-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QZkHhyWIc0GgdDD2huBERyxODKBtR0adaLrXZFu3c7KL/itAKC3W5dQ9iQdrD0kc cPiRfABiHYcTnK/FhUZ7sA== 0000950115-99-000417.txt : 19990330 0000950115-99-000417.hdr.sgml : 19990330 ACCESSION NUMBER: 0000950115-99-000417 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROGRESS FINANCIAL CORP CENTRAL INDEX KEY: 0000790183 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 232413363 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-72543 FILM NUMBER: 99575130 BUSINESS ADDRESS: STREET 1: PO BOX 3036 CITY: BLUE BELL STATE: PA ZIP: 19422-0764 BUSINESS PHONE: 6108258800 MAIL ADDRESS: STREET 1: 4 SENTRY PARKWAY STREET 2: SUITE 200 CITY: BLUE BELL STATE: PA ZIP: 19422-0764 10-K405 1 ANNUAL REPORT 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, 1998 Commission File Number: 0-14815 PROGRESS FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) Delaware 23-2413363 - -------------------------------- ----------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 4 Sentry Parkway - Suite 200 P. O. Box 3036 Blue Bell, Pennsylvania 19422-0764 - -------------------------------- ----------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, (610) 825-8800 including area code: -------------- Securities registered pursuant to Non applicable Section 12(b) of the Act: -------------- Securities registered pursuant to Common Stock, $1.00 par value Section 12(g) of the Act: ------------------------------ (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. |X| The aggregate market value of the voting stock, held by non-affiliates of the Registrant as a group, was $65,802,717 as of March 5, 1999, based upon the closing price of $14.6875 per share of the Registrant's common stock on March 5, 1999 as reported by the Nasdaq Stock Market. As of March 5, 1999, there were 5,270,728 issued and outstanding shares of the Registrant's Common Stock. Documents Incorporated By Reference: - ----------------------------------- (1) Portions of the Annual Report to Stockholders for the year ended December 31, 1998 are incorporated into Part II, Items 5 through 8 of this Form 10-K. (2) Portions of the definitive proxy statement for the 1999 Annual Meeting of Stockholders are incorporated into Part III, Items 10 through 13 of this Form 10-K. 1 PROGRESS FINANCIAL CORPORATION Table of Contents PART I Page ---- Item 1. Business............................................................3 Item 2. Properties.........................................................19 Item 3. Legal Proceedings..................................................19 Item 4. Submission of Matters to a Vote of Security Holders................19 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters............................................20 Item 6. Selected Consolidated Financial Data...............................20 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..........................................20 Item 7A. Quantitative and Qualitative Disclosure about Market Risk..........20 Item 8. Financial Statements and Supplementary Data........................20 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...........................................20 PART III Item 10. Directors and Executive Officers of the Registrant.................20 Item 11. Executive Compensation.............................................20 Item 12. Security Ownership of Certain Beneficial Owners and Management..........................................20 Item 13. Certain Relationships and Related Transactions.....................20 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................................21 Signatures.........................................................22 2 PART I Item 1. Business General Progress Financial Corporation (the "Company") was incorporated under the laws of the State of Delaware in February 1986 by authorization of the Board of Directors of Progress Bank (the "Bank") for the purpose of becoming a unitary thrift holding company owning all of the outstanding stock of the Bank. On July 18, 1986, pursuant to a plan of reorganization approved by the Bank's stockholders, all of the outstanding shares of capital stock of the Bank were converted into shares of capital stock of the Company on a share-for-share basis so that the stockholders of the Bank became the stockholders of the Company, and the Company became the sole stockholder of the Bank. The Company is authorized as a Delaware corporation to engage in any activity permitted by the Delaware General Corporation Law. The holding company structure permits the Bank, through the Company, to expand the size and scope of the financial services offered beyond those that the Bank is permitted to offer. The Company is a Delaware corporation headquartered in Blue Bell, Pennsylvania. The Company is a unitary thrift holding company and the sole stockholder of the Bank, a federally-chartered savings bank, which has been engaged in the thrift business since 1878. The Bank conducts its business through eight banking offices located in Montgomery County, one banking office in Delaware County, one banking office in Chester County and one banking office in the Andorra section of Philadelphia, in southeastern Pennsylvania. The Company's current business strategy is to operate as a profitable, diversified financial institution providing a full range of banking services with an emphasis on commercial real estate and commercial business loans to small- and medium-sized businesses, as well as 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: equipment leasing; insurance and financial planning; commercial mortgage banking; asset management, managing a fund which provides subordinated debt financing primarily to technology companies in the Mid-Atlantic region; and communications and telemarketing, which provide a steady source of fee income. As a result of increased acquisitions of small- and medium-sized financial institutions by large bank holding companies in southeastern Pennsylvania, the Company believes that there is a significant market opportunity for the Bank to provide a full range of commercial banking services to small- and middle-market commercial customers seeking personalized service that is generally unavailable to such customers at larger regional and national institutions. 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 real estate and existing multi-family residential and commercial real estate as well as to originate construction loans (which included land acquisition and development loans). Prior to 1995, such lending activities comprised, in the aggregate, at least 80% of the Company's total loan originations. Beginning in 1995, the Company started to change its focus and to modify its operations to become more like a commercial bank. The Company's emphasis shifted to commercial business, commercial real estate and 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's shift in focus to providing a full range of commercial banking services also coincided with the recent acquisitions of small- to medium-sized banking institutions by larger bank holding companies and the consolidation in the banking industry which has limited the number of lenders available to small commercial borrowers. Since 1995, the Company has not emphasized residential lending and has only originated a limited amount of single-family residential mortgage loans. 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. 3 Commercial Business Lending. The Bank's commercial banking division 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 increased acquisitions of small- and medium-sized financial institutions by large bank holding companies in southern Pennsylvania, the Company believes that there is a large amount of small- and middle-market commercial customers seeking the full range of commercial banking services that the Bank offers combined with personalized service that is generally unavailable to such customers at larger regional and national institutions. Due to this consolidation, the Company believes it has an opportunity to expand its commercial lending relationships and thereby continue to grow the Bank's interest-earning assets, as well as increase its commercial deposits. In addition, this consolidation has resulted in the availability of experienced commercial lenders who do not remain with an institution after it is acquired. The Company in the past has hired, and will look to hire in the future, high quality experienced commercial lending officers who become available as a result of such industry consolidation. The commercial banking division provides a full range of banking services targeted to businesses with annual revenues of $1 million to $25 million located primarily in Bucks, Chester, Montgomery, Philadelphia and Delaware counties of Pennsylvania. The Company's commercial business loans consist primarily of loans secured by various equipment, machinery and other corporate assets, including accounts receivable. Commercial business loans are also made to provide working capital to businesses in the form of lines of credit which may be secured by inventory or other assets or are unsecured, as well as for various other miscellaneous purposes. The Bank has established a specialized lending division which provides customized financial services to companies in the technology, healthcare and insurance industries. The specialized lending division primarily focuses on lending to technology-based companies in the greater Philadelphia geographic area from Princeton, New Jersey to Wilmington, Delaware and west to Harrisburg, Pennsylvania. The division seeks relationships with emerging technology-based companies which have already received initial venture capital and have annual revenues of at least $1.0 million. In addition to providing financing, the Company often obtains a small equity position in the borrower in the form of warrants to purchase common stock of the borrower. The Bank has originated approximately $37.5 million of loans through the Specialized Lending Division during 1998. These included loans to approximately 14 companies engaged in the software, electronics and healthcare services industries. Generally, such loans are originated with a balance of between $100,000 and $4.3 million. As of December 31, 1998, the Bank had 107 loans outstanding originated through the Specialized Loan Division with an aggregate outstanding balance of $35.3 million. In December 1997, the Bank and the Eastern Technology Council of Greater Philadelphia, a non-profit technology-oriented trade group, entered into a three-year agreement providing for the Bank to serve as the Council's preferred provider of financial services. Through this "TechBanc" alliance, the Bank now has access to over 600 member organizations of the council to provide lending and banking services. Commercial Real Estate Activities. The Company originates commercial real estate loans through the Bank and conducts commercial mortgage banking activities through Progress Realty Advisors, Inc. ("PRA"), a subsidiary of the Company formed in September of 1993. In evaluating whether a lending opportunity is originated for the Bank's portfolio or placed with third parties through PRA, the Company considers the following four factors: loan size, recourse provisions, geographic location and business banking relationships. 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. A significant portion of such loans are secured by owner-occupied properties and relate to borrowers which have an existing banking relationship with the Bank. At December 31, 1998, the Bank's commercial real estate loan portfolio consisted of approximately 248 loans with an average principal balance of approximately $542,000 and the Bank's largest commercial real estate loan had an outstanding balance of $6.0 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, 1998, 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 4 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. Commercial Mortgage Banking. The Company conducts commercial mortgage banking and brokerage services through PRA and its divisions. 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, the location of the borrower and recourse provisions. 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 brokerage 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, 1998, the Company's construction loan portfolio consisted of approximately 46 loans with an average principal balance of approximately $968,000 and the Company's largest construction loan had an outstanding balance of $3.1 million. 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, 1998, 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 80% or less of the appraised value of the property upon completion (75% in the case of land loans). 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. 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. Equipment Leasing. As part of the strategy to be a full-service commercial lender, the Company acquired an equipment leasing company in 1996 in order to provide diversified equipment leasing services to small- and middle-market business companies. In January and November, 1998, the Company further expanded its leasing capacity through the acquisition of two additional leasing companies. 5 Equipment lease financing is provided through the Bank's subsidiary, Progress Leasing Company ("PLC"), formerly The Equipment Leasing Company ("ELC"), also doing business as Quaker State Leasing Company ("QSL"). PLC has two divisions, one located in Blue Bell, Pennsylvania and another in Baltimore, Maryland. Through this network, 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 many of the Company's leases the Company retains the residual value of the leased property upon expiration of the lease. 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 this area to date. 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. 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 80% 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 80% 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. Other Activities. Progress Capital, Inc. ("PCI"), a subsidiary of the Company was formed in 1996 and is the corporate general partner of the Ben Franklin/Progress Capital Fund, L.P., a $9.1 million fund managed by Progress Capital Management, Inc. ("PCM"), also a subsidiary of the Company, which commenced operations in December 1997 and provides subordinated debt financing to early-stage Mid-Atlantic based technology companies with proven, innovative products and an existing revenue stream. In addition, the fund generally receives warrants to purchase equity of the borrowers in connection with such lending. The Company earns a fee for managing the fund through its subsidiary PCM as well as maintaining an equity interest. 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. Procall Teleservices, Inc. ("PTI"), a subsidiary of the Company, is an interactive communications and marketing firm, which provides a full range of business-to-business teleservices, including customer service, market research and telesales. PTI, which was formed and began operations in the second quarter of 1997, provides marketing support to a variety of businesses, from start up companies to Fortune 500 companies as well as the subsidiaries of the Company. PTI also manages the call center for the Bank. In February 1998, the Company formed Progress Development Corp ("PDC"), to invest in a joint venture partnership, Progress Development LP, which acquired an interest in NewSeasons Assisted Living Communities ("NewSeasons"). NewSeasons owns, acquires, develops and operates assisted living residences for the elderly. NewSeasons had ten 6 projects at December 31, 1998 and has plans for a total of 21 projects within the next three years. In addition to owning an equity interest in NewSeasons, Progress Development LP will provide fee based development, construction management and financial services to NewSeasons. In January 1999, the Company's newest 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. Recent Development In February 1999, VerticalNet, an internet company, went public at an initial offering price of $16 per share of common stock. The Company holds warrants to purchase 49,962 shares of common stock of VerticalNet, with a weighted average exercise price of $5.58, issued in connection with a loan from the Specialized Lending Division. The Company is prohibited from selling or otherwise disposing of the warrants or any shares of common stock received from the exercise of such warrants for a period of 180 days from February 11, 1999. The closing price of a share of VerticalNet common stock between February 11, 1999 and March 25, 1999 ranged between $35 and $108.50. VerticalNet common stock is traded on the Nasdaq Stock Market under the symbol of "VERT." 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. Four of the Company's non-banking subsidiaries (PRA, PTI, PCM and PDC) are subject to the laws of the Commonwealth of Pennsylvania. PCI and PFR are Delaware corporations. The Bank 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. A one-time assessment on thrift institutions sufficient to recapitalize the SAIF was enacted in September 1996. On September 30, 1996, the Bank paid a special one-time premium of $1.8 million to capitalize SAIF. Deposit insurance premiums in 1998, were 6.22 cents per $100 of deposits, compared to an average 7.89 cents per $100 of deposits in 1997. Deposit insurance is payable on a quarterly basis. 7 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. The Bank complied with this test for 1998. At December 31, 1998, approximately 81.39% of the Bank's assets were invested in qualified thrift investments, which was in excess of the percentage required to qualify under the QTL test. 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, 1998, the Bank's advances from the FHLB amounted to $88.0 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, 1998, the Bank had $4.9 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 stockholders of the Company and the Bank. At December 31, 1998, the Bank was in compliance with this regulation. Employees As of December 31, 1998, the Company, PCI, PCM and PFR had no employees. The Bank and its leasing companies had 178 full-time and 24 part-time employees, while PRA had 24 full-time employees. PTI had 8 full-time and 2 part-time employees. PTI also utilizes personnel obtained through an employment services agency. PDC had 3 full-time employees. 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. The information required herein is incorporated by reference from pages 9 to 17 and page 35 of the Company's Annual Report to Stockholders. Additional disclosures required in Guide 3 and not incorporated by reference are included below. Tabular information is provided in thousands of dollars except for share and per share data. 8 Distribution of Average Assets, Liabilities and Stockholders' Equity The following table sets forth, for the periods indicated, information regarding (i) the total dollar amount of interest income on average interest-earning assets and the resultant average yield; (ii) the total dollar amount of interest expense on average interest-bearing liabilities and the resultant average cost; (iii) net interest income; (iv) interest rate spread; and (v) net interest margin. Information is based on average daily balances during the indicated periods. For the purposes of this table, non-accrual loans have been included in the appropriate average balance category.
For the years ended December 31, 1998 1997 ---- ---- Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate Interest-earning assets: Interest-bearing deposits $ 3,990 $ 158 3.96% $ 3,082 $ 178 5.78% Investment securities(1) 18,030 1,017 5.64 7,797 447 5.73 Mortgage-backed securities (1) 134,528 8,686 6.46 88,937 6,065 6.82 Single family residential loans (2) 54,890 4,193 7.64 61,084 4,875 7.98 Commercial real estate loans (2) 123,113 10,868 8.83 95,353 8,774 9.20 Construction loans 31,611 3,432 10.86 27,371 3,038 11.10 Commercial business loans 77,268 7,487 9.69 49,515 4,833 9.76 Lease financing 60,446 7,298 12.07 47,933 6,198 12.93 Consumer loans 26,217 2,190 8.35 24,796 2,089 8.42 -------- -------- ----- -------- ------- ----- Total interest-earning assets 530,093 45,329 8.55 405,868 36,497 8.99 Non-interest-earning assets (5) 33,015 29,542 -------- -------- Total assets $563,108 $435,410 ======== ======== Interest-bearing liabilities: Interest-bearing deposits: NOW and Super NOW $ 51,515 1,384 2.69 $ 31,688 679 2.14 Money market accounts 33,722 999 2.96 37,199 1,181 3.17 Passbook and statement savings 31,314 725 2.32 29,698 810 2.73 Time deposits 206,158 11,358 5.51 177,860 9,687 5.45 -------- -------- ----- -------- ------- ----- Total interest-bearing deposits 322,709 14,466 4.48 276,445 12,357 4.47 Federal Home Loan Bank borrowings 69,069 3,996 5.79 33,332 2,108 6.32 Other borrowings 67,301 3,988 5.93 47,683 3,429 7.19 -------- -------- ----- -------- ------- ----- Total interest-bearing liabilities 459,079 22,450 4.89 357,460 17,894 5.01 -------- ----- ------- ----- Non-interest-bearing liabilities (5) 52,842 46,415 -------- -------- Total liabilities 511,921 403,875 Capital securities 15,000 8,750 Stockholders' equity 36,187 22,785 -------- -------- Total liabilities, capital securities and stockholders' equity $563,108 $435,410 ======== ======== Net interest income $ 22,879 $18,603 ======== ======= Interest rate spread (3) 3.66% 3.98% ===== ===== Net interest margin (4) 4.32% 4.58% ===== ===== Average interest-earning assets to average 115.47% 113.54% interest-bearing liabilities ====== ====== (1) Includes investment and mortgage-backed securities classified as available for sale. Yield information does not give effect to changes in fair values that are reflected as a component of stockholders' equity. (2) Includes loans held for sale. (3) Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. (4) Net interest margin represents net interest income divided by average interest-earning assets. (5) For the years ended December 31, 1998 1997 --------------------------------------------------------------- Cash $10,093 $ 8,573 Allowance for possible loan and lease losses (4,339) (3,887) Other assets 27,261 24,856 ------- ------- Total non-interest earning assets $33,015 $29,542 ======= ======= Non-interest bearing liabilities: Non-interest bearing deposits $40,928 $35,292 Other liabilities 11,914 11,123 ------- ------- Total non-interest bearing liabilities $52,842 $46,415 ======= =======
9 Distribution of Average Assets, Liabilities and Stockholders' Equity The following table sets forth, for the periods indicated, information regarding (i) the total dollar amount of interest income on average interest-earning assets and the resultant average yield; (ii) the total dollar amount of interest expense on average interest-bearing liabilities and the resultant average cost; (iii) net interest income; (iv) interest rate spread; and (v) net interest margin. Information is based on average daily balances during the indicated periods. For the purposes of this table, non-accrual loans have been included in the appropriate average balance category.
For the years ended December 31, 1996 1995 ---- ---- Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate Interest-earning assets: Interest-bearing deposits $ 2,319 $ 172 7.42% $ 2,555 $ 179 7.01% Investment securities (1) 6,645 414 6.23 16,809 1,056 6.28 Mortgage-backed securities (1) 96,959 6,443 6.65 100,377 6,598 6.57 Single family residential loans (2) 77,360 6,035 7.80 95,355 7,022 7.36 Commercial real estate loans (2) 84,101 7,991 9.50 75,241 7,515 9.99 Construction loans 18,106 2,050 11.32 8,383 952 11.36 Commercial business loans 22,443 2,213 9.86 13,651 1,426 10.45 Lease financing 21,342 2,838 13.30 3,741 483 12.91 Consumer loans 22,724 1,958 8.62 20,895 1,821 8.72 -------- ------- ------ -------- ------- ------ Total interest-earning assets 351,999 30,114 8.56 337,007 27,052 8.03 ------- ------ ------- ------ Non-interest-earning assets (5) 22,935 18,350 -------- -------- Total assets $374,934 $355,357 ======== ======== Interest-bearing liabilities: Interest-bearing deposits: NOW and Super NOW $ 27,977 594 2.12 $26,661 716 2.69 Money market accounts 33,781 1,023 3.03 33,577 1,042 3.10 Passbook and statement savings 28,258 806 2.85 27,290 783 2.87 Time deposits 178,677 9,597 5.37 177,972 9,712 5.46 -------- ------- ------ -------- ------- ------ Total interest-bearing deposits 268,693 12,020 4.47 265,500 12,253 4.62 Federal Home Loan Bank borrowings 27,901 1,746 6.26 44,177 2,812 6.37 Other borrowings 26,031 2,054 7.89 6,057 535 8.83 -------- ------- ------ -------- ------- ------ Total interest-bearing liabilities 322,625 15,820 4.90 315,734 15,600 4.94 ------- ------ ------- ------ Non-interest-bearing liabilities (5) 32,654 25,138 -------- ------ Total liabilities 355,279 340,872 Capital securities -- -- Stockholders' equity 19,655 14,485 -------- ------ Total liabilities, capital securities and stockholders' equity $374,934 $355,357 ======== ======== Net interest income $14,294 $11,452 ======= ======= Interest rate spread (3) 3.66% 3.09% ====== ====== Net interest margin (4) 4.06% 3.40% ====== ====== Average interest-earning assets to average interest-bearing liabilities 109.10% 106.74% ====== ====== (1) Includes investment and mortgage-backed securities classified as available for sale. Yield information does not give effect to changes in fair values that are reflected as a component of stockholders' equity. (2) Includes loans held for sale. (3) Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. (4) Net interest margin represents net interest income divided by average interest-earning assets. (5) For the years ended December 31, 1996 1995 ------------------------------------------------------------------------- Non-interest earning assets: Cash $6,064 $4,691 Allowance for possible loan and lease losses (5,287) (1,667) Other assets 22,158 15,326 ------- ------- Total non-interest earning assets $22,935 $18,350 ======= ======= Non-interest bearing liabilities: Non-interest bearing deposits $25,521 $20,210 Other liabilities 7,133 4,928 ------- ------- Total non-interest bearing liabilities $32,654 $25,138 ======= =======
10 Distribution of Average Assets, Liabilities and Stockholders' Equity The following table sets forth, for the periods indicated, information regarding (i) the total dollar amount of interest income on average interest-earning assets and the resultant average yield; (ii) the total dollar amount of interest expense on average interest-bearing liabilities and the resultant average cost; (iii) net interest income; (iv) interest rate spread; and (v) net interest margin. Information is based on average daily balances during the indicated periods. For the purposes of this table, non-accrual loans have been included in the appropriate average balance category.
For the year ended December 31, 1994 ---- Average Yield/ Balance Interest Rate Interest-earning assets: Interest-bearing deposits $ 1,257 $ 69 5.49% Investment securities(1) 15,682 960 6.12 Mortgage-backed securities (1) 113,819 6,617 5.81 Single family residential loans (2) 84,508 6,201 7.34 Commercial real estate loans (2) 72,277 6,042 8.36 Construction loans 4,554 449 9.86 Commercial business loans 10,658 1,036 9.72 Lease financing -- -- -- Consumer loans 17,055 1,456 8.54 -------- -------- ------ Total interest-earning assets 319,810 22,830 7.14 -------- ------ Non-interest-earning assets (5) 20,304 -------- Total assets $340,114 ======== Interest-bearing liabilities: Interest-bearing deposits: NOW and Super NOW $ 21,932 532 2.43 Money market accounts 41,428 1,138 2.75 Passbook and statement savings 27,808 820 2.95 Time deposits 168,250 7,678 4.56 -------- -------- ------ 259,418 10,168 Total interest-bearing deposits 3.92 Federal Home Loan Bank borrowings 44,007 2,202 5.00 Other borrowings 1,508 135 8.95 -------- -------- ------ Total interest-bearing liabilities 304,933 12,505 4.10 -------- -------- ------ Non-interest-bearing liabilities (5) 21,528 -------- Total liabilities 326,461 Capital securities -- Stockholders' equity 13,653 -------- Total liabilities, capital securities and stockholders' equity $340,114 ======== Net interest income $10,325 ======= Interest rate spread (3) 3.04% ====== Net interest margin (4) 3.23% ====== Average interest-earning assets to average interest-bearing liabilities 104.88% ====== (1) Includes investment and mortgage-backed securities classified as available for sale. Yield information does not give effect to changes in fair values that are reflected as a component of stockholders' equity. (2) Includes loans held for sale. (3) Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. (4) Net interest margin represents net interest income divided by average interest-earning assets. (5) For the year ended December 31, 1994 Non-interest earning assets: Cash $5,945 Allowance for possible loan and lease losses (1,808) Other assets 16,167 ------- Total non-interest earning assets $20,304 ======= Non-interest bearing liabilities: Non-interest bearing deposits $16,713 Other liabilities 4,815 ------- Total non-interest bearing liabilities $21,528 =======
11 Investment Securities Investment securities are comprised of the following at December 31, 1998, 1997, and 1996:
1998 ---- Held to Maturity Available for Sale Amortized Estimated Amortized Estimated Cost Fair Value Cost Fair Value --------- ---------- --------- ---------- FHLB stock $ 4,923 $ 4,923 $ -- $ -- FHLB investment securities 4,975 5,089 -- -- U.S. agency obligations 2,503 2,535 2,000 2,001 Municipal bonds -- -- 9,599 9,591 Equity investments -- -- 6,609 6,317 ------- ------- ------- ------- Total investment securities $12,401 $12,547 $18,208 $17,909 ------- ------- ------- ------- 1997 ---- Held to Maturity Available for Sale Amortized Estimated Amortized Estimated Cost Fair Value Cost Fair Value --------- ---------- --------- ---------- FHLB stock $ 1,728 $ 1,728 $ -- $ -- FHLB investment securities 2,323 2,342 -- -- U.S. agency obligations -- -- 3,000 3,001 Equity investments -- -- 2,924 3,394 ------- ------- ------- ------- Total investment securities $ 4,051 $ 4,070 $ 5,924 $ 6,395 ------- ------- ------- ------- 1996 ---- Held to Maturity Available for Sale Amortized Estimated Amortized Estimated Cost Fair Value Cost Fair Value --------- ---------- --------- ---------- FHLB stock $ 1,937 $ 1,937 $ -- $ -- U.S. agency obligations -- -- 3,468 3,418 Equity investments -- -- 30 44 ------- ------- ------- ------- Total investment securities $ 1,937 $ 1,937 $ 3,498 $ 3,462 ------- ------- ------- -------
The investment securities which are classified as held to maturity and available for sale have a weighted average coupon rate of 7.04% and 4.19% respectively, at December 31, 1998. 12 Mortgage-Backed Securities The following table details the Company's mortgage-backed securities by classification at December 31, 1998, 1997, and 1996.
1998 Held to Maturity Available for Sale Amortized Estimated Amortized Estimated Cost Fair Value Cost Fair Value ------- ------- ------- ------- GNMA $ -- $ -- $121,178 $120,893 FNMA -- -- 13,330 13,307 FHLMC -- -- 10,714 10,564 Non-agency pass through certificate -- -- 1,688 1,695 ------- ------- -------- -------- Total investment securities $ -- $ -- $146,910 $146,459 ======= ======= ======== ======== 1997 Held to Maturity Available for Sale Amortized Estimated Amortized Estimated Cost Fair Value Cost Fair Value ------- ------- ------- ------- GNMA $19,509 $19,247 $39,553 $39,772 FNMA 15,900 15,872 914 904 FHLMC 14,012 13,975 1,336 1,315 Non-agency pass through certificate -- -- 2,443 2,527 ------- ------- ------- ------- Total investment securities $49,421 $49,094 $44,246 $44,518 ------- ------- ------- ------- 1996 Held to Maturity Available for Sale Amortized Estimated Amortized Estimated Cost Fair Value Cost Fair Value ------- ------- ------- ------- GNMA $22,759 $22,217 $21,770 $21,839 FNMA 7,321 7,219 7,335 7,188 FHLMC 17,254 17,099 7,229 7,172 Collateralized mortgage obligations -- -- 3,000 2,940 Non-agency pass through certificate -- -- 3,605 3,599 ------- ------- ------- ------- Total investment securities $47,334 $46,535 $42,939 $42,738 ------- ------- ------- -------
13 Mortgage-Backed Securities (continued) The following table sets forth the activity in the Company's mortgage-backed securities portfolio during the periods indicated:
For the years ended December 31, 1998 1997 1996 -------- -------- --------- Mortgage-backed securities at beginning of period $ 93,939 $ 90,072 $ 89,675 Purchases (1) 147,537 54,672 52,800 Conversion of existing loans to mortgage-backed securities -- -- 9,982 Sales of loans converted to securities -- -- (9,982) Sales from portfolio (55,882) (33,428) (34,924) Repayments (37,228) (17,176) (17,082) Premium amortization (1,146) (675) (598) Other (72) -- -- Change in unrealized loss on securities available for sale (689) 474 201 -------- -------- --------- Mortgage-backed securities at end of period (2) $146,459 $ 93,939 $ 90,072 -------- -------- --------- Weighted average coupon at end of period 7.40% 7.97% 7.88% ======== ======== ========= (1) Includes applicable premiums and discounts. (2) Includes $146.5 million, $44.5 million and $42.7 million of mortgage-backed securities classified as available for sale at estimated fair value at December 31, 1998, 1997 and 1996, respectively.
Loan and Lease Portfolio The principal categories in the Company's loan and lease portfolio are residential real estate loans, which are secured by single-family (one-to-four units) residences; 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; commercial business loans, lease financing, consumer loans and credit card receivables. 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, including loans held for sale, totaled $419.5 million at December 31, 1998 or 64.8% of its total assets, an increase of $79.2 million or 23.3% from the $340.3 million outstanding at December 31, 1997. The following table depicts the composition of the Company's portfolio at December 31 for the years indicated net of unearned income.
1998 1997 1996 1995 1994 Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent -------- ------- -------- ------- -------- ------- -------- ------- ------- ------- Real estate loans: Single family residential (1) $ 50,086 11.81% $ 56,565 16.44% $ 64,259 23.77% $ 91,091 37.72% $ 99,917 48.12% Commercial real estate(2) 134,380 31.69 109,938 31.94 90,350 33.42 81,535 33.77 71,273 34.33 Construction 44,546 10.51 26,695 7.76 20,692 7.65 14,230 5.89 5,379 2.59 -------- ------ -------- ------ -------- ------ -------- ------ ------- ------ Total real estate loans 229,012 54.01 193,198 56.14 175,301 64.84 186,856 77.38 176,569 85.04 -------- ------ -------- ------ -------- ------ -------- ------ ------- ------ Commercial business 92,737 21.87 69,312 20.14 30,384 11.24 17,244 7.14 12,005 5.78 -------- ------ -------- ------ -------- ------ -------- ------ ------- ------ Lease financing 73,499 17.34 56,072 16.29 40,867 15.12 14,965 6.20 -- -- -------- ------ -------- ------ -------- ------ -------- ------ ------- ------ Consumer loans Consumer 27,807 6.56 24,639 7.16 22,898 8.47 21,666 8.97 19,027 9.17 Credit card receivables 931 .22 918 .27 885 .33 757 .31 24 .01 -------- ------ -------- ------ -------- ------ -------- ------ ------- ------ Total consumer loans 28,738 6.78 25,557 7.43 23,783 8.80 22,423 9.28 19,051 9.18 -------- ------ -------- ------ -------- ------ -------- ------ ------- ------ Total loans and leases 423,986 100.00% 344,139 100.00% 270,335 100.00% 241,488 100.00% 207,625 100.00% ====== ====== ====== ====== ====== Allowance for possible loan and lease losses (4,490) (3,863) (3,768) (2,310) (1,503) -------- -------- -------- -------- -------- Net loans and leases $419,496 $340,276 $266,567 $239,178 $206,122 ======== ======== ======== ======== ======== (1) Includes $373,000, $599,000, $3.2 million, and $351,000 of loans classified as held for sale at December 31, 1997, 1996, 1995 and 1994, respectively. (2) Includes $25.3 million of loans classified as held for sale at December 31, 1998.
14 Loans and Lease Portfolio (continued) The following table sets forth the scheduled contractual amortization of loans and leases in the Company's total loan and lease portfolio (including loans classified as held for sale) at December 31, 1998. Loans and leases having no stated schedule of repayments and no stated maturity are reported as due in one year or less . The following table also sets forth the dollar amount of loans and leases which are scheduled to mature after one year which have fixed or adjustable rates.
Real Estate Real Estate Lease Commercial Mortgage Construction Financing Business Consumer Total ----------- ------------ --------- ---------- -------- -------- Amounts due: One year or less $ 4,886 $23,300 $29,776 $55,892 $ 1,915 $115,769 After one year through five years 26,553 19,263 43,293 27,589 7,304 124,002 Beyond five years 153,027 1,983 430 9,256 19,519 184,215 -------- ------- ------- ------- ------- -------- Total $184,466 $44,546 $73,499 $92,737 $28,738 $423,986 ======== ======= ======= ======= ======= ======== Interest rate terms on amounts due after one year: Fixed $86,681 $ 7,499 $43,723 $22,014 $22,583 $182,500 -------- ------- ------- ------- ------- -------- Adjustable $92,899 $13,747 $ -- $14,831 $ 4,240 $125,717 -------- ------- ------- ------- ------- --------
Scheduled contractual principal repayments do not reflect the actual maturities of loans and leases. The average maturity of loans and leases is less than their average contractual terms because of prepayments and, in the case of conventional mortgage loans due and payable in the event, among other things, that the borrower sells the real property subject to the mortgage and the loan is not repaid. 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. The following table shows total loans and leases originated, purchased, sold and repaid during the periods ended December 31 for the years indicated:
1998 1997 1996 -------- -------- -------- Loan originations: Single family residential $ 2,095 $ 3,692 $ 17,018 Commercial real estate 52,236 42,155 25,503 Construction 54,516 35,300 25,711 Lease financing 33,568 40,899 19,157 Commercial business 136,699 52,390 33,024 Consumer 15,014 7,168 11,643 -------- -------- -------- Total loans and leases originated 294,128 181,604 132,056 Leases acquired through purchases (2) 13,339 -- 20,025 -------- -------- -------- Total loans and leases originated and purchased 307,467 181,604 152,081 -------- -------- -------- Sales and loan/lease principal reductions: Loans and leases sold (1) 28,021 3,347 30,787 Loan and lease principal reductions 199,267 98,731 90,059 -------- -------- -------- Total loans/leases sold and principal reductions 227,288 102,078 120,846 -------- -------- -------- Net change due to other items (332) (5,722) (2,388) -------- -------- -------- Net increase (decrease) in loan and leases, net of unearned income $ 79,847 $ 73,804 $ 28,847 ======== ======== ======== (1) For the years ended December 31, 1998 and 1997 there were no loans converted into mortgage-backed securities and subsequently sold. For the years ended December 31, 1996, $10.0 million of loans, were converted into mortgage-backed securities and subsequently sold. (2) Leases purchased from a third party in 1998 and leases acquired through the purchase of Primary Capital, Inc. in 1998 and The Equipment Leasing Company in 1996.
15 Loans and Lease Portfolio (continued) The accrual of interest on commercial and mortgage loans is generally discontinued when loans become 90 days past due and when, in management's judgement, it is determined that a reasonable doubt exists as to collectibility. The accrual of interest is also discontinued on residential and consumer loans when such loans become 90 days past due, except for those loans in the process of collection which are secured by real estate with a loan to value less than 80% where the accrual of interest ceases at 180 days. Consumer loans generally are charged-off when the loan becomes over 120 days delinquent, unless secured by real estate and meeting the above mentioned criteria. When a loan is placed on non-accrual status, interest accruals cease and uncollected accrued interest is reversed and charged against current income. Additional interest income on such loans is recognized only when received. A loan remains on non-accrual status until the factors which indicate doubtful collectibility no longer exist, or the loan is liquidated, or when the loan is determined to be uncollectible and is charged-off against the allowance for possible loan losses. The following table details the Company's underperforming assets at December 31:
1998 1997 1996 1995 1994 ------ ------ ------ ------ ------ Loans and leases accounted for on a non-accrual $3,683 $2,179 $1,689 $4,075 $4,369 basis REO, net of related reserves -- 380 2,150 728 4,534 ------ ------ ------ ------ ------ Total non-performing assets 3,683 2,559 3,839 4,803 8,903 Accruing loans 90 or more days past due 4,030 2,721 4,077 -- 182 ------ ------ ------ ------ ------ Total underperforming assets $7,713 $5,280 $7,916 $4,803 $9,085 ------ ------ ------ ------ ------ Non-performing assets as a percentage of total loans and leases and real estate owned .88% .75% 1.43% 2.00% 4.23% ------ ------ ------ ------ ------ Non-performing assets as a percentage of total assets .57% .50% 0.96% 1.33% 2.56% ------ ------ ------ ------ ------ Underperforming assets as a percentage of total loans and leases and real estate owned 1.84% 1.55% 2.95% 2.00% 4.31% ------ ------ ------ ------ ------ Underperforming assets as a percentage of total assets 1.19% 1.04% 1.99% 1.33% 2.61% ====== ====== ====== ====== ======
Gross interest income that would have been recorded during 1998, 1997, and 1996 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 $252,000, $190,000 and $251,000, respectively. The amount of interest income that was actually recorded during 1998, 1997, and 1996 with respect to such non-accrual loans and leases amounted to approximately $112,000, $148,000 and $153,000, respectively. The $3.7 million of non-accrual loans and leases at December 31, 1998 consists of $981,000 of loans secured by single-family residential property, $181,000 of loans secured by commercial property, $188,000 of commercial business loans, $209,000 of consumer loans and $2.1 million of lease financing. Delinquencies All loans and leases are reviewed on a regular basis and are placed on non-accrual status when, in the opinion of management, the collection of additional interest is deemed insufficient to warrant further accrual. 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:
As of December 31, 1998 1997 1996 ---- ---- ---- Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- Delinquencies: 30 to 59 days $ 7,305 1.76% $ 6,167 1.79% $3,291 1.22% 60 to 89 days 3,337 .81 1,934 .56 776 .28 90 or more days 4,030 .97 2,721 .79 4,077 1.51 -------- ---- ------- ---- ------ ---- Total $14,672 3.54% $10,822 3.14% $8,144 3.01% -------- ---- ------- ---- ------ ----
16 Allowance for Possible Loan and Lease Losses The following table details the allocation of the allowance for possible 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.
December 31, 1998 1997 1996 1995 1994 Percent Percent Percent Percent Percent of of of of of Loans to Loans to Loans to Loans to Loans to Total Total Total Total Total Loans Loans Loans Loans Loans and and and and and Amount Leases Amount Leases Amount Leases Amount Leases Amount Leases ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- Residential real $ 116 11.81% $ 127 16.44% $ 129 23.77% $ 148 37.72% $ 268 48.12% estate Commercial real estate 1,134 31.69 1,120 31.94 1,620 33.42 1,045 33.77 917 34.33 Real estate construction 652 10.51 290 7.76 257 7.65 286 5.89 125 2.59 Commercial business 930 21.87 749 20.14 387 11.24 166 7.14 152 5.78 Lease financing 1,619 17.34 1,446 16.29 1,221 15.12 590 6.20 -- -- Consumer 39 6.78 131 7.43 154 8.80 75 9.28 41 9.18 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total $4,490 100.00% $3,863 100.00% $3,768 100.00% $2,310 100.00% $1,503 100.00% ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
17 The following table details the Company's allowance for possible loan and lease losses for the periods indicated:
For the years ended December 31, 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- Average loans and leases outstanding $373,545 $306,052 $246,076 $217,266 $189,052 -------- -------- -------- -------- -------- Balance beginning of period $ 3,863 $ 3,768 $ 2,310 $ 1,503 $ 2,113 Charge-offs: Residential real estate -- 3 25 20 -- Commercial real estate -- 394 -- -- 1,160 Real estate construction -- -- -- 100 50 Commercial business 2 291 7 281 88 Lease financing 681 879 309 74 -- Consumer 72 100 80 26 20 -------- -------- -------- -------- -------- Total charge-offs 755 1,667 421 501 1,318 -------- -------- -------- -------- -------- Recoveries: Residential real estate 1 -- 2 -- -- Commercial real estate 5 -- 30 -- -- Real estate construction 2 -- -- 1 137 Commercial business 128 20 26 3 36 Lease financing 275 214 171 41 -- Consumer 12 19 19 15 14 -------- -------- -------- -------- -------- Total recoveries 423 253 248 60 187 -------- -------- -------- -------- -------- Net charge-offs 332 1,414 173 441 1,131 Provision for possible loan and lease losses 959 1,509 781 641 521 Allowances assumed through acquisitions (1) -- -- 850 607 -- -------- -------- -------- -------- -------- Total additions 959 1,509 1,631 1,248 521 -------- -------- -------- -------- -------- Balance at end of period $4,490 $3,863 $3,768 $2,310 $ 1,503 ======== ======== ======== ======== ======== Ratio of net chargeoffs during the period to average loans and leases outstanding during the period .09% .46% .07% .20% .60% ======== ======== ======== ======== ======== Ratio of allowance for possible loan and lease losses to non performing loans and leases at end of period 121.91% 177.28% 223.09% 56.69% 34.40% ======== ======== ======== ======== ======== Ratio of allowance for possible loan and lease losses to underperforming loans and leases at end of period (2) 58.21% 78.84% 65.35% 56.69% 33.03% ======== ======== ======== ======== ======== (1) Allowance assumed through acquisitions represents, The Equipment Leasing Company in 1996, and First Valley Leasing, Inc., a subsidiary of UJB Financial, in 1995. (2) Includes loans 90 or more days delinquent and still accruing. An allowance for possible loan and lease losses is maintained at a level that management considers adequate to provide for potential losses based upon an evaluation of known and inherent risks in the 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.
18 Deposits The following table presents the interest rate and maturity information for time deposits at December 31, 1998.
Maturity Date One year or less >1-2 Years >2-3 Years Over 3 Years Total ---------------- ---------- ------------- ------------ ----- Interest Rate 2.00 - 3.99% $ 1,262 $ 25 $ 13 $ 12 1,312 4.00 - 5.99% 139,670 24,509 8,980 5,993 179,152 6.00 - 7.99% 13,363 10,959 492 1,383 26,197 8.00 - 9.99% 27 -- -- 16 43 10.00 - 11.99% -- -- -- 17 17 --------- ------- ------ ------ -------- $ 154,322 $35,493 $9,485 $7,421 $206,721 --------- ------- ------ ------ --------
Time deposits of $100,000 or more totaled $36.9 million at December 31, 1998 which mature as follows: $20.7 million within three months; $4.3 million between three and six months; $9.1 million between six and twelve months; and $2.8 million after twelve months. The ability of the Company to attract and maintain deposits and the Company's cost of funds on these deposit accounts have been, and will continue to be, significantly affected by economic and competitive conditions. Borrowings The following table presents certain information regarding borrowings:
For the years ended December 31, 1998 1997 1996 - -------------------------------- ---- ---- ---- Average balance outstanding $136,370 $81,015 $53,932 Maximum amount outstanding at any month-end during the period $172,405 $97,983 $80,589 Weighted average interest rate during the period 5.85% 6.83% 7.05% Weight average interest rate at end of period 5.53% 6.73% 7.18%
Included in borrowings at December 31, 1998 were securities sold under agreements to repurchase of $75.2 million, FHLB borrowings of $88.0 million, subordinated debt of $3.0 million and an Employee Stock Option Plan note payable of $127,000 Borrowings increased $83.2 million from year-end 1997. 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 eleven branch offices in Bridgeport, Plymouth Meeting, East Norriton, Conshohocken, King of Prussia, Lansdale, Norristown, Jeffersonville, Paoli, and Rosemont, Pennsylvania and the Andorra community of Philadelphia, one of which is owned and ten are leased. The Bank also conducts equipment leasing business in leased facilities in Baltimore, MD, and Blue Bell, PA. The Company, through PRA, has leased locations in Blue Bell, PA, Richmond, VA, Woodbridge, NJ, Chesapeake, VA, and Wilmington, DE. 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. 19 PART III Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The information required herein is incorporated by reference from page 35 of the Company's 1998 Annual Report to Stockholders, which is included herein as Exhibit 13 (the "Company's 1998 Annual Report.") Item 6. Selected Financial Data. The information required herein is incorporated by reference from page 9 of the Company's 1998 Annual Report. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The information required herein is incorporated by reference from pages 10 to 17 of the Company's 1998 Annual Report. Item 7A. Quantitative and Qualitative Disclosure About Market Risk The information required herein is incorporated by reference from pages 14 to 16 of the Company's 1998 Annual Report. Item 8. Financial Statements and Supplementary Data The information required herein is incorporated by reference from pages 18 to 34 of the Company's 1998 Annual Report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable. Item 10. Directors and Executive Officers of the Registrant The information contained in the section titled "Election of Directors" in the Company's definitive Proxy Statement for the 1999 Annual Meeting to be held April 27, 1999 (the "Proxy Statement"), with respect to the Directors of the Company is incorporated herein by reference. Item 11. Executive Compensation The information appearing in the Caption "Executive Compensation and Transactions" in the Proxy Statement is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information appearing in the captions "Security Ownership of Certain Beneficial Owners" and "Election of Directors" (with respect to security ownership by Directors) in the Proxy Statement is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions The information appearing in the caption "Indebtedness of Management" in the Proxy Statement is incorporated herein by reference. 20 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K a. The financial statements listed on the index set forth in Item 8 of this Annual Report on Form 10-K are filed as part of this Annual Report. Financial Statement schedules are not required under the related instructions of the Securities and Exchange Commission or are inapplicable and, therefore, have been omitted. b. The following exhibits are incorporated by reference herein or are filed as part of this Annual Report. No. Exhibits --- -------- *3.1 Certificate of Incorporation (Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1987) *3.2 By-Laws (Exhibit 3.2 to the Company's Registration Statement No. 33-3685 on Form S-4, filed with the Securities and Exchange Commission (the "SEC") on March 3, 1986) 3.3 Certificate of Amendment of Certificate of Incorporation dated May 13, 1998. *4.1 Amended and Restated Declaration of Trust relating to Progress Capital Trust I, dated as of June 3, 1997, between Progress Financial Corporation and the trustees named therein. (Exhibit 4.4 to the Company's Registration Statement on Form S-4, filed with the SEC on October 22, 1997) *4.2 Indenture, dated as of June 3, 1997, between Progress Financial Corporation and The Bank of New York, as trustee, relating to Junior Subordinated Deferrable Interest Debentures due 2027 of Progress Financial Corporation. (Exhibit 4.1 to the Company's Registration Statement on Form S-4, filed with the SEC on October 22, 1997) *4.3 Series B Capital Securities Guarantee Agreement, dated as of December 11, 1997, relating to the Capital Securities of Progress Capital Trust I. (Exhibit 4.6 to the Company's Registration Statement on Form S-4, filed with the SEC on October 22, 1997) *10.1 Key Employee Stock Compensation Program (Exhibit 28 to the Company's Registration Statement on Form S-8, filed with the SEC on November 13, 1986) *10.2 Amendment dated December 15, 1987 to Key Employee Stock Compensation Program (Exhibit 4.2 to the Company's Registration Statement, No. 33-19570) 10.3 1993 Stock Incentive Plan as amended in 1997 and 1998. *10.4 1993 Directors' Stock Option Plan as amended in 1997 (Appendix B to the Company's Definitive Proxy on Form DEF 14A, filed with the SEC on April 7, 1997) *10.5 Employment Agreement between Progress Financial Corporation, Progress Bank and W. Kirk Wycoff dated March 1, 1997. (Exhibit 10.5 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997, filed with the SEC on March 31, 1998) 10.6 Change in Control and Termination Agreement between Progress Financial Corporation, Progress Bank and Michael B. High dated October 2, 1998. 10.7 Change in Control and Termination Agreement between Progress Financial Corporation, Progress Bank and H. Wayne Griest dated November 17, 1998. 10.8 Change in Control and Termination Agreement between Progress Financial Corporation, Progress Bank and Eric J. Morgan dated October 2, 1998. 21 *10.9 Restricted Stock Award Plan dated February 17, 1999 (Exhibit 4 on the Company's Registration Statement on Form S-8, File Number 333-72543 filed with the SEC on February 18, 1999) 11 Computation of Earnings per Share 13 1998 Annual Report to Stockholders 21 Subsidiaries of the Registrant 23 Consent of Independent Accountants 27 Financial Data Table No reports on Form 8-K were filed for the quarter ended December 31, 1998. * Incorporated by reference. Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto being duly authorized. Progress Financial Corporation March 23, 1999 BY: /s/ W. Kirk Wycoff - -------------- --------------------------------------- Date W. Kirk Wycoff, Chairman, President and Chief Executive Officer Pursuant to the Requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ W. Kirk Wycoff March 23, 1999 - ----------------------------------------- -------------- W. Kirk Wycoff, Chairman, President Date and Chief Executive Officer /s/ John E. F. Corson March 23, 1999 - ----------------------------------------- -------------- John E.Flynn Corson, Director Date /s/ William O. Daggett, Jr. March 23, 1999 - ----------------------------------------- -------------- William O. Daggett, Jr., Director Date /s/ H. Wayne Griest March 23, 1999 - ----------------------------------------- -------------- H. Wayne Griest, Director Date - ----------------------------------------- -------------- G. Daniel Jones, Director Date /s/ Joseph R. Klinger March 23, 1999 - ----------------------------------------- -------------- Joseph R. Klinger, Director Date /s/ Paul M. LaNoce March 23, 1999 - ----------------------------------------- -------------- Paul M. LaNoce, Director Date - ----------------------------------------- -------------- A. John May, III, Director Date 22 /s/ William L. Mueller March 23, 1999 - ----------------------------------------- -------------- William L. Mueller, Director Date /s/ Janet E. Paroo March 23, 1999 - ----------------------------------------- -------------- Janet E. Paroo, Director Date /s/ Kevin J. Silverang March 23, 1999 - ----------------------------------------- -------------- Kevin J. Silverang, Director /s/ Charles J. Tornetta March 23, 1999 - ----------------------------------------- -------------- Charles J. Tornetta, Director Date /s/ Michael B. High March 23, 1999 - ----------------------------------------- -------------- Michael B. High, Sr. Vice President Date and Chief Financial Officer
23 EX-3.3 2 CERTIFICATE OF AMENDMENT Exhibit 3.3 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION Progress Financial Corporation, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: That at a meeting of the Board of Directors of Progress Financial Corporation resolutions were duly adopted setting forth a proposed amendment to the Certificate of Incorporation of said corporation, declaring said amendment to be advisable and calling a meeting of the stockholders of said corporation for consideration thereof. The resolution setting forth the proposed amendment provided that the first sentence of paragraph (a) of Section 5 of the Certificate of Incorporation of Progress Financial Corporation shall read in its entirety as follows: (a) The total number of shares of all classes of stock which the Corporation shall have the authority to issue is 13,000,000 consisting of: ( i) 12,000,000 shares of Common Stock, $1.00 par value per share; and (ii) 1,000,000 shares of Preferred Stock, $.01 par value per share. SECOND: That thereafter, pursuant to resolution of its Board of Directors, the annual meeting of the stockholders of said corporation was duly called and held, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware at which meeting the necessary number of shares as required by statute were voted in favor of the amendment. THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, Progress Financial Corporation has caused this certificate to be signed by Frederick E. Schea, Senior Vice President and Chief Financial Officer and attested by Eric J. Morgan, its Secretary, this 13th day of May, 1998. By: /s/ Frederick E. Schea -------------------------- Frederick E. Schea Senior Vice President and Chief Financial Officer ATTEST: By: /s/ Eric J. Morgan --------------------------- Eric J. Morgan, Secretary 24 EX-10.3 3 STOCK INCENTIVE PLAN Exhibit 10.3 PROGRESS FINANCIAL CORPORATION AMENDED AND RESTATED 1993 STOCK INCENTIVE PLAN ARTICLE I ESTABLISHMENT OF THE PLAN Progress Financial Corporation (the "Company") hereby establishes this Amended and Restated 1993 Stock Incentive Plan (the "Plan") upon the terms and conditions hereinafter stated. ARTICLE II PURPOSE OF THE PLAN The purpose of this Plan is to improve the growth and profitability of the Company and its Subsidiary Companies by attracting and retaining qualified personnel, providing such Employees with a proprietary interest in the Company as an incentive to contribute to the success of the Company and its Subsidiary Companies, and rewarding those Employees for outstanding performance and the attainment of targeted goals. All Incentive Stock Options issued under this Plan are intended to comply with the requirements of Section 422 of the Code, and the regulations thereunder, and all provisions hereunder shall be read, interpreted and applied with that purpose in mind. ARTICLE III DEFINITIONS 3.01 "Award" means an Option or Stock Appreciation Right granted pursuant to the terms of this Plan. 3.02 "Board" means the Board of Directors of the Company. 3.03 "Code" means the Internal Revenue Code of 1986, as amended. 3.04 "Committee" means a committee of not less than two directors appointed by the Board pursuant to Article IV hereof, each of whom shall be a "non-employee director" as defined in Rule 16b-3(b)(3)(i) of the Exchange Act or any successor thereto. 3.05 "Common Stock" means shares of the common stock, $1.00 par value per share, of the Company. 3.06 "Director" means a member of the Board of Directors of the Company. 3.06 "Director" means a member of the Board of Directors of the Company. 3.07 "Disability" means any physical or mental impairment which qualifies an Employee for disability benefits under the applicable long-term disability plan maintained by the Company or a Subsidiary Company, or, if no such plan applies, which would qualify such Employee for disability benefits under the long-term disability plan maintained by the Company, if such Employee were covered by that plan. 3.08 "Effective Date" means the date on which this Amended and Restated Plan was adopted by the Board of Directors of the Company. 3.09 "Employee" means any person who is employed by the Company or a Subsidiary Company, including Officers, but not including Directors who are not also Officers of or otherwise employed by the Company or a Subsidiary Company. 3.10 "Exchange Act" means the Securities Exchange Act of 1934, as amended. 3.11 "Fair Market Value" shall be equal to the fair market value per share of the Company's Common Stock on the date an Award is granted. For purposes hereof, the Fair Market Value of a share of Common Stock shall be the closing sale price of a share of Common Stock on the date in question (or, if such day is not a trading day in the U.S. markets, on the nearest preceding trading day), as reported with respect to the principal market (or the composite of the markets, if more than one) in which such shares are then traded, or if no such closing prices are reported, the mean between the high bid and low asked prices that day on the principal market or national quotation system then in use, or if 25 no such quotations are available, the price furnished by a professional securities dealer making a market in such shares selected by the Committee. 3.12 "Incentive Stock Option" means any Option granted under this Plan which the Board intends (at the time it is granted) to be an incentive stock option within the meaning of Section 422 of the Code or any successor thereto. 3.13 "Non-Qualified Option" means any Option granted under this Plan which is not an Incentive Stock Option. 3.14 "Officer" means an Employee whose position in the Company or Subsidiary Company is that of a corporate officer, as determined by the Board. 3.15 "Option" means a right granted under this Plan to purchase Common Stock. 3.16 "Optionee" means an Employee or former Employee to whom an Option is granted under the Plan. 3.17 "Retirement" means a termination of employment which constitutes a "retirement" under any applicable qualified pension benefit plan maintained by the Company or a Subsidiary Company, or if no such plan is applicable, which would constitute "retirement" under any qualified pension benefit plan maintained by the Company or a Subsidiary Company, if such individual were a participant in such plan. 3.18 "Stock Appreciation Right" means a right to surrender an Option in consideration for a payment by the Company in cash and/or Common Stock, as provided in the discretion of the Committee, in accordance with Section 8.10. 3.19 "Subsidiary Companies" means those subsidiaries of the Company which meet the definition of "subsidiary corporations" set forth in Section 425(f) of the Code, at the time of granting of the Option in question. ARTICLE IV ADMINISTRATION OF THE PLAN 4.01 Duties of the Committee. The Plan shall be administered and interpreted by the Committee, as appointed from time to time by the Board pursuant to Section 4.02. The Committee shall have the authority in its absolute discretion to adopt, amend and rescind such rules, regulations and procedures as, in its opinion, may be advisable in the administration of the Plan, including, without limitation, rules, regulations and procedures which (i) deal with satisfaction of an Employee's tax withholding obligation pursuant to Section 12.02 hereof, (ii) include arrangements to facilitate the Employee's ability to borrow funds for payment of the exercise or purchase price of an Award, if applicable, from securities brokers and dealers, and (iii) include arrangements which provide for the payment of some or all of such exercise or purchase price by delivery of previously-owned shares of Common Stock or other property and/or by withholding some of the shares of Common Stock which are being acquired. The interpretation and construction by the Committee of any provisions of the Plan, any rule, regulation or procedure adopted by it pursuant thereto or of any Award shall be final and binding in the absence of action by the Board of Directors. 4.02 Appointment and Operation of the Committee. The members of the Committee shall be appointed by, and will serve at the pleasure of, the Board. The Board from time to time may remove members from, or add members to, the Committee, provided the Committee shall continue to consist of two or more members of the Board, each of whom shall be a non-employee director as defined in Rule 16b-3(b)(3)(i) of the Exchange Act or any successor thereto. The Committee shall act by vote or written consent of a majority of its members. Subject to the express provisions and limitations of the Plan, the Committee may adopt such rules, regulations and procedures as it deems appropriate for the conduct of its affairs. It may appoint one of its members to be chairman and any person, whether or not a member, to be its secretary or agent. The Committee shall report its actions and decisions to the Board at appropriate times but in no event less than one time per calendar year. 4.03 Revocation for Misconduct. The Board or the Committee may by resolution immediately revoke, rescind and terminate any Option, or portion thereof, to the extent not yet vested, or any Stock Appreciation Right, to the 26 extent not yet exercised, previously granted or awarded under this Plan to an Employee who is discharged from the employ of the Company or a Subsidiary Company for cause, which, for purposes hereof, shall mean termination for: (1) conviction of a felony involving the misappropriation of the Company's or any Subsidiary's assets or a conviction of a felony which results in a substantial, demonstrable threat to the Company's or any Subsidiary's reputation, or (ii) gross and willful failure to perform a substantial portion of employee's duties and responsibilities as an employee, which failure continues for more than thirty (30) days after written notice given to employee pursuant to a two-thirds vote of all of the members of the Board of Directors of the Company or any Subsidiary, as the case may be, then in office, such vote to set forth in reasonable detail the nature of such failure. 4.04 Limitation on Liability. Neither the members of the Board nor any member of the Committee shall be liable for any action or determination made in good faith with respect to the Plan, any rule, regulation or procedure adopted by it pursuant thereto or any Awards granted under it. If a member of the Board or the Committee is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of anything done or not done by him in such capacity under or with respect to the Plan, the Company shall indemnify such member against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in the best interests of the Company and its Subsidiary Companies and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. 4.05 Compliance with Law and Regulations. All Awards granted hereunder shall be subject to all applicable federal and state laws, rules and regulations and to such approvals by any government or regulatory agency as may be required. The Company shall not be required to issue or deliver any certificates for shares of Common Stock prior to the completion of any registration or qualification of or obtaining of consents or approvals with respect to such shares under any federal or state law or any rule or regulation of any government body, which the Company shall, in its sole discretion, determine to be necessary or advisable. Moreover, no Option or Stock Appreciation Right may be exercised if such exercise would be contrary to applicable laws and regulations. 4.06 Restrictions on Transfer. The Company may place a legend upon any certificate representing shares acquired pursuant to an Award granted hereunder noting that the transfer of such shares may be restricted by applicable laws and regulations. ARTICLE V ELIGIBILITY Awards may be granted to such Employees of the Company and its Subsidiary Companies as may be designated from time to time by the Board or the Committee. ARTICLE VI COMMON STOCK COVERED BY THE PLAN 6.01 Option Shares. The aggregate number of shares of Common Stock which may be issued pursuant to this Plan, subject to adjustment as provided in Article IX, shall be 553,312. None of such shares shall be the subject of more than one Award at any time, but if an Option as to any shares is surrendered before exercise (including surrender in connection with exercise of a Stock Appreciation Right), or expires or terminates for any reason without having been exercised in full, or for any other reason ceases to be exercisable, the number of shares covered thereby shall again become available for grant under the Plan as if no Awards had been previously granted with respect to such shares. 6.02 Source of Shares. The shares of Common Stock issued under the Plan may be authorized but unissued shares, treasury shares or shares purchased by the Company on the open market or from private sources for use under the Plan. 27 ARTICLE VII DETERMINATION OF AWARDS, NUMBER OF SHARES, ETC. The Board or the Committee shall, in its discretion, determine from time to time which Employees will be granted Awards under the Plan, the number of shares of Common Stock subject to each Award, whether each Option will be an Incentive Stock Option or a Non-Qualified Option, and the exercise price of an Option. In making all such determinations there shall be taken into account the duties, responsibilities and performance of each respective individual, his present and potential contributions to the growth and success of the Company, his salary and such other factors as the Board or the Committee shall deem relevant to accomplishing the purposes of the Plan. ARTICLE VIII OPTIONS AND STOCK APPRECIATION RIGHTS Each Option granted hereunder shall be on the following terms and conditions: 8.01 Stock Option Agreement. The proper Officers of the Company and each Optionee shall execute a Stock Option Agreement which shall set forth the total number of shares of Common Stock to which it pertains, the exercise price, whether it is a Non-Qualified Option or an Incentive Stock Option, and such other terms, conditions, restrictions and privileges as the Committee in each instance shall deem appropriate, provided they are not inconsistent with the terms, conditions and provisions of this Plan. Each Optionee shall receive a copy of his executed Stock Option Agreement. 8.02 Option Exercise Price. (a) Incentive Stock Options. The per share price at which the subject Common Stock may be purchased upon exercise of an Incentive Stock Option shall be no less than one hundred percent (100%) of the Fair Market Value of a share of Common Stock at the time such Incentive Stock Option is granted, except as provided in Section 8.09(b). (b) Non-Qualified Options. The per share price at which the subject Common Stock may be purchased upon exercise of a Non-Qualified Option shall be no less than the greater of (i) the par value or (ii) eight-five percent (85%) of the Fair Market Value of a share of Common Stock at the time such Non-Qualified Option is granted. 8.03 Vesting and Exercise of Options. (a) General Rules. Incentive Stock Options and Non-Qualified Options shall become vested and exercisable at the rate, to the extent and subject to such limitations as may be specified by the Board or the Committee. Notwithstanding the foregoing, no vesting shall occur on or after an Optionee's employment with the Company and all Subsidiary Companies is terminated for any reason other than his death, Disability or Retirement. In determining the number of shares of Common Stock with respect to which Options are vested and/or exercisable, fractional shares will be rounded up to the nearest whole number if the fraction is 0.5 or higher, and down if it is less. (b) Accelerated Vesting Upon Death, Disability or Retirement. Unless the Board or the Committee shall specifically state otherwise at the time an Option is granted, all Options granted under this Plan shall become vested and exercisable in full on the date an Optionee terminates his employment with the Company or a Subsidiary Company because of his death, Disability or Retirement. (c) Accelerated Vesting for Changes in Control. Notwithstanding the general rule described in Section 8.03(a), all outstanding Options shall become immediately vested and exercisable in the event there is an actual or threatened change in control of the Company. (1) Change in Control. A "change in control of the Company" shall mean a change in control of a nature that would be required to be reported 28 in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Exchange Act, whether or not the Company in fact is required to comply with Regulation 14A thereunder; provided that, without limitation, such a change in control shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities, or (ii) during any period of twenty-four consecutive months during the term of an Option, individuals who at the beginning of such period constitute the Board of the Company cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by the Company's stockholders, of each director who was not a director at the date of grant has been approved in advance by directors representing at least two-thirds of the directors then in office who were directors at the beginning of the period. (2) Threatened Change in Control. A "threatened change in control of the Company" shall mean any set of circumstances which in the opinion of the Board, as expressed through a resolution, poses a real, substantial and immediate possibility of leading to a change in control of the Company as defined in clause (1) above. 8.04 Duration of Options. (a) General. Except as provided in Sections 8.04(c) and 8.09, each Option or portion thereof shall be exercisable at any time on or after it vests and becomes exercisable until the earlier of (i) ten (10) years after its date of grant or (ii) three (3) months after the date on which the Optionee ceases to be employed by the Company and all Subsidiary Companies, unless the Board or the Committee in its discretion decides at the time of grant or thereafter to extend such period of exercise from three (3) months to a period not exceeding five (5) years. However, failure to exercise Incentive Stock Options within three months after the date on which the Optionee's employment terminates may result in adverse tax consequences to the Optionee. (b) Exception for Termination Due to Death, Disability or Retirement. If an Optionee dies while in the employ of the Company or a Subsidiary Company or terminates employment with the Company or a Subsidiary Company as a result of Disability or Retirement without having fully exercised his Options, the Optionee or the executors, administrators, legatees or distributees of his estate shall have the right, during the twelve-month period following the earlier of his death, Disability or Retirement, to exercise such Options to the extent vested on the date of such death, Disability or Retirement. In no event, however, shall any Option be exercisable more than ten (10) years from the date it was granted. 8.05 Nonassignability. Options shall not be transferable by an Optionee except by will or the laws of descent or distribution, and during an Optionee's lifetime shall be exercisable only by such Optionee or the Optionee's guardian or legal representative. Notwithstanding the foregoing, or any other provision of this Plan, an Optionee who holds Non-Qualified Options may transfer such Options to his or her spouse, lineal ascendants, lineal descendants, or to a duly established trust for the benefit of one or more of these individuals. Options so transferred may thereafter be transferred only to the Optionee who originally received the grant or to an individual or trust to whom the Optionee could have initially transferred the Option pursuant to this Section 8.05. Options which are transferred pursuant to this Section 8.05 shall be exercisable by the transferee according to the same terms and conditions as applied to the Optionee. 8.06 Manner of Exercise. Options may be exercised in part or in whole and at one time or from time to time. The procedures for exercise shall be set forth in the written Stock Option Agreement provided for in Section 8.01 above. 29 8.07 Payment for Shares. Payment in full of the purchase price for shares of Common Stock purchased pursuant to the exercise of any Option shall be made to the Company upon exercise of the Option. All shares sold under the Plan shall be fully paid and nonassessable. Payment for shares may be made by the Optionee in cash or, at the discretion of the Board or the Committee, by delivering shares of Common Stock (including shares acquired pursuant to the exercise of an Option) or other property equal in Fair Market Value to the purchase price of the shares to be acquired pursuant to the Option, by withholding some of the shares of Common Stock which are being purchased upon exercise of an Option, or any combination of the foregoing. 8.08 Voting and Dividend Rights. No Optionee shall have any voting or dividend rights or other rights of a stockholder in respect of any shares of Common Stock covered by an Option prior to the time that his name is recorded on the Company's stockholder ledger as the holder of record of such shares acquired pursuant to an exercise of an Option. 8.09 Additional Terms Applicable to Incentive Stock Options. All Options issued under the Plan as Incentive Stock Options will be subject, in addition to the terms detailed in Sections 8.01 to 8.08 above, to those contained in this Section 8.09. (a) Notwithstanding any contrary provisions contained elsewhere in this Plan and as long as required by Section 422 of the Code, the aggregate Fair Market Value, determined as of the time an Incentive Stock Option is granted, of the Common Stock with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year, under this Plan and stock options that satisfy the requirements of Section 422 of the Code under any other stock option plan or plans maintained by the Company (or any parent or Subsidiary Company), shall not exceed $100,000. (b) Limitation on Ten Percent Stockholders. The price at which shares of Common Stock may be purchased upon exercise of an Incentive Stock Option granted to an individual who, at the time such Incentive Stock Option is granted, owns, directly or indirectly, more than ten percent (10%) of the total combined voting power of all classes of stock issued to stockholders of the Company or any Subsidiary Company, shall be no less than one hundred and ten percent (110%) of the Fair Market Value of a share of the Common Stock of the Company at the time of grant, and such Incentive Stock Option shall by its terms not be exercisable after the earlier of the date determined under Section 8.03 or the expiration of five (5) years from the date such Incentive Stock Option is granted. (c) Notice of Disposition; Withholding; Escrow. An Optionee shall immediately notify the Company in writing of any sale, transfer, assignment or other disposition (or action constituting a disqualifying disposition within the meaning of Section 421 of the Code) of any shares of Common Stock acquired through exercise of an Incentive Stock Option, within two (2) years after the grant of such Incentive Stock Option or within one (1) year after the acquisition of such shares, setting forth the date and manner of disposition, the number of shares disposed of and the price at which such shares were disposed of. The Company shall be entitled to withhold from any compensation or other payments then or thereafter due to the Optionee such amounts as may be necessary to satisfy any withholding requirements of federal or state law or regulation and, further, to collect from the Optionee any additional amounts which may be required for such purpose. The Committee may, in its discretion, require shares of Common Stock acquired by an Optionee upon exercise of an Incentive Stock Option to be held in an escrow arrangement for the purpose of enabling compliance with the provisions of this Section 8.09(c). 8.10 Stock Appreciation Rights. (a) General Terms and Conditions. The Board or the Committee may, but shall not be obligated to, authorize the Company, on such terms and conditions as it deems appropriate in each case, to grant rights to Optionees to surrender an exercisable Option, or any portion thereof, in consideration for the payment by the Company of an amount equal to the excess of the Fair Market Value of the shares of Common Stock subject to the Option, or portion thereof, surrendered over the exercise price of the Option with respect to such shares (any such authorized surrender and payment being hereinafter referred to as a "Stock Appreciation Right"). Such payment, at the discretion of the Board or the Committee, may be made in shares of Common Stock valued at the then Fair Market Value thereof, or in cash, or partly in cash and partly in shares of Common Stock. The terms and conditions set with respect to a Stock Appreciation Right may include (without limitation), subject to other provisions of this Section 8.10 and the Plan, the period during which, date by which or event upon which the Stock Appreciation Right may be exercised; the method for valuing shares of Common Stock for purposes of this Section 8.10; a ceiling on the amount of consideration which the Company may pay in connection with exercise and cancellation of the Stock Appreciation Right; and arrangements for income tax withholding. The Board or the Committee shall have complete discretion to determine whether, when and to whom Stock Appreciation Rights may be granted. 30 (b) Time Limitations. If a holder of a Stock Appreciation Right terminates service with the Company as an Officer or Employee, the Stock Appreciation Right may be exercised only within the period, if any, within which the Option to which it relates may be exercised. (c) Effects of Exercise of Stock Appreciation Rights or Options. Upon the exercise of a Stock Appreciation Right, the number of shares of Common Stock available under the Option to which it relates shall decrease by a number equal to the number of shares for which the Stock Appreciation Right was exercised. Upon the exercise of an Option, any related Stock Appreciation Right shall terminate as to any number of shares of Common Stock subject to the Stock Appreciation Right that exceeds the total number of shares for which the Option remains unexercised. (d) Time of Grant. A Stock Appreciation Right granted in connection with an Incentive Stock Option must be granted concurrently with the Option to which it relates while a Stock Appreciation Right granted in connection with a Non-Qualified Option may be granted concurrently with the Option to which it relates or at any time thereafter prior to the exercise or expiration of such Option. (e) Non-Transferable. The holder of a Stock Appreciation Right may not transfer or assign the Stock Appreciation Right otherwise than by will or in accordance with the laws of descent and distribution, and during a holder's lifetime a Stock Appreciation Right may be exercisable only by the holder. ARTICLE IX ADJUSTMENTS FOR CAPITAL CHANGES The aggregate number of shares of Common Stock available for issuance under this Plan, the number of shares to which any Award relates and the exercise price per share of Common Stock under any Option shall be proportionately adjusted for any increase or decrease in the total number of outstanding shares of Common Stock issued subsequent to the Effective Date of this Plan resulting from a split, subdivision or consolidation of shares or any other capital adjustment, the payment of a stock dividend, or other increase or decrease in such shares effected without receipt or payment of consideration by the Company. If, upon a merger, consolidation, reorganization, liquidation, recapitalization or the like of the Company, the shares of the Company's Common Stock shall be exchanged for other securities of the Company or of another corporation, each recipient of an Award shall be entitled, subject to the conditions herein stated, to purchase or acquire such number of shares of Common Stock or amount of other securities of the Company or such other corporation as were exchangeable for the number of shares of Common Stock of the Company which such optionees would have been entitled to purchase or acquire except for such action, and appropriate adjustments shall be made to the per share exercise price of outstanding Options. ARTICLE X AMENDMENT AND TERMINATION OF THE PLAN The Board may, by resolution, at any time terminate or amend the Plan with respect to any shares of Common Stock as to which Awards have not been granted, subject to any applicable regulatory requirements and any required stockholder approval or any stockholder approval which the Board may deem to be advisable for any reason, such as for the purpose of obtaining or retaining any statutory or regulatory benefits under tax, securities or other laws or satisfying any applicable stock exchange listing requirements. The Board may not, without the consent of the holder of an Award, alter or impair any Award previously granted or awarded under this Plan as specifically authorized herein. ARTICLE XI CONTINUATION RIGHTS Neither the Plan nor the grant of any Awards hereunder nor any action taken by the Committee or the Board in connection with the Plan shall create any right on the part of any Employee of the Company or a Subsidiary Company to continue as such. 31 ARTICLE XII WITHHOLDING 12.01 Tax Withholding. The Company may withold from any cash payment made under this Plan sufficient amounts to cover any applicable withhoding and employment taxes, and if the amount of such cash withheld as a condition to delivering the shares acquired pursant to an Award. The Company also may whthhold or collect amounts with respect to a disqualifying disposition of shares of Common Stock acquired pursuant to exercise of an Incentive Stock Option, as provided in Section 8.09(c). 12.02 Methods of Tax Withholding. The Board or the Committee is authorized to adopt rules, regulations or procedures which provide for the satisfaction of an Optionee's tax withholding obligation by the retention of shares of Common Stock to which the Optionee would otherwise be entitled pursuant to an Award and/or by the Optionee's delivery of previously-owned shares of Common Stock or other property. ARTICLE XIII EFFECTIVE DATE OF THE PLAN; TERM 13.01 Effective Date of the Plan. This Plan initially became effective upon adoption by the Board and stockholders of the Company in 1993. The amendments to this Plan increasing the total number of shares of Common Stock which may be issued under the Plan from 176,488 to 336,488 and otherwise amending and restating this Plan became effective upon adoption by the Board in March 1997, subject to approval of the Company's stockholders at or before the next annual meeting of stockholders of the Company. 13.02 Term of Plan. Unless sooner terminated, this Plan shall remain in effect for a period of ten (10) years ending on the tenth anniversary of the Effective Date. Termination of the Plan shall not affect any Awards previously granted and such Awards shall remain valid and in effect until they have been fully exercised or earned, are surrendered or by their terms expire or are forfeited. ARTICLE XIV MISCELLANEOUS 14.01 Governing Law. This Plan shall be construed under the laws of the State of Delaware. 14.02 Pronouns. Wherever appropriate, the masculine pronoun shall include the feminine pronoun, and the singular shall include the plural. 32 EX-10.6 4 TERMINATION AGREEMENT Exhibit 10.6 CHANGE IN CONTROL AND TERMINATION AGREEMENT THIS AGREEMENT made as of this 2nd day of October, 1998, by and between PROGRESS FINANCIAL CORPORATION (the "Company"), a Pennsylvania business corporation and Michael B. High ("Executive"). WHEREAS, the Executive is presently serving as Senior Vice President and Chief Financial Officer of the Company and Progress Bank; and WHEREAS, the Company recognizes that, as is the case with many publicly held corporations, the possibility of a change in control of the Company exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of key management personnel to the detriment of the Company; WHEREAS, the Company has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of key members of the Company's management to their assigned duties without distraction and with a view to enhancing the Company's long term shareholder interests in the event of a change in control of the Company; and WHEREAS, in order to induce the Executive to remain in the employ of the Company, the Company agrees that the Executive shall receive the compensation and benefits set forth in this Agreement as a cushion against the financial and career impact on the Executive in the event the Executive's employment with the Company is terminated subsequent to a "Change of Control" (as defined in Section 4 hereof) of the Company. AGREEMENT NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows. 1. Term of Agreement. ----------------- (a) This Agreement shall be effective as of the date first set forth above ("Effective Date") and shall be for a term ending on the fifth anniversary of the Effective Date. (b) Notwithstanding the provisions of Section 1 (a) of this Agreement, this Agreement shall terminate automatically as of the effective date of termination of the Executive's employment, and the Executive shall not be entitled to any payments or benefits hereunder, upon termination by the Company of the Executive's employment for Cause. As used in this Agreement, "Cause" shall mean (A) the Executive's conviction of or plea of guilty or nolo contendere to a felony or the actual incarceration of the Executive for a period of forty-five (45) consecutive days, (B) the issuance by any federal or state banking authority of an order directing that the Company terminate the Executive's employment with the Company or relieve the Executive of the duties being performed by the Executive for the Company or (C) Executive's willful misconduct or gross negligence in the performance of Executive's duties. (c) Notwithstanding the provisions of Section 1 (a) of this Agreement, this Agreement shall terminate automatically as of the effective date of termination of the Executive's employment, and the Executive shall not be entitled to any payments or benefits hereunder, upon termination of the Executive's employment as a result of the Executive's voluntary termination (other than in accordance with Section 2 of this Agreement), retirement at the Executive's election, or death; provided, however, that if the Executive dies after a Notice of Termination (as defined in Section 2 of this Agreement) is delivered by the Executive, the provisions of Section 9(b) of this Agreement. (d) Notwithstanding the provisions of Section 1 (a) of this Agreement, this Agreement shall terminate automatically as of the effective date of termination of the Executive's employment, and the Executive shall not be entitled to any 33 payments or benefits hereunder, upon termination of the Executive's employment as a result of the Executive's disability; provided, however, that, if the Executive becomes disabled after a Notice of Termination (as defined in Section 2 of this Agreement) is delivered by the Executive, the Executive shall nevertheless be entitled to receive all of the compensation and benefits provided for in, and for the term set forth in, Section 3 of this Agreement. For purposes of this Agreement, "disability" shall mean the Executive's incapacity by reason of accident, sickness, or otherwise which renders the Executive mentally or physically incapable of performing the services required by the Executive for three hundred sixty (360) consecutive days. 2. Change in Control and Termination Provisions. If at any time during the term of this Agreement, there shall be a Change in Control followed by: (a) any involuntary termination of the Executive (other than as set forth in Section 1(b), 1(c), or 1(d) of this Agreement); (b) the Executive not holding the position of Chief Financial Officer of the Company or its successor, which responsibilities shall be similar to the Executive's duties immediately after the Effective Date; (c) any reduction in the sum of Executive's annual base salary and target bonus under the Company's officer or executive bonus plan (EBP) (as distinguished from actual bonus paid) in effect on the Effective Date or as the same may be increased from time to time after the Effective Date; (d) any failure to provide the Executive with a target bonus under the EBP (as distinguished from actual bonus paid) comparable to similarly situated executives at the Company; (e) any failure to provide the Executive with benefits at least as favorable as those enjoyed by similarly situated executives at the Company under the Company's pension, life insurance, medical, health and accident, disability or other written employee plans under which the form and/or amounts of benefits are prescribed in applicable documents; (f) any relocation of the Executive's principal site of employment to a location more than 35 miles from the Executive's principal site of employment as of the Effective Date; (g) any material breach of this Agreement on the part of the Company; then, at the option of Executive, exercisable by the Executive anytime within sixty (60) days after the occurrence of any of the foregoing events, the Executive may resign from employment with the Company (or, if involuntarily terminated, give notice of intention to collect benefits under this Agreement) by delivering a notice in writing (the "Notice of Termination") to the Company and the provisions of Section 3 of this Agreement shall apply. 3. Rights in Event of Change in Control Followed by Termination. (a) In the event that the Executive delivers a Notice of Termination to the Company in accordance with Section 2 above, the Executive shall be entitled to receive the compensation and benefits set forth below: (i) two times the sum of the Executive's annual base salary at the highest amount in effect, and annual cash bonus under the EBP at the highest amount paid, during the two (2) calendar years preceding the year in which the Notice of Termination is delivered, payable in a lump sum or 24 monthly installments at the Executive's election; (ii) life, medical and dental insurance benefits for a period of 24 months following delivery of a Notice of Termination at levels equivalent to the levels to which Executive would have been entitled had the Executive remained in the Company's employ during such period; and (iii) outplacement services for a period of twelve months to be provided by a reputable outplacement firm and consist of those services normally provided by such firm for senior executives. 34 (b) The Executive shall not be required to mitigate the amount of any payment provided for in this Section 3 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 3 be reduced by any compensation earned by the Executive as the result of employment by another employer or by reason of the Executive's receipt of or right to receive any retirement or other benefits after the date of termination of employment or otherwise; provided, however, that the payments provided for in this Section 3 shall be reduced by the amount actually received by the Executive under the severance policy, if any, of the Company then in effect. (c) Except as otherwise provided in this Agreement, the Executive's right to receive payments under this Agreement shall not decrease the amount of, or otherwise adversely affect, any benefits payable to the Executive under any plan, agreement, or arrangement relating to employee benefits provided by the Company. (d) Notwithstanding the foregoing provisions of this Section 3, the present value (determined in accordance with the provisions of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code")) of the total amount of all payments under this Section 3 when aggregated with any other payments to Executive which constitute parachute payments (within the meaning of section 280G of the Code) shall in no event exceed 2.99 times the Executive's "base amount" (as determined under Section 280G of the Code). (e) Notwithstanding the foregoing provisions of this Section 3, the Executive's right to receive any of the, payments or benefits set forth in this Section 3 shall be conditioned upon form satisfactory to the Executive's execution of a separation agreement and general release in a form satisfactory to the Company and the Executive. 4. Change in Control Defined. For the purposes of this Agreement, a "Change in Control" means the occurrence of any of the following: (i) the consummation of a merger or business combination in which the stockholders of the Company immediately prior to the merger own less than 60% of the combined voting power of the outstanding voting securities of the surviving corporation immediately after the merger; (ii) any "person" within the meaning of Section 3(a)(9) of the Securities Exchange Act of 1934 as modified in Sections 13(d) and 14(d) thereof (other than the Company, a subsidiary of the Company, a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a subsidiary, or an underwriter temporarily holding securities pursuant to an offer of such securities) becomes the "beneficial owner" as defined in Rule 13d-3 thereunder, directly or indirectly, of more than 25% of the combined voting power of the outstanding voting securities of the Company; or (iii) the approval by the stockholders of the Company of the sale of all or substantially all of the assets of the Company or of a plan of complete liquidation of the Company. 5. Notices. Except as otherwise provided in this Agreement, any notice required or permitted under this Agreement shall be deemed properly given if in writing and if mailed by registered or certified mail, postage prepaid with return receipt requested, to the Executive's residence, in the case of notices to the Executive, and to the principal office of the Company, Attention: Chief Executive Officer, in the case of notices to the Company. 6. Waiver. No provision of this Agreement may be modified, waived, or discharged unless such waiver, modification, or discharge is agreed to in writing and signed by the Executive and Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 7. Assignment. This Agreement shall not be assignable by either party, except by the Company to any successor in interest to the Company's business. 8. Entire Agreement. This Agreement contains the entire agreement of the parties relating to the subject matter of this Agreement and supersedes any prior agreement and any other prior or contemporaneous oral or written understanding or agreement between the parties relating to such subject matter. Any such prior agreement is terminated in its entirety, and shall no longer have any force or effect, as of the date first above written. 35 9. Successors Binding Agreement. (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure by the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall constitute a breach of this Agreement and the provisions of Section 3 of this Agreement shall apply. As used in this Agreement, "Company" shall mean the Company as defined previously and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise. (b) This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, heirs, distributees, devisees, and legatees. If the Executive should die after a Notice of Termination is delivered by the Executive and any amounts would be payable to the Executive under this Agreement if the Executive had continued to live, all such amounts shall be paid in accordance with the terms of this Agreement if paid in accordance with the terms of this Agreement to the Executive's devisee, legatee, or other designee, or, if there is no such designee, to the Executive's estate. 10. Validity. The invalidity or unenforceability of any provision of this shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 11. Applicable Law. This Agreement shall be governed by and construed in the domestic laws (but not the law of conflicts of law) of the Commonwealth of Pennsylvania. 12. Headings. The headings of the sections of this Agreement are for convenience only and shall not control or affect the meaning or construction or limit the scope or intent of any provisions of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. PROGRESS FINANCIAL CORPORATION By: /s/ W. Kirk Wycoff --------------------- Title President (SEAL) ---------------------- Attest: /s/ Joyce E. Bilger ---------------------- Secretary Witness: /s/ Lois M. Anerino /s/ Michael B. High ------------------------- ---------------------- Michael B. High Senior Vice President and Chief Financial Officer 36 EX-10.7 5 TERMINATION AGREEMENT Exhibit 10.7 CHANGE IN CONTROL AND TERMINATION AGREEMENT THIS AGREEMENT made as of this 17th day of November 1998, by and between PROGRESS FINANCIAL CORPORATION, a Pennsylvania business corporation and PROGRESS REALTY ADVISORS, INC., a Pennsylvania business corporation and subsidiary of PROGRESS FINANCIAL CORPORATION (collectively the "Company"), and H. Wayne Griest ("Executive"). WHEREAS, the Executive is presently serving as a director of the Company and as President and Chief Executive Officer of Progress Realty Advisors, Inc.; and WHEREAS, the Company recognizes that, as is the case with many publicly held corporations, the possibility of a change in control of the Company exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of key management personnel to the detriment of the Company; WHEREAS, the Company has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of key members of the Company's management to their assigned duties without distraction and with a view to enhancing the Company's long term shareholder interests in the event of a change in control of the Company; and WHEREAS, in order to induce the Executive to remain in the employ of the Company, the Company agrees that the Executive shall receive the compensation and benefits set forth in this Agreement as a cushion against the financial and career impact on the Executive in the event the Executive's employment with the Company is terminated subsequent to a "Change of Control" (as defined in Section 4 hereof) of the Company. AGREEMENT NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows. 1. Term of Agreement. (a) This Agreement shall be effective as of the date first set forth above ("Effective Date") and shall be for a term ending on the fifth anniversary of the Effective Date. (b) Notwithstanding the provisions of Section 1 (a) of this Agreement, this Agreement shall terminate automatically as of the effective date of termination of the Executive's employment, and the Executive shall not be entitled to any payments or benefits hereunder, upon termination by the Company of the Executive's employment for Cause. As used in this Agreement, "Cause" shall mean (A) the Executive's conviction of or plea of guilty or nolo contendere to a felony or the actual incarceration of the Executive for a period of forty-five (45) consecutive days, (B) the issuance by any federal or state banking authority of an order directing that the Company terminate the Executive's employment with the Company or relieve the Executive of the duties being performed by the Executive for the Company or (C) Executive's willful misconduct or gross negligence in the performance of Executive's duties. (c) Notwithstanding the provisions of Section 1 (a) of this Agreement, this Agreement shall terminate automatically as of the effective date of termination of the Executive's employment, and the Executive shall not be entitled to any payments or benefits hereunder, upon termination of the Executive's employment as a result of the Executive's voluntary termination (other than in accordance with Section 2 of this Agreement), retirement at the Executive's election, or death; provided, however, that if the Executive dies after a Notice of Termination (as defined in Section 2 of this Agreement) is delivered by the Executive, the provisions of Section 9(b) of this Agreement shall still apply. 37 (d) Notwithstanding the provisions of Section 1 (a) of this Agreement, this Agreement shall terminate automatically as of the effective date of termination of the Executive's employment, and the Executive shall not be entitled to any payments or benefits hereunder, upon termination of the Executive's employment as a result of the Executive's disability; provided, however, that, if the Executive becomes disabled after a Notice of Termination (as defined in Section 2 of this Agreement) is delivered by the Executive, the Executive shall nevertheless be entitled to receive all of the compensation and benefits provided for in, and for the term set forth in, Section 3 of this Agreement. For purposes of this Agreement, "disability" shall mean the Executive's incapacity by reason of accident, sickness, or otherwise which renders the Executive mentally or physically incapable of performing the services required by the Executive for three hundred sixty (360) consecutive days. 2. Change in Control and Termination Provisions. If at any time during the term of this Agreement, there shall be a Change in Control followed by: (a) any involuntary termination of the Executive (other than as set forth in Section 1(b), 1(c), or 1(d) of this Agreement); (b) the Executive not holding the position of President and Chief Executive Officer of Progress Realty Advisors, Inc., which responsibilities shall be similar to the Executive's duties immediately after the Effective Date; (c) any reduction in the sum of Executive's annual base salary and target bonus under the Company's officer or executive bonus plan (EBP) (as distinguished from actual bonus paid) in effect on the Effective Date or as the same may be increased from time to time after the Effective Date; (d) any failure to provide the Executive with a target bonus under the EBP (as distinguished from actual bonus paid) comparable to similarly situated executives at the Company; (e) any failure to provide the Executive with benefits at least as favorable as then enjoyed or as those enjoyed by similarly situated executives at the Company under the Company's pension, life insurance, medical, health and accident, disability or other written employee plans under which the form and/or amounts of benefits are prescribed in applicable documents; (f) any relocation of the Executive's principal site of employment to a location more than 15 miles from the Executive's principal site of employment as of the Effective Date; (g) any material breach of this Agreement on the part of the Company; then, at the option of Executive, exercisable by the Executive anytime within sixty (60) days after the occurrence of any of the foregoing events, the Executive may resign from employment with the Company (or, if involuntarily terminated, give notice of intention to collect benefits under this Agreement) by delivering a notice in writing (the "Notice of Termination") to the Company and the provisions of Section 3 of this Agreement shall apply. 3. Rights in Event of Change in Control Followed by Termination. (a) In the event that the Executive delivers a Notice of Termination to the Company in accordance with Section 2 above, the Executive shall be entitled to receive the compensation and benefits set forth below: (i) one times the sum of the Executive's annual base salary at the highest amount in effect, and annual cash bonus under the EBP at the highest amount paid, during the two (2) calendar years preceding the year in which the Notice of Termination is delivered, payable in a lump sum or 12 monthly installments at the Executive's election; 38 (ii) life, medical and dental insurance benefits for a period of 12 months following delivery of a Notice of Termination at levels equivalent to the levels to which Executive would have been entitled had the Executive remained in the Company's employ during such period; and (iii) outplacement services for a period of twelve months to be provided by a reputable outplacement firm and consist of those services normally provided by such firm for senior executives. (b) The Executive shall not be required to mitigate the amount of any payment provided for in this Section 3 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 3 be reduced by any compensation earned by the Executive as the result of employment by another employer or by reason of the Executive's receipt of or right to receive any retirement or other benefits after the date of termination of employment or otherwise; provided, however, that the payments provided for in this Section 3 shall be reduced by the amount actually received by the Executive under the severance policy, if any, of the Company then in effect. (c) Except as otherwise provided in this Agreement, the Executive's right to receive payments under this Agreement shall not decrease the amount of, or otherwise adversely affect, any benefits payable to the Executive under any plan, agreement, or arrangement relating to employee benefits provided by the Company. (d) Notwithstanding the foregoing provisions of this Section 3, the present value (determined in accordance with the provisions of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code")) of the total amount of all payments under this Section 3 when aggregated with any other payments to Executive which constitute parachute payments (within the meaning of section 280G of the Code) shall in no event exceed 2.99 times the Executive's "base amount" (as determined under Section 280G of the Code). (e) Notwithstanding the foregoing provisions of this Section 3, the Executive's right to receive any of the, payments or benefits set forth in this Section 3 shall be conditioned upon form satisfactory to the Executive's execution of a separation agreement and general release in a form satisfactory to the Company and the Executive. 4. Change in Control Defined. For the purposes of this Agreement, a "Change in Control" means the occurrence of any of the following: (i) the consummation of a merger or business combination in which the stockholders of the Company immediately prior to the merger own less than 50% of the combined voting power of the outstanding voting securities of the surviving corporation immediately after the merger; (ii) any "person" within the meaning of Section 3(a)(9) of the Securities Exchange Act of 1934 as modified in Sections 13(d) and 14(d) thereof (other than the Company, a subsidiary of the Company, a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a subsidiary, or an underwriter temporarily holding securities pursuant to an offer of such securities) becomes the "beneficial owner" as defined in Rule 13d-3 thereunder, directly or indirectly, of more than 25% of the combined voting power of the outstanding voting securities of the Company; (iii) the approval by the stockholders of the Company of the sale of all or substantially all of the assets of the Company or of a plan of complete liquidation of the Company; or (iv) the termination of W. Kirk Wycoff, without his consent, as the Chief Executive Officer of Progress Financial Corporation or Progress Bank. 5. Notices. Except as otherwise provided in this Agreement, any notice required or permitted under this Agreement shall be deemed properly given if in writing and if mailed by registered or certified mail, postage prepaid with return receipt requested, to the Executive's residence, in the case of notices to the Executive, and to the principal office of the Company, Attention: Chief Executive Officer, in the case of notices to the Company. 6. Waiver. No provision of this Agreement may be modified, waived, or discharged unless such waiver, modification, or discharge is agreed to in writing and signed by the Executive and Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 39 7. Assignment. This Agreement shall not be assignable by either party, except by the Company to any successor in interest to the Company's business. 8. Entire Agreement. This Agreement contains the entire agreement of the parties relating to the subject matter of this Agreement and supersedes any prior agreement and any other prior or contemporaneous oral or written understanding or agreement between the parties relating to such subject matter. Any such prior agreement is terminated in its entirety, and shall no longer have any force or effect, as of the date first above written. 9. Successors Binding Agreement. (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure by the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall constitute a breach of this Agreement and the provisions of Section 3 of this Agreement shall apply. As used in this Agreement, "Company" shall mean the Company as defined previously and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise. (b) This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, heirs, distributees, devisees, and legatees. If the Executive should die after a Notice of Termination is delivered by the Executive and any amounts would be payable to the Executive under this Agreement if the Executive had continued to live, all such amounts shall be paid in accordance with the terms of this Agreement if paid in accordance with the terms of this Agreement to the Executive's devisee, legatee, or other designee, or, if there is no such designee, to the Executive's estate. 10. Validity. The invalidity or unenforceability of any provision of this shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 11. Applicable Law. This Agreement shall be governed by and construed in the domestic laws (but not the law of conflicts of law) of the Commonwealth of Pennsylvania. 12. Headings. The headings of the sections of this Agreement are for convenience only and shall not control or affect the meaning or construction or limit the scope or intent of any provisions of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. PROGRESS FINANCIAL CORPORATION By: /s/ W. Kirk Wycoff -------------------- Title: President (SEAL) -------------------- Attest: /s/ Joyce E. Bilger -------------------- Secretary Witness: /s/ Lois M. Anerino /s/ H.Wayne Griest ------------------------ -------------------- H.Wayne Griest, President of Progress Realty Advisors, Inc. 40 EX-10.8 6 TERMINATION AGREEMENT Exhibit 10.8 CHANGE IN CONTROL AND TERMINATION AGREEMENT THIS AGREEMENT made as of this 2nd day of October, 1998, by and between PROGRESS FINANCIAL CORPORATION (the "Company"), a Pennsylvania business corporation and Eric J. Morgan ("Executive"). WHEREAS, the Executive is presently serving as Senior Vice President and Secretary of the Company and Senior Vice President and Chief Credit Officer of Progress Bank; and WHEREAS, the Company recognizes that, as is the case with many publicly held corporations, the possibility of a change in control of the Company exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of key management personnel to the detriment of the Company; WHEREAS, the Company has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of key members of the Company's management to their assigned duties without distraction and with a view to enhancing the Company's long term shareholder interests in the event of a change in control of the Company; and WHEREAS, in order to induce the Executive to remain in the employ of the Company, the Company agrees that the Executive shall receive the compensation and benefits set forth in this Agreement as a cushion against the financial and career impact on the Executive in the event the Executive's employment with the Company is terminated subsequent to a "Change of Control" (as defined in Section 4 hereof) of the Company. AGREEMENT NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows. 1. Term of Agreement. (a) This Agreement shall be effective as of the date first set forth above ("Effective Date") and shall be for a term ending on the fifth anniversary of the Effective Date. (b) Notwithstanding the provisions of Section 1 (a) of this Agreement, this Agreement shall terminate automatically as of the effective date of termination of the Executive's employment, and the Executive shall not be entitled to any payments or benefits hereunder, upon termination by the Company of the Executive's employment for Cause. As used in this Agreement, "Cause" shall mean (A) the Executive's conviction of or plea of guilty or nolo contendere to a felony or the actual incarceration of the Executive for a period of forty-five (45) consecutive days, (B) the issuance by any federal or state banking authority of an order directing that the Company terminate the Executive's employment with the Company or relieve the Executive of the duties being performed by the Executive for the Company or (C) Executive's willful misconduct or gross negligence in the performance of Executive's duties. (c) Notwithstanding the provisions of Section 1 (a) of this Agreement, this Agreement shall terminate automatically as of the effective date of termination of the Executive's employment, and the Executive shall not be entitled to any payments or benefits hereunder, upon termination of the Executive's employment as a result of the Executive's voluntary termination (other than in accordance with Section 2 of this Agreement), retirement at the Executive's election, or death; provided, however, that if the Executive dies after a Notice of Termination (as defined in Section 2 of this Agreement) is delivered by the Executive, the provisions of Section 9(b) of this Agreement. (d) Notwithstanding the provisions of Section 1 (a) of this Agreement, this Agreement shall terminate automatically as of the effective date of termination of the Executive's employment, and the Executive shall not be entitled to any payments or benefits hereunder, upon termination of the Executive's employment 41 as a result of the Executive's disability; provided, however, that, if the Executive becomes disabled after a Notice of Termination (as defined in Section 2 of this Agreement) is delivered by the Executive, the Executive shall nevertheless be entitled to receive all of the compensation and benefits provided for in, and for the term set forth in, Section 3 of this Agreement. For purposes of this Agreement, "disability" shall mean the Executive's incapacity by reason of accident, sickness, or otherwise which renders the Executive mentally or physically incapable of performing the services required by the Executive for three hundred sixty (360) consecutive days. 2. Change in Control and Termination Provisions. If at any time during the term of this Agreement, there shall be a Change in Control followed by: (a) any involuntary termination of the Executive (other than as set forth in Section 1(b), 1(c), or 1(d) of this Agreement); 42 (b) the Executive not holding the position of Senior Vice President of the Company and Senior Vice President and Chief Credit Officer of Progress Bank or its successor, which responsibilities shall be similar to the Executive's duties immediately after the Effective Date; (c) any reduction in the sum of Executive's annual base salary and target bonus under the Company's officer or executive bonus plan (EBP) (as distinguished from actual bonus paid) in effect on the Effective Date or as the same may be increased from time to time after the Effective Date; (d) any failure to provide the Executive with a target bonus under the EBP (as distinguished from actual bonus paid) comparable to similarly situated executives at the Company; (e) any failure to provide the Executive with benefits at least as favorable as those enjoyed by similarly situated executives at the Company under the Company's pension, life insurance, medical, health and accident, disability or other written employee plans under which the form and/or amounts of benefits are prescribed in applicable documents; (f) any relocation of the Executive's principal site of employment to a location more than 35 miles from the Executive's principal site of employment as of the Effective Date; (g) any material breach of this Agreement on the part of the Company; then, at the option of Executive, exercisable by the Executive anytime within sixty (60) days after the occurrence of any of the foregoing events, the Executive may resign from employment with the Company (or, if involuntarily terminated, give notice of intention to collect benefits under this Agreement) by delivering a notice in writing (the "Notice of Termination") to the Company and the provisions of Section 3 of this Agreement shall apply. 3. Rights in Event of Change in Control Followed by Termination. (a) In the event that the Executive delivers a Notice of Termination to the Company in accordance with Section 2 above, the Executive shall be entitled to receive the compensation and benefits set forth below: (i) two times the sum of the Executive's annual base salary at the highest amount in effect, and annual cash bonus under the EBP at the highest amount paid, during the two (2) calendar years preceding the year in which the Notice of Termination is delivered, payable in a lump sum or 24 monthly installments at the Executive's election; (ii) life, medical and dental insurance benefits for a period of 24 months following delivery of a Notice of Termination at levels equivalent to the levels to which Executive would have been entitled had the Executive remained in the Company's employ during such period; and (iii) outplacement services for a period of twelve months to be provided by a reputable outplacement firm and consist of those services normally provided by such firm for senior executives. (b) The Executive shall not be required to mitigate the amount of any payment provided for in this Section 3 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 3 be reduced by any compensation earned by the Executive as the result of employment by another employer or by reason of the Executive's receipt of or right to receive any retirement or other benefits after the date of termination of employment or otherwise; provided, however, that the payments provided for in this Section 3 shall be reduced by the amount actually received by the Executive under the severance policy, if any, of the Company then in effect. (c) Except as otherwise provided in this Agreement, the Executive's right to receive payments under this Agreement shall not decrease the amount of, or otherwise adversely affect, any benefits payable to the Executive under any plan, agreement, or arrangement relating to employee benefits provided by the Company. (d) Notwithstanding the foregoing provisions of this Section 3, the present value (determined in accordance with the provisions of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code")) of the total amount of all payments under this Section 3 when aggregated with any other payments to Executive which constitute parachute payments (within the meaning of section 280G of the Code) shall in no event exceed 2.99 times the Executive's "base amount" (as determined under Section 280G of the Code). 43 (e) Notwithstanding the foregoing provisions of this Section 3, the Executive's right to receive any of the, payments or benefits set forth in this Section 3 shall be conditioned upon form satisfactory to the Executive's execution of a separation agreement and general release in a form satisfactory to the Company and the Executive. 4. Change in Control Defined. For the purposes of this Agreement, a "Change in Control" means the occurrence of any of the following: (i) the consummation of a merger or business combination in which the stockholders of the Company immediately prior to the merger own less than 50% of the combined voting power of the outstanding voting securities of the surviving corporation immediately after the merger; (ii) any "person" within the meaning of Section 3(a)(9) of the Securities Exchange Act of 1934 as modified in Sections 13(d) and 14(d) thereof (other than the Company, a subsidiary of the Company, a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a subsidiary, or an underwriter temporarily holding securities pursuant to an offer of such securities) becomes the "beneficial owner" as defined in Rule 13d-3 thereunder, directly or indirectly, of more than 25% of the combined voting power of the outstanding voting securities of the Company; or (iii) the approval by the stockholders of the Company of the sale of all or substantially all of the assets of the Company or of a plan of complete liquidation of the Company. 5. Notices. Except as otherwise provided in this Agreement, any notice required or permitted under this Agreement shall be deemed properly given if in writing and if mailed by registered or certified mail, postage prepaid with return receipt requested, to the Executive's residence, in the case of notices to the Executive, and to the principal office of the Company, Attention: Chief Executive Officer, in the case of notices to the Company. 6. Waiver. No provision of this Agreement may be modified, waived, or discharged unless such waiver, modification, or discharge is agreed to in writing and signed by the Executive and Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 7. Assignment. This Agreement shall not be assignable by either party, except by the Company to any successor in interest to the Company's business. 8. Entire Agreement. This Agreement contains the entire agreement of the parties relating to the subject matter of this Agreement and supersedes any prior agreement and any other prior or contemporaneous oral or written understanding or agreement between the parties relating to such subject matter. Any such prior agreement is terminated in its entirety, and shall no longer have any force or effect, as of the date first above written. 9. Successors Binding Agreement. (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure by the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall constitute a breach of this Agreement and the provisions of Section 3 of this Agreement shall apply. As used in this Agreement, "Company" shall mean the Company as defined previously and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise. (b) This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, heirs, distributees, devisees, and legatees. If the Executive should die after a Notice of Termination is delivered by the Executive and any amounts would be payable to the Executive under this Agreement if the Executive had continued to live, all such amounts shall be paid in accordance with the terms of this Agreement if paid in accordance with the terms of this Agreement to the Executive's devisee, legatee, or other designee, or, if there is no such designee, to the Executive's estate. 10. Validity. The invalidity or unenforceability of any provision of this shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 11. Applicable Law. This Agreement shall be governed by and construed in the domestic laws (but not the law of conflicts of law) of the Commonwealth of Pennsylvania. 12. Headings. The headings of the sections of this Agreement are for convenience only and shall not control or affect the meaning or construction or limit the scope or intent of any provisions of this Agreement. 44 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. PROGRESS FINANCIAL CORPORATION By: /s/ W. Kirk Wycoff ---------------------- Title: Chairman of the Board (SEAL) ---------------------- Attest: /s/ Joyce E. Bilger ---------------------- Secretary Witness: /s/ Sandra Pascale /s/ Eric J. Morgan ----------------------- ---------------------- Eric J. Morgan Senior Vice President and Secretary 45 EX-11 7 COMPUTATION OF EARNINGS PER SHARE Exhibit (11) Computation of Earnings Per Share
For the Years Ended December 31, 1998 1997 1996 ---- ---- ---- A. Income before cumulative effect of accounting change $ 5,026,000 $ 3,467,000 $ 1,343,000 B. Cumulative effect of accounting change, net of tax benefit (46,000) -- -- ----------- ----------- ----------- C. Net Income applicable to common stock $ 4,980,000 $ 3,467,000 $ 1,343,000 =========== =========== =========== Basic Earnings Per Share: D. Average common shares outstanding 4,881,017 4,235,742 4,138,977 =========== =========== =========== Primary Earnings Per Share: Income before cumulative effect of accounting change (A/D) $ 1.03 $ 0.82 $ 0.32 Cumulative effect of accounting change, net of tax benefit (B/D) (.01) -- -- ----------- ----------- ----------- Net income (C/D) $ 1.02 $ 0.82 $ 0.32 =========== =========== =========== Fully Diluted Earnings Per Common Share: Average shares outstanding 4,881,017 4,235,742 4,138,977 Dilutive average common shares outstanding under options and warrants 782,892 675,912 639,415 Exercise prices $.91 to $.91 to $.91 to $15.71 $10.32 $5.22 Assumed proceeds on exercise $ 4,624,411 $ 3,224,101 $ 2,776,937 Market value per share $ 16.0510 $ 11.1100 $ 6.0796 Less: Treasury stock purchases with the assumed proceeds from exercise of options and warrants 288,107 290,198 456,763 ----------- ----------- ----------- E. Fully diluted average common shares outstanding 5,375,802 4,621,456 4,321,629 =========== =========== =========== Fully Diluted Earnings Per Common Share: Income before cumulative effect of accounting change (A/E) $ 0.94 $ 0.75 $ 0.31 Cumulative effect of accounting change, net of tax benefit (B/E) (.01) -- -- ----------- ----------- ----------- Net income (C/E) $ 0.93 $ 0.75 $ 0.31 =========== =========== ===========
46 EX-13 8 ANNUAL REPORT [LOGO] STRATEGIES FOR GROWTH CORPORATE PROFILE Progress Financial Corporation (PFC) is headquartered in Blue Bell, Pennsylvania. Our primary business, Progress Bank, is a federally chartered stock savings bank serving businesses and consumers through full-service offices in Bridgeport, Conshohocken, East Norriton, Jeffersonville, King of Prussia, Lansdale, Norristown, Paoli, Plymouth Meeting, Rosemont and the Andorra section of Philadelphia, Pennsylvania. The bank has active lending programs to meet the needs of businesses, real estate entrepreneurs, home builders and consumers in its market area. Additionally, the specialized lending division provides loans and mezzanine financing to venture-backed and emerging growth companies. The bank also provides equipment leasing for small and medium-sized companies through its subsidiary, Progress Leasing Company. In addition to banking, PFC conducts commercial mortgage banking and mortgage brokerage services through its subsidiary, Progress Realty Advisors, Inc., business-to-business telemarketing through Procall Teleservices, Inc., and financial planning and insurance services through Progress Financial Resources, Inc. Progress Financial Corporation's stock is traded on the Nasdaq Stock Market under the symbol PFNC. [LOGO] FINANCIAL HIGHLIGHTS (In thousands, except per share data)
1998 1997** Change - -------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------- Income Net interest income $ 22,879 $ 18,603 22.99% Provision for possible loan and lease losses . 959 1,509 (36.45) Non-interest income 8,660 6,642 30.38 Non-interest expense 22,676 18,047 25.65 Income before income taxes and cumulative effect of accounting change 7,904 5,689 38.93 Net income 4,980 3,467 43.64 Per Share* Net income (fully diluted) $ 0.93 $ 0.75 24.00% Book value 8.21 5.90 39.15 Stock price High 21 43/64 15 23/32 Low 11 1/2 7 5/16 Balance Sheet Assets $647,382 $508,060 27.42% Earning assets 607,253 456,213 33.11 Loans and leases, net 394,246 339,903 15.99 Deposits 406,518 340,761 19.30 Stockholders' equity 41,554 25,362 63.84 Selected Ratios Return on average assets 0.88% 0.80% Return on average stockholders' equity 13.76 15.22 Net interest margin 4.32 4.58 Average stockholders' equity to average assets 6.43 5.23 Non-performing assets as a percentage of total assets 0.57 0.50
*Per share amounts have been restated to reflect the 5% stock dividend distributed to shareholders on August 31, 1998. **All prior financial information has been restated to include the 1998 acquisition of PAM Holding Corp. and subsidiaries. In the printed version, there are four bar graphs with the following plot points depicted:
Loans and Leases (in millions) 96 97 98 ------ ------- ------- $266.0 $ 339.9 $ 394.2 Deposits (in millions) 96 97 98 ------ ------- ------- $306.2 $ 340.8 $ 406.5 Non-Interest Income (in millions) 96 97 98 ------ ------- ------- $ 5.1 $ 6.6 $ 8.7 Net Interest Income (in millions) 96 97 98 ------ ------- ----- $ 14.3 $ 18.6 $22.9
TO OUR SHAREHOLDERS [PHOTO] W. Kirk Wycoff Chairman and Chief Executive Officer Progress Financial Corporation (PFC)has been transformed. It is now a dynamic, competitive and sought-after provider of financing for entrepreneurs and businesses. Its non-bank businesses are profitable and growing as they follow definitive strategic plans. Our clients, employees and shareholders have enjoyed significant capital appreciation over the past three years, while consistent stock and cash dividends have contributed to this growth. The financial performance of PFC and Progress Bank was excellent in 1998, as evidenced by a 44 percent increase in net income over the previous year. Growth in assets was also impressive, with annual percentage growth rates of 27 percent in 1998 and 1997, and 11 percent in 1996. The expansion of the banking market in the Philadelphia metropolitan area--the result of a robust local economy and customer dislocation from recent bank mergers--enabled Progress Bank to establish itself as a key provider of financial services to our target clients. New Initiatives The acquisition of Primary Capital Corp, a capital equipment financing firm, in November 1998 and its merger into Progress Leasing Company (PLC) was an important investment for Progress Bank. PLC now provides us the depth of management experience needed to grow our small-ticket leasing division. In November 1998, we announced our entry into the insurance distribution field with the formation of Progress Financial Resources, Inc., which commenced operation in January 1999. An experienced team of five senior managers and two dozen producers and support staff bring immediate firepower to this strategy. In a partnership with The Equitable and EQ Financial Consultants, this group offers financial planning, corporate benefits, 401(k) plans and estate-planning services to our clients. Finally, in 1999 we are pleased to report that two of our clients--early stage companies that chose Progress Bank as their first and only financial services provider--are poised to go public. Due to our willingness to finance these companies in their infancy, Progress Capital, Inc., a subsidiary of PFC, is a warrant holder in both entities. Outlook for 1999 The stock market correction in the third quarter of 1998 temporarily dulled the luster of our strong domestic economy. Yet at year-end, a strong housing market and vigorous auto sales stimulated an historic market rebound. At this PAGE 2 [LOGO] time, it appears that 1999 will bring another year of increased new business development and a continued push for efficiency and consolidation in many industries, banking included. We anticipate that Progress Bank's growth will also continue in 1999. Our management team, lending groups, retail client service representatives and operations staff all contributed to our significant expansion in loans and deposits in 1998. We expect that trend to continue as our target lending clients are reminded daily that the mega banks cannot match Progress Bank's quick turnaround and flexible terms. Likewise, development of our retail distribution network will continue as we open our Lionville, Pa. and Southampton, Pa. offices during the first half of 1999. Core deposit growth and the distribution of a broad range of financial service products require that we open two or three new locations per year, despite the cost of such development. Our expansion will continue to focus on Bucks, Chester, Montgomery and Philadelphia counties. 1999 is also an important year for our non-bank businesses. We are dedicating significant resources to developing strategies for Procall Teleservices, Inc., Progress Realty Advisors, Inc. and our newest subsidiary, Progress Financial Resources, Inc. We expect each of these companies to demonstrate its ability to generate increased income and to add to the range and scope of financial products we deliver to our clients. Finally, in 1998, we consolidated our Operations Division, which will spearhead a new emphasis on operating efficiency. Across our organization, we will be working hard to expertly manage our operating expenses to increase our returns to shareholders. Looking ahead, we remain committed to our strategy to provide all of our shareholders with first-rate service and diverse products as we reach toward the new millennium. Our new moniker says it all: Put us to the test. We are confident that we can compete effectively and win your business. /s/ W. Kirk Wycoff - ------------------ W. Kirk Wycoff Chairman and Chief Executive Officer PAGE 3 RETAIL BANKING The goal of the retail banking team is to develop new relationships and to solidify existing relationships, enabling Progress Bank to become the financial institution of choice for more and more businesses and households. Ultimately, we seek to form partnerships with all of our clients to help them achieve their financial goals. In 1998, we added over 2,000 new households, while growing core deposits by 18 percent. This growth reflected the success of our "Partners in Progress" initiative, a consultative sales and service strategy designed to benefit our clients, our staff and our company. Banking is a business dictated by convenience. That is why, while our competitors continue to consolidate and close branches, we remain committed to offering our clients the delivery channel of their choice, such as telephone banking, automatic teller machines and our upcoming Internet banking product. We believe, however, that these delivery channels serve to augment traditional branches and personal service, not replace it. In 1998, we opened a new branch office in East Norriton and we have recently relocated our Paoli office to maximize its potential. In 1999, we will continue to add locations, including new offices in both Chester and Bucks counties during the second quarter. We are also exploring additional sites in Montgomery and Philadelphia counties. From left: Progress Bank Senior Vice Presidents, Steven D. Hobman, Specialized Lending; Michael J. Falco, Construction Lending; Donald M. DeMaio, Retail Banking; and Robert J. Bifolco, Commercial Banking. [PHOTO] PAGE 4 [LOGO] COMMERCIAL BANKING The Commercial Banking Division provides customized loan, deposit and investment products, as well as cash management services to small and middle-market businesses. The division's focus is on business banking services, residential tract home development loans, commercial construction financing, investment property mortgages, cash management and private banking. Commercial Banking reported exceptional growth in 1998. The group generated $142 million in total loan production; $51 million in business lending; $67 million in commercial and home construction lending; and $24 million in commercial mortgages. This activity resulted in $1.4 million in fees for the division and more than 80 new client relationships. Our excellent performance was buoyed by a strong residential housing market and generally positive business trends in all facets of the economy. Nonetheless, we maintained our underwriting standards and bolstered our reserves during 1998 as a precaution against an eventual economic downturn. During 1999, Commercial Banking will decentralize part of its lending staff into two loan production offices in Lionville (Chester County, Pa.) and Southampton (Bucks County, Pa.), where we expect to expand existing connections with clients and cultivate new relationships in these fast-growing areas. In the printed version, there is a bar graph with the following plot points depicted: Loans (in millions) 96 97 98 ------ ------- ---- $ 141.4 $205.9 $271.7 SPECIALIZED LENDING Progress Bank's Specialized Lending Division (SLD) provides customized financial services to leading-edge companies in technology, health care and insurance. In 1998, SLD increased its loan portfolio to nearly $34 million outstanding and increased business checking by more than 100 percent to more than $12 million. Among the division's 28 new credit relationships are the Software Consulting Group, an information technology firm, and Continuum Health Care, an occupational health management company. During 1998, SLD served as a preferred provider for the Eastern Technology Council, a non-profit trade association for technology companies. Through their "TechBanc" program, the division marketed the entire range of PFC products and services to member companies and their employees. By meeting the unique needs of emerging companies at different stages in their growth cycles and through its understanding of the technology industry, SLD has earned a reputation as a key provider of value-added services. In 1998, it began to penetrate and expand in southern New Jersey. In addition, in 1998, the Ben Franklin-Progress Capital Fund began making subordinated debt investments in existing bank clients and potential bank clients. During 1999, SLD will continue to look for emerging companies with which to do business, and it will continue to strengthen ties with the venture capital community to provide clients with a full range of funding alternatives. PAGE 5 COMMERCIAL MORTGAGE BANKING Progress Realty Advisors, Inc. (PRA), our full-service commercial mortgage banking subsidiary, placed more than $290 million of real estate financing in 1998, compared to $124 million in 1997. During the year, PRA financed 100 properties in a territory that extends from southern Connecticut to North Carolina. PRA also added a loan origination office in Wilmington, Del., through a joint venture that established Progress Realty Advisors of Delaware, LLC. With this acquisition, PRA now maintains five origination offices: Blue Bell, Pa.; Chesapeake, Va.; Richmond, Va.; Wilmington, Del.; and Woodbridge, N.J. A new office in Raleigh, N.C. is expected to open during the first quarter of 1999. In addition, PRA's Health Care Capital Group helped health care firms select, structure and negotiate equipment and real estate financing. In 1998, this group continued to expand its market presence working with long-term and senior care providers, hospitals and physician groups. In 1999, production and profitability are expected to grow as a result of increased origination throughout PRA's service area and through strategic acquisitions to further expand its business. EQUIPMENT LEASING Progress Financial Corporation has expanded its ability to provide diversified equipment-leasing services. During 1998, PFC acquired two more companies, Primary Capital Corp of Norristown, Pa. and PAM Financial Corporation of Bethlehem, Pa. These two subsidiaries joined the former Equipment Leasing Company of Timonium, Md., and the Quaker State Leasing Company of Blue Bell, Pa., to operate under the new name, Progress Leasing Company (PLC). With each new acquisition, PLC has added to the depth of its management team in terms of experience and specialized expertise. Today, it is able to develop leasing arrangements for essential-use equipment of any size for companies ranging from small businesses to Fortune 500 firms. In addition, the new name is bolstering the subsidiary's marketing efforts by closely associating it with the financial strength of Progress Financial Corporation. PLC continues to seek to grow its business through expansion of vendor business with both current and new clients, by portfolio acquisition and by acquiring additional leasing companies. In the printed version there is a bar graph with the following plot points depicted: Leases (in millions) 96 97 98 ----- ----- ---- $40.9 $56.1 $73.5 BUSINESS TELESERVICES Procall Teleservices, Inc. is a state-of-the-art call center, specializing in telemarketing, telesales, customer service and market research. The group provides valuable marketing and client service support to businesses ranging from start-up companies to Fortune 500 companies, including PAGE 6 [LOGO] PFC subsidiaries. As a combination in-bound/out-bound telemarketing firm, Procall develops leads for clients and also functions as a solution for companies that want to outsource their customer service divisions. Procall matches executives they hire with clients who can benefit from the executives' years of experience in similar fields. Procall invested in new technology in 1998, specifically a state-of-the-art digital switching and software controlled communication system. This mix of sophisticated technology and very experienced people has achieved outstanding results for Procall clients. Procall anticipates growing demand for its services due to the explosion of Internet commerce, the deregulation of the utility industry, the current tight labor market and the trend to outsource. From left: PFC Subsidiary Heads, George R. Mark, Executive Vice President, PFC; Dennis M. Horner, Executive Vice President, Progress Leasing Company; Claudia B. Timbo, President, Procall Teleservices, Inc.; Michael A. Basile, Jr., President, Progress Leasing Company; and H. Wayne Griest, President and Chief Executive Officer, Progress Realty Advisors, Inc. [PHOTO] DEVELOPMENT SERVICES In 1998, PFC ventured into commercial real estate development consulting. Its new joint venture, Progress Development L.P., has an equity interest in and provides fee-based consulting services to NewSeasons Assisted Living Communities, Inc., a company with a current network of ten assisted living facilities in the tri-state area. The assisted living housing industry is the fastest growing segment of the elderly housing market. This market has enjoyed robust growth in Pennsylvania, a state with one of the largest elderly populations in the country. With its equity interest in NewSeasons, Progress Development L.P. is well positioned at an early stage in the life cycle of the industry to grow its business in response to the rapidly changing demographics of the elderly population in the region. PAGE 7 FINANCIAL REVIEW Progress Financial Corporation is pleased to report continued strong financial performance throughout 1998--results that underscore the soundness of our fundamental strategic direction. We have succeeded in placing PFC on firm financial footing by nurturing our core banking relationships and complementing this business with strategically related acquisitions. Our traditional banking units and non-bank subsidiaries team up to offer personalized attention and a full menu of products and services to businesses, professionals and entrepreneurs. Progress Financial Corporation reported a record earning per share of $.93, which translates into a 24 percent growth over 1997. PFC also rewarded shareholders with a 5 percent stock dividend, along with an increase in the quarterly cash dividend of $.01 per share. PFC issued 792,800 new shares in May 1998 with proceeds of $14.3 million which, including 1998 earnings, brought shareholder's equity to $41.6 million or a book value of $8.21 per share. Progress Bank achieved loan and leasing growth of 23 percent in 1998, funded by 19 percent deposit growth primarily from retail offices, including our new Northtowne branch, which opened in February 1998. Moreover, our demand deposits grew to 32 percent of total deposits thanks to our newly implemented Partners in Progress sales program. Our corporate diversification plan flourished in 1998 as we generated increased fee income from our non-bank businesses. Progress Realty Advisors, Inc. generated $2.2 million in placement fees. Procall Teleservices, Inc., in its second year, recorded third-party revenue of $1.0 million while continuing to manage all of Progress Bank's customer service and outbound calling requirements. Progress Capital, Inc. and Progress Development Corp.--our other subsidiaries--were also successful in generating non-interest revenue and profits for the corporation. From left: Progress Senior Vice Presidents, Michael B. High, Chief Financial Officer; Georgann Berger McKenna, Human Resources; Eric J. Morgan, Credit and Administration; and Richard T. Powers, Operations. [PHOTO] PAGE 8 PROGRESS FINANCIAL CORPORATION AND SUBSIDIARIES 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, 1998 1997 1996 1995 1994 - ------------ ---- ---- ---- ---- ---- Financial Condition Investment securities: Available for sale $ 17,909 $ 6,395 $ 3,462 $ 5,504 $ 4,627 Held to maturity 12,401 4,051 1,937 2,149 12,867 Mortgage-backed securities: Available for sale 146,459 44,518 42,738 36,842 9,103 Held to maturity -- 49,421 47,334 52,833 93,673 Loans and leases, net 394,246 339,903 265,968 236,025 205,771 Loans held for sale 25,250 373 599 3,153 351 Real estate owned, net -- 380 2,150 728 4,534 Total assets 647,382 508,060 398,679 360,660 348,189 Deposits 406,518 340,761 306,248 297,260 283,958 Borrowings 167,416 84,247 63,403 40,626 47,052 Capital securities 15,000 15,000 -- -- -- Stockholders' equity 41,554 25,362 20,594 16,957 13,020 Results of Operations Interest income $ 45,329 $ 36,497 $ 30,114 $ 27,052 $ 22,830 Interest expense 22,450 17,894 15,820 15,600 12,505 Net interest income 22,879 18,603 14,294 11,452 10,325 Provision for possible loan and lease losses 959 1,509 781 641 521 Net interest income after provision for possible loan and lease losses 21,920 17,094 13,513 10,811 9,804 Non-interest income 8,660 6,642 5,100 2,331 1,545 Non-interest expense 22,676 18,047 16,466 12,273 12,065 Income (loss) before income taxes and cumulative effect of accounting change 7,904 5,689 2,147 869 (716) Tax expense (benefit) 2,878 2,222 804 (1,851) -- Income (loss) before cumulative effect of accounting change 5,026 3,467 1,343 2,720 (716) Cumulative effect of accounting change, net of tax (46) -- -- -- -- Net income (loss) $ 4,980 $ 3,467 $ 1,343 $ 2,720 $ (716) Per Share Data Basic income (loss) per common share before cumulative effect of accounting change $ 1.03 $ .82 $ .32 $ .74 $ (.19) Fully diluted income (loss) per common share before cumulative effect of accounting change .94 .75 .31 .71 (.19) Basic net income (loss) per common share 1.02 .82 .32 .74 (.19) Fully diluted net income (loss) per common share .93 .75 .31 .71 (.19) Dividends .14 .10 .04 -- -- Book value 8.21 5.90 4.90 4.60 3.55 Operating Data Return on average assets .88% .80% .36%* .77% (.21)% Return on average stockholders' equity 13.76 15.22 6.83* 18.78 (5.24) Average stockholders' equity to average assets 6.43 5.23 5.24 4.08 4.01 Allowance for possible loan and lease losses to total loans and leases 1.06 1.12 1.39 .96 .72 Non-performing assets as a percentage of total assets .57 .50 .96 1.33 2.56 Interest rate spread 3.66 3.98 3.66 3.09 3.04 Net interest margin 4.32 4.58 4.06 3.40 3.23 Dividends declared as a percent of net income per share 13.73 12.20 12.50 -- -- Branch Data Number of full service branches 11 10 10 9 8 *Excluding the 1996 one-time SAIF assessment, return on average assets was .68% and return on average equity was 12.92%.
PAGE 9 PROGRESS FINANCIAL CORPORATION AND SUBSIDIARIES Management's Discussion & Analysis of Financial Condition & Results of Operations This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and related notes. Other information is available in Form 10-K filed with the Securities and Exchange Commission. Progress Financial Corporation (the "Company") is a unitary thrift holding company that has six subsidiaries: Progress Bank (the "Bank"), Progress Realty Advisors, Inc. ("PRA"), Progress Capital, Inc. ("PCI"), Procall Teleservices, Inc. ("PTI"), Progress Development Corp. ("PDC"), and Progress Capital Management, Inc. ("PCM"). The Bank's primary subsidiary is Progress Leasing Company ("PLC"), formerly The Equipment Leasing Company ("ELC"), also doing business as Quaker State Leasing Company ("QSL"). 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 1998 data. On January 14, 1998, the Company acquired PAM Holding Corporation and its subsidiaries, PAM Financial and PAM Investment Company, which had audited assets and stockholders' equity of $15.5 million and $235,000, respectively, at December 31, 1997. The transaction was accounted for under the pooling of interests method of accounting during 1998. The Company issued 61,835 shares of common stock for all of PAM Holding Corporation's common shares outstanding. The prior period financial information has been restated to include PAM Holding Corporation and its subsidiaries. The acquisition did not have a material impact on the financial statements. 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 $5.0 million for the year ended December 31, 1998, in comparison with $3.5 million and $1.3 million for the years 1997 and 1996, respectively. The results for 1996 are after a special one-time assessment for the Savings Association Insurance Fund ("SAIF") of $1.8 million. The basic net income per common share was $1.02 for 1998 in comparison with $.82 for 1997, and $.32 for 1996. Fully diluted net income per common share was $.93 for 1998, $.75 for 1997 and $.31 for 1996, respectively. Return on average stockholders' equity was 13.76% and return on average assets was .88% for the year ended December 31, 1998. For 1997 return on average stockholders' equity was 15.22% and return on average assets was .80%. Return on average stockholders' equity was 6.83% and return on average assets was .36% for 1996. Results for 1998 reflect a higher net interest income of $22.9 million, in comparison with $18.6 million and $14.3 million for 1997 and 1996, respectively. Results for 1998 also include $959,000 in provision for possible loan and lease losses in comparison with $1.5 million and $781,000 for 1997 and 1996, respectively. Non-interest income amounted to $8.7 million for 1998, a $2.1 million increase over the $6.6 million earned in 1997, and a $3.6 million increase over the $5.1 million reported in 1996. Non-interest income increased in 1998 in comparison with 1997, primarily due to loan brokerage and advisory fees and teleservices fee income. Non-interest expense amounted to $22.7 million for 1998, a $4.7 million increase over the $18.0 million reported in 1997 and a $6.2 million increase over the $16.5 million reported in 1996. The increase in 1998 is primarily due to an increase in salaries and benefits, mainly due to additional employees of companies acquired and a higher cost of benefits. Results for 1998 include income tax expense of $2.9 million (excluding the tax benefit of $26,000 on the cumulative effect of accounting change) compared to an income tax expense of $2.2 million in 1997 and an income tax expense of $804,000 in 1996. Net Interest Income Net interest income totalled $22.9 million, $18.6 million and $14.3 million for the years ended December 31, 1998, 1997, and 1996, respectively. The $4.3 million increase in net interest income in 1998 compared to 1997 was due to a $22.6 million net increase in average interest-earning assets over average interest-bearing liabilities. Total average interest-earning assets increased $124.2 million while total average interest-bearing liabilities increased $101.6 million. The increase in total average interest-earning assets was primarily due to a $45.6 million increase in mortgage-backed securities, a $27.8 million increase in commercial business loans and a $27.8 million increase in commercial real estate loans. In addition, lease financing increased $12.5 million and investment securities increased $11.1 million while single family residential loans decreased $6.2 million. The increase in interest-bearing liabilities was due to a $46.3 million increase in average interest-bearing deposits and a $55.4 million increase in average borrowings. The Company's interest rate spread decreased 32 basis points in 1998, compared to 1997 (with 100 basis points equalling 1.0%) due to a 44 basis point decrease in the rate on earning assets partially offset by a 12 basis point decrease in the rate on interest-bearing liabilities. The $4.3 million increase in net interest income in 1997 compared to 1996, was due to a $53.9 million increase in average interest-earning assets, which was partially offset by a $34.8 million increase in average interest-bearing liabilities. The increase in average interest-earning assets was primarily due to a $27.1 million increase in commercial business loans and a $26.6 million increase in lease financing. In addition, commercial real estate loans and construction loans increased by $11.3 million and $9.3 million. These increases were partially offset by decreases of $16.3 million and $8.0 million in single-family residential loans and mortgage-backed securities, respectively. The Company's interest rate spread increased 32 basis points in 1997 compared to 1996 due to a 43 basis point increase in the rate on earning assets offset by an 11 basis point increase in the rate on interest-bearing liabilities. The following table sets forth, for the periods indicated, information regarding (i) 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. PAGE 10 Distribution of Average Assets, Liabilities and Stockholders' Equity
For the years ended December 31, 1998 1997 - ---------------------------------------------------------------------------------------------------------- Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate ----------------------------------------------------------------- Interest-earning assets: Investment securities and other interest-earning assets (1) $ 22,020 $ 1,175 5.34% $ 10,879 $ 625 5.75% Mortgage-backed securities (1) 134,528 8,686 6.46 88,937 6,065 6.82 Single family residential loans (2) 54,890 4,193 7.64 61,084 4,875 7.98 Commercial real estate loans (3) 123,113 10,868 8.83 95,353 8,774 9.20 Construction loans 31,611 3,432 10.86 27,371 3,038 11.10 Commercial business loans 77,268 7,487 9.69 49,515 4,833 9.76 Lease financing 60,446 7,298 12.07 47,933 6,198 12.93 Consumer loans 26,217 2,190 8.35 24,796 2,089 8.42 ----------------------------------------------------------------- Total interest-earning assets 530,093 45,329 8.55% 405,868 36,497 8.99% ----------------------------------------------------------------- Non-interest-earning assets (6) 33,015 29,542 ----------------------------------------------------------------- Total assets $563,108 $435,410 ----------------------------------------------------------------- Interest-bearing liabilities: Interest-bearing deposits: NOW and Super NOW $ 51,515 1,384 2.69% $ 31,688 679 2.14% Money market accounts 33,722 999 2.96 37,199 1,181 3.17 Passbook and statement savings 31,314 725 2.32 29,698 810 2.73 Time deposits 206,158 11,358 5.51 177,860 9,687 5.45 ----------------------------------------------------------------- Total interest-bearing deposits 322,709 14,466 4.48 276,445 12,357 4.47 FHLB borrowings 69,069 3,996 5.79 33,332 2,108 6.32 Other borrowings 67,301 3,988 5.93 47,683 3,429 7.19 ----------------------------------------------------------------- Total interest-bearing liabilities 459,079 22,450 4.89% 357,460 17,894 5.01% ----------------------------------------------------------------- Non-interest-bearing liabilities (6) 52,842 46,415 ----------------------------------------------------------------- Total liabilities 511,921 403,875 ----------------------------------------------------------------- Capital securities 15,000 8,750 Stockholders' equity 36,187 22,785 ----------------------------------------------------------------- Total liabilities, capital securities and stockholders' equity $563,108 $435,410 ----------------------------------------------------------------- Net interest income $ 22,879 $ 18,603 ----------------------------------------------------------------- Interest rate spread (4) 3.66% 3.98% ----------------------------------------------------------------- Net interest margin (5) 4.32% 4.58% ----------------------------------------------------------------- Average interest-earning assets to average interest-bearing liabilities 115.47% 113.54% ----------------------------------------------------------------- For the years ended December 31, 1996 - --------------------------------------------------------------------------------------------- Average Yield/ Balance Interest Rate ------------------------------ Interest-earning assets: Investment securities and other interest-earning assets (1) $ 8,964 $ 586 6.54% Mortgage-backed securities (1) 96,959 6,443 6.65 Single family residential loans (2) 77,360 6,035 7.80 Commercial real estate loans (3) 84,101 7,991 9.50 Construction loans 18,106 2,050 11.32 Commercial business loans 22,443 2,213 9.86 Lease financing 21,342 2,838 13.30 Consumer loans 22,724 1,958 8.62 ------------------------------ Total interest-earning assets 351,999 30,114 8.56% ------------------------------ Non-interest-earning assets (6) 22,935 ------------------------------ Total assets $374,934 ------------------------------ Interest-bearing liabilities: Interest-bearing deposits: NOW and Super NOW $ 27,977 594 2.12% Money market accounts 33,781 1,023 3.03 Passbook and statement savings 28,258 806 2.85 Time deposits 178,677 9,597 5.37 ------------------------------ Total interest-bearing deposits 268,693 12,020 4.47 FHLB borrowings 27,901 1,746 6.26 Other borrowings 26,031 2,054 7.89 ------------------------------ Total interest-bearing liabilities 322,625 15,820 4.90% ------------------------------ Non-interest-bearing liabilities (6) 32,654 ------------------------------ Total liabilities 355,279 ------------------------------ Capital securities -- Stockholders' equity 19,655 ------------------------------ Total liabilities, capital securities and stockholders' equity $374,934 ------------------------------ Net interest income $ 14,294 ------------------------------ Interest rate spread (4) 3.66% ------------------------------ Net interest margin (5) 4.06% ------------------------------ Average interest-earning assets to average interest-bearing liabilities 109.10% ------------------------------ (1)Includes investment and mortgage-backed securities classified as available for sale. Yield information does not give effect to changes in fair value that are reflected as a component of stockholders' equity. (2)Includes mortgage loans held for sale. (3)Includes commercial real estate loans held for sale. (4)Interest rate spread represents the difference between the weighted average yield on interest-earning assets, and the weighted average cost of interest-bearing liabilities. (5)Net interest margin represents net interest income divided by average interest-earning assets. (6) For the years ended December 31, 1998 1997 1996 - -------------------------------------------------------------------------------- Non-interest-earning assets: Cash $10,093 $ 8,573 $ 6,064 Allowance for possible loan and lease losses (4,339) (3,887) (5,287) Other assets 27,261 24,856 22,158 ----------------------------- Total non-interest-earning assets $33,015 $29,542 $22,935 ============================= Non-interest-bearing liabilities: Non-interest-bearing deposits $40,928 $35,292 $25,521 Other liabilities 11,914 11,123 7,133 ----------------------------- Total non-interest-bearing liabilities $52,842 $46,415 $32,654 =============================
Rate/Volume Analysis The following table presents the degree to which changes in the Company's 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 have been allocated proportionately. Amounts in brackets represent a decrease in interest income or expense. PAGE 11
For the years ended December 31, 1998 vs. 1997 1997 vs. 1996 - --------------------------------------------------------------------------------------------------------- Volume Rate Total Volume Rate Total --------------------------------------------------------------------- Interest-earning assets: Investment securities and other interest-earning assets $ 598 $ (48) $ 550 $ 115 $ (76) $ 39 Mortgage-backed securities 2,957 (336) 2,621 (541) 163 (378) Single family residential (480) (202) (682) (1,296) 136 (1,160) Commercial real estate loans 2,460 (366) 2,094 1,041 (258) 783 Construction loans 461 (67) 394 1,029 (41) 988 Commercial business 2,689 (35) 2,654 2,642 (22) 2,620 Lease financing 1,534 (434) 1,100 3,441 (81) 3,360 Consumer loans 118 (17) 101 177 (46) 131 --------------------------------------------------------------------- Total 10,337 (1,505) 8,832 6,608 (225) 6,383 --------------------------------------------------------------------- Interest-bearing liabilities: Deposits 2,081 28 2,109 337 -- 337 FHLB borrowings 2,079 (191) 1,888 345 17 362 Other borrowings 1,235 (676) 559 1,572 (197) 1,375 --------------------------------------------------------------------- Total 5,395 (839) 4,556 2,254 (180) 2,074 --------------------------------------------------------------------- Net interest income $ 4,942 $ (666) $ 4,276 $ 4,354 $ (45) $ 4,309 ---------------------------------------------------------------------
Interest Income Total interest income amounted to $45.3 million for 1998, an increase of $8.8 million or 24.2% when compared to 1997. Interest income on mortgage-backed securities increased $2.6 million as the average volume increased $45.6 million and the average yield decreased 36 basis points. Interest income on commercial business loans, commercial real estate loans and lease financing increased $2.7 million, $2.1 million and $1.1 million, respectively, as the average volume increased $27.8 million, $27.8 million and $12.5 million, respectively. The average yield on these loans decreased 7 basis points, 37 basis points, and 86 basis points, respectively. Interest income on construction loans increased $394,000 as the average volume increased $4.2 million and the average yield decreased 24 basis points. Interest income on single family residential loans decreased $682,000 as the average volume decreased $6.2 million and the average yield decreased 34 basis points. Interest income on investment securities and other interest-earning assets increased $550,000 as the average balance increased $11.1 million which more than offset a 41 basis point decrease in the average yield. Total interest income amounted to $36.5 million for 1997, an increase of $6.4 million or 21.2% when compared to 1996. Interest income on lease financing and commercial business loans increased $3.4 million, and $2.6 million as the average volume increased $26.6 million and $27.1 million, respectively. The average yield on these loans decreased 37 basis points and 10 basis points, respectively. Interest income on construction loans, commercial real estate and consumer loans increased $988,000, $783,000 and $131,000, respectively, as the average volume increased $9.3 million, $11.3 million and $2.1 million, respectively. The average yield on these loans decreased 22 basis points, 30 basis points and 20 basis points, respectively. Interest income on single-family residential loans decreased by $1.2 million as the average volume decreased $16.3 million. Interest income on investment securities and other interest-earning assets increased $40,000 as the average volume increased $1.9 million and the average yield decreased 78 basis points. Interest income on mortgage-backed securities decreased $378,000 in 1997, as the average volume declined $8.0 million, which more than offset a 17 basis point increase in average yield. Interest Expense Total interest expense amounted to $22.5 million for 1998, an increase of $4.6 million or 25.5% when compared to 1997. Interest expense on deposits increased $2.1 million in 1998, as the average volume increased $46.3 million while the average rate on interest-bearing deposits remained unchanged. Interest expense on Federal Home Loan Bank of Pittsburgh ("FHLB") borrowings, increased $1.9 million due to an increase in average volume of $35.7 million. Interest expense on other borrowings increased $559,000 due to an increase in average volume of $19.6 million partially offset by a decrease in the average rate of 126 basis points. Total interest expense amounted to $17.9 million for 1997, an increase of $2.1 million or 13.1% when compared to 1996. Interest expense on deposits increased $337,000 in 1997, as the average rate on interest-bearing deposits remained unchanged. Interest expense on FHLB borrowings increased by $362,000 in 1997, as the average rate increased 6 basis points and average volume increased $5.4 million. Interest expense on other borrowings increased $1.4 million, due to an increase in volume of $21.7 million while the average rate decreased 70 basis points. Provision for Possible Loan and Lease Losses The provision for possible loan and lease losses represents the charge against earnings that is required to fund the allowance for possible loan and lease losses. The 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, the results of the most recent regulatory examinations and other relevant factors. For the years ended December 31, 1998, 1997, and 1996, the provision for possible loan and lease losses amounted to $959,000, $1.5 million, and $781,000, respectively. The provision for possible loan and lease losses during 1998, 1997, and 1996, was an amount considered necessary by management to maintain the allowance at an adequate level after it was reduced by net charge-offs of $332,000, $1.4 million, and $173,000 during such respective years. The ratio of the allowance for possible loan and lease losses to total non-performing loans and leases was 121.91% at December 31, 1998, 177.28% at December 31, 1997, and 223.09% at December 31, 1996. PAGE 12 Although management utilizes its best judgment in providing for possible losses, there can be no assurance that the Bank will not have to increase its provision for possible 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 possible 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 possible 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 March 31, 1998. Non-interest Income For the years ended December 31, 1998 1997 1996 - -------------------------------------------------------------------- Non-interest income: Service charges on deposits $ 1,663 $ 1,451 $ 979 Lease financing fees 1,414 1,352 831 Teleservices fee income 1,034 663 -- Loan brokerage and advisory fees 2,108 842 645 Gain on sale of mortgage servicing rights -- 978 924 Gain from sale of securities 533 226 49 Gain on sale of loan and lease receivables 418 176 -- Gain from sale of loans held for sale -- -- 213 Gain (loss) on sale of real estate owned 203 (10) (10) Fees and other 1,287 964 1,469 ---------------------------- Total non-interest income $ 8,660 $ 6,642 $ 5,100 ---------------------------- Total non-interest income amounted to $8.7 million in 1998, a $2.0 million increase from the $6.7 million earned in 1997. Service charges on deposits increased $212,000 from the $1.5 million earned in 1997. This increase was mainly due to increased automated teller machine ("ATM") transaction fees. Lease financing fees amounted to $1.4 million, a $62,000 increase over 1997. Teleservices fee income increased $371,000 over the $663,000 earned in 1997. Loan brokerage and advisory fees were $2.1 million, a $1.3 million increase over 1997, substantially due to fees earned by the Company's subsidiary, PRA. 1997 included a gain of $978,000 on the sale of mortgage servicing rights. Gains from sales of securities amounted to $533,000 in 1998, in comparison to gains of $226,000 during 1997. This increase was attributable to continued favorable market conditions during 1998. The Company may decide to sell investments and mortgage-backed securities classified as available for sale in accordance with its asset/liability strategy or in response to changes in interest rates, prepayment rates, the need to increase the Bank's regulatory capital or similar factors. The securities available for sale portfolio amounted to $164.4 million, including $750,000 in net unrealized losses at December 31, 1998. During 1998 the Company recorded gains on the sale of loan and lease receivables of $418,000 compared to $176,000 in 1997. Gains on sale of real estate owned were $203,000 in 1998 in comparison to a loss of $10,000 in 1997. Total non-interest income amounted to $6.7 million in 1997, a $1.6 million increase from the $5.1 million earned in 1996. Service charges on deposits increased $472,000 from the $979,000 earned in 1996. This increase was mainly due to increased ATM transaction fees. Lease financing fees amounted to $1.4 million, a $521,000 increase over 1996. Loan brokerage and advisory fees were $842,000, a $197,000 increase over 1996, substantially due to fees earned by the Company's subsidiary, PRA. Teleservices fee income was $663,000 during 1997. During the first quarter of 1997 the Company sold $347.4 million of mortgage servicing rights which resulted in a gain of $978,000. During the first quarter of 1996 the Company sold $85.0 million of mortgage servicing rights which resulted in a gain of $924,000. Gains from the sales of securities amounted to $226,000 in 1997, in comparison to gains of $49,000 during 1996. This increase was attributable to favorable market conditions during 1997. The securities available for sale portfolio amounted to $50.9 million, including $743,000 in net unrealized gains at December 31, 1997. Gains from the sale of lease receivables amounted to $176,000 during 1997. During 1996 the Company sold $6.5 million of adjustable rate mortgage loans held for sale at a gain of $213,000. Net losses on sales of real estate owned remained unchanged at $10,000 in 1997 and 1996. Non-interest Expense December 31, 1998 1997 1996 - ------------------------------------------------------------------ Non-interest expense: Salaries and employee benefits $11,272 $ 8,554 $ 7,182 Occupancy 1,280 1,127 1,346 Data processing 1,073 1,067 1,137 Professional services 1,117 1,026 831 Furniture, fixtures, and equipment 1,085 842 638 Loan and real estate owned expenses, net 592 510 130 Deposit insurance premiums 207 237 2,579 Provision for real estate owned, net -- -- 25 Capital securities expense 1,593 925 -- Other 4,457 3,759 2,598 --------------------------- Total non-interest expense $22,676 $18,047 $16,466 --------------------------- Non-interest expense for 1998 amounted to $22.6 million an increase of $4.6 million from the $18.0 million recognized in 1997. Salaries and employee benefits increased $2.7 million, primarily due to increased staffing needs at the Bank and the recognition of additional staffing cost related to prior year acquisitions. Occupancy expense increased $153,000 to $1.3 million in 1998 from $1.1 million in 1997. The increase is primarily attributable to additional rent expense incurred in 1998 over 1997 from prior year acquisitions of two new off sight locations for PRA in Virginia and New Jersey. In addition, rental expense increased at the bank branch level. Professional services expense, which consists primarily of legal, accounting, tax and supervisory/examination fees and outside consulting fees, increased by $91,000. Audit and accounting services increased by $166,000 primarily due to the outsourcing of the internal audit function and due diligence related to potential acquisitions. This was partially offset by reductions in other outside consulting expense of $70,000. Furniture, fixtures and equipment expense increased $243,000 to $1.1 million for 1998 from $842,000 in 1997. The increase is primarily related to increased amortization. Capital securities expense totalled $1.6 million for 1998 compared to $925,000 for 1997, an increase of $668,000. The expense for 1998 represents a full year of interest incurred on $15.0 million of Corporation-obligated mandatory redeemable securities of subsidiary trust holding solely junior subordinated debenture of the Corporation, while in the prior year the Company was only obligated to account for seven months of capital securities expense. Other expense increased by $698,000 to $4.5 million, from $3.8 million in 1997. This includes increases in advertising, amortization of goodwill and other general and administrative expense. PAGE 13 Total non-interest expense amounted to $18.0 million during 1997, an increase of $1.5 million from the $16.5 million recognized during 1996. Excluding a special one-time premium of $1.8 million in 1996 to capitalize the SAIF, total other expense would have increased $3.3 million over 1996. Salaries and employee benefits increased $1.4 million, primarily due to the additional staff increase resulting from the ELC acquisition in the fourth quarter of 1996. Additionally, there was a higher cost of benefits in 1997. Occupancy expense decreased $219,000 to $1.1 million in 1997, from $1.3 million in 1996. This was partially due to the Company relocating its corporate headquarters during 1996. 1997 was the first full year that the Company was located in its new headquarters which resulted in a decrease in rental expense when compared to 1996. Data processing expense decreased $70,000 partially due to the Company converting several of their computer systems to a centralized provider. Professional services expense increased $195,000 primarily due to increased legal and professional expenses resulting from the activities of acquired and formed companies including PTI and PRA divisions located in Virginia and New Jersey. Also contributing to this increase were legal and professional expenses relating to the sale of several properties included in real estate owned. Furniture, fixtures and equipment expense increased $204,000 to $842,000 from $638,000 in 1996, primarily due to expenses related to ELC, PTI and other acquisitions including PRA divisions. Loan and real estate owned expenses increased $380,000 to $510,000 from $130,000 in 1996, due to expenses related to leases and real estate owned. Deposit insurance premiums decreased $2.3 million to $237,000 from $2.6 million in 1996, primarily due to a one-time premium of $1.8 million to capitalize the SAIF recognized in 1996. Capital securities expense of $925,000 was recognized in 1997, while there was no such expense in 1996. Other expenses increased $1.2 million to $3.8 million from $2.6 million in 1996. This includes increases in advertising, amortization of goodwill and other general and administrative expenses. Income Tax Expense The Company recorded income tax expense of $2.9 million in 1998, gross of the tax benefit of $26,000 due to the cumulative effect of accounting change, compared to $2.2 million in 1997 and $804,000 in 1996. The deferred tax asset valuation allowance was eliminated in 1996 as a result of management's determination of the outlook for future taxable income and the reduction in non-performing assets offset by the potential for a substantial special SAIF insurance assessment. Financial Condition Asset Liability Management The major objectives of the Bank's asset and liability management are to manage exposure to changes in the interest rate environment, ensure adequate liquidity and funding, preserve and build capital, and to maximize net interest income opportunities. The Bank 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, consider current economic conditions and anticipate the direction of interest rates, while managing 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 interest rate environment, a negative gap should adversely affect net interest income. The converse would be true for a positive gap. However, shortcomings are inherent in a simplified gap analysis that may result in an institution with a nominally negative gap having interest rate behavior associated with an asset sensitive balance sheet. For example, although certain assets and liabilities may have a similar maturity or periods to repricing, they may react in different degrees to changes in market interest rates. Furthermore, repricing characteristics of certain assets and liabilities may vary substantially within a given time period. In the event of a change in interest rates, prepayment and early withdrawal levels could also deviate significantly from those assumed in calculating gap. Management believes that the simulation of net interest income in different interest rate environments provides a more meaningful measure of interest rate risk. Simulation analysis incorporates the potential of all assets and liabilities to mature or reprice as well as the probability that they will do so. Simulation in net interest income over a two year period also incorporates the relative interest rate sensitivities of these items, and projects their behavior over an extended period of time. Finally, simulation analysis permits management to assess the probable effects on the balance sheet not only of changes in interest rates, but also of proposed strategies for responding to them. The Bank's simulation model analyzes interest rate sensitivity by projecting net interest income over the next twelve months in a flat rate scenario. The flat rate model projects growth in the Bank's loan portfolio and projects the mix of accounts within the loan portfolio. In addition, the Company must also make certain assumptions regarding the movement of the rates on its assets and liabilities, especially its deposit rates. The Bank projects net interest income in a rising rate scenario of 200 basis points over a twelve month period as well as a 200 basis point decrease in a declining rate scenario during this same period. The Bank then determines its interest rate sensitivity by calculating the difference in net interest income in the rising and declining rate scenarios versus the flat rate scenario. Based on this analysis at December 31, 1998 the Bank would experience an approximate .55% increase in net interest income over a one year period if rates rise 200 basis points in comparison to a flat rate scenario and an approximate 1.06% decrease in net interest income if rates decline 200 basis points. PAGE 14 Interest Rate Sensitivity The following table presents the anticipated maturities or repricing of the Company's interest-earning assets and interest-bearing liabilities for various time periods based on the information and the assumptions set forth in the notes below.
December 31, 1998 Less than three months Three months to one year One to five years - --------------------------------------------------------------------------------------------------------------------------- Amount Yield/Rate Amount Yield/Rate Amount Yield/Rate - --------------------------------------------------------------------------------------------------------------------------- Interest-earning assets: (1) Interest-earning deposits $ 6,498 4.70% $ -- --% $ -- --% Investment securities 9,464 3.89 -- -- 2,001 6.15 Mortgage-backed securities 9,340 6.28 24,476 6.28 112,643 6.28 Single family residential 1,807 8.43 9,857 8.36 12,752 7.09 Commercial real estate loans 17,020 8.89 5,184 9.22 68,235 8.65 Construction loans 38,794 8.75 720 8.00 5,499 8.35 Consumer loans 6,283 8.86 158 8.95 6,119 8.15 Commercial business 69,976 8.87 626 9.22 18,040 8.66 Lease financing 6,047 13.59 19,416 13.59 44,617 13.59 ------------------------------------------------------------------------------ Total interest-earning assets $165,229 8.42% $ 60,437 9.28% $269,906 8.37% ------------------------------------------------------------------------------ Interest-bearing liabilities: (2) Money market deposits $ 3,635 2.42% $ -- --% $ 34,299 2.42% NOW and Super NOW 19,162 2.87 -- -- 58,568 2.87 Passbook and statement savings 1,980 2.00 -- -- 28,863 2.00 Time deposits 46,956 5.01 107,398 5.29 52,025 5.47 Advances from FHLB 10,000 5.48 5,000 8.30 48,000 5.24 Other borrowings 11,136 5.01 29,150 5.87 36,130 5.25 ------------------------------------------------------------------------------ Total interest-bearing liabilities $ 92,869 4.45% $141,548 5.51% $257,885 4.01% ------------------------------------------------------------------------------ Excess (deficiency) of interest-earning assets over interest-bearing liabilities $ 72,360 $(81,111) $ 12,021 Cumulative excess (deficiency) of ------------------------------------------------------------------------------ interest-earning assets over interest-bearing liabilities $ 72,360 $ (8,751) $ 3,270 ------------------------------------------------------------------------------ Cumulative excess (deficiency) of interest-earning assets over interest-bearing liabilities as a percent of total assets 11.18% (1.35)% .51% ------------------------------------------------------------------------------ December 31, 1998 Five to ten years Over ten years - --------------------------------------------------------------------------------------------------- Amount Yield/Rate Amount Yield/Rate - --------------------------------------------------------------------------------------------------- Interest-earning assets: (1) Interest-earning deposits $ -- --% $ -- --% Investment securities -- -- 18,845 6.01 Mortgage-backed securities -- -- -- -- Single family residential 5,732 6.43 18,883 7.78 Commercial real estate loans 29,464 7.87 14,958 8.05 Construction loans -- -- -- -- Consumer loans 9,246 7.87 6,448 8.29 Commercial business 3,974 8.55 -- -- Lease financing -- -- -- -- ------------------------------------------------ Total interest-earning assets $ 48,416 7.76% $59,134 7.34% ------------------------------------------------ Interest-bearing liabilities: (2) Money market deposits $ -- --% $ -- --% NOW and Super NOW -- -- -- -- Passbook and statement savings -- -- -- -- Time deposits 315 6.98 27 4.87 Advances from FHLB 25,000 5.44 -- -- Other borrowings 3,000 8.25 -- -- ------------------------------------------------ Total interest-bearing liabilities $ 28,315 5.75% $ 27 4.87% ------------------------------------------------ Excess (deficiency) of interest-earning assets over interest-bearing liabilities $ 20,101 $59,107 Cumulative excess (deficiency) of ------------------------------------------------ interest-earning assets over interest-bearing liabilities $ 23,371 $82,478 ------------------------------------------------ Cumulative excess (deficiency) of interest-earning assets over interest-bearing liabilities as a percent of total assets 3.61% 12.74% ------------------------------------------------ (1) Adjustable and floating-rate assets are included in the period in which interest rates are next scheduled to adjust rather than in the period in which they are due, and fixed-rate loans are included in the periods in which they are scheduled to be repaid. Balances have been reduced for non-accrual loans, which amounted to $3.7 million at December 31, 1998. Balances are based on anticipated principal and interest payments at average interest rates on the entire portfolio. (2) Money market deposits, savings accounts and NOW accounts in the 30-day period are estimates of deposits which are historically subject to immediate withdrawal. Remaining balances are historically stable balances which are placed in the one to five year period. Other borrowings consist of securities sold under agreement to repurchase, the ESOP note payable and subordinated debt. The subordinated debt is callable at the option of the Company at any time after July 1, 1996, and therefore is presented as maturing in the three month period. If not called, the subordinated debt matures June 30, 2004.
PAGE 15 Liquidity and Funding The Bank 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, 1998, the Bank met all regulatory capital liquidity requirements. The Bank's need for liquidity is affected by loan demand and net changes in retail deposit levels. The Bank 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 are usually caused by factors over which the Bank has limited control. The Bank derives its liquidity from both its assets and liabilities. Liquidity is derived from assets by receipt of interest and principal payments and prepayments, by the ability to sell assets at market prices and by utilizing unpledged assets as collateral for borrowings. Liquidity is derived from liabilities by maintaining a variety of funding sources, including retail deposits, FHLB borrowings and other borrowings. The Bank's primary sources of funds have historically consisted of deposits, amortization and prepayments of outstanding loans, borrowings from the FHLB and sales of investment and mortgage-backed securities. During 1998, 1997 and 1996, the Bank 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, 1998, cash was used by operating activities primarily due to the increase in loans held for sale. Cash was used in the Bank's investment activities during 1998, as purchases of mortgage-backed and investment securities, and net originations of loans exceeded repayments on mortgage-backed securities, 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. At December 31, 1998, the total of approved loan commitments amounted to $55.8 million, and the Bank had $154.8 million of undisbursed loan funds. At December 31, 1998, total FHLB borrowings which are scheduled to mature during the 12 months ending December 31, 1999, totalled $5.0 million. At December 31, 1998, total other borrowings, which are scheduled to mature during the 12 months ended December 31, 1999, totalled $40.9 million. At December 31, 1998, the amount of time deposits that are scheduled to mature within 12 months total $154.3 million, a substantial portion of which management believes, on the basis of prior experience, will remain in the Bank. For the year ended December 31, 1997, cash was provided by operating activities. Cash was used in the Bank's investment activities during 1997 as purchases of mortgage-backed and investment securities, capital expenditures, and net originations of loans exceeded repayments on mortgage-backed securities, maturities of investments, proceeds from sales of mortgage-backed and investment securities, and net proceeds from sales of real estate owned. Funds provided by financing activities in 1997 partially offset the cash outflows from investment activities as cash was provided by increased levels of deposits and borrowings and the issuance of capital securities. The Bank is required under applicable federal regulations to maintain specified levels of "liquid" investments in qualifying types of United States Treasury, federal agency and obligations of the Federal National Mortgage Association ("FNMA"), Government National Mortgage Association ("GNMA"), and Federal Home Loan Mortgage Corporation ("FHLMC"). Regulations currently in effect require the Bank to maintain liquid assets of not less than 4% of its net withdrawable accounts plus short-term borrowings. These levels are changed from time to time by the Office of Thrift Supervision ("OTS") to reflect economic conditions. The Bank's policy has been to maintain a liquidity ratio no less than the regulatory minimum. At December 31, 1998, the Bank's liquidity ratio of 8.18% was in excess of the current minimum requirement. In addition the Bank is subject to restrictions on the amount of dividends it can pay to the Company. The Bank's deposits are obtained primarily from residents near the Bank's eight full-service offices in Montgomery County, one office in Rosemont, Delaware County, one office in Paoli, Chester County, and one office in the Andorra section of Philadelphia. The Bank has drive-up banking facilities at four of its offices and has 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, 1998 was approximately $110.6 million. Capital Resources The Bank is required pursuant to OTS regulations to have (i) tangible equity equal to 2.00% of adjusted total assets, (ii) Tier 1 or leverage capital equal to 4.00% of adjusted total assets, (iii) Tier 1 risk-based capital equal to 4.00% of risk-weighted assets, and (iv) total risk-based capital equal to 8.00% of risk-weighted assets. At December 31, 1998, the Bank met all regulatory capital requirements. At December 31, 1998, the Bank's tangible equity ratio was 6.61%, Tier 1 or leverage capital ratio was 6.61%, Tier 1 risk-based capital ratio was 9.57% and total risk-based capital ratio was 10.59%, based on tangible equity of $41.6 million, Tier 1 or leverage capital of $41.6 million, Tier 1 risk-based capital of $46.1 million, and total risk-based capital of $46.1 million, respectively. At December 31, 1998, the Bank was classified as "well capitalized" under the OTS regulations. 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. PAGE 16 Year 2000 The Year 2000 issue concerns the potential impact of historic computer software code that utilizes only two digits to represent the calendar year (i.e. "98" for "1998"). Software so developed, and not corrected, could produce inaccurate or unpredictable results commencing upon January 1, 2000, when current and future dates present a lower two digit number than dates from the prior century. The Company, similar to most financial service providers, is significantly subject to the potential impact of the Year 2000 issue due to the nature of financial information. Potential impacts to the Company may arise from software, computer hardware, and other equipment both within the Company's direct control and outside of the Company's ownership, yet with which the Company electronically or operationally interfaces. Financial institution regulators have intensively focused upon Year 2000 exposures, issuing guidance concerning the responsibilities of senior management and directors. Year 2000 testing and certification is being addressed as a key safety and soundness issue in conjunction with regulatory exams. In order to address the Year 2000 issue, the Company has developed and implemented a five-phase plan divided into the following major components: 1) awareness; 2) assessment; 3) renovation; 4) validation; and 5) implementation. The Company has divided these phases into the following three categories: 1) internal; 2) vendors; and 3) customers. The Company has completed the first three phases for all three categories. Because the Company outsources its data processing and item processing operations, a significant component of the Year 2000 plan is to work with external vendors to test and certify their systems as Year 2000 compliant. Based on conversations with critical vendors the completion of phase four is anticipated by the end of the first quarter of 1999. The Company has established a Year 2000 committee which meets bi-weekly and reports at least quarterly to the Board of Directors on the progress toward achieving and certifying Year 2000 compliance. The Company's current plan is to complete the Year 2000 project by June 30, 1999. Final validation testing with the Company's primary data processor is scheduled for the first quarter of 1999. The Company has no internally generated programmed software coding to correct, as all of the software utilized by the Company is purchased or licensed from external providers. The Company has determined that it has little or no exposure to contingencies related to Year 2000 issues for products it has sold. The Company has initiated formal communications with all of its significant suppliers and customers to determine the extent to which the Company is vulnerable to those third parties' failure to remediate their own Year 2000 issues. The Company is requesting that third party vendors represent their products and services to be Year 2000 compliant and that they have a program to test for that compliance. The response of certain third parties, however, is beyond the control of the Company. To the extent that adequate responses have not been received, the Company is prepared to develop contingency plans, with the completion of those plans scheduled no later than March 31, 1999. At this time the Company cannot estimate the additional cost, if any, that might develop from such contingency plans. The Company's total Year 2000 estimated project cost, which is based upon currently available information, includes expenses for the review and testing related to third parties, including government entities. However, there can be no guarantee that the hardware, software, and systems of such third parties will be without unfavorable Year 2000 impact and therefore present a material adverse impact upon the Company. Year 2000 compliance costs incurred during fiscal 1998 have totalled approximately $56,000, the majority of which is related to software upgrades for ATM's and telephone systems. The Company anticipates spending approximately $270,000 in fiscal 1999 in conjunction with changes to and testing of technological aspects of its delivery structure. These costs are exclusive of internal costs related with non-dedicated personnel which are not tracked separately. At this time no significant projects have been delayed as a result of the Company's Year 2000 effort. Despite the Company's activities with regard to the Year 2000 issue, there can be no assurance that partial or total systems interruptions or the costs necessary to update hardware and software would not have a material adverse effect upon the Company's business, financial condition, results of operations, and business prospects. PAGE 17 PROGRESS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands) December 31, 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Assets Cash and due from banks: Interest-bearing $ 6,498 $ 7,689 Non-interest-bearing 14,189 11,697 Investments: Available for sale at fair value (amortized cost: $18,208 in 1998 and $5,924 in 1997) 17,909 6,395 Held to maturity at amortized cost (fair value: $12,547 in 1998 and $4,070 in 1997) 12,401 4,051 Mortgage-backed securities: Available for sale at fair value (amortized cost: $146,910 in 1998 and $44,246 in 1997) 146,459 44,518 Held to maturity at amortized cost (fair value: $49,094 in 1997) -- 49,421 Loans and leases (net of reserves: $4,490 in 1998 and $3,863 in 1997) 394,246 339,903 Loans held for sale (fair value: $25,326 in 1998 and $380 in 1997) 25,250 373 Real estate owned, net -- 380 Premises and equipment, net 10,707 9,319 Accrued interest receivable 3,245 2,728 Deferred income taxes assets (liabilities) 277 (486) Receivable for securities sold 262 21,043 Other assets 15,939 11,029 --------------------------- Total assets $647,382 $508,060 --------------------------- Liabilities and Stockholders' Equity Liabilities: Deposits $406,518 $340,761 Federal Home Loan Bank borrowings 88,000 33,450 Other borrowings 79,416 50,797 Advance payments by borrowers 1,644 3,561 Payable for securities purchased 5,844 32,385 Accrued interest payable 2,260 1,626 Other liabilities 7,146 5,118 --------------------------- Total liabilities 590,828 467,698 Corporation-obligated mandatorily redeemable capital securities of subsidiary trust holding solely junior subordinated debentures of the Corporation 15,000 15,000 --------------------------- Commitments and contingencies (Note 14) Stockholders' equity: Serial preferred stock--$1 par value; 1,000,000 shares authorized but unissued -- -- Junior participating preferred stock--$.01 par value; 1,010 shares authorized but unissued -- -- Common stock--$1 par value; 12,000,000 shares authorized; 5,263,000 and 4,126,000 shares issued and outstanding at December 31, 1998 and December 31, 1997, respectively 5,263 4,126 Treasury stock (177,000 shares at December 31, 1998) (2,287) -- Unearned Employee Stock Ownership Plan shares (24,000 shares at December 31, 1998 and 33,000 shares at December 31, 1997) (143) (174) Capital surplus 39,615 20,960 Retained earnings (deficit) (399) (10) Net accumulated other comprehensive income (loss) (495) 460 --------------------------- Total stockholders' equity 41,554 25,362 Total liabilities, Corporation-obligated mandatorily redeemable capital securities of subsidiary trust holding solely junior subordinated debentures of the Corporation and stockholders' equity $647,382 $508,060 ---------------------------
See Notes to Consolidated Financial Statements. PAGE 18 PROGRESS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data) For the years ended December 31, 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- Interest income: Loans and leases, including fees $35,468 $29,807 $23,085 Mortgage-backed securities 8,686 6,065 6,443 Investment securities 1,017 447 395 Other 158 178 191 ------------------------------------- Total interest income 45,329 36,497 30,114 Interest expense: Deposits 14,466 12,357 12,020 Federal Home Loan Bank borrowings 3,996 2,108 1,746 Other borrowings 3,988 3,429 2,054 ------------------------------------- Total interest expense 22,450 17,894 15,820 Net interest income 22,879 18,603 14,294 Provision for possible loan and lease losses 959 1,509 781 ------------------------------------- Net interest income after provision for possible loan and lease losses 21,920 17,094 13,513 Non-interest income: Service charges on deposits 1,663 1,451 979 Lease financing fees 1,414 1,352 831 Teleservices fee income 1,034 663 -- Loan brokerage and advisory fees 2,108 842 645 Gain on sale of mortgage servicing rights -- 978 924 Gain from sale of securities 533 226 49 Gain on sale of loan and lease receivables 418 176 -- Gain from sale of loans held for sale -- -- 213 Gain (loss) on sale of real estate owned 203 (10) (10) Fees and other 1,287 964 1,469 ------------------------------------- Total non-interest income 8,660 6,642 5,100 Non-interest expense: Salaries and employee benefits 11,272 8,554 7,182 Occupancy 1,280 1,127 1,346 Data processing 1,073 1,067 1,137 Professional services 1,117 1,026 831 Furniture, fixtures, and equipment 1,085 842 638 Loan and real estate owned expenses, net 592 510 130 Deposit insurance premiums 207 237 2,579 Provision for real estate owned, net -- -- 25 Capital securities expense 1,593 925 -- Other 4,457 3,759 2,598 ------------------------------------- Total non-interest expense 22,676 18,047 16,466 Income before income taxes and cumulative effect of accounting change 7,904 5,689 2,147 Income tax expense 2,878 2,222 804 ------------------------------------- Income before cumulative effect of accounting change 5,026 3,467 1,343 Cumulative effect of accounting change (net of tax benefit of $26) (46) -- -- ------------------------------------- Net income $ 4,980 $ 3,467 $ 1,343 Basic income per common share before cumulative effect of accounting change $ 1.03 $ .82 $ .32 Fully diluted income per common share before cumulative effect of accounting change .94 .75 .31 Basic net income per common share 1.02 .82 .32 Fully diluted net income per common share .93 .75 .31 ------------------------------------- Dividends per share $ .14 $ .10 $ .04 Average common shares outstanding 4,881,017 4,235,742 4,138,977 Fully diluted average common shares outstanding 5,375,802 4,621,456 4,321,629 -------------------------------------
See Notes to Consolidated Financial Statements. PAGE 19 PROGRESS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands) For the years ended December 31, 1998, 1997, and 1996 Net accumulated Unearned Retained other Compre- Total Common Treasury ESOP Capital earnings comprehensive hensive stockholders' stock stock shares surplus (deficit) income (loss) income equity - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1995 $3,342 $ -- $ -- $16,145 $(2,189) $(341) $16,957 Issuance of common stock in stock offering (500,000 common shares) 500 -- -- 2,000 -- -- 2,500 Issuance of stock under employee benefit plans (5,000 common shares; 9,317 ESOP shares) 5 -- 36 9 -- -- 50 Net income -- -- -- -- 1,343 -- $1,343 1,343 Other comprehensive income, net of tax (a) -- -- -- -- -- 143 143 143 ------ Comprehensive income $1,486 ------ Shares acquired for ESOP (50,000 shares) -- -- (250) -- -- -- (250) Cash dividends declared -- -- -- -- (149) -- (149) ------------------------------------------------------------------------------------ Balance, December 31, 1996 3,847 -- (214) 18,154 (995) (198) 20,594 Issuance of common stock under employee benefit plans (35,005 common shares; 9,825 ESOP shares) 35 -- 63 99 -- -- 197 Net income -- -- -- -- 3,467 -- $3,467 3,467 Other comprehensive income, net of tax (a) -- -- -- -- -- 658 658 658 ------ Comprehensive income $4,125 ------ Acquisition of subsidiaries (53,097 common shares) 53 -- -- 747 35 -- 835 Cash dividend declared -- -- -- -- (389) -- (389) Stock dividends declared (190,636 common shares; 2,034 ESOP shares) 191 -- (23) 1,960 (2,128) -- -- ------------------------------------------------------------------------------------ Balance, December 31, 1997 4,126 -- (174) 20,960 (10) 460 25,362 Issuance of common stock in stock offering (792,800 common shares) 793 -- -- 13,468 -- -- 14,261 Issuance of stock under employee benefit plans (47,774 common shares; 10,525 ESOP shares) 48 -- 62 322 -- -- 432 Exercise of stock warrants (26,250 common shares) 26 -- -- 124 -- -- 150 Net income -- -- -- -- 4,980 -- $4,980 4,980 Other comprehensive loss, net of tax (a) -- -- -- -- -- (955) (955) (955) ------ Comprehensive income $4,025 ------ Purchase of Treasury stock (231,000 treasury shares) -- (3,098) -- -- -- -- (3,098) Acquisition of subsidiary (54,003 treasury shares) -- 817 -- (67) -- -- 750 Investment in unconsolidated subsidiary (21,153 common shares) 21 -- -- 309 -- 330 Cash dividend declared -- -- -- -- (658) -- (658) Stock dividend declared (249,653 common shares; 300 treasury shares; 1,644 ESOP shares) 249 (6) (31) 4,499 (4,711) -- -- ------------------------------------------------------------------------------------ Balance, December 31, 1998 $5,263 $(2,287) $(143) $39,615 $ (399) $(495) $41,554 ==================================================================================== (a) Calculation of other comprehensive income (loss); net of tax: 1998 1997 1996 -------------------------------- Unrealized holding gains (losses) arising during the period, net of tax $(603) $807 $175 Less: Reclassification adjustment for gains included in net income, net of tax 352 149 32 -------------------------------- Other comprehensive income (loss), net of tax $(955) $658 $143 --------------------------------
See Notes to Consolidated Financial Statements. PAGE 20 PROGRESS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands) For the years ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income $ 4,980 $ 3,467 $ 1,343 Add (deduct) items not affecting cash flows from operating activities: Depreciation and amortization 1,483 1,187 792 Provision for possible loan and lease losses 959 1,509 781 Deferred income tax (benefit) expense 13 1,681 (559) Gain from mortgage banking activities -- (978) (924) Gain from sale of loans held for sale -- -- (213) Gain from sales of loans and leases (418) (176) -- Gain from sales of securities available for sale (533) (226) (49) Realized loss on transfer of mortgage-backed securities 72 -- -- (Gain) loss on properties sold (203) 10 10 Amortization of deferred loan fees (1,657) (1,047) (1,000) Amortization of premiums/accretion of discounts on securities 1,076 693 629 Other, net 170 67 (23) Originations and purchases of loans held for sale (25,250) -- (12,065) Sales of loans held for sale -- 105 21,105 (Increase) decrease in accrued interest receivable (517) (572) 125 (Increase) decrease in other assets 16,580 2,097 (4,194) Increase (decrease) in other liabilities (28,029) 3,749 135 Increase in accrued interest payable 634 516 276 --------------------------------------- Net cash flows provided by (used in) operating activities (30,640) 12,082 6,169 --------------------------------------- Cash flows from investment activities: Capital expenditures (2,455) (2,448) (3,093) Purchases of mortgage-backed securities held to maturity -- (10,930) (2,952) Purchases of mortgage-backed securities available for sale (147,537) (11,357) (49,848) Purchase of investment securities held to maturity (8,350) (2,058) (1,401) Purchase of investment securities available for sale (21,100) (9,122) (3,000) Repayments on mortgage-backed securities held to maturity 8,788 8,409 8,022 Repayments on mortgage-backed securities available for sale 28,440 8,767 9,060 Proceeds from sales of mortgage-backed securities available for sale 55,818 12,392 44,906 Proceeds from sales and calls of investments available for sale 9,423 4,577 5,049 Maturities of investments held to maturity -- -- 1,612 Maturities of investments available for sale -- 2,268 -- Proceeds from sales of real estate owned 583 5,888 618 Advances for construction of real estate owned -- -- (96) Proceeds from sales of loan and lease receivables 28,343 3,418 9,895 Purchase of lease receivables (10,079) -- -- Net increase in total loans and leases (67,765) (81,615) (37,728) Purchase of subsidiaries, net of cash received 41 -- (6,600) --------------------------------------- Net cash flows used in investment activities (125,850) (71,811) (25,556) --------------------------------------- Cash flows from financing activities: Net increase in demand, NOW, and savings deposits 51,713 17,121 17,312 Net (decrease) increase in time deposits 14,044 17,392 (8,325) Net (decrease) increase in FHLB borrowings 54,550 15,450 (7,400) Net (decrease) increase in advance payments by borrowers for tax and insurance (1,917) (2,084) 2,208 Net increase in other borrowings 28,523 5,394 16,752 Dividends paid (656) (389) (149) Net proceeds from stock offerings and exercise of warrants 14,411 -- 2,500 Net proceeds from issuance of stock under employee benefit plans 221 100 5 Purchase of treasury stock (3,098) -- -- Purchase of stock for ESOP -- -- (250) Net proceeds from issuance of capital securities -- 15,000 -- --------------------------------------- Net cash flows provided by financing activities 157,791 67,984 22,653 --------------------------------------- Net increase in cash and cash equivalents 1,301 8,255 3,266 Cash and cash equivalents: Beginning of year 19,386 11,131 7,865 ======================================= End of year $ 20,687 $19,386 $11,131 ======================================= Supplemental disclosures: Loan and lease charge-offs $ 755 $ 1,667 $ 421 ======================================= Net conversion of loans receivable to real estate owned $ -- $ 4,055 $ 1,967 ======================================= Securitization of mortgage loans into mortgage-backed securities $ -- $ -- $ 9,982 ======================================= Transfer of loans held in portfolio to held for sale $ -- $ -- $ 6,536 ======================================= Increase (decrease) in net payables for trade dated security transactions $ (5,760) $11,342 $-- ======================================= Transfer of mortgage-backed securities held to maturity to available for sale $ 40,147 $ -- $-- ======================================= Transfer of property for Company use from other assets to premises and equipment $ -- $ -- $ 3,150 ======================================= Cash payments during the year for: Income taxes $ 3,973 $ 247 $ 227 ======================================= Interest $ 21,816 $17,530 $15,601 =======================================
See Notes to Consolidated Financial Statements. PAGE 21 PROGRESS FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Summary of Significant Accounting Policies Progress Financial Corporation and its subsidiaries (the "Company") follow accounting principles and reporting practices which are in accordance with generally accepted accounting principles. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet, and affect revenues and expenses for the period. Actual results could differ from such estimates. The material estimates relate to the determination of the allowance for possible loan and lease losses, the deferred tax asset valuation allowance, and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowance for possible loan and lease losses and real estate owned, management obtains independent appraisals for collateral dependent loans and significant properties. The more significant accounting policies are summarized below. Certain prior period amounts have been reclassified when necessary to conform with current year classifications. Tabular information is presented in thousands of dollars. Basis of Presentation The consolidated financial statements include the accounts of Progress Financial Corporation and its subsidiaries; Progress Bank (the "Bank"), Progress Realty Advisors, Inc. ("PRA"), Progress Capital Inc. ("PCI"), Procall Teleservices, Inc. ("PTI"), Progress Development Corp. ("PDC"), and Progress Capital Management, Inc. ("PCM"). All significant intercompany transactions and balances have been eliminated. Cash and Cash Equivalents The Company's cash and due from banks are classified as cash and cash equivalents, which have an original maturity of three months or less. Investment and Mortgage-Backed Securities The Company accounts for its investments in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). SFAS 115 requires debt and equity securities to be classified in one of three categories, as applicable, and to be accounted for as follows: debt securities which the Company has the positive intent and ability to hold to maturity are classified as "securities held to maturity" and are reported at amortized cost; debt and equity securities that are bought and held principally for the purpose of selling in the near term are classified as "trading securities" and are reported at fair value with unrealized gains and losses included in earnings; and debt and equity securities not classified as either held to maturity or trading securities are classified as "securities available for sale" and are reported at fair value with unrealized gains and losses excluded from earnings, but reported as a separate component of other comprehensive income, net of deferred income taxes. Investment and mortgage-backed securities classified as available for sale include such items that management intends to use as part of its asset-liability strategy or that may be sold in response to changes in interest rates, changes in prepayment risks, the need to increase regulatory capital or other strategic factors. When an investment or mortgage-backed security is sold, any gain or loss is recognized utilizing the specific identification method. Real Estate Owned Real estate acquired in partial or full satisfaction of loans are classified as real estate owned ("REO"). Prior to transferring a real estate loan to REO, it is written down to the lower of cost or estimated fair value less estimated selling costs (net realizable value) through a charge to the allowance for possible loan and lease losses. Subsequently, valuations are periodically performed by management, and any decline in net realizable value is charged to operations. Costs relating to the development and improvement of property are capitalized, whereas costs relating to the holding of property are only capitalized when carrying value does not exceed net realizable value. If a sale of real estate owned results in a gain or loss, the gain or loss is charged to operations as incurred. Premises and Equipment Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is computed based on the estimated useful lives of the assets using the straight-line method. Gains and losses are recognized upon disposal of the assets. Maintenance and repairs are recorded as expenses. Federal Income Taxes The Company and its subsidiaries file a consolidated Federal income tax return. Certain items of income and expense (primarily net operating losses, depreciation, provision for possible loan and lease losses, and real estate owned losses) are reported in different periods for tax purposes. Deferred taxes are provided on such temporary differences existing between financial and income tax reporting subject to the deferred tax asset realization criteria required under SFAS No. 109, "Accounting for Income Taxes" ("SFAS 109"). Loans Held for Sale Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or market value. Net unrealized losses are charged to income in the period in which they arise. Deferred Loan Fees Loan origination fees and related direct loan origination costs are deferred and recognized over the life of the loan as an adjustment to yield. The unamortized balance of such net loan origination fees is reported on the Company's consolidated statements of financial condition as part of loans. Allowance for Possible Loan and Lease Losses An allowance for possible loan and lease losses is maintained at a level that management considers adequate to provide for potential losses based upon an evaluation of known and inherent risks in the related portfolio. Management's periodic evaluation of the adequacy of the allowance is based upon examination of the portfolio, past loss experience, impairments to any loans based on the probability that all amounts owed will not be collected, the fair value of collateral, or any deficiency in the present value of expected future cash flows for an impaired loan, 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 the evaluations. Treasury Stock The Company accounts for treasury stock purchases at cost. When shares are reissued, the first-in-first-out cost flow assumption is used. In 1998 the Company repurchased 231,000 shares of common stock of which 54,003 shares were subsequently reissued. Earnings Per Share In 1997 the Company has implemented SFAS No. 128, "Earnings Per Share" which requires entities with simple capital structures, that is, those with only common stock outstanding, to present basic per-share amounts for income from continuing operations. All prior period per share amounts have been presented in accordance with the new standard. The per share results of operations were computed by dividing net income by the weighted average number of shares outstanding during the period. PAGE 22 (1) Summary of Significant Accounting Policies (continued) Shares outstanding do not include treasury shares and Employee Stock Ownership Plan ("ESOP") shares that were purchased and unallocated in accordance with Statement of Position ("SOP") 93-6, "Employers Accounting for Employees Stock Ownership Plans." Prior period amounts have been restated to reflect stock dividends paid during 1998 and 1997. Loans and Leases Loans and leases are stated at the principal amount outstanding, excluding unearned interest and allowance for possible loan and lease losses and including unamortized initial direct costs. The company originates direct finance leases accounted for in accordance with SFAS No. 13 "Accounting for Leases." Under this method, the excess of minimum rentals plus estimated residual value over the cost of equipment is recorded as unearned income and amortized over the lease term so as to produce a constant periodic rate of return on the net investment in the lease. In accordance with SFAS No. 91, "Accounting For Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases," loan and lease origination and commitment fees and related costs are deferred and the amount is amortized as an adjustment to the related asset's yield. The accrual of interest on commercial loans and leases is discontinued when they become 90 days past due and when, in management's judgment, it is determined that a reasonable doubt exists as to their collectibility. The accrual of interest is also discontinued on residential mortgage and consumer loans when such loans become 90 days past due, except for those loans less than 180 days past due and in the process of collection which are secured by real estate and have a loan to value ratio less than 80%. 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. Accounting for Derivative Instruments In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS 133"). The statement is effective for fiscal years beginning after June 15, 1999 and will not be applied retroactively. The statement establishes accounting and reporting standards for derivative instruments and hedging activity. Under the standard, all derivatives must be measured at fair value and recognized as either assets or liabilities in the financial statements. As permitted under SFAS 133, the Company transferred $40.1 million, gross of unrealized losses of $276,000 and net of realized losses of $72,000, of mortgage-backed securities from the held to maturity to the available for sale portfolio in the third quarter of 1998. The realized loss of $46,000, net of tax benefit of $26,000, was presented as the cumulative effect of accounting change on the Consolidated Statement of Operations. Under SFAS 133 warrants are considered derivatives and should be marked to market through earnings if readily convertible to cash. At December 31, 1998, the Company owned warrants on non-marketable common stock in nineteen companies which were not readily convertible to cash and contained certain conditions which may preclude their convertibility and have not been included in assets. If, in the future, those conditions were to be satisfied and the underlying common stock were to become marketable, the warrants would be recorded at fair value as an adjustment to current earnings. Recent Accounting Pronouncement In October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise," ("SFAS 134"). The statement is effective for the first fiscal quarter beginning after December 15, 1998. The statement amends existing classification and accounting treatment of mortgage-backed securities after mortgage loans held for sale are securitized, for entities engaged in mortgage-banking activities. SFAS 134 is not expected to have a material effect on the Company's financial statements. (2) Acquisitions The following acquisitions were accounted for under the purchase method of accounting. Goodwill on these transactions has been recorded in other assets and will be amortized on the straight-line basis over 15 years.
Date Purchase Method of Goodwill Completed Price (000) Shares Issued Accounting (000) - ------------------------------------------------------------------------------------------------------------------------------------ Primary Capital Corp 11/20/98 $ 750 54,003 Treasury Purchase $ 823 Atlantic Mortgage & Investment Company 12/22/97 $ 900 31,821 Common Purchase $ 934 Progress Realty Advisors, L.P. 10/17/97 $ 300 21,276 Common Purchase $ 144 Allied Commercial Mortgage and Asset Management 10/16/97 $ 488 -- Purchase $ 484 The Equipment Leasing Co. 10/01/96 $6,600 -- Purchase $2,562
On January 14, 1998, the Company acquired PAM Holding Corporation and its subsidiaries, PAM Financial and PAM Investment Company, which had audited assets and stockholders' equity of $15.5 million and $235,000 respectively, at December 31, 1997. The transaction was accounted for under the pooling of interests method of accounting during 1998 and accordingly, prior year financial statements have been restated to reflect the impact of the transaction. The Company issued 61,835 shares of common stock for all of PAM Holding Corporation's common shares outstanding. On November 20, 1998, the Company acquired Primary Capital Corp, a Pennsylvania based leasing company with assets of approximately $1.1 million. The transaction was recorded under the purchase method of accounting and generated goodwill amounting to $823,000. (3) Cash and Due from Banks Progress Bank is required by the Federal Reserve Board to maintain reserves based principally on deposits outstanding and are included in cash and due from banks. At December 31, 1998 and 1997, required reserves were $4.8 million and $1.6 million, respectively. PAGE 23 (4) Investment Securities The Bank is required under current Office of Thrift Supervision ("OTS") regulations to maintain defined levels of liquidity and utilizes certain investments that qualify as liquid assets. To meet these requirements, the Bank utilizes deposits with the Federal Home Loan Bank of Pittsburgh ("FHLB"), bankers' acceptances, loans to financial institutions whose deposits are insured by the Federal Deposit Insurance Corporation ("FDIC"), Federal funds and United States government and agency obligations.
December 31, 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Gross Gross Estimated Amortized Unrealized Unrealized Fair Carrying Held to Maturity: Cost Gains Losses Value Value --------------------------------------------------------------------- FHLB stock $ 4,923 $ -- $ -- $ 4,923 $ 4,923 FHLB investment securities 4,975 114 -- 5,089 4,975 FHLMC investment securities 2,503 32 -- 2,535 2,503 --------------------------------------------------------------------- $12,401 $146 $ -- $12,547 $12,401 ===================================================================== Gross Gross Estimated Amortized Unrealized Unrealized Fair Carrying Available for Sale: Cost Gains Losses Value Value --------------------------------------------------------------------- Municipal bonds $ 9,599 $ 16 $ 24 $ 9,591 $ 9,591 U.S. agency obligations 2,000 1 -- 2,001 2,001 Equity investments 6,609 197 489 6,317 6,317 --------------------------------------------------------------------- $18,208 $214 $513 $17,909 $17,909 ===================================================================== December 31,1997 - ------------------------------------------------------------------------------------------------------------------------------------ Gross Gross Estimated Amortized Unrealized Unrealized Fair Carrying Held to Maturity: Cost Gains Losses Value Value --------------------------------------------------------------------- FHLB stock $ 1,728 $ -- $ -- $ 1,728 $ 1,728 FHLB investment securities 2,323 19 -- 2,342 2,323 --------------------------------------------------------------------- $ 4,051 $ 19 $ -- $ 4,070 $ 4,051 ===================================================================== Gross Gross Estimated Amortized Unrealized Unrealized Fair Carrying Available for Sale: Cost Gains Losses Value Value --------------------------------------------------------------------- U.S. agency obligations $ 3,000 $ 1 $ -- $ 3,001 $ 3,001 Equity investments 2,924 470 $ -- 3,394 3,394 --------------------------------------------------------------------- $ 5,924 $471 $ -- $ 6,395 $ 6,395 =====================================================================
Investment securities pledged as collateral for FHLB borrowings amounted to $7.5 million at December 31, 1998. Investment securities pledged to the Federal Reserve Bank for Small Business Administration loans amounted to $1.0 million at December 31, 1998. The carrying value and estimated fair value of the Bank's investment securities at December 31, 1998 by contractual maturity are shown below. Expected maturities will differ from contractual maturities due to the right to call or prepay such obligations with or without prepayment penalties.
- ------------------------------------------------------------------------------------------------------------------------------------ Amortized Estimated Fair Weighted Held to Maturity: Cost Value Average Yield ------------------------------------------------------------- Due after ten years $ 7,478 $ 7,624 7.39% No stated maturity 4,923 4,923 6.50 ------------------------------------------------------------- $12,401 $12,547 7.04% ============================================================= Amortized Estimated Fair Weighted Available for Sale: Cost Value Average Yield ------------------------------------------------------------- Due one year through five years $ 2,000 $ 2,001 6.15% Due five years through ten years -- -- -- Due after ten years 11,494 11,221 5.06 No stated maturity 4,714 4,687 1.28 ------------------------------------------------------------- $18,208 $17,909 4.19% =============================================================
PAGE 24 (4) Investment Securities (continued) Proceeds from sales of investment securities available for sale were $7.4 million and $2.1 million in 1998 and 1997, respectively. Total realized gains in 1998 and 1997 on the sale of investment securities classified as available for sale were $672,000 and $233,000, respectively. Total realized losses in 1998 and 1997 on the sale of investment securities classified as available for sale were $75,000 and $12,000, respectively. There were no sales of investment securities classified as available for sale during 1996. Additionally, $2.0 million and $2.5 million in investment securities classified as available for sale were called during 1998 and 1997, respectively. Accrued interest receivable on investment securities amounted to $98,000 and $62,000 at December 31, 1998 and 1997, respectively. (5) Mortgage-Backed Securities The following tables detail the amortized cost, carrying value and estimated fair value of the Company's mortgage-backed securities:
December 31, 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Gross Gross Estimated Amortized Unrealized Unrealized Fair Carrying Available for Sale: Cost Gains Losses Value Value -------------------------------------------------------------------- GNMA $121,178 $121 $406 $120,893 $120,893 FNMA 13,330 14 37 13,307 13,307 FHLMC 10,714 26 176 10,564 10,564 Non-agency pass through certificate 1,688 7 -- 1,695 1,695 -------------------------------------------------------------------- $146,910 $168 $619 $146,459 $146,459 -------------------------------------------------------------------- December 31, 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Gross Gross Estimated Amortized Unrealized Unrealized Fair Carrying Held to Maturity: Cost Gains Losses Value Value -------------------------------------------------------------------- GNMA $ 19,509 $ -- $262 $ 19,247 $ 19,509 FNMA 15,900 14 42 15,872 15,900 FHLMC 14,012 75 112 13,975 14,012 -------------------------------------------------------------------- $ 49,421 $ 89 $416 $ 49,094 $ 49,421 -------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Carrying Available for Sale: Cost Gains Losses Value Value -------------------------------------------------------------------- GNMA $ 39,553 $234 $ 15 $ 39,772 $ 39,772 FNMA 914 2 12 904 904 FHLMC 1,336 8 29 1,315 1,315 Non-agency pass through certificate 2,443 84 -- 2,527 2,527 -------------------------------------------------------------------- $ 44,246 $328 $ 56 $ 44,518 $ 44,518 --------------------------------------------------------------------
Mortgage-backed securities mature over the life of the security through regular principal payments and are subject to prepayment risk. Proceeds from sales of mortgage-backed securities available for sale were $55.8 million, $12.4 million and $44.9 million in 1998, 1997 and 1996, respectively. Total realized gains in 1998, 1997 and 1996 on the sale of mortgage-backed securities classified as available for sale were $152,000, $215,000 and $288,000, respectively. Total realized losses in 1998, 1997 and 1996 on the sale of mortgage-backed securities classified as available for sale were $216,000, $209,000 and $239,000, respectively. During 1998, the Company implemented SFAS 133, resulting in the transfer of $40.1 million of mortgage-backed securities previously held to maturity to the available for sale portfolio. This transfer was gross of unrealized losses of $276,000, and net of realized losses presented as a cumulative effect of accounting change of $72,000. Mortgage-backed securities pledged under agreements to repurchase in connection with borrowings amounted to $86.1 million at December 31, 1998. Mortgage-backed securities pledged as collateral for public funds amounted to $15.6 million at December 31, 1998. Mortgage-backed securities pledged as collateral for FHLB borrowings amounted to $26.2 million at December 31, 1998. Mortgage-backed securities pledged to the Federal Reserve Bank to secure borrowings and Treasury, Tax and Loan balances amounted to $2.2 million at December 31, 1998. Accrued interest receivable on mortgage-backed securities amounted to $916,000 and $584,000 at December 31, 1998 and 1997, respectively. (6) Loans and Leases December 31, 1998 1997 - -------------------------------------------------------------------------------- Single-family residential real estate $ 50,086 $ 56,192 Commercial real estate 109,130 109,938 Construction (net of loans in process of $88,175 and $23,641, respectively) 44,546 26,695 Consumer loans 27,807 24,639 Credit card receivables 931 918 Commercial business 92,737 69,312 Lease financing 87,856 67,439 Unearned income (14,357) (11,367) Allowance for possible loan and lease losses (4,490) (3,863) --------- --------- Total $ 394,246 $ 339,903 --------- --------- For the years ended December 31, 1998 and 1997, the average recorded investment in impaired loans was approximately $2.6 million and $2.1 million, respectively. At December 31, 1998 and 1997, the recorded investment in loans for which impairment has been recognized in accordance with SFAS Nos. 114 and 118 "Accounting by Creditors for Impairment of a Loan" totalled $3.7 million and $2.2 million, of which none related to loans with a specific valuation allowance. PAGE 25 (6) Loans and Leases (continued) At December 31, 1998, 1997 and 1996, the principal amount of outstanding loans on a non-accrual basis was $3.7 million, $2.2 million and $1.7 million, respectively. Additional gross interest income that would have been recorded during 1998, 1997 and 1996 if the Company's non-performing loans at the end of such periods had been performing in accordance with their terms during such periods was $252,000, $190,000 and $251,000, respectively. The amount of interest income that was actually recorded during 1998, 1997 and 1996 with respect to such non-performing loans amounted to approximately $112,000, $148,000 and $153,000, respectively. Accrued interest receivable on loans and leases amounted to $2.2 million at December 31, 1998 and $2.1 million at December 31, 1997. The Company is a lessor of equipment and machinery under agreements expiring at various dates through the year 2004. At December 31, 1998, the components of lease financing are as follows: 1999 $ 35,592 2000 25,276 2001 15,662 2002 7,666 2003 3,146 2004 514 -------- Total future minimum lease payments receivable including estimated residual values of $7,477 87,856 Unearned income (14,357) -------- Total $ 73,499 -------- At December 31, 1998, 1997 and 1996, the Company was servicing loans, including participations sold, in the amounts of $179.6 million, $131.4 million, $416.8 million, respectively, for the benefit of others. The decline in 1997 was due to the sale of $347.4 million of purchased mortgage servicing rights during the first quarter of 1997, which resulted in a gain of $978,000. The following is a summary of the activity in the allowance for possible loan and lease losses: December 31, 1998 1997 1996 - -------------------------------------------------------------------- Balance at beginning of year $ 3,863 $ 3,768 $ 2,310 Provisions for possible loan and lease losses 959 1,509 781 Losses charged against the allowance (755) (1,667) (421) Recoveries on charged-off loans 423 253 248 Allowance assumed through acquisition -- -- 850 ----------------------------- Balance at end of year $ 4,490 $ 3,863 $ 3,768 ----------------------------- (7) Loans Held for Sale At December 31, 1998 the Bank held $25.3 million in commercial real estate loans classified as held for sale and are carried at the lower of aggregate cost or market value. At December 31, 1997, the Bank held $110,000 in 30 year fixed rate and $263,000 in 15 year fixed rate residential mortgages that were classified as held for sale and are carried at the lower of aggregate cost or market value. (8) Real Estate Owned, Net December 31, 1998 1997 - --------------------------------------------------------------- Balance at beginning of year $ 380 $ 2,150 Real estate acquired in settlement of loans 4,301 Dispositions/sales (380) (6,071) Write-downs -- ----------------- Balance at end of year $ -- $ 380 ----------------- The following table summarizes the activity in the allowance for possible losses on real estate owned: December 31, 1998 1997 1996 - ----------------------------------------------------------------- Balance at beginning of year $-- $-- $ -- Provision charged to income -- 25 Charge-offs, net of recoveries -- -- (25) - ----------------------------------------------------------------- Balance at end of year $-- $-- $ -- - ----------------------------------------------------------------- (9) Premises and Equipment Land, office buildings and equipment, at cost, are summarized by major classification: December 31, Estimated Life 1998 1997 - ------------------------------------------------------------------------------ Land $ 1,162 $ 1,162 Buildings and leasehold improvements (40 years or lease term) 7,626 7,250 Furniture, fixtures and equipment (3-5 years) 9,731 7,648 -------------------- 18,519 16,060 Accumulated depreciation (7,812) (6,741) -------------------- $10,707 $ 9,319 -------------------- Depreciation expense for the years ended December 31, 1998, 1997 and 1996 was $1.1 million, $870,000 and $716,000, respectively. At December 31, 1998, the Company had leases on a number of its office facilities and certain equipment. Minimum future non-cancelable rental commitments under operating leases are as follows: 1999 $ 665 2000 575 2001 526 2002 526 2003 526 ------ $2,818 ------ Rental expense for the years ended December 31, 1998, 1997 and 1996 was $332,000, $513,000 and $759,000, respectively. (10) Other Assets The following items are included in other assets: December 31, 1998 1997 - ----------------------------------------------------------------------- Mortgage servicing rights (A) $ 129 $ 48 Accounts receivable 3,396 4,425 Goodwill 5,130 4,649 Investment in unconsolidated subsidiaries (B) 5,538 172 Other assets 1,746 1,735 ----------------------- $15,939 $11,029 ----------------------- (A) Mortgage servicing rights include $34,000 and $48,000 of purchased mortgage servicing rights at December 31, 1998 and 1997, respectively; and $95,000 at December 31, 1998 of originated mortgage servicing rights which have been capitalized in accordance with SFAS No. 122, "Accounting for Mortgage Servicing Rights." (B) Investments in unconsolidated subsidiaries consist of the following: $2.2 million investment in New Seasons Assisted Living Communities Series "C" preferred stock, accounted for under the cost method; $2.0 million investment in Progress Development I L.P., owned 50% by the Company and accounted for under the equity method; and a $1.3 million investment in the Ben Franklin/Progress Capital Fund, L.P. of which 37.5% is owned by the Company. PAGE 26 (11) Deposits December 31, 1998 1997 - --------------------------------------------------------------- Money market deposit accounts $ 37,934 $ 33,607 NOW and Super NOW accounts 77,730 34,141 Savings accounts 30,843 30,740 Other time deposits 149,784 148,011 Time deposits of $100,000 or more 36,937 34,666 Brokered time deposits 20,000 10,000 -------------------- Total interest-bearing deposits 353,228 291,165 -------------------- Non-interest-bearing deposits 53,290 49,596 -------------------- Total deposits $406,518 $340,761 -------------------- Other time deposits of less than $100,000 by date of maturity are as follows: 1999 $120,136 2000 33,050 2001 9,485 2002 4,003 2003 2,768 2004 and thereafter 342 - ---- -------- $169,784 -------- Other time deposits of $100,000 or more by date of maturity are as follows: 1999 $ 34,186 2000 2,443 2001 -- 2002 and thereafter 308 -------- $ 36,937 -------- Total deposits of $100,000 or more amounted to $111.4 million and $85.1 million at December 31, 1998 and 1997, respectively. Accrued interest payable on deposits amounted to $1.2 million and $876,000 at December 31, 1998 and 1997, respectively. Interest expense on deposits: December 31, 1998 1997 1996 - --------------------------------------------------------------- NOW accounts $ 1,384 $ 679 $ 595 Savings and money market deposit accounts 1,724 1,991 1,829 Time deposits 11,358 9,687 9,596 - --------------------------------------------------------------- Total $14,466 $12,357 $12,020 - --------------------------------------------------------------- (12) Borrowings Borrowings at December 31, 1998 and 1997 consist of the following:
December 31, 1998 1997 - -------------------------------------------------------------------------------------- Weighted Weighted Average Average Amount Rate Amount Rate - -------------------------------------------------------------------------------------- Short-term maturity (less than one year): FHLB borrowings (A) $ 5,000 8.30% $ 450 5.92% Securities sold under agreements to repurchase (B) 40,150 5.63 21,546 5.92 ESOP note payable (C) 67 7.75 49 8.50 Partial Recourse Notes (E) 715 9.42 1,126 9.42 Other 9 8.75 10,819 9.79 ---------------------------------------- 45,941 5.98 33,990 7.27 ---------------------------------------- Long-term: FHLB borrowings (A) 83,000 5.33 33,000 6.25 Securities sold under agreements to repurchase (B) 35,000 5.12 13,000 5.96 ESOP note payable (C) 60 7.75 127 8.50 Subordinated debt (D) 3,000 8.25 3,000 8.25 Partial Recourse Notes (E) 415 9.42 1,130 9.42 ---------------------------------------- 121,475 5.36 50,257 6.37 ---------------------------------------- Total $167,416 5.53% $ 84,247 6.73% ---------------------------------------- (A) At December 31, 1998 there were $10.0 million in variable rate FHLB borrowings at three-month LIBOR plus 8 basis points; and $78.0 million in fixed rate FHLB borrowings ranging from 4.81% to 8.30%. At December 31, 1998 the Company had $80.0 million of FHLB borrowings that contained a provision whereby, at the option of the FHLB, the borrowing may be converted to a LIBOR adjustable rate advance for the remaining term of the advance. However, the Company may choose not to accept the adjustable rate advance and would have the option, at that time, to put the borrowing back to the FHLB without penalty. At December 31, 1998, FHLB borrowings were secured by approximately $33.7 million in certain investment and mortgage-backed securities and $77.6 million in certain mortgage loans. (B) Securities sold under repurchase agreements are detailed below by date of maturity. Less than 30-90 Over December 31, 1998 Overnight 30 days days 90 days - -------------------------------------------------------------------------------- Mortgage-backed securities (including accrued interest): Securities sold: Carrying value -- $11,027 $ 4,533 $71,046 Market value -- 11,027 4,533 71,046 Repurchase borrowings (including accrued interest) -- 8,005 3,027 64,641 Average borrowing interest rate -- 4.85% 5.30% 5.46% Included in the above table are mortgage-backed securities including accrued interest sold under agreement to repurchase with Salomon Brothers which exceed the repurchase liability adjusted for accrued interest by $6.1 million. The weighted average maturity of these repurchase agreements is 20 months. PAGE 27 (12) Borrowings (continued) (C) The ESOP note is a variable note at the prime rate and due in quarterly installments through January 31, 2001. (D) The subordinated debt consists of 12 units, of which 3 are to related parties, of $250,000 notes payable June 30, 2004. The notes are redeemable at the Company's option at a price of 105% of par after July 1, 1996, declining annually thereafter to par on and after July 1, 2003. Interest is paid quarterly at the fixed rate of 8.25%. The terms of the notes limit the Company's aggregate amount of long-term senior indebtedness to an amount equal to or less than the Company's net worth. At December 31, 1998, the Company's net worth was $38.6 million greater than its aggregate long-term senior indebtedness. (E) Partial recourse notes consist of 9.44% and 9.40% fixed rate notes due in monthly installments through April 5, 2001.
Long-term borrowings by date of maturity are as follows:
Securities Sold Partial Under Agreement ESOP Note Subordinated Recourse FHLB to Repurchase Payable Debt Notes Total - ------------------------------------------------------------------------------------- 2000 $ 3,000 $15,000 $45 $-- $377 $18,422 2001 5,000 10,000 15 -- 38 15,053 2002 20,000 -- -- -- -- 20,000 2003 30,000 10,000 -- -- -- 40,000 2004 and thereafter 25,000 -- -- 3,000 -- 28,000 - ------------------------------------------------------------------------------------- $83,000 $35,000 $60 $3,000 $415 $121,475 - -------------------------------------------------------------------------------------
Accrued interest payable on borrowings amounted to $1.1 million and $775,000 at December 31, 1998 and 1997, respectively. The following table presents certain information regarding borrowings: December 31, 1998 1997 1996 - -------------------------------------------------------------------- Average balance outstanding $136,370 $ 81,015 $ 53,932 Maximum amount outstanding at any month-end during the period 172,405 97,983 80,589 Weighted average interest rate during the period (1) 5.85% 6.83% 7.05% -------------------------------- (1) Weighted average interest rate is calculated by dividing the actual interest expense for the period by the average outstanding balances for the period. (13) Income Taxes Income tax expense, including the tax benefit of $26,000 on the cumulative effect of accounting change, consisted of the following: December 31, 1998 1997 1996 - --------------------------------------------------------------- Current: Federal $2,752 $ 381 $1,308 State 87 160 55 Deferred: Federal (71) 1,672 (541) State 84 9 (18) ---------------------------- $2,852 $2,222 $ 804 ---------------------------- On August 20, 1996, The Small Business Job Protection Act was signed into law which repealed the favorable reserve method available to savings banks. As a result, the Bank was required to change its tax bad debt method to the specific charge-off method effective for the year ended December 31, 1996. The change in method resulted in taxable income of approximately $1.6 million representing the excess of the Bank's tax bad debt reserve at December 31, 1995 over the base year reserve amount of $2.8 million that arose in tax years beginning before December 31, 1987. The income will be recognized for tax purposes ratably over a six year period. Accordingly, the Company has not provided deferred income taxes of approximately $951,000 for the Bank's tax return reserve for bad debts that arose in tax years beginning before December 31, 1987. It is not expected that this difference will reverse in the foreseeable future. A deferred tax liability has been recognized for the portion of the tax bad debt reserves which arose in 1988 through 1995. The provision for income taxes differs from the statutory rate due to the following: December 31, 1998 1997 1996 - --------------------------------------------------------------- Tax at statutory rate $2,663 $1,934 $ 730 State tax, net of Federal effect 113 171 24 Tax-free interest (10) (8) (11) Other 86 125 61 ---------------------------- $2,852 $2,222 $ 804 ---------------------------- Deferred income taxes reflect the impact of differences between the financial statement and tax basis of assets and liabilities and available tax carryforwards. The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at December 31, 1998, 1997 and 1996 are presented below: December 31, 1998 1997 1996 - -------------------------------------------------------------------- Deferred tax assets: Net operating loss carryforwards $ -- $ -- $ 2,297 Write-downs on real estate owned -- -- 22 Unrealized loss on securities available for sale 255 -- 102 Provision for possible loan and lease losses 1,389 896 873 Other -- 87 99 --------------------------- Total deferred tax assets 1,644 983 3,393 Deferred tax liabilities: Unrealized gain on securities available for sale -- 250 -- Direct finance lease receivable 1,221 921 897 Excess servicing fees -- -- 61 Depreciation and amortization 64 155 72 Deposit insurance premiums 37 143 32 Other 45 -- -- --------------------------- Total deferred tax liabilities 1,367 1,469 1,062 --------------------------- Net deferred tax assets (liabilities) $ 277 $ (486) $ 2,331 --------------------------- A valuation allowance has not been provided at December 31, 1998, 1997 and 1996 since management believes it is more likely than not that the deferred tax assets will be realized. (14) Commitments and Contingencies Financial Instruments with Off Balance-Sheet Risk The Company is a party to various financial instruments required in the normal course of business to meet the financing needs of its customers, which are not included in the Consolidated Statements of Financial Condition at December 31, 1998. Management does not expect any material losses from these transactions. The Company's involvement in such financial instruments is summarized as follows: December 31, 1998 1997 - ---------------------------------------------------------------- Contract or Notional Amount ------------------- Amounts representing credit risk: Commitments to extend credit (including unused lines of credit) $210,584 $101,499 Standby letters of credit, financial guarantees and other letters of credit $ 3,551 $ 560 PAGE 28 (14) Commitments and Contingencies (continued) The Bank uses the same credit policies in extending commitments and letters of credit as it does for on-balance sheet instruments. The Bank controls its exposure to loss from these agreements through credit approval processes and monitoring procedures. Letters of credit and commitments to extend credit are generally issued for one year or less and may require payment of a fee. The total commitment amounts do not necessarily represent future cash disbursements, as many of the commitments expire without being drawn upon. The Bank may require collateral in extending commitments, which may include cash, accounts receivable, securities, real or personal property, or other assets. For those commitments which require collateral, the value of the collateral generally equals or exceeds the amount of the commitment. The majority of the Company's commitments to extend credit and letters of credit carry current market interest rates if converted to loans. Because commitments to extend credit and letters of credit are generally unassignable by either the Company or the borrower, they only have value to the Company and the borrower. The estimated fair value approximates the recorded deferred fee amounts. At December 31, 1998, the Company was party to a number of lawsuits. While any litigation has an element of uncertainty, after reviewing these actions with legal counsel, management is of the opinion that the liability, if any, resulting from these actions will not have a material effect on the financial condition or results of operations of the Company. (15) Benefit Plans Savings Plan The Company has a savings plan under Section 401(K) of the Internal Revenue Code available to all full-time employees. The plan allows employees to contribute part of their pretax or after-tax income according to specified guidelines. The Company matches a percentage of the employee contributions up to a certain limit. The expense amounted to $206,000, $178,000 and $111,000 for the years 1998, 1997 and 1996, respectively. Employee Stock Ownership Plan The Company's ESOP is a defined contribution plan covering all full-time employees of the Company who have one year of service and are age 21 or older. It is subject to the provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"). The Company follows the provisions of SOP 93-6, "Employers' Accounting for Employee Stock Ownership Plans" in accounting for the ESOP. In January 1996, the ESOP borrowed funds from a third party and purchased 50,000 shares (53,678 shares after the effects of the stock dividends) of the Company's stock for the ESOP trust. Cash contributions to the ESOP have been determined based on the ESOP's total debt service less dividends paid on ESOP shares. Compensation expense of the ESOP was $170,000, $98,000 and $45,000 for 1998, 1997 and 1996, respectively. Interest expense on the borrowings was $13,000, $17,000 and $18,000 for 1998, 1997 and 1996, respectively. As of December 31, 1998, the Company had a remaining guaranteed ESOP obligation of $127,000 included in other borrowings. Of the 53,678 shares, 29,667 have been allocated and the 24,011 unallocated shares are reported as a reduction of stockholders' equity. At December 31, 1998, the unallocated shares had a fair value of $297,000. Employee Stock Purchase Plan In April 1996, the Company established an Employee Stock Purchase Plan ("ESPP"). Employees can elect to purchase shares in the Company at 95% of the market price of the Company's stock on certain dates throughout the year. During 1998 and 1997, 8,556 and 9,480 shares, respectively, were issued to employees through their participation in the ESPP. These transactions increased stockholders' equity $106,000 and $68,000 during 1998 and 1997, respectively. (16) Related Party Transactions Loans receivable from executive officers and directors, including loans and leases to related persons and entities, consisted of the following activity: December 31, 1998 1997 1996 - ------------------------------------------------------------------- Balances at beginning of year $ 659 $ 1,205 $ 568 Additional loans and leases granted 3,034 161 751 Repayments (366) (325) (114) Other changes -- (382) -- ----------------------------- Balances at end of year $ 3,327 $ 659 $ 1,205 ----------------------------- Other changes resulted from the charge-off of loans and leases to a company in which a related party had an equity interest. (17) Capital Securities 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. (18) Stockholders' Equity On May 15, 1998 the Company completed a secondary offering of 792,800 shares of common stock at a price of $19.50 per share. On January 31, 1996 the Company successfully completed the offering of 500,000 shares of common stock at a price of $5.25 per share. During 1998, the Company announced a plan to repurchase up to 357,000 shares of common stock of which 231,000 shares had been repurchased at December 31, 1998. The treasury shares are recorded at cost. During 1998, the Company issued 54,003 treasury shares in the acquisition of Primary Capital Corp. In 1994, the Company completed the sale of $3.0 million in subordinated debentures in a private placement. Six half units and nine whole units were sold, ranging from $125,000 to $250,000 in principal amount of 8.25% subordinated notes due in 2004 and warrants to purchase 13,781 to 27,562 shares of common stock. Each warrant entitles the holder to purchase one share of the Company's common stock at an exercise price of $5.44. The warrants are exercisable in whole or in part, at any time prior to June 30, 1999. During 1998, 26,250 shares were issued under these warrants. Interest on the subordinated debentures is payable quarterly. The subordinated debentures are due June 30, 2004 and are redeemable after July 1, 1996. On April 25, 1990, the Board of Directors of Progress Financial Corporation declared a dividend distribution of one Right for each outstanding share of Common Stock of the Company to stockholders of record at the close of business on May 11, 1990. Each Right entitles the registered holder to purchase from the Company a unit consisting of one one-hundredth of a share (a "Unit") of Series A Junior Participating Preferred Stock, par value $.01 per share, at a purchase price of $40.00 per Unit, subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement, between the Company and American Stock Transfer & Trust Company, as Rights Agent. PAGE 29 (18) Stockholders' Equity (continued) In 1993, as amended in 1997 and 1998, the Board of Directors adopted a Stock Incentive Plan which provides for the grant of incentive stock options, non-qualified stock options and stock appreciation rights to key employees. The per share exercise price of an incentive stock option shall at least equal the fair market value of a share of Common Stock on the date the option is granted, and the per share exercise price of a non-qualified stock option shall at least equal the greater of par value or 85% of fair market value of a share of Common Stock on the date the option is granted. Under this plan, 475,507 shares of Common Stock were reserved for issuance of which 73,449 shares remained for future grants at December 31, 1998. To date, all options issued have had a per share exercise price equal to the fair market value of a share of Common Stock on the grant date. Under the Directors' Plan, which was also adopted in February 1993, and amended in 1997, each non-employee director of the Company will receive compensatory options to purchase 551 shares (or such less number of shares as remain to be granted pursuant to the Directors' Plan) with an exercise price equal to the fair market value of a share of Common Stock on the date the option is granted. Additional options may be granted based on the level of business referrals to the Company. A total of 99,225 authorized but unissued shares of Common Stock have been reserved for issuance pursuant to the Directors' Plan. At December 31, 1998, 33,286 shares remained in the reserve for future grants. Under the Company's Stock Option Plan which was adopted in April 1984 and amended in April 1987, 27,563 shares remained outstanding at December 31, 1998. No grants have been made under this plan since 1992. Options granted under each of the plans are exercisable during the period specified in each option agreement and expire no later than the tenth anniversary of the date the option was granted. The average remaining term of outstanding options at December 31, 1998 was 6.9 years. Changes in total options outstanding during 1998, 1997 and 1996 are as follows: December 31, 1998 - -------------------------------------------------------------------------------- Shares Under Option Price Option Per Share - -------------------------------------------------------------------------------- Outstanding at beginning of year 456,136 $ .91 to $15.71 Granted during year 78,184 $12.38 to $17.26 Exercised during year (39,218) $ .91 to $ 7.86 Forfeited during year (15,398) $ 4.99 to $ 7.48 --------------------------------------- Outstanding at end of year 479,704 $ .91 to $17.26 --------------------------------------- Options exercisable at end of year 348,287 $ .91 to $15.71 --------------------------------------- December 31, 1997 - -------------------------------------------------------------------------------- Shares Under Option Price Option Per Share - -------------------------------------------------------------------------------- Outstanding at beginning of year 308,568 $ .91 to $10.83 Granted during year 173,093 $ 7.48 to $15.71 Exercised during year (25,525) $ 1.00 to $10.83 Forfeited during year -- -- --------------------------------------- Outstanding at end of year 456,136 $ .91 to $15.71 --------------------------------------- Options exercisable at end of year 276,530 $ .91 to $ 7.48 --------------------------------------- December 31, 1996 - -------------------------------------------------------------------------------- Shares Under Option Price Option Per Share - -------------------------------------------------------------------------------- Outstanding at beginning of year 250,449 $ .91 to $13.61 Granted during year 80,759 $ 4.99 to $ 7.48 Exercised during year (5,000) $ 1.00 Forfeited during year (17,640) $ 3.17 to $13.61 --------------------------------------- Outstanding at end of year 308,568 $ .91 to $10.83 --------------------------------------- Options exercisable at end of year 231,801 $ .91 to $10.32 --------------------------------------- The weighted average exercise price of options outstanding at December 31, 1998, 1997 and 1996 was $6.79, $4.38 and $3.20, per share, respectively. In October 1995, the FASB issued the Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which is effective for the Company January 1, 1996. The Company adopted the disclosure-only provision of SFAS 123 and continues to apply Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its plans. Compensation expense was immaterial for 1998, 1997, and 1996. If the Company had elected to recognize compensation cost for the various Option Plans based on the fair value at the grant dates for awards under those plans, consistent with the method prescribed by SFAS 123, the net income and net income per share for the years ended December 31, 1998, 1997 and 1996 would have been changed to the pro forma amounts indicated below: 1998 1997 1996 - -------------------------------------------------------------------------------- Pro forma net income $4,787 $3,281 $1,301 Pro forma net income per share $ 0.98 $ 0.77 $ 0.31 Pro forma diluted net income per share $ 0.89 $ 0.71 $ 0.30 ------------------------------------- The fair value of Company stock options used to compute pro forma net income and net income per share disclosures is the estimated present value at grant date using the Black-Scholes option-pricing model with the following weighted average assumptions for 1998, 1997 and 1996, respectively; dividend yield of .98%, 1.02% and no dividend yield; expected volatility of 33.38%, 31.99% and 28.24%; risk free interest rate of 5.01%, 6.43% and 5.79%; and an expected holding period of 7 years, 7 years and 10 years. The weighted average fair value of Company stock options were $6.01, $3.63 and $3.02 for 1998, 1997 and 1996; respectively. (19) Regulatory Matters 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, 1998 and December 31, 1997, the Bank's tangible equity ratio was 6.61% and 6.50%, Tier 1 or leverage capital ratio was 6.61% and 6.50%, Tier 1 risk-based capital ratio was 9.57% and 9.05% and total risk-based capital ratio was 10.59% and 10.00%, respectively. These ratios were based on tangible equity of $41.6 million and $31.4 million, Tier 1 or leverage capital of $41.6 million and $31.4 million, Tier 1 risk-based capital of $41.6 million and $31.4 million and total risk-based capital of $46.1 million and $34.7 million, respectively. In addition these ratios were based on adjusted total assets of $630.0 million and $483.4 million, and risk-weighted assets of $434.9 million and $347.2 million at December 31, 1998 and December 31, 1997, respectively. At December 31, 1998, the Bank is classified as "well capitalized." PAGE 30 (19) Regulatory Matters (continued) The following is a reconciliation of the Bank's capital determined in accordance with generally accepted accounting principles ("GAAP") to regulatory tangible, core, and risk-based capital at December 31, 1998: Tier 1 or Tier 1 Total Tangible Leverage Risk-Based Risk-Based Equity Capital Capital Capital - -------------------------------------------------------------------------------- Total qualifying capital $41,614 $41,614 $41,614 $46,068 Capital ratio 6.61% 6.61% 9.57% 10.59% Minimum capital adequacy requirement $12,600 $25,200 $17,396 $34,792 Minimum capital adequacy ratio 2.00% 4.00% 4.00% 8.00% Regulatory capital excess $29,014 $16,414 $24,218 $11,276 Dividend Restrictions The Bank's ability to pay dividends is restricted by certain regulations. Under the current regulations, the Bank is not permitted to pay cash dividends or repurchase any of its capital stock if such payment or repurchase would cause its regulatory capital to be reduced below either the amount of the liquidation account or the regulatory capital requirements applicable to it. An institution that exceeds its fully phased-in capital requirement could, after prior notice, but without the approval of the OTS, make capital distributions during a calendar year of up to 100% of its current net income plus the amount that would reduce its "surplus capital ratio" (the excess capital over its fully phased-in capital requirement) to less than one-half of its surplus capital ratio at the beginning of the calendar year. Any additional capital distributions would require prior regulatory approval. A savings institution that does not meet its minimum regulatory capital requirements cannot make any capital distributions without prior OTS approval. Because the Bank is the primary source of working capital for the Company, the Company's ability to pay dividends is therefore limited. The Company paid cash dividends of $.14 per share during 1998. (20) Financial Instruments Fair Value of Financial Instruments Fair values for financial instruments, based on various assumptions and estimates as of a specific point in time, represent liquidation values and may vary significantly from amounts that will be realized in actual transactions. In addition, certain financial instruments such as lease contracts, and all non-financial instruments are excluded from the fair value disclosure requirements. Therefore, the fair values presented below should not be construed as the underlying value of the Company. The following methods and assumptions were used to estimate the fair value of selected financial instruments at December 31, 1998 and 1997: Cash and cash equivalents: Current carrying amounts reported in the statement of financial condition for cash and short-term instruments approximate estimated fair value. Investment and mortgage-backed securities: Fair values for investment and mortgage-backed securities were based on current quoted market prices. Loans, excluding leases: For variable rate loans that reprice frequently and have no significant credit risk, fair values are based on carrying values. The estimated fair values for certain mortgage loans (e.g., one- to four-family residential) and other consumer loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions. The fair value of non-accruing and restructured loans was estimated using discounted cash flow analysis, with incremental discount rates which consider credit risk and other relevant factors. The fair values for all other loans were estimated by discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Interest receivable: Current carrying amounts reported in the statement of financial condition for interest receivable approximate estimated fair value. Deposits: Fair values disclosed for deposits with no stated maturity (checking, NOW, savings, and money market accounts) are, by definition, equal to the amount payable on demand at December 31, 1998 and 1997 (i.e., current carrying amounts). Fair values for deposits with stated maturity dates (time deposits) were estimated with a discounted cash flow calculation that uses current interest rates offered in the Company's market area for deposits with comparable terms and maturities. FHLB borrowings: Short-term: Current carrying amounts of borrowings under repurchase agreements and other short-term borrowings approximate estimated fair value. Long-term: Fair value of long-term borrowings are estimated using a discounted cash flow calculation that uses current borrowing rates for advances with comparable terms and maturities. Other borrowings: Fair value of other borrowings was estimated with a discounted cash flow calculation using a current interest rate for debt with comparable maturities and terms. Other liabilities: Includes interest payable and advance payments by borrowers. Current carrying amounts of interest payable and advance payments by borrowers approximate estimated fair value. Commitments to extend credit and letters of credit: The majority of the Company's commitments to extend credit and letters of credit carry current market interest rates if converted to loans. Because commitments to extend credit and letters of credit are generally unassignable by either the Company or the borrower, they only have value to the Company and the borrower. The estimated fair value approximates the recorded deferred fee amounts. PAGE 31 (20) Financial Instruments (continued) The carrying amounts and fair values of the Company's financial instruments were as follows:
December 31, 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value ---------------------------------------------------------- Financial assets: Cash and due from banks and interest-bearing deposits $ 20,687 $ 20,687 $ 19,386 $ 19,386 Investment and mortgage-backed securities 176,769 176,915 104,385 104,077 Loans, excluding leases (1) 350,487 354,769 288,067 290,389 Interest receivable 3,245 3,245 2,728 2,728 Mortgage servicing rights 129 129 48 48 ========================================================== Financial liabilities: Deposits $406,518 $408,360 $340,761 $342,025 Advances from the FHLB 88,000 86,629 33,450 33,690 Other borrowings 79,416 79,405 50,797 50,982 Other financial liabilities 3,904 3,904 4,014 4,014 ==========================================================
(1) Includes loans held for sale (21) Significant Risks and Uncertainties The earnings of the Company depend primarily upon the level of net interest income, which is the difference between interest earned on its interest-earning assets, such as loans and leases and investments, and the interest paid on its interest-bearing liabilities, such as deposits and borrowings. Accordingly, the operations of the Company are subject to broad risks and uncertainties surrounding its exposure to changes in the interest rate environment. The financial statements of the Company are prepared in conformity with generally accepted accounting principles that require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported period. Actual results could differ from these estimates. Significant estimates are made by management in determining the allowance for possible loan and lease losses and carrying values of real estate owned. Consideration is given to a variety of factors in establishing these estimates including current economic conditions, diversification of the loan portfolio, delinquency statistics, results of internal loan reviews, borrowers' perceived financial and managerial strengths, the adequacy of underlying collateral, if collateral dependent, or present value of future cash flows and other relevant factors. Since the allowance for possible loan and lease losses and carrying value of real estate assets is dependent, to a great extent, on general and other conditions that may be beyond the Company's control, it is at least reasonably possible that the Company's estimates of the allowance for possible loan and lease losses and the carrying values of the real estate assets could differ materially in the near term. 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, 1998, include: retail consumers who account for 20% of all credit extensions; commercial mortgage and commercial real estate borrowers who account for 31%; residential construction and land loan customers who account for 7%; and commercial business borrowers who account for 42%. (22) Segments The Company has three principal activities, banking, leasing and real estate advisory services. 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. Selected financial information by business segment for the years ended: December 31, 1998 Revenues Net Income Assets - --------------------------------------------------------------- Banking $22,663 $4,464 $562,086 Leasing 4,881 1,199 71,416 Real estate advisory 2,534 192 3,184 Other 1,461 (875) 10,696 ------------------------------------- Total $31,539 $4,980 $647,382 ===================================== December 31, 1997 Revenues Net Income Assets - --------------------------------------------------------------- Banking $ 18,501 $ 3,411 $ 447,758 Leasing 4,764 522 52,940 Real estate advisory 1,265 58 3,528 Other 715 (524) 3,834 ------------------------------------- Total $ 25,245 $ 3,467 $ 508,060 ===================================== (23) Subsequent Event In January 1999 the Company's newest 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. The Company made an initial capital contribution of $500,000 in PFR. Under the 1993 Stock Incentive Plan, as amended in 1997 and 1998, the Company made available 30,000 non-qualified stock options for distribution to the PFR management team, associates and staff. The Company also initiated a restrictive stock plan under which 77,500 shares of common stock were reserved for future awards. PAGE 32 (24) Condensed Financial Information of Progress Financial Corporation (Parent Company Only) Condensed Statements of Financial Condition December 31, 1998 1997 - --------------------------------------------------------------- Assets: Cash on deposit with subsidiary $ -- $ 15 Investment in Bank 44,750 34,223 Investment in non-bank subsidiaries 8,052 3,669 Equity investment 213 1,462 Loans and advances from subsidiaries 5,788 3,512 Other 1,718 817 -------------------- Total assets $60,521 $43,698 ==================== Liabilities and stockholders' equity: Liabilities: Other borrowings $ 3,000 $ 3,000 Employee Stock Ownership Plan note payable 127 176 Other 840 160 -------------------- Total liabilities 3,967 3,336 -------------------- Corporation-obligated mandatorily redeemable capital securities of subsidiary trust holding solely junior subordinated debentures of the Corporation 15,000 15,000 -------------------- Stockholders' equity: Serial preferred stock -- -- Common stock 5,263 4,126 Treasury stock (2,287) -- Unearned Employee Stock Ownership Plan shares (143) (174) Capital surplus 39,615 20,960 Retained deficit (399) (10) Net accumulated other comprehensive income (loss) (495) 460 -------------------- Total stockholders' equity 41,554 25,362 -------------------- Total liabilities, Corporation-obligated mandatorily redeemable capital securities of subsidiary trust holding solely junior subordinated debentures of the Corporation and stockholders' equity $60,521 $43,698 ==================== Condensed Statements of Operations For the years ended December 31, 1998 1997 1996 - --------------------------------------------------------------- Dividends from equity investment $ 12 $ 5 $ 1 Management fees from subsidiary -- 130 311 Equity in undistributed income of subsidiaries 6,188 3,848 1,332 Gain on sale of equity investments 246 -- -- Interest income 9 498 1 ---------------------------- Total income 6,455 4,481 1,645 ---------------------------- Interest expense 287 279 291 Professional services 136 5 -- Amortization of goodwill -- -- 6 Capital securities expense 1,593 925 -- Miscellaneous expense 70 9 -- ---------------------------- Total expense 2,086 1,218 297 ---------------------------- Income before income taxes 4,369 3,263 1,348 Income tax expense (benefit) (611) (204) 5 ---------------------------- Net income $4,980 $3,467 $1,343 ---------------------------- Condensed Statements of Cash Flows For the years ended December 31, 1998 1997 1996 - -------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 4,980 $ 3,467 $ 1,343 Add (deduct) items not affecting cash flow from operating activities: Equity in income of subsidiaries (6,188) (3,848) (1,332) Gain on sale of equity investments (246) -- -- Amortization of deferred debt issuance cost 38 31 25 Amortization of goodwill -- -- 6 Other, net 170 97 45 Net increase (decrease) in accounts receivable and other (2,390) (4,666) 138 -------------------------------- Net cash flows provided by (used in) operating activities (3,636) (4,919) 225 -------------------------------- Cash flows from investment activities: Capital contributions and additional investment in subsidiaries (9,652) (9,736) (2,637) Dividends from Bank 1,259 973 157 Proceeds from sales of equity investments 1,185 -- -- Purchase of equity investments -- (1,068) -- -------------------------------- Net cash flows used in investment activities (7,208) (9,831) (2,480) -------------------------------- Cash flows from financing activities: Net proceeds from issuance (repayment) of ESOP debt (49) (44) 220 Purchase of treasury stock (3,098) -- -- Purchase of ESOP shares -- -- (250) Net proceeds from stock offering and exercise of warrants 14,411 -- 2,500 Net proceeds from issuance of common stock under employee benefit plans 221 100 5 Dividends paid (656) (389) (149) Proceeds from issuance of capital securities -- 15,000 -- -------------------------------- Net cash flows provided by financing activities 10,829 14,667 2,326 -------------------------------- Net increase (decrease) in cash and cash equivalents (15) (83) 71 Cash and cash equivalents: Beginning of year 15 98 27 -------------------------------- End of year $ -- $ 15 $ 98 -------------------------------- These statements should be read in conjunction with the other notes to the consolidated financial statements. PAGE 33 [LOGO: PricewaterhouseCoopers LLP] PricewaterhouseCoopers LLP 2400 Eleven Penn Center Philadelphia, PA 19103-2962 Telephone:(215) 963-8000 Facsimile: (215) 963-8700 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and Board of Directors of Progress Financial Corporation: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Progress Financial Corporation and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP January 22, 1999 PAGE 34 SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED) The following table represents quarterly financial data for the periods indicated. In the opinion of management, this information reflects all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the results of operations for the periods indicated. Reclassifications have been made to certain previously reported amounts to conform with the 1998 classifications.
Dec. 31, Sept. 30, Jun. 30, Mar. 31, Dec. 31, Sept. 30, Jun. 30, Mar. 31, 1998 1998 1998 1998 1997 1997 1997 1997 - ----------------------------------------------------------------------------------------------------------------------------------- Interest income $12,353 $12,266 $10,778 $9,932 $9,890 $9,381 $8,874 $8,352 Interest expense 6,141 6,251 5,317 4,741 4,751 4,570 4,356 4,217 ----------------------------------------------------------------------------------------- Net interest income 6,212 6,015 5,461 5,191 5,139 4,811 4,518 4,135 Provision for possible loan and lease losses 300 233 224 202 871 242 203 193 ----------------------------------------------------------------------------------------- Net interest income after provision for possible loan and lease losses 5,912 5,782 5,237 4,989 4,268 4,569 4,315 3,942 Non-interest income 2,255 2,338 2,262 1,805 2,115 1,508 1,285 1,734 Non-interest expense 5,800 5,927 5,730 5,219 5,431 4,570 4,191 3,855 ----------------------------------------------------------------------------------------- Income before income taxes and cumulative effect of accounting change 2,367 2,193 1,769 1,575 952 1,507 1,409 1,821 Income tax expense 850 801 648 579 455 577 519 671 ----------------------------------------------------------------------------------------- Income before cumulative effect of accounting change 1,517 1,392 1,121 996 497 930 890 1,150 Cumulative effect of accounting change, net of tax benefit -- (46) -- -- -- -- -- -- ----------------------------------------------------------------------------------------- Net income $ 1,517 $ 1,346 $ 1,121 $ 996 $ 497 $ 930 $ 890 $1,150 ----------------------------------------------------------------------------------------- Basic income per common share before cumulative effect of accounting change $ 0.30 $ 0.27 $ 0.23 $ 0.23 $ 0.12 $ 0.22 $ 0.21 $ 0.27 Fully diluted income per common share before cumulative effect of accounting change 0.28 0.25 0.20 0.21 0.10 0.20 0.20 0.25 Basic net income per common share 0.30 0.26 0.23 0.23 0.12 0.22 0.21 0.27 Fully diluted net income per common share 0.28 0.24 0.21 0.20 0.10 0.20 0.20 0.25 ----------------------------------------------------------------------------------------- Dividends per share $ 0.04 $ 0.04 $ 0.03 $ 0.03 $ 0.03 $ 0.03 $ 0.02 $ 0.02 -----------------------------------------------------------------------------------------
MARKET INFORMATION Progress Financial Corporation's common stock is traded on the National Association Securities Dealers Automated Quotation Stock Market under the symbol "PFNC." At December 31, 1998 the Company had approximately 1,800 holders of record. Payment of cash dividends is subject to regulatory restrictions as described in Note 19 of Notes to Consolidated Financial Statements. In 1998, the Company paid dividends of $.14 per share. During 1997 the Company paid dividends of $.10 per share. The following table sets forth the high and low closing prices and trading volumes for the periods described:
1998 1997* - ------------------------------------------------------------------------------------------------------------------------------------ Low High Volume Low High Volume - ------------------------------------------------------------------------------------------------------------------------------------ First Quarter $14 17/32 $17 5/8 535,000 $ 7 31/64 $ 8 9/32 555,000 Second Quarter 16 29/32 21 43/64 1,317,000 7 5/16 9 17/32 710,000 Third Quarter 12 3/4 18 11/16 666,000 9 19/64 14 13/32 827,000 Fourth Quarter 11 1/2 14 7/8 1,125,000 13 7/32 15 23/32 590,000 *Prior period has been restated to reflect the 5% stock dividend distributed to shareholders on August 31, 1998.
PAGE 35 INFORMATION FOR SHAREHOLDERS PROGRESS FINANCIAL CORPORATION AND PROGRESS BANK Directors John E. F. Corson Consultant and President Corson Investments William O. Daggett, Jr. Managing Partner Kistler-Tiffany Companies Donald F. U. Goebert(1) Chairman of the Board Adage, Inc. H. Wayne Griest(2) President and Chief Executive Officer Progress Realty Advisors, Inc. Joseph R. Klinger Principal KMR Management, Inc. Paul M. LaNoce President DAR Industrial Products, Inc. A. John May, III, Esquire(2) Attorney Pepper, Hamilton LLP William L. Mueller, Esquire Attorney Brandt, Haughey, Penberthy, Lewis & Hyland Janet E. Paroo Chief Operating Officer Global Health Group, Inc. Kevin J. Silverang, Esquire(3) Attorney Buchanan Ingersoll Charles J. Tornetta President Tornetta Realty W. Kirk Wycoff Chairman, President and Chief Executive Officer PROGRESS FINANCIAL CORPORATION AND PROGRESS BANK Principal Officers W. Kirk Wycoff Chairman, President and Chief Executive Officer Robert J. Bifolco(4) Senior Vice President Commercial Banking Donald M. DeMaio(4) Senior Vice President Retail Banking Michael J. Falco(4) Senior Vice President Construction Lending Michael B. High Senior Vice President and Chief Financial Officer Steven D. Hobman(4) Senior Vice President Specialized Lending George R. Mark(5) Executive Vice President Georgann Berger McKenna(4) Senior Vice President Human Resources Eric J. Morgan Senior Vice President Credit and Administration Richard T. Powers(4) Senior Vice President Operations PROGRESS DEVELOPMENT L. P. Principal Officer Anthony P. Lordi Managing Director PROGRESS FINANCIAL RESOURCES, INC. Principal Officers Adam T. Sherman President Samuel Jacobs Executive Vice President and Chief Financial Officer Donald Antonacio Executive Vice President David Fleisher Executive Vice President Andrew McIlhenny Executive Vice President PROGRESS LEASING COMPANY Principal Officers Michael A. Basile, Jr. President Christopher L. Campbell Executive Vice President Dennis M. Horner Executive Vice President PROGRESS REALTY ADVISORS, INC. Principal Officers H. Wayne Griest President and Chief Executive Officer Blue Bell, PA Office Francis W. Ashmore Senior Vice President Joseph F. Lebano Senior Vice President Richmond, VA Office Thomas J. Mueller Senior Vice President R. Brad Partrea Senior Vice President Chesapeake, VA Office Russell G. Hanson, Jr. Senior Vice President Woodbridge, NJ Office Kathleen M. Anderson Senior Vice President Peter M. Shapiro Senior Vice President Wilmington, DE Office Robert F. McCann Senior Vice President H. Gerald Nanos Senior Vice President PROCALL TELESERVICES, INC. Principal Officers Claudia B. Timbo President Lisa L. Mills Vice President Debra Zbrzeznj Vice President (1)Resigned effective 1/15/99 (2)Director of Corporation only (3)Elected to replace Donald F.U. Goebert (4)Officer of Bank only (5)Officer of Corporation only PROGRESS FINANCIAL CORP. AND SUBSIDIARIES SHAREHOLDERS' INFORMATION PROGRESS FINANCIAL CORPORATION Progress Bank Progress Leasing Company, Progress Realty Advisors, Inc. Procall Teleservices 4 Sentry Parkway P.O. Box 3036 Blue Bell, Pennsylvania 19422 Progress Development L.P. 595 Skippack Pike Suite 100 Blue Bell, Pennsylvania 19422 Progress Financial Resources, Inc. 1818 Market Street, 29th Floor Philadelphia, Pennsylvania 19103 Progress Leasing Company 6 Green Meadow Drive Timonium, Maryland 21093 Progress Realty Advisors, Inc. 900 Route 9, Sixth Floor Woodbridge, New Jersey 07095 Atlantic Mortgage & Investment Company 1401 Greenbrier Parkway Suite 465 Chesapeake, Virginia 23320 804 Moorefield, Park Drive Suite 104 P.O. Box 35690 Richmond, Virginia 23236 Progress Realty Advisors of Delaware, LLC 2115 Concord Pike, Suite 201 Wilmington, Delaware 19803 Annual Meeting of Shareholders The Annual Meeting of shareholders will be held at 9:00 a.m., April 27, 1999, at: Plymouth Country Club Belvoir and Plymouth Roads Norristown, Pennsylvania Contacts Analysts, investors, news media representatives and others seeking financial and general information should contact: Patricia Ellick--Director of Investor Relations or Michael B. High--Senior Vice President and Chief Financial Officer at (610) 825-8800. Form 10-K A copy of Progress Financial Corporation's Form 10-K will be provided upon written request to: Progress Financial Corporation 4 Sentry Parkway, Suite 230 Blue Bell, Pennsylvania 19422 Attn: Investor Relations Stock Listing Shares of Progress Financial Corporation are traded on the Nasdaq Stock Market under the symbol of "PFNC." Transfer Agent/Registrar American Stock Transfer & Trust Company 40 Wall Street New York, New York 10005 Toll-free: 1-800-937-5449 Market Makers Sandler O'Neill & Partners, L.P. F. J. Morrissey & Co., Inc. Ryan, Beck & Co. First Union Capital Markets Corp. Herzog, Heine, Geduld, Inc. M. H. Meyerson & Co., Inc. Knight Securities, Inc. Progress Foundation Organized to support the financial needs of children's causes in our trading areas. Funding comes from the Bank, its officers and employees and special events held throughout the year. Progress Bank Branch Offices 207 West 4th Street Bridgeport, Pennsylvania 19405 (610) 272-5559 405 Fayette Street Conshohocken, Pennsylvania 19428 (610) 828-4710 Genuardi Shopping Center Jeffersonville, Pennsylvania 19403 (610) 631-0717 Valley Forge Shopping Center King of Prussia, Pennsylvania 19406 (610) 265-0196 Sandy Hill Shopping Center Norristown, Pennsylvania 19401 (610) 272-7461 Andorra Shopping Center Philadelphia, Pennsylvania 19128 (215) 483-0450 Plymouth Meeting Executive Campus Plymouth Meeting, Pennsylvania 19462 (610) 825-3320 1084 Lancaster Avenue Rosemont, Pennsylvania 19010 (610) 527-2600 Paoli Shopping Center Paoli, Pennsylvania 19301 (610) 648-9422 Allen Forge Center Lansdale, Pennsylvania 19446 (215) 631-9180 Northtowne Shopping Center Norristown, Pennsylvania 19401 (610) 278-7600 Designed by Curran & Connors, Inc. [LOGO] EX-21 9 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 Subsidiaries of the registrant Name Jurisdiction of Organization Progress Bank.....................................................United States Progress Holdings, Inc.......................................Pennsylvania Progress Investment Company..............................Pennsylvania Progress Leasing Company.................................Maryland PBIC, Inc....................................................Delaware Pilot Financial Corporation..................................Pennsylvania P. H. Sentry Associates......................................Pennsylvania Progress Sentry Corporation..................................Pennsylvania Progress Capital, Inc.............................................Delaware Progress Realty Advisors, Inc.....................................Pennsylvania ProCall Teleservices, Inc.........................................Pennsylvania Progress Capital Management, Inc..................................Pennsylvania Progress Development Corp.........................................Pennsylvania Progress Financial Resources, Inc.................................Delaware 47 EX-23 10 CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23 PricewaterhouseCoopers LLP 2400 Eleven Penn Center Philadelphia, PA 19103-2962 Phone: (215) 963-8615 Facsimile: (215) 963-8824 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of Progress Financial Corporation on Forms S-3 (File Nos. 333-43109, 333-48039, 033-58377 and 333-74059) and Forms S-8 (File Nos. 333-06107, 033-58781 and 333-72543) of our report dated January 22, 1999 on our audits of the consolidated financial statements of Progress Financial Corporation as of December 31, 1998 and 1997, and for the years ended December 31, 1998, 1997 and 1996, which report is incorporated by reference in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP PRICEWATERHOUSECOOPERS LLP Philadelphia, Pennsylvania March 26, 1999 EX-27 11 FDS --
9 0000790183 Progress Financial 1,000 U.S. Dollars 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 1.000 14,189 6,498 0 0 164,368 12,401 12,547 398,736 4,490 647,382 406,518 45,941 16,894 121,475 0 0 5,263 37,291 647,382 35,468 9,703 158 45,329 14,466 22,450 22,879 959 533 22,676 7,904 5,026 0 (46) 4,980 1.02 0.93 4.32 3,683 4,030 0 0 3,863 755 423 4,490 4,490 0 0
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