<PAGE>
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, 1996
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)
Suite 200
Four Sentry Parkway
Blue Bell, Pennsylvania 19422-2311
- ----------------------- ----------
(address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 825-8800
Plymouth Meeting Executive Campus
600 West Germantown Pike
Plymouth Meeting, Pennsylvania 19462-1060
- ------------------------------------------
(Former address changed since last report)
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) 3,730,000
------------------------------ -------------------------
Title of Each Class Number of Shares Outstanding
as of August 6, 1996
<PAGE>
PROGRESS FINANCIAL CORPORATION
Table of Contents
PART I - FINANCIAL INFORMATION
Page
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
June 30, 1996 (unaudited) and December 31,1995........................3
Consolidated Statements of Operations for the three and
six months ended June 30, 1996 and 1995 (unaudited).-.................4
Consolidated Statements of Cash Flows for the six months ended
June 30, 1996 and 1995 (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
<PAGE>
PROGRESS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
PART I- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---- ----
(Dollars in Thousands)
(unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks:
Interest bearing $ 311 $ 4,780
Non-interest bearing 6,604 2,309
Investment securities:
Available for sale at fair value
(amortized cost: $3,513 in 1996 and $5,527 in 1995) 3,417 5,504
Held to maturity (fair value: $1,949 in 1996 and $2,149 in 1995) 1,937 2,149
Mortgage-backed securities:
Available for sale at fair value
(amortized cost: $51,106 in 1996 and $37,244 in 1995) 50,299 36,842
Held to maturity (fair value: $49,442 in 1996 and $52,090 in 1995) 50,939 52,833
Loans, net of unearned discounts and deferred fees 216,245 223,370
Less: allowance for possible loan losses (2,114) (1,720)
--------- ---------
Net Loans 214,131 21,650
Loans held for sale (fair value: $2,325 in 1996 and $3,160 in 1995) 2,323 3,153
Real estate owned, net 612 728
Premises and equipment 6,771 2,182
Accrued interest receivable 2,259 2,280
Deferred income tax 2,961 3,417
Other Assets 5,294 7,567
--------- ---------
TOTAL ASSETS $ 347,858 $ 345,394
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 295,004 $ 297,260
Advances from the Federal Home Loan Bank 19,400 25,400
Subordinated debt and other borrowings 6,000 3,000
Advanced payments by borrowers for taxes and insurance 2,654 2,312
Accrued interest payable 956 722
Other liabilities 4,336 293
--------- ---------
TOTAL LIABILITIES 328,350 328,987
--------- ---------
--------- ---------
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; 3,780,000
and 3,280,000 shares issued and outstanding at June 30, 1996 and
December 31, 1995, respectively 3,780 3,280
Capital surplus 17,706 15,706
Unearned Employee Stock Ownership Plan (263) ---
Retained earnings (deficit) (1,068) (2,238)
Unrealized loss on securities available for sale,
net of deferred income taxes (647) (341)
--------- ---------
Total stockholders' equity 19,508 16,407
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 347,858 $ 345,394
--------- ---------
--------- ---------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
PROGRESS FINANCIAL CORPORATION
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CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For The Three Months For The Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
---- ---- ---- ----
(Dollars in Thousands) (Dollars in Thousands)
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans, including fees $ 4,879 $ 4,645 $ 9,937 $ 9,193
Mortgage-backed securities 1,537 1,696 2,921 3,350
Investment securities 109 271 226 538
Other 72 48 146 77
------- ------- ------- -------
Total interest income 6,597 6,660 13,230 13,158
------- ------- ------- -------
INTEREST EXPENSE:
Deposits 2,989 3,067 6,021 5,906
Advances from the Federal Home
Loan Bank 281 770 654 1,519
Subordinated debt and other borrowings 110 67 216 133
------- ------- ------- -------
Total interest expense 3,380 3,904 6,891 7,558
------- ------- ------- -------
Net interest income 3,217 2,756 6,339 5,600
Provision for possible loan losses 100 150 400 250
------- ------- ------- -------
Net interest income after provision for loan losses 3,117 2,606 5,939 5,350
------- ------- ------- -------
OTHER INCOME:
Mortgage origination and servicing 150 195 331 402
Service charges on deposits 233 253 468 484
Gain from mortgage banking activities 28 29 68 28
Gain on sale of mortgage servicing rights --- --- 924 ---
Gain ( loss) from sales of securities 24 --- 133 (35)
Income (loss) on properties sold (2) 6 (8) (18)
Fees and other 364 138 408 162
------- ------- ------- -------
Total other income 797 621 2,324 1,023
------- ------- ------- -------
OTHER EXPENSE:
Salaries and employee benefits 1,432 1,254 2,882 2,454
Occupancy 362 366 731 691
Data processing 312 205 540 396
Furniture, fixtures, and equipment 113 146 272 273
Insurance premiums 273 257 544 515
Provision for real estate owned --- 331 --- 406
Loan and real estate owned expense, net 48 (92) 134 (49)
Professional services 160 20 382 294
Other 509 438 986 713
------- ------- ------- -------
Total other expense 3,209 2,925 6,471 5,693
------- ------- ------- -------
Income before income taxes 705 302 1,792 680
Income tax expense 251 --- 621 ---
------- ------- ------- -------
Net income $ 454 $ 302 $ 1,171 $ 680
------- ------- ------- -------
------- ------- ------- -------
Earnings per share $ .12 $ .09 $ .31 $ .20
------- ------- ------- -------
------- ------- ------- -------
Average shares outstanding 3,903,666 3,384,130 3,843,277 3,382,332
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
PROGRESS FINANCIAL CORPORATION
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CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For The Six Months
Ended June 30,
1996 1995
---- ----
(Dollars in Thousands)
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,171 $ 680
Add (deduct) items not affecting cash flows from operating activities:
Depreciation and amortization 319 278
Provision for real estate owned --- 406
Provision for possible loan losses 400 250
Deferred income tax expense 621
Capitalized interest on real estate owned (2) ---
(Gain) from mortgage banking activities (68) (28)
(Gain) from loan sales and securitizations --- (12)
(Gain) loss from sales of securities available for sale (133) 35
Loss on properties sold 8 18
Amortization of deferred loan fees (423) (262)
Amortization of premiums/accretion
of discounts on securities 312 279
Originations and purchases of loans held for sale (9,755) (2,916)
Sales of loans 10,654 10,152
(Increase) decrease in accrued interest receivable 21 (49)
(Increase) in other assets (878) (2,423)
Increase in other liabilities 4,044 821
Increase in accrued interest payable 234 600
-------- --------
Net cash flows provided by operating activities 6,525 7,829
-------- --------
(CONTINUED)
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
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PROGRESS FINANCIAL CORPORATION
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CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
For The Six Months
June 30,
1996 1995
---- ----
(Dollars in Thousands)
(unaudited)
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures $ (1,758) $ (3,406)
Repayments on mortgage-backed securities held to maturity 4,682 5,668
Repayments on mortgage-backed securities available for sale 5,532 246
Purchases of mortgage-backed securities available for sale (27,006) (6,054)
Purchases of mortgage-backed securities held to maturity (3,000) ---
Sales of mortgage-backed securities available for sale 17,509 ---
Net increase in loans (2,579) (6,970)
Purchases of investments held to maturity --- (548)
Purchases of investments available for sale (3,000) (998)
Proceeds from sales of investments available for sale 5,133 965
Maturities of investments held to maturity 212 407
Proceeds from sales of real estate owned 253 1,044
Advances for construction of real estate owned --- (621)
-------- --------
Net cash flows used in investing activities (4,022) (10,267)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand, NOW and saving deposits 1,702 941
Net increase (decrease) in time deposits (3,959) 7,070
Net (decrease) in advances from
the Federal Home Loan Bank (6,000) (2,674)
Net increase in advance payments by borrowers
for taxes and insurance 342 141
Net increase in other borrowings 3,000 ---
Net proceeds from issuance of common stock 2,238 5
-------- --------
Net cash flows (used in) provided by financing activities (2,677) 5,483
-------- --------
Net increase (decrease) in cash and cash equivalents (174) 3,045
Cash and cash equivalents:
Beginning of year 7,089 8,075
-------- --------
End of period $ 6,915 $ 11,120
-------- --------
-------- --------
Supplemental disclosures:
Non-monetary transfers:
Net conversion of loans receivable to real estate owned $ 139 $ 42
-------- --------
-------- --------
Securitization of mortgage loans into mortgage-backed
securities $ 9,982 $ ---
-------- --------
-------- --------
Transfer of balance on property for Company use from
other assets to premises and equipment $ 3,150 $ ---
-------- --------
-------- --------
Cash payments for:
Income taxes $ --- $ ---
-------- --------
-------- --------
Interest $ 6,714 $ 5,524
-------- --------
-------- --------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
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PROGRESS FINANCIAL CORPORATION
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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, 1996 and 1995 in
conformity with generally accepted accounting principles. These financial
statements should be read in conjunction with Progress Financial
Corporation's (the "Company") 1995 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 Bank (the "Bank").
The year end consolidated statement of financial condition was derived from
the Company's 1995 audited financial statements, but does not include all
disclosures required by generally accepted accounting principles.
(2) In May 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 122, "Accounting for
Mortgage Servicing Rights" (SFAS 122) which is effective for the Company
January 1, 1996. SFAS 122 requires the recognition of separate assets
relating to the rights to service mortgage loans based on their fair value
if it is practicable to estimate the value. Additionally, the fair value
of servicing assets is measured a each reporting date to determine any
potential impairment. The statement applies prospectively to transactions
entered into in 1996, therefore, there is no cumulative effect at January
1, 1996, when the statement was adopted. The statement did not have a
significant effect on the financial position or results of operation of the
Company.
(3) DEPOSIT INSURANCE PREMIUMS
The Bank pays an insurance premium to the Savings Association Insurance
Fund (SAIF) of the Federal Deposit Insurance Corporation (FDIC). The
premium is 26 cents per $100 of deposits. Congress is considering
legislation that could result in a special, one-time assessment on SAIF
insured deposits. If enacted, the assessment could result in a one-time
charge which could be offset by lower insurance costs in the future.
(4) In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123),
which is effective for the Company January 1, 1996. SFAS 123 provides an
alternative method of accounting for stock-based compensation arrangements,
based on fair value of the stock-based compensation determined by an option
pricing model utilizing various assumptions regarding the underlying
attributes of the options and the Company's stock, rather than the existing
method of accounting for stock-based compensation which is provided in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25). The FASB encourages entities to adopt the fair value
based method, but does not require the adoption of this method. For those
entities that continue to apply APB 25, pro forma disclosure of the
effects, if adopted, of SFAS 123 on net income and earnings per share are
required in the 1996 financial statements. The Company will continue to
apply APB 25 and therefore, there will be no impact on its financial
position and results of operation.
7
<PAGE>
PROGRESS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
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 1996 data.
SUMMARY
The Company recorded net income of $454 thousand or $.12 per share for the three
months ended June 30, 1996 in comparison with net income of $302 thousand or
$.09 per share for the three months ended June 1995. Return on average
stockholders' equity was 9.50% and return on average assets was .53% for the
three months ended June 30, 1996 compared to 8.58% and .34%, respectively, for
the three months ended June 1995.
For the six months ended June 30, 1996, the Company had net income of $1.1
million or $.31 per share in comparison with net income of $680 thousand or $.20
per share for the six months ended June 30, 1995. Return on average
stockholders' equity was 12.60% and return on average assets was .68% for the
six months ended June 30, 1996 compared to 9.95% and .39%, respectively for the
six months ended June 30, 1995.
Net interest income was $3.2 million and $2.8 million for the three months ended
June 30, 1996 and 1995, respectively. Operating results for the three months
ended June 30, 1996 and 1995 included $100 thousand and $150 thousand,
respectively, in provision for possible loan losses. Other income for the three
months ended June 30, 1996 includes $79 thousand of fee income generated by
subsidiaries acquired subsequent to June 30, 1995. Other expense totalled $3.2
million for the three months ended June 30, 1996 in comparison with $2.9 million
for the same period in 1995, an increase of $284 thousand, primarily due to
increases in salaries and employee benefits ($178 thousand), data processing
($107 thousand), loan and real estate owned expenses ($140 thousand), and
professional services ($140 thousand), offset by a reduction in the provision
for real estate owned of $331 thousand. Salary increases are principally due
to the addition of several experienced business lenders, a cash management
specialist and the formation of a technology lending area.
For the six months ended June 30, 1996, net interest income was $6.3 million in
comparison with $5.6 million for the six months ended June 30, 1995. Operating
results for the six months ended June 30, 1996 and 1995 included $400 thousand
and $250 thousand, respectively, in provision for possible loan losses. Other
income for the six months ended June 30, 1996 includes a gain of $924 thousand
on the sale of $85.0 million of mortgage servicing rights and a $133 thousand
gain on the sale of securities. For the comparable period last year, these
items were $0 and a loss of $35 thousand. Other expenses totalled $6.5 million
for the six months ended June 30, 1996 in comparison with $5.7 million for the
same period in 1995, primarily due to increases in expenses as mentioned above
offset by a $406 thousand reduction in the provision for real estate owned
expenses.
As a result of a determination of the outlook for future taxable income, the
deferred tax valuation allowance was eliminated in the fourth quarter of 1995.
Tax provisions of $251 thousand and $621 thousand were recorded
for the three and six month periods ended June 30, 1996. No expense was
recorded for the comparable periods in 1995.
In January 1996, the Company completed a successful offering of 500,000 shares
of its common stock. At the time of the offering, 50 thousand shares were
reserved for the Company's Employee Stock ownership Plan. Net proceeds of the
offering were $2.2 million.
On July 17, 1996, the Company announced a $.02 per share cash dividend,
payable August 15, 1996 to shareholders of record on July 31, 1996.
8
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PROGRESS FINANCIAL CORPORATION
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RESULTS OF OPERATIONS
NET INTEREST INCOME
For the three months ended June 30, 1996, net interest income amounted to $3.2
million in comparison with $2.8 million for the same period in 1995. Net
interest income for the three months ended June 30, 1996 was positively impacted
by a $7.3 improvement in the excess of average interest bearing assets over
average interest bearing liabilities at June 30, 1996 compared to June 30, 1995.
Also, the interest rate spread improved to 3.59% from 2.99%. The average balance
of deposits increased to $269.0 at June 30, 1995 from $262.5 at June 30,1995,
while other interest bearing liabilities decreased to $27.2 million from $51.1
million. This change also had a positive effect as deposits have a lower cost
of funds than other interest-bearing liabilities.
For the six months ended June 30, 1996, net interest income amounted to $6.3
million in comparison with $5.6 million for the same period in 1995. Net
interest income for the six months ended June 30, 1996 was positively impacted
by a $6.2 million improvement in the excess of average interest-earning assets
over average interest-bearing liabilities at June 30, 1996 compared to June 30,
1995. Also, the interest rate spread improved to 3.55% from 3.10%.
9
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PROGRESS FINANCIAL CORPORATION
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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>
<CAPTION>
For the Three Months Ended June 30,
----------------------------------
1996 1995
---- ----
(Dollars in Thousands)
Average Yield/ Average Yield/
Balance Interest Rate(1) Balance Interest Rate (1)
------- -------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans (2) $174,615 $ 3,900 8.98% $ 180,438 $ 3,867 8.60%
Mortgage-backed securities (2) 94,790 1,537 6.52 101,567 1,696 6.70
Other loans 43,133 979 9.13 32,784 778 9.52
Investment securities and other interest-
earning assets (3) 11,996 181 6.07 19,852 319 6.45
-------- ------- ---- --------- ------- ----
Total interest-earning assets 324,534 6,597 8.18 334,641 6,660 7.98
-------- ------- ---- --------- ------- ----
Non-interest-earning assets 20,310 17,501
-------- ---------
Total assets $344,844 $ 352,142
-------- ---------
-------- ---------
Interest-bearing liabilities:
Interest-bearing deposits:
NOW and Super NOW $ 27,488 $ 147 2.15% $ 26,766 $ 191 2.86%
Money market accounts 32,387 246 3.05 32,941 267 3.25
Passbook and statement savings 28,224 189 2.69 27,194 200 2.95
Time deposits 180,893 2,407 5.35 175,609 2,409 5.50
-------- ------- ---- --------- ------- ----
Total interest-bearing deposits 268,992 2,989 4.47 262,510 3,067 4.69
Advances from the Federal Home Loan Bank 21,240 281 5.34 48,095 770 6.42
Subordinated debt and other borrowings 6,000 110 7.37 3,000 67 8.96
-------- ------- ---- --------- ------- ----
Total interest-bearing liabilities 296,232 3,380 4.59 313,605 3,904 4.99
-------- ------- ---- --------- ------- ----
Non-interest-bearing liabilities 29,366 24,420
-------- ---------
Total liabilities 325,598 338,025
Stockholders' equity 19,246 14,117
-------- ---------
Total liabilities and stockholders' equity $344,844 $ 352,142
-------- ---------
-------- ---------
Net interest income; interest rate spread (4) $ 3,217 3.59% $ 2,756 2.99%
-------- ---- ------- ----
-------- ---- ------- ----
Net interest margin (4) 3.99% 3.30%
---- ----
---- ----
Average interest-earning assets to average interest-
bearing liabilities 109.55% 106.71%
------ ------
------ ------
</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.
10
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PROGRESS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
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>
<CAPTION>
For the Three Months Ended June 30,
----------------------------------
1996 1995
---- ----
(Dollars in Thousands)
Average Yield/ Average Yield/
Balance Interest Rate(1) Balance Interest Rate (1)
------- -------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans (2) $ 180,613 $ 8,042 8.95% $ 179,578 $ 7,679 8.62%
Mortgage-backed securities (2) 89,988 2,921 6.53 101,511 3,350 6.65
Other loans 41,485 1,895 9.19 32,250 1,514 9.47
Investment securities and other interest-earning
assets (3) 11,838 372 6.32 19,173 615 6.47
-------- ------ ---- -------- ------ ----
Total interest-earning assets 323,924 13,230 8.21 332,512 13,158 7.98
-------- ------ ---- -------- ------ ----
Non-interest-earning assets 19,906 17,351
-------- --------
Total assets $343,830 $349,863
-------- --------
-------- --------
Interest-bearing liabilities:
Interest-bearing deposits:
NOW and Super NOW $ 27,071 $ 284 2.11% $ 25,824 $ 352 2.75%
Money market accounts 33,293 506 3.06 33,945 522 3.10
Passbook and statement savings 27,924 375 2.70 27,397 400 2.94
Time deposits 181,344 4,856 5.38 174,324 4,632 5.36
-------- ------ ---- -------- ------ ----
Total interest-bearing deposits 269,632 6,021 4.49 261,490 5,906 4.55
Advances from the Federal Home Loan Bank 22,396 654 5.87 47,802 1,519 6.41
Subordinated debt and other borrowings 5,500 216 7.90 3,000 133 8.94
-------- ------ ---- -------- ------ ----
Total interest-bearing liabilities 297,528 6,891 4.66 312,292 7,558 4.88
-------- ------ ---- -------- ------ ----
Non-interest-bearing liabilities 27,606 23,796
--------- --------
Total liabilities 325,134 336,088
Stockholders' equity 18,696 13,775
--------- --------
Total liabilities and stockholders' equity $ 343,830 $ 349,863
--------- --------
--------- --------
Net interest income; interest rate spread (4) $ 6,339 3.55% $ 5,600 3.10%
------- ---- ------ ----
------- ---- ------ ----
Net interest margin (4) 3.94% 3.40%
---- ----
---- ----
Average interest-earning assets to average interest-bearing
liabilities 108.87% 106.47%
------ ------
------ ------
</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.
11
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PROGRESS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
Total interest income amounted to $6.6 million for the three months ended June
30,1996, a $63 thousand decrease when compared to the same period in 1995.
Interest income on mortgage loans increased $33 thousand, as the average balance
outstanding decreased $5.8 million and the average yield decreased 38 basis
points. Interest income on mortgage-backed securities decreased $159 thousand,
as the average yield increased 18 basis points, which offset a $6.8 million
decrease in the average balance. Interest income on investments and other
interest-earning assets decreased $138 thousand, as the average balance
outstanding decreased $7.9 million and the average yield decreased 38 basis
points. Interest income on other loans increased $201 thousand as the average
balance increased $10.3 million and the yield on other loans decreased 39 basis
points.
Total interest expense amounted to $3.4 million for the three months ended June
30, 1996, a $524 thousand decrease in comparison to the same period in 1995.
Interest expense on deposits decreased $78 thousand, as the average rate on
deposits increased 22 basis points and the average balance increased $6.5
million. Interest expense on Federal Home Loan Bank of Pittsburgh ("FHLB")
advances decreased $489 thousand, as the average balance and average rate
decreased $26.9 million and 108 basis points, respectively. Interest expense on
subordinated debt and other borrowings amounted to $110 thousand for the three
months ended June 30, 1996 due to the increase in borrowings.
For the six months ended June 30, 1996, total interest income amounted to $13.2
million, unchanged from the same period in 1995. Interest income on mortgage
loans increased $363 thousand, as the average balance outstanding increased $1.0
million and the average yield increased 33 basis points. Interest income on
mortgage-backed securities decreased $429 thousand, as the average yield
decreased 12 basis points and the average balance decreased $11.5 million.
Interest income on investments and other interest-earning assets decreased $243
thousand, as the average balance outstanding decreased $7.3 million and the
average yield decreased 15 basis points. Interest income on other loans
increased $381 thousand as the average balance increased $9.2 million and the
yield on other loans decreased 28 basis points, respectively.
For the six months ended June 30, 1996, total interest expense amounted to $6.9
million, a $667 thousand or 8.8% decrease when compared to the same period in
1995. Interest expense on deposits increased $115 thousand, as the average
balance of deposits increased $8.1 million and the average rate on deposits
decreased 6 basis points. Interest expense on FHLB advances decreased $865
thousand, as the average balance and average rate decreased $25.4 million and 54
basis points, respectively. These decreases reflect lower levels of FHLB
advances to meet loan demand. Interest expense on subordinated debt and other
borrowings amounted to $266 thousand for the six months ended June 30 1996 due
to the increase in the average balance of the liability to $5.6 million from
$3.0 million during the comparable period in 1995.
12
<PAGE>
PROGRESS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
PROVISION FOR POSSIBLE LOAN LOSSES
The Company's provision for possible loan losses represents the charge against
earnings that is required to fund the allowance for loan losses. The level of
the allowance for loan losses is determined by inherent risks within the
Company'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, 1996, the Company recorded a $400 thousand
provision compared with $250 thousand for the comparable period in 1995, and had
net charge-offs of $6 thousand during the six months ended June 30, 1996 in
comparison with $293 thousand during the comparable period in 1995. At June 30,
1996, the allowance for loan losses amounted to $2.1 million or .98% of total
loans and 40.98% of total non-performing loans. See "Allowance for Loan
Losses."
The Company's allowance for possible loan losses increased by $655 thousand or
44.9% from $1.5 million at June 30, 1995 to $2.1 million at June 30, 1996. The
increase in the allowance reflects the decrease in net charge-offs of $287
thousand and the increase in the provision for possible loan losses of $150
thousand during the six months ended June 30, 1996 as compared to June 30, 1995.
Loan delinquencies increased to $8.8 million from $3.5 million at June 30, 1995.
The allowance for possible loan losses to total non-performing loans decreased
from 110.03% at June 30, 1995 to 40.98% at June 30, 1996. 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 possible 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.
13
<PAGE>
PROGRESS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
OTHER INCOME
The following table details other income for the periods indicated.
<TABLE>
<CAPTION>
For The Three Months For The Six Months
Ended June 30, Ended June 30
1996 1995 1996 1995
---- ---- ---- ----
(Dollars in Thousands) (Dollars in Thousands)
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Other income:
Mortgage origination and servicing $ 150 $ 195 $331 $ 402
Service charges on deposits 233 253 468 484
Gain from mortgage banking activities 28 29 68 28
Gain on sale of mortgage servicing rights --- --- 924 ---
Gain (loss) from sales of securities 24 --- 133 (35)
Income (loss) on properties sold (2) 6 (8) (18)
Fees and other 364 138 408 162
------ ------ ------ ------
Total other income $ 797 $ 621 $2,324 $1,023
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
Total other income amounted to $797 thousand for the three months ended June 30,
1996, an increase of $176 thousand compared with the $621 thousand in other
income for the three months ended June 30, 1995. Other income for the three
months ended June 30, 1996 included $364 thousand in fees and other income in
comparison to $138 thousand for the same period in 1995. The increase in fees
primarily relates to increased activity in the Company's leasing and commercial
real estate subsidiaries. Service charges on deposits decreased $20 thousand
for the three months ended June 30, 1996 due primarily to decreases in business
checking fees.
The Company had gains from sales of securities of $24 thousand for the three
months ended June 30, 1996. There were no gains or losses on securities in the
similar period last year. 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 1996, the Company intends to sell substantially all
residential mortgage loan originations in the secondary market or to private
investors.
Mortgage origination and servicing decreased $45 thousand to $150 thousand for
the three months ended June 30, 1996 compared to June 30, 1995 due to the sale
of $85 million of mortgage servicing rights in the first quarter of 1996.
Total other income amounted to $2.3 million for the six months ended June 30,
1996, an increase of $1.3 million from the $1.0 million recognized for the
comparable 1995 period. The increase primarily relates to the $924 thousand
gain on the sale of mortgage servicing rights, the $133 thousand gain on the
sale of securities and increased fees and other income generated by the
Company's leasing and commercial real estate subsidiaries.
14
<PAGE>
PROGRESS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
OTHER EXPENSE
The following table details other expense for the periods indicated.
<TABLE>
<CAPTION>
For The Three Months For The Six Months
Ended June 30, Ended June 30
1996 1995 1996 1995
---- ---- ---- ----
(Dollars in Thousands) (Dollars in Thousands)
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Other expense:
Salaries and employee benefits $ 1,432 $ 1,254 $ 2,882 $ 2,454
Occupancy 362 366 731 691
Data processing 312 205 540 396
Furniture, fixtures and equipment 113 146 272 273
Insurance premiums 273 257 544 515
Provision for real estate owned --- 331 --- 406
Loan and real estate owned expense, net 48 (92) 134 (49)
Professional services 160 20 382 294
Other 509 438 986 713
------- ------- ------- -------
Total other expense $ 3,209 $ 2,925 $ 6,471 $ 5,693
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
Total other expense amounted to $3.2 million for the three months ended June 30,
1996, an increase of $284 thousand from the $2.9 million recognized during the
comparable 1995 period. Salaries and employee benefits increased $178 thousand
to $1.4 million for the three months ended June 30, 1996 in comparison with $1.3
million for the three months ended June 30, 1995 principally due to the addition
of several experienced business lenders, a cash management specialist and the
formation of a technology lending area. Data processing expenses, which include
the cost of outsourced processing of transactions, increased $107 thousand to
$312 thousand for the three months ended June 30, 1996 from the comparable
period last year. The Company outsourced the processing of customer checking
accounts in the fourth quarter of 1995. Loan and real estate owned expense,
net, amounted to $48 thousand during the three months ended June 30, 1996 versus
a recovery of $92 thousand in the comparable period of 1995. Professional
services increased to $160 thousand for the three months ended June 30, 1996
from $20 thousand for the similar period last year due primarily to legal fees
in the area of asset recovery. Increased expenses were offset by a reduction in
the provision for real estate owned of $331 thousand.
Total other expenses amounted to $6.5 million for the six months ended June 30,
1996, an increase of $778 thousand from $5.7 million for the comparable 1995
period. Salaries and employee benefits increased $428 thousand for the six
months ended June 30, 1996 to $2.9 million in comparison with $2.5 million for
the six months ended June 30, 1995 primarily due to staffing additions to
support the Bank's lending initiatives. Loan and real estate owned expense, net
increased from a recovery of $49 thousand for the six months ended June 30, 1995
to $134 thousand of expense for the six months ended June 30, 1996 due primarily
to negative cash flow from the operation of REO properties and expenses of
maintaining properties. Data processing expenses increased $144 thousand to
$540 thousand for the six months ended June 30, 1996 due to the outsourcing of
transaction processing as mentioned above. Other miscellaneous expenses
increased $273 thousand primarily due to costs related to the subsidiaries
acquired in 1995.
15
<PAGE>
PROGRESS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
INCOME TAX EXPENSE
The Company recorded income tax expense of $251 thousand and $621 thousand for
the three and six months ended June 30, 1996. Tax expense for the three and six
months ended June 30, 1995 was offset by the partial recognition of a net
operating loss carryforward. At June 30, 1996, the Company had a net operating
loss carryforward for federal income tax purposes of approximately $6.1 million,
that expires in 2007 through 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, 1996, The Company had a $3.0 million net deferred tax
asset. 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. A valuation allowance was not required at June 30, 1996.
16
<PAGE>
PROGRESS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
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, 1996 was
approximately 9.16%.
The Company 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
the six months ended June 30, 1996 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, 1996, cash was provided by operating and
financing activities and used in investing activities. Operating activities
provided $6.5 million of cash, primarily due to sales of loans totalling $10.7
million. Investing activities used $4.0 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 and mortgage-backed securities available for sale. In addition,
financing activities used $2.7 million in cash due to decreases in deposits and
FHLB borrowings offset by $2.2 million generated by a common stock offering.
At June 30, 1996, the Company had $81.7 million in loan commitments to extend
credit and $565 thousand in letters of credit outstanding. At June 30, 1996,
FHLB advances which were scheduled to mature through June 30, 1997 totalled $6.4
million. The subordinated debentures are due June 30, 2004 and are redeemable
beginning July 1, 1996. At June 30, 1996, the total amount of time deposits
which were scheduled to mature through June 30, 1997 totalled $134.7 million.
17
<PAGE>
PROGRESS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
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 Company's deposits are obtained primarily from residents near the Bank's six
full service offices in Montgomery County, one office in Delaware County, one
office in Chester 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 Company 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 decreased $2.3 million during the six months ended June 30, 1996 from
$297.3 million at December 31, 1995 to $295.0 million at June 30, 1996 The
ability of the Company to attract and maintain deposits and the Company'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.
The following table presents certain information regarding FHLB advances for the
periods indicated.
At or For the Six Months
Ended June 30,
1996 1995
---- ----
(Dollars in thousands)
Average balance outstanding $ 22,396 $ 47,802
Maximum amount outstanding at
any month-end during the period $ 21,000 $ 50,845
Weighted average interest rate during the period 5.87% 6.41%
Weighted average interest rate at end of the period 6.70% 6.42%
The Company utilizes advances from the FHLB as a source of funds to meet loan
demand. FHLB advances decreased $6.0 million to $19.4 million at June 30, 1996
from $25.4 million at December 31, 1995.
18
<PAGE>
PROGRESS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
CAPITAL RESOURCES
The Bank is required pursuant to OTS regulations to have (i) a leverage ratio
equal to at least 1.5% of adjusted total assets, (ii) tier 1 risk-based 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 30,1996, 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 leverage,
tier 1 risk-based, and total risk-based capital at June 30, 1996:
<TABLE>
<CAPTION>
Tier 1 Total
Leverage Risk-Based Risk-Based
Ratio % Capital % Capital %
----- ------- ------- -------- ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Adjusted GAAP Capital $ 21,527 $ 21,527 $ 21,527
General valuation allowance --- --- 2,108
Unrealized loss on securities available for sale 647 647 647
Goodwill (109) (109) (109)
Non-qualifying deferred tax asset (1,794) (1,794) (1,794)
-------- -------- --------
Total 20,271 5.87% 20,271 9.29% 22,379 10.25%
Minimum capital requirement 5,183 1.50 10,367 3.00 17,460 8.00
-------- ---- -------- ---- -------- ----
Regulatory capital - excess $ 15,088 4.37% $ 9,904 6.29% $ 4,919 2.25%
-------- ---- -------- ---- -------- ----
-------- ---- -------- ---- -------- ----
</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 "well
capitalized," an institution must generally have a leverage ratio of at least
5%, a Tier 1 risk-based capital ratio of at least 6%, and a total risk-based
capital ratio of at least 10%.
At June 30, 1996, the Bank's leverage ratio was 5.87%, tier 1 risk-based ratio
was 9.29 %, total risk-based ratio was 10.25%, and tangible equity ratio was
5.87%, based on leverage capital of $20,271,000, Tier 1 capital of 20,271,000,
total risk-based capital of $22,379,000 and tangible equity capital of
$20,271,000, respectively. As of June 30, 1996, the Bank met the criteria to be
classified "well capitalized."
CASH AND DUE FROM BANKS
Interest-bearing deposits in other banks totalled $311 thousand at June 30, 1996
in comparison with $4.8 million at December 31, 1995. At June 30, 1996, the
Bank also had $6.6 million in cash and non-interest bearing deposits in other
banks compared with $2.3 million at December 31, 1995.
19
<PAGE>
PROGRESS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
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, 1996.
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>
<CAPTION>
At June 30, 1996
----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost (1) Gains Losses Value Value
-------- ----- ------ ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. agency obligations $ 3,483 $ --- $ 96 $ 3,387 $ 3,387
Equity investments 30 --- --- 30 30
-------- ------ ------ ------- --------
Total available for sale $ 3,513 $ --- $ 96 $ 3,417 $ 3,417
-------- ------ ------ ------- --------
-------- ------ ------ ------- --------
HELD TO MATURITY:
FHLB stock, pledged $ 1,937 $ --- $ --- $ 1,937 $ 1,937
-------- ------ ------ ------- --------
Total held to maturity $ 1,937 $ --- $ --- $ 1,937 $ 1,937
-------- ------ ------ ------- --------
-------- ------ ------ ------- --------
At December 31, 1995
--------------------
AVAILABLE FOR SALE:
U.S. agency obligations $ 5,497 $ 2 $ 25 $ 5,474 $ 5,474
Equity investments 30 ---- --- 30 30
-------- ------ ------ ------- --------
Total available for sale $ 5,527 $ 2 $ 25 $ 5,504 $ 5,504
-------- ------ ------ ------- --------
-------- ------ ------ ------- --------
HELD TO MATURITY:
FHLB stock, pledged $ 2,149 $ --- $ --- $ 2,149 $ 2,149
-------- ------ ------ ------- --------
Total held to maturity $ 2,149 $ --- $ --- $ 2,149 $ 2,149
-------- ------ ------ ------- --------
-------- ------ ------ ------- --------
</TABLE>
The amortized cost and estimated fair value of investment securities by
contractual maturity at June 30, 1996 are as follows:
<TABLE>
<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 $ 1,000 $ 974 $ --- $ ---
Due after five years through ten years 2,483 2,413 --- ---
Due after ten years --- --- --- ---
No stated maturity 30 30 1,937 1,937
-------- -------- -------- ----------
Total investment securities $ 3,513 $ 3,417 $ 1,937 $ 1,937
-------- -------- -------- ----------
-------- -------- -------- ----------
</TABLE>
(1) Original cost of securities adjusted for repayments, amortization of
premiums and accretion of discounts.
20
<PAGE>
PROGRESS FINANCIAL CORPORATION
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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>
<CAPTION>
AT JUNE 30, 1996
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost (1) Gains Losses Value Value
-------- ----- ------ ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE:
GNMA pass-through certificates $ 2,126 $ --- $ 48 $ 2,078 $ 2,078
FNMA pass-through certificates 17,518 --- 291 17,227 17,227
FHLMC pass-through certificates 24,648 --- 387 24,261 24,261
Non-agency pass-through
certificates 3,814 --- 6 3,808 3,808
FHLMC collateralized
mortgage obligations 3,000 --- 75 2,925 2,925
--------- ------- -------- --------- ----------
Total available for sale $ 51,106 $ --- $ 807 $ 50,299 $ 50,299
--------- ------- -------- --------- ----------
--------- ------- -------- --------- ----------
HELD TO MATURITY:
GNMA pass-through certificates $ 24,148 $ --- $ 936 $ 23,212 $ 24,148
FNMA pass-through certificates 7,903 --- 213 7,690 7,903
FHLMC pass-through certificates 18,888 --- 348 18,540 18,888
--------- ------- -------- --------- ----------
Total held to maturitY $ 50,939 $ --- $ 1,497 $ 49,442 $ 50,939
--------- ------- -------- --------- ----------
--------- ------- -------- --------- ----------
AT DECEMBER 31, 1995
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost (1) Gains Losses Value Value
-------- ----- ------ ----- -----
(Dollars in Thousands)
HELD TO MATURITY:
GNMA pass-through certificates $ 26,618 $ --- $ 505 $ 26,113 $ 26,618
FNMA pass-through certificates 8,620 2 93 8,529 8,620
FHLMC pass-through certificates 17,595 8 155 17,448 17,595
--------- ------- -------- --------- ----------
Total held to maturity $ 52,833 $ 10 $ 753 $ 52,090 $ 52,833
--------- ------- -------- --------- ----------
--------- ------- -------- --------- ----------
AVAILABLE FOR SALE:
GNMA pass-through certificates $ 168 $ --- $ --- $ 168 $ 168
FNMA pass-through certificates 8,801 9 179 8,631 8,631
FHLMC pass-through certificates 19,040 34 211 18,863 18,863
Collateralized mortgage obligations 7,501 16 77 7,440 7,440
Non-Agency pass through certificate 1,734 6 --- 1,740 1,740
--------- ------- -------- --------- ----------
Total available for sale $ 37,244 $ 65 $ 467 $ 36,842 $ 36,842
--------- ------- -------- --------- ----------
--------- ------- -------- --------- ----------
</TABLE>
(1) Original cost of securities adjusted for repayments, amortization of
premiums and accretion of discounts.
21
<PAGE>
PROGRESS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
Mortgage-backed securities increase the credit quality of the Company'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, 1996. In addition, since August 1992, the
Company 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 Company's asset/liability strategy or in response to
changes in interest rates, changes in prepayment rates, the need to increase the
Company'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. 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 Company
approximate the duration of the type of loan the Company originates and
therefore, such securities may be sold to allow for additional loan growth
and/or other asset/liability management strategies. The Company sold $17.5
million of mortgage-backed securities available for sale during the six months
ended June 30, 1996. There were no sales of mortgage-backed securities
classified as available for sale during the three months ended June 30, 1995.
Although the Company's mortgage-backed securities portfolio may have a shorter
average term to maturity and greater liquidity than the Company's single-family
residential real estate loans, the Company is subject to reinvestment risk with
respect to such portfolio. Specifically, as the Company's mortgage-backed
securities amortize or prepay, the Company 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 Company's portfolio of mortgage-
backed securities classified as available for sale may result in increased
volatility in the Company's liquidity, operations and capital. The Company
attempts to address such risks by actively managing its portfolio in relation to
changes in interest rates and the Company's liquidity needs.
22
<PAGE>
PROGRESS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
LOAN PORTFOLIO
The Company's net loan portfolio, including loans held for sale, totalled $216.5
million at June 30, 1996 or 62.2% of its total assets, a decrease of $8.3
million or 3.7% from the $224.8 million outstanding at December 31, 1995. The
following table depicts the composition of the Company's loan portfolio at the
dates indicated.
June 30, 1996 December 31, 1995
------------- -----------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
Real estate loans:
Single family residential (1) $ 74,523 34.10% $ 91,091 40.21%
Commercial real estate (2) 80,931 37.02 81,535 36.00
Construction 18,788 8.60 14,230 6.28
---------- ----- --------- -----
Total real estate loans 174,242 79.72 186,856 82.49
---------- ----- --------- -----
Commercial business loans 21,635 9.90 17,244 7.61
---------- ----- --------- -----
Consumer loans:
Consumer 21,943 10.04 21,666 9.57
Credit card receivables 748 .34 757 .33
---------- ----- --------- -----
Total consumer loans 22,691 10.38 22,423 9.90
---------- ----- --------- -----
Total loans 218,568 100.00% 226,523 100.00%
------ ------
------ ------
Allowance for possible loan losses (2,114) (1,720)
---------- ---------
Net loans $ 216,454 $ 224,803
---------- ---------
---------- ---------
(1) Includes $2.3 and $3.2 million of loans held for sale at June 30, 1996 and
December 31, 1995, respectively.
(2) Includes $19.7 million and $18.9 million of multi-family residential loans
at June 30, 1996 and December 31, 1995, respectively.
23
<PAGE>
PROGRESS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
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 Company's loans. As a result of
certain steps taken by the Company, total non-performing assets have been
substantially reduced, and amounted to $5.2 million at June 30, 1996.
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.
24
<PAGE>
PROGRESS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
The following table details the Bank's non-performing assets at the dates
indicated:
June 30, December 31, June 30,
1996 1995 1995
---- ---- ----
(Dollars in Thousands)
Loans accounted for on a
non-accrual basis (1) $ 4,546 $ 3,879 $ 1,326
Accruing loans 90 or
more days past due --- --- ---
-------- -------- --------
Total non-performing loans 4,546 3,879 1,326
REO, net of related reserves 612 728 3,729
-------- -------- --------
Total non-performing assets $ 5,158 $ 4,607 $ 5,055
-------- -------- --------
-------- -------- --------
Non-performing loans as a
percentage of total loans 2.08% 1.71% 0.64%
---- ---- ----
---- ---- ----
Non-performing assets as a
percentage of total assets 1.48% 1.33% 1.42%
---- ---- ----
---- ---- ----
(1) Includes impaired loans of $2.9 million, $2.3 million and $0 at June 30,
1996, December 31, 1995 and June 30, 1995, respectively.
Non-performing assets increased $551 thousand to $5.2 million at June 30, 1996
from $4.6 million at December 31, 1995. This increase primarily resulted from
placing a commercial building located in Philadelphia, PA on non-accrual status
during the second quarter of 1996. The unpaid principal balance on the loan
approximates $791 thousand.
The $4.6 million of non-accrual loans at June 30, 1996 consists of $3.1 million
of commercial real estate mortgages, $960 thousand of loans secured by single-
family residential properties, $135 thousand of commercial business loans and
$375 thousand of consumer loans. The $612 thousand of REO at June 30, 1996
consists of four residential properties and four undeveloped residential lots.
25
<PAGE>
PROGRESS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
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:
June 30, December 31, June 30,
1996 1995 1995
---- ---- ----
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Delinquencies:
30 to 59 days $ 3,899 1.78% $ 2,973 1.31% $ 861 .4%
60 to 89 days 341 .16 450 .20 1,314 .6
90 or more days and
non-accrual loans 4,546 2.08 3,879 1.71 1,326 .7
-------- ---- ------- ----- ------- ----
$ 8,786 4.02% $ 7,302 3.22% $ 3,501 1.7%
-------- ---- ------- ----- ------- ----
-------- ---- ------- ----- ------- ----
26
<PAGE>
PROGRESS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The following table details the Company's allowance for possible loan losses for
the periods indicated:
<TABLE>
<CAPTION>
At or At or
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
---- ---- ---- ----
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C>
Average loans outstanding $ 217,748 $ 213,222 $ 222,098 $ 211,828
--------- --------- --------- ---------
Balance beginning of period $ 2,050 $ 1,611 $ 1,720 $ 1,502
Charge-offs:
Residential real estate 24 9 24 9
Consumer 43 17 43 17
Commercial --- 281 --- 281
-------- --------- -------- --------
Total charge-offs 67 307 67 307
-------- --------- -------- --------
Recoveries:
Real estate construction --- 1 --- 1
Residential real estate --- --- 3 ---
Commercial real estate 30 --- 30 ---
Consumer 1 4 10 10
Commercial --- --- 18 3
-------- --------- -------- --------
Total recoveries 31 5 61 14
-------- --------- -------- --------
Net charge-offs 36 302 6 293
Additions charged to operations 100 150 400 250
-------- --------- -------- --------
Balance at end of period $ 2,114 $ 1,459 $ 2,114 $ 1,459
-------- --------- -------- --------
-------- --------- -------- --------
Ratio of net charge-offs during the period to
average loans outstanding during the period .02% .14% .00% .14%
--- --- --- ---
--- --- --- ---
Ratio of allowance for possible loan losses to
non-performing loans at end of period 40.98% 110.03% 40.98% 110.03%
----- ------ ----- ------
----- ------ ----- ------
</TABLE>
An allowance for possible 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.
27
<PAGE>
PROGRESS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
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 30, 1996 for the
following purposes:
1) To elect four directors for a term of three years (John E.F. Corson,
Donald F.U. Goebert, Paul LaNoce, Janet E. Paroo) and to elect one
director for a term of two years (H.Wayne Griest).
2) To consider & Approve the 1996 Employee Stock Purchase Plan.
3) To ratify the appointment of Coopers & Lybrand L.L.P. as the Company's
independent auditors for the year ending December 31, 1996.
All proposals were adopted by the Company's stockholders as follows:
1) Election of Directors For Against Abstain/not Voted
--- ------- -----------------
John E. F. Corson 2,686,343 13,176 200
Donald F.U. Goebert 2,686,343 13,176 200
Paul M. LaNoce 2,686,343 13,176 200
Janet E. Paroo 2,685,964 13,555 200
H. Wayne Griest 2,686,343 13,176 200
2) Approve 1996 Employee
Stock Purchase Plan 2,558,887 7,616 133,216
3) Ratify appointment of
Coopers & Lybrand L.L.P. 2,684,342 6,531 8,846
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
28
<PAGE>
PROGRESS FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
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 6, 1996 /S/ W. Kirk Wycoff
- -------------- -----------------------------
Date W. Kirk Wycoff, Chairman,
President and Chief Executive
Officer
August 6, 1996 /S/ Frederick E. Schea
- -------------- -----------------------------
Date Frederick E. Schea
Senior Vice President and
Chief Financial Officer
29
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10Q FOR
THE QUARTER ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 6,604
<INT-BEARING-DEPOSITS> 311
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 53,716
<INVESTMENTS-CARRYING> 52,876
<INVESTMENTS-MARKET> 51,379
<LOANS> 218,568
<ALLOWANCE> 2,114
<TOTAL-ASSETS> 347,858
<DEPOSITS> 295,004
<SHORT-TERM> 9,400
<LIABILITIES-OTHER> 7,946
<LONG-TERM> 16,000
0
0
<COMMON> 3,780
<OTHER-SE> 15,728
<TOTAL-LIABILITIES-AND-EQUITY> 347,858
<INTEREST-LOAN> 9,937
<INTEREST-INVEST> 3,147
<INTEREST-OTHER> 146
<INTEREST-TOTAL> 13,230
<INTEREST-DEPOSIT> 6,021
<INTEREST-EXPENSE> 6,891
<INTEREST-INCOME-NET> 6,339
<LOAN-LOSSES> 400
<SECURITIES-GAINS> 133
<EXPENSE-OTHER> 6,471
<INCOME-PRETAX> 1,792
<INCOME-PRE-EXTRAORDINARY> 1,792
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,171
<EPS-PRIMARY> 0.31
<EPS-DILUTED> 0.31
<YIELD-ACTUAL> 8.21
<LOANS-NON> 4,546
<LOANS-PAST> 0
<LOANS-TROUBLED> 2,900
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,720
<CHARGE-OFFS> 67
<RECOVERIES> 61
<ALLOWANCE-CLOSE> 2,114
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,114
</TABLE>
