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, 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) 5,001,577
------------------------------ ----------------------------
Title of Each Class Number of Shares Outstanding
as of July 31, 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 June 30, 1998
and December 31, 1997 (unaudited).....................................3
Consolidated Statements of Operations for the three and
six months ended June 30, 1998 and 1997 (unaudited)...................4
Consolidated Statements of Cash Flows for the six months ended
June 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).....................................9
PART II - Other Information
Item 1.Legal Proceedings....................................................25
Item 2.Changes in Securities................................................25
Item 3.Defaults upon Senior Securities......................................25
Item 4.Submission of Matters to a Vote of Security Holders..................25
Item 5.Other Information....................................................25
Item 6.Exhibits and Reports on Form 8-K.....................................25
Signatures...........................................................26
<PAGE>
PART I- FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------- ------------
(Dollars in thousands)
(unaudited)
<S> <C> <C>
Assets
Cash and due from banks:
Interest bearing $ 922 $ 7,689
Non-interest bearing 12,183 11,697
Investment securities
Available for sale at fair value (amortized cost:$7,834 in 1998 and $5,924 in 1997) 8,050 6,395
Held to maturity at amortized cost (fair value: $ 11,295 in 1998 and $4,070 in 1997) 11,222 4,051
Mortgage-backed securities:
Available for sale at fair value (amortized cost: $134,312 in 1998 and $44,246 in 1997) 134,079 44,518
Held to maturity at amortized cost (fair value: $39,789 in 1998 and $49,094 in 1997) 40,219 49,421
Loans and leases, net 365,536 340,276
Real estate owned, net 300 380
Premises and equipment, net 9,755 9,319
Accrued interest receivable 3,301 2,728
Deferred income taxes 1,800 274
Receivable for securities sold -- 21,043
Other assets 14,959 11,144
-------- --------
Total assets $602,326 $508,935
======== ========
Liabilities and Stockholder's Equity
Liabilities:
Deposits $362,679 $340,761
Federal Home Loan Bank borrowings 80,240 33,450
Other borrowings 90,020 50,797
Advance payments by borrowers 2,630 3,561
Accrued interest payable 2,223 1,626
Payable for securities purchased -- 32,385
Other liabilities 7,835 5,886
-------- --------
Total liabilities 545,627 468,466
-------- --------
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 - 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 and 6,000,000 shares authorized;
4,996,000 and 4,126,000 shares issued and outstanding at June 30, 1998 and
December 31, 1997, respectively 4,996 4,126
Capital surplus 34,990 20,950
Unearned Employee Stock Ownership Plan (255) (164)
Retained earnings 1,979 97
Unrealized gain (loss) on securities available for sale, net of deferred income tax (11) 460
-------- --------
Total stockholder's equity 41,699 25,469
-------- --------
Total liabilities, Corporation-obligated mandatorily redeemable capital
securities of subsidiary trust holding solely junior subordinated
debentures of the Corporation and stockholders' equity $602,326 $508,935
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in Thousands) (Dollars in Thousands)
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Interest income:
Loans and leases, including fees $8,659 $7,192 $16,952 $13,863
Mortgage-backed securities 1,877 1,513 3,352 3,059
Investment securities 226 100 367 210
Other 16 69 39 94
------ ------ ------- -------
Total interest income 10,778 8,874 20,710 17,226
Interest expense:
Deposits 3,547 3,018 6,897 5,977
Federal Home Loan Bank borrowings 898 460 1,580 867
Other borrowings 872 878 1,581 1,729
------ ------ ------- ------
Total interest expense 5,317 4,356 10,058 8,573
------ ------ ------- ------
Net interest income 5,461 4,518 10,652 8,653
Provision for possible loan and lease losses 224 203 426 396
------ ------ ------- ------
Net interest income after provision for possible loan 5,237 4,315 10,226 8,257
and lease loans ------ ------ ------- ------
Non-interest income:
Service charges on deposits 409 409 776 769
Lease financing fees 384 300 749 607
Teleservices fee income 338 111 512 111
Loan brokerage and advisory fees 390 99 835 129
Gain on sale of mortgage servicing rights -- -- -- 978
Gain on sale of securities 122 -- 337 34
Gain (loss) on properties sold -- 11 -- (182)
Fees and other 619 355 858 573
------ ------ ------- ------
Total non-interest income 2,262 1,285 4,067 3,019
------ ------ ------- ------
Non-interest expense:
Salaries and employee benefits 2,893 2,088 5,696 4,049
Occupancy 353 320 658 627
Data processing 262 286 511 598
Furniture, fixtures and equipment 282 200 536 389
Loan and real estate owned expenses, net 36 43 (32) 146
Professional services 189 201 380 440
Capital securities expense 399 128 797 128
Other 1,316 925 2,403 1,669
------ ------ ------- ------
Total non-interest expense 5,730 4,191 10,949 8,046
------ ------ ------- ------
Income before income taxes 1,769 1,409 3,344 3,230
Income tax expense 648 519 1,227 1,190
------ ------ ------- ------
Net income $1,121 $ 890 $2,117 $2,040
====== ====== ======= ======
Net income per common share $ .24 $ .22 $ .48 $ .51
========= ========= ========= =========
Net income per common share, assuming dilution $ .22 $ .21 $ .44 $ .48
========= ========= ========= =========
Dividends per common share $ .03 $ .02 $ .06 $ .04
========= ========= ========= =========
Average common shares outstanding 4,624,515 4,029,847 4,382,043 4,020,705
========= ========= ========= =========
Average common shares outstanding, assuming dilution 5,124,001 4,306,212 4,864,796 4,274,444
========= ========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
1998 1997
---- ----
(Dollars in thousands)
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $2,117 $2,040
Add (deduct) items not affecting cash flows from operating activities:
Depreciation and amortization 666 577
Provision for possible loan and lease losses 426 396
Deferred income tax expense -- 1,461
Gain from mortgage banking activities -- (1,005)
Gain from sales of securities available for sale (337) (34)
Gains from sales of loans and leases (48) --
Loss on properties sold -- 182
Accretion of deferred loan and lease fees and expenses (513) (501)
Amortization of premiums/accretion of discounts on securities 1,542 335
Sales of loans held for sale -- 72
Increase in accrued interest receivable (573) (269)
Decrease in other assets 15,790 2,261
Increase (decrease) in other liabilities (30,361) 7,279
Increase in accrued interest payable 597 356
---------- --------
Net cash flows provided by (used in) operating activities (10,694) 13,150
---------- --------
</TABLE>
(continued)
See Notes to Consolidated Financial Statements.
<PAGE>
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
For The Six Months
Ended June 30,
1998 1997
---- ----
(Dollars in thousands)
(unaudited)
<S> <C> <C>
Cash flows from investing activities:
Capital expenditures $ (935) $ (855)
Purchases of mortgage-backed securities available for sale (129,827) (10,043)
Purchase of investment securities available for sale (4,849) --
Purchase of investment securities held to maturity (7,171) --
Repayments on mortgage-backed securities held to maturity 8,788 3,359
Repayments on mortgage-backed securities available for sale 8,662 3,610
Proceeds from sales of mortgage-backed securities available for sale 29,920 3,039
Proceeds from sales of investment securities available for sale 3,301 --
Maturities of investments held to maturity -- 220
Proceeds from sales of loans and leases 768 --
Proceeds from sales of real estate owned 80 1,897
Net increase in loans and leases (25,893) (41,927)
---------- ---------
Net cash flows used in investing activities (117,156) (40,700)
---------- ---------
Cash flows from financing activities:
Net increase (decrease) in demand, NOW and savings deposits 7,088 (1,888)
Net increase (decrease) in time deposits 14,830 (2,450)
Net increase in FHLB borrowings 46,790 10,600
Net increase in other borrowings 39,223 3,927
Net increase (decrease) in advance payments by borrowers (931) 470
Net proceeds from issuance of capital securities -- 15,000
Dividends paid (250) (152)
Net proceeds from issuance of common stock 14,587 26
Net proceeds from exercise of stock options 232 25
---------- ---------
Net cash flows provided by financing activities 121,569 25,558
---------- ---------
Net decrease in cash and cash equivalents (6,281) (1,992)
Cash and cash equivalents:
Beginning of year 19,386 11,131
---------- ---------
End of period $ 13,105 $ 9,139
========== =========
Supplemental disclosures:
Non-monetary transfer:
Net conversion of loans receivable to real estate owned $ -- $ 3,503
========== =========
Cash payments for:
Income taxes $ 2,478 $ 70
========== =========
Interest $ 7,976 $ 8,345
========== =========
</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 June 30, 1998 and December 31, 1997 and for the three
and six months ended June 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. 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. Also, the Company
declared a 5% stock dividend effective during the third quarter of 1998.
The Company issued 792,800 shares of common stock in a secondary offering
and filed a Registration Statement on Form S-2 with the Securities and
Exchange Commission dated May 6, 1998, in connection therewith.
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 June 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, 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. For the six-month periods ended June 30,
1998 and 1997, comprehensive income was $1.6 million and $2.2 million,
respectively.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities, ("SFAS 133"). The statement becomes
effective for fiscal years beginning after June 15, 1999 and will not be
applied retroactively. The statement established 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. The Company
is currently assessing the potential impact of SFAS 133 on future
corporate operations.
<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 $1.1 million or diluted earnings per share of
$.22 for the three months ended June 30, 1998, in comparison with net income of
$890,000 or $.21 per share for the three months ended June 30, 1997. Return on
average stockholders' equity was 12.86% and return on average assets was .85%
for the three months ended June 30, 1998 compared to 16.16% and .85%,
respectively, for the three months ended June 30, 1997.
For the six months ended June 30, 1998, the Company had net income of $2.1
million or diluted earnings per share of $.44 in comparison with net income of
$2.0 million or diluted earnings per share of $.48 for the six months ended June
30, 1997. Return on average shareholders' equity was 14.00% and return on
average assets was .84% for the six months ended June 30, 1998 compared to
19.09% and .99%, respectively, for the six months ended June 30, 1997.
Net interest income was $5.5 million and $4.5 million for the three months ended
June 30, 1998 and 1997, respectively. Operating results for the three months
ended June 30, 1998 and 1997 included $224,000 and $203,000, respectively, in
provision for possible loan and lease losses. Non-interest income for the three
months ended June 30, 1998 and June 30, 1997 included service charges on
deposits of $409,000 in both periods. Lease financing fees were $384,000 for the
three months ended June 30, 1998 compared to $300,000 for the same period in
1997. Teleservices fee income was $338,000 for the three months ended June 30,
1998 as compared to $111,000 for the same period in 1997. Loan brokerage and
advisory fees were $390,000 for the three months ended June 30, 1998 as compared
to $99,000 for the same period in 1997. Gain on sale of securities was $122,000
for the three months ended June 30, 1998.
Non-interest expenses totaled $5.7 million for the three months ended June 30,
1998 in comparison with $4.2 million for the same period in 1997. The increase
of $1.5 million was partially due to increased salaries and employee benefits
relating to employees of acquired companies and new staffing, and other
operating expense, including an increase in expense on capital securities of
$271,000.
For the six months ended June 30, 1998, net interest income was $10.7 million in
comparison with $8.7 million for the six months ended June 30, 1997. Operating
results for the six months ended June 30, 1998 and 1997 included $426,000 and
$396,000, respectively, in provision for possible loan and lease losses.
Non-interest income for the six months ended June 30, 1998 and June 30, 1997
included service charges on deposits of $776,000 and $769,000, respectively.
Lease financing fees were $749,000 for the six months ended June 30, 1998
compared with $607,000 for the same period in 1997. Teleservices fee income was
$512,000 for the six months ended June 30, 1998 compared to $111,000 for the
same period in 1997. Gain on sale of securities was $337,000 for the six months
ended June 30, 1998 compared to $34,000 for the same period in 1997. Loan
brokerage and advisory fees increased to $835,000 for the six months ended June
30, 1998 from $129,000 in the same period in 1997. Prior period non-interest
income included a $978,000 gain on sale of mortgage servicing rights.
Non-interest expenses totaled $10.9 million for the six months ended June 30,
1998 in comparison to $8.0 million for the same period in 1997. The increase of
$2.9 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.
<PAGE>
Total assets increased to $602.3 million at June 30, 1998 from $508.9 million at
December 31, 1997. Mortgage-backed securities available for sale increased $89.6
million from December 31, 1997 and net loans and leases increased $25.3 million.
The net interest margin was 4.52% for the six-month periods ended June 30, 1998
and 1997.
The Company's equity increased to $41.7 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.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income amounted to $5.5 million for the three months ended June 30,
1998 in comparison with $4.5 million for the same period in 1997. Net interest
income for the three months ended June 30, 1998 was positively impacted by a
$107.7 million increase in average interest-earning assets, while average
interest-bearing liabilities increased $82.9 million. The net interest margin
decreased 24 basis points due to lower yields on mortgage-backed securities and
residential loans.
For the six months ended June 30, 1998, net interest income amounted to $10.7
million in comparison to $8.7 million for the same period in 1997. Net interest
income for the six months ended June 30, 1998 was positively impacted by a $24.0
million improvement in the excess of average interest-earning assets over
average interest-bearing liabilities at June 30, 1998 compared to June 30, 1997.
The net interest margin remained the same at 4.52% at June 30, 1998 and 1997.
<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 June 30,
1998 1997
---- ----
(Dollars in Thousands)
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ------ ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Investment securities(1)and other interest-earning 17,435 $ 242 5.57% $11,334 $ 169 5.98%
assets
Mortgage-backed securities (1) 121,954 1,877 6.17 86,936 1,513 6.98
Single family residential loans 56,059 1,038 7.43 62,252 1,213 7.82
Commercial real estate loans 118,898 2,623 8.85 92,427 2,158 9.36
Construction loans 27,602 783 11.38 27,609 774 11.24
Commercial business loans 75,298 1,885 10.04 41,056 997 9.74
Lease financing 57,432 1,789 12.49 46,463 1,536 13.26
Consumer loans 25,314 541 8.57 24,243 514 8.50
-------- ------- ------ -------- ------ ------
Total interest-earning assets 499,992 10,778 8.65 392,320 8,874 9.07
------- ------ ------ ------
Non-interest-earning assets
31,101 28,462
-------- --------
Total assets $531,093 $420,782
======== ========
Interest-bearing liabilities:
Interest-bearing deposits:
NOW and Super NOW $47,736 308 2.59 $32,307 171 2.12
Money market accounts 33,246 252 3.04 37,198 298 3.21
Passbook and statement savings 32,017 201 2.52 29,508 200 2.72
Time deposits 201,299 2,786 5.55 174,789 2,349 5.39
-------- ------- ------ -------- ------ ------
Total interest-bearing deposits 314,298 3,547 4.53 273,802 3,018 4.42
Federal Home Loan Bank borrowings 60,508 898 5.95 28,402 460 6.50
Other borrowings 57,807 872 6.05 47,549 878 7.41
-------- ------- ------ -------- ------ ------
Total interest-bearing liabilities 432,613 5,317 4.93 349,753 4,356 5.00
------- ------ ------ ------
Non-interest-bearing liabilities 48,527 44,152
-------- --------
Total liabilities 481,140 393,905
Capital securities 15,000 4,780
Stockholders' equity 34,953 22,097
-------- --------
Total liabilities , capital securities and $531,093 $420,782
stockholders' equity ======== ========
Net interest income: interest rate spread (2) $5,461 3.72% $4,518 4.07%
======= ======= ====== ======
Net interest margin (3) 4.38% 4.62%
======= ======
Average interest-earning assets to average 115.57% 112.17%
interest-bearing liabilities ======= =======
</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 Six Months Ended June 30,
1998 1997
---- ----
(Dollars in Thousands)
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ------ ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Investment securities(1) and other interest-earning $15,361 $ 406 5.33% $10,266 $ 304 5.97%
assets
Mortgage-backed securities (1) 106,236 3,352 6.36 88,332 3,059 6.98
Single family residential loans 56,403 2,129 7.61 63,305 2,457 7.83
Commercial real estate loans 116,341 5,142 8.91 92,990 4,376 9.49
Construction loans 26,599 1,465 11.11 24,606 1,287 10.55
Commercial business loans 72,280 3,580 9.99 37,560 1,792 9.62
Lease financing 57,090 3,559 12.57 44,956 2,953 13.25
Consumer loans 25,425 1,077 8.54 23,957 998 8.40
-------- ------- ----- -------- ------- ------
Total interest-earning assets 475,735 20,710 8.78 385,972 17,226 9.00
------- ----- ------- ------
Non-interest-earning assets 31,324 28,807
-------- --------
Total assets $507,059 $414,779
======== ========
Interest-bearing liabilities:
Interest-bearing deposits:
NOW and Super NOW $43,153 526 2.46 $31,585 332 2.12
Money market accounts 32,900 497 3.05 37,926 615 3.27
Passbook and statement savings 31,667 412 2.62 29,436 398 2.73
Time deposits 198,225 5,462 5.56 173,362 4,632 5.39
-------- ------- ----- -------- ------ ------
Total interest-bearing deposits 305,945 6,897 4.55 272,309 5,977 4.43
Federal Home Loan Bank borrowings 54,225 1,580 5.88 26,579 867 6.58
Other borrowings 52,434 1,581 6.08 48,001 1,729 7.26
-------- ------- ----- -------- ------ ------
Total interest-bearing liabilities 412,604 10,058 4.92 346,889 8,573 4.98
------- ----- ------ ------
Non-interest-bearing liabilities 48,952 43,943
-------- --------
Total liabilities 461,556 390,832
Capital securities 15,000 2,403
Stockholders' equity 30,503 21,544
-------- --------
Total liabilities, capital securities and $507,059 $414,779
stockholders' equity ======== ========
Net interest income: interest rate spread (2) $10,652 3.86% $8,653 4.02%
======= ======= ====== =======
Net interest margin (3) 4.52% 4.52%
======= =======
Average interest-earning assets to average 115.30% 111.27%
interest-bearing liabilities ======= =======
</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 $10.8 million for the three months ended June
30, 1998, a $1.9 million or 21.5% increase when compared to the same period in
1997. This increase was due to a $107.7 million increase in average
interest-earning assets, which was partially the result of growth in
mortgage-backed securities of $35.0 million. Average commercial business loan
and average commercial real estate loan balances increased by $34.2 million and
$26.5 million, respectively, resulting in increases in interest income on
commercial business loans and commercial real estate loans of $888,000 and
$465,000, respectively. These increases were partially offset by a decrease of
$6.2 million in average single-family residential loans which resulted in a
$175,000 decrease in related interest income.
Total interest expense amounted to $5.3 million for the three months ended June
30, 1998, a $961,000 or 22.1% increase in comparison to the same period in 1997.
Interest expense on deposits increased $529,000 as the average balance of
deposits increased $40.5 million. Interest expense on Federal Home Loan Bank
("FHLB") borrowings increased $438,000, mainly due to a $32.1 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 six months ended June 30, 1998, total interest income amounted to $20.7
million, a $3.5 million increase from the same period in 1997. This increase was
due to a $89.8 million increase in average earning assets which was primarily
the result of growth in loans and leases. For the six months ended June 30, 1998
interest income from lease financing increased $606,000. In addition, interest
income on commercial business loans and commercial real estate loans increased
$1.8 million and $766,000, respectively,due to increases in average balances of
$34.7 million and $23.4 million, respectively. These increases were partially
offset by a decrease of $6.9 million in the average balances of single-family
residential loans resulting in a $328,000 decrease in related interest income.
For the six months ended June 30, 1998, total interest expense amounted to $10.1
million, a $1.5 million increase when compared to the same period in 1997.
Interest expense on deposits increased $920,000 as the average rate on deposits
increased 12 basis points and the average balance of deposits increased $33.6
million. Interest expense on FHLB borrowings increased $713,000, mainly due to a
$27.6 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 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 six months ended June 30, 1998, the Company recorded a $426,000
provision compared with $396,000 for the comparable period in 1997. Net
recoveries amounted to $18,000 during the six months ended June 30, 1998 in
comparison with $417,000 in net charge-offs during the comparable period in
1997. At June 30, 1998, the allowance for possible loan and lease losses
amounted to $4.3 million or 1.2% of total loans and leases and 197.4% 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
$444,000, from December 31, 1997. The provision for possible loan and lease
losses of $426,000 for the six months ended June 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 4.7% at June 30, 1998 versus 3.2% 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 Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in Thousands) (Dollars in Thousands)
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Non-interest income:
Service charges on deposits $ 409 $ 409 $ 776 $769
Leasing financing fees 384 300 749 607
Teleservices fee income 338 111 512 111
Loan brokerage and advisory fees 390 99 835 129
Gain on sale of mortgage servicing rights -- -- -- 978
Gain on sale of securities 122 -- 337 34
Gain (loss) on properties sold -- 11 -- (182)
Fees and other 619 355 858 573
------ ------ ------ ------
Total non-interest income $2,262 $1,285 $4,067 $3,019
====== ====== ====== ======
</TABLE>
Total non-interest income amounted to $2.3 million for the three months ended
June 30, 1998, an increase of $977,000 compared with the $1.3 million in
non-interest income for the three months ended June 30, 1997. This increase
primarily relates to loan brokerage and advisory fees generated by the Company's
commercial mortgage banking subsidiary which increased by $291,000 over the
second quarter of 1997. Teleservices fee income increased $227,000 over the
second quarter of 1997. Gain on sale of securities increased by $122,000 over
1997.
Total non-interest income amounted to $4.1 million for the six months ended June
30, 1998, an increase of $1.1 compared with the $3.0 million in non-interest
income for the six months ended June 30, 1997. The increase primarily relates to
increased loan brokerage and advisory fees of $706,000. In addition,
teleservices fee income increased by $401,000 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 Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in Thousands) (Dollars in Thousands)
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Non-interest expense:
Salaries and employee benefits $2,893 $2,088 $5,696 $4,049
Occupancy 353 320 658 627
Data processing 262 286 511 598
Furniture, fixtures and equipment 282 200 536 389
Loan and real estate owned expenses, net 36 43 (32) 146
Professional services 189 201 380 440
Capital securities expense 399 128 797 128
Other 1,316 925 2,403 1,669
------- ------- -------- -------
Total non-interest expense $5,730 $4,191 $10,949 $8,046
======= ======= ======== =======
</TABLE>
Total non-interest expense amounted to $5.7 million for the three months ended
June 30, 1998, an increase of $1.5 million from the $4.2 million recognized
during the comparable 1997 period. This increase was partially due to increases
in salaries and employee benefits of $805,000 relating to additional employees
of companies acquired and new staffing requirements within the Bank. Capital
securities expense increased by $271,000 over 1997. The capital securities were
issued in June of 1997.
Total non-interest expense amounted to $10.9 million for the six months ended
June 30, 1998, an increase of $2.9 million from the $8.0 million recognized
during the comparable 1997 period. This increase was partially due to increases
in salaries and employee benefits of $1.6 million relating to additional
employees of companies acquired and new staffing requirements within the Bank.
Capital securities expense increased by $669,000 for the six months ended June
30, 1998 compared to the same period in 1997.
Income Tax Expense
The Company recorded income tax expense of $648,000 for the three months
ended June 30, 1998 compared to $519,000 for the same period in 1997.
The Company recorded income tax expense of $1.2 million for the six-month
periods ended June 30, 1998 and 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 other investments having maturities of five years or less.
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, of
which short-term liquid assets must consist of not less than 1%. These levels
are changed from time to time by the Office of Thrift Supervision ("OTS") to
reflect economic conditions. The Bank's average liquidity ratio for the six
months ended June 30, 1998 was 4.92%.
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 six months ended June 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 six months ended June 30, 1998, cash was used in operating and investing
activities and provided by financing activities. Operating activities used $10.7
million of cash. Investing activities used $117.2 million in cash as the
purchases of mortgage-backed securities exceeded repayments and sales of such
securities by $82.5 million and net increases in loan and leases of $25.9
million. In addition, financing activities provided $121.6 million in cash
primarily from net increases of $46.8 million in FHLB borrowings, increases in
other borrowings of $39.2 million, net increases in time deposits of $14.8
million and proceeds from the issuance of common stock of $14.6 million.
At June 30, 1998, the Company had $151.9 million in loan commitments to extend
credit, including unused lines of credit, and $6.0 million in letters of credit
outstanding. At June 30, 1998, FHLB borrowings scheduled to mature through June
30, 1999 totaled $27.2 million. Other borrowings scheduled to mature within one
year of June 30, 1998 totaled $61.2 million. Subordinated debentures of $3.0
million are due June 30, 2004 and are redeemable after July 1, 1996. The capital
securities are due June 1, 2027. At June 30, 1998, the total amount of time
deposits scheduled to mature through June 30, 1999 totaled $142.4 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 four of its offices
and has automated teller machines at all of its offices and at three 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 $21.9 million during the six months ended June 30, 1998 from
$340.8 million at December 31, 1997 to $362.7 million at June 30, 1998. 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 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 Six Months
Ended June 30,
1998 1997
---- ----
(Dollars in thousands)
<S> <C> <C>
Average balance outstanding $106,659 $74,580
Maximum amount outstanding at any month-end during the period $170,260 $82,557
Weighted average interest rate during the period 5.98% 7.02%
Weighted average interest rate at end of the period 5.87% 6.81%
</TABLE>
The Company continued to utilize FHLB borrowings as a source of funds to meet
loan demand during the six months ended June 30, 1998. FHLB borrowings increased
$46.8 million to $80.2 million at June 30, 1998 from $33.4 million at December
31, 1997. Other borrowings, consisting primarily of securities sold under
agreements to repurchase, were $90.0 million at June 30, 1998 and $50.8 million
at December 31, 1997.
<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 June 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 June 30, 1998:
<TABLE>
<CAPTION>
Tangible Core Risk-Based
Capital % Capital % Capital %
-------- --- ------- --- ---------- ---
<S> <C> <C> <C> <C> <C> <C>
GAAP Capital $41,712 $41,712 $41,712
General valuation allowance -- -- 4,263
Unrealized loss on securities available 151 151 151
for sale
Goodwill (2,958) (2,958) (2,958)
--------- -------- -------
Total 38,905 6.65% 38,905 10.59% 43,168 11.75%
Minimum capital requirement 8,779 1.50% 17,559 3.00% 29,401 8.00%
--------- ------ -------- ------- -------- -------
Regulatory capital-excess $30,126 5.15% $21,346 7.59% $13,767 3.75%
========= ====== ======== ======= ======== =======
</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 June 30, 1998, the Bank's leverage ratio was 6.65%, Tier 1 risk-based ratio
was 10.59%, and total risk-based ratio was 11.75%, based on leverage capital of
$38.9 million, Tier 1 capital of $38.9 million, and total risk-based capital of
$43.2 million. As of June 30, 1998, the Bank was classified as "well
capitalized."
Cash and Due From Banks
Interest-bearing deposits in other banks totaled $922,000 at June 30, 1998 in
comparison with $7.7 million at December 31, 1997. At June 30, 1998, the Company
also had $12.2 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 $6.0 million of such securities on its books at June 30,
1998.
<PAGE>
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>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
--------- ---------- ---------- --------- --------
(Dollars in thousands)
At June 30, 1998
----------------------
<S> <C> <C> <C> <C> <C>
Available for sale:
U.S. agency obligations $2,000 $ 1 $ -- $2,001 $ 2,001
Equity investments 5,834 223 8 6,049 6,049
------- ---- ---- ------- -------
Total available for sale $ 7,834 $224 $ 8 $8,050 $ 8,050
======= ==== ==== ======= =======
Held to maturity:
FHLB stock, pledged $ 4,01 $ -- $ -- $ 4,012 $ 4,012
FHLB investment securities 7,210 73 -- 7,283 7,210
------- ---- ---- ------- -------
Total held maturity $11,222 $ 73 $ -- $11,295 $11,222
======= ==== ==== ======= =======
<CAPTION>
At December 31, 1997
--------------------
<S> <C> <C> <C> <C> <C> <C>
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 June 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 $2,000 $ 2,001 $ -- $ --
Due after five years through ten years -- -- -- --
Due after ten years 2,673 2,669 7,210 7,283
No stated maturity 3,161 3,380 4,012 4,012
------ ------- ------- -------
Total investment securities $7,834 $ 8,050 $11,222 $11,295
====== ======= ======= =======
</TABLE>
<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 June 30, 1998
----------------------
<S> <C> <C> <C> <C> <C>
Held to maturity:
GNMA $ 16,567 $ -- $305 $ 16,262 $ 16,567
FNMA 12,555 8 66 12,497 12,555
FHLMC 11,097 39 106 11,030 11,097
-------- ---- ---- -------- --------
Total held to maturity $ 40,219 $ 47 $477 $ 39,789 $ 40,219
======== ==== ==== ======== ========
Available for sale:
GNMA $115,138 $ 69 $266 $114,941 $114,941
FNMA 10,800 7 6 10,801 10,801
FHLMC 6,205 -- 48 6,157 6,157
Non-agency pass through certificate 2,169 11 -- 2,180 2,180
-------- ---- ---- -------- --------
Total available for sale $134,312 $ 87 $320 $134,079 $134,079
======== ==== ==== ======== ========
<CAPTION>
At December 31, 1997
--------------------
<S> <C> <C> <C> <C> <C>
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 that back 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 June 30, 1998. In addition, 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 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.
<PAGE>
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 $97.2 million at June 30, 1998. Mortgage-backed
securities pledged as collateral for public funds amounted to $19.3 million at
June 30, 1998.
Loans and Leases
The Company's net loan and lease portfolio, totaled $365.5 million at June 30,
1998 or 60.7% of its total assets, an increase of $25.2 million or 7.4% 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>
June 30, 1998 December 31, 1997
------------- -----------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Single family residential real estate $ 56,350 15.24% $56,565 16.44%
Commercial real estate 119,889 32.41 109,938 31.94
Construction, net of loans in process 30,841 8.34 26,695 7.76
Consumer loans 24,631 6.66 24,639 7.16
Credit card receivables 848 .23 918 .27
Commercial business 75,145 20.32 69,312 20.14
Lease financing 75,134 20.31 67,439 19.59
Unearned income (12,995) (3.51) (11,367) (3.30)
--------- -------- --------- -------
Total loans and leases 369,843 100.00% 344,139 100.00%
======== =======
Allowance for possible loan and lease losses (4,307) (3,863)
--------- ---------
Net loans and leases $365,536 $340,276
========= =========
</TABLE>
<PAGE>
NON-PERFORMING ASSETS
General
Non-performing assets consist of non-accrual loans and REO. Total non-performing
assets amounted to $2.5 million at June 30, 1998, $2.6 million at December 31,
1997 and $6.4 million at June 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 secured by real estate with a
loan-to-value less than 80% for which 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
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 through a charge to the allowance for possible loan and
lease 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 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>
June 30, December 31, June 30,
1998 1997 1997
-------- ------------ --------
(Dollars in thousands)
<S> <C> <C> <C>
Loans and leases accounted for on a non-accrual basis $2,182 $2,179 $2,553
REO, net of related reserves 300 380 3,880
------ ------ ------
Total non-performing assets $2,482 $2,559 $6,433
====== ====== ======
Non-performing loans and leases as a percentage of net loans and leases .60% .64% .84%
====== ====== ======
Non-performing assets as a percentage of total assets .41% .50% 1.48%
====== ====== ======
Accruing loans 90 or more days past due $2,277 $2,721 $2,512
====== ====== ======
</TABLE>
Non-performing assets decreased $77,000 to $2.5 million at June 30, 1998 from
$2.6 million at December 31, 1997. This decrease is mainly due to a lower level
of REO at June 30, 1998.
The $2.2 million of non-accrual loans at June 30, 1998 consists of $1.1 million
of loans secured by single family residential property, $213,000 in commercial
business loans, $189,000 of consumer loans, $124,000 of commercial mortgages,
$111,000 in construction loans, and $425,000 of lease financing. The $300,000 of
REO at June 30, 1998 consists of one single-family property.
<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>
June 30, December 31, June 30,
1998 1997 1997
------------------ ------------------- --------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Delinquencies:
30 to 59 days $12,638 3.42% $ 6,167 1.80% $ 6,634 2.15%
60 to 89 days 2,590 .70 1,934 .56 1,098 .36
90 or more days 2,277 .61 2,721 .79 2,512 .81
------- ----- ------- ------ ------- ------
Total $17,505 4.73% $10,822 3.15% $10,244 3.32%
======= ===== ======= ====== ======= ======
</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 Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in Thousands) (Dollars in Thousands)
<S> <C> <C> <C> <C>
Average loans and leases outstanding $360,603 $294,050 $354,138 $287,374
======== ======== ======== ========
Balance beginning of period $ 4,120 $ 3,916 $ 3,863 $ 3,768
Charge-offs:
Residential real estate -- -- -- 3
Commercial real estate -- 304 -- 333
Consumer 30 36 30 42
Commercial 2 -- 2 --
Leases 76 96 128 161
-------- -------- -------- --------
Total charge-offs 108 436 160 539
-------- -------- -------- --------
Recoveries:
Consumer 3 3 4 7
Commercial -- -- 6 --
Leases 68 61 168 115
-------- -------- -------- --------
Total recoveries 71 64 178 122
-------- -------- -------- --------
Net charge-offs (recoveries) 37 372 (18) 417
Additions charged to operations 224 203 426 396
-------- -------- -------- --------
Balance at end of period $ 4,307 $3,747 $4,307 $ 3,747
======== ======== ======== ========
Ratio of net charge-offs (recoveries) during the period to
average loans and leases outstanding during the period .01% .13% (.01)% .15%
======== ======== ======== ========
Ratio of allowance for possible loan and lease losses to
non-performing loans and leases at end of period 197.39% 146.77% 197.39% 146.77%
========= ======== ======== ========
</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 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 May 6, 1998 for the
following purposes:
1) To elect four Directors for a term of three years or until their successors
have been elected or qualified;
2) To approve the proposal to adopt an amendment to the Company's Certificate
of Incorporation to increase the authorized shares of common stock;
3) To amend the 1993 Stock Incentive Plan to increase the shares authorized
under the plan; and
4) To ratify the appointment of PricewaterhouseCoopers LLP as the Company's
independent accountants for the year ending December 31, 1998.
All proposals were adopted by the Company's stockholders as follows:
1) Election of Directors
<TABLE>
<CAPTION>
For Against Abstained/Not Voted
--- ------- -------------------
<S> <C> <C> <C>
William O. Daggett, Jr. 3,361,291 131,250 0
H. Wayne Griest 3,361,291 131,250 0
Joseph R. Klinger 3,361,291 131,250 0
William L. Mueller 3,361,291 131,250 0
2) Amend Company's Certificate of Incorporation 3,406,165 75,086 11,290
3) Amend the 1993 Stock Incentive Plan 3,216,009 240,018 36,514
4) Ratify appointment of PricewaterhouseCoopers LLP 3,477,662 3,348 11,531
</TABLE>
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
On April 22, 1998, the Company filed a Form 8-K with the Securities and Exchange
Commission announcing its first quarter 1998 earnings.
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
August 13, 1998 /s/ W. Kirk Wycoff
- ----------------- -------------------------
Date W. Kirk Wycoff, Chairman,
President and Chief Executive Officer
August 13, 1998 /s/ Frederick E. Schea
- ---------------- ----------------------------
Date Frederick E. Schea,
Senior Vice President and
Chief Financial Officer
<PAGE>
Exhibit (11)
Computation of Earnings Per Share
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in Thousands) (Dollars in Thousands)
<S> <C> <C> <C> <C>
A. Net Income applicable to common stock $1,121,000 $ 890,000 $2,117,000 $2,040,000
Earnings Per Common Share:
B. Average common shares outstanding 4,624,515 4,029,847 4,382,043 4,020,705
Earnings Per Share:
Net income (A/B) $ .24 $ .22 $ .48 $ .51
========== ========== ========== ==========
Earning Per Common Share Assuming Dilution:
Average common shares outstanding 4,624,515 4,029,847 4,382,043 4,020,705
Dilutive average common shares outstanding under
options and warrants 727,428 615,765 727,428 615,765
Exercise prices $.95 to $.95 to $.95 to $.95 to
$18.13 $7.86 $18.13 $7.86
Assumed proceeds on exercise $4,442,809 $3,003,007 $4,442,809 $3,003,007
Market value per share $19.491 $8.848 $18.158 $8.295
Less: Treasury stock purchases with the assumed
proceeds from exercise of options and warrants 227,942 339,400 244,675 362,026
--------- --------- --------- ---------
C. Adjusted average common shares - assuming dilution 5,124,001 4,306,212 4,864,796 4,274,444
========= ========= ========= =========
Earnings Per Common Share Assuming Dilution:
Net income (A/C) $ .22 $ .21 $ .44 $ .48
========= ========= ========= =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000790183
<NAME> David Kiefer
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-Mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Jun-30-1998
<CASH> 12,183
<INT-BEARING-DEPOSITS> 922
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 142,129
<INVESTMENTS-CARRYING> 51,441
<INVESTMENTS-MARKET> 51,084
<LOANS> 369,843
<ALLOWANCE> 4,307
<TOTAL-ASSETS> 602,326
<DEPOSITS> 362,679
<SHORT-TERM> 76,060
<LIABILITIES-OTHER> 12,688
<LONG-TERM> 94,200
0
0
<COMMON> 4,996
<OTHER-SE> 36,703
<TOTAL-LIABILITIES-AND-EQUITY> 602,326
<INTEREST-LOAN> 16,952
<INTEREST-INVEST> 3,719
<INTEREST-OTHER> 39
<INTEREST-TOTAL> 20,710
<INTEREST-DEPOSIT> 6,897
<INTEREST-EXPENSE> 10,058
<INTEREST-INCOME-NET> 10,652
<LOAN-LOSSES> 426
<SECURITIES-GAINS> 337
<EXPENSE-OTHER> 10,949
<INCOME-PRETAX> 3,344
<INCOME-PRE-EXTRAORDINARY> 3,344
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,117
<EPS-PRIMARY> .48
<EPS-DILUTED> .44
<YIELD-ACTUAL> 8.78
<LOANS-NON> 2,182
<LOANS-PAST> 2,277
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,863
<CHARGE-OFFS> 160
<RECOVERIES> 178
<ALLOWANCE-CLOSE> 4,307
<ALLOWANCE-DOMESTIC> 4,307
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 163
</TABLE>
