SELECTED CONSOLIDATED FINANCIAL DATA
Tabular information is presented in thousands of dollars except for share and
per share data.
- - ----------------------------------------------------------------------------------------------------------------------------------
December 31, 1997 1996 1995 1994 1993
- - ----------------------------------------------------------------------------------------------------------------------------------
Financial Condition
Investment securities:
Available for sale $ 6,395 $ 3,462 $ 5,504 $ 4,627 $ --
Held to maturity 4,051 1,937 2,149 12,867 4,632
Mortgage-backed securities:
Available for sale 44,518 42,738 36,842 9,103 8,893
Held to maturity 49,421 47,334 52,833 93,673 117,054
Loans and leases 325,544 251,562 221,650 205,771 158,268
Loans held for sale 373 599 3,153 351 16,744
Real estate owned, net 380 2,150 728 4,534 11,577
Total assets 493,406 383,649 345,394 348,189 333,209
Deposits 340,761 306,248 297,260 283,958 273,583
Borrowings 71,172 50,270 28,400 47,052 40,536
Capital securities 15,000 -- -- -- --
Stockholders' equity 25,115 19,954 16,407 13,020 14,788
Results of Operations
Interest income $ 34,448 $ 28,121 $ 26,569 $ 22,830 $ 20,824
Interest expense 16,609 14,682 15,335 12,505 11,465
Net interest income 17,839 13,439 11,234 10,325 9,359
Provision for possible loan and lease losses 1,121 687 625 521 368
Net interest income after provision for
possible loan and lease losses 16,718 12,752 10,609 9,804 8,991
Other income 6,478 4,859 2,265 1,545 2,226
Other expense 17,014 15,596 12,071 12,065 11,568
Income (loss) before income taxes 6,182 2,015 803 (716) (351)
Tax expense (benefit) 2,310 762 (1,868) -- (1,034)
Net income (loss) $ 3,872 $ 1,253 $ 2,671 $ (716) $ 683
Per Share Data
Net income (loss) per common share $ .97 $ .32 $ .77 $ (.21) $ .27
Net income (loss) per common share,
assuming dilution .90 .31 .75 (.20) .26
Dividends .10 .04 -- -- --
Book value 6.18 5.02 4.76 3.79 4.30
Operating Data
Return on average assets .92% .35% .76% (.21)% .21%
Return on average stockholders' equity 17.50 6.59 18.62 (5.24) 6.25
Average stockholders' equity to average assets 5.27 5.29 4.08 4.01 3.42
Allowance for possible loan and lease losses to
total loans and leases 1.00 1.25 .76 .72 1.19
Non-performing assets as a percentage of
total assets .50 .91 1.33 2.61 5.29
Interest rate spread 3.99 3.60 3.07 3.04 3.26
Net interest margin 4.57 3.99 3.37 3.23 3.25
Dividends declared as a percent of net income
per share 10.31 12.50 -- -- --
Branch Data
Number of full service branches 10 10 9 8 8
MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION &RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and related notes.
Progress Financial Corporation (the "Company") is a unitary thrift holding
company that has five subsidiaries: Progress Bank (the "Bank"), Progress Realty
Advisors, Inc. ("PRA"), Progress Capital, Inc., ("PCI"), Procall Teleservices,
Inc. ("PTI") and Progress Capital Management, Inc. The Bank's primary
subsidiaries are 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 1997 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 income before income taxes of $6.2 million for the
year ended December 31, 1997, in comparison with income before tax of $2.0
million and $803,000 for the years 1996 and 1995, respectively. The results for
1996 are after a special one-time assessment for the Savings Association
Insurance Fund ("SAIF") of $1.8 million.
The Company reported net income of $3.9 million for the year ended December
31, 1997 in comparison with net income of $1.3 million and $2.7 million for 1996
and 1995, respectively. The basic earnings per common share were $.97 for 1997
in comparison with earnings per common share of $.32 for 1996, and $.77 for
1995. Earnings per share assuming dilution were $.90 for 1997, $.31 and $.75 for
1996 and 1995, respectively. Return on average stockholders' equity was 17.50%
and return on average assets was .92% for the year ended December 31, 1997. For
1996, return on average stockholders' equity was 6.59% and return on average
assets was .35%. Return on average stockholders' equity was 18.62% and return on
average assets was .76% for 1995.
Results for 1997 reflect a higher net interest income of $17.8 million, in
comparison with $13.4 million and $11.2 million for 1996 and 1995, respectively.
Results for 1997 also include $1.1 million in provision for possible loan and
lease losses in comparison with $687,000 and $625,000 for 1996 and 1995,
respectively. Other income amounted to $6.5 million for 1997, a $1.6 million
increase over the $4.9 million earned in 1996, and a $4.2 million increase over
the $2.3 million reported in 1995. Other income increased in 1997 in comparison
with 1996, primarily due to leasing fees and service charges on deposits. Other
expense amounted to $17.0 million for 1997, a $1.4 million increase over the
$15.6 million reported in 1996 and a $4.9 million increase over the $12.1
million reported in 1995. The increase in 1997 is primarily due to an increase
in salaries and benefits, mainly due to additional employees of companies
acquired and a higher cost of benefits in 1997. Results for 1997 include income
tax expense of $2.3 million compared to an income tax expense of $762,000 in
1996 and an income tax benefit of $1.9 million in 1995.
Net Interest Income
Net interest income totalled $17.8 million, $13.4 million and $11.2 million
for the years ended December 31, 1997, 1996 and 1995, respectively. The $4.4
million increase in net interest income in 1997 compared to 1996 was due to a
$53.3 million increase in total average interest-earning assets which was
partially offset by a $33.9 million increase in total average interest-bearing
liabilities. The increase in total average interest-earning assets was primarily
due to a $27.1 million increase in commercial business loans and a $26.1 million
increase in lease financing. In addition, commercial real estate loans and
construction loans increased $11.3 million and $9.3 million on average,
respectively. These increases were partially offset by decreases of $16.3
million in single-family residential loans and $8.0 million in mortgage-backed
securities. The Company's interest rate spread increased 39 basis points in
1997, compared to 1996 (with 100 basis points equaling 1.0%) due to a 48 basis
point increase in the rate on earning assets partially offset by a 9 basis point
increase in the rate on interest-bearing liabilities.
The $2.2 million increase in net interest income in 1996 compared to 1995,
was due to a $3.8 million increase in total average interest-earning assets,
combined with a $2.7 million decrease in total average interest-bearing
liabilities. The increase in total average interest-earning assets was primarily
due to a $9.7 million, $8.9 million, and $8.8 million increase in construction
loans, commercial real estate loans and commercial business loans, respectively.
In addition, lease financing and consumer loans increased by $6.4 million and
$1.8 million on average. These increases were partially offset by decreases of
$18.0 million, $10.4 million, and $3.4 million in single-family
residential loans, investment securities, and mortgage-backed securities,
respectively. The Company's interest rate spread increased 53 basis points in
1996, compared to 1995 due to a 37 basis point increase in the rate on earning
assets combined with a 16 basis point decline in the rate on interest-bearing
liabilities.
The following table sets forth, for the periods indicated, information
regarding (i) total dollar amount of interest income on average interest-earning
assets and the resultant average yield; (ii) the total dollar amount of interest
expense on average interest-bearing liabilities and the resultant average cost;
(iii) net interest income; (iv) interest rate spread; and (v) net interest
margin. Information is based on average daily balances during the indicated
periods. For the purposes of this table non-accrual loans have been included in
the appropriate average balance category.
Distribution of Average Assets, Liabilities and Stockholders' Equity
- - -----------------------------------------------------------------------------------------------------------------------------
For the years ended December 31, 1997 1996 1995
- - -----------------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- - -----------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Investment securities
and other interest-earning
assets (1) $ 10,879 $ 625 5.75% $ 8,964 $ 585 6.48% $ 19,364 $ 1,235 6.33%
Mortgage-backed
securities (1) 88,937 6,065 6.82 96,959 6,443 6.60 100,377 6,598 6.55
Single family residential
loans (2) 61,084 4,875 7.98 77,360 6,035 7.80 95,355 7,022 7.36
Commercial real estate loans 95,353 8,774 9.20 84,101 7,991 9.50 75,241 7,515 9.99
Construction loans 27,371 3,038 11.10 18,106 2,050 11.32 8,383 952 11.35
Commercial business loans 49,515 4,833 9.76 22,443 2,213 9.86 13,651 1,426 10.45
Lease financing 32,478 4,149 12.77 6,419 846 13.18 -- -- --
Consumer loans 24,796 2,089 8.42 22,724 1,958 8.61 20,895 1,821 8.72
- - -----------------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets 390,413 34,448 8.82 337,076 28,121 8.34 333,266 26,569 7.97
- - -----------------------------------------------------------------------------------------------------------------------------
Non-interest-earning assets 29,294 22,872 18,274
- - -----------------------------------------------------------------------------------------------------------------------------
Total assets $419,707 $359,948 $351,540
- - -----------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Interest-bearing deposits:
NOW and Super NOW $ 31,688 $ 679 2.14% $ 27,977 $ 594 2.12% $ 26,661 $ 716 2.69%
Money market accounts 37,199 1,181 3.17 33,781 1,023 3.03 33,577 1,042 3.10
Passbook and
statement savings 29,698 810 2.73 28,258 806 2.85 27,290 783 2.87
Time deposits 177,860 9,687 5.45 178,677 9,597 5.37 177,972 9,712 5.46
- - -----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
deposits 276,445 12,357 4.47 268,693 12,020 4.47 265,500 12,253 4.62
Advances from the FHLB 33,332 2,108 6.32 27,901 1,746 6.26 44,177 2,812 6.37
Other borrowings 34,157 2,144 6.28 13,425 916 6.82 3,000 270 9.00
- - -----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 343,934 16,609 4.83 310,019 14,682 4.74 312,677 15,335 4.90
- - -----------------------------------------------------------------------------------------------------------------------------
Non-interest-bearing
liabilities 44,913 30,897 24,516
- - -----------------------------------------------------------------------------------------------------------------------------
Total liabilities 388,847 340,916 337,193
Capital securities 8,750 -- --
Stockholders' equity 22,110 19,032 14,347
- - -----------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $419,707 $359,948 $351,540
- - -----------------------------------------------------------------------------------------------------------------------------
Net interest income:
Interest rate spread (3) $17,839 3.99% $13,439 3.60% $11,234 3.07%
- - -----------------------------------------------------------------------------------------------------------------------------
Net interest margin (4) 4.57% 3.99% 3.37%
Average interest-earning
assets to average
interest-bearing liabilities 113.51% 108.73% 106.58%
- - -----------------------------------------------------------------------------------------------------------------------------
(1) Includes investment and mortgage-backed securities classified as available
for sale. Yield information does not give effect to changes in fair value
that are reflected as a component of stockholders' equity.
(2) Includes mortgage loans held for sale.
(3) Interest rate spread represents the difference between the weighted average
yield on interest-earnings assets, and the weighted average cost of
interest-bearing liabilities. (4) Net interest margin represents net
interest income divided by average interest-earning assets.
Rate/Volume Analysis
The following table presents the degree to which changes in the Company's
interest income, interest expense and net interest income are attributable to
changes in the average amount of interest-earning assets and interest-bearing
liabilities outstanding and/or to changes in rates earned or paid thereon. The
net change attributable to both volume and rate have been allocated
proportionately. Amounts in brackets represent a
decrease in interest income or expense.
- - ---------------------------------------------------------------------------------------------------------------------------
For the years ended December 31, 1997 vs. 1996 1996 vs. 1995
- - ---------------------------------------------------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total
- - ---------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Investment securities and other
interest-earning assets $ 115 $ (75) $ 40 $ (679) $ 29 $ (650)
Mortgage-backed securities (544) 166 (378) (208) 53 (155)
Single family residential (1,296) 136 (1,160) (1,385) 398 (987)
Commercial real estate loans 1,042 (259) 783 855 (379) 476
Construction loans 1,029 (41) 988 1,101 (3) 1,098
Commercial business 2,643 (23) 2,620 871 (84) 787
Lease financing 3,330 (27) 3,303 846 -- 846
Consumer loans 175 (44) 131 158 (21) 137
- - ---------------------------------------------------------------------------------------------------------------------------
Total 6,494 (167) 6,327 1,559 (7) 1,552
- - ---------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits 347 (10) 337 146 (379) (233)
Advances from the FHLB 343 19 362 (1,020) (46) (1,066)
Other borrowings 1,307 (79) 1,228 726 (80) 646
- - ---------------------------------------------------------------------------------------------------------------------------
Total 1,997 (70) 1,927 (148) (505) (653)
===========================================================================================================================
Net interest income $ 4,497 $ (97) $ 4,400 $ 1,707 $ 498 $ 2,205
===========================================================================================================================
Interest Income
Total interest income amounted to $34.4 million for 1997, an increase of
$6.3 million or 22.5% when compared to 1996. Interest income on lease financing
and commercial business loans increased $3.3 million, and $2.6 million as the
average volume increased $26.1 million and $27.1 million, respectively. The
average yield on these loans decreased 41 basis points and 10 basis points,
respectively. Interest income on construction loans, commercial real estate
loans and consumer loans increased $988,000, $783,000 and $131,000, as the
average volume increased $9.3 million, $11.3 million and $2.1 million,
respectively. The average yield on these loans decreased 22 basis points, 30
basis points and 19 basis points, respectively. Interest income on single family
residential loans decreased by $1.2 million as the average volume decreased
$16.3 million. Interest income on investment securities and other
interest-earning assets increased $40,000 as the average volume increased $1.9
million and the average yield decreased 73 basis points. Interest income on
mortgage-backed securities decreased $378,000 in 1997, as the average volume
declined $8.0 million, which more than offset a 22 basis point increase in
average yield.
Total interest income amounted to $28.1 million for 1996, an increase of
$1.6 million or 5.8% when compared to 1995. Interest income on construction
loans, commercial business loans and commercial real estate loans increased $1.1
million, $787,000 and $476,000 respectively. The average volume on construction
loans, commercial business loans and commercial real estate loans increased $9.7
million, $8.8 million and $8.9 million, respectively. The average yield on these
loans decreased 3 basis points, 59 basis points and 49 basis points,
respectively. Interest income on lease financing increased $846,000, while
interest income on consumer loans increased $137,000. Interest income on
single-family residential loans decreased by $987,000 as the average volume
decreased $18.0 million. Interest income on investment securities and other
interest-earning assets decreased $650,000 as the average volume decreased $10.4
million. Interest income on mortgage-backed securities decreased $155,000 in
1996, as the average volume declined $3.4 million, which more than offset the 5
basis point increase in average yield.
Interest Expense
Total interest expense amounted to $16.6 million for 1997, an increase of
$1.9 million or 13.1% when compared to 1996. Interest expense on deposits
increased $337,000 in 1997, as the average volume increased $7.8 million while
the average rate on interest-bearing deposits remained unchanged. Interest
expense on advances from the Federal Home Loan Bank of Pittsburgh ("FHLB")
increased $362,000 as the average volume increased $5.4 million and the average
rate increased 6 basis points. Interest expense on other borrowings increased
$1.2 million, due to an increase in volume of $20.7 million while the average
rate decreased 54 basis points.
Total interest expense amounted to $14.7 million for 1996, a decrease of
$653,000 or 4.3% when compared to 1995. Interest expense on deposits decreased
$233,000 in 1996, as the average rate on interest-bearing deposits decreased 15
basis points, which was partially offset by a $3.2 million increase in volume.
Interest expense on advances from the FHLB decreased by $1.1 million in 1996, as
the average rate decreased 11 basis points and average volume decreased $16.3
million. Interest expense on other borrowings increased $646,000, due to an
increase in volume of $10.4 million.
Provision for Possible Loan and Lease Losses
The provision for possible loan and lease losses represents the charge
against earnings that is required to fund the allowance for possible 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, the results of the most recent regulatory
examinations and other relevant factors.
For the years ended December 31, 1997, 1996, and 1995, the provision for
possible loan and lease losses amounted to $1.1 million, $687,000, and $625,000,
respectively. The provision for possible loan and lease losses during 1997,
1996, and 1995 was an amount considered necessary by management to maintain the
allowance at an adequate level after it was reduced by net charge-offs of $1.0
million, $80,000 and $408,000, during such respective years. The ratio of the
allowance for possible loan and lease losses to total non-performing loans and
leases was 68.4% at December 31, 1997, 58.8% at December 31, 1996, and 44.3%
at December 31, 1995.
Although management utilizes its best judgment in providing for possible
losses, there can be no assurance that the Bank will not have to increase its
provision for possible 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 possible 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 possible 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 March 31, 1997.
Other Income
- - ----------------------------------------------------------------------------
For the years ended
December 31, 1997 1996 1995
- - ----------------------------------------------------------------------------
Other income:
Service charges on deposits $ 1,451 $ 979 $ 991
Leasing fees 1,188 590 58
Loan brokerage and
advisory fees 842 645 682
Mortgage origination
and servicing 522 684 741
Gain on sale of mortgage
servicing rights 978 924 --
Gain (loss) from sale
of securities 226 49 (143)
Gain on sale of lease
receivables 176 -- --
Gain from mortgage banking
activities 30 93 60
Gain from sale of mortgages -- 213 --
Loss on properties sold (10) (10) (250)
Fees and other 1,075 692 126
- - ----------------------------------------------------------------------------
Total other income $ 6,478 $ 4,859 $ 2,265
============================================================================
Total other income amounted to $6.5 million in 1997, a $1.6 million
increase from the $4.9 million earned in 1996. Service charges on deposits
increased $472,000 from the $1.0 million earned in 1996. This increase was
mainly due to increased automated teller machine ("ATM") transaction fees.
Leasing fees amounted to $1.2 million, a $598,000 increase over 1996. Loan
brokerage and advisory fees were $842,000, a $197,000 increase over 1996,
substantially due to fees earned by the Company's subsidiary, PRA. Mortgage
origination and servicing income decreased $162,000 from $684,000 in 1996 to
$522,000 in 1997. This decline was partially due to a sale of $350.0 million of
mortgage servicing rights during the first quarter of 1997, which resulted in a
gain of $978,000. During the first quarter of 1996 the Company sold $85.0
million of mortgage servicing rights which resulted in a gain of $924,000. Loans
serviced for others at December 31, 1997 were $47.9 million compared to $416.8
at December 31, 1996.
Gains from sales of securities amounted to $226,000 in 1997, in comparison
to gains of $49,000 during 1996. This increase was attributable to favorable
market conditions during 1997. The Company may decide to sell investments and
mortgage-backed securities classified as available for sale in accordance with
its asset/liability strategy or in response to changes in interest rates,
prepayment rates, the need to increase the Bank's regulatory capital or similar
factors. The securities available for sale portfolio amounted to $50.9 million,
including $743,000 in net unrealized gains at December 31, 1997.
During 1997 the Company recorded gains on the sale of lease receivables of
$176,000. Gains from mortgage banking activities amounted to $30,000, a $63,000
decrease from 1996. During 1997 the Company discontinued active originations and
sales of residential mortgage loans. In addition, there were no gains from the
sale of mortgages during 1997, in comparison to a $213,000 gain on the sale of
$6.5 million of adjustable rate mortgage loans during 1996.
Net losses on properties sold remained unchanged at $10,000 in comparison
to 1996. Fees and other income includes $243,000 in property management fees,
mainly generated by Alliance Realty, a subsidiary of PRA.
Total other income amounted to $4.9 million in 1996, a $2.6 million
increase from the $2.3 million earned in 1995. Mortgage origination and
servicing income decreased $57,000 from $741,000 in 1995 to $684,000 in 1996.
This decline was partially due to a sale of $85.0 million of mortgage servicing
rights during the first quarter of 1996, which resulted in a gain of $924,000.
During 1996 the Company purchased the servicing rights on $201.7 million of
mortgage loans for $3.2 million. Loans serviced for others at December 31, 1996
were $416.8 million, a $119.7 million increase over the $297.1 million serviced
for others at December 31, 1995. Also during 1996, the Company sold $6.5 million
of adjustable rate mortgage loans at a gain of $213,000. Lease financing fees
amounted to $590,000, a $532,000 increase over 1995. This increase was
attributable to fees generated by The Equipment Leasing Company. Service charges
on deposits amounted to $1.0 million, relatively flat in comparison to 1995.
Loan brokerage and advisory fees were $645,000, a $37,000 decrease in comparison
to 1995, substantially due to fees earned by the Company's subsidiary, PRA.
Gains from sales of securities amounted to $49,000 in 1996, in comparison
to a loss of $143,000 during 1995. The securities available for sale portfolio
amounted to $46.2 million, net of
$237,000 in net unrealized losses as of December 31, 1996. Gains from
mortgage banking activities amounted to $93,000 in 1996, a $33,000 increase from
$60,000 in 1995.
Net losses on properties sold amounted to $10,000 in 1996 compared to
$250,000 in 1995. The $240,000 decrease was due to net losses realized from the
Company's disposition of certain REO properties including a $280,000 loss on the
sale of a medical office building in New York during 1995. Fees and other income
includes $334,000 in property management fees, mainly generated by Alliance
Realty, a subsidiary of PRA.
Other Expense
- - ----------------------------------------------------------------------------
December 31, 1997 1996 1995
- - ----------------------------------------------------------------------------
Other expense:
Salaries and employee
benefits $ 7,987 $ 6,645 $ 4,961
Occupancy 1,086 1,306 1,383
Data processing 1,067 1,137 849
Professional services 963 761 918
Furniture, fixtures, and
equipment 829 615 575
Loan and real estate
owned expenses, net 489 107 94
Deposit insurance premiums 237 2,579 813
Provision for real estate
owned, net -- 25 480
Capital securities expense 925 -- --
Other 3,431 2,421 1,998
- - ---------------------------------------------------------------------------
Total other expense $17,014 $15,596 $12,071
===========================================================================
Total other expense amounted to $17.0 million during 1997, an increase of
$1.4 million from the $15.6 million recognized during 1996. Salaries and
employee benefits increased $1.3 million, primarily due to the fourth quarter
1996 acquisition of ELC. This resulted in a full year of expense for 1997
compared to three months in 1996. Additionally, there was a higher cost of
benefits in 1997. Occupancy expense decreased $220,000 to $1.1 million in 1997,
from $1.3 million in 1996. This was partially due to the Company relocating
their corporate headquarters during 1996. 1997 was the first full year that the
Company was located in its new headquarters which resulted in a decrease in
rental expense when compared to 1996. Data processing expense decreased $70,000
partially due to the Company converting several of their computer systems to a
centralized provider. Professional services expense, which consists primarily of
legal, accounting, tax and supervisory/examination fees, increased $202,000
primarily due to increased legal and professional expenses resulting from the
activities of acquired and formed companies including PTI and PRA divisions
located in Virginia and New Jersey. Also contributing to this increase were
legal and professional expenses relating to the sale of several properties
included in real estate owned. Furniture, fixtures, and equipment increased
$214,000 to $829,000 from $615,000 in 1996, primarily due to expenses related to
ELC, PTIand other acquisitions including PRA divisions. Loan and real estate
owned expenses increased $382,000 to $489,000 from $107,000 in 1996, due to
expenses related to leases and real estate owned.
Deposit insurance premiums decreased $2.3 million to $237,000 from $2.6
million in 1996, primarily due to a one-time premium of $1.8 million to
capitalize the SAIF recognized in 1996. Capital securities expense of $925,000
was recognized in 1997, while there was no such expense in 1996. This represents
the interest expense on $15.0 million of Corporation-obligated mandatorily
redeemable securities of subsidiary trust holding solely junior subordinated
debentures of the Corporation. There was no needed provision for real estate
owned during 1997, compared to $25,000 during 1996. Other expenses increased
$1.0 million to $3.4 million in 1997, from $2.4 million in 1996. This includes
increases in advertising, amortization of goodwill and other general and
administrative expenses.
Total other expense amounted to $15.6 million during 1996, an increase of
$3.5 million from the $12.1 million recognized during 1995. Excluding a special
one-time premium of $1.8 million to capitalize the SAIF, total other expense
would have been $13.8 million, or a $1.7 million increase over 1995. In
addition, expenses related to ELC, which was acquired during 1996, of $328,000
are included in total other expense. Salaries and employee benefits increased
$1.7 million, primarily due to the staffing additions to support the Bank's
lending initiatives, and the additional staff increase resulting from the ELC
acquisition. Occupancy expenses decreased $77,000 to $1.3 million in 1996, from
$1.4 million in 1995. This was partially due to the Company relocating its
corporate headquarters during 1996, which resulted in a decrease in rental
expense. Furniture, fixtures, and equipment increased $40,000 to $615,000 in
1996 from $575,000 in 1995, primarily due to expenses resulting from the opening
of the Paoli branch in September 1995. Data processing expense increased
$228,000 during 1996 as the Company outsourced the processing of customer
checking accounts in the fourth quarter of 1995. Deposit insurance premiums
increased $1.8 million to $2.6 million during 1996, due to the special SAIF
assessment.
The provision for REO amounted to $25,000 during 1996, a decrease of
$455,000 from the $480,000 recognized during 1995. The provision for REO in 1995
included a $381,000 write-down on a medical office building in New York and
$56,000 on a Philadelphia property. Loan and REO expenses increased $13,000
primarily due to a negative cash flow from the operation of REO properties and
the expenses of maintaining these properties. Professional services expense,
which consists primarily of legal, accounting, tax and supervisory/examination
fees, decreased $157,000 primarily due to legal expenses associated with an
agreement to merge with another depository institution in 1995. This agreement
was subsequently cancelled in November 1995. Other expenses increased $423,000
to $2.4 million in 1996, from $2.0 million in 1995. This includes increases in
marketing and other general and administrative expenses.
Income Tax Expense (Benefit)
The Company recorded income tax expense of $2.3 million in 1997 compared to
$762,000 in 1996 and an income tax benefit of $1.9 million in 1995. The deferred
tax asset valuation allowance was eliminated in 1996 as a result of management's
determination of the outlook for future taxable income and the reduction in
non-performing assets offset by the potential for a substantial special SAIF
insurance assessment.
FINANCIAL CONDITION
Asset Liability Management
The major objectives of the Bank's asset and liability management are to
manage exposure to changes in the interest rate environment, ensure adequate
liquidity and funding, preserve and build capital, and to maximize net interest
income opportunities. The Bank manages these objectives through its Asset
Liability and Investment Committees. Each Committee meets monthly to develop
strategies that affect the future level of net interest income, liquidity and
capital. The Committees utilize cash flow forecasts, consider current economic
conditions and anticipate the direction of interest rates, while managing the
Bank's risk to such changes.
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An institution is
considered to be liability sensitive, or as having a negative gap, when the
amount of its interest-bearing liabilities maturing or repricing within a given
time period exceeds the amount of its interest-earning assets also maturing or
repricing within that time period. Conversely, an institution is considered to
be asset sensitive, or as having a positive gap, when the amount of its
interest-bearing liabilities maturing or repricing is less than the amount of
its interest-earning assets also maturing or repricing during the same period.
Generally, in a falling interest rate environment, a negative gap should result
in an increase in net interest income, and in a rising interest rate
environment, a negative gap should adversely affect net interest income. The
converse would be true for a positive gap.
However, shortcomings are inherent in a simplified gap analysis that may
result in an institution with a nominally negative gap having interest rate
behavior associated with an asset sensitive balance sheet. For example, although
certain assets and liabilities may have a similar maturity or periods to
repricing, they may react in different degrees to changes in market interest
rates. Furthermore, repricing characteristics of certain assets and liabilities
may vary substantially within a given time period. In the event of a change in
interest rates, prepayment and early withdrawal levels could also deviate
significantly from those assumed in calculating gap.
Management believes that the simulation of net interest income in different
interest rate environments provides a more meaningful measure of interest rate
risk. Simulation analysis incorporates the potential of all assets and
liabilities to mature or reprice as well as the probability that they will do
so. Simulation in net interest income over a two year period also incorporates
the relative interest rate sensitivities of these items, and projects their
behavior over an extended period of time. Finally, simulation analysis permits
management to assess the probable effects on the balance sheet not only of
changes in interest rates, but also of proposed strategies for responding to
them.
The Bank's simulation model analyzes interest rate sensitivity by
projecting net interest income over the next twelve months in a flat rate
scenario. The flat rate model projects growth in the Bank's loan portfolio and
projects the mix of accounts within the loan portfolio. In addition, the Company
must also make certain assumptions regarding the movement of the rates on its
assets and liabilities, especially its deposit rates.
The Bank projects net interest income in a rising rate scenario of 200
basis points over a twelve month period as well as a 200 basis point decrease in
a declining rate scenario during this same period. The Bank then determines its
interest rate sensitivity by calculating the difference in net interest income
in the rising and declining rate scenarios versus the flat rate scenario. Based
on this analysis at December 31, 1997 the Bank would experience an approximate
1.34% increase in net interest income over a one year period if rates rise 200
basis points in comparison to a flat rate scenario and an approximate 1.45%
decrease in net interest income if rates decline 200 basis points.
Interest Rate Sensitivity
The following table presents the anticipated maturities or repricing of the
Company's interest-earning assets and interest-bearing liabilities for various
time periods based on the information and the assumptions set forth in the notes
below.
- - -----------------------------------------------------------------------------------------------------------------------------
December 31, 1997 Less than Three months One to Five to
three months to one year five years ten years Over ten years
- - -----------------------------------------------------------------------------------------------------------------------------
Amount Yield/Rate Amount Yield/Rate Amount Yield/Rate Amount Yield/Rate Amount Yield/Rate
- - -----------------------------------------------------------------------------------------------------------------------------
Interest-earning assets (1)
Interest-earning deposits $ 7,689 5.78% $ -- --% $ -- --% $ -- --% $ -- --%
Investment securities 8,123 4.39 -- -- -- -- 2,323 6.86 -- --
Mortgage-backed securities 48,508 7.30 11,970 6.46 33,461 6.46 -- -- -- --
Mortgage loans 64,132 9.21 46,877 9.00 73,735 8.69 6,570 8.42 1,060 8.38
Consumer loans 8,301 10.21 2,086 8.21 8,482 8.33 4,666 8.46 1,420 8.52
Commercial business 53,906 9.57 2,620 8.74 9,753 8.81 2,130 8.57 900 9.00
Lease financing 2,500 13.10 7,499 13.10 30,001 13.10 -- -- -- --
- - -----------------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets $193,159 8.61% $ 71,052 8.97% $155,432 9.05% $15,689 8.22% $ 3,380 8.60%
- - -----------------------------------------------------------------------------------------------------------------------------
Interest-bearing
liabilities: (2)
Money market deposits $ 1,621 3.03% $ -- --% $ 31,986 3.03% $ -- --% $ -- --%
NOW and Super NOW 6,915 2.08 -- -- 27,226 2.08 -- -- -- --
Passbook and statement
savings 3,213 2.72 -- -- 27,527 2.72 -- -- -- --
Time deposits 52,785 5.17 83,645 5.48 55,835 5.84 412 6.61 -- --
Advances from FHLB 20,000 5.78 5,000 5.97 8,000 7.63 -- -- -- --
Other borrowings 10,007 6.56 15,038 5.98 13,127 5.98 -- -- -- --
- - -----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities $ 94,541 5.10% $103,683 5.58% $163,701 4.24% $ 412 6.61% $ -- --%
=============================================================================================================================
Excess (deficiency) of
interest-earning assets
over interest-bearing
liabilities $ 98,618 $(32,631) $( 8,269) $15,277 $ 3,380
=============================================================================================================================
Cumulative excess of
interest-earning assets
over interest-bearing
liabilities $ 98,618 $ 65,987 $ 57,718 $72,995 $76,375
=============================================================================================================================
Cumulative excess of
interest-earning assets
over interest-bearing
liabilities as a
percent of total assets 19.99% 13.37% 11.70% 14.79% 15.48%
=============================================================================================================================
(1) Adjustable and floating-rate assets are included in the period in which
interest rates are next scheduled to adjust rather than in the period in
which they are due, and fixed-rate loans are included in the periods in
which they are scheduled to be repaid. Balances have been reduced for
non-accrual loans, which amounted to $2.1 million at December 31, 1997.
Mortgage-backed securities and investment securities classified as
available for sale are classified as maturing or repricing in less than
three months. Balances are based on anticipated principal and interest
payments at average interest rates on the entire portfolio.
(2) Money market deposits, savings accounts and NOW accounts in the 30-day
period are estimates of deposits which are historically subject to
immediate withdrawal. Remaining balances are historically stable balances
which are placed in the one to five year period. Other borrowings consist
of securities sold under agreement to repurchase, the ESOPnote payable and
subordinated debt. The subordinated debt is callable at the option of the
Company at any time after July 1, 1996, and therefore is presented as
maturing in the three month period. If not called, the subordinated debt
matures June 30, 2004.
Liquidity and Funding
The Bank must maintain sufficient liquidity to meet its funding
requirements for loan and lease commitments, scheduled debt repayments,
operating expenses, and deposit withdrawals. The Bank is the primary source of
working capital for the Company. At December 31, 1997, the Bank met all
regulatory capital liquidity requirements.
The Bank's need for liquidity is affected by loan demand and net changes in
retail deposit levels. The Bank can minimize the cash required during the times
of heavy loan demand by modifying its credit policies or reducing its marketing
efforts. Liquidity demand caused by net reductions in retail deposits are
usually caused by factors over which the Bank has limited control. The Bank
derives its liquidity from both its assets and liabilities. Liquidity is derived
from assets by receipt of interest and principal payments and prepayments, by
the ability to sell assets at market prices and by utilizing unpledged assets as
collateral for borrowings. Liquidity is derived from liabilities by maintaining
a variety of funding sources, including retail deposits, advances from the FHLB
and other borrowings.
The Bank's primary sources of funds have historically consisted of
deposits, amortization and prepayments of outstanding loans, borrowings from the
FHLB and sales of investment and mortgage-backed securities. During 1997, 1996,
and 1995, the Bank used its capital resources primarily to meet its ongoing
commitments to fund maturing savings certificates and deposit withdrawals, fund
existing and continuing loan commitments, and maintain its liquidity. For the
year ended December 31, 1997, cash was provided by operating activities as sales
of securities exceeded loan originations and purchases of loans held for sale.
Cash was used in the Bank'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 increased
borrowings.
At December 31, 1997, the total of approved loan commitments amounted to
$32.5 million, and the Bank had $69.6 million of undisbursed loan funds. At
December 31, 1997, total FHLB borrowings which are scheduled to mature during
the 12 months ending December 31, 1998, total $450,000. At December 31, 1997,
total other borrowings, which are scheduled to mature during the 12 months ended
December 31, 1998,
totalled $21.6 million. At December 31, 1997, the amount of time deposits
that are scheduled to mature within 12 months total $136.4 million, a
substantial portion of which management believes, on the basis of prior
experience, will remain in the Bank.
For the year ended December 31, 1996, cash was provided by operating
activities as sales of loans exceeded loan originations and purchases of loans
held for sale. Cash was used in the Bank's investment activities during 1996 as
purchases of mortgage-backed and investment securities, capital expenditures,
and net originations of loans exceeded repayments on mortgage-backed securities,
maturities of investments, proceeds from sales of mortgage-backed and investment
securities, and net proceeds from sales of real estate owned. Funds provided by
financing activities in 1996 partially offset the cash outflows from investment
activities as cash was provided by increased levels of deposits, increased
borrowings and the sale of 500,000 shares of common stock in January, 1996.
Under OTS regulations, the Bank is required to maintain a minimum
regulatory liquidity ratio. This ratio, defined as the average daily balance of
liquid assets to the average balance of net withdrawable accounts plus
short-term borrowings, is currently set at 4%, but may be changed from time to
time. The Bank's policy has been to maintain a liquidity ratio no less than the
regulatory minimum. At December 31, 1997, the Bank's liquidity ratio of 5.61%
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 Bank's deposits are obtained primarily from residents near the Bank's
seven full-service offices in Montgomery County, one office in Rosemont,
Delaware County, one office in Paoli, Chester County, and one office in the
Andorra section of Philadelphia. The Bank has drive-up banking facilities at
three of its offices and has installed ATM's at all of its offices and at three
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, 1997 was approximately $108.0
million.
Capital Resources
The Bank is required pursuant to the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 ("FIRREA") and OTS regulations promulgated
thereunder to have (i) tangible capital equal to 1.5% of adjusted total assets,
(ii) core capital equal to 3.0% of adjusted total assets, and (iii) total
risk-based capital equal to 8.0% of risk-weighted assets.
At December 31, 1997, the Bank met all regulatory capital requirements. At
December 31, 1997, the Bank's leverage ratio was 6.50%, Tier 1 risk-based
capital ratio was 9.05%, total risk-based ratio was 10.00%, and tangible equity
ratio was 6.50%, based on leverage capital of $31.4 million, Tier 1 capital of
$34.7 million, total risk-based capital of $31.4 million, and tangible capital
of $31.4 million, respectively. At December 31, 1997, the Bank was classified as
"well capitalized" under the OTS regulations.
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
Many of the Company's computer programs were originally designed to
recognize calendar years by their last two digits. Calculations performed using
these truncated fields will not work properly with dates from the year 2000 and
beyond. The Company has formed a project committee that meets monthly to review
the status of the conversion. A comprehensive review to identify the systems
affected by this issue was completed, and an implementation plan was compiled
and is currently being executed. The Company's primary loan, deposit and general
ledger systems are provided by Fiserv, a major third party service provider.
They have provided continued updates and assurances that the year 2000
compliance issues will be resolved on a timely basis. Many of the Company's
other systems, such as payroll and lease accounting, are vendor-supplied, and
most vendors have provided the Company with certification or a delivery
commitment letter. Related costs of compliance will include additional training
and testing of third party system providers, consultants and educational
sessions for loan customers. Management's current estimate of costs approximate
$50,000 in each of the next two years.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
- - ---------------------------------------------------------------------------------------------------------------------------
December 31, 1997 1996
- - ---------------------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks
Interest bearing $ 7,689 $ 666
Non-interest bearing 11,251 9,967
Investments:
Available for sale at fair value (amortized cost: $5,924 in 1997 and $3,498 in 1996) 6,395 3,462
Held to maturity at amortized cost (fair value: $4,070 in 1997 and $1,937 in 1996) 4,051 1,937
Mortgage-backed securities:
Available for sale at fair value (amortized cost: $44,246 in 1997 and $42,939 in 1996) 44,518 42,738
Held to maturity at amortized cost (fair value: $49,094 in 1997 and $46,535 in 1996) 49,421 47,334
Loans and leases 325,544 251,562
Loans held for sale (fair value: $380 in 1997 and $600 in 1996) 373 599
Real estate owned, net 380 2,150
Premises and equipment 9,312 7,725
Accrued interest receivable 2,728 2,156
Deferred income taxes 270 3,064
Receivable for securities sold 21,043 --
Other assets 10,431 10,289
- - ---------------------------------------------------------------------------------------------------------------------------
Total assets $493,406 $383,649
===========================================================================================================================
Liabilities and Stockholders' Equity
Liabilities:
Deposits $340,761 $306,248
Advances from the Federal Home Loan Bank 33,450 18,000
Other borrowings 37,722 32,270
Advance payments by borrowers 2,529 4,628
Accrued interest payable 1,485 984
Payable for securities purchased 32,385 --
Other liabilities 4,959 1,565
- - ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 453,291 363,695
- - ---------------------------------------------------------------------------------------------------------------------------
Corporation-obligated mandatorily redeemable capital securities of subsidiary
trust holding solely junior subordinated debentures of the Corporation 15,000 --
- - ---------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 14)
Stockholders' equity:
Serial preferred stock--1,000,000 shares authorized but unissued -- --
Junior participating preferred stock--$.01 par value--1,010 shares authorized but unissued -- --
Common stock--$1 par value; 6,000,000 shares authorized; 4,064,000 and 3,785,000 shares
issued and outstanding at December 31, 1997 and December 31, 1996, respectively 4,064 3,785
Capital surplus 20,511 17,715
Unearned Employee Stock Ownership Plan shares (164) (214)
Retained earnings (deficit) 244 (1,134)
Unrealized gain (loss) on securities available for sale, net of deferred income taxes 460 (198)
- - ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 25,115 19,954
- - ---------------------------------------------------------------------------------------------------------------------------
Total liabilities, Corporation-obligated mandatorily redeemable capital securities of
subsidiary trust holding solely junior subordinated debentures of the Corporation
and stockholders' equity $493,406 $383,649
===========================================================================================================================
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
- - ---------------------------------------------------------------------------------------------------------------------------
For the years ended December 31, 1997 1996 1995
- - ---------------------------------------------------------------------------------------------------------------------------
Interest income:
Loans and leases, including fees $ 27,758 $ 21,092 $ 18,737
Mortgage-backed securities 6,065 6,443 6,598
Investment securities 447 395 1,055
Other 178 191 179
- - ---------------------------------------------------------------------------------------------------------------------------
Total interest income 34,448 28,121 26,569
- - ---------------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 12,357 12,020 12,253
Advances from the Federal Home Loan Bank 1,679 1,746 2,812
Other borrowings 2,573 916 270
- - ---------------------------------------------------------------------------------------------------------------------------
Total interest expense 16,609 14,682 15,335
- - ---------------------------------------------------------------------------------------------------------------------------
Net interest income 17,839 13,439 11,234
Provision for possible loan and lease losses 1,121 687 625
- - ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for possible loan and lease losses 16,718 12,752 10,609
- - ---------------------------------------------------------------------------------------------------------------------------
Other income:
Service charges on deposits 1,451 979 991
Leasing fees 1,188 590 58
Loan brokerage and advisory fees 842 645 682
Mortgage origination and servicing 522 684 741
Gain on sale of mortgage servicing rights 978 924 --
Gain (loss) from sale of securities 226 49 (143)
Gain on sale of lease receivable 176 -- --
Gain from mortgage banking activities 30 93 60
Gain from sales of mortgages -- 213 --
Loss on properties sold (10) (10) (250)
Fees and other 1,075 692 126
- - ---------------------------------------------------------------------------------------------------------------------------
Total other income 6,478 4,859 2,265
- - ---------------------------------------------------------------------------------------------------------------------------
Other expense:
Salaries and employee benefits 7,987 6,645 4,961
Occupancy 1,086 1,306 1,383
Data processing 1,067 1,137 849
Professional services 963 761 918
Furniture, fixtures, and equipment 829 615 575
Loan and real estate owned expenses, net 489 107 94
Deposit insurance premiums 237 2,579 813
Provision for real estate owned, net -- 25 480
Capital securities expense 925 -- --
Other 3,431 2,421 1,998
- - ---------------------------------------------------------------------------------------------------------------------------
Total other expense 17,014 15,596 12,071
===========================================================================================================================
Income before income taxes 6,182 2,015 803
Income tax expense (benefit) 2,310 762 (1,868)
===========================================================================================================================
Net income $ 3,872 $ 1,253 $ 2,671
===========================================================================================================================
Net income per common share $ .97 $ .32 $ .77
Net income per common share, assuming dilution $ .90 $ .31 $ .75
===========================================================================================================================
Dividends per share $ .10 $ .04 $ --
===========================================================================================================================
Average common shares outstanding 3,974,085 3,879,822 3,468,386
Average common shares outstanding, assuming dilution 4,323,525 4,070,674 3,580,559
===========================================================================================================================
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
- - -----------------------------------------------------------------------------------------------------------------------
For the years ended December 31, 1997, 1996, and 1995
- - -----------------------------------------------------------------------------------------------------------------------
Unearned Retained Unrealized Total
Common Capital ESOP earnings gain stockholders'
stock surplus shares (deficit) (loss) equity
- - -----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 $3,275 $15,706 $ -- $(4,909) $(1,052) $13,020
Issuance of common stock 5 -- -- -- -- 5
Net income -- -- -- 2,671 -- 2,671
Change in unrealized gain (loss) on
securities available for sale
net of deferred income taxes -- -- -- -- 711 711
- - -----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 3,280 15,706 -- (2,238) (341) 16,407
Issuance of common stock 505 2,000 -- -- -- 2,505
Net income -- -- -- 1,253 -- 1,253
Shares acquired for ESOP -- -- (250) -- -- (250)
Principal repayment of ESOP debt -- 9 36 -- -- 45
Cash dividend declared -- -- -- (149) -- (149)
Change in unrealized gain (loss) on
securities available for sale,
net of deferred income taxes -- -- -- -- 143 143
- - -----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 3,785 17,715 (214) (1,134) (198) 19,954
Issuance of common stock 88 859 -- -- -- 947
Net income -- -- -- 3,872 -- 3,872
Principal repayment of ESOP debt -- -- 50 -- -- 50
Cash dividend declared -- -- -- (366) -- (366)
Stock dividend declared 191 1,937 -- (2,128) -- --
Change in unrealized gain (loss) on
securities available for sale,
net of deferred income taxes -- -- -- -- 658 658
- - -----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $4,064 $20,511 $(164) $ 244 $ 460 $25,115
=======================================================================================================================
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
- - ----------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31, 1997 1996 1995
- - ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 3,872 $ 1,253 $ 2,671
Add (deduct) items not affecting cash flows from operating activities:
Depreciation and amortization 1,101 697 584
Provision for real estate owned -- 25 480
Provision for possible loan and lease losses 1,121 687 625
Deferred income tax (benefit) expense 2,189 661 (1,868)
Gain from mortgage banking activities (1,008) (1,017) (60)
Gain from sales of loans and leases (176) (213) --
(Gain) loss from sales of securities available for sale (226) (49) 143
Loss on properties sold 10 10 250
Amortization of deferred loan fees (1,022) (1,009) (650)
Amortization of premiums/accretion of discounts on securities 693 629 594
Originations and purchases of loans held for sale -- (12,065) (11,509)
Sales of loans held for sale 105 21,105 16,261
(Increase) decrease in accrued interest receivable (572) 125 (70)
(Increase) decrease in other assets 873 (5,311) (703)
Increase (decrease) in other liabilities 3,394 1,273 (927)
Increase in accrued interest payable 501 262 134
- - ----------------------------------------------------------------------------------------------------------------------------------
Net cash flows provided by operating activities 10,855 7,063 5,955
Cash flows from investment activities:
Capital expenditures (2,448) (3,091) (4,023)
Purchases of mortgage-backed securities held to maturity (10,930) (2,952) --
Purchases of mortgage-backed securities available for sale (11,357) (49,848) (11,577)
Purchase of investment securities held to maturity (2,058) (1,401) (831)
Purchase of investment securities available for sale (9,122) (3,000) (2,998)
Repayments on mortgage-backed securities held to maturity 8,409 8,022 11,216
Repayments on mortgage-backed securities available for sale 8,767 9,060 1,880
Sales of mortgage-backed securities available for sale 12,392 44,906 11,145
Sales of investments available for sale 4,577 5,049 6,918
Maturities of investments held to maturity -- 1,612 985
Maturities of investments available for sale 2,268 -- 6,000
Proceeds from sales of real estate owned 5,888 618 1,654
Advances for construction of real estate owned -- (96) (634)
Net increase in total loans and leases (77,881) (27,699) (21,292)
Purchase of subsidiaries -- (6,600) --
- - ----------------------------------------------------------------------------------------------------------------------------------
Net cash flows used in investment activities (71,495) (25,420) (1,557)
Cash flows from financing activities:
Net increase in demand, NOW, and savings deposits 17,121 17,312 2,215
Net (decrease) increase in time deposits 17,392 (8,325) 11,087
Net (decrease) increase of advances from the FHLB 15,450 (7,400) (18,652)
Net (decrease) increase in advance payments by borrowers for tax and insurance (2,099) 2,317 (40)
Net increase in other borrowings 5,452 15,845 --
Dividends paid (384) (149) --
Net proceeds from exercise of stock options 31 5 5
Net proceeds from issuance of common stock 984 2,296 --
Net proceeds from issuance of capital securities 15,000 -- --
- - ----------------------------------------------------------------------------------------------------------------------------------
Net cash flows (used in) provided by financing activities 68,947 21,901 (5,385)
Net (decrease) increase in cash and cash equivalents 8,307 3,544 (987)
Cash and cash equivalents:
Beginning of year 10,633 7,089 8,076
- - ----------------------------------------------------------------------------------------------------------------------------------
End of year $ 18,940 $ 10,633 $ 7,089
Supplemental disclosures:
Loan charge-offs $ 1,153 $ 177 $ 427
- - ----------------------------------------------------------------------------------------------------------------------------------
Loans to facilitate the sale of real estate owned $ -- $ -- $ 2,720
Net conversion of loans receivable to real estate owned $ 4,055 $ 1,967 $ 664
Securitization of mortgage loans into mortgage-backed securities $ -- $ 9,982 $ 241
Transfer of loans held in portfolio to held for sale $ -- $ 6,536 $ 8,425
Increase in net payables for trade dated security transactions $ 11,342 $ -- $ --
Transfer of mortgage-backed securities held to maturity to available for sale $ -- $ -- $ 32,740
Transfer of mortgage-backed securities available for sale to held to maturity $ -- $ -- $ 3,646
Transfer of note receivable on property from fixed assets to other assets $ -- $ -- $ 3,166
Transfer of property for Company use from other assets to premises and equipment $ -- $ 3,150 $ --
Cash payments during the year for:
Income taxes $ 121 $ 101 $ --
- - ----------------------------------------------------------------------------------------------------------------------------------
Interest $ 16,260 $ 14,477 $ 15,201
- - ----------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Progress Financial Corporation and its subsidiaries (the "Company") follow
accounting principles and reporting practices which are in accordance with
generally accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheet,
and affect revenues and expenses for the period. Actual results could differ
from such estimates.
The material estimates relate to the determination of the allowance for
possible loan and lease losses, the deferred tax asset valuation allowance, and
the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowance for
possible loan and lease losses and real estate owned, management obtains
independent appraisals for 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") and Progress Capital Management, Inc. All
significant intercompany transactions and balances have been eliminated.
Cash and Cash Equivalents
The Company's cash and due from banks are classified as cash and cash
equivalents, which have an original maturity of three months or less.
Investment and Mortgage-Backed Securities
The Company accounts for its investments in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS 115"). SFAS 115 requires debt and equity
securities to be classified in one of three categories, as applicable, and to be
accounted for as follows: debt securities which the Company has the positive
intent and ability to hold to maturity are classified as "securities held to
maturity" and are reported at amortized cost; debt and equity securities that
are bought and held principally for the purpose of selling in the near term are
classified as "trading securities" and are reported at fair value with
unrealized gains and losses included in earnings; and debt and equity securities
not classified as either held to maturity or trading securities are classified
as "securities available for sale" and are reported at fair value with
unrealized gains and losses excluded from earnings, but reported as a separate
component of stockholders' equity, net of deferred income taxes.
Investment and mortgage-backed securities classified as available for sale
include such items that management intends to use as part of its asset-liability
strategy or that may be sold in response to changes in interest rates, changes
in prepayment risks, the need to increase regulatory capital or other strategic
factors. When an investment or mortgage-backed security is sold, any gain or
loss is recognized utilizing the specific identification method.
Real Estate Owned
Real estate acquired in partial or full satisfaction of loans are
classified as real estate owned ("REO"). Prior to transferring a real estate
loan to REO, it is written down to the lower of cost or estimated fair value
less estimated selling costs (net realizable value) through a charge to the
allowance for possible 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.
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 possible loan and lease losses, and real estate
owned losses)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
are reported in different periods for tax purposes. Deferred taxes are
provided on such temporary differences existing between financial and income tax
reporting subject to the deferred tax asset realization criteria required under
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109").
Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of aggregate cost or market value. Net unrealized losses
are charged to income in the period in which they arise.
Deferred Loan Fees
Loan origination fees and related direct loan origination costs are deferred and
recognized over the life of the loan as an adjustment to yield. The unamortized
balance of such net loan origination fees is reported on the Company's
consolidated statements of financial condition as part of loans.
Allowance for Possible Loan and Lease Losses
An allowance for possible loan and lease losses is maintained at a level
that management considers adequate to provide for potential losses based upon an
evaluation of known and inherent risks in the related portfolio. Management's
periodic evaluation of the adequacy of the allowance is based upon examination
of the portfolio, past loss experience, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying collateral,
current economic conditions, the results of the most recent regulatory
examinations, and other relevant factors. While management uses the best
information available to make such evaluations, future adjustments to the
allowance may be necessary if economic conditions differ substantially from the
assumptions used in making the evaluations.
Earnings Per Share
In 1997 the Company has implemented SFAS 128, "earnings per share" which
requires entities with simple capital structures, that is, those with only
common stock outstanding, to present basic per-share amounts for income from
continuing operations. All prior period per share amounts have been presented in
accordance with the new standard.
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 for 1997 do not include ESOP shares that were purchased and
unallocated during 1997 in accordance with SOP 93-6, "Employers Accounting for
Employees Stock Ownership Plans."
Loans and Leases
Loans and leases are stated at the principal amount outstanding, excluding
unearned interest and allowance for possible loan and lease losses and including
unamortized initial direct costs.
The company originates direct finance leases accounted for in accordance
with Statement of Financial Accounting Standards "Accounting for Leases" ("SFAS
13"). 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.
In accordance with SFAS 91, "Accounting For Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases," loan and lease origination and commitment fees and related costs are
deferred and the amount is amortized as an adjustment to the related asset's
yield.
The accrual of interest on commercial loans and leases is discontinued when
they become 90 days past due and when, in management's judgment, it is
determined that a reasonable doubt exists as to their collectibility. The
accrual of interest is also discontinued on residential mortgage and consumer
loans when such loans become 90 days past due, except for those loans less than
180 days past due and in the process of collection which are secured by real
estate and have a loan to value ratio less than 80%. 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.
Other
SFAS 121 "Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to Be Disposed Of," was adopted January 1, 1996 and requires
that long-lived assets and certain identifiable intangibles, such as goodwill,
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amounts of these assets may not be recovered. The adoption of
SFAS 121 did not have a material effect on the Consolidated Financial
Statements. The Company did not record an impairment loss in 1997 or 1996.
The Company adopted SFAS 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," issued in June, 1996.
(2) ACQUISITIONS
The following acquisitions were accounted for as purchases. Goodwill has
been recorded on these transactions in other assets and will be amortized on the
straight-line basis over 15 years.
- - ---------------------------------------------------------------------------------------------------------------------------
Date Purchase Common Method of Goodwill
Completed Price (000) Shares Issued Accounting (000)
- - ---------------------------------------------------------------------------------------------------------------------------
Allied Commercial Mortgage and Asset Management 10/16/97 $ 488 -- Purchase $ 484
Atlantic Mortgage & Investment Company 12/22/97 $ 900 31,821 Purchase $ 934
The Equipment Leasing Co. 10/1/96 $6,600 -- Purchase $2,562
On January 14, 1998, the Company acquired PAM Holding Corporation and its
subsidiaries, PAM Financial and PAM Investment Company, which had unaudited
assets and stockholders' equity of $15.5 million and $.4 million respectively,
at December 31, 1997. The transaction was accounted for under the pooling of
interests method of accounting during 1998. The Company issued 61,835 shares of
common stock for all of PAM Holding Corporation's common shares outstanding.
(3) CASH AND DUE FROM BANKS
Progress Bank is required by the Federal Reserve Board to maintain reserves
based principally on deposits outstanding and are included in cash and due from
banks. At December 31, 1997 and 1996, required reserves were $1.6 million and
$2.3 million, respectively.
(4) INVESTMENT 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"),
bankers' acceptances, loans to financial institutions whose deposits are insured
by the Federal Deposit Insurance Corporation ("FDIC"), Federal funds and United
States government and agency obligations.
- - ---------------------------------------------------------------------------------------------------------------------------
December 31, 1997
- - ---------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Held to Maturity: Cost Gains Losses Value Value
- - ---------------------------------------------------------------------------------------------------------------------------
FHLB stock $1,728 $ -- $ -- $1,728 $1,728
FHLB investments securities 2,323 19 -- 2,342 2,323
- - ---------------------------------------------------------------------------------------------------------------------------
$4,051 $ 19 $ -- $4,070 $4,051
- - ---------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Available for Sale: Cost Gains Losses Value Value
- - ---------------------------------------------------------------------------------------------------------------------------
U.S. agency obligations $3,000 $ 1 $ -- $3,001 $3,001
Equity investments 2,924 470 -- 3,394 3,394
- - ---------------------------------------------------------------------------------------------------------------------------
$5,924 $471 $ -- $6,395 $6,395
- - ---------------------------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------------------------
December 1996
- - ---------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Held to Maturity: Cost Gains Losses Value Value
- - ---------------------------------------------------------------------------------------------------------------------------
FHLB stock $1,937 $ -- $-- $1,937 $1,937
- - ---------------------------------------------------------------------------------------------------------------------------
$1,937 $ -- $-- $1,937 $1,937
- - ---------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Available for Sale: Cost Gains Losses Value Value
- - ---------------------------------------------------------------------------------------------------------------------------
U.S. agency obligations $3,468 $ -- $50 $3,418 $3,418
Equity investments 30 14 -- 44 44
- - ---------------------------------------------------------------------------------------------------------------------------
$3,498 $ 14 $50 $3,462 $3,462
- - ---------------------------------------------------------------------------------------------------------------------------
(4) INVESTMENT SECURITIES (continued)
At December 31, 1997, the Bank was required to maintain $1.7 million of
FHLB stock under current regulations which were used to pledge advances.
The carrying value and estimated fair value of the Bank's investment
securities at December 31, 1997 by contractual maturity are shown below.
Expected maturities will differ from contractual maturities due to the right to
call or prepay such obligations with or without prepayment penalties.
- - ---------------------------------------------------------------------------------------------------------------------------
Amortized Estimated Fair Weighted
Held to Maturity: Cost Value Average Yield
- - ---------------------------------------------------------------------------------------------------------------------------
Due after ten years $2,323 $2,342 6.86%
No stated maturity 1,728 1,728 6.38%
- - ---------------------------------------------------------------------------------------------------------------------------
$4,051 $4,070 6.66%
- - ---------------------------------------------------------------------------------------------------------------------------
Amortized Estimated Fair Weighted
Available for Sale: Cost Value Average Yield
- - ---------------------------------------------------------------------------------------------------------------------------
Due before one year $ -- $ -- --%
Due one year through five years 3,000 3,001 6.61
Due five years through ten years -- -- --
Due after ten years -- -- --
No stated maturity 3,044 3,394 3.63
- - ---------------------------------------------------------------------------------------------------------------------------
$6,044 $6,395 5.11%
- - ---------------------------------------------------------------------------------------------------------------------------
Total realized gains in 1997 on the sale of $908,000 in investment
securities classified as available for sale was $233,000. Total realized losses
in 1997 on the sale of $1.0 million in investment securities classified as
available for sale was $12,000.
There were no sales of investment securities classified as available for
sale during 1996. Total realized losses in 1995 on the sale of $7.0 million in
investment securities classified as available for sale was $106,000.
Additionally, $2.5 million in investment securities classified as available for
sale were called during 1997. Accrued interest receivable on investment
securities amounted to $62,000 and $86,000 at December 31, 1997 and 1996,
respectively.
(5) MORTGAGE-BACKED SECURITIES
The following tables detail the amortized cost, carrying value and estimated
fair value of the Company's mortgage-backed securities:
- - ---------------------------------------------------------------------------------------------------------------------------
December 31, 1997
- - ---------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Held to Maturity: Cost Gains Losses Value Value
- - ---------------------------------------------------------------------------------------------------------------------------
GNMA $19,509 $ -- $262 $19,247 $19,509
FNMA 15,900 14 42 15,871 15,900
FHLMC 14,012 75 112 13,976 14,012
- - ---------------------------------------------------------------------------------------------------------------------------
$49,421 $ 89 $416 $49,094 $49,421
- - ---------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Available for Sale: Cost Gains Losses Value Value
- - ---------------------------------------------------------------------------------------------------------------------------
GNMA $39,553 $234 $ 15 $39,772 $39,772
FNMA 914 2 12 904 904
FHLMC 1,336 8 29 1,315 1,315
Non-agency pass through certificate 2,443 84 -- 2,527 2,527
- - ---------------------------------------------------------------------------------------------------------------------------
$44,246 $328 $ 56 $44,518 $44,518
- - ---------------------------------------------------------------------------------------------------------------------------
(5) MORTGAGE-BACKED SECURITIES(continued)
- - ---------------------------------------------------------------------------------------------------------------------------
December 31, 1996
- - ---------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Held to Maturity: Cost Gains Losses Value Value
- - ---------------------------------------------------------------------------------------------------------------------------
GNMA $22,759 $ -- $542 $22,217 $22,759
FNMA 7,321 -- 102 7,219 7,321
FHLMC 17,254 42 197 17,099 17,254
- - ---------------------------------------------------------------------------------------------------------------------------
$47,334 $ 42 $841 $46,535 $47,334
- - ---------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Available for Sale: Cost Gains Losses Value Value
- - ---------------------------------------------------------------------------------------------------------------------------
GNMA $21,770 $ 88 $ 19 $21,839 $21,839
FNMA 7,335 2 149 7,188 7,188
FHLMC 7,229 20 77 7,172 7,172
Collateralized mortgage obligations 3,000 -- 60 2,940 2,940
Non-agency pass through certificate 3,605 -- 6 3,599 3,599
- - ---------------------------------------------------------------------------------------------------------------------------
$42,939 $110 $311 $42,738 $42,738
- - ---------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities mature over the life of the security through
regular principal payments and are subject to prepayment risk. Total realized
gains in 1997, 1996 and 1995 on the sale of $19.8 million, $23.5 million and
$3.5 million in mortgage-backed securities classified as available for sale were
$215,000, $288,000 and $91,000, respectively. Total realized losses in 1997,
1996 and 1995 on the sale of $13.3 million, $21.3 million and $7.7 million in
mortgage-backed securities classified as available for sale were $209,000,
$239,000 and $128,000, respectively.
Accrued interest receivable on mortgage-backed securities amounted to
$584,000 and $661,000 at December 31, 1997 and 1996, respectively.
Mortgage-backed securities pledged under agreements to repurchase in
connection with borrowings amounted to $34.9 million at December 31, 1997.
Mortgage-backed securities pledged as collateral for public funds amounted to
$31.6 million at December 31, 1997.
(6) LOANS AND LEASES
- - -----------------------------------------------------------------------------
December 31, 1997 1996
- - -----------------------------------------------------------------------------
Single-family residential real estate $ 56,192 $ 63,660
Commercial real estate 109,938 90,350
Construction (net of loans in
process of $21,901 and
$23,641, respectively) 26,695 20,692
Consumer loans 24,639 22,898
Credit card receivables 918 885
Commercial business 69,312 30,384
Lease financing 49,355 31,434
Unearned income (8,218) (5,564)
Allowance for possible loan
and lease losses (3,287) (3,177)
- - -----------------------------------------------------------------------------
Total $ 325,544 $ 251,562
- - -----------------------------------------------------------------------------
For the years ended December 31, 1997 and 1996, the average recorded
investment in impaired loans was approximately $1.8 million and $1.4 million,
respectively. At December 31, 1997 and 1996, the recorded investment in loans
for which impairment has been recognized in accordance with Statements of
Financial Accounting Standards Nos. 114 and 118 "Accounting by Creditors for
Impairment of a Loan" ("SFAS 114 and 118"), totaled $2.1 million and $1.3
million, of which none related to loans with a specific valuation allowance.
At December 31, 1997, 1996, and 1995, the principal amount of outstanding
loans on a non-accrual basis was $2.1 million, $1.3 million, and $3.9 million,
respectively. Additional gross interest income that would have been recorded
during 1997, 1996, and 1995 if the Company's non-performing loans at the end of
such periods had been performing in accordance with their terms during such
periods was $172,000, $193,000, and $242,000, respectively. The amount of
interest income that was actually recorded during 1997, 1996, and 1995 with
respect to such non-performing loans amounted to approximately $138,000,
$114,000, and $174,000, respectively.
Accrued interest receivable on loans and leases amounted to $2.1 million
and $1.4 million at December 31, 1997 and 1996, respectively.
(6) LOANS AND LEASES (continued)
The Company is a lessor of equipment and machinery under agreements
expiring at various dates through the year 2003. At December 31, 1997, the
components of lease financing are as follows:
1998 $16,664
1999 12,567
2000 6,034
2001 10,669
2002 3,406
2003 15
- - -----------------------------------------------------------
Total future minimum lease payments
receivable including estimated
residual values of $4,641 49,355
Unearned income (8,218)
- - -----------------------------------------------------------
Total $41,137
- - -----------------------------------------------------------
At December 31, 1997, 1996, and 1995, the Bank was servicing loans,
including participations sold, in the amounts of $47.9 million, $416.8 million,
and $297.1 million, respectively, for the benefit of others. The decline in 1997
was due to the sale of $350.0 million of mortgage servicing rights during the
first quarter of 1997, which resulted in a gain of $978,000.
The following is a summary of the activity in the allowance for possible
loan and lease losses:
- - -----------------------------------------------------------
December 31, 1997 1996 1995
- - -----------------------------------------------------------
Balance at beginning
of year $3,177 $1,720 $1,503
Provisions for possible
loan and lease losses 1,121 687 625
Losses charged against
the allowance (1,153) (177) (427)
Recoveries on
charged-off loans 142 97 19
Allowance assumed
through acquisition -- 850 --
- - -----------------------------------------------------------
Balance at end of year $3,287 $3,177 $1,720
- - -----------------------------------------------------------
(7) LOANS HELD FOR SALE
At December 31, 1997, the Bank held $110,000 in 30 year fixed rate and
$263,000 in 15 year fixed rate residential mortgages that were classified as
held for sale and are carried at the lower of aggregate cost or market value. At
December 31, 1996, the Bank held $502,000 in 30 year fixed rate residential
mortgages and $97,000 in 15 year fixed rate residential mortgages that were
classified as held for sale.
The Bank had $0 and $642,000 in commitments to originate agency conforming
fixed rate residential mortgage loans at December 31, 1997 and December 31,
1996, respectively. Loans sold totalled $105,000 and $13.7 million for the years
ended December 31, 1997 and 1996, respectively.
(8) REAL ESTATE OWNED, NET
- - -----------------------------------------------------------
December 31, 1997 1996
- - -----------------------------------------------------------
Balance at beginning of year $ 2,150 $ 728
Real estate acquired in
settlement of loans 4,301 1,967
Capitalized interest -- 2
Dispositions/sales (6,071) (522)
Write-downs -- (25)
- - -----------------------------------------------------------
Balance at end of year $ 380 $2,150
- - -----------------------------------------------------------
The following table summarizes the activity in the allowance for possible
losses on real estate owned:
- - -----------------------------------------------------------
December 31, 1997 1996 1995
- - -----------------------------------------------------------
Balance at beginning of year $-- $-- $ --
Provision charged to income -- 25 480
Charge-offs, net of recoveries -- (25) (480)
- - -----------------------------------------------------------
Balance at end of year $-- $-- $ --
- - -----------------------------------------------------------
(9) PREMISES AND EQUIPMENT
Land, office buildings and equipment, at cost, are summarized by major
classification:
- - -----------------------------------------------------------
December 31, 1997 1996
- - -----------------------------------------------------------
Land $ 1,162 $ 1,187
Buildings and leasehold
improvements 7,250 6,263
Furniture, fixtures and equipment 7,398 5,913
- - -----------------------------------------------------------
15,810 13,363
Accumulated depreciation (6,498) (5,638)
- - -----------------------------------------------------------
$ 9,312 $ 7,725
- - -----------------------------------------------------------
Depreciation expense for the years ended December 31, 1997, 1996 and 1995
was $861,000, $697,000, and $584,000, respectively.
(9) PREMISES AND EQUIPMENT (continued)
At December 31, 1997, the Company had leases on a number of its office
facilities and certain equipment. Minimum future non-cancelable rental
commitments under operating leases are as follows:
- - -----------------------------------------------------------
1998 $ 525
1999 444
2000 365
2001 316
2002 316
- - -----------------------------------------------------------
$1,966
- - -----------------------------------------------------------
Rental expense for the years ended December 31, 1997, 1996 and 1995 was
$472,000, $719,000 and $866,000, respectively.
(10) OTHER ASSETS
The following items are included in other assets:
- - -----------------------------------------------------------
December 31, 1997 1996
- - -----------------------------------------------------------
Mortgage servicing rights $ 48 $ 4,843
Excess servicing fees -- 157
Accounts receivable 4,425 1,758
Goodwill 4.032 2,660
Other assets 1,926 871
- - -----------------------------------------------------------
$10,431 $10,289
- - -----------------------------------------------------------
(11) DEPOSITS
- - -----------------------------------------------------------
December 31, 1997
- - -----------------------------------------------------------
Weighted
Average
Interest Rate Amount % of Total
- - -----------------------------------------------------------
Money market deposit
accounts 3.03% $ 33,607 10%
NOW and Super
NOW accounts 2.08 34,141 10
Savings accounts 2.72 30,740 9
Other time deposits 5.47 158,011 46
Time deposits of
$100,000 or more 5.62 34,666 10
- - -----------------------------------------------------------
Total interest bearing
deposits 4.52% 291,165 85%
- - -----------------------------------------------------------
Non-interest bearing
deposits 49,596 15
- - -----------------------------------------------------------
Total deposits $340,761 100%
- - -----------------------------------------------------------
- - -----------------------------------------------------------
December 31, 1996
- - -----------------------------------------------------------
Weighted
Average
Interest Rate Amount % of Total
- - -----------------------------------------------------------
Money market deposit
accounts 3.19% $ 35,228 11%
NOW and Super
NOW accounts 2.06 29,961 10
Savings accounts 2.72 29,238 10
Other time deposits 5.36 152,245 50
Time deposits of
$100,000 or more 5.40 23,040 7
- - -----------------------------------------------------------
Total interest bearing
deposits 4.43% 269,712 88
- - -----------------------------------------------------------
Non-interest bearing
deposits 36,536 12
- - -----------------------------------------------------------
Total deposits $306,248 100%
- - -----------------------------------------------------------
Other time deposits of less than $100,000 by date of maturity are as
follows:
1998 $105,737
1999 28,666
2000 16,881
2001 2,780
2002 3,536
2003 and thereafter 411
- - -----------------------------------------------------------
$158,011
- - -----------------------------------------------------------
Other time deposits of $100,000 or more by date of maturity are as
follows:
1998 $30,669
1999 2,770
2000 1,227
2001 and thereafter --
- - -----------------------------------------------------------
$34,666
- - -----------------------------------------------------------
Total deposits of $100,000 or more amounted to $85.1 million and $53.1
million at December 31, 1997 and 1996, respectively. Accrued interest payable on
deposits amounted to $876,000 and $602,000 at December 31, 1997 and 1996,
respectively. Interest expense on deposits:
- - -----------------------------------------------------------
December 31, 1997 1996 1995
- - -----------------------------------------------------------
NOW accounts $ 679 $ 595 $ 716
Savings and money market
deposit accounts 1,991 1,829 1,825
Time deposits 9,687 9,596 9,712
- - -----------------------------------------------------------
Total $12,357 $12,020 $12,253
- - -----------------------------------------------------------
(12) BORROWINGS
Borrowings at December 31, 1997 and 1996 consist of the following:
- - -----------------------------------------------------------
December 31, 1997 1996
- - -----------------------------------------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
- - ----------------------------------------------------------
Short-term:
FHLB advances $ 450 5.92% $ 5,000 7.65%
Securities sold under
agreements to
repurchase 21,546 5.92 6,050 7.19
ESOP note payable 49 8.50 44 8.25
- - ----------------------------------------------------------
22,045 5.93 11,094 7.40
- - ----------------------------------------------------------
Long-term:
FHLB advances (A) 33,000 6.25 13,000 6.99
Securities sold under
agreements to
repurchase (B) 13,000 5.96 23,000 6.02
ESOP note payable (C) 127 8.50 176 8.25
Subordinated debt (D) 3,000 8.25 3,000 8.25
- - ----------------------------------------------------------
49,127 6.30 39,176 6.52
- - ----------------------------------------------------------
Total $71,172 6.18% $50,270 6.72%
- - ----------------------------------------------------------
(A) Long-term FHLB advances are detailed as follows:
- - -----------------------------------------------------------
December 31, 1997 1996
- - -----------------------------------------------------------
Amount Due Amount Due
- - -----------------------------------------------------------
$ 5,000 12/15/99 $ 5,000 12/15/99
3,000 06/02/00 3,000 06/02/00
5,000 08/06/01 5,000 08/06/01
10,000 02/14/02 -- --
10,000 07/11/02 -- --
- - -----------------------------------------------------------
$33,000 $13,000
- - -----------------------------------------------------------
(B) Long-term securities sold under agreements to repurchase are detailed
as follows:
- - -----------------------------------------------------------
December 31, 1997 1996
- - -----------------------------------------------------------
Amount Due Amount Due
- - -----------------------------------------------------------
$-- -- $ 5,000 09/25/98
-- -- 5,000 10/23/98
3,000 02/01/99 3,000 02/01/99
10,000 10/12/99 10,000 10/12/99
- - -----------------------------------------------------------
$13,000 $23,000
- - -----------------------------------------------------------
(C) The ESOP note payable is due in quarterly installments ranging from
$10,000 to $15,000 through January 31, 2001.
(D) The subordinated debt consists of 12 units of $250,000 notes payable
June 30, 2004. The notes are redeemable at the Company's option at a price of
105% of par after July 1, 1996, declining annually thereafter to par on and
after July 1, 2003. Interest is paid quarterly. (E) Accrued interest payable on
borrowings amounted to $634,000 and $384,000 at December 31, 1997 and 1996,
respectively. (F) The following table presents certain information regarding
borrowings:
- - -----------------------------------------------------------
December 31, 1997 1996
- - -----------------------------------------------------------
Average balance outstanding $67,489 $41,092
Maximum amount outstanding at
any month-end during the period 84,628 67,905
Weighted average interest rate
during the period (1) 6.30% 6.47%
- - -----------------------------------------------------------
(1) Weighted average interest rate is calculated by dividing the actual
interest expense for the period by the average outstanding balances for the
period.
As of December 31, 1997 and 1996, the Bank had a $35.0 million line of
credit available from the FHLB. The unused balance on the line of credit was
$34.6 million and $35.0 million at December 31, 1997 and 1996, respectively.
(13) INCOME TAXES
Income tax expense (benefit) consisted of the following:
- - -----------------------------------------------------------
December 31, 1997 1996 1995
- - -----------------------------------------------------------
Current:
State $ 128 $ 38 $--
Federal 524 1,202 --
Deferred--Federal 1,658 (478) (1,868)
- - -----------------------------------------------------------
$2,310 $ 762 $(1,868)
- - -----------------------------------------------------------
On August 20, 1996, The Small Business Job Protection Act was signed into
law which repealed the favorable reserve method available to savings banks. As a
result, the Bank was required to change its tax bad debt method to the specific
charge-off method effective for the year ended December 31, 1996. The change in
method resulted in taxable income of approximately $1.6 million representing the
excess of the Bank's tax bad debt reserve at December 31, 1995 over the base
year reserve amount of $2.8 million that arose in tax years beginning before
December 31, 1987. The income will be recognized for tax purposes ratably over a
six year period. Accordingly, the Company has not provided deferred income taxes
of approximately $951,000 for the Bank's tax return reserve for bad debts that
arose in tax years beginning before
(13) INCOME TAXES (continued)
December 31, 1987. It is not expected that this difference will reverse in
the foreseeable future. A deferred tax liability has been recognized for the
portion of the tax bad debt reserves which arose in 1988 through 1995.
The provision for income taxes differs from the statutory rate due to the
following:
- - -----------------------------------------------------------
December 31, 1997 1996 1995
- - -----------------------------------------------------------
Tax (benefit) at statutory rate $2,102 $685 $ 273
State tax, net of Federal effect 85 25 --
Tax free interest (8) (11) (11)
Change in valuation
allowance (1) -- -- (2,156)
Other 131 63 26
- - -----------------------------------------------------------
$2,310 $762 $(1,868)
- - -----------------------------------------------------------
(1) Excludes the change in the valuation allowance related to the unrealized
loss on securities available for sale, which was charged directly to
stockholders' equity.
Deferred income taxes reflect the impact of differences between the
financial statement and tax basis of assets and liabilities and available tax
carryforwards. The tax effects of temporary differences that give rise to
significant portions of deferred tax assets and deferred tax liabilities at
December 31, 1997, 1996, and 1995 are presented below:
- - -----------------------------------------------------------
December 31, 1997 1996 1995
- - -----------------------------------------------------------
Deferred tax assets:
Net operating loss
carryforwards $ -- $2,297 $3,486
Write-downs on real
estate owned -- 22 27
Unrealized loss on
securities available for sale -- 102 176
Provision for possible loan
and lease losses 646 634 49
Other 87 106 (84)
- - -----------------------------------------------------------
Total deferred tax assets 733 3,161 3,654
- - -----------------------------------------------------------
Deferred tax liabilities:
Unrealized gain on securities
available for sale 250 -- --
Excess servicing fees -- 61 95
Depreciation and
amortization 70 4 --
Deposit insurance
premiums 143 32 142
- - -----------------------------------------------------------
Total deferred tax
liabilities 463 97 237
- - -----------------------------------------------------------
Deferred tax assets in
excess of deferred tax
liabilities 270 3,064 3,417
- - -----------------------------------------------------------
Net deferred tax assets $ 270 $3,064 $3,417
- - -----------------------------------------------------------
A deferred tax asset valuation allowance approximately $2,513 was
eliminated in 1995 as a result of a determination of the outlook for future
taxable income and the reduction in non-performing assets offset by the
potential for a substantial SAIF insurance assessment. A valuation allowance has
not been provided at December 31, 1997 and 1996, since management believes it is
more likely than not that the deferred tax assets will be realized. The SAIF
assessment of $1.8 million was paid in 1996.
(14) COMMITMENTS AND CONTINGENCIES
Financial Instruments with Off Balance-Sheet Risk
The Company is a party to various financial instruments required in the
normal course of business to meet the financing needs of its customers, which
are not included in the Consolidated Statements of Financial Condition at
December 31, 1997. Management does not expect any material losses from these
transactions. The Company's involvement in such financial instruments is
summarized as follows:
- - --------------------------------------------------------------
December 31, 1997 1996
- - --------------------------------------------------------------
Contract or
Notional Amount
- - --------------------------------------------------------------
Amounts representing credit risk:
Commitments to extend credit
(including unused lines of credit) $101,499 $103,315
Standby letters of credit,
financial guarantees and other
letters of credit $ 560 $ 850
The Bank uses the same credit policies in extending commitments and letters
of credit as it does for on-balance sheet instruments. The Bank controls its
exposure to loss from these agreements through credit approval processes and
monitoring procedures. Letters of credit and commitments to extend credit are
generally issued for one year or less and may require payment of a fee. The
total commitment amounts do not necessarily represent future cash disbursements,
as many of the commitments expire without being drawn upon. The Bank may require
collateral in extending commitments, which may include cash, accounts
receivable, securities, real or personal property, or other assets. For those
commitments which require collateral, the value of the collateral generally
equals or exceeds the amount of the commitment.
The majority of the Company's commitments to extend credit and letters of
credit carry current market interest rates if converted to loans. Because
commitments to extend credit and letters of credit are generally unassignable by
either the Company or the borrower, they only have value to the Company and the
borrower. The estimated fair value approximates the recorded deferred fee
amounts.
At December 31, 1997, the Company was party to a number of lawsuits. While
any litigation has an element of uncertainty, after reviewing these actions with
legal counsel, management is of the opinion that the liability, if any,
resulting from these actions will not have a material effect on the financial
condition or results of operations of the Company.
(15) BENEFIT PLANS
Savings Plan
The Company has a savings plan under Section 401(K) of the Internal Revenue
Code available to all full-time employees. The plan allows employees to
contribute part of their pretax or after-tax income according to specified
guidelines. The Company matches a percentage of the employee contributions up to
a certain limit. The expense amounted to $164,000, $92,000 and $55,000 for the
years 1997, 1996 and 1995, respectively.
Employee Stock Ownership Plan
The Company has an Employee Stock Ownership Plan ("ESOP"). The ESOP is a
defined contribution plan covering all full-time employees of the Company who
have one year of service and are age 21 or older. It is subject to the
provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"). The
Company follows the provisions of Statement of Position 93-6, "Employers'
Accounting for Employee Stock Ownership Plans" in accounting for the ESOP. In
January, 1996, the ESOP borrowed funds from a third party and purchased 50,000
shares of the Company's stock for the ESOP trust. Cash contributions to the ESOP
have been determined based on the ESOP's total debt service less dividends paid
on ESOP shares. Compensation expense of the ESOP was $98,000 and $45,000 for
1997 and 1996. Interest expense on the borrowings was $17,000 and $18,000 for
1997 and 1996. There was no ESOP expense for 1995. As of December 31, 1997, the
Company had a remaining guaranteed ESOP obligation of $176,000 included in other
borrowings. Of the 50,000 shares, 17,108 have been allocated and the 32,892
unallocated shares are reported as a reduction of stockholders' equity. As of
December 31, 1997, the unallocated shares had a fair value of $543,000.
Employee Stock Purchase Plan
In April 1996, the Company established an Employee Stock Purchase Plan
("ESPP"). Employees can elect to purchase shares in the Company at 95% of the
market price of the Company's stock on certain dates throughout the year. During
1997 9,479 shares were issued to employees through their participation in the
ESPP. These transactions increased stockholders' equity $68,000.
(16) RELATED PARTY TRANSACTIONS
Loans receivable from executive officers and directors, including loans and
leases to related persons and entities, consisted of the following activity:
- - -----------------------------------------------------------
December 31, 1997 1996 1995
- - -----------------------------------------------------------
Balances at
beginning of year $1,205 $ 568 $228
Additional loans and
leases granted 161 751 420
Repayments (325) (114) (80)
Other changes (382) -- --
- - -----------------------------------------------------------
Balances at end of year $ 659 $1,205 $568
- - -----------------------------------------------------------
Other changes resulted from the charge off of loans and leases to a company in
which a related party had an equity interest.
(17) 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.
(18) STOCKHOLDERS' EQUITY
On January 31, 1996 the Company successfully completed the offering of
500,000 shares of common stock at a price of $5.25 per share. In 1994, the
Company completed the sale of $3.0 million in subordinated debentures in a
private placement. Twelve units were sold, with each unit consisting of $250,000
in principal amount of 8.25% subordinated notes due in 2004 and warrants to
purchase 25,000 shares of common stock. Each warrant entitles the holder to
purchase one share of the Company's common stock at an exercise price of $6.00.
The warrants are exercisable in whole or in part, at any time prior to June 30,
1999. Interest on the subordinated debentures is payable quarterly. The
subordinated debentures are due June 30, 2004 and are redeemable after July 1,
1996.
On April 25, 1990, the Board of Directors of Progress Financial Corporation
declared a dividend distribution of one Right for each outstanding share of
Common Stock of the Company to stockholders of record at the close of business
on May 11, 1990. Each Right entitles the registered holder to purchase from the
Company a unit consisting of one one-hundredth of a share (a "Unit") of Series A
Junior Participating Preferred Stock, par value $.01 per share, at a purchase
price of $40.00 per Unit, subject to adjustment. The description and terms of
the Rights are set forth in a Rights Agreement, between the Company and American
Stock Transfer & Trust Company, as Rights Agent.
In 1993, as amended in 1997, the Board of Directors adopted a Stock
Incentive Plan which provides for the grant of incentive stock options,
non-incentive or compensatory stock options and stock appreciation rights to key
employees. The per share exercise price of an incentive stock
(18) STOCKHOLDERS' EQUITY (continued)
option shall at least equal the fair market value of a share of Common
Stock on the date the option is granted, and the per share exercise price of a
compensatory stock option shall at least equal the greater of par value or 85%
of fair market value of a share of Common Stock on the date the option is
granted. Under this plan, 353,312 shares of common stock were reserved for
issuance of which 160,125, 69,300, 15,750 and 133,875 shares were granted in
1997, 1996, 1995 and 1993. There were no options granted under this plan in
1994. During 1996 and 1995, options for 10,500 and 36,750 shares granted in 1993
were forfeited and returned to the plan.
Under the Directors' Plan, which was also adopted in February 1993, and
amended in 1997, each non-employee director of the Company will receive
compensatory options to purchase 525 shares (or such less number of shares as
remain to be granted pursuant to the Directors' Plan) with an exercise price
equal to the fair market value of a share of Common Stock on the date the option
is granted. A total of 94,500 authorized but unissued shares of Common Stock
have been reserved for issuance pursuant to the Directors' Plan. In 1997 and
1996, 4,725 and 6,825 shares were granted under this plan. In 1995 and 1994,
2,100 shares were granted each year.
Under the Company's Stock Option Plan which was adopted in April 1984 and
amended in April 1987, 100,753 shares of common stock were reserved and issued
to officers and key employees. The plan provides that the option price will be
fixed by a committee of the Board of Directors, but will not be less than 100%
of the fair value of the stock at the date of the grant. During 1997, 25,525
options were exercised at a price between $.95 and $10.83. During 1996 and 1995,
5,250 options were exercised each year at a price of $.95 per share. In 1996,
6,300 shares were forfeited and returned to the plan.
Options granted under each of the plans are exercisable during the period
specified in each option agreement and expire no later than the tenth
anniversary of the date the option was granted.
Changes in total options outstanding during 1997, 1996 and 1995 are as
follows:
- - -----------------------------------------------------------
December 31, 1997
- - -----------------------------------------------------------
Shares Option
Under Price
Option Per Share
- - -----------------------------------------------------------
Outstanding at
beginning of year 295,560 $ .95 to $10.84
Granted during year 164,850 $7.86 to $16.50
Exercised during year (25,525) $ .95 to $10.83
Forfeited during year --
- - -----------------------------------------------------------
Outstanding at end of year 434,885 $ .95 to $16.50
- - -----------------------------------------------------------
Options exercisable
at end of year 276,530 $ .95 to $ 7.98
- - -----------------------------------------------------------
- - -----------------------------------------------------------
December 31, 1996
- - -----------------------------------------------------------
Shares Option
Under Price
Option Per Share
- - -----------------------------------------------------------
Outstanding at
beginning of year 241,485 $ .95 to $12.96
Granted during year 76,125 $5.24 to $ 7.86
Exercised during year (5,250) $ .95
Forfeited during year (16,800) $3.33 to $14.29
- - -----------------------------------------------------------
Outstanding at end of year 295,560 $ .95 to $10.84
- - -----------------------------------------------------------
Options exercisable
at end of year 220,762 $ .95 to $10.84
- - -----------------------------------------------------------
- - -----------------------------------------------------------
December 31, 1995
- - -----------------------------------------------------------
Shares Option
Under Price
Option Per Share
- - -----------------------------------------------------------
Outstanding at
beginning of year 265,635 $ .95 to $12.96
Granted during year 17,850 $4.05 to $ 5.36
Exercised during year (5,250) $ .95
Forfeited during year (36,750) $3.33
- - -----------------------------------------------------------
Outstanding at end of year 241,485 $ .95 to $12.96
- - -----------------------------------------------------------
Options exercisable
at end of year 203,962 $ .95 to $12.96
- - -----------------------------------------------------------
The weighted average exercise price of options outstanding at December 31,
1997, 1996 and 1995 was $5.33, $3.30, and $2.90 per share, respectively.
In October 1995, the FASB issued the Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which
is effective for the Company January 1, 1996. The Company adopted the
disclosure-only provision of SFAS 123 and continues to apply Accounting
Principles Board Opinion No. 25 and related interpretations in accounting for
its plans. Compensation expense was immaterial for 1997 and 1996. If the Company
had elected to recognize compensation cost for the various Option Plans based on
the fair value at the grant dates for awards under those plans, consistent with
the method prescribed by SFAS 123, the net income and net income per share for
the years ended December 31, 1997 and 1996 would have been changed to the pro
forma amounts indicated below:
- - -----------------------------------------------------------
1997 1996
- - -----------------------------------------------------------
Pro forma net income $3,686 $1,223
Pro forma net income per share $ 0.93 $ 0.31
Pro forma diluted net income per share $ 0.85 $ 0.30
- - -----------------------------------------------------------
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 1997 and 1996: dividend yield of 1.02% and no
dividend yield; expected volatility of 31.99% and 28.24%; risk free interest
rate of 6.43% and 5.79%; and an expected holding period of 7 years and 10 years.
(19) REGULATORY MATTERS
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") was signed into law on December 19, 1991; regulations implementing
the prompt corrective action provisions of FDICIA became effective on December
19, 1992. In addition to the prompt corrective action requirements, FDICIA
includes significant changes to the legal and regulatory environment for insured
depository institutions, including reductions in insurance coverage for certain
kinds of deposits, increased supervision by the federal regulatory agencies,
increased reporting requirements for insured institutions, and new regulations
concerning internal controls, accounting, and 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
leverage ratio of at least 5%, a Tier 1 risk-based capital ratio of at least 6%,
and a total risk-based capital ratio of at least 10%. An institution is deemed
to be "critically undercapitalized" if it has a tangible equity ratio of 2% or
less.
At December 31, 1997 the Bank's leverage ratio was 6.50%, Tier 1 risk-based
ratio was 9.05%, total risk-based ratio was 10.00%, and tangible equity ratio
was 6.50%, based on leverage capital of $31.4 million, Tier 1 capital of $31.4
million, total risk-based capital of $34.7 million and tangible equity capital
of $31.4 million, respectively. At December 31, 1997, 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, core, and risk-based capital at December 31, 1997:
- - ---------------------------------------------------------------------------------------------------------------------------
Tangible Capital % Core Capital % Risk-Based Capital %
- - ---------------------------------------------------------------------------------------------------------------------------
Adjusted GAAP Capital $34,043 $34,043 $34,043
- - ---------------------------------------------------------------------------------------------------------------------------
General valuation allowance -- -- 3,286
Unrealized gain on securities available for sale,
net of taxes (150) (150) (150)
Goodwill (2,460) (2,460) (2,460)
- - ---------------------------------------------------------------------------------------------------------------------------
Total 31,433 6.50% 31,433 6.50% 34,719 10.00%
- - ---------------------------------------------------------------------------------------------------------------------------
Minimum capital requirement 7,252 1.50 14,503 3.00 27,774 8.00
- - ---------------------------------------------------------------------------------------------------------------------------
Regulatory capital--excess $24,181 5.00% $16,930 3.50% $ 6,945 2.00%
- - ---------------------------------------------------------------------------------------------------------------------------
Dividend Restrictions
The Bank's ability to pay dividends is restricted by certain regulations.
Under the current regulations, the Bank is not permitted to pay cash dividends
or repurchase any of its capital stock if such payment or repurchase would cause
its regulatory capital to be reduced below either the amount of the liquidation
account or the regulatory capital requirements applicable to it. An institution
that exceeds its fully phased in capital requirement could, after prior notice,
but without the approval of the OTS, make capital distributions during a
calendar year of up to 100% of its current net income plus the amount that would
reduce its "surplus capital ratio" (the excess capital over its fully phased-in
capital requirement) to less than one-half of its surplus capital ratio at the
beginning of the calendar year. Any additional capital distributions would
require prior regulatory approval. An institution that meets its regulatory
capital requirement, but not its fully phased-in capital requirement could make
capital distributions without prior OTS approval of between 25% and 75% of
current earnings. A savings institution that does not meet its minimum
regulatory capital requirements cannot make any capital distributions without
prior OTS approval. Because the Bank is the primary source of working capital
for the Company, the Company's ability to pay dividends is therefore limited.
The Company paid cash dividends of $.10 per share during 1997.
(20) FINANCIAL INSTRUMENTS
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.
(20) FINANCIAL INSTRUMENTS (continued)
The following methods and assumptions were used to estimate the fair value
of selected financial instruments at December 31, 1997 and 1996:
Cash and cash equivalents: Current carrying amounts reported in the
statement of financial condition for cash and short-term instruments approximate
estimated fair value.
Investment and mortgage-backed securities: Fair values for investment and
mortgage-backed securities were based on current quoted market prices.
Loans, excluding leases: For variable rate loans that reprice frequently
and have no significant credit risk, fair values are based on carrying values.
The estimated fair values for certain mortgage loans (e.g., one- to- four-family
residential) and other consumer loans are based on quoted market prices of
similar loans sold in conjunction with securitization transactions. The fair
value of non-accruing and restructured 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.
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, 1997 and 1996 (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 interest rates offered in the Company's market area for deposits with
comparable terms and maturities.
Advances from the FHLB:
Short-term: Current carrying amounts of borrowings under repurchase
agreements and other short-term borrowings approximate estimated fair
value.
Long-term: Fair value of long-term borrowings are estimated using a
discounted cash flow calculation that uses current borrowing rates for
advances with comparable terms and maturities.
Other borrowings: Fair value of other borrowings was estimated with a
discounted cash flow calculation using a current interest rate for debt with
comparable maturities and terms.
Other liabilities: Includes interest payable and advance payments by
borrowers. Current carrying amounts of interest payable and advance payments by
borrowers approximate estimated fair value.
Commitments to extend credit and letters of credit: The majority of the
Company's commitments to extend credit and letters of credit carry current
market interest rates if converted to loans. Because commitments to extend
credit and letters of credit are generally unassignable by either the Company or
the borrower, they only have value to the Company and the borrower. The
estimated fair value approximates the recorded deferred fee amounts.
The carrying amounts and fair values of the Company's financial instruments
were as follows:
- - ---------------------------------------------------------------------------------------------------------------------------
December 31, 1997 1996
- - ---------------------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
- - ---------------------------------------------------------------------------------------------------------------------------
Financial assets:
Cash and due from banks and interest-bearing deposits $ 18,940 $ 18,940 $ 10,633 $ 10,633
Investment and mortgage-backed securities 104,385 104,077 95,471 94,672
Loans, excluding leases 288,067 290,389 229,468 226,471
Interest receivable 2,728 2,728 2,156 2,156
Mortgage servicing rights 48 48 4,843 5,594
- - ---------------------------------------------------------------------------------------------------------------------------
Financial liabilities:
Deposits $340,761 $342,025 $306,248 $306,408
Advances from the FHLB 33,450 33,690 18,000 18,231
Other borrowings 37,722 37,898 32,270 32,552
Other financial liabilities 4,014 4,014 5,612 5,612
- - ---------------------------------------------------------------------------------------------------------------------------
(21) SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
The following table represents quarterly financial data for the periods
indicated. In the opinion of management, this information reflects all
adjustments (consisting solely of normal recurring adjustments) necessary for a
fair presentation of the results of operations for the periods indicated.
Reclassifications have been made to certain previously reported amounts to
conform with the 1997 classifications.
- - ---------------------------------------------------------------------------------------------------------------------------
Dec. 31, Sept. 30, Jun. 30, Mar. 31, Dec. 31, Sept. 30, Jun. 30, Mar. 31,
1997 1997 1997 1997 1996 1996 1996 1996
- - ---------------------------------------------------------------------------------------------------------------------------
Interest income $9,376 $8,874 $8,353 $7,845 $7,892 $6,993 $6,601 $6,635
Interest expense 4,419 4,248 4,033 3,909 4,049 3,742 3,380 3,511
- - ---------------------------------------------------------------------------------------------------------------------------
Net interest income 4,957 4,626 4,320 3,936 3,843 3,251 3,221 3,124
Provision for possible loan and
lease losses 489 241 200 191 187 100 100 300
Net interest income after provision
for possible loan and lease losses 4,468 4,385 4,120 3,745 3,656 3,151 3,121 2,824
Other income 2,060 1,472 1,246 1,700 1,492 874 947 1,546
Other expense 4,962 4,394 3,992 3,666 4,007 4,943 3,363 3,283
- - ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 1,566 1,463 1,374 1,779 1,141 (918) 705 1,087
Income tax expense (benefit) 587 561 507 655 440 (299) 251 370
- - ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 979 $ 902 $ 867 $1,124 $ 701 $ (619) $ 454 $ 717
- - ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) per common share $ 0.24 $ 0.23 $ 0.22 $ 0.28 $ 0.18 $(0.16) $ 0.11 $ 0.19
Net income (loss) per common share,
assuming dilution $ 0.22 $ 0.21 $ 0.20 $ 0.27 $ 0.17 $(0.16) $ 0.11 $ 0.18
Dividends per share $ 0.03 $ 0.03 $ 0.02 $ 0.02 $ 0.02 $ 0.02 $ -- $ --
- - ---------------------------------------------------------------------------------------------------------------------------
(22) CONDENSED FINANCIAL INFORMATION OF PROGRESS FINANCIAL CORPORATION
(PARENT COMPANY ONLY)
Condensed Statements of Financial Condition
- - -------------------------------------------------------------
December 31, 1997 1996
- - -------------------------------------------------------------
Assets:
Cash on deposit with subsidiary $ 15 $ 98
Investments in subsidiaries 37,645 23,103
Equity investment 1,462 44
Loans and advances from subsidiaries 3,512 57
Other 817 137
- - -------------------------------------------------------------
Total assets $ 43,451 $23,439
- - -------------------------------------------------------------
Liabilities and stockholders'
equity Liabilities:
Other borrowings $ 3,000 $ 3,000
Employee Stock Ownership
Plan note payable 176 220
Other 160 265
- - -------------------------------------------------------------
Total liabilities 3,336 3,485
- - -------------------------------------------------------------
Corporation-obligated mandatorily
redeemable capital securities of
subsidiary trust holding solely
junior sub-ordinated debentures
of the Corporation 15,000 --
- - -------------------------------------------------------------
Stockholders' equity:
Serial preferred stock -- --
Common stock 4,064 3,785
Capital surplus 20,511 17,715
Retained earnings (deficit) 244 (1,134)
Unearned Employee Stock
Ownership Plan shares (164) (214)
Unrealized gain (loss) on securities
available for sale 460 (198)
- - -------------------------------------------------------------
Total stockholders' equity 25,115 19,954
- - -------------------------------------------------------------
Total liabilities, Corporation-obligated
mandatorily redeemable capital
securities of subsidiary trust
holding solely junior subordinated
debentures of the Corporation
and stockholders' equity $43,451 $23,439
- - -------------------------------------------------------------
Condensed Statements of Operations
- - -------------------------------------------------------------
For the years ended
December 31, 1997 1996 1995
- - -------------------------------------------------------------
Dividends from equity
investment $ 5 $ 1 $ --
Management fees from
subsidiary 130 311 225
Equity in undistributed
income of subsidiaries 4,253 1,242 2,707
Interest income 498 1 --
- - -------------------------------------------------------------
Total income 4,886 1,555 2,932
- - -------------------------------------------------------------
Interest expense 279 291 270
Professional services 5 -- 5
Amortization of goodwill -- 6 3
Capital securities expense 925 --
Miscellaneous expense 9 --
- - -------------------------------------------------------------
Total expense 1,218 297 278
- - -------------------------------------------------------------
Income before
income taxes 3,668 1,258 2,654
Income tax expense
(benefit) (204) 5 (17)
- - -------------------------------------------------------------
Net income $3,872 $1,253 $2,671
- - -------------------------------------------------------------
(22) CONDENSED FINANCIAL INFORMATION OF PROGRESS FINANCIAL CORPORATION
(PARENT COMPANY ONLY)(continued)
Condensed Statements of Cash Flows
- - ----------------------------------------------------------------------------------
For the years ended
December 31, 1997 1996 1995
- - ----------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 3,872 $ 1,253 $ 2,671
Add (deduct) items not
affecting cash flow from
operating activities:
Equity in income
of subsidiaries (4,253) (1,242) (2,707)
Amortization of deferred
debt issuance cost 31 25 4
Amortization of goodwill -- 6 3
Net increase in accounts
receivable and other (4,684) 137 (22)
- - ----------------------------------------------------------------------------------
Net cash flows provided
by (used in) operating
activities (5,034) 179 (51)
- - ----------------------------------------------------------------------------------
Cash flows from investment
activities:
Capital contributions and
additional investment
in subsidiaries (10,559) (2,637) (23)
Dividend from subsidiaries 973 157 --
Purchase of equity
investment (1,068) -- --
- - ----------------------------------------------------------------------------------
Net cash flows used in
investment activities (10,654) (2,480) (23)
- - ----------------------------------------------------------------------------------
Cash flows from financing
activities:
Net proceeds from issuance
(repayment) of ESOP debt (44) 220 --
Net proceeds from issuance
of common stock 1,015 2,301 5
Dividends paid (366) (149) --
Proceeds from issuance
of capital securities 15,000 -- --
- - ----------------------------------------------------------------------------------
Net cash flows provided by
financing activities 15,605 2,372 5
- - ----------------------------------------------------------------------------------
Net increase (decrease) in
cash and cash equivalents (83) 71 (69)
Cash and cash equivalents:
Beginning of year 98 27 96
- - ----------------------------------------------------------------------------------
End of year $ 15 $ 98 $ 27
- - ----------------------------------------------------------------------------------
These statements should be read in conjunction with the other notes to the
consolidated financial statements.
(23) SIGNIFICANT RISKS AND UNCERTAINTIES
The earnings of the Company depend primarily upon the level of net interest
income, which is the difference between interest earned on its interest earning
assets, such as loans and leases and investments, and the interest paid on its
interest-bearing liabilities, such as deposits and borrowings. Accordingly, the
operations of the Company are subject to broad risks and uncertainties
surrounding its exposure to changes in the interest rate environment.
The financial statements of the Company are prepared in conformity with
generally accepted accounting principles that require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from these estimates.
Significant estimates are made by management in determining the allowance
for possible loan and lease losses and carrying values of real estate owned.
Consideration is given to a variety of factors in establishing these estimates
including current economic conditions, diversification of the loan portfolio,
delinquency statistics, results of internal loan reviews, borrowers' perceived
financial and managerial strengths, the adequacy of underlying collateral, if
collateral dependent, or present value of future cash flows and other relevant
factors. Since the allowance for possible loan and lease losses and carrying
value of real estate assets is dependent, to a great extent, on general and
other conditions that may be beyond the Bank's control, it is at least
reasonably possible that the Company's estimates of the allowance for possible
loan and lease losses and the carrying values of the real estate assets could
differ materially in the near term.
Concentrations of Credit Risk
The Company extends credit 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, 1997,
include: retail consumers that account for 25% of all credit extensions;
commercial mortgages and commercial real estate that account for 33%;
residential construction and land that account for 8%; and commercial business
that accounts for 34%.
(24) SEGMENTS
The Company has two principal activities, Banking and Leasing. The
measurement of the performance of these business segments are 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 the segments' financial
condition and results of operations if they were independent entities.
Selected financial information by business segment for the year ended
December 31,1997.
- - -------------------------------------------------------------
Revenues Net income Assets
- - -------------------------------------------------------------
Banking $33,371 $3,411 $447,758
Leasing 5,545 927 38,286
Other 2,010 (466) 7,362
- - -------------------------------------------------------------
Total $40,926 $3,872 $493,406
- - -------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
a professional services firm
To the Stockholders and Board of Directors of
Progress Financial Corporation:
We have audited the accompanying consolidated statements of financial
condition of Progress Financial Corporation as of December 31, 1997 and 1996 and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Progress Financial Corporation as of December 31, 1997 and 1996 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/S/ Coopers & Lybrand L.L.P.
-------------------------------
2400 Eleven Penn Center
Philadelphia, Pennsylvania
January 22, 1998
MARKET INFORMATION
Progress Financial Corporation's common stock is traded on the National
Association Securities Dealers Automated Quotation Stock Market under the symbol
"PFNC." At December 31, 1997 the Company had approximately 1,500 holders of
record.
Payment of cash dividends is subject to regulatory restrictions as
described in Note 19 of Notes to Consolidated Financial Statements. In 1997, the
Company paid dividends of $.10 per share, during 1996 the Company paid dividends
of $.04 per share.
The following table sets forth the high and low closing prices and trading
volumes for the periods described:
- - ----------------------------------------------------------------------------------------------------------
1997 1996
- - ----------------------------------------------------------------------------------------------------------
Low High Volume Low High Volume
- - ----------------------------------------------------------------------------------------------------------
First Quarter $ 7 55/64 $ 8 11/16 528,000 $5 1/4 $7 1/4 583,000
Second Quarter 7 43/64 10 676,000 6 1/4 7 1/4 350,000
Third Quarter 9 49/64 15 1/8 788,000 5 3/8 6 3/8 388,000
Fourth Quarter 13 7/8 16 1/2 562,000 6 3/8 8 3/4 1,155,000