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Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended December 31, 2000
Commission File Number: 0-14815
PROGRESS FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 23-2413363
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4 Sentry Parkway - Suite 200
P. O. Box 3036
Blue Bell, Pennsylvania 19422-0764
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 825-8800
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Securities registered pursuant to Section 12(b) of the Act: Non applicable
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value
-----------------------------
(Title of class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ____________
The aggregate market value of the voting stock, held by non-affiliates of the
Registrant as a group, was $39,240,118 as of March 5, 2001, based upon the
closing price of $7.625 per share of the Registrant's common stock on March 5,
2001 as reported by The Nasdaq Stock Market(SM).
As of March 5, 2001, there were 5,688,895 issued and outstanding shares of the
Registrant's Common Stock.
Documents Incorporated By Reference:
(1) Portions of the definitive proxy statement for the 2001 Annual Meeting
of Shareholders are incorporated into Part III, Items 10 through 13 of
this Form 10-K.
PROGRESS FINANCIAL CORPORATION
Table of Contents
PART I
Page
Item 1. Business.................................................................................. 3
Item 2. Properties................................................................................ 9
Item 3. Legal Proceedings......................................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders....................................... 10
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters ............ 10
Item 6. Selected Consolidated Financial Data...................................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................. 12
Item 7A. Quantitative and Qualitative Disclosure about Market Risk................................. 23
Item 8. Financial Statements and Supplementary Data............................................... 25
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................................. 50
PART III
Item 10. Directors and Executive Officers of the Registrant........................................ 50
Item 11. Executive Compensation.................................................................... 50
Item 12. Security Ownership of Certain Beneficial Owners and Management............................ 50
Item 13. Certain Relationships and Related Transactions............................................ 50
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................... 51
Signatures................................................................................ 53
2
PART I
Item 1. Business
General
Progress Financial Corporation (the "Company"), headquartered in Blue
Bell, Pennsylvania, is a diversified financial services company incorporated
under the laws of the State of Delaware. The Company owns all of the outstanding
stock of Progress Bank (the "Bank"), a federally chartered savings bank. The
Company is a registered unitary thrift holding company and is authorized as a
Delaware corporation to engage in any activity permitted by the Delaware General
Corporation Law and federal law and regulation. The holding company structure
permits the Company to expand the size and scope of the financial services
offered beyond those that the Bank is permitted to offer.
The Company's current business strategy is to operate as a diversified
financial services company providing a full range of banking services with an
emphasis on commercial business loans and leases to small- and medium-sized
businesses, commercial real estate loans, and to a lesser scope, residential
construction and consumer lending, funded primarily by customer deposits. As a
complement to this core business, the Company has expanded its business
activities to include: real estate advisory; insurance and financial planning;
asset management, managing funds which provide subordinated debt financing and
equity funding primarily to technology companies in the Mid-Atlantic region; and
communications and telemarketing, which provide a steady source of fee income.
Banking. The Bank conducts its business through ten full-service banking
offices located in Montgomery County, one full-service banking office in Bucks
County, one full-service banking office in Delaware County, two full-service
banking offices in Chester County and two full-service banking offices in
Philadelphia County, in southeastern Pennsylvania.
Historically, the principal business of the Company consisted of
attracting deposits from the general public through the Bank's branch office
network and using such deposits to originate loans secured by first mortgage
liens on existing single-family residential, multi-family residential and
commercial real estate as well as to originate construction loans. Beginning in
1995, the Company's emphasis shifted to commercial business, commercial real
estate, construction lending and equipment leasing, with a focus on providing
such banking services to small- and medium-sized businesses, including companies
in the technology sector.
The Company also invests in mortgage-backed securities, including
securities which are insured or guaranteed by the U.S. Government and agencies
thereof, and other similar investments permitted by applicable laws and
regulations. In addition, the Bank is periodically involved in real estate
development and related activities, through its subsidiaries, primarily to
facilitate the completion and sale of certain property held as real estate
owned.
Commercial Business Lending. The Bank's commercial business lending area, which
excludes TechBanc, provides customized loan, deposit and investment products, as
well as cash management services to small- and middle-market businesses. Through
the Bank, the Company originates secured or unsecured loans for commercial,
corporate, business and agricultural purposes, which include the issuance of
letters of credit.
As a result of acquisitions of small- and medium-sized financial
institutions by large bank holding companies in southeastern Pennsylvania in
recent years, a growing number of small- and middle-market commercial customers
have sought the full range of commercial banking services that the Bank offers
due to the personalized service the Bank provides. The Company believes it has
an opportunity to expand further its commercial lending relationships and
increase its commercial deposits due to the willingness to tailor its products
to the small- and middle-market businesses. In addition, this consolidation has
resulted in the availability of experienced commercial lenders.
In recent years, the Bank has increased significantly its commercial
business lending. The Bank's commercial business lending portfolio increased to
$113.4 million at December 31, 2000 from $71.5 million at December 31, 1999.
Most commercial business loan customers are small- to middle-market businesses
located in the Bank's primary market area. Generally, commercial business loans
are between $100,000 and $2.5 million; however, the largest commercial business
loan at December 31, 2000 was $3.9 million. During 2000, the Bank launched
eBusiness Banking, a device that makes commercial cash management products
available on-line. Several eBusiness Banking access packages are available to
coordinate with the different types of business checking accounts. The Bank has
also enhanced its commercial banking by allocating resources to specialized
areas of commercial lending including Private Banking, Government Guaranteed
Lending and Asset-based Lending.
3
Private Banking offers a wide range of banking and investment services
to high net worth individuals and small businesses. During 2000, its second
year, Private Banking expanded to include its first de-centralized office in the
Bank's Chestnut Hill branch. At December 31, 2000, Private Banking had $15.6
million in commercial business loans.
Government Guaranteed Lending started in January 2000. While various
governmental guaranteed programs are implemented to give our clients the desired
solution to their financial challenges, the most prevalent is the Small Business
Administration ("SBA") loan program. Under the SBA loan program, the Bank was
granted Certified Lender status in March 2000 and gained Preferred Lending
Program ("PLP") status in October 2000, reflecting the high level of activity in
the program after only nine months in operation. The PLP designation, reserved
for the most active and knowledgeable lenders, streamlines the lending process
by allowing the Bank to underwrite SBA loans independently and grant credit
approval without prior SBA review. At December 31, 2000 Government Guaranteed
Lending had $4.7 million ($7.7 million gross of $3.0 million in participations
sold) in commercial business loans.
TechBanc. The Bank established the Specialized Lending Division in 1996, in
order to provide customized financial services to companies in the technology,
healthcare and insurance industries. In 2000 the Specialized Lending Division
was renamed TechBanc. TechBanc primarily focuses on lending to technology-based
companies in the greater Philadelphia geographic area from Princeton, New Jersey
to Richmond, Virginia and west to Harrisburg, Pennsylvania. The division seeks
to develop relationships with emerging technology-based companies which have
already received initial venture capital and have annual revenues of at least
$1.0 million. TechBanc is comprised of senior lending officers with experience
in the emerging business markets and operates out of its office in Blue Bell,
Pennsylvania; and expanded in 2001 to New Jersey opening an office in the
Princeton area. The New Jersey Technology Council named TechBanc its "preferred
provider." This designation gives TechBanc the exclusive marketing rights to the
membership of that organization, a status the Bank has retained with the Eastern
Technology Council of Greater Philadelphia since 1998.
Generally, TechBanc loans are originated with a balance of between
$100,000 and $5.0 million. At December 31, 2000, the Bank had approximately 160
commercial business loans with an aggregate balance of $62.6 million outstanding
originated through TechBanc; the largest TechBanc loan was $7.5 million of which
$3.8 million was participated to other financial institutions. Customer assets
(including deposits in checking, certificates of deposits and sweep accounts)
under TechBanc management reached $206 million during 2000.
In addition to providing financing, the Company often obtains an equity
position in the borrower in the form of warrants to purchase common stock of the
borrower. At December 31, 2000, the Company held warrants to purchase common
stock of 43 companies that are customers of TechBanc. The Company generally
recognizes client warrant income on such investments when such common stock is
publicly traded and any applicable restriction or lock-up period on the sale of
the warrants or the common stock expires. There can be no assurance that the
common stock of any of these companies will become publicly traded or that the
common stock will trade at or above the warrant exercise price. As an incentive,
10% to 15% of any proceeds realized from the warrants during each six-month
period beginning in January and July is contributed to an incentive pool to be
paid to employees of TechBanc. The incentive pool is reduced by a portion of the
charge-offs the Bank has realized from loans in the TechBanc portfolio during
such six-month period.
The following is a brief description of the only company in which the
Company held warrants at December 31, 2000 for which the underlying common stock
was publicly traded:
Ravisent Technologies, Inc. ("Ravisent") is a DVD hardware and software
company located in Malvern, Pennsylvania. The Company holds warrants to
purchase 50,000 shares of Ravisent common stock with an exercise price
of $3.56 per share and an expiration of seven years from the date of
issue. Ravisent went public at an initial offering price of $12.00 per
share of common stock on July 16, 1999. The trading of this stock, like
many Internet companies, is very volatile. Upon exercise of the
warrant, the Company would be prohibited, under General Rule 144 of the
Securities Act of 1933, from selling or otherwise disposing of the
stock acquired for a period of 12 months.
Commercial Real Estate Lending. The Bank originates mortgage loans secured by
multi-family residential and commercial real estate. Commercial real estate
loans originated by the Bank are primarily secured by office buildings, retail
stores, warehouses and general-purpose industrial space. Commercial real estate
loans also include multi-family residential loans, substantially all of which
are secured by apartment buildings. Significant portions of such loans are
secured by owner-occupied properties and relate to borrowers that have an
existing banking relationship with the Bank. Commercial Real Estate Lending
continued to expand through the Bank's Real Estate Capital Markets Lending
Program which enables the Bank to provide its real estate clients with
non-recourse, long-term, fixed-rate permanent financing for all types of income
properties.
4
At December 31, 2000, the Bank's commercial real estate loan portfolio
consisted of approximately 300 loans with an aggregate principal balance of
approximately $178.9 million and the Bank's largest commercial real estate loan
customer had an outstanding balance of $12.9 million which includes
participations with other financial institutions of $9.7 million. Although terms
vary, commercial real estate loans secured by existing properties generally have
maturities of ten years or less and interest rates which adjust every one, three
or five years in accordance with a designated index.
At December 31, 2000, substantially all of the Bank's commercial real
estate loan portfolio was secured by properties located within its primary
market area. Loan-to-value ratios on the Bank's commercial real estate loans are
limited to 80% or lower, except in certain limited circumstances. In addition,
as part of the criteria for underwriting permanent commercial real estate loans,
the Bank generally imposes a debt service coverage ratio (the ratio of net cash
from operations before payment of debt service to debt service) of at least
1.2x. It is also the Bank's general policy to obtain personal guarantees of its
commercial real estate loans from the principals of the borrower.
Commercial real estate lending is generally considered to involve a
higher degree of risk than single-family residential lending. Such lending
typically involves large loan balances concentrated in a single borrower or
groups of related borrowers. In addition, the payment experience on loans
secured by income-producing properties is typically dependent on the successful
operation of the related real estate project and thus may be subject to a
greater extent to adverse conditions in the real estate market or in the economy
generally. The Bank generally attempts to offset the risks associated with
commercial real estate lending by, among other things, lending primarily in its
market area, periodically inspecting each property, using conservative
loan-to-value ratios in the underwriting process and obtaining financial
statements and rent rolls from all commercial and multi-family borrowers on at
least an annual basis.
The Company also conducts commercial mortgage banking and brokerage
services through Progress Realty Advisors, Inc. ("PRA"), a subsidiary of the
Bank. PRA was formed as a complement to the Bank's commercial lending activities
in order to provide lending services for borrowers where borrowing needs are not
consistent with the Bank's lending operations due to, among other things, the
amount of financing required, geographic location of the borrower, recourse
provisions and business/banking relationships. PRA specializes in originating,
underwriting and closing commercial real estate financing for residential,
multi-family and commercial properties for other financial institutions,
insurance and finance companies for a fee.
Construction Lending. Through the Bank, the Company also offers both residential
construction loans and, to a lesser extent, commercial construction loans. At
December 31, 2000, the Company's construction loan portfolio consisted of
approximately 75 loans with an aggregate principal balance of approximately
$60.2 million and the Company's largest construction loan had an outstanding
balance of $9.2 million, of which $4.6 million was participated to other
financial institutions.
Construction loans generally offer higher yields and afford the Company
the opportunity to increase the interest rate sensitivity of its loan portfolio.
Construction financing is generally considered to involve a higher degree of
risk of loss than long-term financing on improved, owner-occupied real estate.
Risk of loss on a construction loan is dependent in large part upon the accuracy
of the initial estimate of the property's value at completion of construction or
development, the estimated cost (including interest) of construction and the
financial strength of the borrower. During the construction phase, a number of
factors could result in delays and cost overruns. If the estimate of
construction costs proves to be inaccurate, the Company may be required to
advance funds beyond the amount originally committed to permit completion of the
development. If the estimate of value proves to be inaccurate, the Company may
be confronted, at or prior to the maturity of the loan, with a project having a
value which is insufficient to assure full repayment, in which case the Company
would have to rely upon the borrower's financial ability.
The Company generally attempts to address the additional risks
associated with construction lending by, among other things, lending primarily
in its market area, periodically inspecting each property during the
construction period, using conservative loan-to-value ratios in the underwriting
process and generally requiring personal guarantees. At December 31, 2000, all
of the Company's construction loans were secured by properties located within
the Company's primary market area. In addition, residential construction loans
are generally made for 75% or less of the appraised value of the property upon
completion. For owner-occupied construction/permanent loans, the Bank will lend
up to 80% of the lesser of the full appraised value or the land plus costs.
Moreover, the Company does not originate loans for the construction of
speculative (or unsold) residential properties. Prior to making a commitment to
fund a construction loan, the Company requires both an appraisal of the property
by independent appraisers approved by the Board of Directors and a study of the
feasibility of the proposed project.
5
Construction loans, including land loans, generally have maturities of
12 to 24 months (up to three years in the case of land loans). Interest rates on
construction loans generally adjust in accordance with a designated index.
Advances are generally made to cover actual construction costs, and generally
include a reserve for paying the stated interest due on the loan during the life
of the loan. Loan proceeds are disbursed as inspections of construction progress
warrants and as pre-construction sale and leasing requirements generally imposed
by the Company are met.
Consumer Lending. Subject to restrictions contained in applicable federal laws
and regulations, the Bank is authorized to make loans for a wide variety of
personal or consumer purposes. At December 31, 2000 the Bank's consumer loan
portfolio consisted of approximately 1,970 loans with an aggregate outstanding
balance of $37.2 million.
The Bank has been emphasizing a variety of consumer loans in recent
years in order to provide a full range of financial services to its customers
and because such loans generally have shorter terms and higher interest rates
than traditional first mortgage loans. The consumer loans offered by the Bank
include home equity loans and lines of credit, deposit account secured loans and
loans that are secured by personal property, including automobiles.
Home equity loans are originated by the Bank for up to 90% of the
appraised value, less the amount of any existing prior liens on the property.
The Bank also offers home equity lines of credit in amounts up to 90% of the
appraised value, less the amount of any existing prior liens. Home equity loans
have a maximum term of 15 years, and the interest rate is dependent upon the
term of the loan. The Bank secures the loan with a mortgage on the property
(generally a second mortgage) and will originate the loan even if another
institution holds the first mortgage.
Consumer loans generally have shorter terms and higher interest rates
than mortgage loans but generally involve more credit risk than mortgage loans
because of the type and nature of the collateral and, in certain cases, the
absence of collateral. In addition, consumer lending collections are dependent
on the borrower's continuing financial stability, and thus are more likely to be
adversely effected by job loss, divorce, illness and personal bankruptcy. In
most cases, any repossessed collateral for a defaulted consumer loan will not
provide an adequate source of repayment of the outstanding loan balance. The
Company believes that the generally higher yields earned on consumer loans
compensate for the increased credit risk associated with such loans and that
consumer loans are important to its efforts to increase rate sensitivity,
shorten the average maturity of its loan portfolio and provide a full range of
services to its customers.
Equipment Leasing. As part of the strategy to be a full-service commercial
lender, the Company provides diversified equipment leasing services to small-
and middle-market business companies. At December 31, 2000, the Company's lease
financing portfolio consisted of approximately 3,320 leases with an outstanding
balance of $56.2 million. In December 2000, the Company sold its Maryland-based
leasing division that resulted in the sale of $31.0 million of lease financing
receivables.
Equipment lease financing is provided through the Bank's subsidiary,
Progress Leasing Company ("PLC"). located in Blue Bell, Pennsylvania. The
Company provides lease financing throughout the mid-Atlantic region with a
current concentration on Pennsylvania, New York, New Jersey, Maryland and
Virginia. The Company provides leasing either directly to the business customer
or through regional vendor sponsored programs.
The Company provides lease financing for a wide variety of business
equipment, including computer systems, telephone systems, furniture, landscaping
and construction equipment, medical equipment, dry cleaning equipment and
graphic systems equipment.
For some of the Company's leases, the Company may retain the leased
property upon expiration of the lease based on the residual value. In the event
that the residual value is less than provided for in the lease, the Company may
have a loss related to the disposition of such property. However, because a
majority of the Company's leases are bought out or extended at the end of their
terms, the Company has not experienced any material losses in aggregate residual
values to date.
Private Equity Fund Management. Progress Capital Management, Inc. ("PCM"), a
subsidiary of the Company, manages Ben Franklin/Progress Capital Fund, L.P.
("Ben Franklin"), a $9.1 million fund which commenced operations in December
1997 and provides subordinated debt financing to early-stage Mid-Atlantic based
technology companies with innovative products and an existing revenue stream. In
addition, Ben Franklin generally receives warrants to purchase equity of the
borrowers in connection with such lending. PCM also manages the newly formed
NewSpring Ventures, L.P. ("NewSpring") which provides growth capital for
emerging companies. NewSpring is funded by $30.2 million in private placements
of institutional and individual investors and, as a licensed Small Business
Investment Company,
6
funded by $60.4 million in leveraged participating securities for a total fund
amount of $90.6 million. NewSpring primarily invests in mid-Atlantic companies
with significant growth potential, proven management and strategic competitive
advantage. PCM earns fees for managing Ben Franklin and NewSpring.
Insurance/Wealth Management. In January 1999, the Company's subsidiary Progress
Financial Resources, Inc. ("PFR") commenced operations. PFR, a Delaware
corporation, is headquartered in Philadelphia, Pennsylvania, and sells
investment and insurance products, employee benefits and financial planning
services to individuals and businesses. PFR offers securities and insurance
products, primarily but not exclusively, through AXA Advisors, LLC (New York,
New York).
Other Activities. Progress Capital, Inc. ("PCI"), a subsidiary of the Company,
was formed in 1996 and is the corporate general partner of Ben Franklin and
hold's the Company's equity interest in Ben Franklin and NewSpring. PCI also
invests in middle market companies that are prospects or customers of the
Company and companies who have demonstrated a superior track record in their
area of expertise.
In February 1998, the Company formed Progress Development Corp ("PDC"),
to invest in a joint venture partnership, Progress Development I LP, which
acquired an interest in NewSeasons Assisted Living Communities ("NewSeasons")
with Independence Blue Cross. NewSeasons owns, acquires, develops and operates
assisted living residences for the elderly. In addition to owning an equity
interest in NewSeasons, Progress Development I LP will provide fee based
development, construction management and financial services to NewSeasons and
other investors.
In January 2000, the Company acquired KMR Management, Inc. ("KMR"), a
Pennsylvania based corporation. KMR specializes in corporate turnaround and
crisis management consulting for commercial clients. Working primarily for
companies with up to $50 million in sales, KMR takes an active role in
short-term management of its clients' businesses. It also provides expert
testimony in court proceedings and when needed, asset liquidation services.
Financial Information by Business Segment
The Company has four principal activities: Banking, Equipment Leasing,
Private Equity Fund Management and Insurance/Wealth Management. Emerging
operating segments not directly related to the four principal activities and
that do not currently meet the quantitative thresholds of a reportable segment
are aggregated under Other Segments. Intercompany business transactions, the
parent company and other non-operating segments are aggregated under Corporate.
The measurement of the performance of these business segments is based on the
Company's current management structure and is not necessarily comparable with
similar information for any other financial institution. The information
presented is also not necessarily indicative of each segments' financial
condition and results of operations if they were independent entities. The
following selected financial information by business segment is presented in
thousands of dollars:
Private Insurance/
Equipment Equity Fund Wealth Other
Banking Leasing Management Management Segments Corporate Total
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Assets at:
December 31, 2000 $842,901 $54,886 $ 114 $1,640 $1,176 $13,532 $914,249
December 31, 1999 662,130 85,159 272 989 -- 20,391 768,941
Revenues for the year ended:
December 31, 2000 33,376 9,058 2,230 4,566 1,058 1,107 51,395
December 31, 1999 29,849 5,799 699 2,645 -- 5,337 44,329
December 31, 1998 25,269 4,881 202 -- -- 172 30,524
Income from continuing operations before cumulative effect of accounting change for the year ended:
December 31, 2000 4,531 2,088 349 52 (85) (1,278) 5,657
December 31, 1999 4,259 112 126 (189) -- 1,724 6,032
December 31, 1998 4,702 1,199 80 -- -- (1,066) 4,915
7
Competition
The Company faces strong competition both in attracting deposits and
making loans. As a provider of a wide range of financial services, the Company
competes with national and state banks, savings and loan associations,
securities dealers, brokers, mortgage bankers, finance and insurance companies,
and other financial service companies. The ability of the Company to attract and
retain deposits depends on its ability to generally provide a rate of return,
liquidity and risk comparable to that offered by competing investment
opportunities. The Company competes for loans principally through the interest
rates and loan fees it charges and the efficiency and quality of services it
provides borrowers.
REGULATION AND SUPERVISION
General
The Company, as a unitary thrift holding company, is subject to
comprehensive examination, supervision and regulation by the Office of Thrift
Supervision ("OTS"). As a subsidiary of a unitary thrift holding company, the
Bank is subject to certain restrictions in its dealings with the Company and
affiliates thereof. Three of the Company's non-banking subsidiaries (KMR, PCM
and PDC) are subject to the laws of the Commonwealth of Pennsylvania. PCI and
PFR are Delaware corporations.
The Bank
Lending Restrictions
As a federally chartered savings bank, the Bank is subject to certain
lending restrictions. Commercial business loans are limited to 20% of the Bank's
assets; there is no limitation on the guaranteed portion of Small Business
Association ("SBA") commercial loans. Mortgage loans secured by non-residential
properties are limited to four times the Bank's risk-based capital. Consumer
loans are subject to a limitation of 35% of the Bank's assets. Under federal
regulations financing leases are either considered loans, in which case are
accordingly classified as and aggregated with commercial, consumer or
agricultural loans based upon the underlying collateral or personal property, or
as operating leases which are subject to a separate 10% of assets limitation.
The Company's financing leases are considered operating leases and are subject
to the 10% limitation. At December 31, 2000, the Bank was in compliance with all
loan limitations.
The Bank is also limited, under federal regulation, in the amount it
can lend to one borrower. At December 31, 2000, the Bank's loans-to-one-borrower
limit was approximately $9.8 million. The Bank was in compliance with this
limitation at December 31, 2000.
Insurance of Deposits
The Bank's deposits are insured by the Savings Association Insurance
Fund ("SAIF") to a maximum of $100,000 for each depositor. The Federal Deposit
Insurance Corporation ("FDIC") requires an annual audit by independent
accountants and may also examine the Bank.
Federal law requires that the FDIC maintain the reserve level of each
of the SAIF and the Bank Insurance Fund ("BIF") at 1.25% of insured deposits.
The BIF reached this level during 1995. Deposit insurance premiums in 2000
averaged 2.07 cents per $100 of deposits compared to an average 5.925 cents per
$100 of deposits in 1999 and 6.22 cents per $100 of deposits in 1998. Deposit
insurance is payable on a quarterly basis.
Qualified Thrift Lender Test
All savings associations are required to meet a qualified thrift lender
("QTL") test set forth in Section 10(m) of the Home Owners' Loan Act ("HOLA")
and regulations of the OTS thereunder to avoid certain restrictions on their
operations. Currently, the QTL test requires that 65% of an institution's
"portfolio assets" (as defined) consist of certain housing, small business, and
consumer related assets on a monthly average basis in 9 out of every 12 months.
8
The Bank only complied with this test for 8 out 12 months during 2000;
at December 31, 2000, approximately 62.35% of the Bank's assets were invested in
qualified thrift investments. Consequently, the Bank is prohibited from making
any new investments or engaging in any new activities not allowed for both
national bank and a savings association, establishing any new branch office
unless allowable for a national bank, and paying dividends unless allowable for
a national bank. Unless the Bank requalifies as a QTL within the three-year
period ended December 31, 2003, it must not retain any investment or engage in
any activity not allowed for both a national bank and a savings association.
Until the Bank regains QTL status, the Company is subject to the restrictions
applicable to multiple savings and loan holding companies. If the Bank fails to
regain QTL status by December 31, 2001, the Company will be required to register
as and be deemed to be a bank holding company, thus, subject to all provisions
of the Bank Holding Company Act of 1956, Section 8 of the Federal Deposit
Insurance Act, and other statues applicable to bank holding companies.
Federal Home Loan Bank System
The Bank is a member of the Federal Home Loan Bank of Pittsburgh
("FHLB"), which administers the home financing credit function and serves as a
source of liquidity for member savings associations and commercial banks within
its assigned region. It makes loans to members (i.e., advances) in accordance
with policies and procedures established by its Board of Directors. As of
December 31, 2000, the Bank's advances from the FHLB amounted to $127.0 million.
As a member, the Bank is required to purchase and maintain stock in the
FHLB in an amount equal to the greater of 1% of its mortgage related assets or
.3% of total assets. At December 31, 2000, the Bank had $6.4 million in FHLB
stock, which was in compliance with this requirement.
Federal Limitations on Transactions with Affiliates
Transactions between savings associations and any affiliate are
governed by Section 23A and 23B of the Federal Reserve Act. In addition to the
restrictions imposed, no savings association may (i) loan or otherwise extend
credit to an affiliate, except for any affiliate which engages only in
activities which are permissible for bank holding companies, or (ii) purchase or
invest in any stocks, bonds, debentures, notes, or similar obligations of any
affiliate, except for affiliates which are subsidiaries of the savings
association.
In addition, Section 12 CRF-215 (Regulation O) of the Code of Federal
Regulations places restrictions on loans by savings associations to executive
officers, directors, and principal shareholders of the Company and the Bank. At
December 31, 2000, the Bank was in compliance with this regulation.
Employees
As of December 31, 2000, the Company had a total of 298 full-time
equivalent employees. Employment at the Company's individual subsidiaries was as
follows: The Bank and its subsidiaries PLC and PRA had 254 full-time equivalent
employees; PFR had 29 full-time equivalent employees; PCM had 8 full-time
equivalent employees; and KMR had 3 full-time equivalent employees.
Item 2. Properties
The Company's and the Bank's executive offices are located at 4 Sentry
Parkway, Suite 200, Blue Bell, Pennsylvania. The Bank conducts business from
sixteen Pennsylvania branch offices in Bridgeport, Plymouth Meeting, East
Norriton, Chestnut Hill, Conshohocken, Glenside, King of Prussia, Lansdale,
Norristown, Jeffersonville, Paoli, Lionville, Southampton, Trappe, Rosemont and
the Andorra community of Philadelphia; three of which are owned and thirteen are
leased. PLC conducts equipment-leasing business in leased facilities in Blue
Bell, PA. PRA has leased locations in Blue Bell, PA; Richmond, VA; Woodbridge,
NJ; Chesapeake, VA; and Raleigh, NC. KMR has lease office space in Willow Grove,
PA. PFR leases its location in Philadelphia, PA and leases office space in Blue
Bell, PA and Northfield, NJ. PCM leases office space in Conshohocken, PA.
9
Item 3. Legal Proceedings
The Company is involved in routine legal proceedings occurring in the
ordinary course of business which management, after reviewing the foregoing
actions with legal counsel, is of the opinion that the liability, if any,
resulting from such actions will not have a material effect on the financial
condition or results of operations of the Company.
Item 4. Submissions of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Progress Financial Corporation's common stock is traded on The Nasdaq
Stock MarketSM under the symbol "PFNC." At December 31, 2000 the Company had
approximately 2,800 holders of record.
Payment of cash dividends is subject to regulatory restrictions as
described in Note 18 of Notes to Consolidated Financial Statements. The Company
paid cash dividends on a quarterly basis totaling $.21 per share during 2000 and
$.17 per share during 1999.
The following table sets forth the high and low closing prices, trading
volumes and cash dividends per share paid for the periods described. Prior
periods have been restated to reflect the 5% stock dividend distributed to
shareholders on August 31, 2000.
2000 1999
---------------------------------------------------- ---------------------------------------------------
Low High Volume Dividends Low High Volume Dividends
-------------- ------------ ------------ ----------- -------------- ------------- ----------- ----------
First Quarter $10 107/256 $12 67/256 1,299,000 $.05 $10 113/128 $14 51/128 1,088,000 $.04
Second Quarter 10 15/128 11 27/32 933,000 .05 12 237/256 15 165/256 1,031,000 .04
Third Quarter 11 3/16 12 79/128 657,000 .05 12 5/256 14 11/32 597,000 .04
Fourth Quarter 7 1/8 10 3/4 861,000 .06 11 35/64 12 79/128 1,011,000 .05
10
Item 6. Selected Consolidated Financial Data
Tabular information is presented in thousands of dollars except for share and per share data. This data should be read in
conjunction with the Notes to Consolidated Financial Statements.
December 31, 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
Financial Condition
Investment and mortgage-backed securities:
Available for sale $205,166 $149,518 $164,368 $ 50,913 $ 46,200
Held to maturity 41,940 34,309 12,401 53,472 49,271
Loans and leases, net 535,712 497,738 394,246 339,903 265,968
Loans held for sale -- -- 25,250 373 599
Real estate owned, net 1,750 66 -- 380 2,150
Total assets 914,249 768,941 648,198 508,919 401,010
Deposits 617,543 521,439 408,162 344,322 306,248
Borrowings and subordinated debt 194,360 162,767 167,416 84,247 63,403
Capital securities 20,232 14,451 14,431 14,400 --
Shareholders' equity 50,160 47,809 41,554 25,362 20,594
Results of Operations
Interest income $ 67,028 $ 52,174 $ 45,329 $ 36,497 $ 30,114
Interest expense 35,175 25,432 22,450 17,894 15,820
Net interest income 31,853 26,742 22,879 18,603 14,294
Provision for loan and lease losses 4,416 3,548 959 1,509 781
Net interest income after provision for loan and lease
losses 27,437 23,194 21,920 17,094 13,513
Non-interest income 19,542 17,587 7,645 5,950 5,100
Non-interest expense 38,306 31,648 21,834 17,332 16,466
Income from continuing operations before income taxes
and cumulative effect of accounting change 8,673 9,133 7,731 5,712 2,147
Tax expense (benefit) 3,016 3,101 2,816 2,230 804
Income from continuing operations before cumulative
effect of accounting change 5,657 6,032 4,915 3,482 1,343
Cumulative effect of accounting change, net of tax
benefit -- -- (46) -- --
Income from continuing operations 5,657 6,032 4,869 3,482 1,343
Gain on sale of discontinued operations, net of tax 1,519 -- -- -- --
Income from discontinued operations, net of tax 123 639 111 (15) --
Net income 7,299 6,671 4,980 3,467 1,343
Per Share Data
Basic income from continuing operations per common share
before cumulative effect of accounting change $ .98 $ 1.04 $ .92 $ .74 $ .29
Diluted income from continuing operations per common
share before cumulative effect of accounting change .95 .99 .84 .68 .28
Basic net income per common share 1.26 1.15 .93 .74 .29
Diluted net income per common share 1.22 1.10 .85 .68 .28
Dividends .21 .17 .12 .08 .03
Book value 8.82 8.26 7.45 5.35 4.46
Operating Data
Return on average assets .88% .98% .89% .80% .36%*
Return on average shareholders' equity 15.16 15.47 13.78 15.22 6.83*
Average shareholders' equity to average assets 5.78 6.33 6.42 5.23 5.24
Allowance for loan and lease losses to total loans and
leases 1.36 1.18 1.06 1.12 1.39
Non-performing assets as a percentage of total assets .63 .75 .57 .50 .96
Interest rate spread 3.50 3.63 3.66 3.98 3.66
Net interest margin 4.17 4.24 4.32 4.58 4.06
Dividends declared as a percent of net income per share 17.21 15.45 14.12 11.76 10.71
Branch Data
Number of full service branches 16 14 11 10 10
*Excluding the 1996 one-time SAIF assessment, return on average assets was .68% and return on average equity was 12.92%.
11
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Progress Financial Corporation (the "Company") is a unitary thrift
holding company that has six primary subsidiaries: Progress Bank (the "Bank"),
Progress Capital, Inc. ("PCI"), KMR Management, Inc. ("KMR"), Progress
Development Corp. ("PDC"), Progress Financial Resources, Inc. ("PFR") and
Progress Capital Management, Inc. ("PCM"). The Bank's primary operating
subsidiaries are Progress Leasing Company ("PLC") and Progress Realty Advisors,
Inc. ("PRA").
The following discussion and analysis of financial condition and
results of operations should be read in conjunction with the Company's
Consolidated Financial Statements and accompanying notes. Certain
reclassifications have been made to prior years' data throughout the following
discussion and analysis for comparability with 2000 data.
When used in filings by the Company with the Securities and Exchange
Commission, in the Company's press releases or other public or shareholder
communications, or in oral statements made with the approval of an authorized
executive officer, the words or phrases "will likely result", "are expected to",
"will continue", "is anticipated", "estimate", "project", or similar expressions
are intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject to
certain risks and uncertainties including changes in economic conditions in the
Company's market area, changes in policies by regulatory agencies, fluctuations
in interest rates, demand for loans in the Company's market area and competition
that could cause actual results to differ materially from historical earnings
and those presently anticipated or projected. The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements,
which speak only as of the date made. The Company wishes to advise readers that
the factors listed above could affect the Company's financial performance and
could cause the Company's actual results for future periods to differ materially
from any opinions or statements expressed with respect to future periods in any
current statements.
Results of Operations
The Company reported net income of $7.3 million for the year ended
December 31, 2000, in comparison with $6.7 million and $5.0 million for the
years 1999 and 1998, respectively. The basic net income per common share was
$1.26 for 2000, $1.15 for 1999 and $.93 for 1998. Fully diluted net income per
common share was $1.22 for 2000, $1.10 for 1999 and $.85 for 1998. Income from
continuing operations was $5.7 million for the year ended December 31, 2000, in
comparison with $6.0 million and $4.9 million for the years 1999 and 1998,
respectively. During the second quarter of 2000, the Company sold the assets of
Procall Teleservices, Inc., its teleservices operations, resulting in a gain of
$2.5 million pretax, $1.5 million net of tax, or diluted earnings per share of
$.25. Return on average shareholders' equity was 15.16% and return on average
assets was .88% for the year ended December 31, 2000. For 1999, return on
average shareholders' equity was 15.47% and return on average assets was .98%.
Return on average shareholders' equity was 13.78% and return on average assets
was .89% for 1998.
Net Interest Income
Net interest income increased to $31.9 million for 2000, in comparison
with $26.7 million for 1999. This was primarily due to a $15.0 million increase
in the positive variance between average interest-earning assets and average
interest-bearing liabilities resulting from higher volumes in commercial
business loans, commercial real estate loans, lease financing receivables and
investments which were partially offset by increased time deposit volume and
short-term borrowings. Despite numerous rate increases by the Federal Reserve,
the Company has sufficiently managed its increasing cost of funds by deploying
capital into higher yielding investments and variable rate loans. The net
interest margin was 4.17% for 2000 compared to 4.24% for 1999; the slight
decline was primarily due to higher deposit rates in 2000 partially offset by
higher yields on commercial business loans, construction loans and investments
in 2000.
Net interest income increased to $26.7 million for 1999, in comparison
with $22.9 million for 1998. This was primarily due to a $13.2 million increase
in the positive variance between average interest-earning assets and average
interest-bearing liabilities resulting from higher volumes in commercial real
estate loans, construction loans, commercial business loans, lease financing
receivables and investment securities partially offset by increased deposit
volume. The net interest margin was 4.24% for 1999 compared to 4.32% for 1998;
the slight decline was primarily due to higher yields on commercial business
loans and lease financing in 1998 partially offset by higher deposit rates in
1998.
12
Provision for Loan and Lease Losses
The provision for loan and lease losses represents the charge against
earnings that is required to fund the allowance for loan and lease losses. The
level of the allowance is determined by known and inherent risks within the
Bank's loan and lease portfolio. Management's periodic evaluation is based upon
an examination of the portfolio, past loss experience, current economic
conditions and other relevant factors.
The provision for loan and lease losses amounted to $4.4 million in
2000 compared to $3.5 million in 1999. The increase was primarily due to loan
growth and to increase the reserve coverage as a result of the current economic
climate.
The provision for loan and lease losses amounted to $3.5 million in
1999 compared to $959,000 in 1998. The increase was due to increases in the loan
and lease portfolio and non-performing loans and leases, an additional charge of
$1.1 million as a result of a new charge-off policy at PLC, and a charge of
$250,000 due to the deterioration of a commercial manufacturing customer's
credit.
The ratio of the allowance for loan and lease losses to total
non-performing loans and leases was 183.61%, 103.96% and 121.91% at December 31,
2000, 1999 and 1998, respectively.
Although management utilizes its best judgment in providing for loan
and lease losses, there can be no assurance that the Bank will not have to
increase its provision for loan and lease losses in the future as a result of
adverse market conditions for real estate in the Bank's primary market area,
future increases in non-performing loans and leases, or for other reasons. Any
such increase could adversely affect the Bank's results of operations. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowance for loan and lease losses and
the carrying value of its other non-performing assets. Such agencies may require
the Bank to recognize additions to its allowance for losses based on their
judgements of information available to them at the time of their examination.
The Company and the Bank were most recently examined by the Office of Thrift
Supervision ("OTS") as of June 30, 2000.
Non-interest Income
Non-interest income increased to $19.5 million in 2000 compared to
$17.6 million in 1999. This increase was primarily due to a $4.9 million
increase in financial services fee income and a $1.7 million gain on the sale of
the leasing division partially offset by a $5.3 million decrease in equity in
unconsolidated entities.
Private equity fund management fees increased $1.5 million primarily
generated by the Company's subsidiary PCM, which manages the mezzanine debt and
venture capital funds. Mutual fund, annuity and insurance commissions increased
$1.9 million from the Company's subsidiary PFR. Consulting fees of $963,000 were
generated during 2000 by the Company's subsidiary KMR, which provides financial
and operational management consulting services for commercial clients.
In December 2000, the Company sold the assets of its Maryland-based
leasing division that resulted in the sale of $31.0 million of lease financing
receivables and a gain of $1.7 million.
The losses in unconsolidated entities of $2.8 million in 2000 primarily
relate to Ben Franklin and NewSpring of which the Company owns approximately 36%
and 20%, respectively, and which are accounted for under the equity method.
These losses represent a partial reversal of unrealized gains reported in the
third and fourth quarters of 1999.
The Company recognized $3.5 million of client warrant income during
2000 due to the expiration of restrictions on the sale of warrants to acquire
common stock of Internet Capital Group, Inc. ("ICGE"), US Interactive, Inc. and
EMAX Solutions Partners, Inc. The Company recognized client warrant income of
$1.1 million from the sale of and market value adjustments on shares of ICGE;
$2.0 million from market value adjustments on US Interactive warrants and
$340,000 was on the sale of EMAX warrants back to SciQuest.com in accordance
with the terms of the acquisition of EMAX by SciQuest.com.
The Company has obtained rights to acquire stock (in the form of
warrants) in certain clients as part of negotiated credit facilities. The
receipt of warrants does not change the loan convenants or other collateral
control
13
techniques employed by the Company to mitigate the risk of a loan becoming
nonperforming, and collateral requirements on loans with warrants are similar to
lending arrangements where warrants are not obtained. The timing and amount of
income from the disposition of client warrants typically depends upon factors
beyond the control of the Company, including the general condition of the public
equity markets and restrictions on sales as well as the merger and acquisition
environment. Therefore, income from the disposition of client warrants cannot be
predicted with any degree of accuracy and is likely to vary materially from
period to period. As opportunities present themselves in future periods, the
Company may continue to reinvest some or all of the income realized from the
disposition of client warrants in furthering its business strategies. Additional
information on warrants held by the Company can be found under "Business--
Banking-TechBanc."
A gain on sale of securities of $603,000 was recorded during 2000 from
the sale of 49,412 shares (adjusted for a 2-for-1 split) of common stock of ICGE
which the Company acquired through an investment in a convertible note of ICGE
made by it venture capital subsidiary.
Non-interest income increased to $17.6 million in 1999 compared to $7.6
million in 1998. This increase was partially due to an increase in financial
services fee income of $4.2 million as the Company earned $2.7 million in mutual
fund, annuity and insurance commissions in 1999, private equity fund management
fees increased $500,000 and service charges on deposits increased $434,000.
During 1999, the Company recognized $4.2 million of client warrant
income due to the expiration of restrictions on the sale of warrants to acquire
common stock of VerticalNet and IQEplc. The Company realized $3.7 million of
client warrant income from the sale and market value adjustments on shares of
VerticalNet. The Company realized $513,000 of client warrant income on sales of
common shares of IQEplc.
Equity in unconsolidated entities of $2.5 million in 1999 represents an
increase of $2.3 million over 1998 primarily due to the Company's equity
investment in the Ben Franklin/Progress Capital Fund, L.P. The increase in
equity investment is primarily due to the unrealized appreciation of investments
in Internet Capital Group, Inc. and VerticalNet, Inc. held by Ben
Franklin/Progress Capital Fund, L.P.
During 1999, securities were sold for a loss of $347,000 primarily as
part of a restructuring of investments to higher interest rates as compared to a
gain on sale of securities of $533,000 in 1998.
Non-interest Expense
Non-interest expense for 2000 amounted to $38.3 million compared to
$31.6 million in 1999. Excluding non-recurring expenses of $253,000 during 2000
related to data system conversion costs, a $373,000 write-down of goodwill
during 2000 related to the sale of certain offices of PRA known as the AMIC
Division, and $1.1 million in 1999 associated with a leasing acquisition and
unrelated adjustments, non-interest expense increased $7.1 million. This
increase was partially due to a $4.3 million increase in salaries and employee
benefits as a result of additional employees to staff new bank branches, the
acquisition of KMR, the staffing of PCM, commissions at PFR and from other new
positions established within the Company. Occupancy and furniture, fixtures and
equipment expenses increased $1.5 million mainly due to a new operations center,
bringing data processing in-house and new branch openings. Professional services
expense, excluding $31,000 in data system conversion related expenses in 2000,
increased $492,000 primarily due to consulting costs associated with the
business generated by the Company's subsidiaries PCM and KMR and legal costs
associated with aggressive collection efforts on charged-off loans and leases.
Real estate owned expenses increased $287,000 primarily due to construction
management and legal expenses related to residential real estate development
projects, classified as real estate owned. Loan expenses increased $221,000
primarily due to lease financing broker fees. Capital securities expense
increased $312,000 due to the issuance of $6.0 million of 11.455% capital
securities in July 2000.
Non-interest expense increased to $31.6 million in 1999 in comparison
with $21.8 million for 1998. Excluding non-recurring expenses of $1.1 million in
1999 associated with a leasing acquisition and unrelated adjustments,
non-interest expense increased $8.7 million. This increase was partially due to
a $5.5 million increase in salaries and employee benefits relating to employees
of acquired and newly formed companies and new positions within the Company.
Professional services increased by $852,000 mainly due to the outsourcing of the
internal audit function, consulting fees for Year 2000 systems testing and
increased tax services. Occupancy and furniture, fixtures and equipment expenses
increased $805,000 due to new branch openings and recent acquisitions. Other
non-interest expense for 1999 included a $313,000 loss on the sale of equipment
at PLC from the liquidation of leased property.
14
Income Tax Expense
The Company recorded income tax expense from continuing operations of
$3.0 million during 2000 compared to $3.1 million in 1999 and $2.8 million in
1998, gross of the tax benefit of $26,000 due to the cumulative effect of
accounting change. Income tax expense from the gain on sale of and income from
discontinued operations was $1.1 million during 2000. Income tax expense on
income from discontinued operations was $442,000 in 1999 and $62,000 in 1998.
The changes in income tax expense were primarily due to changes in taxable
income.
Liquidity and Funding
The Company must maintain sufficient liquidity to meet its funding
requirements for loan and lease commitments, scheduled debt repayments,
operating expenses, and deposit withdrawals. The Bank is the primary source of
working capital for the Company. At December 31, 2000, the Bank met all
regulatory capital liquidity requirements.
The Company's need for liquidity is affected by loan demand and net
changes in retail deposit levels. The Company can minimize the cash required
during the times of heavy loan demand by modifying its credit policies or
reducing its marketing efforts. Liquidity demand caused by net reductions in
retail deposits is usually caused by factors over which the Company has limited
control. The Company derives its liquidity from both its assets and liabilities.
Liquidity is derived from assets by receipt of interest and principal payments
and prepayments, by the ability to sell assets at market prices and by utilizing
unpledged assets as collateral for borrowings. Liquidity is derived from
liabilities by maintaining a variety of funding sources, including retail
deposits, FHLB borrowings and securities sold under agreement to repurchase.
At December 31, 2000, the total of approved loan commitments amounted
to $62.0 million, and the Company had $172.5 million of undisbursed loan funds.
At December 31, 2000, total FHLB borrowings that are scheduled to mature during
the 12 months ending December 31, 2001 totaled $25.0 million. At December 31,
2000, total securities purchased under agreement to resell which are scheduled
to mature during the 12 months ended December 31, 2001, totaled $53.7 million.
At December 31, 2000, the amount of time deposits that are scheduled to mature
within 12 months totaled $318.7 million, a substantial portion of which
management believes, on the basis of prior experience, will remain in the
Company.
Deposits are obtained primarily from residents near the Bank's ten
full-service offices in Montgomery County, one full-service office in Rosemont,
Delaware County, two full-service offices in Chester County, one full-service
office in Southampton, Bucks County, and two full-service offices in
Philadelphia County. The Bank has drive-up banking facilities at ten of its
offices and has installed ATM's at all of its offices and at two additional
locations. The Bank offers a wide variety of options to its customer base,
including consumer and commercial demand deposit accounts, negotiable order of
withdrawal ("NOW") accounts, money market accounts, passbook accounts,
certificates of deposit and retirement accounts.
As a member of the FHLB, the Bank is required to own capital stock in
the FHLB and is authorized to apply for advances on the security of such stock
and certain of its home mortgages and other assets (principally securities which
are obligations of, or guaranteed by, the United States), provided certain
standards related to creditworthiness have been met. Advances are made pursuant
to several different credit programs. Each credit program has its own interest
rate and range of maturities. Depending on the program, limitations on the
amount of advances are based either on a fixed percentage of a savings bank's
assets or on the FHLB's assessment of the savings bank's creditworthiness. The
FHLB credit policies may change from time to time at its discretion. The Bank's
maximum borrowing authority from the FHLB on December 31, 2000 was approximately
$184.4 million.
The Company's primary sources of funds have historically consisted of
deposits, amortization and prepayments of outstanding loans, FHLB borrowings and
securities sold under agreement to repurchase and sales of investment and
mortgage-backed securities. During 2000 and 1999, the Company used its capital
resources primarily to meet its ongoing commitments to fund maturing savings
certificates and deposit withdrawals, fund existing and continuing loan
commitments, and maintain its liquidity. For the year ended December 31, 2000,
cash was provided by operating activities. Cash was used in investing activities
as purchases of mortgage-backed and investment securities, and net originations
of loans exceeded repayments and proceeds from sales, maturities and calls of
mortgage-backed and investment securities and proceeds from sales of loans,
lease receivables and the Maryland-based leasing division. Cash provided by
financing activities during 2000, primarily due to increases in deposits, offset
the outflows from investments activities. For the year ended December 31, 1999,
cash was provided by operating activities. Cash was used in investing
15
activities primarily due to net origination of loans. Cash provided by financing
activities, primarily due to increases in time deposits, offset the outflows
from investment activities. For the year ended December 31, 1998, cash was used
by operating activities primarily due to the increase in loans held for sale.
Cash was used in the Company's investment activities during 1998, as purchases
of mortgage-backed and investment securities, and net originations of loans
exceeded repayments on mortgage-backed securities, maturities of investments,
proceeds from sales of mortgage-backed and investment securities. Funds provided
by financing activities in 1998 offset the cash outflows from investment
activities as cash was provided by increased levels of deposits and borrowings.
Capital Resources
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") was signed into law on December 19, 1991; regulations implementing
the prompt corrective action provision of FDICIA became effective on December
19, 1992. In addition to the prompt corrective action requirements, FDICIA
includes significant changes to the legal and insured depository institutions,
including reductions in insurance coverage for certain kinds of deposits,
increased supervision by the federal regulatory agencies, increased reporting
requirements for insured institutions, and new regulations concerning internal
controls, accounting, and operations. The prompt corrective action regulations
defined specific capital categories based on an institution's capital ratios.
The capital categories, in declining order, are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," and
"critically undercapitalized." To be considered "well capitalized," an
institution must generally have a tangible equity ratio of at least 2%, a Tier 1
or leverage capital ratio of at least 5%, a Tier 1 risk-based capital ratio of
at least 6%, and a total risk-based capital ratio of at least 10%. An
institution is deemed to be "critically undercapitalized" if it has a tangible
equity ratio of 2% or less.
At December 31, 2000, the Bank met all regulatory capital requirements.
At December 31, 2000, the Bank's leverage capital ratio was 6.46%, Tier 1
risk-based capital ratio was 9.79%, total risk-based ratio was 11.04% and
tangible equity ratio was 6.46%, based on leverage capital of $57.9 million,
Tier 1 risk-based capital of $57.9 million, total risk-based capital of $65.3
million, and tangible capital of $57.9 million, respectively. As of December 31,
2000, the Bank is classified as "well capitalized."
In July 2000, the Company issued 6,000 shares, or $6.0 million, of
11.445% trust preferred securities, $1,000 liquidation amount per security, due
July 19, 2030 (the "Trust Preferred Securities"), in a private offering managed
by First Union Securities, Inc. The Trust Preferred Securities represent
undivided beneficial interests in Progress Capital Trust II (the "Trust II"), a
statutory business trust created under the laws of Delaware, which was
established by the Company for the purpose of issuing the Trust Preferred
Securities. The Company has fully, irrevocably and unconditionally guaranteed
all of the Trust II's obligations under the Trust Preferred Securities. Net
proceeds from the sale of the securities were used for general purposes,
including but not limited to, capital contributions to the Bank to fund its
growth and for repurchases of the Company's common stock under its existing
stock repurchase program.
During 1997 the Company issued $15.0 million of 10.5% capital
securities due June 1, 2027 (the "Capital Securities"). The Capital Securities
were issued by the Company's recently formed subsidiary, Progress Capital Trust
I, a statutory business trust created under the laws of Delaware. The Company is
the owner of all of the common securities of the Trust (the "Common
Securities"). The Trust issued $15.0 million of 10.5% Capital Securities (and
together with the Common Securities, the "Trust Securities"), the proceeds from
which were used by the Trust, along with the Company's $464,000 capital
contribution for the Common Securities, to acquire $15.5 million aggregate
principal amount of the Company's 10.5% Junior Subordinated Deferrable Interest
Debentures due June 1, 2027 (the "Debentures"), which constitute the sole assets
of the Trust. The Company has, through the Declaration of Trust establishing the
Trust, Common Securities and Capital Securities Guarantee Agreements, the
Debentures and a related Indenture, taken together, fully irrevocably and
unconditionally guaranteed all of the Trust's obligations under the Trust
Securities. The Company contributed approximately $6.0 million of the net
proceeds to Progress Bank, to increase its regulatory capital ratios and support
the growth of the expanded lending operations. Net proceeds retained by the
Company will be used for general purposes, including investments in other
subsidiaries and potential future acquisitions.
Statistical Information
Statistical information is furnished pursuant to the requirements of
Guide 3 (Statistical Disclosure by Bank Holding Companies) promulgated under the
Securities Act of 1933. Tabular information is provided in thousands of dollars
except for share and per share data.
16
Distribution of Average Assets, Liabilities and Shareholders' Equity
The following table sets forth, for the periods indicated,
tax-equivalent information regarding (i) the total dollar amount of interest
income on average interest-earning assets and the resultant average yield; (ii)
the total dollar amount of interest expense on average interest-bearing
liabilities and the resultant average cost; (iii) net interest income; (iv)
interest rate spread; and (v) net interest margin. Information is based on
average daily balances during the indicated periods. For the purposes of this
table, non-accrual loans have been included in the appropriate average balance
category.
For the years ended December 31, 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
--------------------------------------------------------------------------------------
Interest-earning assets:
Interest-earning deposits $21,244 $1,320 6.21% $16,907 $ 868 5.13% $ 3,990 $ 158 3.96%
Trading securities 264 -- -- 86 -- -- -- -- --
Investment securities(1) 65,529 4,430 6.76 40,195 2,550 6.34 18,030 1,017 5.64
Mortgage-backed securities (1) 145,056 10,461 7.21 123,786 8,008 6.47 134,528 8,686 6.46
Commercial business loans 146,332 13,801 9.43 103,934 8,862 8.53 77,268 7,487 9.69
Commercial real estate loans (5) 170,180 14,980 8.80 146,784 12,652 8.62 123,113 10,868 8.83
Construction loans 54,435 5,944 10.92 50,161 5,062 10.09 31,611 3,432 10.86
Single family residential real estate
loans(5) 39,078 2,991 7.65 45,656 3,329 7.29 54,890 4,193 7.64
Consumer loans 37,538 3,049 8.12 31,083 2,449 7.88 26,217 2,190 8.35
Lease financing 93,615 10,446 11.16 76,861 8,600 11.19 60,446 7,298 12.07
------- ------ ----- ------- ------ ----- ------- ------ -----
Total interest-earning assets 773,271 67,422 8.72 635,453 52,380 8.24 530,093 45,329 8.55
------- ------ ----- ------- ------ ----- ------- ------ -----
Non-interest-earning assets:
Cash 16,762 14,091 10,093
Allowance for loan and lease losses (6,263) (4,924) (4,339)
Other assets 49,535 36,237 26,708
-------- -------- --------
Total non-interest earning assets 60,034 45,404 32,462
-------- -------- --------
Total assets $833,305 $680,857 $562,555
======== ======== ========
Interest-bearing liabilities:
Interest-bearing deposits:
NOW and Super NOW $91,975 3,119 3.39 $79,206 2,195 2.77 $ 51,515 1,384 2.69
Money market accounts 37,223 1,172 3.15 35,649 993 2.79 33,722 999 2.96
Passbook and statement savings 29,752 527 1.77 31,763 603 1.90 31,314 725 2.32
Time deposits 329,874 19,344 5.86 248,866 12,968 5.21 206,158 11,358 5.51
------- ------ ----- ------- ------ ----- ------- ------ -----
Total interest-bearing deposits 488,824 24,162 4.94 395,484 16,759 4.24 322,709 14,466 4.48
Short-term borrowings 76,515 4,707 6.15 35,340 2,199 6.22 53,836 3,164 5.88
Long-term debt 108,752 6,306 5.80 120,400 6,474 5.38 82,534 4,820 5.84
------- ------ ----- ------- ------ ----- ------- ------ -----
Total interest-bearing
liabilities 674,091 35,175 5.22 551,224 25,432 4.61 459,079 22,450 4.89
------- ------ ----- ------- ------ ----- ------- ------ -----
Non-interest-bearing liabilities:
Non-interest bearing deposits 72,626 57,514 41,517
Other liabilities 20,652 14,547 11,397
-------- -------- --------
Total non-interest bearing
liabilities 93,278 72,061 52,914
-------- -------- --------
Total liabilities 767,369 623,285 511,993
Capital securities 17,795 14,441 14,422
Shareholders' equity 48,141 43,131 36,140
-------- -------- --------
Total liabilities, capital
securities and
shareholders' equity $833,305 $680,857 $562,555
======== ======== ========
Net interest income $32,247 $26,948 $22,879
======= ======= =======
Interest rate spread (2) 3.50% 3.63% 3.66%
Effect of net interest-free funding
sources(3) .67 .61 .66
----- ----- -----
Net interest margin (4) 4.17% 4.24% 4.32%
===== ===== =====
Average interest-earning assets to
average interest-bearing liabilities 114.71% 115.28% 115.47%
====== ====== ======
(1) Includes investment and mortgage-backed securities classified as available for sale. Yield information does not give effect to
changes in fair values that are reflected as a component of shareholders' equity.
(2) Represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(3) Represents the effect on the net interest margin of the difference between non-interest earnings assets and non-interest-bearing
liabilities, capital securities and shareholders' equity.
(4) Represents net interest income divided by average interest-earning assets.
(5) Includes loans held for sale.
17
Rate/Volume Analysis
The following table presents the degree to which changes in the
Company's tax-equivalent interest income, interest expense and net interest
income are attributable to changes in the average amount of interest-earning
assets and interest-bearing liabilities outstanding and/or to changes in rates
earned or paid thereon. The net change attributable to both volume and rate has
been allocated proportionately. Amounts in brackets represent a decrease in
interest income or expense.
- ------------------------------------------------------------------------------------------------------
For the years ended December 31, 2000 vs. 1999 1999 vs. 1998
- ------------------------------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total
-------------------------------------------------------------
Interest-earning assets:
Interest-earning deposits $248 $204 $452 $ 650 $ 60 $ 710
Trading securities -- -- -- -- -- --
Investment securities 1,701 179 1,880 1,392 141 1,533
Mortgage-backed securities 1,473 980 2,453 (690) 12 (678)
Commercial business 3,925 1,014 4,939 2,354 (979) 1,375
Commercial real estate loans 2,059 269 2,328 2,048 (264) 1,784
Construction loans 449 433 882 1,888 (258) 1,630
Single family residential real estate
loans (496) 158 (338) (680) (184) (864)
Consumer loans 523 77 600 388 (129) 259
Lease financing 1,869 (23) 1,846 1,866 (564) 1,302
- ------------------------------------------------------------------------------------------------------
Interest income 11,751 3,291 15,042 9,216 (2,165) 7,051
- ------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits 4,356 3,047 7,403 3,111 (818) 2,293
Short-term borrowings 2,533 (25) 2,508 (1,140) 175 (965)
Long-term debt (653) 485 (168) 2,062 (408) 1,654
- ------------------------------------------------------------------------------------------------------
Interest expense 6,236 3,507 9,743 4,033 (1,051) 2,982
- ------------------------------------------------------------------------------------------------------
Net interest income $5,515 $(216) $5,299 $5,183 $(1,114) $4,069
======================================================================================================
Investment and Mortgage-Backed Securities
Investment and mortgage-backed securities are comprised of the
following at December 31, 2000, 1999 and 1998:
Held to Maturity Available for Sale
--------------------------------------------------
Amortized Estimated Amortized Estimated
December 31, 2000 Cost Fair Value Cost Fair Value
- --------------------------------------------------------------------------------------------------
FHLB stock $ 6,350 $ 6,350 $ -- $ --
U.S. agency obligations 20,755 19,230 16,524 16,687
Bank deposits -- -- 447 447
Corporate bonds -- -- 1,913 1,570
Municipal bonds 14,835 14,645 -- --
Equity investments -- -- 5,436 2,994
Mortgage-backed securities -- -- 183,475 183,468
- --------------------------------------------------------------------------------------------------
Total investment and mortgage-backed securities $41,940 $40,225 $207,795 $205,166
==================================================================================================
Held to Maturity Available for Sale
--------------------------------------------------
Amortized Estimated Amortized Estimated
December 31, 1999 Cost Fair Value Cost Fair Value
- --------------------------------------------------------------------------------------------------
FHLB stock $ 4,923 $ 4,923 $ -- $ --
U.S. agency obligations 14,581 14,255 17,107 16,777
Corporate bonds -- -- 1,900 1,693
Municipal bonds 14,805 13,736 -- --
Equity investments -- -- 4,564 12,162
Mortgage-backed securities -- -- 123,958 118,886
- --------------------------------------------------------------------------------------------------
Total investment and mortgage-backed securities $34,309 $32,914 $147,529 $149,518
==================================================================================================
18
Held to Maturity Available for Sale
--------------------------------------------------
Amortized Estimated Amortized Estimated
December 31, 1998 Cost Fair Value Cost Fair Value
- --------------------------------------------------------------------------------------------------
FHLB stock $ 4,923 $ 4,923 $ -- $ --
U.S. agency obligations 7,478 7,624 2,000 2,001
Corporate bonds -- -- 1,895 1,630
Municipal bonds -- -- 9,599 9,591
Equity investments -- -- 4,714 4,687
Mortgage-backed securities -- -- 146,910 146,459
- --------------------------------------------------------------------------------------------------
Total investment and mortgage-backed securities $12,401 $12,547 $165,118 $164,368
==================================================================================================
The following table sets forth the contractual maturities of the investment and mortgage-backed securities at December 31,
2000 by investment type and the weighted average yield for each range of maturities. The yield on municipal bonds is calculated on a
tax-equivalent basis.
US Government Business Weighted
Agencies Corporations Municipalities Total Average Yield
- --------------------------------------------------------------------------------------------------------------
Available for sale:
Due one year or less $ 524 $ 447 $ -- $ 971 5.07%
Due after one year through 5 years 6,138 10 -- 6,148 7.15
Due after 5 years through 10 years 10,025 -- -- 10,025 7.51
Due after 10 years -- 1,560 -- 1,560 7.94
Mortgage-backed securities 183,468 -- -- 183,468 7.14
Equity securities -- 2,994 -- 2,994 .37
- --------------------------------------------------------------------------------------------------------------
Total available for sale $200,155 $ 5,011 $ -- $205,166 7.06%
==============================================================================================================
Held to maturity:
Due after 5 years through 10 years $ -- $ -- $ 788 $ 788 6.83%
Due after 10 years 20,755 -- 14,047 34,802 7.46
FHLB stock 6,350 -- -- 6,350 7.25
- --------------------------------------------------------------------------------------------------------------
Total held for sale $ 27,105 $ -- $14,835 $ 41,940 7.42%
==============================================================================================================
Loan and Lease Portfolio
The principal categories in the Company's loan and lease portfolio are
commercial business loans; commercial real estate loans, which are secured by
multi-family (over five units) residential and commercial real estate; loans for
the construction of single-family, multi-family and commercial properties,
including land acquisition and development loans; residential real estate loans,
which are secured by single-family (one to four units) residences; consumer
loans; and lease financing. Substantially all of the Company's mortgage loan
portfolio consists of conventional mortgage loans, which are loans that are
neither insured by the Federal Housing Administration nor partially guaranteed
by the Department of Veterans Affairs.
The Company's net loan and lease portfolio totaled $535.7 million at
December 31, 2000 or 58.6% of its total assets, an increase of $38.0 million or
7.6% from the $497.7 million outstanding at December 31, 1999.
19
The following table depicts the composition of the Company's loan and lease portfolio, net of unearned income, at December 31 for
the years indicated:
At December 31, 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------------------------------------------------------------------------------------------------------
Commercial business $175,972 32.40% 119,807 23.79% $ 92,737 21.87% $ 69,312 20.14% $ 30,384 11.24%
Commercial real estate(1) 178,874 32.93 162,588 32.28 134,380 31.69 109,938 31.94 90,350 33.42
Construction 60,172 11.08 58,813 11.68 44,546 10.51 26,695 7.76 20,692 7.65
Single family residential
mortgage (2) 34,676 6.39 40,554 8.05 50,086 11.81 56,565 16.44 64,259 23.77
Consumer loans 37,242 6.86 34,918 6.93 28,738 6.78 7.43 8.80
Lease financing 56,183 10.34 86,985 17.27 73,499 17.34 56,072 16.29 40,867 15.12
-------------------------------------------------------------------------------------------------------
Total loans and leases 543,119 100.00% 503,665 100.00% 423,986 100.00% 344,139 100.00% 270,335 100.00%
======= ======= ======= ======= =======
Allowance for loan and
Lease losses (7,407) (5,927) (4,490) (3,863) (3,768)
-------- -------- -------- -------- --------
Net loans and leases $535,712 $497,738 $419,496 $340,276 $266,567
======== ======== ======== ======== ========
(1) Includes $25.3 million of loans classified as held for sale at December 31, 1998.
(2) Includes $373,000 and $599,000 of loans classified as held for sale at December 31, 1997 and 1996, respectively.
The following table sets forth the scheduled contractual maturities of the Company's commercial loans at December 31, 2000.
The following table also sets forth the dollar amount of commercial loans scheduled to mature after one year which have fixed or
adjustable rates.
-------------------------------------------------------------------------------------------------
Commercial Commercial
At December 31, 2000 Mortgage Construction Business
-------------------------------------------------------------------------------------------------
Amounts due:
One year or less $ 16,369 $37,010 $ 97,243
After one year through five years 26,869 23,162 60,533
Beyond five years 135,636 -- 18,196
-------------------------------------------------------------------------------------------------
Total $178,874 $60,172 $175,972
=================================================================================================
Interest rate terms on amounts due after one year:
Fixed $ 72,726 $ 452 $ 41,346
-------------------------------------------------------------------------------------------------
Adjustable $ 89,779 $22,710 $ 37,383
-------------------------------------------------------------------------------------------------
Scheduled contractual principal repayments do not reflect the actual
maturities of commercial loans. The average maturity of commercial loans is less
than their average contractual terms because of prepayments and refinancings.
The average life of mortgage loans tends to increase when current mortgage loan
rates are higher than rates on existing mortgage loans and, conversely, decrease
when rates on existing mortgages are lower than current mortgage loan rates (due
to refinancing of adjustable-rate and fixed-rate loans at lower rates). Under
the circumstances, the weighted average yield on loans decreases as higher
yielding loans are paid or refinanced at lower rates.
Risk Elements
The following table details the Company's underperforming assets at December 31 for the years indicated:
- ------------------------------------------------------------------------------------------------------------------------------------
At December 31, 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Loans and leases accounted for on a non-accrual basis $ 4,034 $5,701 $3,683 $2,179 $1,689
REO, net of related reserves 1,750 66 -- 380 2,150
- ------------------------------------------------------------------------------------------------------------------------------------
Total non-performing assets 5,784 5,767 3,683 2,559 3,839
Accruing loans 90 or more days past due 4,502 2,336 4,030 2,721 4,077
- ------------------------------------------------------------------------------------------------------------------------------------
Total underperforming assets $10,286 $8,103 $7,713 $5,280 $7,916
- ------------------------------------------------------------------------------------------------------------------------------------
Non-performing assets as a percentage of total
loans and leases and real estate owned 1.08% 1.16% .88% .75% 1.43%
- ------------------------------------------------------------------------------------------------------------------------------------
Non-performing assets as a percentage of total assets .63% .75% .57% .50% .96%
- ------------------------------------------------------------------------------------------------------------------------------------
Underperforming assets as a percentage of total loans and
leases and real estate owned 1.91% 1.63% 1.84% 1.55% 2.95%
- ------------------------------------------------------------------------------------------------------------------------------------
Underperforming assets as a percentage of total assets 1.13% 1.05% 1.19% 1.04% 1.99%
- ------------------------------------------------------------------------------------------------------------------------------------
20
Gross interest income that would have been recorded during 2000, 1999
and 1998 if the Company's non-accrual loans and leases at the end of such
periods had been performing in accordance with their terms during such periods
was $351,000, $637,000 and $252,000, respectively. The amount of interest income
that was actually recorded during 2000, 1999 and 1998 with respect to such
non-accrual loans and leases amounted to approximately $175,000, $426,000 and
$112,000, respectively.
The $4.0 million of non-accrual loans and leases at December 31, 2000
consists of $789,000 of loans secured by single-family residential property,
$564,000 of loans secured by commercial property, $1.1 million of commercial
business loans, $346,000 of consumer loans and $1.2 million of lease financing.
The accrual of interest on commercial loans, mortgage loans and leases
is generally discontinued when the loans and leases become 90 days past due and
when, in management's judgement, it is determined that a reasonable doubt exists
as to collectibility. The accrual of interest is also discontinued on
residential and consumer loans when such loans become 90 days past due, except
for those loans in the process of collection which are secured by cash
collateral or by real estate with a loan to value less than 75% for first
mortgage loans and less than 60% for second mortgage loans. When a loan is
placed on non-accrual status, interest accruals cease and uncollected accrued
interest is reversed and charged against current income. Additional interest
income on such loans is recognized only when received. A loan remains on
non-accrual status until the factors which indicate doubtful collectibility no
longer exist, or the loan is liquidated, or when the loan is determined to be
uncollectible and is charged-off against the allowance for loan losses.
All loans and leases are reviewed on a regular basis and are placed on
non-accrual status when, in the opinion of management, the collection of
additional interest is deemed insufficient to warrant further accrual.
The increase in other real estate owned since December 31, 1999 was
primarily related to residential real estate development projects, acquired by
the Company through deeds in lieu of foreclosure as a result of defaulted loans
The following table sets forth information concerning the principal balances and percent of the total loan and lease
portfolio represented by delinquent loans and leases at the dates indicated:
- ------------------------------------------------------------------------------------------------------------------------------------
At of December 31, 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Delinquencies:
30 to 59 days $6,255 1.15% $7,488 1.49% $7,305 1.72%
60 to 89 days 1,480 .27 1,288 .26 3,337 .79
90 or more days 4,502 .83 2,336 .46 4,030 .95
- ------------------------------------------------------------------------------------------------------------------------------------
Total $12,237 2.25% $11,112 2.21% $14,672 3.46%
====================================================================================================================================
Concentrations of Credit Risk
The Company extends credit through loans and leases in the normal
course of business to its customers, a significant number of whom operate or
reside within southeastern Pennsylvania and surrounding business areas. The
ability of its customers to meet contractual obligations is, to some extent,
dependent upon the conditions of this regional economy.
In addition, certain groups of borrowers share characteristics which,
given current economic conditions may affect their ability to meet contractual
obligations. These customers and their credit extensions at December 31, 2000,
include: retail consumers that account for 13% of all credit extensions;
commercial mortgages and construction that account for 36%; residential
construction that account for 8%; and commercial business that accounts for 43%.
21
Summary of Loan and Lease Loss Experience
The following table details the allocation of the allowance for loan and lease losses to the various categories at the
dates indicated. The allocation is not necessarily indicative of the categories in which future losses will occur, and the entire
allowance is available to absorb losses in any category of loans or leases.
- ------------------------------------------------------------------------------------------------------------------------------------
At December 31, 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Percent of Percent of Percent of Percent of Percent of
Loans to Loans to Loans to Loans to Loans to
Amount Total Amount Total Amount Total Amount Total Amount Total
Loans Loans Loans Loans Loans
and and and and and
Leases Leases Leases Leases Leases
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial business $2,342 32.40% $1,256 23.79% $ 930 21.87% $749 20.14% $ 387 11.24%
Commercial real estate 2,332 32.93 1,384 32.28 1,134 31.69 1,120 31.94 1,620 33.42
Construction 1,068 11.08 885 11.68 652 10.51 290 7.76 257 7.65
Single family
residential mortgage 176 6.39 436 8.05 116 11.81 127 16.44 129 23.77
Consumer 15 6.86 39 6.93 39 6.78 131 7.43 154 8.80
Lease financing 1,474 10.34 1,927 17.27 1,619 17.34 1,446 16.29 1,221 15.12
- ------------------------------------------------------------------------------------------------------------------------------------
Total $7,407 100.00% $5,927 100.00% $4,490 100.00% $3,863 100.00% $3,768 100.00%
====================================================================================================================================
The following table details the Company's allowance for loan and lease losses for the periods indicated:
- ------------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31, 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Average loans and leases outstanding $541,178 $454,479 $373,545 $306,052 $246,076
- ------------------------------------------------------------------------------------------------------------------------------------
Balance beginning of period $5,927 $4,490 $3,863 $3,768 $2,310
Charge-offs:
Commercial business 1,717 -- 2 291 7
Commercial real estate -- -- -- 394 --
Single family residential mortgage 52 79 -- 3 25
Consumer 10 2 72 100 80
Lease financing 1,839 2,473 681 879 309
- ------------------------------------------------------------------------------------------------------------------------------------
Total charge-offs 3,618 2,554 755 1,667 421
- ------------------------------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial business 121 18 128 20 26
Commercial real estate 7 -- 5 -- 30
Construction -- -- 2 -- --
Single family residential mortgage 2 -- 1 -- 2
Consumer 6 16 12 19 19
Lease financing 546 409 275 214 171
- ------------------------------------------------------------------------------------------------------------------------------------
Total recoveries 682 443 423 253 248
- ------------------------------------------------------------------------------------------------------------------------------------
Net charge-offs 2,936 2,111 332 1,414 173
Provision for loan and lease losses 4,416 3,548 959 1,509 781
Allowances assumed through acquisitions (1) -- -- -- -- 850
- ------------------------------------------------------------------------------------------------------------------------------------
Total additions 4,416 3,548 959 1,509 1,631
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of period $7,407 $5,927 $4,490 $3,863 $3,768
====================================================================================================================================
Ratio of net charge-offs during the period to
average loans and leases outstanding during the period .54% .46% .09% .46% .07%
====================================================================================================================================
Ratio of allowance for loan and lease losses to
non-performing loans and leases at end of period 183.61% 103.96% 121.91% 177.28% 223.09%
====================================================================================================================================
Ratio of allowance for loan and lease losses to
under-performing loans and leases at end of period(2) 86.77% 73.75% 58.21% 78.84% 65.35%
====================================================================================================================================
(1) Allowance assumed through acquisitions represents The Equipment Leasing Company in 1996.
(2) Includes loans 90 or more days delinquent and still accruing.
An allowance for loan and lease losses is maintained at a level that
management considers adequate to provide for potential losses based upon an
evaluation of known and inherent risks in the portfolio. Management's periodic
evaluation of the adequacy of the allowance is based upon examination of the
portfolio, past loss experience, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying collateral,
current economic conditions, the results of the most recent regulatory
examinations, and other relevant factors. While management uses the best
information available to make such evaluations, future adjustments to the
allowance may be necessary if economic conditions differ substantially from the
assumptions used in making such evaluations.
22
Deposits
Certificates of deposit in amounts of $100,000 or more were $125.5
million, $116.9 million and $56.9 million at December 31, 2000, 1999 and 1998,
including brokered certificates of deposits of $30.0 million, $25.0 million and
$20.0 million, respectively.
The following table presents the remaining maturity of certificates of deposits of $100,000 or more at December 31, 2000:
--------------------------------------------------------------------------------------------------------------------------
Remaining Maturity > 3 months > 6 months > 12 months
At December 31, 2000 3 months or less through 6 months through 12 months
--------------------------------------------------------------------------------------------------------------------------
Certificates of Deposit $100,000 or more $73,385 $33,026 $14,199 $4,893
==========================================================================================================================
Short-Term Borrowings
The following table presents certain information regarding short-term securities sold under agreement to repurchase:
- --------------------------------------------------------------------------------------------------------------------------
For the years ended December 31, 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
Balance outstanding at end of period $53,700 $47,145 $40,150
Weighted average interest rate at end of period 6.34% 5.51% 5.63%
Average balance outstanding $66,259 $28,162 $39,461
Weighted average interest rate during the period 6.06% 5.72% 5.70%
Maximum amount outstanding at any month-end during the period $77,710 $47,145 $60,003
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
Asset Liability Management
The major objectives of the Company's asset and liability management
are to manage exposure to changes in the interest rate environment, to ensure
adequate liquidity and funding, to preserve and build capital, and to maximize
net interest income opportunities. The Company manages these objectives through
its Asset Liability and Investment Committee. The Committee meets monthly to
develop strategies that affect the future level of net interest income,
liquidity and capital. The Committee utilizes cash flow forecasts, considers
current economic conditions and the direction of interest rates, and manages the
Bank's risk to such changes.
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An institution is
considered to be liability sensitive, or as having a negative gap, when the
amount of its interest-bearing liabilities maturing or repricing within a given
time period exceeds the amount of its interest-earning assets also maturing or
repricing within that time period. Conversely, an institution is considered to
be asset sensitive, or as having a positive gap, when the amount of its
interest-bearing liabilities maturing or repricing is less than the amount of
its interest-earning assets also maturing or repricing during the same period.
Generally, in a falling interest rate environment, a negative gap should result
in an increase in net interest income, and in a rising