UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
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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: 0-15025
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PROGRESSIVE BANK, INC.
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(Exact name of registrant as specified in its charter)
New York
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(State or other jurisdiction of incorporation or organization)
14-1682661
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(I.R.S. Employer Identification No.)
86 State Route 22, Pawling, New York 12564
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(Address of principal executive offices) (Zip Code)
(914) 855-1333
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [x] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of August 1, 1995: 2,717,434 shares.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of June 30, 1995 and December 31, 1994
Consolidated Statements of Income for the Three and Six Months Ended June 30,
1995 and June 30, 1994
Consolidated Statements of Shareholders' Equity for the Six Months Ended June
30, 1995 and June 30, 1994
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1995
and June 30, 1994
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit I
<TABLE>
CONSOLIDATED BALANCE SHEETS
Progressive Bank, Inc. and Subsidiary
(In thousands, except shares and per share amounts)
(Unaudited)
<CAPTION>
June 30, 1995
December 31, 1994
<S> <C> <C>
Assets
Cash and due from banks $13,005 14,054
Federal funds sold 31,400 57,700
Securities:
Available for sale (fair value of $48,742 in 1995 and $43,916 in 1994) 48,742 43,916
Held to maturity (fair value of $82,930 in 1995 and $81,172 in 1994) 82,058 83,764
Total securities 130,800 127,680
Loans, net:
Mortgage loans 452,245 425,397
Other loans 58,225 57,920
Allowance for loan losses (8,691) (9,402)
Net deferred loan origination fees (474) (836)
Total loans, net 501,305 473,079
Accrued interest receivable 4,237 4,208
Other real estate, net 695 2,265
Premises and equipment, net 8,990 8,091
Deferred income taxes, net 5,818 6,333
Other assets 6,877 2,882
Total assets $703,127 696,292
Liabilities and Shareholders' Equity
Liabilities:
Savings and time deposits $582,238 577,935
Demand deposits 43,885 46,394
Accrued expenses and other liabilities 9,173 6,023
Total liabilities 635,296 630,352
Shareholders' equity:
Preferred stock ($1.00 par value; 5,000,000 shares authorized;
none issued) -- --
Common stock ($1.00 par value; 15,000,000 shares authorized;
2,951,974 shares issued) 2,952 2,952
Paid-in capital 27,355 27,355
Retained earnings 42,296 40,165
Treasury stock, at cost (234,540 shares in 1995 and 205,090
shares in 1994) (5,119) (4,310)
Net unrealized gain (loss) on securities available for sale,
net of taxes 347 (222)
Total shareholders' equity 67,831 65,940
Total liabilities and shareholders' equity $703,127 696,292
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
Progressive Bank, Inc. and Subsidiary
(In thousands, except per share amounts)
(Unaudited)
<CAPTION>
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Interest and dividend income:
Mortgage loans $ 9,610 8,390 18,802 16,808
Other loans 1,396 1,294 2,737 2,552
Securities 2,093 2,407 3,968 4,534
Federal funds sold and other 558 270 1,224 388
Total interest and dividend income 13,657 12,361 26,731 24,282
Interest on deposits 6,737 4,985 12,958 9,776
Net interest income 6,920 7,376 13,773 14,506
Provision for loan losses 125 250 250 500
Net interest income after provision for loan losses 6,795 7,126 13,523 14,006
Other income:
Deposit service fees 498 452 985 899
Other service fees 171 133 316 306
Net loss on securities (8) (18) (8) (4)
Net gain (loss) on sale of loans 61 (65) 101 (25)
Other non-interest income 6 14 13 40
Total other income 728 516 1,407 1,216
Net interest and other income 7,523 7,642 14,930 15,222
Other expense:
Salaries and employee benefits 2,197 2,265 4,471 4,513
Occupancy and equipment 554 571 1,154 1,330
Net cost of other real estate 95 799 181 1,543
FDIC deposit insurance 350 360 700 720
Other non-interest expense 1,582 1,526 3,106 2,971
Total other expense 4,778 5,521 9,612 11,077
Income before income taxes 2,745 2,121 5,318 4,145
Income tax expense 1,121 237 2,180 456
Net income $ 1,624 1,884 3,138 3,689
Net income per common share $ 0.59 0.65 1.14 1.26
Weighted average common shares outstanding 2,740 2,902 2,743 2,920
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Progressive Bank, Inc. and Subsidiary
(In thousands, except shares and per share amounts)
(Unaudited)
<CAPTION>
Net
Common Stock Unrealized
Shares Paid-in Retained Treasury Gain (Loss)
Outstanding Amount Capital Earnings Stock on Securities Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 2,746,884 $2,952 27,355 40,165 (4,310) (222) 65,940
Net income -- -- 3,138 -- -- 3,138
Cash dividends declared
($0.30 per share) -- -- (825) -- -- (825)
Stock options exercised 15,550 -- -- (182) 329 -- 147
Purchases of treasury stock (45,000) -- -- -- (1,138) -- (1,138)
Net change in unrealized gain (loss)
on securities available for sale,
net of taxes -- -- -- -- 569 569
Balance at June 30, 1995 2,717,434 $2,952 27,355 42,296 (5,119) 347 67,831
Balance at December 31, 1993 2,938,574 $2,952 27,355 33,748 (234) -- 63,821
Net income -- -- 3,689 -- -- 3,689
Cash dividends declared
($0.175 per share) -- -- (511) -- -- (511)
Stock options exercised 7,400 -- -- (103) 137 -- 34
Purchases of treasury stock (55,000) -- -- -- (1,048) -- (1,048)
Net unrealized gain (loss) on
securities available for sale,
net of taxes:
As of January 1, 1994 -- -- -- -- 2,165 2,165
Net change during period -- -- -- -- (1,957) (1,957)
Balance at June 30, 1994 2,890,974 $2,952 27,355 36,823 (1,145) 208 66,193
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Progressive Bank, Inc. and Subsidiary
(In thousands)
(Unaudited)
<CAPTION>
For the Six Months Ended
June 30,
1995 1994
<S> <C> <C>
Operating activities:
Net income $ 3,138 3,689
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 250 500
Depreciation expense 405 452
Provision for losses on other real estate 175 1,000
Gain on sales of other real estate (209) (278)
Net (gain) loss on securities and loans (93) 29
Amortization of net deferred loan origination fees (162) (400)
Amortization of net premiums on securities 21 512
Net (increase) decrease in accrued interest receivable (29) 48
Net change in income tax assets and liabilities 3,541 (1,421)
Other, net (3,966) 2,482
Net cash provided by operating activities 3,071 6,613
Investing activities:
Purchases of securities:
Securities available for sale (13,246) (8,154)
Securities held to maturity (3,384) (40,214)
Proceeds from principal payments, maturities and calls of securities:
Securities available for sale 8,126 21,899
Securities held to maturity 5,143 8,664
Proceeds from sale of securities available for sale 1,186 403
Disbursements for loan originations, net of principal collections (34,203) (32,654)
Proceeds from sales of loans 6,212 17,139
Purchases of premises and equipment (1,304) (228)
Proceeds from sales of other real estate 1,465 1,400
Net cash used in investing activities (30,005) (31,745)
Financing activities:
Net increase (decrease) in time deposits 30,094 (12,300)
Net increase (decrease) in other deposits (28,693) 47,259
Cash dividends paid on common stock (825) (511)
Net proceeds on issuance of common stock 147 34
Purchases of treasury stock (1,138) (1,048)
Net cash (used in) provided by financing activities (415) 33,434
Net increase (decrease) in cash and cash equivalents (27,349) 8,302
Cash and cash equivalents at beginning of period 71,754 25,793
Cash and cash equivalents at end of period $44,405 34,095
Supplemental data:
Interest paid $12,827 8,255
Income taxes paid, net 1,690 1,665
Loans transferred to other real estate 920 1,917
Loans originated to finance sales of other real estate 1,019 1,315
See accompanying notes to consolidated financial statements.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Progressive Bank, Inc. and Subsidiary
(Unaudited)
Note 1: Basis of Presentation
The consolidated financial statements included herein have been prepared by
Progressive Bank, Inc. ("Progressive", or, together with its subsidiary, the
"Company") in conformity with generally accepted accounting principles for
interim financial statements without audit. Progressive, a New York
corporation, is a bank holding company whose sole subsidiary is Pawling
Savings Bank (a New York state-chartered stock savings bank). In the opinion
of management, the unaudited consolidated financial statements include all
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of the consolidated financial position and results of operations
for the periods presented. Certain information and footnote disclosures
normally included in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. The Company believes that the disclosures
are adequate to make the information presented not misleading. However, the
results for the periods presented are not necessarily indicative of results
to be expected for the entire year.
The unaudited consolidated financial statements presented herein should be
read in conjunction with the annual consolidated financial statements of the
Company for the fiscal year ended December 31, 1994.
Note 2: Net Income Per Common Share
Net income per common share is based on net income divided by the weighted
average common shares outstanding during the period. Outstanding common stock
equivalents (stock options) did not have a significant dilutive effect upon
the net income per share computation.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The financial condition and operating results of Progressive Bank, Inc.
("Progressive", or, together with its subsidiary, the "Company"), a bank
holding company, are primarily dependent upon the financial condition and
operating results of its wholly-owned subsidiary, Pawling Savings Bank
("Pawling").
The Company is engaged principally in the business of attracting retail
deposits from the general public and the business community and investing
those funds in mortgage loans, consumer loans and securities. The operating
results of the Company depend primarily on its net interest income after
provision for loan losses. Net interest income is the difference between
interest and dividend income on earning assets, primarily loans and
securities, and interest expense on deposits. Net income of the Company is
also affected by other income, which includes service fees and net gain
(loss) on securities and loans; other expense, which includes salaries and
employee benefits and other operating expenses; and Federal and state income
taxes.
FINANCIAL CONDITION
Total assets of the Company were $703.1 million at June 30, 1995 as compared
to $696.3 million at December 31, 1994, an increase of $6.8 million or 1.0%.
At June 30, 1995, net loans totaled $501.3 million, compared to $473.1
million at December 31, 1994, an increase of $28.2 million or 6.0%. The
residential mortgage segment of the loan portfolio increased $30.9 million or
8.9% (net of loan sales to the secondary market of $6.1 million) from $346.1
million at December 31, 1994 to $377.0 million at June 30, 1995. The
commercial mortgage segment of the loan portfolio decreased $2.0 million, or
3.1%, from $66.4 million at December 31, 1994 to $64.4 million at June 30,
1995. In addition, the construction and land mortgage segment also declined
$2.0 million, or 15.6%, from $12.9 million at December 31, 1994 to $10.9
million at June 30, 1995. Other loans increased $305,000 during the first six
months of 1995 from $57.9 million at December 31, 1994 to $58.2 million at
June 30, 1995.
The $3.1 million overall increase in securities primarily reflects a $3.1
million increase in equity securities due to a required additional purchase
of Federal Home Loan Bank stock during the first quarter of 1995.
The $1.8 million increase in deposits during the first six months of 1995 was
attributable to the $30.1 increase in time deposits, partially offset by
declines in savings and demand accounts of $25.8 million and $2.5 million,
respectively.
Shareholders' equity at June 30, 1995 was $67.8 million, an increase of $1.9
million or 2.9% from December 31, 1994. This increase primarily reflects net
income of $3.1 million, partially offset by cash dividends of $825,000.
Shareholders' equity, as a percent of total assets, was 9.65% at June 30,
1995 compared to 9.47% at December 31, 1994. Book value per share increased
to $24.97 at June 30, 1995 from $24.00 at December 31, 1994.
The following table shows the Company's average consolidated balances,
interest income and expense, and average rates (not on a tax-equivalent
basis) for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended Six Months Ended Six Months Ended
June 30, 1995 June 30, 1994 June 30, 1995 June 30, 1994
Average Avg. Average Avg. Average Avg. Average Avg.
Balance Interest Rate Balance Interest Rate Balance Interest Rate Balance Interest Rate
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning
assets:
Mortgage loans <F1> $443,562 9,610 8.67% $395,078 8,390 8.49% $438,759 18,802 8.57% $396,364 16,808 8.48%
Other loans <F1> 58,138 1,396 9.60 54,324 1,294 9.53 58,022 2,737 9.43 52,334 2,552 9.75
Mortgage-backed
securities 83,584 1,285 6.15 75,930 1,058 5.57 83,674 2,414 5.77 68,560 1,758 5.13
U.S. Treasury,
corporate and
other securities 46,553 808 6.94 81,306 1,349 6.64 44,826 1,554 6.93 82,996 2,776 6.69
Federal funds sold
and other 38,565 558 5.79 27,155 270 3.98 44,378 1,224 5.52 21,002 388 3.69
Total interest-
earning assets 670,402 13,657 8.15% 633,793 12,361 7.80% 669,659 26,731 7.98% 621,256 24,282 7.82%
Non-interest-
earning assets 28,978 22,835 26,303 27,802
Total assets $699,380 $656,628 $695,962 $649,058
Interest-bearing
liabilities:
Savings deposits <F2> $243,575 2,173 3.57% $279,490 2,214 3.17% $251,336 4,452 3.54% $264,189 4,068 3.08%
Time deposits 334,553 4,564 5.46 261,579 2,771 4.24 327,085 8,506 5.20 265,752 5,708 4.30
Total interest-
bearing liabilities 578,128 6,737 4.66% 541,069 4,985 3.69% 578,421 12,958 4.48% 529,941 9,776 3.69%
Non-interest-
bearing liabilities 53,705 49,029 50,940 53,489
Total liabilities 631,833 590,098 629,361 583,430
Shareholders' equity 67,547 66,530 66,601 65,628
Total liabilities and
shareholders' equity $699,380 $656,628 $695,962 $649,058
Net earning balance $ 92,274 $ 92,724 $ 91,238 $ 91,315
Net interest income 6,920 7,376 13,773 14,506
Interest rate
spread <F3> 3.49% 4.11% 3.50% 4.13%
Net yield on
interest-earning
assets (margin) <F4> 4.13% 4.66% 4.11% 4.67%
<FN>
<F1> Interest income on loans does not include interest on non-accrual loans;
however, such loans have been included in the calculation of the average
balances outstanding.
<F2> Includes NOW accounts, passbook and statement saving accounts, and money
market accounts.
<F3> Average rate on total interest-earning assets less average rate on total
interest-bearing liabilities.
<F4> Net interest income divided by total average interest-earning assets.
</TABLE>
RESULTS OF OPERATIONS
GENERAL
For the quarter ended June 30, 1995, the Company's net income was $1.6
million or $0.59 per share as compared to $1.9 million or $0.65 per share for
the same three-month period in 1994. For the six-month period ended June 30,
1995, the Company earned $3.1 million or $1.14 per share as compared $3.7
million or $1.26 per share for the same period in 1994. The decreases in net
income for the three- and six-month periods are primarily the result of
increases in income tax expense and decreases in net interest income,
partially offset by decreases in the net cost of other real estate and the
provision for loan losses.
NET INTEREST INCOME
Net interest income decreased $456,000, or 6.2%, to $6.9 million for the
three-month period ended June 30, 1995 and $733,000, or 5.1%, for the
six-month period when compared to the same periods in 1994. The decreases in
net interest income for the quarter and six-months ended June 30, 1995 were
primarily due to increases in time deposit interest expense as a result of
increases in both the average balance outstanding as well as increases in the
average rate paid. The increases in interest expense were partially offset by
increases in mortgage interest income as a result of the significant increase
in volume as well as increases in the average rate earned.
Interest on loans increased by $1.3 million, or 13.7%, for the three-month
period and $2.2 million, or 11.3%, for the six-month period when compared to
the same periods in 1994, primarily reflecting increases in the volume of
loans outstanding. The yields earned were generally higher, as the increase
in yield caused by the rising rate environment exceeded the effect of the
changing mix of the portfolio toward adjustable rate loans which generally
have initial rates lower than the comparable fixed rate loans. At June 30,
1995, adjustable rate loans represented approximately 50.6% of the loan
portfolio compared to 36.9% at June 30, 1994.
Interest on mortgage-backed securities increased $227,000, or 21.5%, for the
three-month period and $656,000, or 37.3%, for the six-month period when
compared to the same periods in 1994. These increases primarily reflect
increases in the average balance outstanding due to the Company continuing to
emphasize the purchase of mortgage-backed securities, principally adjustable
rate securities that are consistent with management's overall strategy to
manage interest rate risk. In addition, the average yield earned on the
portfolio increased in 1995 due to purchases of securities with higher yields
as well as upward adjustments on adjustable rate securities.
Interest and dividends on U.S. Treasury, corporate and other securities
decreased by $541,000, or 40.1%, for the three-month period ended June 30,
1995 and $1.2 million, or 44.0%, for the six-month period when compared to
the same periods in 1994. These decreases were primarily the result of
maturities and, to a lesser degree, the effect of corporate securities being
called prior to maturity. Funds provided by maturities and calls were
generally used for loan originations and purchases of mortgage-backed
securities. The average rate earned on U.S. Treasury, corporate and other
securities increased to 6.94% for the three-month period and 6.93% for the
six months ended June 30, 1995 as a result of purchases of securities with
higher yields as well as the sale of lower yielding securities during the
fourth quarter of 1994.
Interest on Federal funds sold increased $288,000 for the three-month period
ended June 30, 1995 and $836,000 for the six-month period when compared to
the same periods in 1994. These increases primarily resulted from the
increased average balance outstanding combined with the higher rates
available during 1995.
Interest expense on deposits increased by $1.8 million, or 35.1%, for the
three-month period ended June 30, 1995 and $3.2 million, or 32.5%, for the
six-month period when compared to the same periods in 1994. The primary
reason for the increase in the three-month period was a substantial increase
in the cost of funds from 3.69% in 1994 to 4.66% in the current quarter. For
the six-month period, the cost of funds was up from 3.69% in 1994 to 4.48% in
the current period. In addition to the increase in the cost of funds, the mix
of deposits shifted from lower cost savings deposits to higher cost time
deposits. For the three- and six-month periods ended June 30, 1995, average
savings accounts decreased $35.9 million and $12.9 million, respectively,
and average time deposits increased $73.0 million and $61.3 million,
respectively, as compared to the same period in the previous year.
PROVISION FOR LOAN LOSSES
The provision for loan losses is a charge against income which increases the
allowance for loan losses. The adequacy of the allowance for loan losses is
evaluated periodically and is determined based on management's judgment
concerning the amount of risk and potential for loss inherent in the
portfolio. Management's judgment is based upon a number of factors including
a review of non-performing and other classified loans, the value of
collateral for such loans, historical loss experience, changes in the nature
and volume of the loan portfolio, and current and prospective economic
conditions.
For the three- and six-month periods ended June 30, 1995, the provision for
loan losses was $125,000 and $250,000, respectively, as compared to $250,000
and $500,000 for the comparable periods in 1994. The lower provisions
primarily reflect the continued reduction in non-performing loans, and
continued stable conditions in the local economy and most sectors of the real
estate market. Non-performing loans declined to $4.9 million, or 0.96% of
total loans, at June 30, 1995 compared to $11.5 million, or 2.50% of total
loans, at June 30, 1994 and $7.4 million, or 1.53% of total loans, at
December 31, 1994.
In determining the provision for loan losses, management also considers the
level of slow paying loans, or loans where the borrower is contractually past
due thirty days or more, but has not yet been placed on non-accrual status.
At June 30, 1995, slow paying loans amounted to $2.3 million as compared to
$4.2 million at June 30, 1994 and $2.9 million at December 31, 1994.
Loan loss provisions in future periods will continue to depend on trends in
the credit quality of the Company's loan portfolio and the level of loan
charge-offs which, in turn, will depend in part on the economic and real
estate market conditions prevailing within the Company's lending region. If
general economic conditions or real estate values deteriorate, the level of
non-performing loans may increase and higher provisions for loan losses may
be necessary.
Activity in the allowance for loan losses for the periods indicated is
summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period $8,506 13,828 9,402 13,920
Provision charged to operations 125 250 250 500
8,631 14,078 9,652 14,420
Loans charged-off:
Mortgage loans:
Residential (63) (83) (161) (152)
Commercial -- (201) (234) (201)
Construction and land (91) -- (758) (178)
Other loans:
Consumer (39) (72) (106) (148)
Commercial -- (4) (30) (49)
Total charge-offs (193) (360) (1,289) (728)
Recoveries:
Mortgage loans:
Residential -- 3 60 5
Commercial 79 15 79 15
Construction and land 159 -- 159 --
Other loans:
Consumer 15 12 29 35
Commercial -- 47 1 48
Total recoveries 253 77 328 103
Net recoveries (charge-offs) 60 (283) (961) (625)
Balance at end of period $8,691 13,795 8,691 13,795
Ratio of net recoveries
(charge-offs) to average total
loans outstanding (annualized) 0.05% (0.25%) (0.39%) (0.28%)
</TABLE>
The following table sets forth information with respect to non-performing
loans and other real estate, and certain asset quality ratios at the dates
indicated:
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994 1994
(Dollars in thousands)
<S> <C> <C> <C>
Non-performing loans:
Mortgage loans:
Residential properties $2,850 3,469 1,636
Commercial properties 1,117 3,890 3,009
Construction and land 935 4,149 2,736
4,902 11,508 7,381
Other loans 6 21 15
Total non-performing loans <F1> 4,908 11,529 7,396
Other real estate, net 695 5,922 2,265
Total non-performing assets $5,603 17,451 9,661
Ratio of non-performing loans to total loans 0.96% 2.50% 1.53%
Ratio of non-performing assets to total assets 0.80% 2.59% 1.39%
Ratio of allowance for loan losses
to total non-performing loans 177.08% 119.65% 127.12%
<FN>
<F1> Includes loans on non-accrual status of $4.7 million, $11.5 million and
$7.3 million at June 30, 1995, June 30, 1994, and December 31, 1994,
respectively. The Company generally stops accruing interest on loans
that are delinquent over 90 days.
</TABLE>
The loan portfolio also includes certain restructured loans that are current
in accordance with modified payment terms and, accordingly, are not included
in the preceding table. These restructured loans are loans for which
concessions, including reduction of interest rates to below-market levels or
deferral of payments, have been granted due to the borrowers' financial
condition. Restructured loans totaled $1.4 million at June 30, 1995, compared
to $3.2 million at June 30, 1994 and $1.8 million at December 31, 1994.
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for
Impairment of a Loan." Under SFAS No. 114, a loan is considered to be
impaired if it is probable that the lender will be unable to collect all
amounts due according to the contractual terms of the loan agreement. SFAS
No. 114 also requires that an impaired loan be measured based on (i) the
present value of expected future cash flows discounted at the loan's
effective interest rate, (ii) the loan's observable market price or (iii) the
fair value of the collateral if the loan is collateral dependent. An
allowance for loan losses is maintained if the measure of an impaired loan is
less than its recorded investment. SFAS No. 114 primarily applies to the
Company's commercial mortgage loans, and construction and land loans. It does
not apply to residential mortgage and consumer loans which represent a
substantial portion of the Company's loan portfolio.
The adoption of SFAS No. 114 did not result in any adjustment to the
Company's overall allowance for loan losses. At June 30, 1995, the Company's
recorded investment in impaired commercial mortgage and construction loans
totaled $4.1 million (including $2.1 million on non-accrual status and $2.0
million of potential problem loans). The total impaired loans consist of (1)
loans of $3.3 million for which there was an allowance for losses of $894,000
determined in accordance with SFAS No. 114 and (2) loans of $841,000 for
which there was no allowance determined under SFAS No. 114. The average
recorded investment in impaired loans was $4.6 million for the second quarter
of 1995. Interest income recognized on impaired loans was insignificant for
the quarter and six months ended June 30, 1995.
OTHER INCOME
Sources of other income include deposit and other service fees, net gain
(loss) on securities, net gain (loss) on sales of loans, and other
non-interest income. Other income increased by $212,000, or 41.1%, for the
three-month period ended June 30, 1995 and $191,000, or 15.7%, for the
six-month period, compared to the same periods in 1994.
Deposit service fees, the largest component of other income, increased by
$46,000, or 10.2%, for the three-month period and $86,000, or 9.6%, for the
six-month period, compared to the same periods in 1994. This was primarily
the result of an increase in the amount of retail checking account fees
collected in 1995. Other service fees totaled $171,000 and $316,000 for the
three- and six-month periods ended June 30, 1995, as compared to $133,000 and
$306,000 for the same periods in 1994. Net loss on securities for the three-
and six-month periods in 1995 primarily consisted of net realized losses on
sales of corporate securities. There have been no sales of securities
classified as held to maturity. Net gains on loans increased by $126,000 for
both the three- and six-month periods ended June 30, 1995 as compared to the
same periods in 1994, primarily due to declining rates on the loans sold.
OTHER EXPENSE
Other expense consists of general and administrative expenses incurred in
managing the core business of the Company and the net costs associated with
managing and selling other real estate properties. Other expense decreased by
$743,000, or 13.5%, for the three-month period ended June 30, 1995 and $1.5
million, or 13.2%, for the six-month period, compared to the same periods in
1994, primarily due to a decrease in the net cost of other real estate.
Salaries and employee benefits, the largest component of other expense,
decreased by $68,000, or 3.0%, for the three-month period and $42,000, or
0.9%, for the six-month period, compared to the same periods in 1994. This
primarily reflects lower medical insurance costs as a result of a change in
the insurance provider, partially offset by the increases in expense
attributable to hiring additional staff and normal merit and promotional
salary increases.
Occupancy and equipment expense decreased $17,000, or 3.0%, for the
three-month period ended June 30, 1995 and decreased $176,000, or 13.2%, for
the six-month period, as compared to the same periods in the previous year.
The decrease in the six-month period was primarily the result of a reduction
in depreciation expense from the second quarter of 1994 to the second quarter
of 1995.
The net cost of other real estate decreased $704,000, or 88.1%, for the
three-month period and $1.4 million, or 88.3%, for the six-month period,
compared to the same periods in 1994, primarily reflecting lower provisions
for losses. The lower provisions reflect the decline in the other real estate
owned portfolio and management's assessment of the adequacy of the allowance
for other real estate losses. The investment in other real estate properties
(before the allowance for losses) declined substantially from $7.7 million at
June 30, 1994 to $697,000 at June 30, 1995.
FDIC deposit insurance expense decreased $10,000, or 2.8%, for the
three-month period and $20,000, or 2.8%, for the six-month period, as
compared to the same periods in the previous year, primarily the result of
lower assessment rates, partially offset by the increase in assessable
deposits. In early 1995, the FDIC proposed to substantially reduce its
assessment rate assigned to institutions insured by the Bank Insurance Fund
that have lower overall risk profiles. If implemented, this proposal would
substantially reduce Pawling's FDIC insurance premiums for 1995.
Other non-interest expense increased $56,000, or 3.7%, for the three-month
period and $135,000, or 4.5%, for the six-month period when compared to the
same periods in 1994. The increases in the three- and six-month periods
primarily reflect the provision made in the second quarter of 1995 to accrue
for possible losses which may result from the Nationar seizure as discussed
on page 14. This provision was partially offset by reductions in foreclosure
and collection expense due to the decline in problem loans.
INCOME TAX EXPENSE
For the three-month periods ended June 30, 1995 and 1994, income tax expense
was $1.1 million and $237,000, respectively (effective tax rates of 40.8% and
11.2%, respectively). For the six-month periods, income tax expense was $2.2
million and $456,000, respectively (effective tax rates of 41.0% and 11.0%,
respectively). The lower effective rates for the first three and six months
of 1994 were primarily due to reductions in the deferred Federal tax asset
valuation allowance of $636,000 and $1.2 million, respectively. These
adjustments were commensurate with the increase in Federal income taxes
recoverable by loss carryback.
The Company's deferred tax assets were $5.8 million at June 30, 1995, net of
a remaining valuation allowance of $251,000. Based on recent historical and
anticipated future pre-tax earnings, management believes it is more likely
than not that the Company will realize its net deferred tax assets.
Management also anticipates that the Company's near-term results of
operations will not be significantly affected by further adjustments to the
valuation allowance for deferred tax assets.
RATIOS
Results of operations can be measured by various ratios. Two widely
recognized performance indicators are the return on assets and the
return on equity. The following table sets forth these performance
ratios for the Company on an annualized basis:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Year Ended
June 30, June 30, December 31,
1995 1994 1995 1994 1994
<S> <C> <C> <C> <C> <C>
Return on assets:
Net income divided by average total assets 0.93% 1.15% 0.90% 1.14% 1.15%
Return on equity:
Net income divided by average equity 9.62% 11.33% 9.42% 11.24% 11.65%
</TABLE>
LIQUIDITY
Liquidity is defined as the ability to generate sufficient cash flow to meet
all present and future funding commitments. Management monitors the Company's
liquidity position on a daily basis and evaluates its ability to meet
depositor withdrawals and to make new loans and investments as opportunities
arise. The Asset/Liability Committee, consisting of members of senior
management, is responsible for setting general guidelines to ensure
maintenance of prudent levels of liquidity. The mix of liquid assets and
various deposit products, at any given time, reflects management's view of
the most efficient use of these sources of funds.
The Company's cash flows are classified according to their source --
operating activities, investing activities, and financing activities. Further
details concerning the Company's cash flows are provided in the "Consolidated
Statements of Cash Flows".
Liquid assets are provided by short-term investments, proceeds from
maturities of securities and principal collections on loans. One measure used
by the Company to assess its liquidity position is the primary liquidity
ratio (defined as the ratio of cash and due from banks, Federal funds sold
and securities maturing within one year to total assets). At June 30, 1995,
the Company had a primary liquidity ratio of 9.14% as compared to 12.27% at
December 31, 1994.
An important source of funds is Pawling's core deposit base. Management
believes that substantially all of Pawling's deposits of $626.1 million at
June 30, 1995 are core deposits. Core deposits are generally considered to be
a highly stable source of liquidity due to long-term relationships with
deposit customers. Pawling recognizes the importance of maintaining and
enhancing its reputation in the consumer market to enable effective gathering
and retention of core deposits. The Company does not currently utilize
brokered deposits as a source of funds.
In addition to the funding sources discussed above, the Company has the
ability to borrow funds from several sources. Pawling is a member of the
Federal Home Loan Bank of New York ("FHLBNY") and, at June 30, 1995, had
access to additional liquidity in the form of borrowings from the FHLBNY of
up to $73.0 million. The Company also has access to the discount window of
the Federal Reserve Bank.
At June 30, 1995, Pawling had outstanding loan commitments and unadvanced
customer lines of credit totaling $69.9 million. These commitments do not
necessarily represent future cash requirements since certain of these
instruments may expire without being funded and others may not be fully drawn
upon. At June 30, 1995, the Company had a commitment for approximately
$654,000 for renovations of a recently acquired building in Fishkill, New
York which serves as the administrative headquarters. The sources of
liquidity discussed above are deemed by management to be sufficient to fund
outstanding loan commitments and to meet the Company's other obligations.
One of the Company's long-time correspondents was Nationar, a state-chartered
trust company. The Company used Nationar for Federal funds transactions, as
well as certain custodial and investment services. On February 6, 1995, the
New York State Superintendent of Banking (the "Superintendent") took
possession of the business and property of Nationar. At that time, all
customer accounts were frozen including $3.6 million of the Company's assets,
primarily consisting of Federal funds sold. Since the seizure, the
Superintendent has maintained the continued operation of Nationar, has begun
the process of selling Nationar's assets, and has prepared an initial
accounting of Nationar's assets and liabilities. Management believes that
there is a reasonable likelihood that the Company will not recover all of its
$3.6 million investment in Federal funds sold from Nationar, which is
included in other assets in the consolidated balance sheet at June 30, 1995.
Accordingly, the Company has established a valuation allowance of
approximately $150,000 through a loss provision primarily recorded in the
second quarter of 1995. The Company may make additional provisions as more
information becomes available. Based upon the information currently
available, the Company does not anticipate that the resolution of this matter
will have a material adverse effect on its consolidated financial statements.
Management is taking all steps necessary to recover the amounts owed to the
Company by Nationar.
CAPITAL
Progressive, as a bank holding company, is subject to regulation and
supervision by the Federal Reserve Board ("FRB"). Pawling, as a New York
state-chartered stock savings bank, is subject to regulation and supervision
by the New York State Banking Department as its chartering agency and by the
FDIC as its deposit insurer. Both the FRB and the FDIC have developed and
follow, in substance, similar requirements to maintain minimum levels of
leverage and risk-based capital.
Under the current leverage capital guidelines, most banking companies must
maintain Tier 1 capital of between 4.0% and 5.0% of total assets.
The risk-based capital adequacy guidelines require the Company and Pawling to
maintain capital according to the risk profile of the asset portfolio and
certain off-balance sheet items. The guidelines set forth a system for
calculating risk-weighted assets by assigning assets (and credit-equivalent
amounts for certain off-balance sheet items) to one of four broad risk-weight
categories. The amount of risk-weighted assets is determined by applying a
specific percentage (0%, 20%, 50% or 100%, depending on the level of credit
risk) to the amounts assigned to each category. As a percentage of
risk-weighted assets, a minimum ratio of 4.0% must be maintained for Tier 1
capital and 8.0% for total capital.
At June 30, 1995, Progressive's capital ratios exceeded the FRB's minimum
regulatory capital guidelines as follows:
<TABLE>
<CAPTION>
Risk-Based Capital
Leverage Capital Tier 1 Total
Amount<F1> Ratio Amount<F1> Ratio Amount<F1> Ratio
<S> <C> <C> <C> <C> <C> <C>
Actual $67,484 9.60% $67,484 16.81% $72,548 18.07%
Minimum requirement 28,128 4.00% 16,058 4.00% 32,117 8.00%
Excess $39,356 5.60% $51,426 12.81% $40,431 10.07%
<FN>
<F1> For all capital amounts, actual capital excludes the Company's net
unrealized gain of $347,000 on securities available for sale.
</TABLE>
At June 30, 1995, Pawling's capital ratios exceeded the FDIC's minimum
regulatory capital requirements as follows:
<TABLE>
<CAPTION>
Risk-Based Capital
Leverage Capital Tier 1 Total
Amount<F1> Ratio Amount<F1> Ratio Amount<F1> Ratio
<S> <C> <C> <C> <C> <C> <C>
Actual $62,084 8.90% $62,084 15.62% $67,098 16.88%
Minimum requirement 27,907 4.00% 15,897 4.00% 31,795 8.00%
Excess $34,177 4.90% $46,187 11.62% $35,303 8.88%
<FN>
<F1> For all capital amounts, actual capital excludes Pawling's net
unrealized gain of $412,000 on securities available for sale.
</TABLE>
During 1994, the Company announced two plans to repurchase in each case up to
5% of Progressive's outstanding common stock, to be used for general
corporate purposes. The first repurchase was completed on November 9, 1994
and consisted of 147,000 shares at a total cost of $3.1 million or $21.21 per
share. On November 10, 1994, the Company announced another plan to repurchase
140,000 shares. At June 30, 1995, 102,000 shares had been purchased under the
second plan at a cost of $2.3 million or $22.83 per share. The Company
considers its stock to be an attractive investment and believes the program
will increase the Company's book value and earnings per share.
On July 12, 1995, the Company's Board of Directors declared a dividend of
fifteen cents ($0.15) per common share, payable on August 31, 1995 to
shareholders of record as of July 31, 1995.
ASSET/LIABILITY MANAGEMENT
The Company's asset/liability management goal is to maintain an acceptable
level of interest rate risk to produce relatively stable net interest income
in changing interest rate environments. Management continually monitors the
Company's interest rate risk. Risk management strategies are developed and
implemented by the Asset/Liability Committee which uses various risk
measurement tools to evaluate the impact of changes in interest rates on the
Company's asset/liability structure and net interest income.
Earnings are susceptible to interest rate risk to the degree that
interest-bearing liabilities mature or reprice on a different basis than
interest-earning assets. These interest rate repricing "gaps" provide an
indication of the extent that net interest income may be affected by future
changes in interest rates. A one-year period is a common measurement interval
of interest sensitivity known as the one-year gap. The Company's one-year gap
as a percentage of total assets was 5.81% at June 30, 1995. A positive gap
exists when the amount of interest-earning assets exceeds the amount of
interest-bearing liabilities expected to mature or reprice in a given period.
A positive gap may enhance earnings in periods of rising interest rates in
that, during such periods, the interest income earned on assets may increase
more rapidly than the interest expense paid on liabilities. Conversely, in a
falling interest rate environment, a positive gap may result in a decrease in
interest income earned on assets that is greater than the decrease in
interest expense paid on liabilities. While a positive gap indicates the
amount of interest-earning assets which may reprice before interest-bearing
liabilities, it does not indicate the extent to which they will reprice.
Therefore, at times, a positive gap may not produce higher margins in a
rising rate environment.
Due to the limitations inherent in a gap analysis, management augments the
asset/liability management process by using simulation analysis. Simulation
analysis estimates the impact on net interest income of changing
the balance sheet structure and/or interest rate environment. This analysis
serves as an additional tool in meeting the Company's goal of maintaining
relatively stable net interest income in varying interest rate environments.
The Company manages its interest rate risk primarily by structuring its
balance sheet to emphasize holding adjustable rate loans in its portfolio and
maintaining a large base of core deposits. The Company has not used synthetic
hedging instruments such as interest rate futures, swaps or options.
The following table summarizes the Company's interest rate sensitive assets
and liabilities at June 30, 1995 according to the time periods in which they
are expected to reprice, and the resulting gap for each time period.
<TABLE>
<CAPTION>
Within One to Five Over Five
One Year Years Years
(Dollars in thousands)
<S> <C> <C> <C>
Total interest-earning assets $392,295 214,853 59,839
Total interest-bearing liabilities 351,448 101,753 129,037
Excess (deficiency) of interest-earning assets
over interest-bearing liabilities $ 40,847 113,100 (69,198)
Excess (deficiency) as a percent of total assets 5.81% 16.09 (9.84)
Cumulative excess as a percent of total assets 5.81% 21.90 12.06
</TABLE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In August 1992, a shareholder of Progressive commenced an action against
Progressive and its directors in the New York Supreme Court seeking to
declare void the March 8, 1991 retirement agreement entered into with E. Hale
Mayer, the retiring Chairman of the Board and Chief Executive Officer of
Progressive and its subsidiary, Pawling Savings Bank, and to recover monies
paid thereunder. On March 25, 1994, the judge hearing the matter upon a
motion for summary judgment ruled in favor of Progressive and its directors
dismissing the complaint against them. The plaintiff has filed an appeal with
the Appellate Division of the New York Supreme Court seeking a reversal of
the decision.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit I, Computation of Net Income Per Share.
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.
PROGRESSIVE BANK, INC.
(Registrant)
Date: August 3, 1995
/s/ Peter Van Kleeck
-------------------------------------
Peter Van Kleeck
President and Chief Executive Officer
Date: August 3, 1995
/s/ Robert Gabrielsen
-------------------------------------
Robert Gabrielsen, Treasurer
Principal Financial Officer and
Principal Accounting Officer
Exhibit I
Computation of Net Income Per Share
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Net income $1,624 $1,884 $3,138 $3,689
Weighted average common shares <F1><F2> 2,740 2,902 2,743 2,920
Net income per share $ 0.59 $ 0.65 $ 1.14 $ 1.26
<FN>
<F1> Outstanding common stock equivalents (stock options) did not have a
significant dilutive effect upon the net income per share computation
for any of the periods presented.
<F2> Net of treasury stock.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 13,005
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 31,400
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 48,742
<INVESTMENTS-CARRYING> 82,058
<INVESTMENTS-MARKET> 82,930
<LOANS> 510,470
<ALLOWANCE> 8,691
<TOTAL-ASSETS> 703,127
<DEPOSITS> 626,123
<SHORT-TERM> 0
<LIABILITIES-OTHER> 9,173
<LONG-TERM> 0
<COMMON> 2,952
0
0
<OTHER-SE> 64,879
<TOTAL-LIABILITIES-AND-EQUITY> 703,127
<INTEREST-LOAN> 21,539
<INTEREST-INVEST> 3,968
<INTEREST-OTHER> 1,224
<INTEREST-TOTAL> 26,731
<INTEREST-DEPOSIT> 12,958
<INTEREST-EXPENSE> 12,958
<INTEREST-INCOME-NET> 13,773
<LOAN-LOSSES> 250
<SECURITIES-GAINS> (8)
<EXPENSE-OTHER> 9,612
<INCOME-PRETAX> 5,318
<INCOME-PRE-EXTRAORDINARY> 5,318
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,138
<EPS-PRIMARY> 1.14
<EPS-DILUTED> 1.14
<YIELD-ACTUAL> 4.11
<LOANS-NON> 4,744
<LOANS-PAST> 164
<LOANS-TROUBLED> 1,355
<LOANS-PROBLEM> 2,050
<ALLOWANCE-OPEN> 9,402
<CHARGE-OFFS> 1,289
<RECOVERIES> 328
<ALLOWANCE-CLOSE> 8,691
<ALLOWANCE-DOMESTIC> 8,691
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
