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 September 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-15025
PROGRESSIVE BANK, INC.
(Exact name of registrant as specified in its charter)
New York 14-1682661
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.
1301 Route 52, Fishkill, New York 12524
(Address of principal executive offices) (Zip Code)
(914) 897-7400
(Registrant's telephone number, including area code)
Not Applicable
(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 October 30, 1996: 2,579,764 shares.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 1996
and December 31, 1995 1
Consolidated Statements of Income for the Three and
Nine Months Ended September 30, 1996 and September 30, 1995 2
Consolidated Statements of Shareholders' Equity for the Nine
Months Ended September 30, 1996 and September 30, 1995 3
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1996 and September 30, 1995 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-16
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
Exhibit I 19
<TABLE>
CONSOLIDATED BALANCE SHEETS
Progressive Bank, Inc. and Subsidiary
(In thousands, except shares and per share amounts)
(Unaudited)
<CAPTION>
September 30, December 31,
1996 1995
<S> <C> <C>
Assets
Cash and due from banks $ 16,316 14,923
Federal funds sold 10,600 22,970
Securities:
Available for sale, at fair value 178,028 106,901
Held to maturity (fair value of $75,866 in 1996 and $40,386 in 1995) 76,702 40,148
Total securities 254,730 147,049
Loans, net:
Mortgage loans 503,746 480,569
Other loans 71,616 59,123
Allowance for loan losses (8,834) (8,033)
Net deferred loan origination costs 962 55
Total loans, net 567,490 531,714
Accrued interest receivable 6,640 5,029
Other real estate, net 1,717 405
Premises and equipment, net 10,474 9,673
Deferred income taxes, net 6,267 5,223
Intangible assets 9,096 --
Other assets 2,713 6,228
Total assets $886,043 743,214
Liabilities and Shareholders' Equity
Liabilities:
Savings and time deposits $746,943 605,056
Demand deposits 59,337 51,956
Accrued expenses and other liabilities 7,042 17,544
Total liabilities 813,322 674,556
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 50,466 44,880
Treasury stock, at cost (352,710 shares in 1996 and 323,705 shares in 1995) (8,711) (7,655)
Net unrealized gain on securities available for sale, net of taxes 659 1,126
Total shareholders' equity 72,721 68,658
Total liabilities and shareholders' equity $886,043 743,214
See accompanying notes to consolidated interim 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 Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Interest and dividend income:
Mortgage loans $10,624 10,027 31,573 28,829
Other loans 1,697 1,469 4,816 4,206
Securities 4,303 2,313 10,715 6,281
Federal funds sold and other 407 439 1,706 1,663
Total interest and dividend income 17,031 14,248 48,810 40,979
Interest expense:
Deposits 8,956 7,248 25,061 20,206
Other borrowings -- -- 51 --
Total interest expense 8,956 7,248 25,112 20,206
Net interest income 8,075 7,000 23,698 20,773
Provision for loan losses 600 150 1,500 400
Net interest income after provision for loan losses 7,475 6,850 22,198 20,373
Other income:
Deposit service fees 599 510 1,802 1,495
Other service fees 184 140 511 456
Net gain (loss) on securities -- 53 (194) 45
Net gain on sale of loans 31 1 139 38
Other non-interest income 83 46 224 123
Total other income 897 750 2,482 2,157
Net interest and other income 8,372 7,600 24,680 22,530
Other expense:
Salaries and employee benefits 2,779 2,302 7,900 6,773
Occupancy and equipment 765 595 2,252 1,749
Net cost of other real estate 172 98 471 279
FDIC deposit insurance 1 (40) 2 660
Amortization of intangible assets 349 -- 655 --
Other non-interest expense 1,587 1,513 4,981 4,619
Total other expense 5,653 4,468 16,261 14,080
Income before income taxes 2,719 3,132 8,419 8,450
Income tax expense 174 1,290 1,018 3,470
Net income $ 2,545 1,842 7,401 4,980
Net income per common share $ 0.97 0.68 2.82 1.82
Weighted average common shares outstanding 2,611 2,714 2,623 2,733
See accompanying notes to consolidated interim 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, 1995 2,628,269 $2,952 27,355 44,880 (7,655) 1,126 68,658
Net income -- -- -- 7,401 -- -- 7,401
Cash dividends declared ($0.60 per share) -- -- -- (1,571) -- -- (1,571)
Stock options exercised 42,995 -- -- (244) 1,040 -- 796
Purchases of treasury stock (72,000) -- -- -- (2,096) -- (2,096)
Net change in unrealized gain (loss) on
securities available for sale, net of taxes -- -- -- -- -- (467) (467)
Balance at September 30, 1996 2,599,264 $2,952 27,355 50,466 (8,711) 659 72,721
Balance at December 31, 1994 2,746,884 $2,952 27,355 40,165 (4,310) (222) 65,940
Net income -- -- -- 4,980 -- -- 4,980
Cash dividends declared ($0.45 per share) -- -- -- (1,232) -- -- (1,232)
Stock options exercised 25,935 -- -- (292) 559 -- 267
Purchases of treasury stock (83,000) -- -- -- (2,147) -- (2,147)
Net change in unrealized gain (loss) on
securities available for sale, net of taxes -- -- -- -- -- 588 588
Balance at September 30, 1995 2,689,819 $2,952 27,355 43,621 (5,898) 366 68,396
See accompanying notes to consolidated interim financial statements
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Progressive Bank, Inc. and Subsidiary
(In thousands)
(Unaudited)
<CAPTION>
For the Nine Months Ended
September 30,
1996 1995
<S> <C> <C>
Operating activities:
Net income $ 7,401 4,980
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Provision for loan losses 1,500 400
Depreciation expense 814 618
Provision for losses on other real estate 375 250
Gain on sales of other real estate (137) (302)
Net loss (gain) on securities and loans 55 (83)
Amortization of net deferred loan origination fees (322) (340)
Amortization of net (discounts) premiums on securities (83) 56
Net increase in accrued interest receivable (1,611) (721)
Net (decrease) increase in accrued expenses and other liabilities (10,502) 3,735
Other, net (6,307) (2,674)
Net cash (used in) provided by operating activities (8,817) 5,919
Investing activities:
Purchases of securities:
Securities available for sale (119,653) (28,407)
Securities held to maturity (46,442) (3,384)
Proceeds from principal payments, maturities and calls of securities:
Securities available for sale 41,776 11,108
Securities held to maturity 9,779 9,538
Proceeds from sale of securities available for sale 5,953 1,780
Disbursements for loan originations, net of principal collections (48,599) (54,985)
Proceeds from sales of loans 9,502 9,554
Purchases of premises and equipment (1,615) (2,163)
Proceeds from sales of other real estate 742 1,685
Net cash used in investing activities (148,557) (55,274)
Financing activities:
Net increase in time deposits 39,212 40,719
Net increase (decrease) in other deposits 110,056 (20,374)
Cash dividends paid on common stock (1,571) (1,232)
Net proceeds on issuance of common stock 796 267
Purchases of treasury stock (2,096) (2,147)
Net cash provided by financing activities 146,397 17,233
Net decrease in cash and cash equivalents (10,977) (32,122)
Cash and cash equivalents at beginning of period 37,893 71,754
Cash and cash equivalents at end of period $26,916 39,632
Supplemental data:
Interest paid $25,057 20,004
Income taxes paid, net of refunds received 2,991 2,490
Loans transferred to other real estate 2,730 951
Loans originated to finance sales of other real estate 431 1,220
See accompanying notes to consolidated interim financial statements
</TABLE>
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
Progressive Bank, Inc. and Subsidiary
(Unaudited)
Note 1: Basis of Presentation
The unaudited 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. 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 to a fair
presentation of the consolidated interim 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 unaudited consolidated interim 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, 1995.
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
residential and commercial mortgages, 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 and other borrowings. Net income of the
Company is also affected by other income, which includes service fees and net
gain (loss) on sale of 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 $886.0 million at September 30, 1996 as
compared to $743.2 million at December 31, 1995, an increase of $142.8 million
or 19.2%. The increase in total assets primarily reflects the acquisition of
two Rockland County branches on April 12, 1996 and the subsequent reinvestment
of these proceeds. Additionally, the purchase premium that resulted from this
transaction is accounted for as an intangible asset.
The $107.7 million increase in securities consisted of a $71.1 million increase
to maturity. The increase in securities available for sale primarily reflects
purchases of $119.7 million in adjustable rate mortgage-backed securities, U.S.
government agencies and U.S. Treasury notes, partially offset by maturities,
sales, calls, and principal paydowns. The increase in securities held to
maturity primarily reflects purchases of $46.4 million of fixed rate five- and
seven-year balloon mortgage-backed securities, partially offset by principal
paydowns.
At September 30, 1996, net loans totaled $567.5 million, compared to $531.7
million at December 31, 1995, an increase of $35.8 million or 6.7%. The
residential mortgage segment of the loan portfolio increased $22.5 million or
5.7% (net of loan sales to the secondary market of $9.4 million) from $395.9
million at December 31, 1995 to $418.4 million at September 30, 1996. The
commercial mortgage segment of the loan portfolio increased $2.1 million or
2.8% from $73.9 million at December 31, 1995 to $75.9 million at September 30,
1996. Other loans increased $12.5 million or 21.1% during the first nine
months of 1996 from $59.1 million to $71.6 million.
The $149.3 million increase in deposits during the first nine months of 1996
primarily reflects the acquisition of two branches which resulted in an
increase in deposits of $152.8 million.
Shareholders' equity at September 30, 1996 was $72.7 million, an increase of
$4.1 million or 5.9% from December 31, 1995. This increase primarily reflects
net income of $7.4 million and proceeds of $796,000 from exercises of stock
options, partially offset by treasury stock purchases of $2.1 million and cash
dividends of $1.6 million. Shareholders' equity, as a percent of total assets,
was 8.21% at September 30, 1996 compared to 9.24% at December 31, 1995. Book
value per share increased to $27.98 at September 30, 1996 from $26.13 at
December 31, 1995.
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 Nine Months Ended Nine Months Ended
September 30, 1996 September 30, 1995 September 30, 1996 September 30, 1995
Average Average Average Average Average Average Average Average
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>) $493,104 10,624 8.62% $461,718 10,027 8.69% $486,096 31,573 8.66% $446,412 28,829 8.61%
Other loans (<F1>) 69,402 1,697 9.78 59,204 1,469 9.93 64,804 4,816 9.91 58,416 4,206 9.60
Mortgage-backed
securities (<F2>) 116,131 1,993 6.86 80,473 1,367 6.79 106,924 5,488 6.84 82,607 3,781 6.10
U.S. Treasury and
agencies,
corporate and
other securities
(<F2>),(<F3>) 143,889 2,310 6.42 55,347 946 6.84 109,529 5,227 6.36 48,179 2,500 6.92
Interest on income
tax refund -- -- -- -- -- -- -- 420 -- -- -- --
Federal funds sold 31,046 407 5.24 29,075 439 6.04 34,067 1,286 5.03 38,759 1,663 5.72
Total
interest-earning
assets 853,572 17,031 7.98% 685,817 14,248 8.31% 801,420 48,810 8.12% 674,373 40,979 8.10%
Non-interest-
earning assets 48,980 27,161 43,506 30,097
Total assets $902,552 $712,978 $844,926 $704,470
Interest-bearing liabilities:
Savings deposits
(<F4>) $360,147 3,555 3.95% $248,355 2,301 3.71% $320,504 9,397 3.91% $250,310 6,753 3.60%
Time deposits 398,406 5,401 5.42 344,375 4,947 5.75 381,755 15,664 5.47 332,849 13,453 5.39
Other borrowings -- -- -- -- -- -- 1,225 51 5.55 -- -- --
Total interest-
bearing
liabilities 758,553 8,956 4.72% 592,730 7,248 4.89% 703,484 25,112 4.76% 583,159 20,206 4.62%
Non-interest-
bearing
liabilities 71,719 52,134 70,738 53,954
Total liabilities 830,272 644,864 774,222 637,113
Shareholders'
equity 72,280 68,114 70,704 67,357
Total liabilities
and shareholders'
equity $902,552 $712,978 $844,926 $704,470
Net earning
balance $ 95,019 $ 93,087 $ 97,936 $ 91,214
Net interest
income 8,075 7,000 23,698 20,773
Interest rate
spread
(<F5>,<F7>) 3.26% 3.42% 3.36% 3.48%
Net yield on
interest-earning
assets (margin)
(<F6>,<F7>) 3.78% 4.08% 3.94% 4.11%
<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>) Average balances have been calculated using amortized cost.
(<F3>) Yields on tax exempt obligations have not been computed on a tax-equivalent basis, as the effect thereof is not
material.
(<F4>) Includes NOW accounts, passbook and statement savings accounts, and money market accounts.
(<F5>) Average rate on total interest-earning assets less average rate on total interest-bearing liabilities.
(<F6>) Net interest income divided by total average interest-earning assets.
(<F7>) Excluding the interest income on tax refund, the interest rate spread for the nine months ended September 30, 1996 was
3.29% and margin was 3.87%
</TABLE>
RESULTS OF OPERATIONS
GENERAL
For the quarter ended September 30, 1996, the Company's net income was $2.5
million or $0.97 per share as compared to $1.8 million or $0.68 per share for
the same three-month period in 1995. For the nine-month period ended September
30, 1996, the Company earned $7.4 million or $2.82 per share as compared to
$5.0 million or $1.82 per share for the same period in 1995. The increases in
net income for the three- and nine-month periods were primarily the result of
increases in net interest income and decreases in income tax expense, partially
offset by increases in other expense and the provision for loan losses.
NET INTEREST INCOME
Net interest income increased $1.1 million, or 15.4%, to $8.1 million for the
three-month period ended September 30, 1996 and $2.9 million, or 14.1%, to
$23.7 million for the nine-month period when compared to the same periods in
1995. The increases in net interest income for the quarter and nine months
ended September 30, 1996 were primarily due to increases in interest on
securities and loans, partially offset by increases in interest paid on
deposits. For the three-month period ended September 30, 1996, the Company's
interest rate spread narrowed by 16 basis points primarily reflecting the
decrease in the average yield on earning assets, partially offset by the
decrease in the cost of interest-bearing liabilities. For the nine-month
period, the Company's interest rate spread narrowed by 12 basis points
primarily the result of the increase in the cost of funds. The Company's
net interest margin also narrowed, primarily a result of the change in
interest rate spread. The reduction in net interest margin and spread was
primarily due to the acquisition of deposits from GreenPoint Bank.
These proceeds were temporarily placed into investment securities until the
funds could be reinvested into loans at higher spreads. The narrowing of the
spread and margin for the nine months ended September 30, 1996 would have been
greater without the impact of interest on income tax refunds as described in
note 7 to the table on page 7.
Interest on loans increased by $825,000, or 7.2%, for the three-month period
and $3.4 million, or 10.2%, for the nine-month period when compared to the
same periods in 1995, primarily reflecting increases in the volume of loans
outstanding. The Company anticipates further loan growth due to the
reinvestment of the funds received in the branch acquisition into new loans.
Average mortgage loans and other loans increased by $41.6 million for the three-
month period ended September 30, 1996 and $46.1 million for the nine-month
period when compared to the same periods in 1995.
Interest on mortgage-backed securities increased $626,000, or 45.8%, for the
three-month period and $1.7 million, or 45.1%, for the nine-month period when
compared to the same periods in 1995, primarily due to increases in the average
balance outstanding due to additional security purchases as well as increases
in the average yield earned on the portfolio due to purchases of securities
with higher yields and upward adjustments on adjustable rate mortgage-backed
securities.
Interest and dividends on U.S. Treasury and agencies, corporate and other
securities increased by $1.4 million for the three-month period ended September
30, 1996 and $2.7 million for the nine-month period when compared to the same
periods in 1995. These increases primarily reflect a higher average balance
outstanding due to additional purchases of U.S. Treasury and agency securities,
partially offset by maturities and calls during the year.
Interest on Federal funds sold and other interest income decreased $32,000 for
the three-month period ended September 30, 1996 and increased $43,000 for the
nine-month period when compared to the same periods in 1995. The increase for
the nine-month period reflects $420,000 of interest income due to the receipt
of refunds of certain prior years' Federal income taxes. This amount was
substantially offset by the decline in interest income on Federal funds sold
due to the decrease in the average yield as well as the decrease in the
average balance outstanding for the nine-month period.
The increases in interest on interest-bearing liabilities for the three- and
nine-month periods ended September 30, 1996 of $1.7 million and $4.9 million,
respectively, were primarily due to increases in the average balance
outstanding due to the acquisition of the Rockland County branches during the
second quarter of 1996.
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 nine-month periods ended September 30, 1996, the provision
for loan losses was $600,000 and $1.5 million, respectively, as compared to
$150,000 and $400,000 for the comparable periods in 1995. The higher
provisions were made to increase the allowance for loan losses in line with
the Company's loan growth and changes in portfolio mix. Non-performing loans
increased to $6.3 million, or 1.09% of total loans, at September 30, 1996
compared to $4.4 million, or 0.83% of total loans, at September 30, 1995 and
$5.8 million, or 1.07% of total loans, at December 31, 1995.
In determining the allowance for loan losses, management also considers the
level of slow paying loans, or loans where the borrower is contractually past
due 30 to 89 days or more, but has not yet been placed on non-accrual status.
At September 30, 1996, slow paying loans amounted to $4.5 million as compared
to $3.3 million at September 30, 1995 and $3.4 million at December 31, 1995.
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 delinquencies, non-
performing loans, and charge-offs 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 Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period $8,666 8,691 8,033 9,402
Provision charged to operations 600 150 1,500 400
9,266 8,841 9,533 9,802
Loans charged-off:
Mortgage loans:
Residential (322) (84) (703) (245)
Commercial (78) (312) (119) (546)
Construction and land -- (61) -- (819)
Other loans:
Consumer (52) (53) (156) (159)
Commercial -- -- (5) (30)
Total charge-offs (452) (510) (983) (1,799)
Recoveries:
Mortgage loans:
Residential 5 -- 53 60
Commercial -- 1 31 80
Construction and land 1 -- 142 159
Other loans:
Consumer 11 13 33 42
Commercial 3 5 25 6
Total recoveries 20 19 284 347
Net charge-offs (432) (491) (699) (1,452)
Balance at end of period $8,834 8,350 8,834 8,350
Ratio of net charge-offs to average total
loans outstanding (annualized) (0.31%) (0.38%) (0.17%) (0.38%)
</TABLE>
The following table sets forth information with respect to non-performing loans
(non-accrual loans and loans greater than 90 days past due and still accruing)
and other real estate, and certain asset quality ratios at the dates indicated:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995 1995
(Dollars in thousands)
<S> <C> <C> <C>
Non-performing loans:
Mortgage loans:
Residential properties $4,590 2,499 2,559
Commercial properties 852 1,029 2,591
Construction and land 802 800 593
6,244 4,328 5,743
Other loans 53 45 20
Total non-performing loans (<F1>) 6,297 4,373 5,763
Other real estate, net 1,717 323 405
Total non-performing assets $8,014 4,696 6,168
Ratio of non-performing loans to total loans 1.09% 0.83% 1.07%
Ratio of non-performing assets to total assets 0.90 0.65 0.83
Ratio of allowance for loan losses to total
non-performing loans 140.29 190.94 139.39
<FN>
(<F1>) Includes loans on non-accrual status of $6.1 million, $4.2 million and $5.6 million at September 30, 1996, September 30,
1995, and December 31, 1995, respectively. The remaining balance consists of loans greater than 90 days past due and still
accruing. 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 $1.3 million at September 30, 1996, compared to $1.4
million at September 30, 1995 and $1.5 million at December 31, 1995.
The Company's recorded investment in impaired loans consisted of commercial
mortgage and construction loans totaling $1.7 million at September 30, 1996 and
$3.2 million at December 31, 1995. Total impaired loans at September 30, 1996
consist of (i) loans of $962,000 for which there was an allowance for losses of
$207,000 determined in accordance with SFAS No. 114 and (ii) loans of $692,000
for which there was no allowance determined under SFAS No. 114 due to the
adequacy of related collateral and historical charge-offs associated with these
loans. For the three and nine months ended September 30, 1996, the average
recorded investment in impaired loans was $1.7 million and $2.5 million,
respectively. Interest income on impaired loans is recognized on a cash basis
and was not significant for the three- and nine-month periods ended September
30, 1996 and 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 $147,000, or 19.6%, for the three-month
period ended September 30, 1996 and increased $325,000, or 15.1% for the
nine-month period, compared to the same periods in 1995.
Deposit service fees, the largest component of other income, increased by
$89,000, or 17.5%, for the three-month period and $307,000, or 20.5%, for the
nine-month period, compared to the same periods in 1995. This was primarily
the result of an increase in the amount of retail checking account fees
collected. Other service fees totaled $184,000 and $511,000 for the three- and
nine-month periods ended September 30, 1996, as compared to $140,000 and
$456,000 for the same periods in 1995. The $194,000 net loss on securities
for the nine months ended September 30, 1996 consists of the net realized
loss on the second quarter sale of U.S. Treasury securities. There have been
no sales of securities classified as held to maturity. Net gain on loans was
$31,000 and $139,000 for the three- and nine-month periods ended September 30,
1996 compared to $1,000 and $38,000 during the same periods in 1995.
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 increased by
$1.2 million, or 26.5%, for the three-month period ended September 30, 1996 and
$2.2 million, or 15.5%, for the nine-month period, compared to the same periods
in 1995, primarily due to increases in salary and employee benefit expense,
amortization of intangible assets, occupancy and equipment expense, and other
operating expense. For the nine-month period, these increases were partially
offset by a decrease in FDIC deposit insurance expense.
Salaries and employee benefits, the largest component of other expense,
increased by $477,000, or 20.7%, for the three-month period and $1.1 million,
or 16.6%, for the nine-month period, compared to the same periods in 1995. The
increases primarily reflect additional expense due to the branch acquisition
during the second quarter of 1996, as well as the hiring of additional staff
and normal merit and promotional salary increases.
Occupancy and equipment expense increased $170,000, or 28.6%, for the three-
month period ended September 30, 1996 and $503,000, or 28.8%, for the nine-
month period, as compared to the same periods in the previous year, primarily
due to the branch acquisition as well as other increases in depreciation,
maintenance and equipment rental and repair expenses.
The net cost of other real estate increased $74,000 for the three-month period
and $192,000 for the nine-month period, compared to the same periods in 1995.
These increases reflect an increase of $67,000 in net holding costs for the
nine-month period and increases in the provision for losses on other real
estate of $75,000 and $125,000, respectively, for the three and nine months
ended September 30, 1996.
FDIC deposit insurance expense increased $41,000 for the three-month period,
and decreased $658,000 for the nine-month period, as compared to the same
periods in the previous year. The decrease in the nine-month period was
primarily the result of the reduction of the insurance premium on Pawling's
deposits.
Amortization of intangible assets totaled $349,000 and $655,000 for the three
and nine months ended September 30, 1996, respectively, primarily reflecting
the amortization of the purchase premium as a result of the branch acquisition.
Other non-interest expense increased $74,000, or 4.9%, for the three-month
period and $362,000, or 7.8%, for the nine-month period when compared to the
same periods in 1995. The increases in the three- and nine-month periods
primarily reflect increased foreclosure and collection expense and increased
loan origination and servicing expense due to increased lending activity.
INCOME TAX EXPENSE
For the quarter ended September 30, 1996, the Company recognized an income tax
expense of $174,000 consisting of a provision of $1.1 million or 41.0% of pre-
tax income for the quarter, less a benefit of $941,000 from the settlement with
the State of New York Department of Taxation and Finance of audits of certain
prior years' New York State tax returns. For the same period in the previous
year, income tax expense was $1.3 million or 41.2% of pre-tax income. For the
nine-month period ended September 30, 1996, income tax expense was $1.1
million, consisting of a provision of $3.5 million or 41.1% of pre-tax income,
less the State tax benefit of $941,000 referred to above and a Federal tax
benefit of $1.5 million from the settlement of certain Internal Revenue Service
audits during the second quarter of 1996. Income tax expense was $3.5 million
(effective tax rate of 41.1%) for the same period in the previous year.
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 Nine Months Ended Year Ended
September 30, September 30, December 31,
1996 1995 1996 1995 1995
<S> <C> <C> <C> <C> <C>
Return on assets:
Net income divided by average
total assets (<F1>) 1.13% 1.03% 1.17% 0.94% 0.95%
Return on equity:
Net income divided by average
equity (<F1>,<F2>) 14.08% 10.82% 13.96% 9.86% 10.04%
<FN>
(<F1>) Excluding the $941,000 New York State income tax benefit, return on assets for the three months ended September 30, 1996
was 0.71% and the return on equity was 8.88%. Excluding the $2.4 million in combined Federal and New York State income tax
benefits, return on assets for the nine months ended September 30, 1996 was 0.78% and the return on equity was 9.35%.
(<F2>) Average equity includes the effect of the net unrealized gain (loss) on securities available for sale, net of taxes.
</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 September 30, 1996,
the Company had a primary liquidity ratio of 5.21% as compared to 8.21% at
December 31, 1995.
An important source of funds is Pawling's core deposit base. Management
believes that a substantial portion of Pawling's deposits of $806.3 million at
September 30, 1996 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 September 30, 1996, had immediate
access to additional liquidity in the form of borrowings from the FHLBNY of up
to $88.8 million. The Company also has access to the discount window of the
Federal Reserve Bank.
At September 30, 1996, Pawling had outstanding loan commitments and unadvanced
customer lines of credit totaling $99.5 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. 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.
On February 6, 1995, the Superintendent of Banks for the State of New York (the
"Superintendent") seized Nationar, a check-clearing and trust company, freezing
all of Nationar's assets. The Superintendent is now in the process of winding
up the affairs of Nationar and liquidating its assets. The Company used
Nationar for Federal funds transactions, as well as certain custodial and
investment services. At the time of seizure, the Company had approximately
$3.6 million in Federal funds sold and other deposits invested with Nationar.
The Superintendent had given preliminary indications that the assets of
Nationar may be inadequate to satisfy all claims of creditors in full.
Based on the foregoing and a deficit in net shareholders' equity that was
noted in a report issued by the Superintendent in February 1996, management,
as advised by legal counsel, believed that there was a reasonable likelihood
that the Company would not recover all of its investments in Federal funds
and other deposits at Nationar. During the second quarter of 1996, the
Company received a partial distribution of $1.4 million, or 40% of the
claim against Nationar. As of September 30, 1996, other assets include
$1.2 million in remaining claims against Nationar, net of a $1.0 million
reserve for probable loss which was established in 1995. On October 23,
1996, the Superintendent announced that he has filed an application
seeking the authority to pay in full the balance of all accepted unsecured
claims before the end of 1996. If the court rules in favor of the
Superintendent's recommendation, the Company would recover the remainder of
its entire claim of 2.2 million in 1996. The Company will continue to review
the situation as developments occur.
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.
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 September 30, 1996, Progressive's capital ratios exceeded the FRB'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 $62,968 7.11% $62,968 13.60% $68,794 14.86%
Minimum requirement 35,447 4.00 18,522 4.00 37,044 8.00
Excess $27,521 3.11% $44,446 9.60% $31,750 6.86%
<FN>
(<F1>) For all capital amounts, actual capital excludes the Company's net unrealized gain of $659,000 on securities available
for sale (other than a $24,000 unrealized loss on equity securities) and intangible assets of $9.1 million.
</TABLE>
At September 30, 1996, 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 $58,131 6.60% $58,131 12.61% $63,931 13.87%
Minimum requirement 35,256 4.00 18,437 4.00 36,875 8.00
Excess $22,875 2.60% $39,694 8.61% $27,056 5.87%
<FN>
(<F1>) For all capital amounts, actual capital excludes Pawling's net unrealized gain of $703,000 on securities available for
sale and intangible assets of $9.1 million.
</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. The
second repurchase plan was completed on September 29, 1995 and consisted of
140,000 shares at a total cost of $3.3 million or $23.84 per share. A third
repurchase plan, which was announced in October 1995 and completed on July
30,1996, consisted of 135,000 shares at a total cost of $3.9 million or $28.78
per share. On October 21, 1996, the Company announced a fourth plan to
repurchase 130,000 shares, or approximately 5% of outstanding stock, over a
six- to nine-month period. The Company considers its stock to be an attractive
investment and believes these programs will increase shareholder value.
On October 8, 1996, the Company's Board of Directors declared a dividend of
twenty cents ($0.20) per common share, payable on November 29, 1996 to
shareholders of record as of October 31, 1996.
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 -8.25% at September 30, 1996. A negative gap
exists when the amount of interest-bearing liabilities exceeds the amount of
interest-earning assets expected to mature or reprice in a given period. A
negative gap may enhance earnings in periods of declining interest rates in
that, during such periods, the interest expense paid on liabilities may
decrease more rapidly than the interest income earned on assets. Conversely, in
a rising interest rate environment, a negative gap may result in an increase
in interest expense paid on liabilities that is greater than the increase in
interest income earned on assets. While a negative gap indicates the amount
of interest-bearing liabilities which may reprice before interest-earning
assets, it does not indicate the extent to which they will reprice.
Therefore, at times, a negative gap may not produce higher margins in a
declining rate environment.
Due to limitations inherent in the 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 and mortgage-backed securities
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 September 30, 1996 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 $435,893 338,959 61,088
Total interest-bearing liabilities 508,989 118,423 119,531
Excess (deficiency) of interest-earning assets
over interest-bearing liabilities ($ 73,096) 220,536 (58,443)
Excess (deficiency) as a percent of total assets (8.25%) 24.89% (6.60%)
Cumulative excess (deficiency) as a percent of total
assets (8.25%) 16.64% 10.04%
</TABLE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
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: October 31, 1996
/s/ Peter Van Kleeck
Peter Van Kleeck
President and Chief Executive Officer
Date: October 31, 1996
/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 Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net income $2,545 $1,842 $7,401 $4,980
Weighted average common shares (<F1>,<F2>) 2,611 2,714 2,623 2,733
Net income per share $ 0.97 $ 0.68 $ 2.82 $ 1.82
<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
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 16,316
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 10,600
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 178,028
<INVESTMENTS-CARRYING> 76,702
<INVESTMENTS-MARKET> 75,866
<LOANS> 575,362
<ALLOWANCE> 8,834
<TOTAL-ASSETS> 886,043
<DEPOSITS> 806,280
<SHORT-TERM> 0
<LIABILITIES-OTHER> 7,042
<LONG-TERM> 0
0
0
<COMMON> 2,952
<OTHER-SE> 69,769
<TOTAL-LIABILITIES-AND-EQUITY> 886,043
<INTEREST-LOAN> 36,389
<INTEREST-INVEST> 10,715
<INTEREST-OTHER> 1,706
<INTEREST-TOTAL> 48,810
<INTEREST-DEPOSIT> 25,061
<INTEREST-EXPENSE> 25,112
<INTEREST-INCOME-NET> 23,698
<LOAN-LOSSES> 1,500
<SECURITIES-GAINS> (194)
<EXPENSE-OTHER> 16,261
<INCOME-PRETAX> 8,419
<INCOME-PRE-EXTRAORDINARY> 8,419
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,401
<EPS-PRIMARY> 2.82
<EPS-DILUTED> 2.82
<YIELD-ACTUAL> 3.94
<LOANS-NON> 6,130
<LOANS-PAST> 167
<LOANS-TROUBLED> 1,315
<LOANS-PROBLEM> 3,343
<ALLOWANCE-OPEN> 8,033
<CHARGE-OFFS> 983
<RECOVERIES> 284
<ALLOWANCE-CLOSE> 8,834
<ALLOWANCE-DOMESTIC> 8,834
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
