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 September 30, 1998.
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)
4 Sentry Parkway
Suite 230
Blue Bell, Pennsylvania 19422
- ------------------------ -----
(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) 5,263,166
------------------------------ -------------------
Title of Each Class Number of Shares Outstanding
as of October 30, 1998
<PAGE>
PROGRESS FINANCIAL CORPORATION
Progress Financial Corporation
Table of Contents
PART I - Financial Information
Page
Item 1.Financial Statements
Consolidated Statements of Financial Condition as of September 30, 1998
and December 31, 1997 (unaudited)......................................3
Consolidated Statements of Operations for the three and nine months ended
September 30, 1998 and 1997 (unaudited)................................4
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1998 and 1997 (unaudited)................................5
Notes to Consolidated Financial Statements (unaudited).................7
Item 2.Management's Discussion and Analysis of Financial Condition and
Results of Operations (unaudited).....................................10
PART II - Other Information
Item 1.Legal Proceedings.....................................................27
Item 2.Changes in Securities.................................................27
Item 3.Defaults upon Senior Securities.......................................27
Item 4.Submission of Matters to a Vote of Security Holders...................27
Item 5.Other Information.....................................................27
Item 6.Exhibits and Reports on Form 8-K......................................27
Signatures............................................................28
<PAGE>
PART I- FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----- ----
(Dollars in thousands)
(unaudited)
Assets
<S> <C> <C>
Cash and due from banks:
Interest bearing $ 695 $ 7,689
Non-interest bearing 8,900 11,697
Investment securities:
Available for sale at fair value (amortized cost:$10,487 in 1998 and $5,924 in 1997) 10,389 6,395
Held to maturity at amortized cost (fair value: $ 12,374 in 1998 and $4,070 in 1997) 12,265 4,051
Mortgage-backed securities:
Available for sale at fair value (amortized cost: $157,912 in 1998 and $44,246 in 157,624 44,518
1997)
Held to maturity at amortized cost (fair value: $49,094 in 1997) -- 49,421
Loans and leases, net (net of reserve: $4,611 in 1998 and $3,863 in 1997) 384,361 340,276
Real estate owned, net -- 380
Premises and equipment, net 9,663 9,319
Accrued interest receivable 3,319 2,728
Net deferred income tax assets (liabilities) 259 (463)
Receivable for securities sold 9,850 21,043
Other assets 20,724 11,148
-------- ---------
Total assets $618,049 $508,202
======== =========
Liabilities and Stockholder's Equity
Liabilities:
Deposits $377,529 $340,761
Federal Home Loan Bank borrowings 93,551 33,450
Other borrowings 78,854 50,797
Advance payments by borrowers 1,306 3,561
Accrued interest payable 2,799 1,626
Payable for securities purchased -- 32,385
Other liabilities 7,153 5,141
-------- ---------
Total liabilities 561,192 467,721
-------- ---------
Corporation-obligated mandatorily redeemable capital securities of subsidiary
trust holding solely junior subordinated debentures of the Corporation 15,000 15,000
Commitments and contingencies
Stockholders' equity:
Serial preferred stock - $.01 par value; 1,000,000 shares authorized
but unissued -- --
Junior participating preferred stock - $.01 par value; 1,010 shares
authorized but unissued -- --
Common stock - $1 par value; 12,000,000 shares authorized:
5,263,000 and 4,126,000 shares issued and outstanding at
September 30, 1998 and December 31, 1997, respectively. 5,263 4,126
Capital surplus 39,627 20,950
Treasury Stock - 71,000 and 0 shares at September 30, 1998 and
December 31, 1997, respectively (1,058) --
Unearned Employee Stock Ownership Plan - 27,000 and 33,000 shares at
September 30, 1998 and December 31, 1997, respectively (124) (164)
Retained earnings (deficit) (1,595) 109
Net accumulated other comprehensive income (loss) (256) 460
-------- --------
Total stockholder's equity 41,857 25,481
-------- --------
Total liabilities, Corporation-obligated mandatorily redeemable capital securities
of subsidiary trust holding solely junior subordinated debentures of the
Corporation and stockholders' equity $618,049 $508,202
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
(Dollars in thousands) (Dollars in thousands)
(unaudited) (unaudited)
Interest income:
<S> <C> <C> <C> <C>
Loans and leases, including fees $ 9,102 $7,679 $26,054 $21,542
Mortgage-backed securities 2,860 1,539 6,212 4,598
Investment securities 295 107 662 317
Other 9 56 48 150
------- ------ ------- -------
Total interest income 12,266 9,381 32,976 26,607
Interest expense:
Deposits 3,739 3,049 10,636 9,026
Federal Home Loan Bank borrowings 1,235 670 2,815 1,537
Other borrowings 1,277 851 2,858 2,580
------- ------ ------- -------
Total interest expense 6,251 4,570 16,309 13,143
------- ------ ------- -------
Net interest income 6,015 4,811 16,667 13,464
Provision for possible loan and lease losses 233 242 659 638
------- ------ ------ -------
Net interest income after provision for possible loan and lease
losses 5,782 4,569 16,008 12,826
------- ------ ------ -------
Non-interest income:
Service charges on deposits 455 329 1,231 1,098
Lease financing fees 315 326 1,064 933
Teleservices fee income 277 291 789 402
Loan brokerage and advisory fees 583 344 1,418 473
Gain on sale of mortgage servicing rights -- -- -- 978
Gain (loss) on sale of securities 100 (83) 437 (49)
Gain on sale of lease receivables 154 61 215 61
Gain (loss) on sale of real estate owned 203 -- 203 (182)
Fees and other 251 240 1,048 813
------- ------ ------ -------
Total non-interest income 2,338 1,508 6,405 4,527
------- ------ ------ -------
Non-interest expense:
Salaries and employee benefits 3,098 2,146 8,794 6,195
Occupancy 337 301 995 928
Data processing 287 224 798 822
Furniture, fixtures and equipment 267 210 803 599
Loan and real estate owned expenses, net (1) 154 (33) 300
Professional services 431 246 811 686
Capital securities expense 398 398 1,195 526
Other 1,110 891 3,513 2,560
------- ------ -------- --------
Total non-interest expense 5,927 4,570 16,876 12,616
------- ------ -------- --------
Income before income taxes and cumulative effect of accounting
change 2,193 1,507 5,537 4,737
Income tax expense 801 577 2,028 1,767
-------- ------ -------- -------
Income before cumulative effect of accounting change 1,392 930 3,509 2,970
Cumulative effect of accounting change (net of tax benefit of $26) (46) -- (46) --
-------- ------ -------- -------
Net income $ 1,346 $ 930 $ 3,463 $ 2,970
======== ====== ======== ========
Basic income per common share before cumulative effect of accounting
change $ .27 $ .22 $ .73 $ .70
======== ====== ======== ========
Fully diluted income per common share before cumulative effect of
accounting change $ .24 $ .20 $ .66 $ .65
======== ====== ======== ========
Basic net income per common share $ .26 $ .22 $ .72 $ .70
======== ====== ======== ========
Fully diluted net income per common share $ .24 $ .20 $ .65 $ .65
======== ====== ======== ========
Dividends per common share $ .04 $ .03 $ .10 $ .07
======== ====== ======== ========
Basic average common shares outstanding 5,223,434 4,237,933 4,810,851 4,225,796
========== ========= ========== ==========
Fully diluted average common shares outstanding 5,707,591 4,669,503 5,305,624 4,570,197
========== ========= ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
1998 1997
---- ----
(Dollars in thousands)
(unaudited)
Cash flows from operating activities:
<S> <C> <C>
Net income $3,463 $2,970
Add (deduct) items not affecting cash flows from operating activities:
Depreciation and amortization 1,039 872
Provision for possible loan and lease losses 659 638
Deferred income tax expense -- 2,128
Gain from mortgage banking activities -- (1,013)
(Gain) loss on sale of securities available for sale (437) 49
Gains on sale of lease receivables (215) (61)
(Gain) loss on sale of real estate owned (203) 182
Accretion of deferred loan and lease fees and expenses (729) (597)
Amortization of premiums/accretion of discounts on securities 789 485
Realized loss on transfer of mortgage-backed securities 72 --
Proceeds from sales of loans held for sale -- 105
Increase in accrued interest receivable (591) (525)
Decrease in other assets 1,339 610
Increase (decrease) in other liabilities (30,612) 2,189
Increase in accrued interest payable 1,173 955
-------- -------
Net cash flows provided by (used in) operating activities (24,253) 8,987
-------- -------
</TABLE>
(continued)
See Notes to Consolidated Financial Statements.
<PAGE>
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
For The Nine Months
Ended September 30,
1998 1997
---- ----
(Dollars in thousands)
(unaudited)
Cash flows from investing activities:
<S> <C> <C>
Capital expenditures $ (1,106) $ (1,533)
Purchase of mortgage-backed securities available for sale (140,117) (22,287)
Purchase of investment securities available for sale (8,502) (6,720)
Purchase of investment securities held to maturity (8,214) (1,164)
Repayments on mortgage-backed securities held to maturity 8,788 5,520
Repayments on mortgage-backed securities available for sale 15,514 5,613
Proceeds from sales of mortgage-backed securities available for sale 50,758 9,385
Proceeds from sales of investment securities available for sale 4,301 3,450
Maturities of investments held to maturity -- 549
Proceeds from sales of lease receivables 2,936 1,018
Proceeds from sales of real estate owned 583 1,897
Net increase in loans and leases (46,736) (53,026)
---------- ---------
Net cash flows used in investing activities (121,795) (57,298)
---------- ---------
Cash flows from financing activities:
Net increase in demand, NOW and savings deposits 14,463 11
Net increase in time deposits 22,305 19,037
Net increase in FHLB borrowings 60,101 15,000
Net increase (decrease) in other borrowings 28,057 (788)
Net decrease in advance payments by borrowers (2,255) (645)
Net proceeds from issuance of capital securities -- 15,000
Dividends paid (457) (266)
Purchase of treasury shares (1,052) --
Net proceeds from issuance of common stock 14,829 26
Net proceeds from exercise of stock options 266 25
--------- --------
Net cash flows provided by financing activities 136,257 47,400
--------- --------
Net decrease in cash and cash equivalents (9,791) (911)
Cash and cash equivalents:
Beginning of year 19,386 11,131
--------- --------
End of period $ 9,595 $10,220
========= ========
Supplemental disclosures:
Non-monetary transfers:
Transfer of mortgage-backed securities from held to maturity to
available for sale (see Note 6) $ 40,147 $ --
========= ========
Net conversion of loans receivable to real estate owned $ -- $ 3,503
========= ========
Increase in net receivable for trade dated securities transactions $ 21,192 $ --
========= ========
Cash payments for:
Income taxes $ 2,568 $ 141
========= ========
Interest $ 15,136 $12,715
========= ========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) Basis of Presentation
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 September 30, 1998 and December 31, 1997 and for the three and nine
months ended September 30, 1998 and 1997 in conformity with generally
accepted accounting principles. These financial statements should be read
in conjunction with Progress Financial Corporation's (the "Company") 1997
Annual Report and Form 10-K. Operating results for the three and nine
months ended September 30, 1998 are not necessarily indicative of the
results that may be expected for any other interim period or the entire
year ending December 31, 1998. Earnings per share have been adjusted to
reflect all stock dividends and prior period amounts have been reclassified
when necessary to conform with current period classification. The Company's
principal subsidiaries are Progress Bank (the "Bank"), Progress Realty
Advisors, Inc., Progress Capital, Inc., Procall Teleservices, Inc.,
Progress Development Corp., and Progress Capital Management, Inc. All
significant intercompany transactions have been eliminated.
(2) Acquisitions
On January 14, 1998, the Company acquired PAM Holding Corporation and its
subsidiaries, PAM Financial and PAM Investment Company, which had
unaudited assets and stockholders' equity of $15.5 million and $.4
million, respectively, at December 31, 1997. The transaction was
accounted for under the pooling of interests method of accounting during
1998. The Company issued 61,835 shares of common stock for all of PAM
Holding Corporation's common shares outstanding. The prior period
financial information has been restated to include PAM Holding
Corporation and its subsidiaries. The acquisition did not have a material
impact on the financial statements.
(3) New Developments
The Company increased its quarterly dividend, effective the third quarter
of 1998, to $.04 per share from $.03 per share. The Company distributed a
5% stock dividend during the third quarter of 1998. Also, the Company
purchased 65,000 treasury shares during September 1998 for a total of
71,000 treasury shares.
The Company issued 792,800 shares of common stock in a secondary
offering, which was completed during the second quarter of 1998.
During the first quarter of 1998, the Company formed Progress Development
Corporation which generates fee income from the development of assisted
living communities.
(4) Capital Securities
During the quarter ended September 30, 1997, the Company issued $15.0
million of 10.5% capital securities due June 1, 2027 (the "Capital
Securities"). The Capital Securities were issued by the Company's
subsidiary, Progress Capital Trust I (the "Trust"), a statutory business
trust created under the laws of Delaware. The Company is the owner of all
of the common securities of the Trust (the "Common Securities"). In June
1997, the Trust issued $15.0 million of 10.5% Capital Securities and
together with the Common Securities, (the "Trust Securities"), the
proceeds from which were used by the Trust, along with the Company's
$464,000 capital contribution for the Common Securities, to acquire $15.0
million aggregate principal amount of the Company's 10.5% Junior
Subordinated Deferrable Interest Debentures due June 1, 2027 (the
"Debentures"), which constitute the sole assets of the Trust. The Company
has (through the Declaration of Trust establishing the Trust, Common
Securities and Capital Securities Guarantee Agreements, the Debentures
and a related Indenture, taken together) fully, irrevocably and
unconditionally guaranteed all of the Trust's obligations under the Trust
Securities. The Company contributed approximately $8.0 million of the net
proceeds to Progress Bank, to increase its regulatory capital ratios and
support the growth of the expanded lending operations.
<PAGE>
(5) Sale of Mortgage Servicing Portfolio
In March 1997, the Company sold its FNMA/FHLMC mortgage servicing
portfolio of approximately $347.4 million. The transaction resulted in a
gain of $978,000.
(6) Other
In February 1997, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share," ("SFAS 128"). SFAS 128 specifies the computation,
presentation, and disclosure requirements for earnings per share. The
statement is effective for the Company for interim and annual periods
ending after December 15, 1997. SFAS 128 requires restatement of all
prior-period per share data that is presented on a comparative basis. All
prior period per share amounts have been presented in accordance with the
new standard.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," "SFAS 130"). SFAS 130 establishes standards for reporting and
display of comprehensive income and its components. The statement is
effective for the Company for interim and annual periods ending after
December 15, 1997. Comprehensive income is defined as the change in
capital for transactions and other events and circumstances from
non-owner sources. Comprehensive income for the Company is derived from
net income by adding or deducting unrealized gains and losses from
available for sale securities.
The following table sets forth a reconcilement of net income to
comprehensive income indicating the components of other comprehensive
income:
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net income $1,346 $ 930 $3,463 $2,970
Other comprehensive income:
Unrealized holding gains (losses) during (369) 639 (1,095) 860
the period
Less: Reclassification adjustment for gains
(losses) included in net income 100 (83) 437 (49)
------- ------- ------- -------
Other comprehensive income (loss) before tax (469) 722 (1,532) 909
Income tax expense (benefit) related to other
comprehensive income (161) 258 (539) 320
------- ------- ------- -------
Other comprehensive income (loss) net of tax (308) 464 (993) 589
------- ------- ------- -------
Net comprehensive income $1,038 $1,394 $2,470 $3,559
======= ======= ======= =======
</TABLE>
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure
about Pensions and Other Postretirement Benefits," ("SFAS 132"). The
statement is effective for fiscal years beginning after December 15, 1997
The statement revises disclosure requirements for pension and postretire-
ment benefit plans. The Company expects to follow industry standards
in reporting the required information.
<PAGE>
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities, " ("SFAS 133"). The
statement is effective for fiscal years beginning after June 15, 1999
and will not be applied retroactively. The statement establishes
accounting and reporting standards for derivative instruments and
hedging activity. Under the standard, all derivatives must be measured
at fair value and recognized as either assets or liabilities in the
financial statements. As permitted under SFAS 133, the Company
transferred $40.1 million, gross of unrealized losses of $276,000
and net of realized losses of $72,000, of mortgage-backed
securities from the held to maturity to the available for sale
portfolio in the third quarter of 1998. The realized loss of $46,000,
net of tax benefit of $26,000 was presented as the cumulative effect
of accounting change on the Consolidated Statement of Operations.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise," ("SFAS
134"). The statement is effective for the first fiscal quarter
beginning after December 15, 1998. The statement amends existing
classification and accounting treatment of mortgage-backed securities
after mortgage loans held for sale are securitized, for entities
engaged in mortgage-banking activities. SFAS 134 is not expected to
have a material effect on the Company's financial statements.
<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 1998 data.
SUMMARY
The Company recorded net income of $1.3 million or diluted earnings per share of
$.24 for the three months ended September 30, 1998, in comparison with net
income of $930,000 or diluted earnings per share of $.20 for the three months
ended September 30, 1997. Return on average stockholders' equity was 12.71% and
return on average assets was .88% for the three months ended September 30, 1998
compared to 15.85% and .83%, respectively, for the three months ended September
30, 1997.
For the nine months ended September 30, 1998, the Company had net income of $3.5
million or diluted earnings per share of $.65 in comparison with net income of
$3.0 million or diluted earnings per share of $.65 for the nine months ended
September 30, 1997. Return on average stockholders' equity was 13.46% and return
on average assets was .86 % for the nine months ended September 30, 1998
compared to 17.95% and .94%, respectively, for the nine months ended September
30, 1997.
Net interest income was $6.0 million and $4.8 million for the three months ended
September 30, 1998 and 1997, respectively. Operating results for the three
months ended September 30, 1998 and 1997 included $233,000 and $242,000,
respectively, in provision for possible loan and lease losses. Non-interest
income for the three months ended September 30, 1998 and September 30, 1997
included service charges on deposits of $455,000 and $329,000, respectively.
Lease financing fees were $315,000 for the three months ended September 30, 1998
compared to $326,000 for the same period in 1997. Teleservices fee income was
$277,000 for the three months ended September 30, 1998 as compared to $291,000
for the same period in 1997. Loan brokerage and advisory fees were $583,000 for
the three months ended September 30, 1998 as compared to $344,000 for the same
period in 1997. Gain on sale of securities was $100,000 for the three months
ended September 30, 1998, compared to a loss on sale of securities of $83,000
for the same period in 1997. The three months ended September 30, 1998 included
a gain on the sale of real estate owned of $203,000.
Non-interest expenses totaled $5.9 million for the three months ended September
30, 1998 in comparison with $4.6 million for the same period in 1997. The
increase of $1.3 million was partially due to increased salaries and employee
benefits relating to employees of acquired companies and new staffing.
For the nine months ended September 30, 1998, net interest income was $16.7
million in comparison with $13.5 million for the nine months ended September 30,
1997. Operating results for the nine months ended September 30, 1998 and 1997
included $659,000 and $638,000, respectively, in provision for possible loan and
lease losses. Non-interest income for the nine months ended September 30, 1998
and September 30, 1997 included service charges on deposits of $1.2 million and
$1.1 million, respectively. Lease financing fees were $1.1 million for the nine
months ended September 30, 1998 compared with $933,000 for the same period in
1997. Teleservices fee income was $789,000 for the nine months ended September
30, 1998 compared to $402,000 for the same period in 1997. Gain on sale of
securities was $437,000 for the nine months ended September 30, 1998 compared to
a loss of $49,000 for the same period in 1997. Loan brokerage and advisory fees
increased to $1.4 million for the nine months ended September 30, 1998 from
$473,000 in the same period in 1997. Prior period non-interest income included a
$978,000 gain on sale of mortgage servicing rights. Gain on sale of real estate
owned was $203,000 for the nine months ended September 30, 1998 compared to
a loss on sale of real estate owned of $182,000 for the same period in 1997.
<PAGE>
Non-interest expenses totaled $16.9 million for the nine months ended September
30, 1998 in comparison to $12.6 million for the same period in 1997. The
increase of $4.3 million was partially due to an increase in salaries and
employees benefits relating to additional employees of companies acquired and an
increase in capital securities expense.
During the third quarter of 1998, the Company adopted SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities," which provided the opportunity
for the transfer of all mortgage-backed securities previously held to maturity
to the available for sale portfolio. Such transfer resulted in a realized
loss during the quarter amounting to $72,000. The cumulative effect of
this accounting change is a $46,000 loss, after tax.
Total assets increased to $618.0 million at September 30, 1998 from $508.2
million at December 31, 1997. Mortgage-backed securities available for sale
increased $113.1 million, including $40.1 million in mortgage-backed securities
transferred from the held to maturity portfolio as permitted under SFAS 133,
from December 31, 1997 and net loans and leases increased $44.1 million. The net
interest margin was 4.38 % and 4.55% for the nine-month periods ended September
30, 1998 and 1997, respectively.
The Company's stockholders' equity increased to $41.9 million from $25.5 million
at December 31, 1997. The increase primarily relates to the issuance of 792,800
shares of common stock during the second quarter of 1998.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income amounted to $6.0 million for the three months ended
September 30, 1998 in comparison with $4.8 million for the same period in 1997.
Net interest income for the three months ended September 30, 1998 was positively
impacted by a $159.9 million increase in average interest-earning assets, while
average interest-bearing liabilities increased $137.9 million. The net interest
margin decreased 46 basis points due to lower yields on mortgage-backed
securities and commercial real estate and residential loans.
For the nine months ended September 30, 1998, net interest income amounted to
$16.7 million in comparison to $13.5 million for the same period in 1997. Net
interest income for the nine months ended September 30, 1998 was positively
impacted by a $23.2 million improvement in the excess of average
interest-earning assets over average interest-bearing liabilities compared to
September 30, 1997. The net interest margin decreased 17 basis points due to
lower yields on mortgage-backed securities and commercial real estate and
residential loans.
<PAGE>
The following table sets forth, for the periods indicated, information regarding
(i) the total dollar amount of interest income on average interest-earning
assets and the resultant average yield; (ii) the total dollar amount of interest
expense on average interest-bearing liabilities and the resultant average cost;
(iii) net interest income; (iv) interest rate spread; and (v) net interest
margin. Information is based on average daily balances during the indicated
periods. For the purposes of this table, non-accrual loans have been included in
the appropriate average balance category.
<TABLE>
<CAPTION>
For the Three Months Ended September 30,
1998 1997
(Dollars in thousands)
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Investment securities(1) and other interest-earning
assets $ 22,105 $ 304 5.46% $ 10,951 $ 163 5.91%
Mortgage-backed securities (1) 171,276 2,860 6.62 88,672 1,539 6.89
Single family residential loans 55,259 1,081 7.76 59,795 1,188 7.88
Commercial real estate loans 122,657 2,777 8.98 93,123 2,178 9.28
Construction loans 32,766 916 11.09 30,219 833 10.94
Commercial business loans 79,806 1,918 9.53 55,682 1,395 9.94
Lease financing 63,396 1,864 11.67 49,572 1,548 12.39
Consumer loans 26,113 546 8.30 25,479 537 8.36
-------- ------ ------ -------- ------ ------
Total interest-earning assets 573,378 12,266 8.49 413,493 9,381 9.00
------ ------ ------ ------
Non-interest-earning assets 32,480 29,106
-------- --------
Total assets $605,858 $442,599
======== ========
Interest-bearing liabilities:
Interest-bearing deposits:
NOW and Super NOW $ 52,265 376 2.85 $ 30,690 170 2.20
Money market accounts 33,221 250 2.99 37,303 290 3.08
Passbook and statement savings 31,338 160 2.03 29,950 205 2.72
Time deposits 212,222 2,953 5.52 173,548 2,384 5.45
-------- ------ ------ -------- ----- ------
Total interest-bearing deposits 329,046 3,739 4.51 271,491 3,049 4.46
Federal Home Loan Bank borrowings 83,709 1,235 5.85 40,927 670 6.49
Other borrowings 84,453 1,277 6.00 46,882 851 7.20
-------- ----- ------ -------- ----- ------
Total interest-bearing liabilities 497,208 6,251 4.99 359,300 4,570 5.05
-------- ----- ------ -------- ----- ------
Non-interest-bearing liabilities 51,624 45,021
-------- --------
Total liabilities 548,832 404,321
Capital securities 15,000 15,000
Stockholders' equity 42,026 23,278
-------- --------
Total liabilities, capital securities and
stockholders' equity $605,858 $442,599
======== ========
Net interest income: $6,015 $4,811
====== ======
Interest rate spread (2) 3.50% 3.95%
====== ======
Net interest margin (3) 4.16% 4.62%
====== ======
Average interest-earning assets to average
interest-bearing liabilities 115.32% 115.08%
======= =======
</TABLE>
(1) Includes investment and mortgage-backed securities classified as available
for sale. Yield information does not give effect to changes in fair values
that are reflected in stockholders' equity.
(2) Interest rate spread represents the difference between the weighted average
yield on interest-earnings assets, and the weighted average cost of
interest-bearing liabilities.
(3) Net interest margin represents net interest income divided by average
interest-earning assets.
<PAGE>
The following table sets forth, for the periods indicated, information regarding
(i) the total dollar amount of interest income on average interest-earning
assets and the resultant average yield; (ii) the total dollar amount of interest
expense on average interest-bearing liabilities and the resultant average cost;
(iii) net interest income; (iv) interest rate spread; and (v) net interest
margin. Information is based on average daily balances during the indicated
periods. For the purposes of this table, non-accrual loans have been included in
the appropriate average balance category.
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
1998 1997
(Dollars in thousands)
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Investment securities(1) and other interest-earning $ 17,609 $ 710 5.39% $ 10,497 $ 467 5.95%
assets
Mortgage-backed securities (1) 127,914 6,212 6.49 88,446 4,598 6.95
Single family residential loans 56,021 3,210 7.66 62,122 3,645 7.84
Commercial real estate loans 118,446 7,919 8.94 93,035 6,554 9.42
Construction loans 28,654 2,381 11.11 26,498 2,120 10.70
Commercial business loans 74,789 5,498 9.83 43,670 3,187 9.76
Lease financing 59,192 5,423 12.25 46,494 4,501 12.94
Consumer loans 25,655 1,623 8.46 24,470 1,535 8.39
-------- ------- ------ -------- ------- ------
Total interest-earning assets 508,280 32,976 8.67 395,232 26,607 9.00
------- ------ ------- ------
Non-interest-earning assets 32,284 28,885
-------- --------
Total assets $540,564 $424,117
======== ========
Interest-bearing liabilities:
Interest-bearing deposits:
NOW and Super NOW $ 46,191 902 2.61 $ 31,283 502 2.15
Money market accounts 33,007 747 3.03 37,580 905 3.22
Passbook and statement savings 31,557 572 2.42 29,609 603 2.72
Time deposits 202,890 8,415 5.55 173,425 7,016 5.41
-------- ------ ----- -------- ------ ------
Total interest-bearing deposits 313,645 10,636 4.53 271,897 9,026 4.44
Federal Home Loan Bank borrowings 64,053 2,815 5.88 31,400 1,537 6.54
Other borrowings 63,107 2,858 6.06 47,671 2,580 7.24
-------- ------ ----- -------- ------ ------
Total interest-bearing liabilities 440,805 16,309 4.95 350,968 13,143 5.01
------ ----- ------ ------
Non-interest-bearing liabilities 50,373 44,381
-------- -------
Total liabilities 491,178 395,349
Capital securities 15,000 6,648
Stockholders' equity 34,386 22,120
-------- --------
Total liabilities, capital securities and
stockholders' equity $540,564 $424,117
======== ========
Net interest income: $16,667 $13,464
======= =======
Interest rate spread (2) 3.72% 3.99%
======= =======
Net interest margin (3) 4.38% 4.55%
======= =======
Average interest-earning assets to average
interest-bearing liabilities 115.31% 112.61%
======= =======
</TABLE>
(1) Includes investment and mortgage-backed securities classified as available
for sale. Yield information does not give effect to changes in fair value
that are reflected in stockholders' equity.
(2) Interest rate spread represents the difference between the weighted average
yield on interest-earnings assets, and the weighted average cost of
interest-bearing liabilities.
(3) Net interest margin represents net interest income divided by average
interest-earning assets.
<PAGE>
Total interest income amounted to $12.3 million for the three months ended
September 30, 1998, a $2.9 million or 30.8% increase when compared to the same
period in 1997. This increase was due to a $159.9 million increase in average
interest-earning assets, which was partially the result of growth in
mortgage-backed securities of $82.6 million. Average commercial business and
average commercial real estate loan balances increased by $24.1 million and
$29.5 million, respectively, resulting in increases in interest income on
commercial business loans and commercial real estate loans of $523,000 and
$599,000 respectively. These increases were partially offset by a decrease of
$4.5 million in average single-family residential loans resulting in a $107,000
decrease in related interest income.
Total interest expense amounted to $6.3 million for the three months ended
September 30, 1998, a $1.7 million or 36.8% increase in comparison to the same
period in 1997. Interest expense on deposits increased $690,000 as the average
balance of deposits increased $57.6 million. Interest expense on Federal Home
Loan Bank ("FHLB") borrowings increased $565,000, mainly due to a $42.8 million
increase in average FHLB borrowings. This increase was due to additional
borrowings necessary to fund the increase in interest-earning assets. Other
borrowings primarily consist of securities sold under agreements to repurchase.
For the nine months ended September 30, 1998, total interest income amounted to
$33.0 million, a $6.4 million increase from the same period in 1997. This
increase was due to a $113.0 million increase in average earning assets which
was primarily the result of growth in loans and leases. For the nine months
ended September 30, 1998 interest income from lease financing increased
$922,000. In addition, interest income on commercial business loans and
commercial real estate loans increased $2.3 million and $1.4 million,
respectively, due to increases in average balances of $31.1 million and $25.4
million, respectively. These increases were partially offset by a decrease of
$6.1 million in the average balances of single-family residential loans
resulting in a $435,000 decrease in related interest income.
For the nine months ended September 30, 1998, total interest expense amounted to
$16.3 million, a $3.2 million increase when compared to the same period in 1997.
Interest expense on deposits increased $1.6 million as the average rate on
deposits increased 9 basis points and the average balance of deposits increased
$41.7 million. Interest expense on FHLB borrowings increased $1.3 million,
mainly due to a $32.7 million increase in the average balance. This increase was
due to additional borrowings necessary to fund the increase in interest-earning
assets.
Provision for Possible Loan and Lease Losses
The Company's provision for possible loan and lease losses represents the charge
against earnings that is required to fund the allowance for possible loan and
lease losses. The appropriate level of the allowance for possible loan and lease
losses is determined by estimating inherent risks within the Company's loan and
lease portfolio. Management's periodic evaluation is based upon an examination
of the portfolio, past loss experience, current economic conditions, the results
of the most recent regulatory examinations and other relevant factors. See
"Non-Performing Assets."
During the nine months ended September 30, 1998, the Company recorded a $659,000
provision compared with $638,000 for the comparable period in 1997. Net
recoveries amounted to $89,000 during the nine months ended September 30, 1998
in comparison with $434,000 in net charge-offs during the comparable period in
1997. At September 30, 1998, the allowance for possible loan and lease losses
amounted to $4.6 million or 1.19% of total loans and leases and 161.7% of total
non-performing loans and leases. See "Non-Performing Assets - Allowance for
Possible Loan and Lease Losses."
The Company's allowance for possible loan and lease losses increased by
$748,000, from December 31, 1997. The provision for possible loan and lease
losses of $659,000 for the nine months ended September 30, 1998 was considered
necessary by management to maintain the allowance for possible loan and lease
losses at an adequate level. The ratio of delinquent loans and leases to the
total loan and lease portfolio increased to 3.97% at September 30, 1998 versus
3.15% at December 31, 1997.
<PAGE>
Although management utilizes its best judgement in providing for possible
losses, there can be no assurance that the Company will not have to increase its
provision for possible loan and lease losses in the future as a result of
adverse market conditions for loans and leases in the Company's primary market
area, future increases in non-performing loans and leases or for other reasons.
Any such increase could adversely affect the Company's results of operations. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Company's allowance for possible loan and lease
losses and the carrying value of its other non-performing assets. Such agencies
may require the Company to recognize additions to its allowance for possible
losses on loans and leases and allowance for possible losses on real estate
owned ("REO") based on their judgement about information available to them at
the time of their examination.
Non-Interest Income
The following table details non-interest income for the periods indicated:
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
(Dollars in thousands) (Dollars in thousands)
(unaudited) (unaudited)
Non-interest income:
<S> <C> <C> <C> <C>
Service charges on deposits $ 455 $ 329 $1,231 $1,098
Lease financing fees 315 326 1,064 933
Teleservices fee income 277 291 789 402
Loan brokerage and advisory fees 583 344 1,418 473
Gain on sale of mortgage servicing rights -- -- -- 978
Gain (loss) on sale of securities 100 (83) 437 (49)
Gain on sale of lease receivables 154 61 215 61
Gain (loss) on sale of real estate owned 203 -- 203 (182)
Fees and other 251 240 1,048 813
------ ------- ------ ------
Total non-interest income $2,338 $1,508 $6,405 $4,527
====== ======= ====== ======
</TABLE>
Total non-interest income amounted to $2.3 million for the three months ended
September 30, 1998, an increase of $830,000 compared with the $1.5 million in
non-interest income for the three months ended September 30, 1997. This increase
primarily relates to loan brokerage and advisory fees generated by the Company's
commercial mortgage banking subsidiary which increased by $239,000 over the
third quarter of 1997. Gain on sale of real estate owned increased $203,000
over the third quarter of 1997. Gain on sale of securities increased by $183,000
over the third quarter of 1997. Other non-interest income includes a $73,000
gain from the sale of warrants held in the Company's technology loan portfolio.
Total non-interest income amounted to $6.4 million for the nine months ended
September 30, 1998, an increase of $1.9 million compared with the $4.5 million
in non-interest income for the nine months ended September 30, 1997. The
increase primarily relates to increased loan brokerage and advisory fees of
$945,000. In addition, teleservices fee income increased by $387,000 over the
same period in 1997. Gain on sale of real estate owned increased $385,000 over
the same period in 1997.
<PAGE>
Non-interest Expense
The following table details non-interest expense for the periods indicated:
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
(Dollars in thousands) (Dollars in thousands)
(unaudited) (unaudited)
Non-interest expense:
<S> <C> <C> <C> <C>
Salaries and employee benefits $3,098 $2,146 $ 8,794 $ 6,195
Occupancy 337 301 995 928
Data processing 287 224 798 822
Furniture, fixtures and equipment 267 210 803 599
Loan and real estate owned expenses, net (1) 154 (33) 300
Professional services 431 246 811 686
Capital securities expense 398 398 1,195 526
Other 1,110 891 3,513 2,560
----- ------ -------- -------
Total non-interest expense $5,927 $4,570 $16,876 $12,616
====== ====== ======== =======
</TABLE>
Total non-interest expense amounted to $5.9 million for the three months ended
September 30, 1998, an increase of $1.3 million over the $4.6 million recognized
during the comparable 1997 period. This increase was partially due to increases
in salaries and employee benefits of $952,000 relating to additional employees
of companies acquired and new staffing requirements within the Bank.
Professional services expense increased by $185,000 over the third quarter of
1997 including a $115,000 one-time expense relating to a potential acquisition
which did not materialize.
Total non-interest expense amounted to $16.9 million for the nine months ended
September 30, 1998, an increase of $4.3 million over the $12.6 million
recognized during the comparable 1997 period. This increase was partially due to
increases in salaries and employee benefits of $2.6 million relating to
additional employees of companies acquired and new staffing requirements within
the Bank. Capital securities expense increased by $669,000 for the nine months
ended September 30, 1998 compared to the same period in 1997. The capital
securities were issued in June of 1997.
Income Tax Expense
The Company recorded income tax expense of $801,000, gross of the $26,000 tax
benefit relating to the cumulative effect of accounting change, for the three
months ended September 30, 1998. This compared to $577,000 for the same period
in 1997.
The Company recorded income tax expense of $2.0 million, gross of the $26,000
tax benefit relating to the cumulative effect of accounting change for the nine
months ended September 30, 1998. This compared to $1.8 million for the
nine months ended September 30, 1997.
<PAGE>
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. The Company pays a monthly management fee to
the Bank in order to compensate the Bank for certain operating expenses.
The Bank is required under applicable federal regulations to maintain specified
levels of "liquid" investments in qualifying types of United States Treasury,
federal agency and obligations of the Federal National Mortgage Association
("FNMA"), Government National Mortgage Association ("GNMA"), and Federal Home
Loan Mortgage Corporation ("FHLMC"). Regulations currently in effect require the
Bank to maintain liquid assets of not less than 4% of its net withdrawable
accounts plus short-term borrowings. These levels are changed from time to time
by the Office of Thrift Supervision ("OTS") to reflect economic conditions. The
Bank's liquidity ratio at September 30, 1998 was 11.43%.
The Company monitors its liquidity in accordance with internal guidelines 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 times of heavy loan demand by modifying its
credit policies or reducing its marketing efforts. Liquidity demand resulting
from net reductions in retail deposits is usually caused by factors over which
the Company has limited control. The Company derives its liquidity from both its
assets and liabilities. Liquidity is derived from assets by receipt of interest
and principal payments and prepayments, by the ability to sell assets at market
prices and by utilizing unpledged assets as collateral for borrowings. Liquidity
is derived from liabilities by maintaining a variety of funding sources,
including retail deposits, FHLB borrowings and other borrowings.
The Company's primary source of funds has historically consisted of: deposits;
amortization and prepayments of outstanding loans; borrowings from the FHLB and
other sources; and, sales of investment securities, loans and mortgage-backed
securities. During the nine months ended September 30, 1998, the Company used
its resources primarily to meet its ongoing commitments to fund maturing savings
certificates and deposit withdrawals, fund existing and new loan commitments and
maintain its liquidity.
For the nine months ended September 30, 1998, cash was used in operating and
investing activities and provided by financing activities. Operating activities
used $24.3 million of cash. Investing activities used $121.8 million in cash as
the purchases of mortgage-backed securities exceeded repayments and sales of
such securities by $65.1 million and net increases in loan and leases amounted
to $46.7 million. In addition, financing activities provided $136.3 million in
cash primarily from net increases of $60.1 million in FHLB borrowings, increases
in other borrowings of $28.1 million, and net increases in time deposits of
$22.3 million. Additionally, the proceeds from the issuance of common stock were
$14.8 million.
At September 30, 1998, the Company had $220.4 million in loan commitments to
extend credit, including unused lines of credit, and $5.4 million in letters of
credit outstanding. At September 30, 1998, FHLB borrowings scheduled to mature
through September 30, 1999 totaled $10.6 million. Other borrowings scheduled to
mature within one year of September 30, 1998 totaled $45.8 million. Subordinated
debentures of $3.0 million are due September 30, 2004 and are redeemable after
July 1, 1996. The capital securities are due June 1, 2027. At September 30,
1998, the total amount of time deposits scheduled to mature through September
30, 1999 totaled $162.1 million.
Management has focused considerable attention on the retention of the Company's
core deposit base, which has been impacted by increased competition for deposit
funds.
<PAGE>
The Company's deposits are obtained primarily from residents near the Bank's
eight 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 has drive-up banking facilities at five of its offices
and has automated teller machines ("ATM's") at all of its offices and at two
additional locations.
The Company offers a wide variety of deposit options to its customer base,
including consumer and commercial demand deposit accounts, negotiable order of
withdrawal accounts, money market accounts, passbook accounts, certificates of
deposit and retirement plans.
Deposits increased $36.7 million from $340.8 million at December 31, 1997 to
$377.5 million at September 30, 1998. The ability of the Company to attract and
maintain deposits and the Company's cost of funds on these deposit accounts has
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 Bank's assets or on the
FHLB's assessment of the Bank's creditworthiness. The FHLB credit policies may
change from time to time at its discretion.
The following table presents certain information regarding FHLB borrowings and
other borrowings for the periods indicated:
<TABLE>
<CAPTION>
At or For the Nine Months
Ended September 30,
1998 1997
---- ----
(Dollars in thousands)
<S> <C> <C>
Average balance outstanding $127,160 $79,071
Maximum amount outstanding at any month-end during the period $172,405 $97,983
Weighted average interest rate during the period 5.96% 6.96%
Weighted average interest rate at end of the period 5.66% 6.38%
</TABLE>
The Company continued to utilize FHLB borrowings as a source of funds to meet
loan demand during the nine months ended September 30, 1998. FHLB borrowings
increased $60.1 million to $93.6 million at September 30, 1998 from $33.5
million at December 31, 1997. Other borrowings, consisting primarily of
securities sold under agreements to repurchase, were $78.9 million at September
30, 1998 and $50.8 million at December 31, 1997.
Year 2000
The Year 2000 issue concerns the potential impact of historic computer software
code that utilizes only two digits to represent the calendar year (i.e. "98" for
"1998"). Software so developed, and not corrected, could produce inaccurate or
unpredictable results commencing upon January 1, 2000, when current and future
dates present a lower two digit number than dates from the prior century. The
Company, similar to most financial service providers, is significantly subject
to the potential impact of the Year 2000 issue due to the nature of financial
information. Potential impacts to the Company may arise from software, computer
hardware, and other equipment both within the Company's direct control and
outside of the Company's ownership, yet with which the Company electronically or
operationally interfaces. Financial institution regulators have intensively
focused upon Year 2000 exposures, issuing guidance concerning the
responsibilities of senior management and directors. Year 2000 testing and
certification is being addressed as a key safety and soundness issue in
conjunction with regulatory exams.
<PAGE>
In order to address the Year 2000 issue, the Company has developed and
implemented a five-phase plan divided into the following major components: 1)
awareness; 2) assessment; 3)renovation; 4) validation; and 5) implementation.
The Company has divided these phases into the following three categories: 1)
internal; 2) vendors; and 3) customers.
The company has completed the first two phases for all three categories.
Completion of the third phase for the internal category is anticipated by
December 1998. Because the Company outsources its data processing and item
processing operations, a significant component of the Year 2000 plan is to work
with external vendors to test and certify their systems as Year 2000 compliant.
Based on conversations with critical vendors the completion of phase three is
anticipated by year-end 1998 and the beginning of phase four in the first
quarter of 1999.
The Company has established a Year 2000 committee which meets bi-weekly and
reports at least quarterly to the Board of Directors on the progress toward
achieving and certifying Year 2000 compliance. The Company's current plan is to
complete the Year 2000 project by June 30, 1999. Final validation testing with
the Company's primary data processor is scheduled for the first quarter of 1999.
The Company has no internally generated programmed software coding to correct,
as all of the software utilized by the Company is purchased or licensed form
external providers. The Company has determined that it has little or no exposure
to contingencies related to Year 2000 issues for products it has sold.
The Company has initiated formal communications with all of its significant
suppliers and customers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
issues. The Company is requesting that third party vendors represent their
products and services to be Year 2000 compliant and that they have a program to
test for that compliance. The response of certain third parties, however, is
beyond the control of the Company. To the extent that adequate responses have
not been received by December 31, 1998, the Company is prepared to develop
contingency plans, with the completion of those plans scheduled no later than
March 31, 1999. At this time the Company cannot estimate the additional cost, if
any, that might develop from such contingency plans.
The Company's total Year 2000 estimated project cost, which is based upon
currently available information, includes expenses for the review and testing
related to third parties, including government entities. However, there can be
no guarantee that the hardware, software, and systems of such third parties will
be without unfavorable Year 2000 impact and therefore present a material adverse
impact upon the Company.
Year 2000 compliance costs incurred during fiscal 1998 have totaled
approximately $40,000, the majority of which is related to software upgrades for
ATM's and telephone systems. Additional Year 2000 costs for 1998, which are
expensed on a current period basis, are estimated to be between $10,000 and
$25,000. The Company anticipates spending approximately $230,000 in fiscal 1999
in conjunction with changes to and testing of technological aspects of its
delivery structure. These costs are exclusive of internal costs related with
non-dedicated personnel which are not tracked separately. At this time no
significant projects have been delayed as a result of the Company's Year 2000
effort.
Despite the Company's activities with regard to the Year 2000 issue, there can
be no assurance that partial or total systems interruptions or the costs
necessary to update hardware and software would not have a material adverse
effect upon the Company's business, financial condition, results of operations,
and business prospects.
<PAGE>
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 September 30, 1998, 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 September 30, 1998:
<TABLE>
<CAPTION>
Tangible Core Risk-Based
Capital % Capital % Capital %
(Dollars in thousands)
<S> <C> <C> <C>
GAAP Capital $42,608 $42,608 $42,608
General valuation allowance -- -- 4,567
Unrealized loss on securities available 247 247 247
for sale
Goodwill (2,901) (2,901) (2,901)
---------- ----------- --------
Total 39,954 6.63% 39,954 6.63% 44,521 10.75%
Minimum capital requirement 9,043 1.50% 18,087 3.00% 33,134 8.00%
---------- ----- --------- ----- -------- -------
Regulatory capital-excess $30,911 5.13% $21,867 3.63% $11,387 2.75%
========= ===== ======== ===== ======= =======
</TABLE>
The prompt corrective action regulations under the Federal Deposit Insurance
Corporation Improvement Act of 1991 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 their 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 September 30, 1998, the Bank's leverage ratio was 6.63%, Tier 1 risk-based
capital ratio was 9.65%, and total risk-based capital ratio was 10.75%, based on
leverage capital of $40.0 million, Tier 1 capital of $40.0 million, and total
risk-based capital of $44.5 million. As of September 30, 1998, the Bank was
classified as "well capitalized."
Cash and Due From Banks
Interest-bearing deposits in other banks totaled $695,000 at September 30, 1998
in comparison with $7.7 million at December 31, 1997. At September 30, 1998, the
Company also had $8.9 million in cash and non-interest bearing deposits in other
banks compared with $11.7 million at December 31, 1997.
Investment Securities
The Company is required under current OTS regulations to maintain defined levels
of liquidity and utilizes certain investments that qualify as liquid assets. The
Company utilizes deposits with the FHLB, bankers' acceptances, loans to
financial institutions whose deposits are insured by the Federal Deposit
Insurance Corporation, 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 $7.4 million of such securities on its books at September
30, 1998.
<PAGE>
The following table sets forth the amortized cost, gross unrealized gains and
losses, estimated fair value and carrying value of the investment portfolio at
the dates indicated:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
(Dollars in thousands)
At September 30, 1998
Available for sale:
<S> <C> <C> <C> <C> <C>
U.S. agency obligations $ 3,000 $ 5 $ -- $ 3,005 $ 3,005
Equity investments 7,487 124 227 7,384 7,384
------- ----- ----- ------- -------
Total available for sale $10,487 $ 129 $ 227 $10,389 $10,389
======= ===== ===== ======= =======
Held to maturity:
FHLB stock, pledged $ 4,923 $ -- $ -- $ 4,923 $ 4,923
FHLB investment securities 4,883 90 -- 4,973 4,883
U. S. agency obligations 2,459 19 -- 2,478 2,459
------- ----- ----- ------- -------
Total held to maturity $12,265 $ 109 $ -- $12,374 $12,265
======= ===== ===== ======= =======
At December 31, 1997
Available for sale:
U.S. agency obligations $ 3,000 $ 1 $ -- $ 3,001 $ 3,001
Equity investments 2,924 470 -- 3,394 3,394
------- ---- ----- ------ ------
Total available for sale $ 5,924 $471 $ -- $ 6,395 $ 6,395
======= ==== ===== ======= =======
Held to maturity:
FHLB stock, pledged $ 1,728 $ -- $ -- $ 1,728 $ 1,728
FHLB investment securities 2,323 19 -- 2,342 2,323
------- ---- ----- ------- -------
Total held to maturity $ 4,051 $ 19 $ -- $ 4,070 $ 4,051
======= ==== ===== ======= =======
</TABLE>
The amortized cost and estimated fair value of investment securities by
contractual maturity at September 30, 1998 are as follows:
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
(Dollars in thousands)
<S> <C> <C> <C> <C>
Due after one year through five years $ 3,000 $ 3,005 $ -- $ --
Due after five years through ten years -- -- -- --
Due after ten years 2,673 2,582 7,342 7,451
No stated maturity 4,814 4,802 4,923 4,923
------- ------- ------- -------
Total investment securities $10,487 $10,389 $12,265 $12,374
======= ======= ======= =======
</TABLE>
Investment securities pledged as collateral for FHLB borrowings amounted to $7.3
million at September 30, 1998. Investment securities pledged to the Federal
Reserve Bank for Small Business Administration loans amounted to $1.0 million at
September 30, 1998.
<PAGE>
Mortgage-Backed Securities
The following tables detail the amortized cost, gross unrealized gains and
losses, estimated fair value and carrying value of mortgage-backed securities by
classification at the dates indicated:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
(Dollars in thousands)
At September 30, 1998
Available for sale:
<S> <C> <C> <C> <C> <C>
GNMA $126,195 $267 $ 422 $126,040 $126,040
FNMA 15,377 21 26 15,372 15,372
FHLMC 14,635 31 166 14,500 14,500
Non-agency pass-through certificate 1,705 7 -- 1,712 1,712
-------- ---- ----- -------- --------
Total available for sale $157,912 $326 $ 614 $157,624 $157,624
======== ==== ===== ======== ========
At December 31, 1997
Held to maturity:
GNMA $19,509 $ -- $ 262 $19,247 $19,509
FNMA 15,900 14 42 15,872 15,900
FHLMC 14,012 75 112 13,975 14,012
------- ---- ----- ------- -------
Total held to maturity $49,421 $ 89 $ 416 $49,094 $49,421
======= ==== ===== ======= =======
Available for sale:
GNMA $39,553 $ 234 $ 15 $39,772 $39,772
FNMA 914 2 12 904 904
FHLMC 1,336 8 29 1,315 1,315
Non-agency pass-through certificate 2,443 84 -- 2,527 2,527
------- ----- ----- ------- -------
Total available for sale $44,246 $ 328 $ 56 $44,518 $44,518
======= ===== ===== ======= =======
</TABLE>
Mortgage-backed securities increase the credit quality of the Company's assets
by virtue of the guarantees backing them, are more liquid than individual
mortgage loans and may be used to collateralize borrowings or other obligations
of the Company. The mortgage-backed securities portfolio contains no speculative
derivative securities at September 30, 1998. During the third quarter of 1998,
the Company implemented SFAS 133, resulting in the transfer of $40.1 million,
gross of unrealized losses of $276,000, of mortgage-backed securities previously
held to maturity to the available for sale portfolio. At September 30, 1998, all
of the Company's mortgage-backed securities are classified as available for
sale. In addition, the Company 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. The fixed-rate mortgage-backed securities 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.
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.
Mortgage-backed securities pledged under agreements to repurchase in connection
with borrowings amounted to $105.3 million at September 30, 1998.
Mortgage-backed securities pledged as collateral for public funds amounted to
$21.2 million at September 30, 1998. Mortgage-backed securities pledged as
collateral for FHLB borrowings amounted to $6.3 million at September 30, 1998.
Mortgage-backed securities pledged to the Federal Reserve Bank to secure
Treasury, Tax and Loan balances amounted to $1.6 million September 30, 1998.
Loans and Leases
The Company's net loan and lease portfolio, totaled $384.4 million at September
30, 1998 or 62.2% of its total assets, an increase of $44.1 million or 13.0%
from the $340.3 million outstanding at December 31, 1997. The following table
depicts the composition of the Company's loan and lease portfolio at the dates
indicated:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
Amount Percent Amount Percent
(Dollars in thousands)
<S> <C> <C> <C> <C>
Single family residential real estate $ 53,704 13.81% $ 56,565 16.44%
Commercial real estate 125,818 32.34 109,938 31.94
Construction, net of loans in process 36,160 9.30 26,695 7.76
Consumer 26,412 6.79 24,639 7.16
Credit card receivables 876 .23 918 .27
Commercial business 84,794 21.80 69,312 20.14
Lease financing 73,675 18.94 67,439 19.59
Unearned income (12,467) (3.21) (11,367) (3.30)
--------- -------- --------- -------
Total loans and leases 388,972 100.00% 344,139 100.00%
======= =======
Allowance for possible loan and lease losses (4,611) (3,863)
--------- ---------
Net loans and leases $384,361 $340,276
======== =========
</TABLE>
<PAGE>
NON-PERFORMING ASSETS
General
Non-performing assets consist of non-accrual loans and REO. Total non-performing
assets amounted to $2.9 million at September 30, 1998, $2.6 million at December
31, 1997 and $6.5 million at September 30, 1997.
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: 1) Secured by a first mortgage with the
Bank, or secured by a second mortgage whereby the first mortgage is a Bank loan,
and where the aggregate amount of the principal, accrued and uncollected
interest and negative escrow balance does not exceed a 75% loan-to-value ratio;
or 2) Secured by a second mortgage with the Bank whereby the first mortgage is
not a Bank loan and where the aggregate amount of the principal, accrued and
uncollected interest and negative escrow balance plus the amount due the first
mortgage holder does not exceed a 60% loan-to-value ratio. 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 possible loan and
lease losses.
Real estate acquired in partial or full satisfaction of loans is recorded at the
lower of cost (recorded balance of the loan at foreclosure plus foreclosure
costs) or fair value less estimated costs to sell thereafter through a charge to
the allowance for possible loan and lease losses. 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 when carrying value does not exceed fair value. Gains on the sale of
real estate are recognized upon disposition of the property and losses are
charged to operations as incurred.
The following table details the Company's non-performing assets at the dates
indicated:
<TABLE>
<CAPTION>
September 30 December 31, September 30,
1998 1997 1997
(Dollars in thousands)
<S> <C> <C> <C>
Loans and leases accounted for on a non-accrual basis $2,852 $2,179 $2,606
REO, net of related reserves -- 380 3,880
------ ------ ------
Total non-performing assets $2,852 $2,559 $6,486
====== ====== ======
Non-performing loans and leases as a percentage of net loans and .74% .64% .83%
====== ====== =======
leases
Non-performing assets as a percentage of total assets .46% .50% 1.43%
======= ====== ======
Accruing loans 90 or more days past due $3,723 $2,721 $3,075
======= ======= ======
</TABLE>
Non-performing assets increased $293,000 to $2.9 million at September 30, 1998
from $2.6 million at December 31, 1997. This increase is mainly due to an
increase in non-accrual lease receivables.
The $2.9 million of non-accrual loans at September 30, 1998 consists of $985,000
of loans secured by single family residential property, $201,000 of commercial
business loans, $166,000 of consumer loans, $182,000 of commercial mortgages,
and $1.3 million of lease financing.
<PAGE>
Delinquencies
All loans and leases are reviewed on a regular basis and are placed on
non-accrual status when, in the opinion of management, the collection of
additional interest is deemed unlikely 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 and lease portfolio represented by delinquent loans
and leases at the dates indicated:
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1998 1997 1997
Amount Percent Amount Percent Amount Percent
(Dollars in thousands)
Delinquencies:
<S> <C> <C> <C> <C> <C> <C> <C>
30 to 59 days $ 9,763 2.51% $ 6,167 1.80% $3,583 1.12%
60 to 89 days 1,939 .50 1,934 .56 2,192 .69
90 or more days 3,723 .96 2,721 .79 3,075 .96
------- ----- ------- ----- ------ -----
Total $15,425 3.97% $10,822 3.15% $8,850 2.77%
======= ===== ======= ===== ====== =====
</TABLE>
<PAGE>
Allowance for Possible Loan and Lease Losses
The following table details the Company's allowance for possible loan and lease
losses for the periods indicated:
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C>
Average loans and leases outstanding $379,997 $313,870 $362,757 $296,289
======== ======== ======== ========
Balance beginning of period $4,307 $3,747 $3,863 $3,768
Charge-offs:
Residential real estate -- -- -- 3
Commercial real estate -- -- -- 333
Consumer 40 2 70 44
Commercial -- -- 2 --
Leases 11 61 139 222
-------- ------ ------- -------
Total charge-offs 51 63 211 602
-------- ------ ------- -------
Recoveries:
Residential real estate 1 -- 1 --
Consumer -- 5 4 12
Commercial 56 -- 62 --
Leases 65 41 233 156
------- ----- ------ ------
Total recoveries 122 46 300 168
------- ----- ------ ------
Net charge-offs (recoveries) (71) 17 (89) 434
Additions charged to operations 233 242 659 638
------- ------ ------ ------
Balance at end of period $4,611 $3,972 $4,611 $3,972
======= ====== ======= ======
Ratio of net charge-offs (recoveries) during the period to
average loans and leases outstanding during the period (.02)% .01% (.02)% .15%
======== ====== ======== ======
Ratio of allowance for possible loan and lease losses to
non-performing loans and leases at end of period 161.68% 152.42% 161.68% 152.42%
======== ======= ======= =======
</TABLE>
An allowance for possible loan and lease losses is maintained at a level that
management considers adequate to provide for potential losses based upon an
evaluation of known and inherent risks in the loan and lease portfolio. The
allowance for possible loan and lease losses is based on estimated net
realizable value unless it is probable that loans and leases will be foreclosed,
in which case the allowance for possible loan and lease 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.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in routine legal proceedings occurring in the ordinary
course of business which management, after reviewing the foregoing actions with
legal counsel, is of the opinion that the liability, if any, resulting from such
actions will not have a material effect on the financial condition or results of
operations of the Company.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 11 - Statement re: Computation of per share earnings
<PAGE>
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
November 16, 1998 /s/ W. Kirk Wycoff
- --------------------------- ------------------
Date W. Kirk Wycoff, Chairman,
President and Chief Executive Officer
November 16, 1998 /s/ Michael B. High
- --------------------------- -------------------
Date Michael B. High,
Senior Vice President and
Chief Financial Officer
<PAGE>
<TABLE>
Exhibit (11)
Computation of Earnings Per Share
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
A. Income before cumulative effect of accounting change $1,392,000 $930,000 $3,509,000 $2,970,000
B. Cumulative effect of accounting change (net of tax
benefit of $26,000) (46,000) -- (46,000) --
------------ --------- ---------- ----------
C. Net Income applicable to common stock $1,346,000 $930,000 $3,463,000 $2,970,000
=========== ======== ========== ==========
Basic Earnings Per Common Share:
D. Basic average common shares outstanding 5,223,434 4,237,933 4,810,851 4,225,796
=========== ========= ========= ==========
Basic Earnings Per Share:
Income before cumulative effect of accounting
change (A/D) $.27 $.22 $.73 $.70
Cumulative effect of accounting change, net of
tax benefit (B/D) (.01) -- (.01) --
-------- ------- -------- ----
Net income (C/D) $.26 $ .22 $.72 $.70
======= ======= ======== ====
Fully Diluted Earnings Per Common Share:
Basic average common shares outstanding 5,223,434 4,237,933 4,810,851 4,225,796
Dilutive average common shares outstanding under
options and warrants 739,650 704,990 755,400 665,852
Exercise prices $.91 to $.91 to $.91 to $.91 to
$15.71 $10.32 $16.90 $7.48
Assumed proceeds on exercise $4,144,862 $3,442,082 $4,411,112 $3,147,651
Market value per share $16.223 $ 12.589 $16.925 $9.792
Less: Treasury stock purchases with the assumed
proceeds from exercise of options and warrants 255,493 273,420 260,627 321,451
----------- --------- --------- ----------
E. Fully diluted average common shares outstanding 5,707,591 4,669,503 5,305,624 4,570,197
=========== ========= =========== ==========
Fully Diluted Earnings Per Common Share:
Income before cumulative effect of accounting
change (A/E) $.24 $.20 $.66 $.65
Cumulative effect of accounting change net of
tax benefit (B/E) -- -- (.01) --
---- ------ ------- -------
Net income (C/D) $.24 $.20 $.65 $.65
==== ====== ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000790183
<NAME> David Kiefer
<MULTIPLIER> 1000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-Mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Sep-30-1998
<EXCHANGE-RATE> 1
<CASH> 8,900
<INT-BEARING-DEPOSITS> 695
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 168,013
<INVESTMENTS-CARRYING> 12,265
<INVESTMENTS-MARKET> 12,374
<LOANS> 388,972
<ALLOWANCE> 4,611
<TOTAL-ASSETS> 618,049
<DEPOSITS> 377,529
<SHORT-TERM> 56,318
<LIABILITIES-OTHER> 11,258
<LONG-TERM> 116,087
0
0
<COMMON> 5,263
<OTHER-SE> 36,594
<TOTAL-LIABILITIES-AND-EQUITY> 618,049
<INTEREST-LOAN> 26,054
<INTEREST-INVEST> 6,874
<INTEREST-OTHER> 48
<INTEREST-TOTAL> 32,976
<INTEREST-DEPOSIT> 10,636
<INTEREST-EXPENSE> 16,309
<INTEREST-INCOME-NET> 16,667
<LOAN-LOSSES> 659
<SECURITIES-GAINS> 437
<EXPENSE-OTHER> 16,876
<INCOME-PRETAX> 5,537
<INCOME-PRE-EXTRAORDINARY> 3,509
<EXTRAORDINARY> 0
<CHANGES> (46)
<NET-INCOME> 3,463
<EPS-PRIMARY> 0.72
<EPS-DILUTED> 0.65
<YIELD-ACTUAL> 4.38
<LOANS-NON> 2,852
<LOANS-PAST> 3,723
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,863
<CHARGE-OFFS> 211
<RECOVERIES> 300
<ALLOWANCE-CLOSE> 4,611
<ALLOWANCE-DOMESTIC> 4,611
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 32
</TABLE>
