[LOGO]
STRATEGIES FOR GROWTH
CORPORATE PROFILE
Progress Financial Corporation (PFC) is headquartered in Blue Bell,
Pennsylvania. Our primary business, Progress Bank, is a federally chartered
stock savings bank serving businesses and consumers through full-service offices
in Bridgeport, Conshohocken, East Norriton, Jeffersonville, King of Prussia,
Lansdale, Norristown, Paoli, Plymouth Meeting, Rosemont and the Andorra section
of Philadelphia, Pennsylvania.
The bank has active lending programs to meet the needs of businesses, real
estate entrepreneurs, home builders and consumers in its market area.
Additionally, the specialized lending division provides loans and mezzanine
financing to venture-backed and emerging growth companies. The bank also
provides equipment leasing for small and medium-sized companies through its
subsidiary, Progress Leasing Company.
In addition to banking, PFC conducts commercial mortgage banking and
mortgage brokerage services through its subsidiary, Progress Realty Advisors,
Inc., business-to-business telemarketing through Procall Teleservices, Inc., and
financial planning and insurance services through Progress Financial Resources,
Inc.
Progress Financial Corporation's stock is traded on the Nasdaq Stock Market
under the symbol PFNC.
[LOGO]
FINANCIAL HIGHLIGHTS
(In thousands, except per share data)
1998 1997** Change
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
Income
Net interest income $ 22,879 $ 18,603 22.99%
Provision for possible loan and lease losses . 959 1,509 (36.45)
Non-interest income 8,660 6,642 30.38
Non-interest expense 22,676 18,047 25.65
Income before income taxes and cumulative
effect of accounting change 7,904 5,689 38.93
Net income 4,980 3,467 43.64
Per Share*
Net income (fully diluted) $ 0.93 $ 0.75 24.00%
Book value 8.21 5.90 39.15
Stock price
High 21 43/64 15 23/32
Low 11 1/2 7 5/16
Balance Sheet
Assets $647,382 $508,060 27.42%
Earning assets 607,253 456,213 33.11
Loans and leases, net 394,246 339,903 15.99
Deposits 406,518 340,761 19.30
Stockholders' equity 41,554 25,362 63.84
Selected Ratios
Return on average assets 0.88% 0.80%
Return on average stockholders' equity 13.76 15.22
Net interest margin 4.32 4.58
Average stockholders' equity to average assets 6.43 5.23
Non-performing assets as a percentage
of total assets 0.57 0.50
*Per share amounts have been restated to reflect the 5% stock dividend
distributed to shareholders on August 31, 1998.
**All prior financial information has been restated to include the 1998
acquisition of PAM Holding Corp. and subsidiaries.
In the printed version, there are four bar graphs with the
following plot points depicted:
Loans and Leases
(in millions) 96 97 98
------ ------- -------
$266.0 $ 339.9 $ 394.2
Deposits
(in millions) 96 97 98
------ ------- -------
$306.2 $ 340.8 $ 406.5
Non-Interest Income
(in millions) 96 97 98
------ ------- -------
$ 5.1 $ 6.6 $ 8.7
Net Interest Income
(in millions) 96 97 98
------ ------- -----
$ 14.3 $ 18.6 $22.9
TO OUR SHAREHOLDERS
[PHOTO]
W. Kirk Wycoff
Chairman and Chief Executive Officer
Progress Financial Corporation (PFC)has been transformed. It is now a
dynamic, competitive and sought-after provider of financing for entrepreneurs
and businesses. Its non-bank businesses are profitable and growing as they
follow definitive strategic plans. Our clients, employees and shareholders have
enjoyed significant capital appreciation over the past three years, while
consistent stock and cash dividends have contributed to this growth.
The financial performance of PFC and Progress Bank was excellent in 1998,
as evidenced by a 44 percent increase in net income over the previous year.
Growth in assets was also impressive, with annual percentage growth rates of 27
percent in 1998 and 1997, and 11 percent in 1996. The expansion of the banking
market in the Philadelphia metropolitan area--the result of a robust local
economy and customer dislocation from recent bank mergers--enabled Progress Bank
to establish itself as a key provider of financial services to our target
clients.
New Initiatives
The acquisition of Primary Capital Corp, a capital equipment financing
firm, in November 1998 and its merger into Progress Leasing Company (PLC) was an
important investment for Progress Bank. PLC now provides us the depth of
management experience needed to grow our small-ticket leasing division.
In November 1998, we announced our entry into the insurance distribution
field with the formation of Progress Financial Resources, Inc., which commenced
operation in January 1999. An experienced team of five senior managers and two
dozen producers and support staff bring immediate firepower to this strategy. In
a partnership with The Equitable and EQ Financial Consultants, this group offers
financial planning, corporate benefits, 401(k) plans and estate-planning
services to our clients.
Finally, in 1999 we are pleased to report that two of our clients--early
stage companies that chose Progress Bank as their first and only financial
services provider--are poised to go public. Due to our willingness to finance
these companies in their infancy, Progress Capital, Inc., a subsidiary of PFC,
is a warrant holder in both entities.
Outlook for 1999
The stock market correction in the third quarter of 1998 temporarily dulled
the luster of our strong domestic economy. Yet at year-end, a strong housing
market and vigorous auto sales stimulated an historic market rebound. At this
PAGE 2
[LOGO]
time, it appears that 1999 will bring another year of increased new business
development and a continued push for efficiency and consolidation in many
industries, banking included.
We anticipate that Progress Bank's growth will also continue in 1999. Our
management team, lending groups, retail client service representatives and
operations staff all contributed to our significant expansion in loans and
deposits in 1998. We expect that trend to continue as our target lending clients
are reminded daily that the mega banks cannot match Progress Bank's quick
turnaround and flexible terms.
Likewise, development of our retail distribution network will continue as
we open our Lionville, Pa. and Southampton, Pa. offices during the first half of
1999. Core deposit growth and the distribution of a broad range of financial
service products require that we open two or three new locations per year,
despite the cost of such development. Our expansion will continue to focus on
Bucks, Chester, Montgomery and Philadelphia counties.
1999 is also an important year for our non-bank businesses. We are
dedicating significant resources to developing strategies for Procall
Teleservices, Inc., Progress Realty Advisors, Inc. and our newest subsidiary,
Progress Financial Resources, Inc. We expect each of these companies to
demonstrate its ability to generate increased income and to add to the range and
scope of financial products we deliver to our clients.
Finally, in 1998, we consolidated our Operations Division, which will
spearhead a new emphasis on operating efficiency. Across our organization, we
will be working hard to expertly manage our operating expenses to increase our
returns to shareholders.
Looking ahead, we remain committed to our strategy to provide all of our
shareholders with first-rate service and diverse products as we reach toward the
new millennium. Our new moniker says it all: Put us to the test. We are
confident that we can compete effectively and win your business.
/s/ W. Kirk Wycoff
- ------------------
W. Kirk Wycoff
Chairman and Chief Executive Officer
PAGE 3
RETAIL BANKING
The goal of the retail banking team is to develop new relationships and to
solidify existing relationships, enabling Progress Bank to become the financial
institution of choice for more and more businesses and households. Ultimately,
we seek to form partnerships with all of our clients to help them achieve their
financial goals.
In 1998, we added over 2,000 new households, while growing core deposits by
18 percent. This growth reflected the success of our "Partners in Progress"
initiative, a consultative sales and service strategy designed to benefit our
clients, our staff and our company.
Banking is a business dictated by convenience. That is why, while our
competitors continue to consolidate and close branches, we remain committed to
offering our clients the delivery channel of their choice, such as telephone
banking, automatic teller machines and our upcoming Internet banking product. We
believe, however, that these delivery channels serve to augment traditional
branches and personal service, not replace it.
In 1998, we opened a new branch office in East Norriton and we have
recently relocated our Paoli office to maximize its potential. In 1999, we will
continue to add locations, including new offices in both Chester and Bucks
counties during the second quarter. We are also exploring additional sites in
Montgomery and Philadelphia counties.
From left: Progress Bank Senior Vice Presidents, Steven D. Hobman,
Specialized Lending; Michael J. Falco, Construction Lending; Donald M. DeMaio,
Retail Banking; and Robert J. Bifolco, Commercial Banking.
[PHOTO]
PAGE 4
[LOGO]
COMMERCIAL BANKING
The Commercial Banking Division provides customized loan, deposit and
investment products, as well as cash management services to small and
middle-market businesses. The division's focus is on business banking services,
residential tract home development loans, commercial construction financing,
investment property mortgages, cash management and private banking.
Commercial Banking reported exceptional growth in 1998. The group generated
$142 million in total loan production; $51 million in business lending; $67
million in commercial and home construction lending; and $24 million in
commercial mortgages. This activity resulted in $1.4 million in fees for the
division and more than 80 new client relationships. Our excellent performance
was buoyed by a strong residential housing market and generally positive
business trends in all facets of the economy. Nonetheless, we maintained our
underwriting standards and bolstered our reserves during 1998 as a precaution
against an eventual economic downturn.
During 1999, Commercial Banking will decentralize part of its lending staff
into two loan production offices in Lionville (Chester County, Pa.) and
Southampton (Bucks County, Pa.), where we expect to expand existing connections
with clients and cultivate new relationships in these fast-growing areas.
In the printed version, there is a bar graph with the following plot points
depicted:
Loans
(in millions) 96 97 98
------ ------- ----
$ 141.4 $205.9 $271.7
SPECIALIZED LENDING
Progress Bank's Specialized Lending Division (SLD) provides customized
financial services to leading-edge companies in technology, health care and
insurance. In 1998, SLD increased its loan portfolio to nearly $34 million
outstanding and increased business checking by more than 100 percent to more
than $12 million. Among the division's 28 new credit relationships are the
Software Consulting Group, an information technology firm, and Continuum Health
Care, an occupational health management company.
During 1998, SLD served as a preferred provider for the Eastern Technology
Council, a non-profit trade association for technology companies. Through their
"TechBanc" program, the division marketed the entire range of PFC products and
services to member companies and their employees.
By meeting the unique needs of emerging companies at different stages in
their growth cycles and through its understanding of the technology industry,
SLD has earned a reputation as a key provider of value-added services. In 1998,
it began to penetrate and expand in southern New Jersey. In addition, in 1998,
the Ben Franklin-Progress Capital Fund began making subordinated debt
investments in existing bank clients and potential bank clients. During 1999,
SLD will continue to look for emerging companies with which to do business, and
it will continue to strengthen ties with the venture capital community to
provide clients with a full range of funding alternatives.
PAGE 5
COMMERCIAL MORTGAGE BANKING
Progress Realty Advisors, Inc. (PRA), our full-service commercial mortgage
banking subsidiary, placed more than $290 million of real estate financing in
1998, compared to $124 million in 1997. During the year, PRA financed 100
properties in a territory that extends from southern Connecticut to North
Carolina. PRA also added a loan origination office in Wilmington, Del., through
a joint venture that established Progress Realty Advisors of Delaware, LLC. With
this acquisition, PRA now maintains five origination offices: Blue Bell, Pa.;
Chesapeake, Va.; Richmond, Va.; Wilmington, Del.; and Woodbridge, N.J. A new
office in Raleigh, N.C. is expected to open during the first quarter of 1999.
In addition, PRA's Health Care Capital Group helped health care firms
select, structure and negotiate equipment and real estate financing. In 1998,
this group continued to expand its market presence working with long-term and
senior care providers, hospitals and physician groups.
In 1999, production and profitability are expected to grow as a result of
increased origination throughout PRA's service area and through strategic
acquisitions to further expand its business.
EQUIPMENT LEASING
Progress Financial Corporation has expanded its ability to provide
diversified equipment-leasing services. During 1998, PFC acquired two more
companies, Primary Capital Corp of Norristown, Pa. and PAM Financial Corporation
of Bethlehem, Pa. These two subsidiaries joined the former Equipment Leasing
Company of Timonium, Md., and the Quaker State Leasing Company of Blue Bell,
Pa., to operate under the new name, Progress Leasing Company (PLC).
With each new acquisition, PLC has added to the depth of its management
team in terms of experience and specialized expertise. Today, it is able to
develop leasing arrangements for essential-use equipment of any size for
companies ranging from small businesses to Fortune 500 firms. In addition, the
new name is bolstering the subsidiary's marketing efforts by closely associating
it with the financial strength of Progress Financial Corporation.
PLC continues to seek to grow its business through expansion of vendor
business with both current and new clients, by portfolio acquisition and by
acquiring additional leasing companies.
In the printed version there is a bar graph with the following plot points
depicted:
Leases
(in millions) 96 97 98
----- ----- ----
$40.9 $56.1 $73.5
BUSINESS TELESERVICES
Procall Teleservices, Inc. is a state-of-the-art call center, specializing
in telemarketing, telesales, customer service and market research. The group
provides valuable marketing and client service support to businesses ranging
from start-up companies to Fortune 500 companies, including
PAGE 6
[LOGO]
PFC subsidiaries. As a combination in-bound/out-bound telemarketing firm,
Procall develops leads for clients and also functions as a solution for
companies that want to outsource their customer service divisions.
Procall matches executives they hire with clients who can benefit from the
executives' years of experience in similar fields. Procall invested in new
technology in 1998, specifically a state-of-the-art digital switching and
software controlled communication system. This mix of sophisticated technology
and very experienced people has achieved outstanding results for Procall
clients.
Procall anticipates growing demand for its services due to the explosion of
Internet commerce, the deregulation of the utility industry, the current tight
labor market and the trend to outsource.
From left: PFC Subsidiary Heads, George R. Mark, Executive Vice President,
PFC; Dennis M. Horner, Executive Vice President, Progress Leasing Company;
Claudia B. Timbo, President, Procall Teleservices, Inc.; Michael A. Basile, Jr.,
President, Progress Leasing Company; and H. Wayne Griest, President and Chief
Executive Officer, Progress Realty Advisors, Inc.
[PHOTO]
DEVELOPMENT SERVICES
In 1998, PFC ventured into commercial real estate development consulting.
Its new joint venture, Progress Development L.P., has an equity interest in and
provides fee-based consulting services to NewSeasons Assisted Living
Communities, Inc., a company with a current network of ten assisted living
facilities in the tri-state area. The assisted living housing industry is the
fastest growing segment of the elderly housing market. This market has enjoyed
robust growth in Pennsylvania, a state with one of the largest elderly
populations in the country. With its equity interest in NewSeasons, Progress
Development L.P. is well positioned at an early stage in the life cycle of the
industry to grow its business in response to the rapidly changing demographics
of the elderly population in the region.
PAGE 7
FINANCIAL REVIEW
Progress Financial Corporation is pleased to report continued strong
financial performance throughout 1998--results that underscore the soundness of
our fundamental strategic direction. We have succeeded in placing PFC on firm
financial footing by nurturing our core banking relationships and complementing
this business with strategically related acquisitions. Our traditional banking
units and non-bank subsidiaries team up to offer personalized attention and a
full menu of products and services to businesses, professionals and
entrepreneurs.
Progress Financial Corporation reported a record earning per share of $.93,
which translates into a 24 percent growth over 1997. PFC also rewarded
shareholders with a 5 percent stock dividend, along with an increase in the
quarterly cash dividend of $.01 per share. PFC issued 792,800 new shares in May
1998 with proceeds of $14.3 million which, including 1998 earnings, brought
shareholder's equity to $41.6 million or a book value of $8.21 per share.
Progress Bank achieved loan and leasing growth of 23 percent in 1998,
funded by 19 percent deposit growth primarily from retail offices, including our
new Northtowne branch, which opened in February 1998. Moreover, our demand
deposits grew to 32 percent of total deposits thanks to our newly implemented
Partners in Progress sales program.
Our corporate diversification plan flourished in 1998 as we generated
increased fee income from our non-bank businesses. Progress Realty Advisors,
Inc. generated $2.2 million in placement fees. Procall Teleservices, Inc., in
its second year, recorded third-party revenue of $1.0 million while continuing
to manage all of Progress Bank's customer service and outbound calling
requirements. Progress Capital, Inc. and Progress Development Corp.--our other
subsidiaries--were also successful in generating non-interest revenue and
profits for the corporation.
From left: Progress Senior Vice Presidents, Michael B. High, Chief
Financial Officer; Georgann Berger McKenna, Human Resources; Eric J. Morgan,
Credit and Administration; and Richard T. Powers, Operations.
[PHOTO]
PAGE 8
PROGRESS FINANCIAL CORPORATION AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
Tabular information is presented in thousands of dollars except for share and
per share data. This data should be read in conjunction with the Notes to
Consolidated Financial Statements.
December 31, 1998 1997 1996 1995 1994
- ------------ ---- ---- ---- ---- ----
Financial Condition
Investment securities:
Available for sale $ 17,909 $ 6,395 $ 3,462 $ 5,504 $ 4,627
Held to maturity 12,401 4,051 1,937 2,149 12,867
Mortgage-backed securities:
Available for sale 146,459 44,518 42,738 36,842 9,103
Held to maturity -- 49,421 47,334 52,833 93,673
Loans and leases, net 394,246 339,903 265,968 236,025 205,771
Loans held for sale 25,250 373 599 3,153 351
Real estate owned, net -- 380 2,150 728 4,534
Total assets 647,382 508,060 398,679 360,660 348,189
Deposits 406,518 340,761 306,248 297,260 283,958
Borrowings 167,416 84,247 63,403 40,626 47,052
Capital securities 15,000 15,000 -- -- --
Stockholders' equity 41,554 25,362 20,594 16,957 13,020
Results of Operations
Interest income $ 45,329 $ 36,497 $ 30,114 $ 27,052 $ 22,830
Interest expense 22,450 17,894 15,820 15,600 12,505
Net interest income 22,879 18,603 14,294 11,452 10,325
Provision for possible loan and lease losses 959 1,509 781 641 521
Net interest income after provision for possible
loan and lease losses 21,920 17,094 13,513 10,811 9,804
Non-interest income 8,660 6,642 5,100 2,331 1,545
Non-interest expense 22,676 18,047 16,466 12,273 12,065
Income (loss) before income taxes and cumulative effect
of accounting change 7,904 5,689 2,147 869 (716)
Tax expense (benefit) 2,878 2,222 804 (1,851) --
Income (loss) before cumulative effect of accounting change 5,026 3,467 1,343 2,720 (716)
Cumulative effect of accounting change, net of tax (46) -- -- -- --
Net income (loss) $ 4,980 $ 3,467 $ 1,343 $ 2,720 $ (716)
Per Share Data
Basic income (loss) per common share before
cumulative effect of accounting change $ 1.03 $ .82 $ .32 $ .74 $ (.19)
Fully diluted income (loss) per common share
before cumulative effect of accounting change .94 .75 .31 .71 (.19)
Basic net income (loss) per common share 1.02 .82 .32 .74 (.19)
Fully diluted net income (loss) per common share .93 .75 .31 .71 (.19)
Dividends .14 .10 .04 -- --
Book value 8.21 5.90 4.90 4.60 3.55
Operating Data
Return on average assets .88% .80% .36%* .77% (.21)%
Return on average stockholders' equity 13.76 15.22 6.83* 18.78 (5.24)
Average stockholders' equity to average assets 6.43 5.23 5.24 4.08 4.01
Allowance for possible loan and lease losses to
total loans and leases 1.06 1.12 1.39 .96 .72
Non-performing assets as a percentage of total assets .57 .50 .96 1.33 2.56
Interest rate spread 3.66 3.98 3.66 3.09 3.04
Net interest margin 4.32 4.58 4.06 3.40 3.23
Dividends declared as a percent of net income per share 13.73 12.20 12.50 -- --
Branch Data
Number of full service branches 11 10 10 9 8
<FN>
*Excluding the 1996 one-time SAIF assessment, return on average assets was .68%
and return on average equity was 12.92%.
</FN>
PAGE 9
PROGRESS FINANCIAL CORPORATION AND SUBSIDIARIES
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. Other information is available in Form
10-K filed with the Securities and Exchange Commission.
Progress Financial Corporation (the "Company") is a unitary thrift holding
company that has six subsidiaries: Progress Bank (the "Bank"), Progress Realty
Advisors, Inc. ("PRA"), Progress Capital, Inc. ("PCI"), Procall Teleservices,
Inc. ("PTI"), Progress Development Corp. ("PDC"), and Progress Capital
Management, Inc. ("PCM"). The Bank's primary subsidiary is Progress Leasing
Company ("PLC"), formerly The Equipment Leasing Company ("ELC"), also doing
business as Quaker State Leasing Company ("QSL").
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the Company's Consolidated
Financial Statements and accompanying notes. Certain reclassifications have been
made to prior years' data throughout the following discussion and analysis for
comparability with 1998 data.
On January 14, 1998, the Company acquired PAM Holding Corporation and its
subsidiaries, PAM Financial and PAM Investment Company, which had audited assets
and stockholders' equity of $15.5 million and $235,000, respectively, at
December 31, 1997. The transaction was accounted for under the pooling of
interests method of accounting during 1998. The Company issued 61,835 shares of
common stock for all of PAM Holding Corporation's common shares outstanding. The
prior period financial information has been restated to include PAM Holding
Corporation and its subsidiaries. The acquisition did not have a material impact
on the financial statements.
When used in filings by the Company with the Securities and Exchange
Commission, in the Company's press releases or other public or shareholder
communications, or in oral statements made with the approval of an authorized
executive officer, the words or phrases "will likely result," "are expected to,"
"will continue," "is anticipated," "estimate," "project," or similar expressions
are intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject to
certain risks and uncertainties including changes in economic conditions in the
Company's market area, changes in policies by regulatory agencies, fluctuations
in interest rates, demand for loans in the Company's market area and competition
that could cause actual results to differ materially from historical earnings
and those presently anticipated or projected. The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements,
which speak only as of the date made. The Company wishes to advise readers that
the factors listed above could affect the Company's financial performance and
could cause the Company's actual results for future periods to differ materially
from any opinions or statements expressed with respect to future periods in any
current statements.
Results of Operations
The Company reported net income of $5.0 million for the year ended December
31, 1998, in comparison with $3.5 million and $1.3 million for the years 1997
and 1996, respectively. The results for 1996 are after a special one-time
assessment for the Savings Association Insurance Fund ("SAIF") of $1.8 million.
The basic net income per common share was $1.02 for 1998 in comparison with $.82
for 1997, and $.32 for 1996. Fully diluted net income per common share was $.93
for 1998, $.75 for 1997 and $.31 for 1996, respectively. Return on average
stockholders' equity was 13.76% and return on average assets was .88% for the
year ended December 31, 1998. For 1997 return on average stockholders' equity
was 15.22% and return on average assets was .80%. Return on average
stockholders' equity was 6.83% and return on average assets was .36% for 1996.
Results for 1998 reflect a higher net interest income of $22.9 million, in
comparison with $18.6 million and $14.3 million for 1997 and 1996, respectively.
Results for 1998 also include $959,000 in provision for possible loan and lease
losses in comparison with $1.5 million and $781,000 for 1997 and 1996,
respectively. Non-interest income amounted to $8.7 million for 1998, a $2.1
million increase over the $6.6 million earned in 1997, and a $3.6 million
increase over the $5.1 million reported in 1996. Non-interest income increased
in 1998 in comparison with 1997, primarily due to loan brokerage and advisory
fees and teleservices fee income. Non-interest expense amounted to $22.7 million
for 1998, a $4.7 million increase over the $18.0 million reported in 1997 and a
$6.2 million increase over the $16.5 million reported in 1996. The increase in
1998 is primarily due to an increase in salaries and benefits, mainly due to
additional employees of companies acquired and a higher cost of benefits.
Results for 1998 include income tax expense of $2.9 million (excluding the tax
benefit of $26,000 on the cumulative effect of accounting change) compared to an
income tax expense of $2.2 million in 1997 and an income tax expense of $804,000
in 1996.
Net Interest Income
Net interest income totalled $22.9 million, $18.6 million and $14.3 million
for the years ended December 31, 1998, 1997, and 1996, respectively. The $4.3
million increase in net interest income in 1998 compared to 1997 was due to a
$22.6 million net increase in average interest-earning assets over average
interest-bearing liabilities. Total average interest-earning assets increased
$124.2 million while total average interest-bearing liabilities increased $101.6
million. The increase in total average interest-earning assets was primarily due
to a $45.6 million increase in mortgage-backed securities, a $27.8 million
increase in commercial business loans and a $27.8 million increase in commercial
real estate loans. In addition, lease financing increased $12.5 million and
investment securities increased $11.1 million while single family residential
loans decreased $6.2 million. The increase in interest-bearing liabilities was
due to a $46.3 million increase in average interest-bearing deposits and a $55.4
million increase in average borrowings. The Company's interest rate spread
decreased 32 basis points in 1998, compared to 1997 (with 100 basis points
equalling 1.0%) due to a 44 basis point decrease in the rate on earning assets
partially offset by a 12 basis point decrease in the rate on interest-bearing
liabilities.
The $4.3 million increase in net interest income in 1997 compared to 1996,
was due to a $53.9 million increase in average interest-earning assets, which
was partially offset by a $34.8 million increase in average interest-bearing
liabilities. The increase in average interest-earning assets was primarily due
to a $27.1 million increase in commercial business loans and a $26.6 million
increase in lease financing. In addition, commercial real estate loans and
construction loans increased by $11.3 million and $9.3 million. These increases
were partially offset by decreases of $16.3 million and $8.0 million in
single-family residential loans and mortgage-backed securities, respectively.
The Company's interest rate spread increased 32 basis points in 1997 compared to
1996 due to a 43 basis point increase in the rate on earning assets offset by an
11 basis point increase 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.
PAGE 10
Distribution of Average Assets, Liabilities and Stockholders' Equity
For the years ended December 31, 1998 1997
- ----------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
-----------------------------------------------------------------
Interest-earning assets:
Investment securities and other
interest-earning assets (1) $ 22,020 $ 1,175 5.34% $ 10,879 $ 625 5.75%
Mortgage-backed securities (1) 134,528 8,686 6.46 88,937 6,065 6.82
Single family residential loans (2) 54,890 4,193 7.64 61,084 4,875 7.98
Commercial real estate loans (3) 123,113 10,868 8.83 95,353 8,774 9.20
Construction loans 31,611 3,432 10.86 27,371 3,038 11.10
Commercial business loans 77,268 7,487 9.69 49,515 4,833 9.76
Lease financing 60,446 7,298 12.07 47,933 6,198 12.93
Consumer loans 26,217 2,190 8.35 24,796 2,089 8.42
-----------------------------------------------------------------
Total interest-earning assets 530,093 45,329 8.55% 405,868 36,497 8.99%
-----------------------------------------------------------------
Non-interest-earning assets (6) 33,015 29,542
-----------------------------------------------------------------
Total assets $563,108 $435,410
-----------------------------------------------------------------
Interest-bearing liabilities:
Interest-bearing deposits:
NOW and Super NOW $ 51,515 1,384 2.69% $ 31,688 679 2.14%
Money market accounts 33,722 999 2.96 37,199 1,181 3.17
Passbook and
statement savings 31,314 725 2.32 29,698 810 2.73
Time deposits 206,158 11,358 5.51 177,860 9,687 5.45
-----------------------------------------------------------------
Total interest-bearing
deposits 322,709 14,466 4.48 276,445 12,357 4.47
FHLB borrowings 69,069 3,996 5.79 33,332 2,108 6.32
Other borrowings 67,301 3,988 5.93 47,683 3,429 7.19
-----------------------------------------------------------------
Total interest-bearing
liabilities 459,079 22,450 4.89% 357,460 17,894 5.01%
-----------------------------------------------------------------
Non-interest-bearing
liabilities (6) 52,842 46,415
-----------------------------------------------------------------
Total liabilities 511,921 403,875
-----------------------------------------------------------------
Capital securities 15,000 8,750
Stockholders' equity 36,187 22,785
-----------------------------------------------------------------
Total liabilities, capital securities
and stockholders' equity $563,108 $435,410
-----------------------------------------------------------------
Net interest income $ 22,879 $ 18,603
-----------------------------------------------------------------
Interest rate spread (4) 3.66% 3.98%
-----------------------------------------------------------------
Net interest margin (5) 4.32% 4.58%
-----------------------------------------------------------------
Average interest-earning assets to
average interest-bearing liabilities 115.47% 113.54%
-----------------------------------------------------------------
For the years ended December 31, 1996
- ---------------------------------------------------------------------------------------------
Average Yield/
Balance Interest Rate
------------------------------
Interest-earning assets:
Investment securities and other
interest-earning assets (1) $ 8,964 $ 586 6.54%
Mortgage-backed securities (1) 96,959 6,443 6.65
Single family residential loans (2) 77,360 6,035 7.80
Commercial real estate loans (3) 84,101 7,991 9.50
Construction loans 18,106 2,050 11.32
Commercial business loans 22,443 2,213 9.86
Lease financing 21,342 2,838 13.30
Consumer loans 22,724 1,958 8.62
------------------------------
Total interest-earning assets 351,999 30,114 8.56%
------------------------------
Non-interest-earning assets (6) 22,935
------------------------------
Total assets $374,934
------------------------------
Interest-bearing liabilities:
Interest-bearing deposits:
NOW and Super NOW $ 27,977 594 2.12%
Money market accounts 33,781 1,023 3.03
Passbook and
statement savings 28,258 806 2.85
Time deposits 178,677 9,597 5.37
------------------------------
Total interest-bearing
deposits 268,693 12,020 4.47
FHLB borrowings 27,901 1,746 6.26
Other borrowings 26,031 2,054 7.89
------------------------------
Total interest-bearing
liabilities 322,625 15,820 4.90%
------------------------------
Non-interest-bearing
liabilities (6) 32,654
------------------------------
Total liabilities 355,279
------------------------------
Capital securities --
Stockholders' equity 19,655
------------------------------
Total liabilities, capital securities
and stockholders' equity $374,934
------------------------------
Net interest income $ 14,294
------------------------------
Interest rate spread (4) 3.66%
------------------------------
Net interest margin (5) 4.06%
------------------------------
Average interest-earning assets to
average interest-bearing liabilities 109.10%
------------------------------
<FN>
(1)Includes investment and mortgage-backed securities classified as available
for sale. Yield information does not give effect to changes in fair value that
are reflected as a component of stockholders' equity.
(2)Includes mortgage loans held for sale.
(3)Includes commercial real estate loans held for sale.
(4)Interest rate spread represents the difference between the weighted average
yield on interest-earning assets, and the weighted average cost of
interest-bearing liabilities.
(5)Net interest margin represents net interest income divided by average
interest-earning assets.
(6) For the years ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
Non-interest-earning assets:
Cash $10,093 $ 8,573 $ 6,064
Allowance for possible loan and lease losses (4,339) (3,887) (5,287)
Other assets 27,261 24,856 22,158
-----------------------------
Total non-interest-earning assets $33,015 $29,542 $22,935
=============================
Non-interest-bearing liabilities:
Non-interest-bearing deposits $40,928 $35,292 $25,521
Other liabilities 11,914 11,123 7,133
-----------------------------
Total non-interest-bearing liabilities $52,842 $46,415 $32,654
=============================
</FN>
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.
PAGE 11
For the years ended December 31, 1998 vs. 1997 1997 vs. 1996
- ---------------------------------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total
---------------------------------------------------------------------
Interest-earning assets:
Investment securities and other
interest-earning assets $ 598 $ (48) $ 550 $ 115 $ (76) $ 39
Mortgage-backed securities 2,957 (336) 2,621 (541) 163 (378)
Single family residential (480) (202) (682) (1,296) 136 (1,160)
Commercial real estate loans 2,460 (366) 2,094 1,041 (258) 783
Construction loans 461 (67) 394 1,029 (41) 988
Commercial business 2,689 (35) 2,654 2,642 (22) 2,620
Lease financing 1,534 (434) 1,100 3,441 (81) 3,360
Consumer loans 118 (17) 101 177 (46) 131
---------------------------------------------------------------------
Total 10,337 (1,505) 8,832 6,608 (225) 6,383
---------------------------------------------------------------------
Interest-bearing liabilities:
Deposits 2,081 28 2,109 337 -- 337
FHLB borrowings 2,079 (191) 1,888 345 17 362
Other borrowings 1,235 (676) 559 1,572 (197) 1,375
---------------------------------------------------------------------
Total 5,395 (839) 4,556 2,254 (180) 2,074
---------------------------------------------------------------------
Net interest income $ 4,942 $ (666) $ 4,276 $ 4,354 $ (45) $ 4,309
---------------------------------------------------------------------
Interest Income
Total interest income amounted to $45.3 million for 1998, an increase of
$8.8 million or 24.2% when compared to 1997. Interest income on mortgage-backed
securities increased $2.6 million as the average volume increased $45.6 million
and the average yield decreased 36 basis points. Interest income on commercial
business loans, commercial real estate loans and lease financing increased $2.7
million, $2.1 million and $1.1 million, respectively, as the average volume
increased $27.8 million, $27.8 million and $12.5 million, respectively. The
average yield on these loans decreased 7 basis points, 37 basis points, and 86
basis points, respectively. Interest income on construction loans increased
$394,000 as the average volume increased $4.2 million and the average yield
decreased 24 basis points. Interest income on single family residential loans
decreased $682,000 as the average volume decreased $6.2 million and the average
yield decreased 34 basis points. Interest income on investment securities and
other interest-earning assets increased $550,000 as the average balance
increased $11.1 million which more than offset a 41 basis point decrease in the
average yield.
Total interest income amounted to $36.5 million for 1997, an increase of
$6.4 million or 21.2% when compared to 1996. Interest income on lease financing
and commercial business loans increased $3.4 million, and $2.6 million as the
average volume increased $26.6 million and $27.1 million, respectively. The
average yield on these loans decreased 37 basis points and 10 basis points,
respectively. Interest income on construction loans, commercial real estate and
consumer loans increased $988,000, $783,000 and $131,000, respectively, 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 20 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 78 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 17 basis point increase in
average yield.
Interest Expense
Total interest expense amounted to $22.5 million for 1998, an increase of
$4.6 million or 25.5% when compared to 1997. Interest expense on deposits
increased $2.1 million in 1998, as the average volume increased $46.3 million
while the average rate on interest-bearing deposits remained unchanged. Interest
expense on Federal Home Loan Bank of Pittsburgh ("FHLB") borrowings, increased
$1.9 million due to an increase in average volume of $35.7 million. Interest
expense on other borrowings increased $559,000 due to an increase in average
volume of $19.6 million partially offset by a decrease in the average rate of
126 basis points.
Total interest expense amounted to $17.9 million for 1997, an increase of
$2.1 million or 13.1% when compared to 1996. Interest expense on deposits
increased $337,000 in 1997, as the average rate on interest-bearing deposits
remained unchanged. Interest expense on FHLB borrowings increased by $362,000 in
1997, as the average rate increased 6 basis points and average volume increased
$5.4 million. Interest expense on other borrowings increased $1.4 million, due
to an increase in volume of $21.7 million while the average rate decreased 70
basis points.
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, 1998, 1997, and 1996, the provision for
possible loan and lease losses amounted to $959,000, $1.5 million, and $781,000,
respectively. The provision for possible loan and lease losses during 1998,
1997, and 1996, was an amount considered necessary by management to maintain the
allowance at an adequate level after it was reduced by net charge-offs of
$332,000, $1.4 million, and $173,000 during such respective years. The ratio of
the allowance for possible loan and lease losses to total non-performing loans
and leases was 121.91% at December 31, 1998, 177.28% at December 31, 1997, and
223.09% at December 31, 1996.
PAGE 12
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, 1998.
Non-interest Income
For the years ended December 31, 1998 1997 1996
- --------------------------------------------------------------------
Non-interest income:
Service charges on deposits $ 1,663 $ 1,451 $ 979
Lease financing fees 1,414 1,352 831
Teleservices fee income 1,034 663 --
Loan brokerage and advisory fees 2,108 842 645
Gain on sale of mortgage
servicing rights -- 978 924
Gain from sale of securities 533 226 49
Gain on sale of loan and
lease receivables 418 176 --
Gain from sale of loans held for sale -- -- 213
Gain (loss) on sale of
real estate owned 203 (10) (10)
Fees and other 1,287 964 1,469
----------------------------
Total non-interest income $ 8,660 $ 6,642 $ 5,100
----------------------------
Total non-interest income amounted to $8.7 million in 1998, a $2.0 million
increase from the $6.7 million earned in 1997. Service charges on deposits
increased $212,000 from the $1.5 million earned in 1997. This increase was
mainly due to increased automated teller machine ("ATM") transaction fees. Lease
financing fees amounted to $1.4 million, a $62,000 increase over 1997.
Teleservices fee income increased $371,000 over the $663,000 earned in 1997.
Loan brokerage and advisory fees were $2.1 million, a $1.3 million increase over
1997, substantially due to fees earned by the Company's subsidiary, PRA. 1997
included a gain of $978,000 on the sale of mortgage servicing rights.
Gains from sales of securities amounted to $533,000 in 1998, in comparison
to gains of $226,000 during 1997. This increase was attributable to continued
favorable market conditions during 1998. 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 $164.4 million, including $750,000 in net unrealized losses at December 31,
1998.
During 1998 the Company recorded gains on the sale of loan and lease
receivables of $418,000 compared to $176,000 in 1997. Gains on sale of real
estate owned were $203,000 in 1998 in comparison to a loss of $10,000 in 1997.
Total non-interest income amounted to $6.7 million in 1997, a $1.6 million
increase from the $5.1 million earned in 1996. Service charges on deposits
increased $472,000 from the $979,000 earned in 1996. This increase was mainly
due to increased ATM transaction fees. Lease financing fees amounted to $1.4
million, a $521,000 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. Teleservices fee income was $663,000 during 1997.
During the first quarter of 1997 the Company sold $347.4 million of
mortgage servicing rights which resulted in a gain of $978,000. During the first
quarter of 1996 the Company sold $85.0 million of mortgage servicing rights
which resulted in a gain of $924,000. Gains from the 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
securities available for sale portfolio amounted to $50.9 million, including
$743,000 in net unrealized gains at December 31, 1997.
Gains from the sale of lease receivables amounted to $176,000 during 1997.
During 1996 the Company sold $6.5 million of adjustable rate mortgage loans held
for sale at a gain of $213,000. Net losses on sales of real estate owned
remained unchanged at $10,000 in 1997 and 1996.
Non-interest Expense
December 31, 1998 1997 1996
- ------------------------------------------------------------------
Non-interest expense:
Salaries and employee benefits $11,272 $ 8,554 $ 7,182
Occupancy 1,280 1,127 1,346
Data processing 1,073 1,067 1,137
Professional services 1,117 1,026 831
Furniture, fixtures, and equipment 1,085 842 638
Loan and real estate
owned expenses, net 592 510 130
Deposit insurance premiums 207 237 2,579
Provision for real estate owned, net -- -- 25
Capital securities expense 1,593 925 --
Other 4,457 3,759 2,598
---------------------------
Total non-interest expense $22,676 $18,047 $16,466
---------------------------
Non-interest expense for 1998 amounted to $22.6 million an increase of $4.6
million from the $18.0 million recognized in 1997. Salaries and employee
benefits increased $2.7 million, primarily due to increased staffing needs at
the Bank and the recognition of additional staffing cost related to prior year
acquisitions. Occupancy expense increased $153,000 to $1.3 million in 1998 from
$1.1 million in 1997. The increase is primarily attributable to additional rent
expense incurred in 1998 over 1997 from prior year acquisitions of two new off
sight locations for PRA in Virginia and New Jersey. In addition, rental expense
increased at the bank branch level. Professional services expense, which
consists primarily of legal, accounting, tax and supervisory/examination fees
and outside consulting fees, increased by $91,000. Audit and accounting services
increased by $166,000 primarily due to the outsourcing of the internal audit
function and due diligence related to potential acquisitions. This was partially
offset by reductions in other outside consulting expense of $70,000. Furniture,
fixtures and equipment expense increased $243,000 to $1.1 million for 1998 from
$842,000 in 1997. The increase is primarily related to increased amortization.
Capital securities expense totalled $1.6 million for 1998 compared to $925,000
for 1997, an increase of $668,000. The expense for 1998 represents a full year
of interest incurred on $15.0 million of Corporation-obligated mandatory
redeemable securities of subsidiary trust holding solely junior subordinated
debenture of the Corporation, while in the prior year the Company was only
obligated to account for seven months of capital securities expense. Other
expense increased by $698,000 to $4.5 million, from $3.8 million in 1997. This
includes increases in advertising, amortization of goodwill and other general
and administrative expense.
PAGE 13
Total non-interest expense amounted to $18.0 million during 1997, an
increase of $1.5 million from the $16.5 million recognized during 1996.
Excluding a special one-time premium of $1.8 million in 1996 to capitalize the
SAIF, total other expense would have increased $3.3 million over 1996. Salaries
and employee benefits increased $1.4 million, primarily due to the additional
staff increase resulting from the ELC acquisition in the fourth quarter of 1996.
Additionally, there was a higher cost of benefits in 1997. Occupancy expense
decreased $219,000 to $1.1 million in 1997, from $1.3 million in 1996. This was
partially due to the Company relocating its 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 increased $195,000 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 expense increased $204,000 to $842,000 from
$638,000 in 1996, primarily due to expenses related to ELC, PTI and other
acquisitions including PRA divisions. Loan and real estate owned expenses
increased $380,000 to $510,000 from $130,000 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. Other expenses
increased $1.2 million to $3.8 million from $2.6 million in 1996. This includes
increases in advertising, amortization of goodwill and other general and
administrative expenses.
Income Tax Expense
The Company recorded income tax expense of $2.9 million in 1998, gross of
the tax benefit of $26,000 due to the cumulative effect of accounting change,
compared to $2.2 million in 1997 and $804,000 in 1996. 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 Committee. The Committee meets monthly to develop
strategies that affect the future level of net interest income, liquidity and
capital. The Committee utilizes cash flow forecasts, 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, 1998 the Bank would experience an approximate
.55% 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 1.06%
decrease in net interest income if rates decline 200 basis points.
PAGE 14
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, 1998 Less than three months Three months to one year One to five years
- ---------------------------------------------------------------------------------------------------------------------------
Amount Yield/Rate Amount Yield/Rate Amount Yield/Rate
- ---------------------------------------------------------------------------------------------------------------------------
Interest-earning assets: (1)
Interest-earning deposits $ 6,498 4.70% $ -- --% $ -- --%
Investment securities 9,464 3.89 -- -- 2,001 6.15
Mortgage-backed securities 9,340 6.28 24,476 6.28 112,643 6.28
Single family residential 1,807 8.43 9,857 8.36 12,752 7.09
Commercial real estate loans 17,020 8.89 5,184 9.22 68,235 8.65
Construction loans 38,794 8.75 720 8.00 5,499 8.35
Consumer loans 6,283 8.86 158 8.95 6,119 8.15
Commercial business 69,976 8.87 626 9.22 18,040 8.66
Lease financing 6,047 13.59 19,416 13.59 44,617 13.59
------------------------------------------------------------------------------
Total interest-earning assets $165,229 8.42% $ 60,437 9.28% $269,906 8.37%
------------------------------------------------------------------------------
Interest-bearing liabilities: (2)
Money market deposits $ 3,635 2.42% $ -- --% $ 34,299 2.42%
NOW and Super NOW 19,162 2.87 -- -- 58,568 2.87
Passbook and statement savings 1,980 2.00 -- -- 28,863 2.00
Time deposits 46,956 5.01 107,398 5.29 52,025 5.47
Advances from FHLB 10,000 5.48 5,000 8.30 48,000 5.24
Other borrowings 11,136 5.01 29,150 5.87 36,130 5.25
------------------------------------------------------------------------------
Total interest-bearing liabilities $ 92,869 4.45% $141,548 5.51% $257,885 4.01%
------------------------------------------------------------------------------
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities $ 72,360 $(81,111) $ 12,021
Cumulative excess (deficiency) of ------------------------------------------------------------------------------
interest-earning assets over
interest-bearing liabilities $ 72,360 $ (8,751) $ 3,270
------------------------------------------------------------------------------
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities as a
percent of total assets 11.18% (1.35)% .51%
------------------------------------------------------------------------------
December 31, 1998 Five to ten years Over ten years
- ---------------------------------------------------------------------------------------------------
Amount Yield/Rate Amount Yield/Rate
- ---------------------------------------------------------------------------------------------------
Interest-earning assets: (1)
Interest-earning deposits $ -- --% $ -- --%
Investment securities -- -- 18,845 6.01
Mortgage-backed securities -- -- -- --
Single family residential 5,732 6.43 18,883 7.78
Commercial real estate loans 29,464 7.87 14,958 8.05
Construction loans -- -- -- --
Consumer loans 9,246 7.87 6,448 8.29
Commercial business 3,974 8.55 -- --
Lease financing -- -- -- --
------------------------------------------------
Total interest-earning assets $ 48,416 7.76% $59,134 7.34%
------------------------------------------------
Interest-bearing liabilities: (2)
Money market deposits $ -- --% $ -- --%
NOW and Super NOW -- -- -- --
Passbook and statement savings -- -- -- --
Time deposits 315 6.98 27 4.87
Advances from FHLB 25,000 5.44 -- --
Other borrowings 3,000 8.25 -- --
------------------------------------------------
Total interest-bearing liabilities $ 28,315 5.75% $ 27 4.87%
------------------------------------------------
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities $ 20,101 $59,107
Cumulative excess (deficiency) of ------------------------------------------------
interest-earning assets over
interest-bearing liabilities $ 23,371 $82,478
------------------------------------------------
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities as a
percent of total assets 3.61% 12.74%
------------------------------------------------
<FN>
(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 $3.7 million at December 31, 1998.
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 ESOP note 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.
</FN>
PAGE 15
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, 1998, 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, FHLB borrowings 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 1998, 1997
and 1996, 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, 1998, cash was used by operating activities primarily
due to the increase in loans held for sale. Cash was used in the Bank's
investment activities during 1998, as purchases of mortgage-backed and
investment securities, and net originations of loans exceeded repayments on
mortgage-backed securities, proceeds from sales of mortgage-backed and
investment securities. Funds provided by financing activities in 1998 offset the
cash outflows from investment activities as cash was provided by increased
levels of deposits and borrowings.
At December 31, 1998, the total of approved loan commitments amounted to
$55.8 million, and the Bank had $154.8 million of undisbursed loan funds. At
December 31, 1998, total FHLB borrowings which are scheduled to mature during
the 12 months ending December 31, 1999, totalled $5.0 million. At December 31,
1998, total other borrowings, which are scheduled to mature during the 12 months
ended December 31, 1999, totalled $40.9 million. At December 31, 1998, the
amount of time deposits that are scheduled to mature within 12 months total
$154.3 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, 1997, cash was provided by operating
activities. 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 borrowings
and the issuance of capital securities.
The Bank is required under applicable federal regulations to maintain
specified levels of "liquid" investments in qualifying types of United States
Treasury, federal agency and obligations of the Federal National Mortgage
Association ("FNMA"), Government National Mortgage Association ("GNMA"), and
Federal Home Loan Mortgage Corporation ("FHLMC"). Regulations currently in
effect require the Bank to maintain liquid assets of not less than 4% of its net
withdrawable accounts plus short-term borrowings. These levels are changed from
time to time by the Office of Thrift Supervision ("OTS") to reflect economic
conditions. The Bank's policy has been to maintain a liquidity ratio no less
than the regulatory minimum. At December 31, 1998, the Bank's liquidity ratio of
8.18% 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
eight 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
four of its offices and has installed ATM's at all of its offices and at two
additional locations.
The Bank offers a wide variety of options to its customer base, including
consumer and commercial demand deposit accounts, negotiable order of withdrawal
("NOW") accounts, money market accounts, passbook accounts, certificates of
deposit and retirement accounts.
As a member of the FHLB, the Bank is required to own capital stock in the
FHLB and is authorized to apply for advances on the security of such stock and
certain of its home mortgages and other assets (principally securities which are
obligations of, or guaranteed by, the United States), provided certain standards
related to creditworthiness have been met. Advances are made pursuant to several
different credit programs. Each credit program has its own interest rate and
range of maturities. Depending on the program, limitations on the amount of
advances are based either on a fixed percentage of a savings bank's assets or on
the FHLB's assessment of the savings bank's creditworthiness. The FHLB credit
policies may change from time to time at its discretion. The Bank's maximum
borrowing authority from the FHLB on December 31, 1998 was approximately $110.6
million.
Capital Resources
The Bank is required pursuant to OTS regulations to have (i) tangible
equity equal to 2.00% of adjusted total assets, (ii) Tier 1 or leverage capital
equal to 4.00% of adjusted total assets, (iii) Tier 1 risk-based capital equal
to 4.00% of risk-weighted assets, and (iv) total risk-based capital equal to
8.00% of risk-weighted assets.
At December 31, 1998, the Bank met all regulatory capital requirements. At
December 31, 1998, the Bank's tangible equity ratio was 6.61%, Tier 1 or
leverage capital ratio was 6.61%, Tier 1 risk-based capital ratio was 9.57% and
total risk-based capital ratio was 10.59%, based on tangible equity of $41.6
million, Tier 1 or leverage capital of $41.6 million, Tier 1 risk-based capital
of $46.1 million, and total risk-based capital of $46.1 million, respectively.
At December 31, 1998, 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.
PAGE 16
Year 2000
The Year 2000 issue concerns the potential impact of historic computer
software code that utilizes only two digits to represent the calendar year (i.e.
"98" for "1998"). Software so developed, and not corrected, could produce
inaccurate or unpredictable results commencing upon January 1, 2000, when
current and future dates present a lower two digit number than dates from the
prior century. The Company, similar to most financial service providers, is
significantly subject to the potential impact of the Year 2000 issue due to the
nature of financial information. Potential impacts to the Company may arise from
software, computer hardware, and other equipment both within the Company's
direct control and outside of the Company's ownership, yet with which the
Company electronically or operationally interfaces. Financial institution
regulators have intensively focused upon Year 2000 exposures, issuing guidance
concerning the responsibilities of senior management and directors. Year 2000
testing and certification is being addressed as a key safety and soundness issue
in conjunction with regulatory exams.
In order to address the Year 2000 issue, the Company has developed and
implemented a five-phase plan divided into the following major components: 1)
awareness; 2) assessment; 3) renovation; 4) validation; and 5) implementation.
The Company has divided these phases into the following three categories: 1)
internal; 2) vendors; and 3) customers.
The Company has completed the first three phases for all three categories.
Because the Company outsources its data processing and item processing
operations, a significant component of the Year 2000 plan is to work with
external vendors to test and certify their systems as Year 2000 compliant. Based
on conversations with critical vendors the completion of phase four is
anticipated by the end of the first quarter of 1999.
The Company has established a Year 2000 committee which meets bi-weekly and
reports at least quarterly to the Board of Directors on the progress toward
achieving and certifying Year 2000 compliance. The Company's current plan is to
complete the Year 2000 project by June 30, 1999. Final validation testing with
the Company's primary data processor is scheduled for the first quarter of 1999.
The Company has no internally generated programmed software coding to
correct, as all of the software utilized by the Company is purchased or licensed
from external providers. The Company has determined that it has little or no
exposure to contingencies related to Year 2000 issues for products it has sold.
The Company has initiated formal communications with all of its significant
suppliers and customers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
issues. The Company is requesting that third party vendors represent their
products and services to be Year 2000 compliant and that they have a program to
test for that compliance. The response of certain third parties, however, is
beyond the control of the Company. To the extent that adequate responses have
not been received, the Company is prepared to develop contingency plans, with
the completion of those plans scheduled no later than March 31, 1999. At this
time the Company cannot estimate the additional cost, if any, that might develop
from such contingency plans.
The Company's total Year 2000 estimated project cost, which is based upon
currently available information, includes expenses for the review and testing
related to third parties, including government entities. However, there can be
no guarantee that the hardware, software, and systems of such third parties will
be without unfavorable Year 2000 impact and therefore present a material adverse
impact upon the Company.
Year 2000 compliance costs incurred during fiscal 1998 have totalled
approximately $56,000, the majority of which is related to software upgrades for
ATM's and telephone systems. The Company anticipates spending approximately
$270,000 in fiscal 1999 in conjunction with changes to and testing of
technological aspects of its delivery structure. These costs are exclusive of
internal costs related with non-dedicated personnel which are not tracked
separately. At this time no significant projects have been delayed as a result
of the Company's Year 2000 effort.
Despite the Company's activities with regard to the Year 2000 issue, there
can be no assurance that partial or total systems interruptions or the costs
necessary to update hardware and software would not have a material adverse
effect upon the Company's business, financial condition, results of operations,
and business prospects.
PAGE 17
PROGRESS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
December 31, 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks:
Interest-bearing $ 6,498 $ 7,689
Non-interest-bearing 14,189 11,697
Investments:
Available for sale at fair value (amortized cost: $18,208 in 1998 and $5,924 in 1997) 17,909 6,395
Held to maturity at amortized cost (fair value: $12,547 in 1998 and $4,070 in 1997) 12,401 4,051
Mortgage-backed securities:
Available for sale at fair value (amortized cost: $146,910 in 1998 and $44,246 in 1997) 146,459 44,518
Held to maturity at amortized cost (fair value: $49,094 in 1997) -- 49,421
Loans and leases (net of reserves: $4,490 in 1998 and $3,863 in 1997) 394,246 339,903
Loans held for sale (fair value: $25,326 in 1998 and $380 in 1997) 25,250 373
Real estate owned, net -- 380
Premises and equipment, net 10,707 9,319
Accrued interest receivable 3,245 2,728
Deferred income taxes assets (liabilities) 277 (486)
Receivable for securities sold 262 21,043
Other assets 15,939 11,029
---------------------------
Total assets $647,382 $508,060
---------------------------
Liabilities and Stockholders' Equity
Liabilities:
Deposits $406,518 $340,761
Federal Home Loan Bank borrowings 88,000 33,450
Other borrowings 79,416 50,797
Advance payments by borrowers 1,644 3,561
Payable for securities purchased 5,844 32,385
Accrued interest payable 2,260 1,626
Other liabilities 7,146 5,118
---------------------------
Total liabilities 590,828 467,698
Corporation-obligated mandatorily redeemable capital securities of subsidiary
trust holding solely junior subordinated debentures of the Corporation 15,000 15,000
---------------------------
Commitments and contingencies (Note 14)
Stockholders' equity:
Serial preferred stock--$1 par value; 1,000,000 shares authorized but unissued -- --
Junior participating preferred stock--$.01 par value; 1,010 shares authorized but unissued -- --
Common stock--$1 par value; 12,000,000 shares authorized; 5,263,000 and 4,126,000 shares
issued and outstanding at December 31, 1998 and December 31, 1997, respectively 5,263 4,126
Treasury stock (177,000 shares at December 31, 1998) (2,287) --
Unearned Employee Stock Ownership Plan shares (24,000 shares at December 31, 1998 and
33,000 shares at December 31, 1997) (143) (174)
Capital surplus 39,615 20,960
Retained earnings (deficit) (399) (10)
Net accumulated other comprehensive income (loss) (495) 460
---------------------------
Total stockholders' equity 41,554 25,362
Total liabilities, Corporation-obligated mandatorily redeemable capital securities of subsidiary
trust holding solely junior subordinated debentures of the Corporation and stockholders' equity $647,382 $508,060
---------------------------
See Notes to Consolidated Financial Statements.
PAGE 18
PROGRESS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
For the years ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Interest income:
Loans and leases, including fees $35,468 $29,807 $23,085
Mortgage-backed securities 8,686 6,065 6,443
Investment securities 1,017 447 395
Other 158 178 191
-------------------------------------
Total interest income 45,329 36,497 30,114
Interest expense:
Deposits 14,466 12,357 12,020
Federal Home Loan Bank borrowings 3,996 2,108 1,746
Other borrowings 3,988 3,429 2,054
-------------------------------------
Total interest expense 22,450 17,894 15,820
Net interest income 22,879 18,603 14,294
Provision for possible loan and lease losses 959 1,509 781
-------------------------------------
Net interest income after provision for possible loan and lease losses 21,920 17,094 13,513
Non-interest income:
Service charges on deposits 1,663 1,451 979
Lease financing fees 1,414 1,352 831
Teleservices fee income 1,034 663 --
Loan brokerage and advisory fees 2,108 842 645
Gain on sale of mortgage servicing rights -- 978 924
Gain from sale of securities 533 226 49
Gain on sale of loan and lease receivables 418 176 --
Gain from sale of loans held for sale -- -- 213
Gain (loss) on sale of real estate owned 203 (10) (10)
Fees and other 1,287 964 1,469
-------------------------------------
Total non-interest income 8,660 6,642 5,100
Non-interest expense:
Salaries and employee benefits 11,272 8,554 7,182
Occupancy 1,280 1,127 1,346
Data processing 1,073 1,067 1,137
Professional services 1,117 1,026 831
Furniture, fixtures, and equipment 1,085 842 638
Loan and real estate owned expenses, net 592 510 130
Deposit insurance premiums 207 237 2,579
Provision for real estate owned, net -- -- 25
Capital securities expense 1,593 925 --
Other 4,457 3,759 2,598
-------------------------------------
Total non-interest expense 22,676 18,047 16,466
Income before income taxes and cumulative effect of accounting change 7,904 5,689 2,147
Income tax expense 2,878 2,222 804
-------------------------------------
Income before cumulative effect of accounting change 5,026 3,467 1,343
Cumulative effect of accounting change (net of tax benefit of $26) (46) -- --
-------------------------------------
Net income $ 4,980 $ 3,467 $ 1,343
Basic income per common share before cumulative effect of accounting change $ 1.03 $ .82 $ .32
Fully diluted income per common share before cumulative effect of accounting change .94 .75 .31
Basic net income per common share 1.02 .82 .32
Fully diluted net income per common share .93 .75 .31
-------------------------------------
Dividends per share $ .14 $ .10 $ .04
Average common shares outstanding 4,881,017 4,235,742 4,138,977
Fully diluted average common shares outstanding 5,375,802 4,621,456 4,321,629
-------------------------------------
See Notes to Consolidated Financial Statements.
PAGE 19
PROGRESS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
For the years ended December 31, 1998, 1997, and 1996
Net
accumulated
Unearned Retained other Compre- Total
Common Treasury ESOP Capital earnings comprehensive hensive stockholders'
stock stock shares surplus (deficit) income (loss) income equity
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 $3,342 $ -- $ -- $16,145 $(2,189) $(341) $16,957
Issuance of common stock in stock
offering (500,000 common shares) 500 -- -- 2,000 -- -- 2,500
Issuance of stock under employee benefit plans
(5,000 common shares; 9,317 ESOP shares) 5 -- 36 9 -- -- 50
Net income -- -- -- -- 1,343 -- $1,343 1,343
Other comprehensive income, net of tax (a) -- -- -- -- -- 143 143 143
------
Comprehensive income $1,486
------
Shares acquired for ESOP (50,000 shares) -- -- (250) -- -- -- (250)
Cash dividends declared -- -- -- -- (149) -- (149)
------------------------------------------------------------------------------------
Balance, December 31, 1996 3,847 -- (214) 18,154 (995) (198) 20,594
Issuance of common stock under employee
benefit plans (35,005 common shares;
9,825 ESOP shares) 35 -- 63 99 -- -- 197
Net income -- -- -- -- 3,467 -- $3,467 3,467
Other comprehensive income, net of tax (a) -- -- -- -- -- 658 658 658
------
Comprehensive income $4,125
------
Acquisition of subsidiaries
(53,097 common shares) 53 -- -- 747 35 -- 835
Cash dividend declared -- -- -- -- (389) -- (389)
Stock dividends declared (190,636 common
shares; 2,034 ESOP shares) 191 -- (23) 1,960 (2,128) -- --
------------------------------------------------------------------------------------
Balance, December 31, 1997 4,126 -- (174) 20,960 (10) 460 25,362
Issuance of common stock in stock
offering (792,800 common shares) 793 -- -- 13,468 -- -- 14,261
Issuance of stock under employee benefit plans
(47,774 common shares;
10,525 ESOP shares) 48 -- 62 322 -- -- 432
Exercise of stock warrants
(26,250 common shares) 26 -- -- 124 -- -- 150
Net income -- -- -- -- 4,980 -- $4,980 4,980
Other comprehensive loss, net of tax (a) -- -- -- -- -- (955) (955) (955)
------
Comprehensive income $4,025
------
Purchase of Treasury stock
(231,000 treasury shares) -- (3,098) -- -- -- -- (3,098)
Acquisition of subsidiary
(54,003 treasury shares) -- 817 -- (67) -- -- 750
Investment in unconsolidated subsidiary
(21,153 common shares) 21 -- -- 309 -- 330
Cash dividend declared -- -- -- -- (658) -- (658)
Stock dividend declared (249,653 common
shares; 300 treasury shares;
1,644 ESOP shares) 249 (6) (31) 4,499 (4,711) -- --
------------------------------------------------------------------------------------
Balance, December 31, 1998 $5,263 $(2,287) $(143) $39,615 $ (399) $(495) $41,554
====================================================================================
<FN>
(a) Calculation of other comprehensive income (loss); net of tax: 1998 1997 1996
--------------------------------
Unrealized holding gains (losses) arising during the period, net of tax $(603) $807 $175
Less: Reclassification adjustment for gains included in net income, net of tax 352 149 32
--------------------------------
Other comprehensive income (loss), net of tax $(955) $658 $143
--------------------------------
</FN>
See Notes to Consolidated Financial Statements.
PAGE 20
PROGRESS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For the years ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 4,980 $ 3,467 $ 1,343
Add (deduct) items not affecting cash flows from operating activities:
Depreciation and amortization 1,483 1,187 792
Provision for possible loan and lease losses 959 1,509 781
Deferred income tax (benefit) expense 13 1,681 (559)
Gain from mortgage banking activities -- (978) (924)
Gain from sale of loans held for sale -- -- (213)
Gain from sales of loans and leases (418) (176) --
Gain from sales of securities available for sale (533) (226) (49)
Realized loss on transfer of mortgage-backed securities 72 -- --
(Gain) loss on properties sold (203) 10 10
Amortization of deferred loan fees (1,657) (1,047) (1,000)
Amortization of premiums/accretion of discounts on securities 1,076 693 629
Other, net 170 67 (23)
Originations and purchases of loans held for sale (25,250) -- (12,065)
Sales of loans held for sale -- 105 21,105
(Increase) decrease in accrued interest receivable (517) (572) 125
(Increase) decrease in other assets 16,580 2,097 (4,194)
Increase (decrease) in other liabilities (28,029) 3,749 135
Increase in accrued interest payable 634 516 276
---------------------------------------
Net cash flows provided by (used in) operating activities (30,640) 12,082 6,169
---------------------------------------
Cash flows from investment activities:
Capital expenditures (2,455) (2,448) (3,093)
Purchases of mortgage-backed securities held to maturity -- (10,930) (2,952)
Purchases of mortgage-backed securities available for sale (147,537) (11,357) (49,848)
Purchase of investment securities held to maturity (8,350) (2,058) (1,401)
Purchase of investment securities available for sale (21,100) (9,122) (3,000)
Repayments on mortgage-backed securities held to maturity 8,788 8,409 8,022
Repayments on mortgage-backed securities available for sale 28,440 8,767 9,060
Proceeds from sales of mortgage-backed securities available for sale 55,818 12,392 44,906
Proceeds from sales and calls of investments available for sale 9,423 4,577 5,049
Maturities of investments held to maturity -- -- 1,612
Maturities of investments available for sale -- 2,268 --
Proceeds from sales of real estate owned 583 5,888 618
Advances for construction of real estate owned -- -- (96)
Proceeds from sales of loan and lease receivables 28,343 3,418 9,895
Purchase of lease receivables (10,079) -- --
Net increase in total loans and leases (67,765) (81,615) (37,728)
Purchase of subsidiaries, net of cash received 41 -- (6,600)
---------------------------------------
Net cash flows used in investment activities (125,850) (71,811) (25,556)
---------------------------------------
Cash flows from financing activities:
Net increase in demand, NOW, and savings deposits 51,713 17,121 17,312
Net (decrease) increase in time deposits 14,044 17,392 (8,325)
Net (decrease) increase in FHLB borrowings 54,550 15,450 (7,400)
Net (decrease) increase in advance payments by borrowers for tax and insurance (1,917) (2,084) 2,208
Net increase in other borrowings 28,523 5,394 16,752
Dividends paid (656) (389) (149)
Net proceeds from stock offerings and exercise of warrants 14,411 -- 2,500
Net proceeds from issuance of stock under employee benefit plans 221 100 5
Purchase of treasury stock (3,098) -- --
Purchase of stock for ESOP -- -- (250)
Net proceeds from issuance of capital securities -- 15,000 --
---------------------------------------
Net cash flows provided by financing activities 157,791 67,984 22,653
---------------------------------------
Net increase in cash and cash equivalents 1,301 8,255 3,266
Cash and cash equivalents:
Beginning of year 19,386 11,131 7,865
=======================================
End of year $ 20,687 $19,386 $11,131
=======================================
Supplemental disclosures:
Loan and lease charge-offs $ 755 $ 1,667 $ 421
=======================================
Net conversion of loans receivable to real estate owned $ -- $ 4,055 $ 1,967
=======================================
Securitization of mortgage loans into mortgage-backed securities $ -- $ -- $ 9,982
=======================================
Transfer of loans held in portfolio to held for sale $ -- $ -- $ 6,536
=======================================
Increase (decrease) in net payables for trade dated security transactions $ (5,760) $11,342 $--
=======================================
Transfer of mortgage-backed securities held to maturity to available for sale $ 40,147 $ -- $--
=======================================
Transfer of property for Company use from other assets to premises and equipment $ -- $ -- $ 3,150
=======================================
Cash payments during the year for:
Income taxes $ 3,973 $ 247 $ 227
=======================================
Interest $ 21,816 $17,530 $15,601
=======================================
See Notes to Consolidated Financial Statements.
PAGE 21
PROGRESS FINANCIAL CORPORATION AND SUBSIDIARIES
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"), Progress Development Corp. ("PDC"), and Progress
Capital Management, Inc. ("PCM"). 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 ("SFAS") 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 other comprehensive income, 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) are reported in different periods for tax purposes. Deferred taxes
are provided on such temporary differences existing between financial and income
tax reporting subject to the deferred tax asset realization criteria required
under SFAS No. 109, "Accounting for Income Taxes" ("SFAS 109").
Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of aggregate cost or market value. Net unrealized losses
are charged to income in the period in which they arise.
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, impairments to any loans based on the
probability that all amounts owed will not be collected, the fair value of
collateral, or any deficiency in the present value of expected future cash flows
for an impaired loan, 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.
Treasury Stock
The Company accounts for treasury stock purchases at cost. When shares are
reissued, the first-in-first-out cost flow assumption is used. In 1998 the
Company repurchased 231,000 shares of common stock of which 54,003 shares were
subsequently reissued.
Earnings Per Share
In 1997 the Company has implemented SFAS No. 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.
PAGE 22
(1) Summary of Significant Accounting Policies
(continued)
Shares outstanding do not include treasury shares and Employee Stock
Ownership Plan ("ESOP") shares that were purchased and unallocated in accordance
with Statement of Position ("SOP") 93-6, "Employers Accounting for Employees
Stock Ownership Plans."
Prior period amounts have been restated to reflect stock dividends paid
during 1998 and 1997.
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
SFAS No. 13 "Accounting for Leases." Under this method, the excess of minimum
rentals plus estimated residual value over the cost of equipment is recorded as
unearned income and amortized over the lease term so as to produce a constant
periodic rate of return on the net investment in the lease.
In accordance with SFAS No. 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.
Accounting for Derivative Instruments
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS
133"). The statement is effective for fiscal years beginning after June 15, 1999
and will not be applied retroactively. The statement establishes accounting and
reporting standards for derivative instruments and hedging activity. Under the
standard, all derivatives must be measured at fair value and recognized as
either assets or liabilities in the financial statements. As permitted under
SFAS 133, the Company transferred $40.1 million, gross of unrealized losses of
$276,000 and net of realized losses of $72,000, of mortgage-backed securities
from the held to maturity to the available for sale portfolio in the third
quarter of 1998. The realized loss of $46,000, net of tax benefit of $26,000,
was presented as the cumulative effect of accounting change on the Consolidated
Statement of Operations.
Under SFAS 133 warrants are considered derivatives and should be marked to
market through earnings if readily convertible to cash. At December 31, 1998,
the Company owned warrants on non-marketable common stock in nineteen companies
which were not readily convertible to cash and contained certain conditions
which may preclude their convertibility and have not been included in assets.
If, in the future, those conditions were to be satisfied and the underlying
common stock were to become marketable, the warrants would be recorded at fair
value as an adjustment to current earnings.
Recent Accounting Pronouncement
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise," ("SFAS 134"). The statement is
effective for the first fiscal quarter beginning after December 15, 1998. The
statement amends existing classification and accounting treatment of
mortgage-backed securities after mortgage loans held for sale are securitized,
for entities engaged in mortgage-banking activities. SFAS 134 is not expected to
have a material effect on the Company's financial statements.
(2) Acquisitions
The following acquisitions were accounted for under the purchase method of
accounting. Goodwill on these transactions has been recorded in other assets and
will be amortized on the straight-line basis over 15 years.
Date Purchase Method of Goodwill
Completed Price (000) Shares Issued Accounting (000)
- ------------------------------------------------------------------------------------------------------------------------------------
Primary Capital Corp 11/20/98 $ 750 54,003 Treasury Purchase $ 823
Atlantic Mortgage & Investment Company 12/22/97 $ 900 31,821 Common Purchase $ 934
Progress Realty Advisors, L.P. 10/17/97 $ 300 21,276 Common Purchase $ 144
Allied Commercial Mortgage and Asset Management 10/16/97 $ 488 -- Purchase $ 484
The Equipment Leasing Co. 10/01/96 $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 audited assets
and stockholders' equity of $15.5 million and $235,000 respectively, at December
31, 1997. The transaction was accounted for under the pooling of interests
method of accounting during 1998 and accordingly, prior year financial
statements have been restated to reflect the impact of the transaction. The
Company issued 61,835 shares of common stock for all of PAM Holding
Corporation's common shares outstanding.
On November 20, 1998, the Company acquired Primary Capital Corp, a
Pennsylvania based leasing company with assets of approximately $1.1 million.
The transaction was recorded under the purchase method of accounting and
generated goodwill amounting to $823,000.
(3) Cash and Due from 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, 1998 and 1997, required reserves were $4.8 million and
$1.6 million, respectively.
PAGE 23
(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, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Held to Maturity: Cost Gains Losses Value Value
---------------------------------------------------------------------
FHLB stock $ 4,923 $ -- $ -- $ 4,923 $ 4,923
FHLB investment securities 4,975 114 -- 5,089 4,975
FHLMC investment securities 2,503 32 -- 2,535 2,503
---------------------------------------------------------------------
$12,401 $146 $ -- $12,547 $12,401
=====================================================================
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Available for Sale: Cost Gains Losses Value Value
---------------------------------------------------------------------
Municipal bonds $ 9,599 $ 16 $ 24 $ 9,591 $ 9,591
U.S. agency obligations 2,000 1 -- 2,001 2,001
Equity investments 6,609 197 489 6,317 6,317
---------------------------------------------------------------------
$18,208 $214 $513 $17,909 $17,909
=====================================================================
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 investment 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
=====================================================================
Investment securities pledged as collateral for FHLB borrowings amounted to
$7.5 million at December 31, 1998. Investment securities pledged to the Federal
Reserve Bank for Small Business Administration loans amounted to $1.0 million at
December 31, 1998.
The carrying value and estimated fair value of the Bank's investment
securities at December 31, 1998 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 $ 7,478 $ 7,624 7.39%
No stated maturity 4,923 4,923 6.50
-------------------------------------------------------------
$12,401 $12,547 7.04%
=============================================================
Amortized Estimated Fair Weighted
Available for Sale: Cost Value Average Yield
-------------------------------------------------------------
Due one year through five years $ 2,000 $ 2,001 6.15%
Due five years through ten years -- -- --
Due after ten years 11,494 11,221 5.06
No stated maturity 4,714 4,687 1.28
-------------------------------------------------------------
$18,208 $17,909 4.19%
=============================================================
PAGE 24
(4) Investment Securities (continued)
Proceeds from sales of investment securities available for sale were $7.4
million and $2.1 million in 1998 and 1997, respectively.
Total realized gains in 1998 and 1997 on the sale of investment securities
classified as available for sale were $672,000 and $233,000, respectively. Total
realized losses in 1998 and 1997 on the sale of investment securities classified
as available for sale were $75,000 and $12,000, respectively.
There were no sales of investment securities classified as available for
sale during 1996. Additionally, $2.0 million and $2.5 million in investment
securities classified as available for sale were called during 1998 and 1997,
respectively. Accrued interest receivable on investment securities amounted to
$98,000 and $62,000 at December 31, 1998 and 1997, 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, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Available for Sale: Cost Gains Losses Value Value
--------------------------------------------------------------------
GNMA $121,178 $121 $406 $120,893 $120,893
FNMA 13,330 14 37 13,307 13,307
FHLMC 10,714 26 176 10,564 10,564
Non-agency pass through certificate 1,688 7 -- 1,695 1,695
--------------------------------------------------------------------
$146,910 $168 $619 $146,459 $146,459
--------------------------------------------------------------------
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 15,872 15,900
FHLMC 14,012 75 112 13,975 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
--------------------------------------------------------------------
Mortgage-backed securities mature over the life of the security through
regular principal payments and are subject to prepayment risk.
Proceeds from sales of mortgage-backed securities available for sale were
$55.8 million, $12.4 million and $44.9 million in 1998, 1997 and 1996,
respectively. Total realized gains in 1998, 1997 and 1996 on the sale of
mortgage-backed securities classified as available for sale were $152,000,
$215,000 and $288,000, respectively. Total realized losses in 1998, 1997 and
1996 on the sale of mortgage-backed securities classified as available for sale
were $216,000, $209,000 and $239,000, respectively.
During 1998, the Company implemented SFAS 133, resulting in the transfer of
$40.1 million of mortgage-backed securities previously held to maturity to the
available for sale portfolio. This transfer was gross of unrealized losses of
$276,000, and net of realized losses presented as a cumulative effect of
accounting change of $72,000.
Mortgage-backed securities pledged under agreements to repurchase in
connection with borrowings amounted to $86.1 million at December 31, 1998.
Mortgage-backed securities pledged as collateral for public funds amounted to
$15.6 million at December 31, 1998. Mortgage-backed securities pledged as
collateral for FHLB borrowings amounted to $26.2 million at December 31, 1998.
Mortgage-backed securities pledged to the Federal Reserve Bank to secure
borrowings and Treasury, Tax and Loan balances amounted to $2.2 million at
December 31, 1998.
Accrued interest receivable on mortgage-backed securities amounted to
$916,000 and $584,000 at December 31, 1998 and 1997, respectively.
(6) Loans and Leases
December 31, 1998 1997
- --------------------------------------------------------------------------------
Single-family residential real estate $ 50,086 $ 56,192
Commercial real estate 109,130 109,938
Construction (net of loans in process of
$88,175 and $23,641, respectively) 44,546 26,695
Consumer loans 27,807 24,639
Credit card receivables 931 918
Commercial business 92,737 69,312
Lease financing 87,856 67,439
Unearned income (14,357) (11,367)
Allowance for possible loan and lease losses (4,490) (3,863)
--------- ---------
Total $ 394,246 $ 339,903
--------- ---------
For the years ended December 31, 1998 and 1997, the average recorded
investment in impaired loans was approximately $2.6 million and $2.1 million,
respectively. At December 31, 1998 and 1997, the recorded investment in loans
for which impairment has been recognized in accordance with SFAS Nos. 114 and
118 "Accounting by Creditors for Impairment of a Loan" totalled $3.7 million and
$2.2 million, of which none related to loans with a specific valuation
allowance.
PAGE 25
(6) Loans and Leases (continued)
At December 31, 1998, 1997 and 1996, the principal amount of outstanding
loans on a non-accrual basis was $3.7 million, $2.2 million and $1.7 million,
respectively. Additional gross interest income that would have been recorded
during 1998, 1997 and 1996 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 $252,000, $190,000 and $251,000, respectively. The amount of
interest income that was actually recorded during 1998, 1997 and 1996 with
respect to such non-performing loans amounted to approximately $112,000,
$148,000 and $153,000, respectively.
Accrued interest receivable on loans and leases amounted to $2.2 million at
December 31, 1998 and $2.1 million at December 31, 1997.
The Company is a lessor of equipment and machinery under agreements
expiring at various dates through the year 2004. At December 31, 1998, the
components of lease financing are as follows:
1999 $ 35,592
2000 25,276
2001 15,662
2002 7,666
2003 3,146
2004 514
--------
Total future minimum lease payments receivable
including estimated residual values of $7,477 87,856
Unearned income (14,357)
--------
Total $ 73,499
--------
At December 31, 1998, 1997 and 1996, the Company was servicing loans,
including participations sold, in the amounts of $179.6 million, $131.4 million,
$416.8 million, respectively, for the benefit of others. The decline in 1997 was
due to the sale of $347.4 million of purchased 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, 1998 1997 1996
- --------------------------------------------------------------------
Balance at beginning of year $ 3,863 $ 3,768 $ 2,310
Provisions for possible
loan and lease losses 959 1,509 781
Losses charged against the allowance (755) (1,667) (421)
Recoveries on charged-off loans 423 253 248
Allowance assumed
through acquisition -- -- 850
-----------------------------
Balance at end of year $ 4,490 $ 3,863 $ 3,768
-----------------------------
(7) Loans Held for Sale
At December 31, 1998 the Bank held $25.3 million in commercial real estate
loans classified as held for sale and are carried at the lower of aggregate cost
or market value.
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.
(8) Real Estate Owned, Net
December 31, 1998 1997
- ---------------------------------------------------------------
Balance at beginning of year $ 380 $ 2,150
Real estate acquired in settlement of loans 4,301
Dispositions/sales (380) (6,071)
Write-downs --
-----------------
Balance at end of year $ -- $ 380
-----------------
The following table summarizes the activity in the allowance for possible
losses on real estate owned:
December 31, 1998 1997 1996
- -----------------------------------------------------------------
Balance at beginning of year $-- $-- $ --
Provision charged to income -- 25
Charge-offs, net of recoveries -- -- (25)
- -----------------------------------------------------------------
Balance at end of year $-- $-- $ --
- -----------------------------------------------------------------
(9) Premises and Equipment
Land, office buildings and equipment, at cost, are summarized by major
classification:
December 31, Estimated Life 1998 1997
- ------------------------------------------------------------------------------
Land $ 1,162 $ 1,162
Buildings and leasehold
improvements (40 years or lease term) 7,626 7,250
Furniture, fixtures
and equipment (3-5 years) 9,731 7,648
--------------------
18,519 16,060
Accumulated depreciation (7,812) (6,741)
--------------------
$10,707 $ 9,319
--------------------
Depreciation expense for the years ended December 31, 1998, 1997 and 1996
was $1.1 million, $870,000 and $716,000, respectively.
At December 31, 1998, 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:
1999 $ 665
2000 575
2001 526
2002 526
2003 526
------
$2,818
------
Rental expense for the years ended December 31, 1998, 1997 and 1996 was
$332,000, $513,000 and $759,000, respectively.
(10) Other Assets
The following items are included in other assets:
December 31, 1998 1997
- -----------------------------------------------------------------------
Mortgage servicing rights (A) $ 129 $ 48
Accounts receivable 3,396 4,425
Goodwill 5,130 4,649
Investment in unconsolidated subsidiaries (B) 5,538 172
Other assets 1,746 1,735
-----------------------
$15,939 $11,029
-----------------------
(A) Mortgage servicing rights include $34,000 and $48,000 of purchased
mortgage servicing rights at December 31, 1998 and 1997, respectively; and
$95,000 at December 31, 1998 of originated mortgage servicing rights which have
been capitalized in accordance with SFAS No. 122, "Accounting for Mortgage
Servicing Rights."
(B) Investments in unconsolidated subsidiaries consist of the following:
$2.2 million investment in New Seasons Assisted Living Communities Series "C"
preferred stock, accounted for under the cost method; $2.0 million investment in
Progress Development I L.P., owned 50% by the Company and accounted for under
the equity method; and a $1.3 million investment in the Ben Franklin/Progress
Capital Fund, L.P. of which 37.5% is owned by the Company.
PAGE 26
(11) Deposits
December 31, 1998 1997
- ---------------------------------------------------------------
Money market deposit accounts $ 37,934 $ 33,607
NOW and Super NOW accounts 77,730 34,141
Savings accounts 30,843 30,740
Other time deposits 149,784 148,011
Time deposits of $100,000 or more 36,937 34,666
Brokered time deposits 20,000 10,000
--------------------
Total interest-bearing deposits 353,228 291,165
--------------------
Non-interest-bearing deposits 53,290 49,596
--------------------
Total deposits $406,518 $340,761
--------------------
Other time deposits of less than $100,000 by date of maturity are as
follows:
1999 $120,136
2000 33,050
2001 9,485
2002 4,003
2003 2,768
2004 and thereafter 342
- ---- --------
$169,784
--------
Other time deposits of $100,000 or more by date of maturity are as follows:
1999 $ 34,186
2000 2,443
2001 --
2002 and thereafter 308
--------
$ 36,937
--------
Total deposits of $100,000 or more amounted to $111.4 million and $85.1
million at December 31, 1998 and 1997, respectively. Accrued interest payable on
deposits amounted to $1.2 million and $876,000 at December 31, 1998 and 1997,
respectively.
Interest expense on deposits:
December 31, 1998 1997 1996
- ---------------------------------------------------------------
NOW accounts $ 1,384 $ 679 $ 595
Savings and money market
deposit accounts 1,724 1,991 1,829
Time deposits 11,358 9,687 9,596
- ---------------------------------------------------------------
Total $14,466 $12,357 $12,020
- ---------------------------------------------------------------
(12) Borrowings
Borrowings at December 31, 1998 and 1997 consist of the following:
December 31, 1998 1997
- --------------------------------------------------------------------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
- --------------------------------------------------------------------------------------
Short-term maturity (less than one year):
FHLB borrowings (A) $ 5,000 8.30% $ 450 5.92%
Securities sold under
agreements to repurchase (B) 40,150 5.63 21,546 5.92
ESOP note payable (C) 67 7.75 49 8.50
Partial Recourse Notes (E) 715 9.42 1,126 9.42
Other 9 8.75 10,819 9.79
----------------------------------------
45,941 5.98 33,990 7.27
----------------------------------------
Long-term:
FHLB borrowings (A) 83,000 5.33 33,000 6.25
Securities sold under
agreements to repurchase (B) 35,000 5.12 13,000 5.96
ESOP note payable (C) 60 7.75 127 8.50
Subordinated debt (D) 3,000 8.25 3,000 8.25
Partial Recourse Notes (E) 415 9.42 1,130 9.42
----------------------------------------
121,475 5.36 50,257 6.37
----------------------------------------
Total $167,416 5.53% $ 84,247 6.73%
----------------------------------------
<FN>
(A) At December 31, 1998 there were $10.0 million in variable rate FHLB
borrowings at three-month LIBOR plus 8 basis points; and $78.0 million in fixed
rate FHLB borrowings ranging from 4.81% to 8.30%. At December 31, 1998 the
Company had $80.0 million of FHLB borrowings that contained a provision whereby,
at the option of the FHLB, the borrowing may be converted to a LIBOR adjustable
rate advance for the remaining term of the advance. However, the Company may
choose not to accept the adjustable rate advance and would have the option, at
that time, to put the borrowing back to the FHLB without penalty. At December
31, 1998, FHLB borrowings were secured by approximately $33.7 million in certain
investment and mortgage-backed securities and $77.6 million in certain mortgage
loans.
(B) Securities sold under repurchase agreements are detailed below by date
of maturity.
Less than 30-90 Over
December 31, 1998 Overnight 30 days days 90 days
- --------------------------------------------------------------------------------
Mortgage-backed securities
(including accrued interest):
Securities sold:
Carrying value -- $11,027 $ 4,533 $71,046
Market value -- 11,027 4,533 71,046
Repurchase borrowings
(including accrued interest) -- 8,005 3,027 64,641
Average borrowing interest rate -- 4.85% 5.30% 5.46%
Included in the above table are mortgage-backed securities including
accrued interest sold under agreement to repurchase with Salomon Brothers which
exceed the repurchase liability adjusted for accrued interest by $6.1 million.
The weighted average maturity of these repurchase agreements is 20 months.
PAGE 27
(12) Borrowings (continued)
(C) The ESOP note is a variable note at the prime rate and due in quarterly
installments through January 31, 2001.
(D) The subordinated debt consists of 12 units, of which 3 are to related
parties, 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
at the fixed rate of 8.25%. The terms of the notes limit the Company's aggregate
amount of long-term senior indebtedness to an amount equal to or less than the
Company's net worth. At December 31, 1998, the Company's net worth was $38.6
million greater than its aggregate long-term senior indebtedness.
(E) Partial recourse notes consist of 9.44% and 9.40% fixed rate notes due
in monthly installments through April 5, 2001.
</FN>
Long-term borrowings by date of maturity are as follows:
Securities Sold Partial
Under Agreement ESOP Note Subordinated Recourse
FHLB to Repurchase Payable Debt Notes Total
- -------------------------------------------------------------------------------------
2000 $ 3,000 $15,000 $45 $-- $377 $18,422
2001 5,000 10,000 15 -- 38 15,053
2002 20,000 -- -- -- -- 20,000
2003 30,000 10,000 -- -- -- 40,000
2004 and
thereafter 25,000 -- -- 3,000 -- 28,000
- -------------------------------------------------------------------------------------
$83,000 $35,000 $60 $3,000 $415 $121,475
- -------------------------------------------------------------------------------------
Accrued interest payable on borrowings amounted to $1.1 million and
$775,000 at December 31, 1998 and 1997, respectively.
The following table presents certain information regarding borrowings:
December 31, 1998 1997 1996
- --------------------------------------------------------------------
Average balance outstanding $136,370 $ 81,015 $ 53,932
Maximum amount outstanding at
any month-end during the period 172,405 97,983 80,589
Weighted average interest rate
during the period (1) 5.85% 6.83% 7.05%
--------------------------------
(1) Weighted average interest rate is calculated by dividing the actual
interest expense for the period by the average outstanding balances for the
period.
(13) Income Taxes
Income tax expense, including the tax benefit of $26,000 on the cumulative
effect of accounting change, consisted of the following:
December 31, 1998 1997 1996
- ---------------------------------------------------------------
Current:
Federal $2,752 $ 381 $1,308
State 87 160 55
Deferred:
Federal (71) 1,672 (541)
State 84 9 (18)
----------------------------
$2,852 $2,222 $ 804
----------------------------
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 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, 1998 1997 1996
- ---------------------------------------------------------------
Tax at statutory rate $2,663 $1,934 $ 730
State tax, net of Federal effect 113 171 24
Tax-free interest (10) (8) (11)
Other 86 125 61
----------------------------
$2,852 $2,222 $ 804
----------------------------
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, 1998, 1997 and 1996 are presented below:
December 31, 1998 1997 1996
- --------------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforwards $ -- $ -- $ 2,297
Write-downs on real estate owned -- -- 22
Unrealized loss on
securities available for sale 255 -- 102
Provision for possible loan
and lease losses 1,389 896 873
Other -- 87 99
---------------------------
Total deferred tax assets 1,644 983 3,393
Deferred tax liabilities:
Unrealized gain on securities
available for sale -- 250 --
Direct finance lease receivable 1,221 921 897
Excess servicing fees -- -- 61
Depreciation and amortization 64 155 72
Deposit insurance premiums 37 143 32
Other 45 -- --
---------------------------
Total deferred tax liabilities 1,367 1,469 1,062
---------------------------
Net deferred tax assets (liabilities) $ 277 $ (486) $ 2,331
---------------------------
A valuation allowance has not been provided at December 31, 1998, 1997 and
1996 since management believes it is more likely than not that the deferred tax
assets will be realized.
(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, 1998. Management does not expect any material losses from these
transactions. The Company's involvement in such financial instruments is
summarized as follows:
December 31, 1998 1997
- ----------------------------------------------------------------
Contract or
Notional Amount
-------------------
Amounts representing credit risk:
Commitments to extend credit
(including unused lines of credit) $210,584 $101,499
Standby letters of credit, financial
guarantees and other letters of credit $ 3,551 $ 560
PAGE 28
(14) Commitments and Contingencies (continued)
The Bank uses the same credit policies in extending commitments and letters
of credit as it does for on-balance sheet instruments. The Bank controls its
exposure to loss from these agreements through credit approval processes and
monitoring procedures. Letters of credit and commitments to extend credit are
generally issued for one year or less and may require payment of a fee. The
total commitment amounts do not necessarily represent future cash disbursements,
as many of the commitments expire without being drawn upon. The Bank may require
collateral in extending commitments, which may include cash, accounts
receivable, securities, real or personal property, or other assets. For those
commitments which require collateral, the value of the collateral generally
equals or exceeds the amount of the commitment.
The majority of the Company's commitments to extend credit and letters of
credit carry current market interest rates if converted to loans. Because
commitments to extend credit and letters of credit are generally unassignable by
either the Company or the borrower, they only have value to the Company and the
borrower. The estimated fair value approximates the recorded deferred fee
amounts.
At December 31, 1998, 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 $206,000, $178,000 and $111,000 for the
years 1998, 1997 and 1996, respectively.
Employee Stock Ownership Plan
The Company's ESOP is a defined contribution plan covering all full-time
employees of the Company who have one year of service and are age 21 or older.
It is subject to the provisions of the Employee Retirement Income Security Act
of 1974 ("ERISA"). The Company follows the provisions of SOP 93-6, "Employers'
Accounting for Employee Stock Ownership Plans" in accounting for the ESOP. In
January 1996, the ESOP borrowed funds from a third party and purchased 50,000
shares (53,678 shares after the effects of the stock dividends) of the Company's
stock for the ESOP trust. Cash contributions to the ESOP have been determined
based on the ESOP's total debt service less dividends paid on ESOP shares.
Compensation expense of the ESOP was $170,000, $98,000 and $45,000 for 1998,
1997 and 1996, respectively. Interest expense on the borrowings was $13,000,
$17,000 and $18,000 for 1998, 1997 and 1996, respectively. As of December 31,
1998, the Company had a remaining guaranteed ESOP obligation of $127,000
included in other borrowings. Of the 53,678 shares, 29,667 have been allocated
and the 24,011 unallocated shares are reported as a reduction of stockholders'
equity. At December 31, 1998, the unallocated shares had a fair value of
$297,000.
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
1998 and 1997, 8,556 and 9,480 shares, respectively, were issued to employees
through their participation in the ESPP. These transactions increased
stockholders' equity $106,000 and $68,000 during 1998 and 1997, respectively.
(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, 1998 1997 1996
- -------------------------------------------------------------------
Balances at beginning of year $ 659 $ 1,205 $ 568
Additional loans and leases granted 3,034 161 751
Repayments (366) (325) (114)
Other changes -- (382) --
-----------------------------
Balances at end of year $ 3,327 $ 659 $ 1,205
-----------------------------
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 May 15, 1998 the Company completed a secondary offering of 792,800
shares of common stock at a price of $19.50 per share.
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.
During 1998, the Company announced a plan to repurchase up to 357,000
shares of common stock of which 231,000 shares had been repurchased at December
31, 1998. The treasury shares are recorded at cost. During 1998, the Company
issued 54,003 treasury shares in the acquisition of Primary Capital Corp. In
1994, the Company completed the sale of $3.0 million in subordinated debentures
in a private placement. Six half units and nine whole units were sold, ranging
from $125,000 to $250,000 in principal amount of 8.25% subordinated notes due in
2004 and warrants to purchase 13,781 to 27,562 shares of common stock. Each
warrant entitles the holder to purchase one share of the Company's common stock
at an exercise price of $5.44. The warrants are exercisable in whole or in part,
at any time prior to June 30, 1999. During 1998, 26,250 shares were issued under
these warrants. Interest on the subordinated debentures is payable quarterly.
The subordinated debentures are due June 30, 2004 and are redeemable after July
1, 1996.
On April 25, 1990, the Board of Directors of 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.
PAGE 29
(18) Stockholders' Equity (continued)
In 1993, as amended in 1997 and 1998, the Board of Directors adopted a
Stock Incentive Plan which provides for the grant of incentive stock options,
non-qualified stock options and stock appreciation rights to key employees. The
per share exercise price of an incentive stock option shall at least equal the
fair market value of a share of Common Stock on the date the option is granted,
and the per share exercise price of a non-qualified stock option shall at least
equal the greater of par value or 85% of fair market value of a share of Common
Stock on the date the option is granted. Under this plan, 475,507 shares of
Common Stock were reserved for issuance of which 73,449 shares remained for
future grants at December 31, 1998. To date, all options issued have had a per
share exercise price equal to the fair market value of a share of Common Stock
on the grant date.
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 551 shares (or such less number of shares as
remain to be granted pursuant to the Directors' Plan) with an exercise price
equal to the fair market value of a share of Common Stock on the date the option
is granted. Additional options may be granted based on the level of business
referrals to the Company. A total of 99,225 authorized but unissued shares of
Common Stock have been reserved for issuance pursuant to the Directors' Plan. At
December 31, 1998, 33,286 shares remained in the reserve for future grants.
Under the Company's Stock Option Plan which was adopted in April 1984 and
amended in April 1987, 27,563 shares remained outstanding at December 31, 1998.
No grants have been made under this plan since 1992.
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. The average remaining term of
outstanding options at December 31, 1998 was 6.9 years.
Changes in total options outstanding during 1998, 1997 and 1996 are as
follows:
December 31, 1998
- --------------------------------------------------------------------------------
Shares Under Option Price
Option Per Share
- --------------------------------------------------------------------------------
Outstanding at beginning of year 456,136 $ .91 to $15.71
Granted during year 78,184 $12.38 to $17.26
Exercised during year (39,218) $ .91 to $ 7.86
Forfeited during year (15,398) $ 4.99 to $ 7.48
---------------------------------------
Outstanding at end of year 479,704 $ .91 to $17.26
---------------------------------------
Options exercisable at end of year 348,287 $ .91 to $15.71
---------------------------------------
December 31, 1997
- --------------------------------------------------------------------------------
Shares Under Option Price
Option Per Share
- --------------------------------------------------------------------------------
Outstanding at beginning of year 308,568 $ .91 to $10.83
Granted during year 173,093 $ 7.48 to $15.71
Exercised during year (25,525) $ 1.00 to $10.83
Forfeited during year -- --
---------------------------------------
Outstanding at end of year 456,136 $ .91 to $15.71
---------------------------------------
Options exercisable at end of year 276,530 $ .91 to $ 7.48
---------------------------------------
December 31, 1996
- --------------------------------------------------------------------------------
Shares Under Option Price
Option Per Share
- --------------------------------------------------------------------------------
Outstanding at beginning of year 250,449 $ .91 to $13.61
Granted during year 80,759 $ 4.99 to $ 7.48
Exercised during year (5,000) $ 1.00
Forfeited during year (17,640) $ 3.17 to $13.61
---------------------------------------
Outstanding at end of year 308,568 $ .91 to $10.83
---------------------------------------
Options exercisable at end of year 231,801 $ .91 to $10.32
---------------------------------------
The weighted average exercise price of options outstanding at December 31,
1998, 1997 and 1996 was $6.79, $4.38 and $3.20, 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 1998, 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, 1998, 1997 and 1996 would have been
changed to the pro forma amounts indicated below:
1998 1997 1996
- --------------------------------------------------------------------------------
Pro forma net income $4,787 $3,281 $1,301
Pro forma net income per share $ 0.98 $ 0.77 $ 0.31
Pro forma diluted net income per share $ 0.89 $ 0.71 $ 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 1998, 1997 and 1996, respectively; dividend
yield of .98%, 1.02% and no dividend yield; expected volatility of 33.38%,
31.99% and 28.24%; risk free interest rate of 5.01%, 6.43% and 5.79%; and an
expected holding period of 7 years, 7 years and 10 years. The weighted average
fair value of Company stock options were $6.01, $3.63 and $3.02 for 1998, 1997
and 1996; respectively.
(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 provision of FDICIA became effective on December
19, 1992. In addition to the prompt corrective action requirements, FDICIA
includes significant changes to the legal and insured depository institutions,
including reductions in insurance coverage for certain kinds of deposits,
increased supervision by the federal regulatory agencies, increased reporting
requirements for insured institutions, and new regulations concerning internal
controls, accounting, and operations. The prompt corrective action regulations
defined specific capital categories based on an institution's capital ratios.
The capital categories, in declining order, are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," and
"critically undercapitalized." To be considered "well capitalized," an
institution must generally have a tangible equity ratio of at least 2%, a Tier 1
or leverage capital ratio of at least 5%, a Tier 1 risk-based capital ratio of
at least 6%, and a total risk-based capital ratio of at least 10%. An
institution is deemed to be "critically undercapitalized" if it has a tangible
equity ratio of 2% or less.
At December 31, 1998 and December 31, 1997, the Bank's tangible equity
ratio was 6.61% and 6.50%, Tier 1 or leverage capital ratio was 6.61% and 6.50%,
Tier 1 risk-based capital ratio was 9.57% and 9.05% and total risk-based capital
ratio was 10.59% and 10.00%, respectively. These ratios were based on tangible
equity of $41.6 million and $31.4 million, Tier 1 or leverage capital of $41.6
million and $31.4 million, Tier 1 risk-based capital of $41.6 million and $31.4
million and total risk-based capital of $46.1 million and $34.7 million,
respectively. In addition these ratios were based on adjusted total assets of
$630.0 million and $483.4 million, and risk-weighted assets of $434.9 million
and $347.2 million at December 31, 1998 and December 31, 1997, respectively. At
December 31, 1998, the Bank is classified as "well capitalized."
PAGE 30
(19) Regulatory Matters (continued)
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, 1998:
Tier 1 or Tier 1 Total
Tangible Leverage Risk-Based Risk-Based
Equity Capital Capital Capital
- --------------------------------------------------------------------------------
Total qualifying capital $41,614 $41,614 $41,614 $46,068
Capital ratio 6.61% 6.61% 9.57% 10.59%
Minimum capital adequacy
requirement $12,600 $25,200 $17,396 $34,792
Minimum capital adequacy ratio 2.00% 4.00% 4.00% 8.00%
Regulatory capital excess $29,014 $16,414 $24,218 $11,276
Dividend Restrictions
The Bank's ability to pay dividends is restricted by certain regulations.
Under the current regulations, the Bank is not permitted to pay cash dividends
or repurchase any of its capital stock if such payment or repurchase would cause
its regulatory capital to be reduced below either the amount of the liquidation
account or the regulatory capital requirements applicable to it. An institution
that exceeds its fully phased-in capital requirement could, after prior notice,
but without the approval of the OTS, make capital distributions during a
calendar year of up to 100% of its current net income plus the amount that would
reduce its "surplus capital ratio" (the excess capital over its fully phased-in
capital requirement) to less than one-half of its surplus capital ratio at the
beginning of the calendar year. Any additional capital distributions would
require prior regulatory approval. A savings institution that does not meet its
minimum regulatory capital requirements cannot make any capital distributions
without prior OTS approval. Because the Bank is the primary source of working
capital for the Company, the Company's ability to pay dividends is therefore
limited. The Company paid cash dividends of $.14 per share during 1998.
(20) Financial Instruments
Fair Value of Financial Instruments
Fair values for financial instruments, 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 are excluded from the fair value disclosure
requirements. Therefore, the fair values presented below should not be construed
as the underlying value of the Company.
The following methods and assumptions were used to estimate the fair value
of selected financial instruments at December 31, 1998 and 1997:
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 analysis, 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.
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, 1998 and 1997 (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.
FHLB borrowings:
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.
PAGE 31
(20) Financial Instruments (continued)
The carrying amounts and fair values of the Company's financial instruments
were as follows:
December 31, 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
----------------------------------------------------------
Financial assets:
Cash and due from banks and interest-bearing deposits $ 20,687 $ 20,687 $ 19,386 $ 19,386
Investment and mortgage-backed securities 176,769 176,915 104,385 104,077
Loans, excluding leases (1) 350,487 354,769 288,067 290,389
Interest receivable 3,245 3,245 2,728 2,728
Mortgage servicing rights 129 129 48 48
==========================================================
Financial liabilities:
Deposits $406,518 $408,360 $340,761 $342,025
Advances from the FHLB 88,000 86,629 33,450 33,690
Other borrowings 79,416 79,405 50,797 50,982
Other financial liabilities 3,904 3,904 4,014 4,014
==========================================================
(1) Includes loans held for sale
(21) 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 Company'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, 1998,
include: retail consumers who account for 20% of all credit extensions;
commercial mortgage and commercial real estate borrowers who account for 31%;
residential construction and land loan customers who account for 7%; and
commercial business borrowers who account for 42%.
(22) Segments
The Company has three principal activities, banking, leasing and real estate
advisory services. The measurement of the performance of these business segments
is based on the Company's current management structure and is not necessarily
comparable with similar information for any other financial institution. The
information presented is also not necessarily indicative of each segments'
financial condition and results of operations if they were independent entities.
Selected financial information by business segment for the years ended:
December 31, 1998 Revenues Net Income Assets
- ---------------------------------------------------------------
Banking $22,663 $4,464 $562,086
Leasing 4,881 1,199 71,416
Real estate advisory 2,534 192 3,184
Other 1,461 (875) 10,696
-------------------------------------
Total $31,539 $4,980 $647,382
=====================================
December 31, 1997 Revenues Net Income Assets
- ---------------------------------------------------------------
Banking $ 18,501 $ 3,411 $ 447,758
Leasing 4,764 522 52,940
Real estate advisory 1,265 58 3,528
Other 715 (524) 3,834
-------------------------------------
Total $ 25,245 $ 3,467 $ 508,060
=====================================
(23) Subsequent Event
In January 1999 the Company's newest subsidiary Progress Financial Resources,
Inc. ("PFR") commenced operations. PFR, a Delaware corporation, is headquartered
in Philadelphia, Pennsylvania, and sells investment and insurance products,
employee benefits and financial planning services to individuals and businesses.
The Company made an initial capital contribution of $500,000 in PFR. Under the
1993 Stock Incentive Plan, as amended in 1997 and 1998, the Company made
available 30,000 non-qualified stock options for distribution to the PFR
management team, associates and staff. The Company also initiated a restrictive
stock plan under which 77,500 shares of common stock were reserved for future
awards.
PAGE 32
(24) Condensed Financial Information of Progress Financial Corporation
(Parent Company Only)
Condensed Statements of Financial Condition
December 31, 1998 1997
- ---------------------------------------------------------------
Assets:
Cash on deposit with subsidiary $ -- $ 15
Investment in Bank 44,750 34,223
Investment in non-bank subsidiaries 8,052 3,669
Equity investment 213 1,462
Loans and advances from subsidiaries 5,788 3,512
Other 1,718 817
--------------------
Total assets $60,521 $43,698
====================
Liabilities and stockholders' equity:
Liabilities:
Other borrowings $ 3,000 $ 3,000
Employee Stock Ownership
Plan note payable 127 176
Other 840 160
--------------------
Total liabilities 3,967 3,336
--------------------
Corporation-obligated mandatorily
redeemable capital securities of
subsidiary trust holding solely
junior subordinated debentures of
the Corporation 15,000 15,000
--------------------
Stockholders' equity:
Serial preferred stock -- --
Common stock 5,263 4,126
Treasury stock (2,287) --
Unearned Employee Stock
Ownership Plan shares (143) (174)
Capital surplus 39,615 20,960
Retained deficit (399) (10)
Net accumulated other comprehensive
income (loss) (495) 460
--------------------
Total stockholders' equity 41,554 25,362
--------------------
Total liabilities, Corporation-obligated
mandatorily redeemable capital
securities of subsidiary trust holding
solely junior subordinated debentures
of the Corporation and stockholders'
equity $60,521 $43,698
====================
Condensed Statements of Operations
For the years ended December 31, 1998 1997 1996
- ---------------------------------------------------------------
Dividends from equity investment $ 12 $ 5 $ 1
Management fees from subsidiary -- 130 311
Equity in undistributed
income of subsidiaries 6,188 3,848 1,332
Gain on sale of equity investments 246 -- --
Interest income 9 498 1
----------------------------
Total income 6,455 4,481 1,645
----------------------------
Interest expense 287 279 291
Professional services 136 5 --
Amortization of goodwill -- -- 6
Capital securities expense 1,593 925 --
Miscellaneous expense 70 9 --
----------------------------
Total expense 2,086 1,218 297
----------------------------
Income before income taxes 4,369 3,263 1,348
Income tax expense (benefit) (611) (204) 5
----------------------------
Net income $4,980 $3,467 $1,343
----------------------------
Condensed Statements of Cash Flows
For the years ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 4,980 $ 3,467 $ 1,343
Add (deduct) items not affecting
cash flow from operating activities:
Equity in income of subsidiaries (6,188) (3,848) (1,332)
Gain on sale of equity investments (246) -- --
Amortization of deferred
debt issuance cost 38 31 25
Amortization of goodwill -- -- 6
Other, net 170 97 45
Net increase (decrease) in accounts
receivable and other (2,390) (4,666) 138
--------------------------------
Net cash flows provided by
(used in) operating activities (3,636) (4,919) 225
--------------------------------
Cash flows from investment activities:
Capital contributions and
additional investment
in subsidiaries (9,652) (9,736) (2,637)
Dividends from Bank 1,259 973 157
Proceeds from sales of
equity investments 1,185 -- --
Purchase of equity investments -- (1,068) --
--------------------------------
Net cash flows used in
investment activities (7,208) (9,831) (2,480)
--------------------------------
Cash flows from financing activities:
Net proceeds from issuance
(repayment) of ESOP debt (49) (44) 220
Purchase of treasury stock (3,098) -- --
Purchase of ESOP shares -- -- (250)
Net proceeds from stock offering
and exercise of warrants 14,411 -- 2,500
Net proceeds from issuance
of common stock under employee
benefit plans 221 100 5
Dividends paid (656) (389) (149)
Proceeds from issuance
of capital securities -- 15,000 --
--------------------------------
Net cash flows provided by
financing activities 10,829 14,667 2,326
--------------------------------
Net increase (decrease) in
cash and cash equivalents (15) (83) 71
Cash and cash equivalents:
Beginning of year 15 98 27
--------------------------------
End of year $ -- $ 15 $ 98
--------------------------------
These statements should be read in conjunction with the other notes to the
consolidated financial statements.
PAGE 33
[LOGO: PricewaterhouseCoopers LLP]
PricewaterhouseCoopers LLP
2400 Eleven Penn Center
Philadelphia, PA 19103-2962
Telephone:(215) 963-8000
Facsimile: (215) 963-8700
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Progress Financial Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Progress
Financial Corporation and its subsidiaries at December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
January 22, 1999
PAGE 34
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 1998 classifications.
Dec. 31, Sept. 30, Jun. 30, Mar. 31, Dec. 31, Sept. 30, Jun. 30, Mar. 31,
1998 1998 1998 1998 1997 1997 1997 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Interest income $12,353 $12,266 $10,778 $9,932 $9,890 $9,381 $8,874 $8,352
Interest expense 6,141 6,251 5,317 4,741 4,751 4,570 4,356 4,217
-----------------------------------------------------------------------------------------
Net interest income 6,212 6,015 5,461 5,191 5,139 4,811 4,518 4,135
Provision for possible loan and lease
losses 300 233 224 202 871 242 203 193
-----------------------------------------------------------------------------------------
Net interest income after provision
for possible loan and lease losses 5,912 5,782 5,237 4,989 4,268 4,569 4,315 3,942
Non-interest income 2,255 2,338 2,262 1,805 2,115 1,508 1,285 1,734
Non-interest expense 5,800 5,927 5,730 5,219 5,431 4,570 4,191 3,855
-----------------------------------------------------------------------------------------
Income before income taxes and
cumulative effect of accounting
change 2,367 2,193 1,769 1,575 952 1,507 1,409 1,821
Income tax expense 850 801 648 579 455 577 519 671
-----------------------------------------------------------------------------------------
Income before cumulative effect of
accounting change 1,517 1,392 1,121 996 497 930 890 1,150
Cumulative effect of accounting change,
net of tax benefit -- (46) -- -- -- -- -- --
-----------------------------------------------------------------------------------------
Net income $ 1,517 $ 1,346 $ 1,121 $ 996 $ 497 $ 930 $ 890 $1,150
-----------------------------------------------------------------------------------------
Basic income per common share before
cumulative effect of accounting
change $ 0.30 $ 0.27 $ 0.23 $ 0.23 $ 0.12 $ 0.22 $ 0.21 $ 0.27
Fully diluted income per common share
before cumulative effect of
accounting change 0.28 0.25 0.20 0.21 0.10 0.20 0.20 0.25
Basic net income per common share 0.30 0.26 0.23 0.23 0.12 0.22 0.21 0.27
Fully diluted net income per common
share 0.28 0.24 0.21 0.20 0.10 0.20 0.20 0.25
-----------------------------------------------------------------------------------------
Dividends per share $ 0.04 $ 0.04 $ 0.03 $ 0.03 $ 0.03 $ 0.03 $ 0.02 $ 0.02
-----------------------------------------------------------------------------------------
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, 1998 the Company had approximately 1,800 holders of
record.
Payment of cash dividends is subject to regulatory restrictions as described
in Note 19 of Notes to Consolidated Financial Statements. In 1998, the Company
paid dividends of $.14 per share. During 1997 the Company paid dividends of $.10
per share.
The following table sets forth the high and low closing prices and trading
volumes for the periods described:
1998 1997*
- ------------------------------------------------------------------------------------------------------------------------------------
Low High Volume Low High Volume
- ------------------------------------------------------------------------------------------------------------------------------------
First Quarter $14 17/32 $17 5/8 535,000 $ 7 31/64 $ 8 9/32 555,000
Second Quarter 16 29/32 21 43/64 1,317,000 7 5/16 9 17/32 710,000
Third Quarter 12 3/4 18 11/16 666,000 9 19/64 14 13/32 827,000
Fourth Quarter 11 1/2 14 7/8 1,125,000 13 7/32 15 23/32 590,000
<FN>
*Prior period has been restated to reflect the 5% stock dividend distributed to
shareholders on August 31, 1998.
</FN>
PAGE 35
INFORMATION FOR SHAREHOLDERS
PROGRESS FINANCIAL CORPORATION
AND PROGRESS BANK
Directors
John E. F. Corson
Consultant and President
Corson Investments
William O. Daggett, Jr.
Managing Partner
Kistler-Tiffany Companies
Donald F. U. Goebert(1)
Chairman of the Board
Adage, Inc.
H. Wayne Griest(2)
President and Chief Executive Officer
Progress Realty Advisors, Inc.
Joseph R. Klinger
Principal
KMR Management, Inc.
Paul M. LaNoce
President
DAR Industrial Products, Inc.
A. John May, III, Esquire(2)
Attorney
Pepper, Hamilton LLP
William L. Mueller, Esquire
Attorney
Brandt, Haughey, Penberthy,
Lewis & Hyland
Janet E. Paroo
Chief Operating Officer
Global Health Group, Inc.
Kevin J. Silverang, Esquire(3)
Attorney
Buchanan Ingersoll
Charles J. Tornetta
President
Tornetta Realty
W. Kirk Wycoff
Chairman, President and
Chief Executive Officer
PROGRESS FINANCIAL CORPORATION
AND PROGRESS BANK
Principal Officers
W. Kirk Wycoff
Chairman, President and
Chief Executive Officer
Robert J. Bifolco(4)
Senior Vice President
Commercial Banking
Donald M. DeMaio(4)
Senior Vice President
Retail Banking
Michael J. Falco(4)
Senior Vice President
Construction Lending
Michael B. High
Senior Vice President and
Chief Financial Officer
Steven D. Hobman(4)
Senior Vice President
Specialized Lending
George R. Mark(5)
Executive Vice President
Georgann Berger McKenna(4)
Senior Vice President
Human Resources
Eric J. Morgan
Senior Vice President
Credit and Administration
Richard T. Powers(4)
Senior Vice President
Operations
PROGRESS DEVELOPMENT L. P.
Principal Officer
Anthony P. Lordi
Managing Director
PROGRESS FINANCIAL RESOURCES, INC.
Principal Officers
Adam T. Sherman
President
Samuel Jacobs
Executive Vice President and Chief Financial Officer
Donald Antonacio
Executive Vice President
David Fleisher
Executive Vice President
Andrew McIlhenny
Executive Vice President
PROGRESS LEASING COMPANY
Principal Officers
Michael A. Basile, Jr.
President
Christopher L. Campbell
Executive Vice President
Dennis M. Horner
Executive Vice President
PROGRESS REALTY ADVISORS, INC.
Principal Officers
H. Wayne Griest
President and Chief Executive Officer
Blue Bell, PA Office
Francis W. Ashmore
Senior Vice President
Joseph F. Lebano
Senior Vice President
Richmond, VA Office
Thomas J. Mueller
Senior Vice President
R. Brad Partrea
Senior Vice President
Chesapeake, VA Office
Russell G. Hanson, Jr.
Senior Vice President
Woodbridge, NJ Office
Kathleen M. Anderson
Senior Vice President
Peter M. Shapiro
Senior Vice President
Wilmington, DE Office
Robert F. McCann
Senior Vice President
H. Gerald Nanos
Senior Vice President
PROCALL TELESERVICES, INC.
Principal Officers
Claudia B. Timbo
President
Lisa L. Mills
Vice President
Debra Zbrzeznj
Vice President
(1)Resigned effective 1/15/99
(2)Director of Corporation only
(3)Elected to replace Donald F.U. Goebert
(4)Officer of Bank only
(5)Officer of Corporation only
PROGRESS FINANCIAL CORP. AND SUBSIDIARIES
SHAREHOLDERS' INFORMATION
PROGRESS FINANCIAL CORPORATION
Progress Bank
Progress Leasing Company,
Progress Realty Advisors, Inc.
Procall Teleservices
4 Sentry Parkway
P.O. Box 3036
Blue Bell, Pennsylvania 19422
Progress Development L.P.
595 Skippack Pike
Suite 100
Blue Bell, Pennsylvania 19422
Progress Financial Resources, Inc.
1818 Market Street, 29th Floor
Philadelphia, Pennsylvania 19103
Progress Leasing Company
6 Green Meadow Drive
Timonium, Maryland 21093
Progress Realty Advisors, Inc.
900 Route 9, Sixth Floor
Woodbridge, New Jersey 07095
Atlantic Mortgage &
Investment Company
1401 Greenbrier Parkway
Suite 465
Chesapeake, Virginia 23320
804 Moorefield, Park Drive
Suite 104
P.O. Box 35690
Richmond, Virginia 23236
Progress Realty Advisors
of Delaware, LLC
2115 Concord Pike, Suite 201
Wilmington, Delaware 19803
Annual Meeting of Shareholders
The Annual Meeting of shareholders will be held at 9:00 a.m., April 27,
1999, at:
Plymouth Country Club
Belvoir and Plymouth Roads
Norristown, Pennsylvania
Contacts
Analysts, investors, news media representatives and others seeking
financial and general information should contact:
Patricia Ellick--Director of Investor Relations or Michael B. High--Senior
Vice President and Chief Financial Officer at (610) 825-8800.
Form 10-K
A copy of Progress Financial Corporation's Form 10-K will be provided upon
written request to:
Progress Financial Corporation
4 Sentry Parkway, Suite 230
Blue Bell, Pennsylvania 19422
Attn: Investor Relations
Stock Listing
Shares of Progress Financial Corporation are traded on the Nasdaq Stock
Market under the symbol of "PFNC."
Transfer Agent/Registrar
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
Toll-free: 1-800-937-5449
Market Makers
Sandler O'Neill & Partners, L.P.
F. J. Morrissey & Co., Inc.
Ryan, Beck & Co.
First Union Capital Markets Corp.
Herzog, Heine, Geduld, Inc.
M. H. Meyerson & Co., Inc.
Knight Securities, Inc.
Progress Foundation
Organized to support the financial needs of children's causes in our
trading areas. Funding comes from the Bank, its officers and employees and
special events held throughout the year.
Progress Bank Branch Offices
207 West 4th Street
Bridgeport, Pennsylvania 19405
(610) 272-5559
405 Fayette Street
Conshohocken, Pennsylvania 19428
(610) 828-4710
Genuardi Shopping Center
Jeffersonville, Pennsylvania 19403
(610) 631-0717
Valley Forge Shopping Center
King of Prussia, Pennsylvania 19406
(610) 265-0196
Sandy Hill Shopping Center
Norristown, Pennsylvania 19401
(610) 272-7461
Andorra Shopping Center
Philadelphia, Pennsylvania 19128
(215) 483-0450
Plymouth Meeting Executive Campus
Plymouth Meeting, Pennsylvania 19462
(610) 825-3320
1084 Lancaster Avenue
Rosemont, Pennsylvania 19010
(610) 527-2600
Paoli Shopping Center
Paoli, Pennsylvania 19301
(610) 648-9422
Allen Forge Center
Lansdale, Pennsylvania 19446
(215) 631-9180
Northtowne Shopping Center
Norristown, Pennsylvania 19401
(610) 278-7600
Designed by Curran & Connors, Inc.
[LOGO]