Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
[ X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarter ended June 30, 1995.
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______ to ________.
Commission File Number: 0-14815
Progress Financial Corporation
(Exact name of registrant as specified in its charter)
Delaware 23-2413363
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification Number)
Plymouth Meeting Executive Campus
600 West Germantown Pike
Plymouth Meeting, Pennsylvania 19462-1060
(address of principal executive offices (Zip Code)
Registrant's telephone number, including area code: (610)825-8800
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock ($1.00 par value) 3,280,000
Title of Each Class Number of Shares Outstanding
as of August 14, 1995
Progress Financial Corporation
Table of Contents
PART I - Financial Information
Page
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of June 30, 1995
(unaudited) and December 31, 1994....................................3
Consolidated Statements of Operations for the three and six months
ended June 30, 1995 and 1994 (unaudited).............................4
Consolidated Statements of Cash Flows for the six months ended
June 30, 1995 and 1994 (unaudited)...................................5
Notes to Consolidated Financial Statements (unaudited)...............7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (unaudited)....................................8
PART II - Other Information
Item 1. Legal Proceedings...................................................28
Item 2. Changes in Securities...............................................28
Item 3. Defaults upon Senior Securities.....................................28
Item 4. Submission of Matters to a Vote of Security Holders.................28
Item 5. Other Information...................................................28
Item 6. Exhibits and Reports on Form 8-K....................................28
Signatures..........................................................29
PART I- FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
Consolidated Statements of Financial Condition
<CAPTION> June 30, December 31,
1995 1994
(Dollars in Thousands)
(unaudited)
Assets
<S> <C> <C>
Cash and due from banks:
Interest bearing $ 3,770 $ 311
Non-interest bearing 7,350 7,764
Investment securities:
Available for sale at fair value
(amortized cost: $5,028 in 1995 and $5,029 in 1994) 4,929 4,627
Held to maturity (fair value: $12,823 in 1995 and $11,928 in 1994) 12,987 12,866
Mortgage-backed securities:
Available for sale at fair value
(amortized cost: $15,566 in 1995 and $9,752 in 1994) 15,292 9,103
Held to maturity (fair value: $85,638 in 1995 and $87,105 in 1994) 87,740 93,673
Loans 206,020 207,274
Less: allowance for loan losses (1,459) (1,502)
Net loans 204,561 205,772
Loans held for sale (fair value: $1,305 in 1995 and $361 in 1994) 1,305 351
Real estate owned, net 3,729 4,534
Premises and equipment 5,037 1,909
Accrued interest receivable 2,259 2,210
Other assets 7,492 5,069
Total assets $ 356,451 $ 348,189
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 291,969 $ 283,958
Advances from the Federal Home Loan Bank 41,378 44,052
Subordinated debt 3,000 3,000
Advance payments by borrowers for taxes and insurance 2,493 2,352
Accrued interest payable 1,188 588
Other liabilities 2,039 1,218
Total liabilities 342,067 335,168
Stockholders' equity:
Serial preferred stock - 1,000,000 shares authorized but unissued --- ---
Junior participating preferred stock - $ .01 par value - 1,010 shares
authorized but unissued --- ---
Common stock - $1 par value; 6,000,000 shares authorized; 3,280,000
and 3,275,000 shares issued and outstanding at June 30, 1995 and
December 31, 1994, respectively 3,280 3,275
Capital surplus 15,706 15,706
Retained earnings (deficit) (4,229) (4,909)
Unrealized loss on securities available for sale (373) (1,051)
Total stockholders' equity 14,384 13,021
Total liabilities and stockholders' equity $ 356,451 $ 348,189
</TABLE>
See Notes to Consolidated Financial Statements.
<TABLE>
Consolidated Statements of Operations
<CAPTION>
For The Three Months For The Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
(Dollars in Thousands) (Dollars in Thousands)
(unaudited) (unaudited)
Interest income:
<S> <C> <C> <C> <C>
Loans, including fees $ 4,645 $ 3,580 $ 9,193 $ 7,013
Mortgage-backed securities 1,696 1,611 3,350 3,157
Investment securities 271 254 538 332
Other 48 14 77 35
Total interest income 6,660 5,459 13,158 10,537
Interest expense:
Deposits 3,067 2,439 5,906 4,839
Advances from the Federal Home
Loan Bank 770 482 1,519 913
Subordinated debt 67 --- 133 ---
Total interest expense 3,904 2,921 7,558 5,752
Net interest income 2,756 2,538 5,600 4,785
Provision for loan losses 150 300 250 350
Net interest income after provision for loan losses 2,606 2,238 5,350 4,435
Other income:
Mortgage origination and servicing 195 167 402 389
Service charges on deposits 253 206 484 398
Gain (loss) from mortgage banking activities 29 (46) 28 (172)
Gain ( loss) from sales of securities --- 1 (35) (69)
Income (loss) on properties sold 6 19 (18) (18)
Other 138 68 162 261
Total other income 621 415 1,023 789
Other expense:
Salaries and employee benefits 1,254 1,056 2,454 2,103
Occupancy 366 340 691 673
Data processing 205 203 396 390
Furniture, fixtures, and equipment 146 116 273 224
Insurance premiums 257 261 515 522
Provision for real estate owned 331 1,489 406 1,489
Loan and real estate owned expense, net (92) 70 (49) 180
Professional services 20 185 294 403
Other 438 384 713 646
Total other expense 2,925 4,104 5,693 6,630
Income (loss) before income taxes 302 (1,451) 680 (1,406)
Income tax expense --- --- --- ---
Net income (loss) $ 302 $ (1,451) $ 680 $ (1,406)
Earnings (loss) per share:
Primary earnings (loss) $ .09 $ (.44) $ .20 $ (.43)
Fully diluted earnings (loss) $ .09 $ (.44) $ .20 $ (.43)
Weighted average number of shares outstanding:
Primary 3,384,130 3,275,000 3,381,081 3,275,000
Fully diluted 3,384,130 3,275,000 3,382,332 3,275,000
</TABLE>
See Notes to Consolidated Financial Statements.
<TABLE>
Consolidated Statements of Cash Flows
<CAPTION>
For The Six Months
Ended June 30,
1995 1994
(Dollars in Thousands)
(unaudited)
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ 680 $ (1,406)
Add (deduct) items not affecting cash flows from operating activities:
Depreciation and amortization 278 267
Provision for real estate owned 406 1,489
Provision for loan losses 250 350
Capitalized interest on real estate owned --- (10)
(Gain)loss from loan sales and securitizations (12) 172
Loss from sales of securities available for sale 35 69
Loss on properties sold 18 18
Amortization of deferred loan fees (262) (318)
Amortization of premiums/accretion
of discounts on securities 279 1,599
Originations and purchases of loans held for sale (2,916) (14,098)
Sales of loans 10,124 32,943
(Increase) decrease in accrued interest receivable (49) 343
(Increase) decrease in other assets (2,423) 2,236
Increase (decrease) in other liabilities 821 (472)
Increase in accrued interest payable 600 238
Net cash flows provided by operating activities 7,829 23,420
Cash flows from investing activities:
Capital expenditures $ (3,406) $ (293)
Purchases of mortgage-backed securities held to maturity --- (10,511)
Repayments on mortgage-backed securities held to maturity 5,668 16,285
Repayments on mortgage-backed securities available for sale 246 3,251
Purchases of mortgage-backed securities available for sale (6,054) (11,133)
Sales of mortgage-backed securities available for sale --- 16,786
Net increase in loans (6,970) (31,386)
Purchases of investments held to maturity (548) (10,157)
Purchases of investments available for sale (998) (5,993)
Proceeds from sales of investments available for sale 965 ---
Maturities of investments held to maturity 407 979
Proceeds from sales of real estate owned 1,044 5,049
Net decrease in investments/advances to affiliates and joint ventures --- 102
Advances for construction of real estate owned (621) (738)
Net cash flows used in investing activities (10,267 (27,759)
Cash flows from financing activities:
Net increase in demand, NOW and saving deposits 941 3,973
Net increase (decrease) in time deposits 7,070 (1,790)
Net (decrease) increase in advances from
the Federal Home Loan Bank (2,674) 482
Net increase (decrease) in advance payments by borrowers
for taxes and insurance 141 (233)
Net proceeds from issuance of subordinated debt --- 2,925
Net proceeds from issuance of common stock 5 ---
Net cash flows provided by financing activities 5,483 5,357
Net decrease in cash and cash equivalents 3,045 1,018
Cash and cash equivalents:
Beginning of year 8,075 4,204
End of period $ 11,120 $ 5,222
Supplemental disclosures:
Non-monetary transfers:
Net conversion of loans receivable to real estate owned $ 42 $ 254
Securitization of mortgage loans into mortgage-backed
securities $ --- $ 24,979
Cash payments for:
Income taxes $ --- $ ---
Interest $ 6,958 $ 5,524
</TABLE>
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) In the opinion of management, the financial information, which is
unaudited, reflects all adjustments (consisting solely of normal recurring
adjustments) necessary for a fair presentation of the financial information
as of and for the three and six months ended June 30, 1995 and 1994 in
conformity with generally accepted accounting principles. These financial
statements should be read in conjunction with Progress Financial
Corporation's (the "Company") 1994 Annual Report and Form 10-K. Prior
period amounts have been reclassified when necessary to conform with
current period classification. The Company's principal subsidiary is
Progress Federal Savings Bank (the "Bank").
The year end consolidated statement of financial condition was derived from
the Company's 1994 audited financial statements, but does not include all
disclosures required by generally accepted accounting principles.
(2) In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan" ("SFAS 114"). SFAS 114 requires
adjustment to the carrying value of a loan through the provision for credit
losses when it is "probable" that a creditor will be unable to collect all
amounts due according to the contractual terms of the loan. SFAS 114 was
subsequently amended by Statement of Financial Accounting Standards No.
118, "Accounting by Creditors for Impairment of a Loan-Income Recognition
and Disclosures" ("SFAS 118") to allow a creditor to use existing methods
for recognizing interest income on an impaired loan. The adoption of SFAS
114 and SFAS 118 in the first quarter of 1995 resulted in the
identification of impaired loans which amounted to $2.9 million with a
related allowance for loan losses of $4 thousand. As of June 30, 1995, the
Company had no impaired loans, as defined under SFAS 114.
Also, in May 1993, the FASB issued Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115"). SFAS 115 requires debt and equity securities to
be classified in one of three categories 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 them 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 reported at fair
value with unrealized gains and losses excluded from earnings, but reported
as a separate component of stockholders' equity. The Company adopted SFAS
115 in the first quarter of 1994. The cumulative effect of adopting SFAS
115 on January 1, 1994 resulted in a $61 thousand reduction in
stockholders' equity for unrealized losses on mortgage-backed securities
and investments classified as available for sale of $46 thousand and $15
thousand, respectively. As of June 30, 1995, stockholders' equity was
reduced by $373 thousand for unrealized losses on mortgage-backed
securities and investments available for sale of $274 thousand and $99
thousand, respectively.
In May 1995, the FASB issued Statement of Financial Accounting Standards
No. 122, "Accounting for Mortgage Servicing Rights and Excess Servicing
Receivables and for Securitization of Mortgage Loans" Progress, which
("SFAS 122"). SFAS 122, which is effective for the years beginning after
December 15, 1995, will require services mortgage loans for others in
return for servicing fees, to recognize these servicing rights as assets,
regardless of how such assets were acquired. Additionally, the Company
would be required to assess the fair value of these assets at each
reporting date to determine any potential impairment. Management of the
Company has not completed an analysis of the effects this pronouncement
would have on its results of operations or financial position. <PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (unaudited)
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the Company's Consolidated
Financial Statements and accompanying notes. Certain reclassifications have
been made to prior period data throughout the following discussion and analysis
for comparability with 1995 data.
SUMMARY
The Company recorded net income of $302 thousand or $.09 per share for the three
months ended June 30, 1995 in comparison with net loss of $1.5 million or $.44
per share for the three months ended June 1994 . Return (loss) on average
stockholders' equity was 8.58% and return (loss) on average assets was .34% for
the three months ended June 30, 1995 compared to (10.44)% and (.43)%,
respectively, for the three months ended June 1994.
For the six months ended June 30, 1995, the Company had net income of $680
thousand or $.21 per share in comparison with a net loss of $1.4 million or $.43
per share for the six months ended June 30, 1994. Return (loss) on average
stockholders' equity was 9.96% and return (loss) on average assets was .39% for
the six months ended June 30, 1995 compared to (9.85)% and (.42)%, respectively
for the six months ended June 30, 1994.
Net interest income was $2.8 million and $2.5 million for the three months ended
June 30, 1995 and 1994, respectively. Operating results for the three months
ended June 30, 1995 and 1994 included $150 thousand and $300 thousand,
respectively, in provision for losses on loans. Other income for the three
months ended June 30, 1995 included gains of $29 thousand from mortgage banking
activities compared to a loss of $46 thousand for the same period in 1994. Other
expense totalled $2.9 million for the three months ended June 30, 1995 in
comparison with $4.1 million for the same period in 1994, primarily due to a
$1.2 million decrease in the provision for real estate owned ("REO").
For the six months ended June 30, 1995, net interest income was $5.6 million in
comparison with $4.8 million for the six months ended June 30, 1994. Operating
results for the six months ended June 30, 1995 and 1994 included $250 thousand
and $350 thousand, respectively, in provision for losses on loans. Gains from
mortgage banking activities totalled $28 thousand for the six months ended June
30, 1995 in comparison with losses of $172 thousand for the six months ended
June 30, 1994. Other expenses totalled $5.7 million for the six months ended
June 30, 1995 in comparison with $6.6 million for the same period in 1994,
primarily due to a $1.1 million decrease in the provision for REO.
On July 17, 1995 the Company acquired a majority interest in Quaker State
Financial Corporation which is engaged in the equipment leasing business.
On May 24, 1995 the Company and the Bank entered into a definitive agreement
whereby the Bank will merge with another, locally based, depository institution.
In connection with this transaction, the Company will raise additional capital
through a common stock offering. The transaction requires approval from the
stockholders of the respective Companies and regulatory bodies.
In November 1994, the Company received final approval from the Office of Thrift
Supervision ("OTS") to open a retail branch office in Paoli, Pennsylvania. The
Company plans to open at this location in August 1995.
On June 30, 1994, the Company completed the sale of $3.0 million in subordinated
debentures in a private placement. Twelve units were sold, with each unit
consisting of $250 thousand in principal amount of 8.25% subordinated notes due
2004 and warrants to purchase 25,000 shares of common stock. Each warrant
entitles the holder to purchase one share of the Company's common stock at an
exercise price of $6.00. The warrants are not exercisable until the earlier to
occur of May 31, 1996 or the effectiveness of the Common Stock Registration
Statement. The warrants are exercisable subsequent thereto, in whole or in
part, at any time prior to June 30, 1999. Interest on the subordinated
debentures is payable quarterly. The subordinated debentures are due June 30,
2004 and are not redeemable prior to July 1, 1996. The Company made a $2.4
million capital contribution to the Bank from the proceeds.
RESULTS OF OPERATIONS
Net Interest Income
For the three months ended June 30, 1995, net interest income amounted to $2.8
million in comparison with $2.5 million for the same period in 1994. Net
interest income for the three months ended June 30, 1995 was positively impacted
by a $20.8 million increase in average interest-earning assets, while average
interest-bearing liabilities increased $15.0 million. The interest rate spread
decreased 7 basis points for the three months ended June 30, 1995 compared to
the same period in 1994, primarily due to a 107 basis point increase in the
average rate on interest-bearing liabilities which was partially offset by an
100 basis point increase in the average yield on interest-earning assets.
For the six months ended June 30, 1995, net interest income amounted to $5.6
million in comparison with $4.8 million for the same period in 1994. Net
interest income for the six months ended June 30, 1995 was positively impacted
by a $21.9 million increase in average interest-earning assets, while average
interest-bearing liabilities increased $14.8 million. In addition, the interest
rate spread increased 16 basis points for the six months ended June 30, 1995
compared to the same period in 1994, primarily due to a 114 basis point increase
in the average yield on interest-earning assets which was partially offset by a
98 basis point increase in the average rate on interest-bearing liabilities.
Net interest income is affected by the interest rate spread, which is the
difference between the yield on average interest- earning assets and the cost of
average interest-bearing liabilities, as well as by the relative amounts of
interest-earning assets and interest-bearing liabilities. When interest-rate
sensitive liabilities exceed interest-rate sensitive assets (a negative gap),
the net interest margin (net interest income divided by average interest-earning
assets) will generally be negatively affected during periods of increasing
interest rates and will generally be positively affected during periods of
decreasing interest rates. Where interest-rate sensitive assets exceed
interest-rate sensitive liabilities (a positive gap), the net interest margin is
positively affected during periods of increasing interest rates and negatively
affected during periods of decreasing interest rates.
The following table sets forth, for the periods indicated, information regarding
(i) the total dollar amount of interest income on interest-earning assets and
the resultant average yield; (ii) the total dollar amount of interest expense on
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, but accrued interest on non-accrual loans has not been
included for purposes of determining interest income.
<TABLE>
For The Three Months Ended June 30,
1995 1994
(Dollars in Thousands)
Average Yield/ Average Yield/
Balance Interest Rate(1) Balance Interest Rate (1)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans (2) $ 180,438 $ 3,867 8.60% $ 157,378 $ 2,986 7.61%
Mortgage-backed securities (2) 101,567 1,696 6.70 111,888 1,611 5.78
Other loans 32,784 778 9.52 26,467 594 9.00
Investment securities and other interest-earning assets (3) 19,852 319 6.45 18,117 268 5.91
Total interest-earning assets 334,641 $ 6,660 7.98% 313,850 $ 5,459 6.98%
Non-interest-earning assets 17,501 21,139
Total assets $ 352,142 $ 334,989
Interest-bearing liabilities:
Interest-bearing deposits:
NOW and Super NOW $ 26,766 $ 191 2.86% $ 21,036 $ 125 2.38%
Money market accounts 32,941 267 3.25 43,876 296 2.71
Passbook and statement savings 27,194 200 2.95 28,029 206 2.95
Time deposits 175,609 2,409 5.50 165,531 1,812 4.39
Total interest-bearing deposits 262,510 3,067 4.69 258,472 2,439 3.78
Advances from the Federal Home Loan Bank 48,095 770 6.42 40,120 482 4.81
Subordinated debt 3,000 67 8.96 33 --- ---
Total interest-bearing liabilities 313,605 $ 3,904 4.99% 298,625 $ 2,921 3.92%
Non-interest-bearing liabilities 24,420 22,467
Total liabilities 338,025 321,092
Stockholders' equity 14,117 13,897
Total liabilities and stockholders' equity $ 352,142 $ 334,989
Net interest income; interest rate spread (4) $ 2,756 2.99% $ 2,538 3.06%
Net interest margin (4) 3.30% 3.24%
Average interest-earning assets to average interest-bearing liabilities 106.71% 105.10%
</TABLE>
(1) As adjusted for fees treated as adjustments to loan yields.
(2) Includes mortgage loans held for sale and mortgage-backed securities
classified as available for sale.
(3) Includes investment securities classified as available for sale.
(4) Interest rate spread represents the difference between the weighted average
yield on interest-earnings assets and the weighted average cost of
interest-bearing liabilities, and net interest margin represents net
interest income divided by average interest-earning assets.
The following table sets forth, for the periods indicated, information regarding
(i) the total dollar amount of interest income on interest-earning assets and
the resultant average yield; (ii) the total dollar amount of interest expense on
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, but accrued interest on non-accrual loans has not been
included for purposes of determining interest income.
<TABLE>
For The Six Months Ended June 30,
1995 1994
(Dollars in Thousands)
Average Yield/ Average Yield/
Balance Interest Rate(1) Balance Interest Rate (1)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans (2) $ 179,578 $ 7,679 8.62% $ 152,847 $ 5,900 7.78%
Mortgage-backed securities (2) 101,511 3,350 6.65 118,618 3,157 5.37
Other loans 32,250 1,514 9.47 25,642 1,113 8.75
Investment securities and other interest-earning assets (3) 19,173 615 6.47 13,533 367 5.47
Total interest-earning assets 332,512 $ 13,158 7.98% 310,640 $10,537 6.84%
Non-interest-earning assets 17,351 23,020
Total assets $ 349,863 $ 333,660
Interest-bearing liabilities:
Interest-bearing deposits:
NOW and Super NOW $ 25,824 $ 352 2.75% $ 20,384 $ 235 2.32%
Money market accounts 33,945 522 3.104 4,327 588 2.67
Passbook and statement savings 27,397 400 2.94 27,176 398 2.95
Time deposits 174,324 4,632 5.36 166,077 3,618 4.39
Total interest-bearing deposits 261,490 5,906 4.55 257,964 4,839 3.78
Advances from the Federal Home Loan Bank 47,802 1,519 6.41 39,469 913 4.66
Subordinated debt 3,000 133 8.94 17 --- ---
Total interest-bearing liabilities 312,292 $ 7,558 4.88% 297,450 $ 5,752 3.90%
Non-interest-bearing liabilities 23,796 21,929
Total liabilities 336,088 319,379
Stockholders' equity 13,775 14,281
Total liabilities and stockholders' equity $ 349,863 $ 333,660
Net interest income; interest rate spread (4) $5,600 3.10% $ 4,785 2.94%
Net interest margin (4) 3.40% 3.11%
Average interest-earning assets to average interest-bearing liabilities 106.47% 104.43%
</TABLE>
(1) As adjusted for fees treated as adjustments to loan yields.
(2) Includes mortgage loans held for sale and mortgage-backed securities
classified as available for sale.
(3) Includes investment securities classified as available for sale.
(4) Interest rate spread represents the difference between the weighted average
yield on interest-earnings assets and the weighted average cost oF
interest-bearing liabilities, and net interest margin represents net
interest income divided by average interest-earning assets.
Total interest income amounted to $6.7 million for the three months ended June
30,1995, a $1.2 million or 22.0% increase when compared to the same period in
1994. Interest income on mortgage loans increased $881 thousand, as the average
balance outstanding increased $23.1 million and the average yield increased 99
basis points. Interest income on mortgage-backed securities increased $85
thousand, as the average yield increased 92 basis points, which offset a $10.3
million decrease in the average balance. Interest income on investments and
other interest-earning assets increased $51 thousand, as the average balance
outstanding increased $1.7 million and the average yield increased 54 basis
points. Interest income on other loans increased $184 thousand as the average
balance and yield on other loans increased $6.3 million and 52 basis points,
respectively.
Total interest expense amounted to $3.9 million for the three months ended June
30, 1995, a $983 thousand or 33.7% increase in comparison to the same period in
1994. Interest expense on deposits increased $628 thousand, as the average rate
on deposits increased 91 basis points and the average balance increased $4.0
million. Interest expenses on Federal Home Loan Bank of Pittsburgh ("FHLB")
advances increased $288 thousand, as the average balance and average rate
increased $8.0 million and 161 basis points, respectively. These increases
reflect higher levels of FHLB advances to meet loan demand and the general
overall market increase in interest rates over the past year. Interest expense
on subordinated debt amounted to $67 thousand for the three months ended June
30, 1995 due to the issuance of $3.0 million of subordinated debentures in June
1994.
For the six months ended June 30, 1995, total interest income amounted to $13.2
million, a $2.6 million or 24.9% increase when compared to the same period in
1994. Interest income on mortgage loans increased $1.8 million, as the average
balance outstanding increased $26.7 million and the average yield increased 84
basis points. Interest income on mortgage-backed securities increased $193
thousand, as the average yield increased 128 basis points, which offset a $17.1
million decrease in the average balance. Interest income on investments and
other interest-earning assets increased $248 thousand, as the average balance
outstanding increased 5.6 million and the average yield increased 100 basis
points. Interest income on other loans increased $401 thousand as the average
balance and yield on other loans increased $6.6 million and 72 basis points,
respectively.
For the six months ended June 30, 1995, total interest expense amounted to $7.6
million, a $1.8 million or 31.4% increase when compared to the same period in
1994. Interest expense on deposits increased $1.1 million, as the average
balance of deposits increased $3.5 million and the average rate on deposits
increased 77 basis points. Interest expense on FHLB advances increased $606
thousand, as the average balance and average rate increased $8.3 million and 175
basis points, respectively. These increases reflect higher levels of FHLB
advances to meet loan demand and the general overall market increase in interest
rates over the past year. Interest expense on subordinated debt amounted to
$133 thousand for the six months ended June 30 1995 due to the issuance of $3.0
million of subordinated debentures in June 1994.
Provision for Loan Losses
The Bank's provision for loan losses represents the charge against earnings that
is required to fund the provision for loan losses. The level of the allowance
for loan losses is determined by inherent risks within the Bank's loan
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. See
"Non-Performing Assets."
During the six months ended June 30, 1995, the Bank recorded a $250 thousand
provision compared with $350 thousand for the comparable period in 1994, and had
net charge-offs of $293 thousand during the six months ended June 30, 1995 in
comparison with $673 thousand in net charge-offs during the comparable period in
1994. At June 30, 1995, the allowance for loan losses amounted to $1.5 million
or .70% of total loans and 110.0% of total non-performing loans. See "Allowance
for Loan Losses."
The Company's allowance for loan losses declined by $331 thousand or 18.5% from
$1.8 million at June 30, 1994 to $1.5 million at June 30, 1995. The decline in
such allowance reflects the decline in non-performing loans, the decline in net
charge-offs and the decline in loan delinquencies during the six months ended
June 30, 1995 as compared to the same period in 1994. In addition, the
allowance for loan losses to total non-performing loans increased from 27.9% at
June 30, 1994 to 110.0% at June 30, 1995. Nevertheless, although management
utilizes its best judgement in providing for losses, there can be no assurance
that the Bank will not have to increase its provision for loan losses in the
future as a result of increases in non-performing loans or for other reasons.
Any such increase could adversely affect the Bank's results of operations. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowance for loan losses and the
carrying value of its other non-performing assets. Such agencies may require
the Bank to recognize additions to its allowance for losses on loans and adjust
the carrying value of its REO based on their judgements about information
available to them at the time of their examination.
Other Income
<TABLE>
The following table details other income for the periods indicated.
<CAPTION>
For The Three Months For The Six Months
Ended June 30, Ended June 30
1995 1994 1995 1994
(Dollars in Thousands) (Dollars in Thousands)
(unaudited) (unaudited)
Other income:
<S> <C> <C> <C> <C>
Mortgage origination and servicing $ 195 $ 167 $ 402 $ 389
Service charges on deposits 253 206 484 398
Gain (loss) from mortgage banking activities 29 (46) 28 (172)
Gain (loss) from sales of securities --- 1 (35) (69)
Income (loss) on properties sold 6 19 (18) (18)
Other 138 68 162 261
Total other income $ 621 $ 415 $ 1,023 $ 789
</TABLE>
Total other income amounted to $621 thousand for the three months ended June 30,
1995, an increase of $206 thousand compared with the $415 thousand in other
income for the three months ended June 30, 1994. Other income for the three
months ended June 30, 1995 included $195 thousand in fees from mortgage
origination and servicing in comparison to $167 thousand for the same period in
1994. The increase in such fees was primarily due to increased mortgage lending
activity and an increase in the portfolio of loans serviced for others from
$204.4 million at June 30, 1994 to $270.2 million at June 30, 1995. Service
charges on deposits increased $47 thousand for the three months ended June 30,
1995 due to higher volumes of account transactions.
Gains from mortgage banking activities were $29 thousand for the three months
ended June 30, 1995 in comparison with losses of $46 thousand for the comparable
period in 1994. During the three months ended June 30, 1995 the company sold
$8.5 million of adjustable-rate mortgages and retained servicing on these loans.
No gain or loss was recognized on this sale. There were no gains or losses from
sales of securities for the three months ended June 30, 1995, in comparison with
gains of $1 thousand for the comparable period in 1994. The Company may decide
to sell securities from its investment 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 ability to recognize
gains from mortgage banking activities and sales of securities is dependent on
market and economic conditions and, accordingly there can be no assurance of
gains in future periods or that there will not be significant inter-period
variation in the results of such activities. In 1995, the Bank intends to sell
substantially all residential mortgage loan originations in the secondary market
or to private investors. In addition, the Bank has recently expanded its
lending activities to include the origination of nonconforming paper.
Gains on properties sold was $6 thousand for the three months ended June 30,
1995, in comparison with $19 thousand in the comparable 1994 period, primarily
due to declining real estate owned activities. Other income for the three
months ended June 30, 1995 increased $70 thousand from the three months ended
June 30, 1994 primarily due to fee income generated by the Company's
subsidiary, Progress Realty Advisors, L.P.
Total other income amounted to $1.0 million for the six months ended June 30,
1995, an increase of $234 thousand from the $789 thousand recognized for the
comparable 1994 period. The increase was primarily due to gains from mortgage
banking activities which totalled $28 thousand for the six months ended June 30,
1995 in comparison with losses of $172 thousand for the first six months of 1994
and $35 thousand in losses from the sale of securities available for sale in
1995 in comparison with $69 thousand in losses in 1994. 1995 results also
included an $86 thousand increase in service charges on deposits. Partially
offsetting these increases, was a $99 thousand decrease in other income,
primarily due to lower fee income generated by the Company's subsidiary,
Progress Realty Advisors, L.P.
Other Expense
<TABLE>
The following table details other expense for the periods indicated.
<CAPTION>
For The Three Months For The Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
(Dollars in Thousands) (Dollars in Thousands)
(unaudited) (unaudited)
Other expense:
<S> <C> <C> <C> <C>
Salaries and employee benefits $ 1,254 $ 1,056 $ 2,454 $ 2,103
Occupancy 366 340 691 673
Data processing 205 203 396 390
Furniture, fixtures and equipment 146 116 273 224
Insurance premiums 257 261 515 522
Provision for real estate owned 331 1,489 406 1,489
Loan and real estate owned expense, net (92) 70 (49) 180
Professional services 20 185 294 403
Other 438 384 713 646
Total other expense $ 2,925 $ 4,104 $ 5,693 $ 6,630
</TABLE>
Total other expense amounted to $2.9 million for the three months ended June 30,
1995, a decrease of $1.2 million from the $4.1 million recognized during the
comparable 1994 period, primarily due to a $1.2 million decrease in the
provision for REO. Salaries and employee benefits increased $198 thousand to
$1.3 million for the three months ended June 30, 1995 in comparison with 1.1
million for the three months ended June 30, 1994 primarily due to staffing
additions to support the Bank's lending initiatives and the cash out of stock
options by a former executive officer. The provision for REO amounted to $331
thousand at June 30, 1995 as compared to $1.5 million for the comparable 1994
period, due to a decrease in fair value writedowns on REO in 1995. Professional
services expense, which consists primarily of legal, accounting, tax and
supervisory examination fees, decreased $165 thousand from $185 thousand for the
three months ended June 30, 1994 to $20 thousand for the three months ended June
30, 1995 primarily due to higher legal expenses associated with loan and REO
workouts in 1994 and the reimbursement of certain legal expenses in 1995. Loan
and REO expense, net decreased from $70 thousand for the three months ended June
30, 1994 to $92 thousand of income for the three months ended June 30, 1995 due
to the lower level of non-performing assets and positive cash flow from the
operation of certain REO properties. Other miscellaneous expenses increased $54
thousand primarily due to increased advertising and postage expenses and other
general and administrative expenses.
Total other expenses amounted to $5.7 million for the six months ended June 30,
1995, a decrease of $937 thousand from $6.6 million for the comparable 1994
period, primarily due to a $1.1 million decrease in provision for REO discussed
above. Salaries and employee benefits increased $351 thousand for the six
months ended June 30, 1995 to $2.5 million in comparison with $2.1 million for
the six months ended June 30, 1994 primarily due to staffing additions to
support the Bank's lending initiatives and the cash out of stock options by a
former executive officer. Professional services expense decreased $109 thousand
from $403 thousand for the six months ended June 30, 1995 to $294 thousand for
the six months ended June 30, 1994 primarily due to a reduction in legal
expenses associated with loan workouts and the reimbursement of certain legal
expenses in 1995. Loan and REO expense, net decreased from $180 thousand for
the six months ended June 30, 1994 to $49 thousand of income for the six months
ended June 30, 1995 due to the lower level of non-performing assets and positive
cash flow from the operation of certain REO properties. Other miscellaneous
expenses increased $67 thousand primarily due to increased advertising and
postage expenses and other general and administrative expenses. <PAGE>
Income Tax Expense
The Company recorded no income tax expense for the three and six months ended
June 30, 1995 and June 30, 1994, respectively, due to the utilization of net
operating loss carryforwards. At June 30, 1995, the Company had a net operating
loss carryforward for federal income tax purposes of approximately $7.1 million,
$866 thousand of which expires in 2006, $4.5 million of which expires in 2007,
$654 thousand of which expires in 2008 and $1.0 million of which expires in
2009.
The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109") on a prospective basis in the first
quarter of 1993. Under SFAS 109, deferred income taxes are recognized in full,
subject to a valuation allowance for the future tax consequences attributable to
differences between financial statement carrying amounts of existing assets and
liabilities using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. At June 30, 1995, the Company had a valuation allowance of $2.3
million against net deferred tax assets of $3.6 million. The amount of the
valuation allowance was determined based on management's estimate of deferred
tax assets that will be realized using the "more likely than not" realization
criteria contained in SFAS 109 in consideration of management's projections of
future taxable income.
FINANCIAL CONDITION
Liquidity and Funding
The Company must maintain sufficient liquidity to meet the funding needs of
current loan demand, savings deposit withdrawals and to pay operating expenses.
The Company generally has no significant source of income other than dividends
from the Bank and its other subsidiaries and any fees paid by the Bank and its
other subsidiaries to the Company. In April 1995, the Bank began paying a
monthly management fee to the Company in order to compensate the Company for
certain operating expenses. Such operating expenses consist primarily of
accounting, tax, legal, transfer agent and other stockholder related expenses of
the Company.
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 other investments having maturities of five years or less.
Regulations currently in effect require the Bank to maintain liquid assets of
not less than 5% of its net withdrawable accounts plus short-term borrowings, of
which short-term liquid assets must consist of not less than 1%. These levels
are changed from time to time by the OTS to reflect economic conditions. The
Bank's average liquidity ratio for the three months ended June 30, 1995 was
approximately 6.78%.
The Bank monitors its liquidity in accordance with guidelines established by the
Bank and applicable regulatory requirements. The Company's need for liquidity
is affected by loan demand and net changes in retail deposit levels. The Company
can minimize the cash required during the times of heavy loan demand by
modifying its credit policies or reducing its marketing efforts. Liquidity
demand caused by net reductions in retail deposits are usually caused by factors
over which the Company has limited control. The Company derives its liquidity
from both its assets and liabilities. Liquidity is derived from assets by
receipt of interest and principal payments and prepayments, by the ability to
sell assets at market prices and by utilizing unpledged assets as collateral for
borrowings. Liquidity is derived from liabilities by maintaining a variety of
funding sources, including retail deposits and advances from the FHLB.
The Company's primary source of funds have historically consisted of deposits,
amortization and prepayments of outstanding loans, borrowings from the FHLB and
sales of investment securities, loans and mortgage-backed securities. During
1994, the Company obtained additional funds through a private placement of $3.0
million of subordinated debentures, of which $2.4 million was contributed to the
Bank. During the six months ended June 30, 1995 the Company used its capital
resources primarily to meet its ongoing commitments to fund maturing savings
certificates and deposit withdrawals, fund existing and continuing loan
commitments and maintain its liquidity.
For the six months ended June 30, 1995, cash was provided by operating and
financing activities and used in investing activities. Operating activities
provided $7.8 million of cash, primarily due to sales of loans totalling $10.1
million. Investing activities used $10.3 million in cash as net originations of
loans, purchases of mortgage-backed securities, and capital expenditures
exceeded repayments of mortgage-backed securities and sales of investment
securities. In addition, financing activities provided $5.5 million in cash due
to an increase in deposits which more than offset a decrease in FHLB borrowings.
At June 30, 1995, the Bank had $19.2 million in loan commitments and $20.3
million of undisbursed loan funds. At June 30, 1995, FHLB advances which were
scheduled to mature through June 30, 1996 totalled $24.4 million. The
subordinated debentures are due September 30, 2004 and are not redeemable prior
to July 1, 1996. At June 30, 1995, the total amount of time deposits which were
scheduled to mature through June 30, 1996 totalled $116.0 million.
Management has focused considerable attention on the retention of the Bank's
core deposit base, which has been impacted by increased competition for deposit
funds.
The Bank's deposits are obtained primarily from residents near the Bank's six
full service offices in Montgomery County, one office in Delaware County and one
office in the Andorra section of Philadelphia. The Bank generally does not
advertise for deposits outside of its market area and does not use brokers to
solicit deposits on its behalf. The Bank has a drive-up banking facility at one
of its offices and has automated teller machines ("ATM's") at all of its
offices. 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 plans.
Deposits increased $8.0 million during the six months ended June 30, 1995 from
$284.0 million at December 31, 1994 to $292.0 million at June 30, 1995. The
ability of the Bank to attract and maintain deposits and the Bank's cost of
funds on these deposit accounts have been, and will continue to be,
significantly affected by economic and competitive conditions.
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.
<TABLE>
The following table presents certain information regarding FHLB advances for the
periods indicated.
<CAPTION>
At or For the Six Months
Ended June 30,
1995 1994
(Dollars in thousands)
<S> <C> <C>
Average balance outstanding $ 47,802 $ 39,486
Maximum amount outstanding at
any month-end during the period $ 50,845 $ 44,958
Weighted average interest rate during the period 6.41% 4.66%
Weighted average interest rate at end of the period 6.42% 5.04%
</TABLE>
The Bank continued to utilize advances from the FHLB as a source of funds to
meet loan demand during the three months ended June 30, 1995. FHLB advances
decreased $2.7 million to $41.4 million at June 30, 1995 from $44.1 million at
December 31, 1994.
At June 30, 1995, the Bank had commitments under standby letters of credit and
commercial and consumer unused lines of credit of approximately $664 thousand
and $9.9 million, respectively. These commitments can be funded, if required,
from the sources outlined above.
Capital Resources
The Bank is required pursuant to OTS regulations to have (i) tangible capital
equal to at least 1.5% of adjusted total assets, (ii) core capital equal to at
least 3.0% of adjusted total assets, and (iii) total risk-based capital equal to
at least 8.0% of risk-weighted assets.
At June 30, 1995, the Bank met all regulatory capital requirements. 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 June 30, 1995:
<TABLE>
Tangible Core Risk-Based
Capital % Capital % Capital %
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Adjusted GAAP Capital $ 17,031 $ 17,031 $ 17,031
General valuation allowance --- --- 1,459
Unrealized loss on securities available for sale 373 373 373
Goodwill (164) (164) (164)
Investment in joint venture (8) (8) (8)
Non-qualifying deferred tax asset (520) (520) (520)
Total 16,712 4.70% 16,712 4.70% 18,171 9.57%
Minimum capital requirement 5,339 1.50 10,678 3.00 15,196 8.00
Regulatory capital - excess $ 11,373 3.20% $ 6,034 1.70% $ 2,975 1.57%
</TABLE>
The prompt corrective action regulations under the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") 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." Institutions categorized as "undercapitalized" or worse are
subject to certain restrictions, including the requirement to file a capital
plan with its primary Federal regulator, prohibitions on the payment of
dividends and management fees, restrictions on executive compensation, and
increased supervisory monitoring, among other things. To be considered
"adequately capitalized," an institution must generally have a leverage ratio of
at least 4%, a Tier 1 risk-based capital ratio of at least 4%, and a total
risk-based capital ratio of at least 8%.
At June 30, 1995, the Bank's leverage ratio was 4.70%, Tier 1 risk-based ratio
was 8.80 %, total risk-based ratio was 9.57%, and tangible equity ratio was
4.70%, based on leverage capital of $16,712,000, Tier 1 capital of 16,712,000,
total risk-based capital of $18,171,000 and tangible equity capital of
$16,712,000, respectively. As of June 30, 1995, the Bank was classified as
"adequately capitalized."
Cash and Due From Banks
Interest-bearing deposits in other banks totalled $3.8 million at June 30, 1995
in comparison with $311 thousand at December 31, 1994. At June 30, 1995, the
Bank also had $7.4 million in cash and non-interest bearing deposits in other
banks compared with $7.8 million at December 31, 1994. <PAGE>
Investment Securities
The Bank is required under current OTS regulations to maintain defined levels of
liquidity and utilizes certain investments that qualify as liquid assets. The
Bank utilizes deposits with the FHLB, including bankers' acceptances, loans to
financial institutions whose deposits are insured by the FDIC, Federal funds and
United States government and agency obligations. Investments held to maturity
are carried at amortized cost. Investments classified as available for sale are
carried at fair value in accordance with SFAS 115. The Company also invests in
equity investments from time to time and held $30 thousand of such securities on
its books at June 30, 1995.
The following table sets forth the amortized cost, gross unrealized losses,
estimated fair value and carrying value of the investment portfolio at the dates
indicated.
<TABLE>
At June 30, 1995
Gross Estimated
Amortized Unrealized Fair Carrying
Cost (1) Losses Value Value
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Available for sale:
U.S. agency obligations $ 4,998 $ (99) $ 4,899 $ 4,899
Equity investments 30 --- 30 30
Total available for sale 5,028 (99) 4,929 4,929
Held to maturity:
FHLB stock, pledged $ 2,444 $ --- $ 2,444 $ 2,444
U.S. agency obligations 10,543 (164) 10,379 10,543
Total held to maturity 12,987 (164) 12,823 12,987
At December 31, 1994
Available for sale:
U.S. agency obligations $ 4,999 $ (402) $ 4,597 $ 4,597
Equity investments 30 --- 30 30
Total available for sale $ 5,029 $ (402) $ 4,627 $ 4,627
Held to maturity:
FHLB stock, pledged $ 2,302 $ --- $ 2,302 $ 2,302
U.S. agency obligations 10,564 (939) 9,625 10,564
Total held to maturity $ 12,866 $ (939) $ 11,927 $ 12,866
</TABLE>
<TABLE>
The amortized cost and estimated fair value of investment securities by
contractual maturity at June 30, 1995 are as follows:
<CAPTION>
Available for sale Held to maturity
Amortized Estimated Amortized Estimated
Cost (1) Fair Value Cost(1) Fair Value
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Due after one year through five years $ 4,000 $ 3,904 $ 1,000 $ 973
Due after five years through ten years 998 995 7,543 7,423
Due after ten years --- --- 2,000 1,983
No stated maturity 30 30 2,444 2,444
Total investment securities $ 5,028 $ 4,929 $ 12,987 $ 12,823
</TABLE>
(1) Original cost of securities adjusted for repayments, amortization of
premiums and accretion of discounts.
There were no sales of investment securities available for sale during the three
months ended June 30, 1995.
Mortgage-Backed Securities
Since July 1991, the Bank has significantly increased its investment in
mortgage-backed securities that are guaranteed by Federal agencies as part of
management's strategy to diversify the interest-earning assets of the Bank and
improve core earnings. The cost, gross unrealized gains and losses, estimated
fair value and carrying value of mortgage-backed securities by classification at
the dates indicated were as follows.
<TABLE>
At June 30, 1995
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost (1) Gains Losses Value Value
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Available for sale:
GNMA pass-through certificates $ 3,678 $ 31 $ (1) $ 3,708 $ 3,708
FNMA pass-through certificates 1,053 --- (40) 1,013 1,013
FHLMC pass-through certificates 3,277 --- (102) 3,175 3,175
Non-agency pass-through
certificates 2,560 --- (1) 2,559 2,559
FHLMC collateralized
mortgage obligations 3,003 --- (78) 2,925 2,925
Non-agency collateralized
mortgage obligations 1,995 --- (83) 1,912 1,912
Total available for sale $ 15,566 $ 31 $ (305) $ 15,292 $ 15,292
Held to maturity:
GNMA pass-through certificates $ 27,913 $ --- $ (845) $ 27,068 $ 27,913
FNMA pass-through certificates 20,330 --- (496) 19,834 20,330
FHLMC pass-through certificates 39,497 --- (761) 38,736 39,497
Total held to maturity $ 87,740 $ --- $ (2,102) $ 85,638 $ 87,740
At December 31, 1994
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost (1) Gains Losses Value Value
(Dollars in Thousands)
Available for sale:
GNMA pass-through certificates $ 227 $ --- $ (8) $ 219 $ 219
FNMA pass-through certificates 1,098 --- (84) 1,014 1,014
FHLMC pass-through certificates 3,429 --- (274) 3,155 3,155
FHLMC collateralized
mortgage obligations 3,003 --- (78) 2,925 2,925
Non-agency collateralized
mortgage obligations 1,995 --- (205) 1,790 1,790
Total available for sale $ 9,752 $ --- $ (649) $ 9,103 $ 9,103
Held to maturity:
GNMA pass-through certificates $ 29,325 $ --- $ (2,246) $ 27,079 $ 29,325
FNMA pass-through certificates 21,577 --- (1,645) 19,932 21,577
FHLMC pass-through certificates 42,771 --- (2,677) 40,094 42,771
Total held to maturity $ 93,673 $ --- $ (6,568) $ 87,105 $ 93,673
</TABLE>
(1) Original cost of securities adjusted for repayments, amortization of
premiums and accretion of discounts.<PAGE>
Mortgage-backed securities increase the credit quality of the Bank's assets by
virtue of the guarantees that back them, are more liquid than individual
mortgage loans and may be used to collateralize borrowings or other obligations
of the Bank. The mortgage-backed securities portfolio contains no speculative
derivative securities at June 30, 1995. In addition, since August 1992, the Bank
has classified a portion of its mortgage-backed securities portfolio as
available for sale and has sold certain securities from this portfolio in
accordance with the Bank's asset/ liability strategy or in response to changes
in interest rates, changes in prepayment rates, the need to increase the Bank's
regulatory capital or similar factors.
Mortgage-backed securities classified as held to maturity are carried at
amortized cost and are adjusted for amortization of premiums and accretion of
discounts over the life of the related security pursuant to the level yield
method. Mortgage-backed securities that are held for an indefinite period of
time are classified as available for sale and are carried at fair value pursuant
to SFAS 115, which was adopted by the Company in the first quarter of 1994.
Mortgage- backed securities are classified as available for sale primarily based
on the yield and duration of specific investments. The fixed rate balloons and
collateralized mortgage obligations held by the Bank approximate the duration of
the type of loan the Bank originates and therefore, such securities may be sold
to allow for additional loan growth and/or other asset/liability management
strategies. There were no sales of mortgage-backed securities classified as
available for sale during the three months ended June 30, 1995.
Although the Bank's mortgage-backed securities portfolio may have a shorter
average term to maturity and greater liquidity than the Bank's single-family
residential real estate loans, the Bank is subject to reinvestment risk with
respect to such portfolio. Specifically, as the Bank's mortgage-backed
securities amortize or prepay, the Bank may not be able to reinvest the proceeds
of such repayment and prepayments at a comparable favorable rate, particularly
if the mortgage- backed securities were acquired in a higher interest rate
environment. In addition, mortgage-backed securities classified as available
for sale are carried at fair value, which could result in fluctuations in the
Company's stockholders' equity, due to changes in the fair value of such
securities. Accordingly, the Bank's portfolio of mortgage-backed securities
classified as available for sale may result in increased volatility in the
Bank's liquidity, operations and capital. The Bank attempts to address such
risks by actively managing its portfolio in relation to changes in interest
rates and the Bank's liquidity needs.
Loan Portfolio
The Bank's net loan portfolio, including loans held for sale, totalled $205.9
million at June 30, 1995 or 57.8% of its total assets, a decrease of $257
thousand or 1.2% from the $206.1 million outstanding at December 31, 1994. The
following table depicts the composition of the Bank's loan portfolio at the
dates indicated.
<TABLE>
June 30, 1995 December 31, 1994
Amount Percent Amount Percent
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real estate loans:
Single family residential (1) $ 92,054 44.40% $ 99,917 48.12%
Commercial real estate (2) 74,535 35.95 71,273 34.33
Construction 7,144 3.45 5,379 2.59
Total real estate loans 173,733 83.80 176,569 85.04
Commercial business loans 12,428 5.99 12,005 5.78
Consumer loans:
Home equity and lines of credit 19,436 9.38 17,927 8.64
Other 1,728 .83 1,124 .54
Total consumer loans 21,164 10.21 19,051 9.18
Total loans 207,325 100.00% 207,625 100.00%
Allowance for possible loan losses (1,459) (1,502)
Net loans $ 205,866 $ 206,123
</TABLE>
(1) Includes $1.3 million and $351 thousand of loans held for sale at June 30,
1995 and December 31, 1995, respectively. (2) Includes $15.0 million and $18.6
million of multi-family residential loans at June 30, 1995 and December 31,
1994, respectively.
Loans Held For Sale
At June 30, 1995, the Bank had $1.3 million of fixed-rate residential loans held
for sale in comparison with $351 thousand at December 31, 1994.
NON-PERFORMING ASSETS
General
Non-performing assets, consisting of non-accrual loans, accruing loans 90 days
or more past due and REO, increased dramatically in 1990 and 1991, and reached
$50.6 million at March 31, 1992. Such increases were to a great extent the
result of a deterioration in the economy and in particular decreases in the
market values of real estate which secured the Bank's loans. As a result of
certain steps taken by the Bank, total non-performing assets have been
substantially reduced, and amounted to $5.1 million at June 30, 1995. The
Bank's future results of operations will be affected by its ability to continue
to reduce the $5.1 million of non-performing assets without incurring additional
losses.
The accrual of interest on commercial and mortgage loans is generally
discontinued when loans become 90 days past due and when, in management's
judgement, it is determined that a reasonable doubt exists as to its
collectibility. The accrual of interest is also discontinued on residential and
consumer loans when such loans become 90 days past due, except for those loans
in the process of collection which are secured by real estate with a loan to
value less than 80% where the accrual of interest ceases at 180 days. Consumer
loans generally are charged-off when the loan becomes over 120 days delinquent,
unless secured by real estate and meeting the above-mentioned criteria. When a
loan is placed on non-accrual status, interest accruals cease and uncollected
accrued interest is reversed and charged against current income. Additional
interest income on such loans is recognized only when received. A loan remains
on non-accrual status until the factors which indicate doubtful collectibility
no longer exist, or the loan is liquidated, or when the loan is determined to be
uncollectible and is charged-off against the allowance for loan losses.
Real estate acquired in partial or full satisfaction of loans is recorded at the
lower of cost (recorded balance of loan at foreclosure plus foreclosure costs)
or fair value through a charge to the allowance for loan losses and the lower of
this new cost basis or fair value less estimated costs to sell thereafter.
Valuations are periodically performed by management, and any subsequent decline
in fair value is charged to operations. Costs relating to the development and
improvement of property are capitalized, whereas costs relating to the holding
of property are only capitalized when carrying value does not exceed fair value.
The interest costs relating to the development of real estate are capitalized.
Gains on the sale of real estate are recognized upon disposition of the property
and losses are charged to operations as incurred.
<TABLE>
The following table details the Bank's non-performing assets at the dates
indicated:
<CAPTION>
June 30, December 31, June 30,
1995 1994 1994
(Dollars in Thousands)
<S> <C> <C> <C>
Loans accounted for on a
non-accrual basis (1) $ 1,326 $ 4,369 $ 6,353
Accruing loans 90 or
more days past due --- 182 58
Total non-performing loans 1,326 4,551 6,411
REO, net of related reserves 3,729 4,534 6,023
Total non-performing assets $ 5,055 $ 9,085 $ 12,434
Non-performing loans as a
percentage of total loans 0.64% 2.19% 3.39%
Non-performing assets as a
percentage of total assets 1.42% 2.61% 3.70%
</TABLE>
(1) Includes $73 thousand, $326 thousand and $455 thousand of loans which were
considered troubled debt restructurings as of June 30, 1995,December 31, 1994
and June 30, 1994, respectively.
Non-performing assets decreased $4.0 million to $5.1 million at June 30, 1995
from $9.1 million at December 31, 1994. This decrease primarily resulted from
the restructuring of a large commercial real estate loan. The $2.9 million
loan, which was over 120 days delinquent as of December, 31, 1994, was
originated in 1987 for the construction of a three- story restaurant and
catering facility located in Voorhees, New Jersey. The loan converted to a
permanent loan and matured on September 30, 1992. In May 1995, in accordance
with an order of the bankruptcy court, the Company restructured the loan for a
two-year term at a premium to the Company's designated prime lending rate, the
borrower paid in advance seven months of debt service payments (five of which
are being held in escrow), and, as a result, the loan has been returned to
accruing status.
The $1.3 million of non-accrual loans at June 30, 1995 consisted of $1.0 million
of loans secured by single-family residential property, $9 thousand of
commercial business loans and $287 thousand of consumer loans. The $3.7 million
of REO at June 30, 1995 consisted primarily of a medical office building located
in the Bronx, New York with an aggregate carrying value of $3.1 million which is
net of $10.4 million in charge-offs. The Bank has entered into an agreement to
sell its REO property located in the Bronx for $3.2 million. The sale required
a $331 thousand REO provision in the second quarter and is expected to close
prior to year end. At June 30, 1995, the medical office building was 68% leased
and covering operating expenses. Furthermore, at June 30, 1995, REO also
included four single-family residences with an aggregate carrying value of $369
thousand and $256 thousand of undeveloped residential property. With the
exception of the medical office building, all of the Bank's REO consists of
properties located within the Bank's primary market area.
Delinquencies
All loans are reviewed on a regular basis and are placed on non-accrual status
when, in the opinion of management, the collection of additional interest is
deemed insufficient to warrant further accrual. See "Non-Performing
Assets-General."
The following table sets forth information concerning the principal balances and
percent of the total loan portfolio represented by delinquent loans at the dates
indicated:
<TABLE>
June 30, December 31, June 30,
1995 1994 1994
Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Delinquencies:
30 to 59 days $ 861 .4 % $ 719 .4 % $ 1,607 .9 %
60 to 89 days 1,314 .6 % 282 .1 % 835 .4 %
90 or more days and
non-accrual loans (1) 1,326 .7 % 4,55 2.2 % 6,411 3.4 %
Total $ 3,501 1.7 % $ 5,552 2.7 % $ 8,853 4.7 %
</TABLE>
(1)Includes $0, $182 thousand and $58 thousand of loans that were accruing
interest at June 30, 1995, December 31, 1994 and June 30, 1994, respectively.
Allowance for Loan Losses
<TABLE>
The following table details the Bank's allowance for loan losses for the periods
indicated:
<CAPTION>
At or At or
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C>
Average loans outstanding $ 213,222 $ 183,845 $ 211,828 $ 178,489
Balance beginning of period $ 1,611 $ 2,130 $ 1,502 $ 2,113
Charge-offs:
Residential real estate 9 --- 9 ---
Consumer 17 --- 17 18
Commercial 281 647 281 724
Total charge-offs 307 647 307 742
Recoveries:
Real estate construction 1 2 1 62
Consumer 4 5 10 7
Commercial --- --- 3 ---
Total recoveries 5 7 14 69
Net charge-offs 302 640 293 673
Additions charged to operations 150 300 250 350
Balance at end of period $ 1,459 $ 1,790 $ 1,459 $ 1,790
Ratio of net charge-offs during the period to
average loans outstanding during the period .14% .35% .14% .38%
Ratio of allowance for loan losses to non-
performing loans at end of period 110.03% 27.92% 110.03% 27.92%
</TABLE>
An allowance for loan 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 loan portfolio. The allowance for possible loan losses is
based on estimated net realizable value unless it is probable that loans will be
foreclosed, in which case the allowance for loan losses is based on fair value.
Management's periodic evaluation is based upon examination of the portfolio,
past loss experience, current economic conditions, the results of the most
recent regulatory examination, 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 evaluations.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in routine legal proceeding occurring in the ordinary
course of business which management, after reviewing the foregoing actions with
legal counsel, is of the opinion that the liability, if any, resulting from such
actions will not have a material effect on the financial condition or results of
operations of the Company.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting of stockholders was held April 25, 1995 for the
following purposes:
1) To elect three directors for a term of three years
(William O. Daggett, Jr, Joseph R. Klinger, William L. Mueller)
2) To ratify the appointment of Coopers & Lybrand L.L.P. as the Company's
independent auditors for the year ending December 31, 1995.
Both proposals were adopted by the Company's stockholders as follows:
1) Election of Directors For Against Abstain/Not Voted
William O. Daggett, Jr. 2,418,899 16,801 839,300
Joseph R. Klinger 2,418,899 16,801 839,300
William L. Mueller 2,418,899 16,801 839,300
2) Ratify appointment of
Coopers & Lybrand L.L.P. 2,417,849 5,351 851,800
Item 5. Other Information
On May 24, 1995 the Company and the Bank entered into a definitive
agreement whereby the Bank will merge with another, locally based,
depository institution. In connection with this transaction, the Company
will raise additional capital through a common stock offering. The
transaction requires approval from the stockholders of the respective
Companies and regulatory bodies.
On July 17, 1995 the Company acquired a majority interest in Quaker State
Financial Corporation which is engaged in the equipment leasing business.
Item 6. Exhibits and Reports on Form 8-K
On May 26, 1995 the Company filed a Current Report on Form 8-K with the
Securities and Exchange Commission reporting under Item 5 the execution of
the definitive agreement referenced above.
27.1 Financial Data Schedule
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Progress Financial Corporation
August 14, 1995 /s/W. Kirk Wycoff
Date W. Kirk Wycoff, Chairman,
President and Chief Executive
Officer
August 14, 1995 /s/Peter J. Meier
Date Peter J. Meier, Vice President
and Corporate Controller
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> JUN-30-1995
<CASH> 7350
<INT-BEARING-DEPOSITS> 3770
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 20221
<INVESTMENTS-CARRYING> 100727
<INVESTMENTS-MARKET> 98461
<LOANS> 207325
<ALLOWANCE> 1459
<TOTAL-ASSETS> 356451
<DEPOSITS> 291969
<SHORT-TERM> 17878
<LIABILITIES-OTHER> 2039
<LONG-TERM> 26500
<COMMON> 3280
0
0
<OTHER-SE> 11104
<TOTAL-LIABILITIES-AND-EQUITY> 356451
<INTEREST-LOAN> 9193
<INTEREST-INVEST> 3888
<INTEREST-OTHER> 77
<INTEREST-TOTAL> 13158
<INTEREST-DEPOSIT> 5906
<INTEREST-EXPENSE> 7558
<INTEREST-INCOME-NET> 5600
<LOAN-LOSSES> 250
<SECURITIES-GAINS> (35)
<EXPENSE-OTHER> 5693
<INCOME-PRETAX> 680
<INCOME-PRE-EXTRAORDINARY> 680
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 680
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
<YIELD-ACTUAL> 3.4
<LOANS-NON> 1326
<LOANS-PAST> 0
<LOANS-TROUBLED> 73
<LOANS-PROBLEM> 6824
<ALLOWANCE-OPEN> 1502
<CHARGE-OFFS> 307
<RECOVERIES> 14
<ALLOWANCE-CLOSE> 1459
<ALLOWANCE-DOMESTIC> 1459
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1459
</TABLE>
