sale to held to maturity 9,464 -- --
Transfer of mortgage-backed securities held to maturity to available for sale -- 40,147 --
Exercise of client warrants 3,256 -- --
Cash payments for:
Income taxes $ 3,723 $ 3,973 $ 247
Interest 24,756 21,816 17,530
See Notes to Consolidated Interim Financial Statements.
29
(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 the United States. In preparing
the financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities as of the date of the financial
statements, and the reported amounts of revenues and expenses for the period.
Actual results could differ from such estimates.
The material estimates relate to the determination of the allowance for
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
loan and lease losses and real estate owned, management obtains independent
appraisals for collateral dependent loans and 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 and its subsidiaries; Progress Bank (the "Bank"), Progress
Realty Advisors, Inc. ("PRA"), Progress Capital Inc. ("PCI"), Procall
Teleservices, Inc. ("PTI"), Progress Development Corp. ("PDC"), Progress
Financial Resources, Inc. ("PFR"), and Progress Capital Management, Inc.
("PCM"). All significant intercompany transactions and balances have been
eliminated.
Significant estimates are made by management in determining the
allowance for 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 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 Company's control, it is at least reasonably
possible that the Company's estimates of the allowance for loan and lease losses
and the carrying values of the real estate assets could differ materially in the
near term.
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.
Cash and Cash Equivalents
The Company's cash and due from other financial institutions are
classified as cash and cash equivalents, which have an original maturity of
three months or less.
Trading, Investment and Mortgage-Backed Securities
The Company accounts for its investments in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"). SFAS 115 requires debt
and equity securities to be classified and 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 shareholders'
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
other strategic factors. When an investment or mortgage-backed security is sold,
any gain or loss is recognized utilizing the specific identification method.
30
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 (net realizable value) through a charge to the
allowance for loan and lease losses. Subsequently, valuations are periodically
performed by management, and any decline in net realizable 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 net realizable value. If a sale
of real estate owned results in a gain or loss, the gain or loss is charged to
operations as incurred.
Investments in Unconsolidated Entities
Investments in unconsolidated entities consist of partnerships,
corporate joint ventures and other investments in which the Company owns 50% or
less of the common stock. Investments in unconsolidated entities which the
Company has the ability to exercise significant influence over operating and
financial policies are accounted for under the equity method. All others are
accounted for under the cost method.
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 and its subsidiaries file a consolidated Federal income tax
return. Certain items of income and expense (primarily net operating losses,
depreciation, provision for 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
SFAS 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 in which they arise.
Loans and Leases
Loans and leases are stated at the principal amount outstanding,
excluding unearned interest and allowance for loan and lease losses and
including unamortized initial direct costs.
The company originates direct finance leases accounted for in
accordance with SFAS No. 13 "Accounting for Leases." Under this method, the
excess of minimum rentals plus estimated residual value over the cost of
equipment is recorded as unearned income and amortized over the lease term so as
to produce a constant periodic rate of return on the net investment in the
lease.
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 in the
process of collection which are secured by real estate and have a loan to value
ratio less than 75% for first mortgage loans and 60% for second mortgage loans.
When a loan is placed on non-accrual status, 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 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. Lease
origination and commitment fees and related costs are deferred and the amount is
amortized as an adjustment to the related asset's yield.
31
Allowance for Loan and Lease Losses
An allowance for loan and lease losses is maintained at a level that
management considers adequate to provide for potential losses in the loan and
lease 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 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. The allowance for loan losses includes reserves for impaired loans.
All non-accrual loans are considered impaired loans. The measurement of impaired
loans may be based on the present value of expected future cash flows discounted
at the historical effective rate or based on the fair value of the underlying
collateral. Impairment criteria are applied to the loan portfolio exclusive of
smaller balance homogeneous loans such as residential mortgages and consumer
loans which are evaluated collectively for impairment.
Treasury Stock
The Company accounts for treasury stock purchases at cost. Shares are
reissued on a FIFO (first-in-first-out) basis.
Earnings Per Share
The Company presents "Earnings Per Share" on a basic per-share amount
for income from continuing operations and on a diluted basis. The per share
results of operations were computed by dividing net income by the weighted
average number of shares outstanding during the period. Shares outstanding do
not include treasury shares and Employee Stock Ownership Plan ("ESOP") shares
that were purchased and unallocated in accordance with Statement of Position
("SOP") 93-6, "Employers Accounting for Employees Stock Ownership Plans." Prior
period amounts have been restated to reflect stock dividends paid during 1999
and 1998.
Accounting for Derivative Instruments
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities,"
("SFAS 133"). The Company chose to adopt SFAS 133 in 1998. SFAS 133 establishes
accounting and reporting standards for derivative instruments and hedging
activity. Under the standard, all derivatives must be measured at fair value and
recognized as either assets or liabilities in the financial statements. As
permitted under SFAS 133, the Company transferred $40.1 million, gross of
unrealized losses of $276,000 and net of realized losses of $72,000, of
mortgage-backed securities from the held to maturity to the available for sale
portfolio in the third quarter of 1998. The realized loss of $46,000, net of tax
benefit of $26,000, was presented as the cumulative effect of accounting change
on the Consolidated Statement of Operations.
Under SFAS 133 client warrants are considered derivatives and should be
marked to market through earnings if readily convertible to cash. At December
31, 1999, the Company owned warrants on common stock in approximately 32
companies which were not readily convertible to cash as they contained certain
conditions which precluded their convertibility; and hence, have not been
included in assets. If, in the future, those conditions were to be satisfied and
the underlying common stock were to become marketable, the warrants would be
recorded at fair value as an adjustment to current earnings.
(2) Acquisitions
The following acquisitions were accounted for as purchases. Goodwill on
these transactions has been recorded in other assets and will be amortized on
the straight-line basis over 15 years.
Date Purchase
Completed Price Shares Issued Goodwill
- ----------------------------------------------------------------------------------------------------------------------
Primary Capital Corp. 11/20/98 $750 54,003 Treasury $823
Atlantic Mortgage & Investment Company 12/22/97 900 31,821 Common 934
Progress Realty Advisors, L.P. 10/17/97 300 21,276 Common 144
Allied Commercial Mortgage and Asset Management 10/16/97 488 -- 484
On January 14, 1998, the Company acquired PAM Holding Corporation and
its subsidiaries, PAM Financial and PAM Investment Company, which had audited
assets and shareholders' equity of $15.5 million and $235,000 respectively, at
December 31, 1997. The transaction was accounted for under the pooling of
interests method of accounting during 1998 and
32
accordingly, prior year financial statements have been restated to reflect the
impact of the transaction. The Company issued 61,835 shares of common stock for
all of PAM Holding Corporation's common shares outstanding.
On November 20, 1998, the Company acquired Primary Capital Corp., a
Pennsylvania based leasing company with assets of approximately $1.1 million.
The transaction was recorded under the purchase method of accounting and
generated goodwill amounting to $823,000.
(3) Cash and Due from Other Financial Institutions
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 other financial institutions. At December 31, 1999 and 1998, required
reserves were $3.9 million and $4.8 million, respectively.
(4) Trading Securities
Trading securities at December 31, 1999 were equity securities acquired
through the exercise of client warrants. The change in net unrealized holding
gains on trading securities that has been included in client warrant income were
$2.7 million during 1999. The Company held no trading securities in 1998.
(5) Investment and Mortgage-Backed Securities
The Bank is required under current Office of Thrift Supervision ("OTS")
regulations to maintain defined levels of liquidity and utilizes certain
investments that qualify as liquid assets. To meet these requirements, the Bank
utilizes deposits with the Federal Home Loan Bank of Pittsburgh ("FHLB") and
United States government and agency obligations. The following tables detail the
amortized cost, carrying value and estimated fair value of the Company's
investments and mortgage-backed securities:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
At December 31, 1999 Cost Gains Losses Value Value
---------------------------------------------------------------------------------------------------------
Available for Sale:
---------------------------------------------------------------------------------------------------------
Equity Investments $ 4,564 $7,598 $ -- $ 12,162 $ 12,162
U.S. Government Agencies 17,107 -- 330 16,777 16,777
Corporate bonds 1,900 -- 207 1,693 1,693
Mortgage-backed securities 123,958 2 5,074 118,886 118,886
---------------------------------------------------------------------------------------------------------
Total available for sale
securities $ 147,529 $7,600 $ 5,611 $ 149,518 $ 149,518
=========================================================================================================
Held to Maturity:
---------------------------------------------------------------------------------------------------------
Federal Home Loan Bank Stock $ 4,923 $ -- $ -- $ 4,923 $ 4,923
U.S. Government Agencies 14,581 30 356 14,255 14,581
Municipal bonds 14,805 1 1,070 13,736 14,805
---------------------------------------------------------------------------------------------------------
Total held to maturity securities $ 34,309 $ 31 $ 1,426 $ 32,914 $ 34,309
=========================================================================================================
33
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
At December 31, 1998 Cost Gains Losses Value Value
---------------------------------------------------------------------------------------------------------
Available for Sale:
---------------------------------------------------------------------------------------------------------
Equity Investments $ 4,714 $ 197 $ 224 $ 4,687 $ 4,687
U.S. Government Agencies 2,000 1 -- 2,001 2,001
Corporate bonds 1,895 -- 265 1,630 1,630
Municipal bonds 9,599 16 24 9,591 9,591
Mortgage-backed securities 146,910 168 619 146,459 146,459
---------------------------------------------------------------------------------------------------------
Total available for sale
securities $ 165,118 $ 382 $ 1,132 $ 164,368 $ 164,368
=========================================================================================================
Held to Maturity:
---------------------------------------------------------------------------------------------------------
Federal Home Loan Bank Stock $ 4,923 $ -- $ -- $ 4,923 $ 4,923
U.S. Government Agencies 7,478 146 -- 7,624 7,478
---------------------------------------------------------------------------------------------------------
Total held to maturity securities $ 12,401 $ 146 $ -- $ 12,547 $ 12,401
=========================================================================================================
Investment and mortgage-backed securities pledged as collateral for
FHLB borrowings amounted to $30.1 million and $33.7 million at December 31, 1999
and 1998, respectively. Investment securities pledged to the Federal Reserve
Bank for Small Business Administration loans amounted to $970,000 and $1.0
million at December 31, 1999 and 1998, respectively. Investment and
mortgage-backed securities pledged under agreements to repurchase in connection
with borrowings amounted to $85.3 million and $86.1 million at December 31, 1999
and 1998, respectively. Investment and mortgage-backed securities pledged as
collateral for public funds amounted to $14.1 million and $15.6 million at
December 31, 1999 and 1998, respectively. Investment and mortgage-backed
securities pledged to the Federal Reserve Bank to secure borrowings and
Treasury, Tax and Loan balances amounted to $2.7 million and $2.2 million at
December 31, 1999 and 1998, respectively.
The amortized cost and estimated fair value of the Company's debt
securities at December 31, 1999 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.
Mortgage-backed securities mature over the life of the security through regular
principal payments and are subject to prepayment risk.
Amortized Estimated Fair
At December 31, 1999 Cost Value
-------------------------------------------------------------------------------------------
Available for Sale:
Due one year or less $ 1,107 $ 1,107
Due after one year through five years 1,000 970
Due five years through ten years 15,000 14,700
Due after ten years 1,900 1,693
Mortgage-backed securities 123,958 118,886
-------------------------------------------------------------------------------------------
Total debt securities available for sale $142,965 $137,356
===========================================================================================
Held to Maturity:
Due after ten years $ 29,386 $ 27,991
-------------------------------------------------------------------------------------------
Total debt securities held to maturity $ 29,386 $ 27,991
===========================================================================================
Proceeds from sales of investment and mortgage-backed securities
available for sale were $15.9 million, $63.2 million and $14.5 million in 1999,
1998 and 1997, respectively. Proceeds from calls of investment and
mortgage-backed securities available for sale were $1.2 million, $2.0 million
and $2.5 million in 1999, 1998 and 1997, respectively.
Total realized gains in 1999, 1998 and 1997 on the sale of investment
and mortgage-backed securities classified as available for sale were $439,000,
$824,000 and $448,000, respectively. Total realized losses in 1999, 1998 and
1997 on the sale of investment and mortgage-backed securities classified as
available for sale was $446,000, $291,000 and $221,000, respectively. Net
realized gains included above on the sale of equity securities available for
sale acquired through the exercise of client warrants during 1999 of $349,000
was recorded in client warrant income. Additionally, realized gains on calls of
mortgage-backed securities in 1999 were $8,000.
34
During 1999, the Company transferred $9.7 million in investments
securities from the available for sale to the held to maturity category. The
investments were transferred at fair value. Unrealized losses, net of tax, on
the date of transfer amounted to $89,000. At December 31, 1999 the remaining
unrealized losses, net of tax, were $79,000 and are reported in net accumulated
other comprehensive income.
During 1998, the Company implemented SFAS 133, resulting in the
transfer of $40.1 million, gross of unrealized losses of $276,000, and net of
realized losses of $72,000, of mortgage-backed securities previously held to
maturity to the available for sale portfolio.
(6) Loans and Leases, Net
The components of loans and leases at December 31, 1999 and 1998 are
detailed below:
At December 31, 1999 1998
-----------------------------------------------------------------------------------------------------------
Single-family residential real estate $ 40,554 $ 50,086
Commercial real estate 162,588 109,130
Construction (net of loans in process of $51,975 and $88,175, respectively) 58,813 44,546
Consumer loans 34,918 27,807
Credit card receivables -- 931
Commercial business 119,807 92,737
Lease financing 103,536 87,856
Unearned income (16,551) (14,357)
Allowance for loan and lease losses (5,927) (4,490)
-----------------------------------------------------------------------------------------------------------
Total loans and leases, net $497,738 $394,246
===========================================================================================================
For the years ended December 31, 1999 and 1998, the average recorded
investment in impaired loans was approximately $4.5 million and $2.6 million,
respectively. At December 31, 1999 and 1998, the recorded investment in loans
for which impairment has been recognized in accordance with SFAS Nos. 114 and
118 "Accounting by Creditors for Impairment of a Loan" totaled $5.7 million and
$3.7 million, respectively.
The Company is a lessor of equipment and machinery under agreements
expiring at various dates through the Year 2006. At December 31, 1999, the
components of lease financing are as follows:
2000 $ 40,513
2001 31,359
2002 19,458
2003 8,547
2004 2,933
2005 386
2006 340
------------------------------------------------------------------
Total future minimum lease payments receivable
including estimated residual value of $7,611 103,536
Unearned income (16,551)
------------------------------------------------------------------
Total lease financing receivables $ 86,985
==================================================================
At December 31, 1999, 1998, and 1997, the Company was servicing loans,
including participations sold, in the amounts of $240.4 million, $179.6 million
and $131.4 million, respectively, for the benefit of others.
Loans receivable from executive officers and directors, including loans
and leases to related persons and entities, consisted of the following activity:
For the years ended December 31, 1999 1998 1997
----------------------------------------------------------------------------------------------
Balances at beginning of year $3,327 $ 659 $1,205
Additional loans and leases granted 5,535 3,034 161
Repayments (2,637) (366) (325)
Other changes -- -- (382)
----------------------------------------------------------------------------------------------
Balances at end of year $6,225 $3,327 $ 659
==============================================================================================
35
Other changes resulted from the charge off of loans and leases to a
company in which a related party had an equity interest.
The following is a summary of the activity in the allowance for loan
and lease losses:
For the years ended December 31, 1999 1998 1997
-------------------------------------------------------------------------------------------------------
Balance at beginning of year $4,490 $3,863 $3,768
Provisions for loan and lease losses 3,548 959 1,509
Losses charged against the allowance (2,554) (755) (1,667)
Recoveries on charge-off loans 443 423 253
-------------------------------------------------------------------------------------------------------
Balance at end of year $5,927 $4,490 $3,863
=======================================================================================================
(7) Loans Held for Sale
The Company had no loans held for sale at December 31, 1999. At
December 31, 1998 the Bank held $25.3 million in commercial real estate loans
classified as held for sale and carried at the lower of aggregate cost or market
value.
(8) Investments in Unconsolidated Entities
Investments in Unconsolidated Entities at December 31, 1999 and 1998
are detailed below:
At December 31, 1999 1998
---------------------------------------------------------------------------------------------
Investment in Ben Franklin/Progress Capital Fund, L.P. (A) $ 4,771 $1,315
Other investments in unconsolidated entities (B) 6,656 4,223
---------------------------------------------------------------------------------------------
Total $11,427 $5,538
=============================================================================================
(A) The Company owns approximately 36% of the Ben Franklin/Progress
Capital Fund, L.P. ("Ben Franklin"), which was formed on December 30,
1997, and accounts for its investment under the equity method.
Financial statements for Ben Franklin are filed herewith as Exhibit
99. Condensed financial data of Ben Franklin follows:
For the years ended December 31, 1999 1998 1997
-----------------------------------------------------------------------------------------------------
Summary of Operations
--------------------------------------------------------
Revenues $ 357 $ 235 $ 7
Expenses 294 298 4
Net increase in investment valuation 6,725 -- --
-----------------------------------------------------------------------------------------------------
Net increase (decrease) in partners' capital
resulting from operations $ 6,788 $ (63) $ 3
-----------------------------------------------------------------------------------------------------
The Company's equity (loss) in Ben Franklin $ 2,822 $ (17) $ --
=====================================================================================================
--------------------------------------------------------
At December 31, 1999 1998
--------------------------------------------------------------------------------------
Balance Sheet Data
--------------------------------------------------------
Assets:
Venture capital investments, at fair value $ 9,830 $3,300
Cash and temporary investments 2,258 740
Other assets 100 57
--------------------------------------------------------------------------------------
Total assets $12,188 $4,097
======================================================================================
Liabilities and Partners' Capital:
Liabilities $ 36 $ 543
Partners' capital 12,152 3,554
--------------------------------------------------------------------------------------
Total liabilities and partners' capital $12,188 $4,097
======================================================================================
(B) Includes a $4.0 million and a $2.2 million investment at December 31,
1999 and 1998, respectively, in New Seasons Assisted Living
Communities Series "C" preferred stock, accounted for under the cost
method; a $2.1 million and a $2.0 million investment at December 31,
1999 and 1998, respectively, in Progress Development I L.P., owned 50%
by the Company and accounted for under the equity method; and a
$861,000 investment at December 31, 1999 in NewSpring Venture Fund,
L.P., accounted for under the equity method.
36
(9) Premises and Equipment
Land, office buildings and equipment, at cost, are summarized by major
classification:
------------------------------------------------------------------------------------------------------
At December 31, Estimated Life 1999 1998
------------------------------------------------------------------------------------------------------
Premises and Equipment Occupied by Company:
Land $ 2,931 $ 1,162
Buildings and leasehold improvements (40 years or lease 7,468 5,894
term)
Furniture, fixtures and equipment (3-5 years) 12,836 9,731
------------------------------------------------------------------------------------------------------
23,235 16,787
Accumulated depreciation (8,849) (7,707)
------------------------------------------------------------------------------------------------------
Total premises and equipment occupied by Company 14,386 9,080
------------------------------------------------------------------------------------------------------
Property Held for Lease:
Buildings and leasehold improvements (40 years or lease 2,205 1,732
term)
Accumulated depreciation (148) (105)
------------------------------------------------------------------------------------------------------
Total property held for lease 2,057 1,627
------------------------------------------------------------------------------------------------------
Total Premises and Equipment, Net $16,443 $10,707
======================================================================================================
Depreciation expense for the years ended December 31, 1999, 1998 and
1997, was $1.5 million, $1.1 million and $870,000, respectively.
At December 31, 1999, the Company leased a number of its office
facilities. The leases provide a schedule of minimum rent for each lease year or
provide for a minimum rental for each lease year as a stated percentage increase
or based upon the consumer price index increase. Generally, the leases provide
for the option to renew with specified terms. At December 31, 1999, minimum
future non-cancelable rental payments under operating leases are as follows:
-------------------------------------------------------------
Premises and Equipment Occupied by Company:
-------------------------------------------------------------
2000 $1,389
2001 1,160
2002 1,102
2003 1,080
2004 903
-------------------------------------------------------------
Total $5,634
=============================================================
Rental expense for the years ended December 31, 1999, 1998, and 1997
was $1.2 million, $914,000 and $691,000, respectively.
The Company was the lessor of office space on two of its properties.
The leases provide a schedule of minimum rent for each lease year and several
leases provide for the option to renew with specified terms. At December 31,
1999, minimum future non-cancelable rental payments to be received under
operating leases are as follows:
------------------------------------------------------------
Property Held for Lease:
------------------------------------------------------------
2000 $ 436
2001 426
2002 405
2003 204
2004 --
-------------------------------------------------------------
Total $1,471
=============================================================
(10) Other Assets
The following items are included in other assets:
At December 31, 1999 1998
----------------------------------------------------------------
Mortgage servicing rights $ 157 $ 129
Accounts receivable 3,046 3,396
Goodwill 4,914 5,130
Other real estate owned 66 --
Other assets 2,067 1,439
----------------------------------------------------------------
Total $10,250 $10,094
================================================================
37
Mortgage servicing rights include $68,000 and $34,000 of purchased
mortgage servicing rights at December 31, 1999 and 1998, respectively; and,
$89,000 and $95,000 at December 31, 1999 and 1998, respectively, of originated
mortgage servicing rights which have been capitalized in accordance with SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." At December 31, 1999, 1998 and 1997, the
Company was servicing loans, including participations sold, in the amounts of
$240.4 million, $179.6 million and $131.4 million, respectively, for the benefit
of others. In 1997 the Company sold $347.4 million of purchased mortgages
servicing rights which resulted in a gain of $978,000.
(11) Securities Sold Under Agreement to Repurchase
U. S. agency investment and mortgage-backed securities sold under
repurchase agreements are detailed below by date of maturity:
- --------------------------------------------------------------------------------------------------------------------------
Less than
December 31, 1999 Overnight 30 days 30-90 days Over 90 days*
- --------------------------------------------------------------------------------------------------------------------------
(including accrued interest):
Carrying value $-- $6,126 $18,863 $55,513
Market value -- 6,126 18,863 55,513
Repurchase borrowings (including accrued interest) -- 5,497 16,669 49,389
Average borrowing interest rate --% 5.53% 5.93% 5.31%
- --------------------------------------------------------------------------------------------------------------------------
* Includes $24.0 million in long-term securities purchased under agreement to
repurchase at fixed rates ranging between 4.93% and 5.71%, and maturities
ranging from February 1, 2001 through June 20, 2003.
Included in the above table are U. S. agency investment and
mortgage-backed securities including accrued interest sold under agreement to
repurchase with Salomon Brothers which exceed the repurchase liability adjusted
for accrued interest by $8.4 million. The weighted average maturity of these
repurchase agreements is 13 months. During 1999 $15.0 million in securities
purchased under agreement to repurchase were transferred from long-term to
short-term as maturities became less than one year.
(12) Other Long-Term Debt
Other long-term debt at December 31, 1999 and 1998 consist of the
following:
-----------------------------------------------------------------------------
At December 31, 1999 1998
-----------------------------------------------------------------------------
FHLB borrowings $85,000 $83,000
Other long-term borrowings -- 475
-----------------------------------------------------------------------------
Total $85,000 $83,475
=============================================================================
At December 31, 1999 there were $10.0 million in variable rate FHLB
long-term borrowings at three-month LIBOR plus 8 basis points. At December 31,
1999 the Company had $75.0 million of FHLB long-term borrowings that contained a
provision whereby, at the option of the FHLB, the borrowing may be converted to
a LIBOR adjustable rate advance for the remaining term of the advance. However,
the Company may choose not to accept the adjustable rate advance and would have
the option, at that time, to put the borrowing back to the FHLB without penalty.
At December 31, 1999, FHLB borrowings were secured by approximately $150.1
million in certain investment and mortgage-backed securities and $73.3 million
in certain mortgage loans.
During 1999, approximately $475,000 in other long-term debt was
reclassified to other short-term borrowings as its maturity become less than one
year.
(13) Subordinated Debt
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. The terms of the notes limit the
Company's aggregate amount of long-term senior indebtedness to an amount equal
to or less than the Company's net worth. At December 31, 1999, the Company's net
worth was $44.8 million greater than its aggregate long-term senior
indebtedness.
38
(14) Income Taxes
Income tax expense, including the tax benefit of $26,000 on the
cumulative effect of accounting change in 1998, consisted of the following:
-------------------------------------------------------------------------------------
For the years ended December 31, 1999 1998 1997
-------------------------------------------------------------------------------------
Current:
Federal $2,664 $2,752 $ 381
State (14) 87 160
Deferred:
Federal 888 (71) 1,672
State 5 84 9
-------------------------------------------------------------------------------------
Total income tax expense $3,543 $2,852 $2,222
=====================================================================================
The provision for income taxes differs from the statutory rate due to
the following:
-------------------------------------------------------------------------------------------------------
For the years ended December 31, 1999 1998 1997
-------------------------------------------------------------------------------------------------------
Tax at statutory rate $3,473 $2,663 $1,934
State tax, net of Federal effect (6) 113 171
Interest on non-taxable loans and securities (140) (10) (8)
Other 216 86 125
-------------------------------------------------------------------------------------------------------
Total income tax expense $3,543 $2,852 $2,222
=======================================================================================================
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, 1999 and 1998 are presented below:
-----------------------------------------------------------------------------------------
At December 31, 1999 1998
-----------------------------------------------------------------------------------------
Deferred tax assets:
Unrealized loss on securities available for sale $ -- $ 255
Provision for loan and lease losses 1,927 1,389
Investments in unconsolidated entities -- 74
Other 154 --
-----------------------------------------------------------------------------------------
Total deferred tax assets 2,081 1,718
-----------------------------------------------------------------------------------------
Deferred tax liabilities:
Unrealized gain on securities available for sale 636 --
Unrealized gain on trading securities 396 --
Direct finance lease receivable 1,654 1,221
Investments in unconsolidated entities 793 --
Depreciation and amortization 57 64
Deposit insurance premiums 18 37
Other 33 119
-----------------------------------------------------------------------------------------
Total deferred tax liabilities 3,587 1,441
-----------------------------------------------------------------------------------------
Net deferred tax assets (liabilities) $(1,506) $ 277
=========================================================================================
A valuation allowance has not been provided at December 31, 1999 and
1998 since management believes it is more likely than not that the deferred tax
assets will be realized.
39
(15) Commitments and Contingencies
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, 1999. Management does not expect any material losses from these
transactions. The Company's involvement in such financial instruments is
summarized as follows:
--------------------------------------------------------------------------------------------------------
At December 31, 1999 1998
--------------------------------------------------------------------------------------------------------
Contract or Notional Amount
----------------------------
Amounts representing credit risk:
Commitments to extend credit (including unused lines of credit) $223,925 $210,584
Standby letters of credit, financial guarantees and other letters of credit 3,983 3,551
The Company uses the same credit policies in extending commitments and
letters of credit as it does for on-balance sheet instruments. The Company
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
Company 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.
At December 31, 1999, 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.
(16) Related Party Transactions
The Company receives management fees from Ben Franklin and other
unconsolidated entities for accounting and advisory services. For the years
ended December 31, 1999 and 1998, the Company recorded management fees from Ben
Franklin of $272,000 and $270,000, respectively. Aggregate management fees from
other unconsolidated entities were $414,000 during 1999; there were no
management fees from other unconsolidated entities in 1998. There were no
management fees recorded in 1997.
Ben Franklin has a certificate of deposit and a money market account
with the Bank totaling $2.3 million and $740,000 at December 31, 1999 and 1998,
respectively.
(17) Benefit Plans
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 $284,000, $206,000, and $178,000 for
the years 1999, 1998 and 1997, respectively.
(18) Capital Securities
During 1997 the Company issued $15.0 million of 10.5% capital
securities due June 1, 2027 (the "Capital Securities"). The Capital Securities
were issued by the Company's recently formed subsidiary, Progress Capital Trust
I, a statutory business trust created under the laws of Delaware. The Company is
the owner of all of the common securities of the Trust (the "Common
Securities"). The Trust issued $15.0 million of 10.5% Capital Securities (and
together with the Common Securities, the "Trust Securities"), the proceeds from
which were used by the Trust, along with the Company's $464,000 capital
contribution for the Common Securities, to acquire $15.5 million aggregate
principal amount of the Company's 10.5% Junior Subordinated Deferrable Interest
Debentures due June 1, 2027 (the "Debentures"), which constitute the sole assets
of the Trust. The Company has, through the Declaration of Trust establishing the
Trust, Common Securities and Capital Securities Guarantee Agreements, the
Debentures and a related Indenture, taken together, fully irrevocably and
unconditionally guaranteed all of the Trust's obligations under the Trust
Securities.
40
(19) Shareholders' Equity
On May 15, 1998 the Company completed a secondary offering of 792,800
shares of common stock at a price of $19.50 per share. During 1998, the Company
announced a plan to repurchase up to 356,000 shares of common stock of which
231,000 shares had been repurchased at December 31, 1998 and the remaining were
repurchased during 1999. In 1999, the Company announced the authorization of a
new stock repurchase program under which the Company may repurchase up to
280,000 or five percent, of its outstanding common stock of which 186,000 common
shares were repurchased.
In 1994, the Company completed the sale of $3.0 million in subordinated
debentures in a private placement. Nine whole units and six half units were
sold, ranging from $125,000 to $250,000 in principal amount of 8.25%
subordinated notes due in 2004 and warrants to purchase 13,781 to 27,562 shares
of common stock. Each warrant entitles the holder to purchase one share of the
Company's common stock at an exercise price of $5.44. The warrants were
exercisable in whole or in part, at any time prior to June 30, 1999. During 1999
and 1998, 248,059 and 26,250 shares were issued under these warrants. Interest
on the subordinated debentures is payable quarterly. The subordinated debentures
are due June 30, 2004 and are redeemable after July 1, 1996.
On April 25, 1990, the Board of Directors of the Company declared a
dividend distribution of one Right for each outstanding share of Common Stock of
the Company to shareholders 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.
Employee Stock Ownership Plan
The Company's 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 SOP 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 (54,878 shares after the effects of the stock dividends) 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 $154,000, $170,000, and $98,000 for
1999, 1998, and 1997, respectively. Interest expense on the borrowings was
$8,000, $13,000, and $17,000 for 1999, 1998, and 1997, respectively. As of
December 31, 1999, the Company had a remaining guaranteed ESOP obligation of
$74,000 included in other short-term borrowings. Of the 54,878 shares, 40,867
shares have been allocated and the 14,011 unallocated shares are reported as a
reduction of shareholders' equity. At December 31, 1999, the unallocated shares
had a fair value of $177,000.
Employee Stock Purchase Plan
In April 1996, the Company established an Employee Stock Purchase Plan
("ESPP") under which 112,956 shares were reserved for issuance. 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. During 1999, 1998 and
1997, 18,722, 8,556 and 9,479 shares, respectively, were issued to employees
through their participation in the ESPP. These transactions increased
shareholders' equity $220,000, $106,000 and $68,000 during 1999, 1998 and 1997,
respectively.
Restricted Stock Award Plan
In February 1999 the Board of Directors adopted a Restricted Stock
Award Plan under which 81,375 shares of common stock were reserved for grant to
certain employees of the Company's subsidiary Progress Financial Resources, Inc.
The awards have a five-year vesting period and are accounted for in accordance
with Accounting Principles Board Opinion No. 25, and related interpretations,
which provide for compensation expense to be measured at the grant date and
recognized as the awards vest. During 1999, the Company granted 13,657 and
65,521 shares, issued at market prices of $11.89 and $13.80, respectively.
Retirements during 1999 amounted to 1,300 shares. The Company accrued $184,000
in compensation expense relating to the awards in 1999.
Stock Incentive Plan and Directors' Stock Option Plan
In 1993, as amended in 1997, 1998 and 1999, the Board of Directors
adopted a Stock Incentive Plan which provides for the grant of incentive stock
options, non-qualified 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
41
date the option is granted, and the per share exercise price of a non-qualified
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, 603,425 shares of common stock were reserved for issuance of which 134,445
shares remained for future grants at December 31, 1999. All options were granted
at the fair market value and have a one- to five-year vesting period.
Under the Directors' Plan, which was also adopted in February 1993, and
amended in 1997, each non-employee director of the Company will receive
non-qualified options to purchase 579 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. Additional options may be granted based on the level of business
referrals to the Company. A total of 103,986 authorized but unissued shares of
Common Stock have been reserved for issuance pursuant to the Directors' Plan. At
December 31, 1999, 23,950 shares remained in the reserve for future grants.
Options granted under each of these 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. The average remaining term of
outstanding options at December 31, 1999 was 5.98 years. Changes in total
options outstanding during 1999, 1998, and 1997 are as follows:
For the year ended December 31, 1999 Shares Under Option Option Price Per Share
-------------------------------------------------------------------------------------------
Outstanding at beginning of year 501,988 $ .91 to $16.44
Granted during year 99,502 $11.90 to $15.00
Exercised during year (35,342) $ .91 to $13.25
Forfeited during year (40,767) $ 7.13 to $14.97
-------------------------------------------------------------------------------------------
Outstanding at end of year 525,381 $ 3.02 to $16.44
===========================================================================================
Options exercisable at end of year 405,115 $ 3.02 to $16.44
===========================================================================================
For the year ended December 31, 1998
-------------------------------------------------------------------------------------------
Outstanding at beginning of year 475,281 $ .91 to $14.97
Granted during year 82,093 $11.79 to $16.44
Exercised during year (39,218) $ .91 to $ 7.86
Forfeited during year (16,168) $ 4.75 to $ 7.12
-------------------------------------------------------------------------------------------
Outstanding at end of year 501,988 $ .91 to $16.44
===========================================================================================
Options exercisable at end of year 365,704 $ .91 to $14.97
===========================================================================================
For the year ended December 31, 1997
-------------------------------------------------------------------------------------------
Outstanding at beginning of year 319,086 $ .91 to $10.83
Granted during year 181,720 $ 7.12 to $14.97
Exercised during year (25,525) $ 1.00 to $10.83
Forfeited during year -- --
-------------------------------------------------------------------------------------------
Outstanding at end of year 475,281 $ .91 to $14.97
===========================================================================================
Options exercisable at end of year 304,875 $ .91 to $ 7.12
===========================================================================================
The weighted average exercise price of options outstanding at December
31, 1999, 1998 and 1997, was $9.65, $6.53 and $4.17 per share, respectively.
Pro Forma Stock Based Compensation
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. 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 net income per share for the years ended December 31, 1999, 1998 and 1997
would have been changed to the pro forma amounts indicated below:
----------------------------------------------------------------------------------------------
For the year ended December 31, 1999 1998 1997
----------------------------------------------------------------------------------------------
Pro forma net income $6,415 $4,787 $3,281
Pro forma net income per share $1.17 $0.93 $0.74
Pro forma diluted net income per share $1.10 $0.85 $0.68
42
The fair value of Company stock options used to compute pro forma net
income and net income 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 1999, 1998 and 1997, dividend yield of 1.41%,
1.03% and 1.02%; expected volatility of 37.28%, 33.38% and 31.99%; risk free
interest rate of 6.19%, 5.01% and 6.43%; and an expected holding period of 7
years, 7 years and 7 years, respectively.
Earnings Per Share
The following table presents a summary of per share data and the
amounts for the periods included. All prior period information has been restated
to relflect the 5% stock dividends distributed to shareholders on August 31,
1999 and August 31, 1998.
Per Share
For the year ended December 31, 1999 Income Shares Amount
-------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share:
Income available to common shareholders $6,671 5,503,259 $1.21
Effect of Dilutive Securities:
Warrants -- 73,034
Options -- 233,796
---------
Diluted Earnings Per Share:
Income available to common shareholders and assumed conversions $6,671 5,810,089 $1.15
====== ========= =====
For the year ended December 31, 1998
-------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share:
Income available to common shareholders before cumulative effect of
accounting change $5,026 5,124,681 $0.98
Cumulative effect of accounting change (net of tax benefit of $26) (46) -- (.01)
------ -----
Income available to common shareholders 4,980 5,124,681 $0.97
=====
Effect of Dilutive Securities:
Warrants -- 210,413
Options -- 292,494
---------
Diluted Earnings Per Share:
Income available to common shareholders and assumed conversions before
cumulative effect of accounting change 5,026 5,627,588 $0.89
Cumulative effect of accounting change (net of tax benefit of $26) (46) (.01)
------ -----
Income available to common shareholders and assumed conversions $4,980 5,627,588 $0.88
====== ========= =====
For the year ended December 31, 1997
-------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share:
Income available to common shareholders $3,467 4,447,141 $0.78
Effect of Dilutive Securities:
Warrants -- 159,730
Options -- 202,199
---------
Diluted Earnings Per Share:
Income available to common shareholders and assumed conversions $3,467 4,809,070 $0.72
====== ========= =====
Capital Resources
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") was signed into law on December 19, 1991; regulations implementing
the prompt corrective action provision of FDICIA became effective on December
19, 1992. In addition to the prompt corrective action requirements, FDICIA
includes significant changes to the legal and 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 operations. 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 "well capitalized," an
institution must generally have a tangible equity ratio of at least 2%, a Tier 1
or leverage capital ratio of at least 5%, a Tier 1 risk-based capital ratio of
at least 6%, and a total risk-based capital ratio of at least 10%. An
institution is deemed to be "critically undercapitalized" if it has a tangible
equity ratio of 2% or less.
43
At December 31, 1999 and 1998, the Bank's tangible equity ratio was
6.30% and 6.61%, Tier 1 or leverage capital ratio was 6.30% and 6.61%, Tier 1
risk-based capital ratio was 8.90% and 9.57% and total risk-based capital ratio
was 10.01% and 10.59%, respectively. These ratios were based on tangible equity
of $47.1 million and $41.6 million, Tier 1 or leverage capital of $47.1 million
and $41.6 million, Tier 1 risk-based capital of $47.1 million and $41.6 million
and total risk-based capital of $53.0 million and $46.1 million, respectively.
In addition these ratios were based on adjusted total assets of $747.8 million
and $630.0 million , and risk-weighted assets of $529.3 million and $434.9
million at December 31, 1999 and 1998, respectively. As of December 31, 1999,
the Bank is classified as "well capitalized."
The following is a reconciliation of the Bank's capital determined in
accordance with generally accepted accounting principles ("GAAP") to regulatory
tangible, leverage, and risk-based capital at December 31, 1999 and 1998:
---------------------------------------------------------------------------------------------------------
Tier 1 or Tier 1 Total
Tangible Leverage Risk-Based Risk-Based
At December 31, 1999 Equity Capital Capital Capital
---------------------------------------------------------------------------------------------------------
Total qualifying capital $47,112 $47,112 $47,112 $53,006
Capital ratio 6.30% 6.30% 8.90% 10.01%
Minimum capital adequacy requirement $14,955 $29,910 $21,174 $42,348
Minimum capital adequacy ratio 2.00% 4.00% 4.00% 8.00%
Regulatory capital excess $32,157 $17,202 $25,938 $10,658
---------------------------------------------------------------------------------------------------------
Tier 1 or Tier 1 Total
Tangible Leverage Risk-Based Risk-Based
At December 31, 1998 Equity Capital Capital Capital
---------------------------------------------------------------------------------------------------------
Total qualifying capital $41,614 $41,614 $41,614 $46,068
Capital ratio 6.61% 6.61% 9.57% 10.59%
Minimum capital adequacy requirement $12,600 $25,200 $17,396 $34,792
Minimum capital adequacy ratio 2.00% 4.00% 4.00% 8.00%
Regulatory capital excess $29,014 $16,414 $24,218 $11,276
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. 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 $.17 per share during 1999.
(20) Fair Value of Financial Instruments
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 such as lease
contracts, and all non-financial instruments were excluded from the fair value
disclosure requirements. Therefore, the fair values presented below 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, 1999 and 1998:
Cash and due from other financial institutions: Current carrying
amounts reported in the statement of financial condition for cash and
short-term instruments approximate estimated fair value.
Trading securities: Current carrying amounts reported in the statement
of financial condition for trading securities are at fair value.
44
Investments and mortgage-backed securities: Fair values for investments
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. The fair value of non-accruing loans
was 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 by 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.
Accrued 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, 1999 and 1998
(i.e., current carrying amounts). Fair values for deposits with stated
maturity dates (time deposits) were estimated with a discounted cash
flow calculation that uses current borrowing rates for advances with
comparable terms and maturities. Current carrying amounts of escrow
deposits approximate estimated fair value.
Short-term borrowings: Current carrying amounts of Federal Home Loan
Bank advances, borrowings under repurchase agreements and other
short-term borrowings approximate estimated fair value.
Long-term and subordinated debt: 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.
Accrued interest payable: Current carrying amounts reported in the
statement of financial condition 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:
-----------------------------------------------------------------------------------------------------
At December 31, 1999 1998
-----------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
------------------------------------------------
Financial assets:
Cash and due from other financial institutions $ 39,926 $ 39,926 $ 20,687 $ 20,687
Trading securities 3,267 3,267 -- --
Investments and mortgage-backed securities 183,827 182,432 176,769 176,915
Loans, excluding lease receivables (1) 416,680 413,767 350,487 354,769
Accrued interest receivable 4,162 4,162 3,245 3,245
Mortgage servicing rights 157 157 129 129
Financial liabilities:
Deposits $521,439 $523,169 $408,162 $410,004
Short-term borrowings 50,767 50,767 45,941 45,941
Long-term and subordinated debt 112,000 114,441 121,475 120,093
Accrued interest payable 2,936 2,936 2,260 2,260
(1) Includes loans held for sale
45
(21) Subsequent Events
In January 2000, the Company acquired KMR Management, Inc. ("KMR"), a
Pennsylvania based corporation. KMR which will operate as a wholly owned
subsidiary of the Company, and will provide financial and operational management
consulting services for commercial clients. The acquisition was accounted for
under the purchase method of accounting. The purchase price was $1.0 million,
which included the issuance of 60,000 treasury shares. Goodwill of $1.0 million
was created in the transaction, which will be amortized over a ten-year period.
(22) Condensed Financial Information of Progress Financial Corporation
(Parent Company Only)
Condensed Statements of Financial Condition
---------------------------------------------------------------------------------------------------------
At December 31, 1999 1998
---------------------------------------------------------------------------------------------------------
Assets:
Cash on deposit with subsidiary $ 189 $ --
Interest-earning deposits 7
Investment in Bank 46,664 44,750
Investment in non-bank subsidiaries 20,098 8,035
Investment in unconsolidated entities 863 2
Investments available for sale 1,107 213
Loans and advances to subsidiaries 3,362 5,788
Other assets 332 1,147
------- -------
Total assets $72,622 $59,935
======= =======
Liabilities and shareholders' equity:
Liabilities:
Subordinated debt $ 3,000 $ 3,000
Employee Stock Ownership Plan note payable 74 127
Accounts payable to subsidiaries 7,183 445
Other liabilities 105 378
------- -------
Total liabilities 10,362 3,950
Corporation-obligated mandatorily redeemable capital securities of subsidiary
trust holding solely junior subordinated debentures of the Corporation 14,451 14,431
Shareholders' equity:
Serial preferred stock -- --
Common stock 5,680 5,263
Treasury stock (1,963) (2,287)
Unearned Employee Stock Ownership Plan shares (64) (114)
Unearned compensation--restricted stock awards (1,051) --
Capital surplus 42,612 39,586
Retained earnings (deficit) 1,361 (399)
Net accumulated other comprehensive income (loss) 1,234 (495)
------- -------
Total shareholders' equity 47,809 41,554
------- -------
Total liabilities, Corporation-obligated mandatorily redeemable capital
securities and shareholders' equity $72,622 $59,935
======= =======
46
Condensed Statements of Operations
For the years ended December 31, 1999 1998 1997
---------------------------------------------------------------------------------------------------------------
Dividends from equity investment $ 1 $ 12 $ 5
Management fees from subsidiaries 441 -- 130
Investment advisory fees 52 -- --
Equity in undistributed income of subsidiaries 9,086 6,171 3,848
Loss in unconsolidated entities (112) -- --
Gain (loss) on sale of investments available for sale (23) 246 --
Interest income 11 9 498
------ ------ ------
Total income 9,456 6,438 4,481
------ ------ ------
Interest expense 266 287 279
Professional services 82 136 5
Management fee to Bank 927 -- --
Capital securities expense 1,595 1,593 925
Miscellaneous expense 1,159 70 9
------ ------ ------
Total expense 4,029 2,086 1,218
------ ------ ------
Income before income taxes 5,427 4,352 3,263
Income tax expense (benefit) (1,244) (628) (204)
------ ------ ------
Net income $6,671 $4,980 $3,467
====== ====== ======
Condensed Statements of Cash Flows
For the years ended December 31, 1999 1998 1997
---------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $6,671 $4,980 $3,467
Add(deduct) items not affecting cash flow from operating activities:
Equity in income of subsidiaries (9,086) (6,171) (3,848)
Loss in unconsolidated entities 112 -- --
(Gain) loss on sale of investments available for sale 23 (246) --
Amortization of deferred debt issuance cost 29 38 31
Amortization of Company owned life insurance 13 -- --
Net (increase) decrease in accounts receivable and other assets 3,381 (2,915) (4,674)
Net increase in accounts payable and other liabilities 6,619 678 105
------ ------ ------
Net cash flows provided by (used in) operating activities 7,762 (3,636) (4,919)
------ ------ ------
Cash flows from investment activities:
Capital contributions and additional investment in subsidiaries (6,726) (9,652) (9,736)
Dividends from subsidiaries 3,620 1,259 973
Investments in unconsolidated entities (973) -- --
Proceeds from sales of investments available for sale 120 1,185 --
Purchases of investments available for sale (1,107) -- (1,068)
Purchase of Company owned life insurance (125) -- --
------ ------ ------
Net cash flows used in investment activities (5,191) (7,208) (9,831)
------ ------ ------
Cash flows from financing activities:
Repayment of ESOP debt (53) (49) (44)
Purchase of treasury stock (2,661) (3,098) --
Retirement of warrants (331) -- --
Net proceeds from stock offering and exercise of warrants 1,350 14,411 --
Net proceeds from issuance of common stock under employee benefit
plans 282 221 100
Dividends paid (962) (656) (389)
Proceeds from issuance of capital securities -- -- 15,000
------ ------ ------
Net cash flows provided by (used in) financing activities (2,375) 10,829 14,667
------ ------ ------
Net increase (decrease) in cash and cash equivalents 196 (15) (83)
Cash and cash equivalents:
Beginning of year -- 15 98
------ ------ ------
End of year $ 196 $ -- $ 15
====== ====== ======
These statements should be read in conjunction with the
other notes to the consolidated financial statements.
47
[PricewaterhouseCoopers LOGO]
Report of Independent Accountants
To the Shareholders and Board of Directors
of Progress Financial Corporation:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, comprehensive income, shareholders'
equity and cash flows present fairly, in all material respects, the financial
position of Progress Financial Corporation and its subsidiaries at December 31,
1999 and December 31, 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/PricewaterhouseCoopers LLP
- -----------------------------
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
26 January 2000
48
Selected Quarterly Consolidated Financial Data (Unaudited)
The following table represents quarterly financial data for the period
indicated. In the opinion of management, this information reflects all
adjustments (consisting 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 1999 classifications. Prior period per share information has
been restated to reflect the 5% stock dividend to shareholders on August 31,
1999.
Dec. 31, Sept. 30, Jun. 30, Mar. 31, Dec.31, Sept. 30, Jun. 30, Mar. 31,
1999 1999 1999 1999 1998 1998 1998 1998
- ------------------------------------------------------------------------------------------------------------------------
Interest income $13,976 $13,168 $12,733 $12,297 $12,353 $12,266 $10,778 $9,932
Interest expense 6,810 6,406 6,134 6,082 6,141 6,251 5,317 4,741
- ------------------------------------------------------------------------------------------------------------------------
Net interest income 7,166 6,762 6,599 6,215 6,212 6,015 5,461 5,191
Provision for loan and lease losses 1,225 658 1,216 449 300 233 224 202
- ------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan and lease losses 5,941 6,104 5,383 5,766 5,912 5,782 5,237 4,989
Non-interest income 6,865 7,116 4,250 2,762 2,255 2,338 2,262 1,805
Non-interest expense 9,855 9,753 7,921 6,444 5,800 5,927 5,730 5,219
- ------------------------------------------------------------------------------------------------------------------------
Income before income taxes and
cumulative effect of accounting 2,951 3,467 1,712 2,084 2,367 2,193 1,769 1,575
change
Income tax expense 990 1,210 582 761 850 801 648 579
- ------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of
accounting change 1,961 2,257 1,130 1,323 1,517 1,392 1,121 996
Cumulative effect of accounting
change, net of tax benefit -- -- -- -- -- (46) -- --
- ------------------------------------------------------------------------------------------------------------------------
Net income $ 1,961 $ 2,257 $ 1,130 $ 1,323 $ 1,517 $ 1,346 $ 1,121 $ 996
========================================================================================================================
Basic income per common share before
cumulative effect of accounting $.35 $.40 $.21 $.25 $.28 $.26 $.22 $.22
change
Diluted income per common share
before cumulative effect of .34 .39 .19 .23 .26 .24 .20 .19
accounting change
Basic income per common share .35 .40 .21 .25 .28 .25 .22 .22
Diluted income per common share .34 .39 .19 .23 .26 .23 .20 .19
Dividends per share .05 .04 .04 .04 .04 .03 .03 .03
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information contained in the section titled "Election of Directors" in the
Company's definitive Proxy Statement for the 2000 Annual Meeting to be held
April 25, 2000 (the "Proxy Statement"), with respect to the Directors of the
Company is incorporated herein by reference.
Item 11. Executive Compensation
The information appearing in the section titled "Executive
Compensation" in the Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information appearing in the section titled "Beneficial Ownership
of Common Stock by Certain Beneficial Owners and Management" and "Election of
Directors" (with respect to security ownership by Directors) in the Proxy
Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information appearing in the caption "Indebtedness of Management"
in the Proxy Statement is incorporated herein by reference.
49
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
a. Financial data schedules are not required under the related instructions of
the Securities and Exchange Commission or are inapplicable and, therefore, have
been omitted.
b. The following exhibits are incorporated by reference herein or are filed as
part of this Annual Report.
No. Exhibits
--- --------
*3.1 Certificate of Incorporation (Exhibit 3.1 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1987)
*3.2 By-Laws (Exhibit 3.2 to the Company's Registration Statement No.
33-3685 on Form S-4, filed with the Securities and Exchange Commission
(the "SEC") on March 3, 1986)
*3.3 Certificate of Amendment of Certificate of Incorporation dated May 13,
1998. (Exhibit 3.3 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1998 and filed with the SEC on March 29, 1999)
*4.1 Amended and Restated Declaration of Trust relating to Progress Capital
Trust I, dated as of June 3, 1997, between Progress Financial
Corporation and the trustees named therein. (Exhibit 4.4 to the
Company's Registration Statement on Form S-4, filed with the SEC on
October 22, 1997)
*4.2 Indenture, dated as of June 3, 1997, between Progress Financial
Corporation and The Bank of New York, as trustee, relating to Junior
Subordinated Deferrable Interest Debentures due 2027 of Progress
Financial Corporation. (Exhibit 4.1 to the Company's Registration
Statement on Form S-4, filed with the SEC on October 22, 1997)
*4.3 Series B Capital Securities Guarantee Agreement, dated as of December
11, 1997, relating to the Capital Securities of Progress Capital Trust
I. (Exhibit 4.6 to the Company's Registration Statement on Form S-4,
filed with the SEC on October 22, 1997)
10.1 1993 Stock Incentive Plan as amended.
*10.2 1993 Directors' Stock Option Plan as amended in 1997. (Appendix B to
the Company's Definitive Proxy on Form DEF 14A, filed with the SEC on
April 7, 1997)
*10.3 Employment Agreement between Progress Financial Corporation, Progress
Bank and W. Kirk Wycoff dated March 1, 1997. (Exhibit 10.5 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1997, filed with the SEC on March 29, 1999)
*10.4 Change in Control and Termination Agreement between Progress Financial
Corporation, Progress Bank and Michael B. High dated October 2, 1998.
(Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1998, filed with the SEC on March 29, 1999)
*10.5 Change in Control and Termination Agreement between Progress Financial
Corporation, Progress Bank and H. Wayne Griest dated November 17, 1998.
(Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1998, filed with the SEC on March 29, 1999)
*10.6 Change in Control and Termination Agreement between Progress Financial
Corporation, Progress Bank and Eric J. Morgan dated October 2, 1998.
(Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1998, filed with the SEC on March 29, 1999)
*10.7 Restricted Stock Award Plan dated February 17, 1999. (Exhibit 4 on the
Company's Registration Statement on Form S-8, File Number 333-72543
filed with the SEC on February 18, 1999)
21 Subsidiaries of the Registrant
50
23 Consent of Independent Accountants for Progress Financial Corporation
27 Financial Data Schedule
99 Audited financial statements for Ben Franklin/Progress Capital Fund,
L.P.
* Incorporated by reference.
c. Reports on Form 8-K filed for the quarter ended December 31, 1999:
1. On November 1, 1999, the Company filed a Current Report under
Item 5 announcing its Third Quarter 1999 earnings and declaration
of its Fourth Quarter 1999 cash dividend.
2. On November 1, 1999, the Company filed a Current Report under
Item 5 announcing its repurchase program to repurchase up to
280,000 shares of common stock.
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto being duly authorized.
Progress Financial Corporation
March 7, 2000 BY: /s/ W./ Kirk Wycoff
- --------------------- ---------------------------------------
Date W. Kirk Wycoff, Chairman, President and
Chief Executive Officer
Pursuant to the Requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates
indicated.
/s/ W. Kirk Wycoff March 7, 2000
- ----------------------------------- -------------------
W. Kirk Wycoff, Chairman, President Date
and Chief Executive Officer
/s/ John E. F. Corson March 7, 2000
- ----------------------------------- -------------------
John E. Flynn Corson, Director Date
/s/ William O. Daggett, Jr. March 7, 2000
- ----------------------------------- -------------------
William O. Daggett, Jr., Director Date
/s/ G. Daniel Jones March 7, 2000
- ----------------------------------- -------------------
G. Daniel Jones, Director Date
/s/ Joseph R. Klinger March 7, 2000
- ----------------------------------- -------------------
Joseph R. Klinger, Director Date
/s/ Paul M. LaNoce March 7, 2000
- ----------------------------------- -------------------
Paul M. LaNoce, Director Date
/s/ A. John May March 7, 2000
- ----------------------------------- -------------------
A. John May, III, Director Date
/s/ William L. Mueller March 7, 2000
- ----------------------------------- -------------------
William L. Mueller, Director Date
/s/ Kevin J. Silverang March 7, 2000
- ----------------------------------- -------------------
Kevin J. Silverang, Director Date
/s/ Charles J. Tornetta March 7, 2000
- ----------------------------------- -------------------
Charles J. Tornetta, Director Date
/s/ Michael B. High March 7, 2000
- ----------------------------------- -------------------
Michael B. High, Sr. Vice President Date
and Chief Financial Officer
52