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 March 31, 1999.
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 200
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) 5,270,728
------------------------------ -------------------------------
Title of Each Class Number of Shares Outstanding
as of April 30, 1999
<PAGE>
Progress Financial Corporation
Table of Contents
PART I - Interim Financial Information
Page
Item 1. Interim Financial Statements
Consolidated Interim Statements of Financial Condition as of
March 31, 1999 (unaudited)and December 31, 1998 (audited).............3
Consolidated Interim Statements of Operations for the three months
ended March 31, 1999 and 1998 (unaudited).............................4
Consolidated Interim Statements of Changes in Stockholders' Equity for
the three months ended March 31, 1999 and 1998 (unaudited)............5
Consolidated Interim Statements of Cash Flows for the three months
ended March 31, 1999 and 1998 (unaudited).............................6
Notes to Consolidated Interim Financial Statements (unaudited)........7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (unaudited)....................................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........16
PART II - Other Information
Item 1. Legal Proceedings....................................................17
Item 2. Changes in Securities................................................17
Item 3. Defaults upon Senior Securities......................................17
Item 4. Submission of Matters to a Vote of Security Holders..................17
Item 5. Other Information....................................................17
Item 6. Exhibits and Reports on Form 8-K.....................................17
Signatures...........................................................18
<PAGE>
PART I- INTERIM FINANCIAL INFORMATION
Item 1. Interim Financial Statements
<TABLE>
Consolidated Interim Statements of Financial Condition
<CAPTION>
(Dollars in thousands) March 31, December 31,
1999 1998
(unaudited) (audited)
Assets Cash and due from banks:
<S> <C> <C>
Non-interest-earning $ 15,663 $ 14,189
Interest-earning 22,248 6,498
Loans held for sale (fair value: $20,393 in 1999 and $25,326 in 1998) 20,274 25,250
Investment securities:
Available for sale at fair value (amortized cost:$17,801 in 1999 and $18,208 in 1998) 17,366 17,909
Held to maturity at amortized cost (fair value: $18,926 in 1999 and $12,547 in 1998) 18,747 12,401
Mortgage-backed securities:
Available for sale at fair value (amortized cost: $131,016 in 1999 and $146,910 in 1998) 130,132 146,459
Loans and leases, net (net of reserves: $4,854 in 1999 and $4,490 in 1998) 410,839 394,246
Premises and equipment, net 10,955 10,707
Other assets 20,549 19,723
----------- ----------
Total assets $666,773 $647,382
=========== ==========
Liabilities and Stockholder's Equity
Liabilities:
Deposits:
Non-interest-bearing $ 57,226 $ 54,934
Interest-bearing 377,644 353,228
Short-term borrowings 40,025 45,941
Other liabilities 9,882 15,250
Long-term debt:
Federal Home Loan Bank advances 83,000 83,000
Other debt 42,319 38,475
--------- ---------
Total liabilities 610,096 590,828
--------- ---------
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: 5,271,000 and 5,263,000
shares issued and outstanding at March 31, 1999 and December 31, 1998,respectively;
including treasury shares of 107,000 and 177,000, and unallocated shares held by
the Employee Stock Ownership Plan of 21,000 and 24,000 at March 31, 1999
and December 31, 1998, respectively. 5,271 5,263
Other common stockholders' equity, net 37,277 36,786
Net accumulated other comprehensive loss (871) (495)
--------- ---------
Total stockholders' equity 41,677 41,554
Total liabilities, Corporation-obligated mandatorily redeemable capital --------- ---------
securities of subsidiary trust holding solely junior subordinated
debentures of the Corporation and stockholders' equity $666,773 $647,382
======== ========
</TABLE>
See Notes to Consolidated Interim Financial Statements.
<PAGE>
<TABLE>
Consolidated Interim Statements of Operations (unaudited)
(Dollars in thousands, except per share data)
<CAPTION>
For the Three Months Ended
March 31,
1999 1998
---- ----
Interest income:
<S> <C> <C>
Loans and leases, including fees $ 9,557 $8,293
Mortgage-backed securities 2,125 1,475
Investment securities 422 141
Other 193 23
------- -------
Total interest income 12,297 9,932
Interest expense:
Deposits 3,768 3,350
Short-term borrowings 665 580
Long-term debt 1,649 811
-------- -------
Total interest expense 6,082 4,741
-------- -------
Net interest income 6,215 5,191
Provision for possible loan and lease losses 449 202
-------- -------
Net interest income after provision for possible loan and lease losses 5,766 4,989
-------- -------
Non-interest income:
Service charges on deposits 420 367
Lease financing fees 387 365
Insurance commissions 480 --
Teleservices fee income 243 174
Loan brokerage and advisory fees 523 445
Gain (loss) on sale of securities (160) 215
Fees and other 869 239
-------- -------
Total non-interest income 2,762 1,805
Non-interest expense: -------- -------
Salaries and employee benefits 3,504 2,618
Occupancy 345 305
Data processing 218 249
Furniture, fixtures and equipment 290 254
Professional services 367 191
Capital securities expense 398 398
Other 1,322 1,204
-------- -------
Total non-interest expense 6,444 5,219
-------- -------
Income before income taxes 2,084 1,575
Income tax expense 761 579
-------- -------
Net income $ 1,323 $ 996
======== =======
Basic earnings per common share $ .26 $ .23
======== =======
Diluted earnings per common share $ .24 $ .21
======== =======
Dividends per common share $ .04 $ .03
======== =======
Basic average common shares outstanding 5,099,263 4,347,726
========= =========
Diluted average common shares outstanding 5,469,823 4,845,802
========= =========
</TABLE>
See Notes to Consolidated Interim Financial Statements
<PAGE>
<TABLE>
Consolidated Interim Statements of Changes in Stockholders' Equity (unaudited)
(Dollars in thousands)
<CAPTION>
Net
Unearned Accumulated
Unearned Compensation Other Total
Common Treasury ESOP Restricted Capital Retained Comprehensive Comprehensive Stockholders'
Stock Stock Shares Stock Surplus Earnings Income Income Equity
(Loss)
--------- -------- -------- ------------- --------- -------- ------------- ------------ -----------
For the three months ended March 31, 1999:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $5,263 $(2,287) $(143) $ -- $39,615 $(399) $(495) $41,554
Issuance of stock under
employee benefit plans
(107,709 treasury shares;
7,562 common shares;
2,580 ESOP shares) 8 1,319 16 (1,094) (67) 182
Net income 1,323 $1,323 1,323
Other comprehensive loss,
net of tax (a) (376) (376) (376)
-------
Comprehensive income $947
=======
Purchase of treasury stock
(37,500 treasury shares) (472) (472)
Retirement of stock warrants (331) (331)
Cash dividend declared (203) (203)
--------- -------- -------- ------------- -------- -------- ------------- ------------ -----------
Balance at March 31, 1999 $5,271 $(1,440) $(127) $(1,094) $39,217 $721 $(871) $41,677
========= ======== ======== ============= ========= ======== ============= ============ ===========
For the three months ended March 31, 1998:
Balance at December 31, 1997 $4,126 $-- $(174) $ -- $20,960 $(10) $460 $25,362
Exercise of stock warrants
(26,250 common shares) 26 124 150
Issuance of stock under
employee benefit plans
(28,352 common shares; 28 13 66 107
2,419 ESOP shares)
Net income 996 $996 996
Other comprehensive loss,
net of tax (a) (188) (188) (188)
-------
Comprehensive income $808
====
Investment in
unconsolidated subsidiary 21 309 330
(21,153 common shares)
Cash dividend declared (122) (122)
--------- -------- -------- ------- ------- ------- ------- ------ --------
Balance at March 31, 1998 $4,201 $-- $(161) $-- $21,459 $864 $272 $26,635
========= ======== ======== ======== ======= ======= ======= ====== ========
(a) For the three months ended March 31, 1999 1998
---- ----
Calculation of other comprehensive loss net of tax:
Unrealized holding losses arising during the period, net of tax $(482) $(46)
Less: Reclassification for gains (losses) included in net income,
net of tax (106) 142
------- ------
Other comprehensive loss, net of tax $(376) $(188)
====== ======
</TABLE>
See Notes to Consolidated Interim Financial Statements
<PAGE>
<TABLE>
Consolidated Interim Statements of Cash Flows (unaudited)
(Dollars in thousands)
<CAPTION>
For the three months ended March 31, 1999 1998
- ------------------------------------ ---- ----
Cash flows from operating activities:
<S> <C> <C>
Net income $1,323 $ 996
Add (deduct) items not affecting cash flows from operating activities:
Depreciation and amortization 419 223
Provision for possible loan and lease losses 449 202
(Gain) loss on sale of securities available for sale 160 (215)
Accretion of deferred loan and lease fees and expenses (519) (372)
Amortization of premiums/accretion of discounts on securities 317 254
Other, net 52 37
Proceeds from sales of loans held for sale 4,451 --
Originations of loans held for sale (7,020) --
Repayments on loans held for sale 4,723 --
Increase in other assets (732) (1,877)
Increase (decrease) in other liabilities (5,385) 2,256
------- ---------
Net cash flows provided by (used in) operating activities (1,762) 1,504
------- -------
Cash flows from investing activities:
Capital expenditures (552) (527)
Purchase of mortgage-backed securities available for sale -- (38,223)
Purchase of investment securities available for sale (800) (500)
Purchase of investment securities held to maturity (6,346) (3,649)
Repayments on mortgage-backed securities held to maturity -- 3,605
Repayments on mortgage-backed securities available for sale 11,831 3,627
Proceeds from sales of mortgage-backed securities available for sale 3,647 21,043
Proceeds from sales and calls of investment securities available for sale 1,146 2,654
Proceeds from sales of real estate owned -- 80
Net increase in loans and leases (13,701) (3,099)
-------- --------
Net cash flows used in investing activities (4,775) (14,989)
-------- --------
Cash flows from financing activities:
Net increase (decrease) in demand, NOW and savings deposits 2,180 (3,695)
Net increase in time deposits 24,528 4,947
Net decrease in short-term borrowings (6,072) (6,390)
Proceeds from issuance of long-term debt 4,000 10,000
Dividends paid (203) (122)
Purchase of treasury shares (472) --
Proceeds from exercise of stock warrants -- 150
Retirement of stock warrants (331) --
Net proceeds from issuance of stock under employee benefit plans 131 100
--------- ---------
Net cash flows provided by financing activities 23,761 4,990
--------- --------
Net increase (decrease) in cash and cash equivalents 17,224 (8,495)
Cash and cash equivalents:
Beginning of year 20,687 19,386
--------- ------
End of period $ 37,911 $10,891
========= =======
Supplemental disclosures:
Non-monetary transfers:
Transfer of loans held for sale to loans held in portfolio $ 2,822 $ --
========= =========
Decrease in net payable for trade dated securities transactions $ (5,582) $(11,342)
========= =========
Cash payments for:
Income taxes $ 299 $ 150
========= ========
Interest $ 5,539 $ 3,949
========= =========
See Notes to Consolidated Interim Financial Statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
(1) Basis of Presentation
In the opinion of management, the financial information reflects all
adjustments (consisting solely of normal recurring adjustments) necessary
for a fair presentation of the financial information as of March 31, 1999
and December 31, 1998 and for the three months ended March 31, 1999 and
1998 in conformity with generally accepted accounting principles. These
interim financial statements should be read in conjunction with Progress
Financial Corporation's (the "Company") 1998 Annual Report on Form 10-K.
Operating results for the three months ended March 31, 1999 are not
necessarily indicative of the results that may be expected for any other
interim period or the entire year ending December 31, 1999. 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., Progress
Capital Management, Inc. and Progress Financial Resources, Inc. All
significant intercompany transactions have been eliminated.
(2) New Developments
On February 11, 1999, VerticalNet, an entity on which the Company holds
warrants to purchase 49,962 shares of common stock at a weighted average
price of $5.58 per share, completed its initial public offering. The
Company is prohibited from selling or otherwise disposing of the warrants
or any shares of common stock received from the exercise of such warrants
for a period of 180 days from February 11, 1999. At March 31, 1999, the
closing price of VerticalNet on the Nasdaq Stock market was $103.875 per
common share; the closing price per common share has ranged between $35
and $108.50 from February 11, 1999 to March 31, 1999.
(3) Stockholders' Equity
Earnings per Share
The following table presents a summary of per share data and amounts for
the periods included. All prior period information has been restated to
reflect the 5% stock dividend distributed to stockholders on August 31,
1998.
<TABLE>
<CAPTION>
For the three months ended March 31,
1999 1998
----- ----
<S> <C> <C> <C> <C> <C> <C>
Per
Per Share Share
Income Shares Amount Income Shares Amount
------ ------ --------- ------ ------ ------
Basic Earnings Per Share
Income available to
common stockholders $1,323,000 5,099,263 $0.26 $996,000 4,347,726 $0.23
===== =====
Effect of Dilutive
Securities:
Warrants -- 152,612 -- 204,278
Options -- 217,948 -- 293,798
----------- ---------- --------- ----------
Diluted Earnings Per Share
Income available to
common stockholders and
assumed conversions $1,323,000 5,469,823 $0.24 $996,000 4,845,802 $0.21
========== ========= ===== ======== ========= =====
</TABLE>
Restricted Stock Awards
In February 1999, the Company established its Restricted Stock Award Plan
under which 77,500 shares of common stock were reserved. The Company
granted 75,417 shares, issued at the then current market price of $14.50.
The awards have a five-year vesting period and are accounted for in
accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," which provides for
compensation expense to be measured at the time when the service
requirement has been completed.
<PAGE>
Capital Resources
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
specific capital categories were defined based on an institution's
capital ratios. To be considered "well capitalized," an institution must
generally have a tangible equity ratio of at least 2%, a Tier 1 or
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 March 31, 1999, the Bank's tangible equity ratio was 6.37%, Tier 1 or
leverage ratio was 6.37%, Tier 1 risk-based capital ratio was 9.08%, and
total risk-based capital ratio was 10.13%. As of March 31, 1999, the Bank
was classified as "well capitalized."
(4) Investment and Mortgage-Backed Securities
The following table sets forth the amortized cost, gross unrealized gains
and losses, estimated fair value and carrying value of investment and
mortgage-backed securities at the dates indicated:
<TABLE>
(Dollars in thousands)
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated Carrying
Cost Gains Losses Fair Value Value
--------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
At March 31, 1999
Available for Sale:
Equity investments $ 6,201 $ 96 $ 345 $ 5,952 $ 5,952
U.S. Government Agencies 2,000 -- 1 1,999 1,999
Municipal bonds 9,600 12 197 9,415 9,415
Mortgage-backed securities 131,016 66 950 130,132 130,132
--------- ------- -------- --------- ---------
Total available for sale $148,817 $174 $1,493 $ 147,498 $ 147,498
========= ======= ======== ========= =========
Held to Maturity:
Federal Home Loan Bank Stock $ 4,923 $ -- $ -- $ 4,923 $ 4,923
U.S. Government Agencies 13,824 179 -- 14,003 13,824
--------- ----- ----- --------- --------
Total held to maturity $ 18,747 $ 179 $ -- $ 18,926 $ 18,747
========= ====== ===== ========= ========
At December 31, 1998
Available for Sale:
Equity investments $ 6,609 $197 $ 489 $ 6,317 $ 6,317
U.S. Government Agencies 2,000 1 -- 2,001 2,001
Municipal bonds 9,599 16 24 9,591 9,591
Mortgage-backed securities 146,910 168 619 146,459 146,459
--------- ----- ------ --------- --------
Total available for sale $ 165,118 $382 $1,132 $ 164,368 $164,368
========= ===== ====== ========= ========
Held to Maturity:
Federal Home Loan Bank Stock $ 4,923 $ -- $ -- $ 4,923 $ 4,923
U.S. Government Agencies 7,478 146 -- 7,624 7,478
--------- ----- ------ -------- --------
Total held to maturity $ 12,401 $ 146 $ -- $ 12,547 $ 12,401
========= ===== ====== ======== ========
</TABLE>
U.S. Government Agencies securities ("Agencies") and mortgage-backed
securities ("MBS") pledged as collateral for Federal Home Loan Bank (the
"FHLB") borrowings amounted to $10.2 million and $21.0 million,
respectively, at March 31, 1999, compared to $7.2 million and $26.2
million, respectively at December 31, 1998. Agencies pledged to the Federal
Reserve Bank (the "FRB") for Small Business Administration Loans amounted
to $1.0 million at March 31, 1999 and December 31, 1998. MBS pledged under
agreements to repurchase in connection with borrowings amounted to $85.1
million at March 31, 1999 compared to $86.1 million at December 31, 1998.
MBS pledged as collateral for public funds amounted to $15.2 million at
March 31, 1999 compared to $15.6 million at December 31, 1998. MBS pledged
to the FRB to secure borrowings and Treasury, Tax and Loan balances
remained unchanged at $2.2 million at March 31, 1999 and December 31, 1998.
<PAGE>
(5) Loans and Leases, Net
The following table depicts the composition of the Company's loan and
lease portfolio at the dates indicated:
<TABLE>
<CAPTION>
(Dollars in thousands) March 31, 1999 December 31, 1998
-------------- -----------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Single family residential real estate $ 48,301 11.62% $ 50,086 12.56%
Commercial real estate 117,113 28.17 109,130 27.37
Construction, net of loans in process 47,610 11.45 44,546 11.17
Consumer 28,840 6.94 27,807 6.98
Credit card receivables 867 .21 931 .23
Commercial business 98,739 23.75 92,737 23.26
Lease financing 88,600 21.31 87,856 22.03
Unearned income (14,377) (3.45) (14,357) (3.60)
--------- -------- ----------- ------
Total loans and leases 415,693 100.00% 398,736 100.00%
======= =======
Allowance for possible loan and lease losses (4,854) (4,490)
--------- -----------
Net loans and leases $410,839 $394,246
========= ===========
</TABLE>
(6) Allowance for Possible Loan and Lease Losses
The following table details changes in the Company's allowance for possible
loan and lease losses for the periods indicated:
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
(Dollars in thousands) 1999 1998
---- ----
<S> <C> <C>
Balance beginning of period $4,490 $3,863
Charge-offs:
Residential real estate 58 --
Consumer 1 --
Lease financing 101 52
------ ------
Total charge-offs 160 52
------ ------
Recoveries:
Consumer 9 1
Commercial business 6 6
Lease financing 60 100
------ ------
Total recoveries 75 107
------ ------
Net charge-offs (recoveries) 85 (55)
Additions charged to operations 449 202
------ -------
Balance at end of period $4,854 $4,120
====== ======
</TABLE>
(7) Commitments and Contingencies
At March 31, 1999, the Company had $167.3 million in loan commitments to
extend credit, including unused lines of credit, and $2.6 million in
letters of credit outstanding.
<PAGE>
(8) Segments
The following table sets forth selected financial information by business
segment for the periods indicated:
<TABLE>
<CAPTION>
Real Estate
Banking Leasing Advisory Other Total
------- ------- ----------- ----- -----
<S> <C> <C> <C> <C> <C>
Assets at:
March 31, 1999 $582,334 $71,189 $2,315 $10,935 $666,773
December 31, 1998 562,086 71,416 3,184 10,696 647,382
Revenues for:
the three months ended
March 31, 1999 6,735 1,121 614 507 8,977
March 31, 1998 4,674 1,344 460 518 6,996
Net income for:
the three months ended
March 31, 1999 1,609 154 (38) (402) 1,323
March 31, 1998 585 439 (32) 4 996
</TABLE>
<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 and with Company's 1998 Annual
Report on Form 10-K. Certain reclassifications have been made to prior period
data throughout the following discussion and analysis for comparability with
1999 data.
SUMMARY
The Company recorded net income of $1.3 million or diluted earnings per share of
$.24 for the three months ended March 31, 1999, in comparison with net
income of $996,000 or diluted earnings per share of $.21 for the three months
ended March 31, 1998. Return on average stockholders' equity was 12.88% and
return on average assets was .82% for the three months ended March 31, 1999
compared to 15.60% and .83%, respectively, for the three months ended March 31,
1998.
Net interest income was $6.2 million and $5.2 million for the three months ended
March 31, 1999 and 1998, respectively. Operating results for the three months
ended March 31, 1999 and 1998 included $449,000 and $202,000, respectively, in
provision for possible loan and lease losses. Non-interest income increased
$1.0 million to $2.8 million for the three months ended March 31, 1999
compared to for the same period in 1998. This increase primarily relates to
non-bank fees which increased $762,000, including insurance commissions of
$480,000 generated by the recently established Progress Financial Resources,
Inc. ("PFR"). PFR sells investment and insurance products, employee benefits and
financial planning services to individuals and businesses. Other income of
$375,000 was recognized during the three months ended March 31, 1999 from an
equity participation in a commercial real estate loan. Loss on sale of
securities was $160,000 for the three months ended March 31, 1999, compared
to a gain on sale of securities of $215,000 for the same period in 1998.
Non-interest expenses totaled $6.4 million for the three months ended March 31,
1999 in comparison with $5.2 million for the same period in 1998. The
increase of $1.2 million was partially due to a $886,000 increase in salaries
and employee benefits relating to employees of acquired and newly formed
companies and new staffing. Other expense increased $339,000 mainly due to
increases in professional services due to the outsourcing of the internal audit
function, increased tax services and Year 2000 systems testing; and occupancy
and furniture and equipment expenses due to recent acquisitions.
Total assets increased to $666.8 million at March 31, 1999 from $647.4 million
at December 31, 1998. Net loans and lease receivables increased $16.6 million.
The net interest margin was 4.13 % and 4.66% for the three-month periods ended
March 31, 1999 and 1998, respectively.
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 monitors its liquidity in accordance with internal guidelines and
applicable regulatory requirements. The Bank is required under applicable
federal regulations 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 to reflect economic conditions.
The Bank's liquidity ratio at March 31, 1999 of 10.89% was in excess of the
current minimum requirement.
The Company's primary source of funds has historically consisted of: deposits;
amortization and prepayments of outstanding loans; borrowings from the Federal
Home Loan Bank ("FHLB") and other sources; and, sales of investment securities,
loans and mortgage-backed securities. During the three months ended March 31,
1999, the Company used its resources primarily to meet its ongoing commitments
to fund existing and new loan commitments and maintain its liquidity.
<PAGE>
For the three months ended March 31, 1999, cash was used in operating and
investing activities and provided by financing activities. Operating activities
used $1.8 million of cash. Investing activities used $4.8 million in cash
primarily due to net increase in loans and leases. Financing activities provided
$23.8 million in cash primarily from net increases of $24.5 million in time
deposits as the Company increased its emphasis on deposit funding.
Year 2000
The Year 2000 issue concerns the potential impact of historic computer software
code that utilizes only two digits to represent the calendar year (i.e., "98"
FOR "1998"). Software so developed, and not corrected, could produce inaccurate
or unpredictable results commencing upon January 1, 2000, when current and
future dates present a lower two digit number than dates from the prior century.
The Company, similar to most financial service providers, is significantly
subject to the potential impact of the Year 2000 issue due to the nature of
financial information. Potential impacts to the Company may arise from software,
computer hardware, and other equipment both within the Company's direct control
and outside of the Company's ownership, yet with which the Company
electronically or operationally interfaces. Financial institution regulators
have intensively focused upon Year 2000 exposures, issuing guidance concerning
the responsibilities of senior management and directors. Year 2000 testing and
certification is being addressed as a key safety and soundness issue in
conjunction with regulatory exams.
In order to address the Year 2000 issue, the Company has developed and
implemented a five-phase plan divided into the following major components:
1)awareness; 2) assessment; 3) renovation; 4) validation; and 5) implementation.
The Company has divided these phases into the following three categories:
1)internal; 2) vendors; and 3) customers.
The company has completed the first three phases for all three categories.
Because the Company outsources its data processing and item processing
operations, a significant component of the Year 2000 plan is to work with
external vendors to test and certify their systems as Year 2000 compliant. Based
on conversations with critical vendors phase four is nearing completion.
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.
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 to date, the Company has developed contingency plans. 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 the three months ended March 31, 1999
have totaled approximately $55,000, the majority of which is related to
consulting fees for systems testing. Additional Year 2000 costs for 1999, which
are expensed on a current period basis, are estimated to be approximately
$215,000. 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>
Non-Performing and Underperforming Assets
The following table details the Company's non-performing and underperforming
assets at the dates indicated:
<TABLE>
<CAPTION>
March 31, December 31, March 31,
(Dollars in thousands) 1999 1998 1998
---- ---- ----
<S> <C> <C> <C>
Loans and leases accounted for on a non-accrual basis $4,407 $3,683 $1,915
REO, net of related reserves -- -- 300
-------- -------- --------
Total non-performing assets 4,407 3,683 2,215
Accruing loans 90 or more days past due 2,123 4,030 4,118
-------- -------- --------
Total underperforming assets $6,530 $7,713 $6,333
======== ======== ========
Non-performing assets as a percentage of net loans and leases
and other real estate owned 1.02% .88% .64%
====== ====== ======
Non-performing assets as a percentage of total assets .66% .57% .46%
====== ====== =====
Underperforming assets as a percentage of net loans and leases
and other real estate owned 1.51% 1.84% 1.84%
===== ===== =====
Underperforming assets as a percentage of total assets .98% 1.19% 1.31%
======= ===== =====
Allowance for possible loan and lease losses $4,854 $4,490 $4,120
====== ====== ======
Ratio of allowance for possible loan and lease losses to
non-performing loans and leases at end of period 110.14% 121.91% 215.14%
======= ======= =======
Ratio of allowance for possible loan and lease losses to
underperforming loans and leases at end of period 74.33% 58.21% 68.29%
====== ======== ======
</TABLE>
Non-performing assets increased $724,000 to $4.4 million at March 31, 1999 from
$3.7 million at December 31, 1998, primarily due to an increase in non-accrual
lease financing. The $4.4 million of non-accrual loans at March 31, 1999
consists of $3.0 million of lease financing, $1.1 million of loans secured by
single family residential property, $130,000 of commercial business loans,
$159,000 of consumer loans, and $181,000 of commercial mortgages.
Accruing loans 90 or more days past due decreased $1.9 million from $4.0 million
at December 31, 1998 to $2.1 million at March 31, 1999. This decrease was
primarily due to a $1.2 million decrease in accruing 90-day-or-more delinquent
commercial mortgages and a $618,000 decrease in accruing 90-day-or-more
delinquent commercial business loans. The $2.1 million of accruing loans 90 or
more days past due at March 31, 1999 consists of $1.1 million of commercial
mortgages, $715,000 of commercial business loans, $155,000 of loans secured by
single family residential property, and $129,000 of consumer loans.
Delinquencies
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>
March 31, December 31, March 31,
1999 1998 1998
(Dollars in thousands) Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Delinquencies:
<S> <C> <C> <C> <C> <C> <C>
30 to 59 days $ 7,312 1.68% $ 7,305 1.76% $ 7,479 2.18%
60 to 89 days 3,320 .76 3,337 .81 2,844 .83
90 or more days 2,123 .49 4,030 .97 4,118 1.20
------- ----- ------- ------ -------- ------
Total $12,755 2.93% $14,672 3.54% $ 14,441 4.21%
======= ===== ======= ====== ======== =======
</TABLE>
<PAGE>
RESULTS OF OPERATIONS
Net Interest Income
Net interest income, on a tax-equivalent basis, amounted to $6.3 million for the
three months ended March 31, 1999 in comparison with $5.2 million for the same
period in 1998. Net interest income for the three months ended March 31, 1999
was positively impacted by a $163.8 million increase in average interest-earning
assets, while average interest-bearing liabilities increased $140.4 million. The
net interest margin decreased 53 basis points due to lower yields on commercial
business loans and lease financing.
The following table sets forth, for the periods indicated, tax-equivalent
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 March 31, 1999 1998
- ------------------------------------ ---- ----
(Dollars in thousands)
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Interest-earning deposits $ 16,294 $ 193 4.80% $ 2,187 $ 23 4.27%
Investment securities(1) 31,131 467 6.08 11,099 141 5.15
Mortgage-backed securities (1) 139,048 2,125 6.20 90,518 1,475 6.61
Single family residential loans 49,358 897 7.37 56,744 1,091 7.80
Commercial real estate loans (4) 137,349 2,937 8.67 113,784 2,519 8.98
Construction loans 44,280 1,092 10.00 25,596 682 10.81
Commercial business loans 95,429 2,064 8.77 68,313 1,695 10.06
Lease financing 73,389 1,996 11.03 57,698 1,770 12.44
Consumer loans 28,956 571 8.00 25,535 536 8.51
-------- ------- ------ -------- ----- -----
Total interest-earning assets 615,234 12,342 8.14 451,474 9,932 8.92
------- ------ ----- -----
Non-interest-earning assets (5) 38,684 32,300
-------- --------
Total assets $653,918 $483,774
======== ========
Interest-bearing liabilities:
Interest-bearing deposits:
NOW and Super NOW $78,084 534 2.77 $38,570 218 2.29
Money market accounts 36,142 240 2.69 32,553 245 3.05
Passbook and statement savings 31,753 155 1.98 31,317 211 2.73
Time deposits 219,496 2,839 5.25 195,151 2,676 5.56
-------- ------- ------ -------- ----- -----
Total interest-bearing deposits 365,475 3,768 4.18 297,591 3,350 4.57
Short-term borrowings 44,191 665 6.10 40,319 580 5.83
Long-term debt 123,395 1,649 5.42 54,739 811 6.01
-------- ------- ------ -------- ----- -----
Total interest-bearing liabilities 533,061 6,082 4.63 392,649 4,741 4.90
Non-interest-bearing deposits 53,888 ------- ------ 4,280 ----- -----
Other non-interest-bearing liabilities 10,311 9,960
-------- --------
Total liabilities 597,260 442,889
Capital securities 15,000 15,000
Stockholders' equity 41,658 25,885
-------- --------
Total liabilities, capital securities and $653,918 $483,774
stockholers' equity ======== ========
Net interest income: $6,260 $5,191
======= ======
Interest rate spread (2) 3.51% 4.02%
====== =====
Net interest margin (3) 4.13% 4.66%
====== =====
Average interest-earning assets to average 115.42% 114.98%
interest-bearing liabilities ======= =======
(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 as a component of 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.
(4) Includes loans held for sale.
(5) For the three months ended March 31, 1999 1998
Non-interest-earning assets:
Cash $13,770 $9,310
Allowance for possible loan and lease losses (4,598) (4,065)
Other assets 29,512 27,055
-------- --------
Total non-interest-earning assets $38,684 $32,300
======= =======
</TABLE>
<PAGE>
On a tax-equivalent basis, total interest income amounted to $12.3 million for
the three months ended March 31, 1999, a $2.4 million or 24.3% increase when
compared to the same period in 1998 due to growth in average interest-earning
assets of $163.8 million. This growth relates to a combination of higher
commercial loan and lease production and an increase in mortgage-backed
securities used to deploy capital raised in the second quarter of 1998. Average
loans and leases increased $81.1 million while mortgage-backed securities
increased $48.5 million compared to the three months ended March 31, 1998.
Total interest expense amounted to $6.1 million for the three months ended March
31, 1999, a $1.3 million or 28.3% increase in comparison to the same period in
1998. Interest expense on deposits increased $418,000 as the average balance of
deposits increased $67.9 million. Interest expense on long-term debt increased
$838,000, mainly due to a $45.0 million increase in average FHLB borrowings and
a $25.5 million increase in securities sold under agreement to repurchase when
compared to the three months ended March 31, 1998. This increase in deposits and
borrowings was necessary to fund the increase in interest-earning assets.
Provision for Possible Loan and Lease Losses
During the three months ended March 31, 1999, the Company recorded a $449,000
provision compared with $202,000 for the comparable period in 1998. Net
charge-offs amounted to $85,000 during the first quarter of 1999 in comparison
with $55,000 in net recoveries during the comparable period in 1998. At March
31, 1999, the allowance for possible loan and lease losses amounted to $4.9
million or 1.11% of total loans and leases and 110.14% of total non-performing
loans and leases. At December 31, 1998, the allowance for possible loan and
lease losses amounted to $4.5 million or 1.06% of total loans and leases and
121.91% of total non-performing loans and leases.
The Company's allowance for possible loan and lease losses increased by
$364,000, from December 31, 1998. The provision for possible loan and lease
losses of $449,000 for the three months ended March 31, 1999 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 decreased to 2.93% at March 31, 1999 from 3.54%
at December 31, 1998.
Non-Interest Income
Total non-interest income amounted to $2.8 million for the three months ended
March 31, 1999, an increase of $1.0 million compared with the $1.8 million for
the three months ended March 31, 1998. This increase primarily relates to
insurance commissions of $480,000 earned by PFR and other income of $375,000
realized from an equity participation in a commercial real estate loan. Other
non-bank fees including lease financing, teleservices, loan brokerage and
advisory, and investment advisory fees increased $282,000 in comparison with the
three months ended March 31, 1998. Loss on sale of securities was $160,000
compared to a gain of $215,000 for the same period in 1998.
Non-interest Expense
Total non-interest expense amounted to $6.4 million for the three months ended
March 31, 1999, an increase of $1.2 million over the $5.2 million recognized
during the comparable 1998 period. This increase was partially due to increases
in salaries and employee benefits of $886,000 relating to additional employees
of companies acquired and new staffing requirements within the Company.
Professional services expense increased by $176,000 primarily due to the
outsourcing of the internal audit function, consulting fees for Year 2000
systems testing, and increased tax services. Occupancy and furniture, fixtures
and equipment expenses increased $76,000 in comparison to the three months ended
March 31, 1998 due to recent acquisitions.
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For information regarding market risk, see the Company's Annual Report on Form
10-K for the year ended December 31, 1998, Item 7 and Item 7A, filed with the
Securities and Exchange Commission on March 29, 1999. The market risk of the
Company has not experienced any significant changes as of March 31, 1999.
<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
(a) List of Exhibits
(27) Financial Data Schedule for the three months ended March 31, 1999
(b) Reports on Form 8-K
On March 26, 1999, the Company filed a current report on Form 8-K with the
Securities and Exchange Commission under Item 5 announcing its warrant
position in VerticalNet, Inc.
<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
May 13, 1998 /s/ W. Kirk Wycoff
- --------------------- -------------------------------------
Date W. Kirk Wycoff, Chairman,
President and Chief Executive Officer
May 13, 1998 /s/ Michael B. High
- --------------------- -------------------------------------
Date Michael B. High,
Senior Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 000790183
<NAME> Michael B. High
<MULTIPLIER> 1000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Mar-31-1999
<EXCHANGE-RATE> 1
<CASH> 15,663
<INT-BEARING-DEPOSITS> 22,248
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 147,498
<INVESTMENTS-CARRYING> 18,747
<INVESTMENTS-MARKET> 18,926
<LOANS> 415,693
<ALLOWANCE> 4,854
<TOTAL-ASSETS> 666,773
<DEPOSITS> 434,870
<SHORT-TERM> 40,025
<LIABILITIES-OTHER> 9,882
<LONG-TERM> 125,319
0
0
<COMMON> 5,271
<OTHER-SE> 36,406
<TOTAL-LIABILITIES-AND-EQUITY> 666,773
<INTEREST-LOAN> 9,557
<INTEREST-INVEST> 2,547
<INTEREST-OTHER> 193
<INTEREST-TOTAL> 12,297
<INTEREST-DEPOSIT> 3,768
<INTEREST-EXPENSE> 6,082
<INTEREST-INCOME-NET> 6,215
<LOAN-LOSSES> 449
<SECURITIES-GAINS> (160)
<EXPENSE-OTHER> 6,444
<INCOME-PRETAX> 2,084
<INCOME-PRE-EXTRAORDINARY> 2,084
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,323
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.24
<YIELD-ACTUAL> 4.13
<LOANS-NON> 4,407
<LOANS-PAST> 2,123
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,490
<CHARGE-OFFS> 160
<RECOVERIES> 75
<ALLOWANCE-CLOSE> 4,854
<ALLOWANCE-DOMESTIC> 4,854
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
