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Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
[ X ] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarter ended September 30, 2002.
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from _________ to ___________________.
Commission File Number: 0-14815
Progress Financial Corporation
(Exact name of registrant as specified in its charter)
Delaware 23-2413363
- -------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4 Sentry Parkway
Suite 200
Blue Bell, Pennsylvania 19422
- ----------------------- ------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 825-8800
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock ($1.00 par value) 6,821,474
------------------------------ --------------------------------
Title of Each Class Number of Shares Outstanding as
of October 31, 2002
Progress Financial Corporation
Table of Contents
PART I - Interim Financial Information
Page
Item 1. Interim Financial Statements (Unaudited)
Consolidated Interim Statements of Financial Condition as of
September 30, 2002 and December 31, 2001...........................3
Consolidated Interim Statements of Operations for the three
and nine months ended September 30, 2002 and 2001..................4
Consolidated Interim Statements of Changes in Shareholders'
Equity and Comprehensive Income for the nine months ended
September 30, 2002 and 2001........................................5
Consolidated Interim Statements of Cash Flows for the
nine months ended September 30, 2002 and 2001......................6
Notes to Consolidated Interim Financial Statements.................7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................16
Item 3. Quantitative and Qualitative Disclosures About Market Risk........20
Item 4. Controls and Procedures...........................................20
PART II - Other Information
Item 1. Legal Proceedings.................................................21
Item 2. Changes in Securities.............................................21
Item 3. Defaults upon Senior Securities...................................21
Item 4. Submission of Matters to a Vote of Security Holders...............21
Item 5. Other Information.................................................21
Item 6. Exhibits and Reports on Form 8-K........ .........................21
Signatures........................................................22
Certifications....................................................23
PART I- INTERIM FINANCIAL INFORMATION
Item 1. Interim Financial Statements
Consolidated Interim Statements of Financial Condition (Unaudited)
(Dollars in thousands) September 30, December 31,
2002 2001
------------- ------------
Assets
Cash and due from other financial institutions:
Non-interest-earning $ 20,434 $ 21,250
Interest-earning 3,506 11,276
Investment and mortgage-backed securities [Note 6]:
Available for sale at fair value (amortized cost: $298,747 and $212,793) 304,307 211,828
Held to maturity at amortized cost (fair value: $91,523 and $38,020) 89,218 38,173
Loans and leases, net [Note 7] (net of reserves[Note 8]: $7,100 and $9,917) 451,237 495,025
Loans held for sale [Note 9] -- 25,587
Investments in unconsolidated entities 1,228 1,985
Premises and equipment, net 26,789 26,038
Other assets [Note 10] 30,976 20,218
-------- --------
Total assets $927,695 $851,380
======== ========
Liabilities, Capital Securities and Shareholders' Equity
Liabilities:
Deposits [Note 9]:
Non-interest-bearing $ 74,261 $ 84,783
Interest-bearing 588,721 544,740
Short-term borrowings:
Securities sold under agreement to repurchase 36,148 --
Other short-term borrowings 629 200
Other liabilities 17,815 10,430
Long-term debt:
Federal Home Loan Bank advances 120,500 117,000
Other debt 1,285 20,368
Subordinated debt 3,000 3,000
-------- --------
Total liabilities 842,359 780,521
-------- --------
Corporation-obligated mandatorily redeemable capital securities of subsidiary trust
holding solely junior subordinated debentures of the Corporation [Note 11] 18,824 20,260
Commitments and contingencies [Note 12]
Shareholders' equity [Note 5]:
Serial preferred stock - $.01 par value;1,000,000 shares authorized but unissued -- --
Junior participating preferred stock - $.01 par value; 1,010 shares authorized but -- --
unissued
Common stock - $1 par value; 12,000,000 shares authorized: 7,056,000 and 5,818,000
shares issued and outstanding; including treasury shares of 64,000 and
84,000 and unallocated shares held by the Employee Stock Ownership Plan of
176,000 and 182,000 7,056 5,818
Other common shareholders' equity, net 55,822 45,466
Net accumulated other comprehensive income (loss) 3,634 (685)
-------- --------
Total shareholders' equity 66,512 50,599
-------- --------
Total liabilities, capital securities and shareholders' equity $927,695 $851,380
======== ========
See Notes to Consolidated Interim Financial Statements.
Consolidated Interim Statements of Operations (Unaudited)
(Dollars in thousands, except per share data)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2002 2001 2002 2001
---- ---- ---- ----
Interest income:
Loans and leases, including fees $ 8,250 $11,821 $25,725 $36,704
Mortgage-backed securities 4,490 3,647 12,145 10,759
Investment securities 674 639 1,908 2,268
Other 59 223 181 803
------- ------- ------- -------
Total interest income 13,473 16,330 39,959 50,534
------- ------- ------- -------
Interest expense:
Deposits 4,011 5,715 11,872 18,515
Short-term borrowings 322 386 733 1,729
Long-term and subordinated debt 1,772 2,134 5,580 6,082
------- ------- ------- -------
Total interest expense 6,105 8,235 18,185 26,326
------- ------- ------- -------
Net interest income 7,368 8,095 21,774 24,208
Provision for loan and lease losses 500 1,543 2,939 6,144
------- ------- ------- -------
Net interest income after provision for loan and lease losses 6,868 6,552 18,835 18,064
------- ------- ------- -------
Non-interest income:
Service charges on deposits 916 640 2,748 1,848
Lease financing fees 50 231 176 750
Mutual fund, annuity and insurance commissions 478 313 2,096 2,094
Loan brokerage and advisory fees 78 158 653 746
Private equity fund management fees 65 614 182 1,843
Gain on sale of securities 84 1,073 436 2,310
Gain on sale of loans and lease receivables 148 437 495 735
Gain on sale of investments in unconsolidated entities -- -- 11 --
Gain on sale of real estate 1,570 -- 1,570 --
Client warrant income (loss) 466 1 1,927 (1,957)
Equity (loss) in unconsolidated entities 1 (240) 102 (818)
Fees and other 495 1,025 1,715 3,044
------- ------- ------- -------
Total non-interest income 4,351 4,252 12,111 10,595
------- ------- ------- -------
Non-interest expense:
Salaries and employee benefits 3,906 4,225 12,211 14,198
Occupancy 720 647 1,967 1,893
Data processing 215 230 702 721
Furniture, fixtures and equipment 511 528 1,566 1,646
Professional services 597 943 1,816 2,673
Capital securities expense 548 573 1,693 1,706
Other 2,341 2,262 6,151 5,916
------- ------- ------- -------
Total non-interest expense 8,838 9,408 26,106 28,753
------- ------- ------- -------
Income (loss) before income taxes 2,381 1,396 4,840 (94)
Income tax expense (benefit) 1,066 463 1,868 (83)
------- ------- ------- -------
Net income (loss) $ 1,315 $ 933 $ 2,972 $ (11)
======= ======= ======= =======
Basic earnings per common share $ .20 $ .17 $ .45 $ --
======= ======= ======= ======
Diluted earnings per common share $ .19 $ .17 $ .44 $ --
======= ======= ======= ======
Dividends per common share $ .05 $ -- $ .05 $ .12
======= ======= ======= ======
Basic average common shares outstanding 6,815,956 5,584,133 6,607,985 5,617,516
========= ========= ========= =========
Diluted average common shares outstanding 6,967,686 5,680,014 6,761,675 5,741,879
========= ========= ========= =========
See Notes to Consolidated Interim Financial Statements.
Consolidated Interim Statements of Changes in Shareholders' Equity and
Comprehensive Income (Unaudited) (Dollars in thousands)
Net
Unearned Accumulated
Unearned Compensation Other Total
Common Treasury ESOP Restricted Capital Retained Comprehensive Comprehensive Shareholders'
Stock Stock Shares Stock Surplus Earnings Income (Loss) Income (Loss) Equity
-----------------------------------------------------------------------------------------------
For the nine months ended September 30, 2002:
- ---------------------------------------------
Balance at December 31, 2001 $5,818 $(628) $(1,448) $(107) $44,029 $3,620 $ (685) $50,599
Issuance of stock under employee
benefit plans (86,829 common shares; 87 -- 53 30 385 -- -- 555
6,681 ESOP shares)
Retirement of restricted stock awards
(1,694 common shares) (2) -- -- 20 (18) -- -- --
Net income -- -- -- -- -- 2,972 -- $2,972 2,972
Other comprehensive income,
net of tax (a) -- -- -- -- -- -- 4,319 4,319 4,319
------
Net comprehensive income $7,291
======
Sale of treasury stock (19,813 treasury -- 144 -- -- 39 -- -- 183
shares)
Issuance of stock under private
placement (1,153,330 common shares) 1,153 -- -- -- 7,071 -- -- -- 8,224
Cash dividend declared -- -- -- -- -- (340) -- (340)
------ ----- ------- ----- ------- ------ ------ -------
Balance at September 30, 2002 $7,056 $(484) $(1,395) $ (57) $51,506 $6,252 $3,634 $66,512
====== ===== ======= ===== ======= ====== ====== =======
For the nine months ended September 30, 2001:
- ----------------------------------------------
Balance at December 31, 2000 $5,814 $(1,245) $ -- $(858) $44,400 $3,848 $(1,799) $50,160
Issuance of stock under employee
benefit plans (44,309 common shares) 44 -- -- 197 252 -- -- 493
Retirement of restricted stock awards
(1,042 common shares) (1) -- -- 12 (11) -- -- --
Net loss -- -- -- -- -- (11) -- $ (11) (11)
Other comprehensive income,
net of tax (a) -- -- -- -- -- -- 3,647 3,647 3,647
------
Net comprehensive income $3,636
======
Purchase of treasury stock
(147,500 treasury shares) -- (1,105) -- -- -- -- -- (1,105)
Shares acquired for ESOP (188,700 -- 1,722 (1,500) -- -- (222) --
shares)
Cash dividend declared -- -- -- -- -- (677) -- (677)
------ ------ ------- ----- ------- ------ ------- -------
Balance at September 30, 2001 $5,857 $ (628)$(1,500) $(649) $44,641 $2,938 $ 1,848 $52,507
====== ====== ======= ===== ======= ====== ======= =======
(a) For nine months ended September 30, 2002 2001
---- ----
Calculation of other comprehensive income, net of tax:
Unrealized holding gains arising during the period, net of tax $4,607 $5,172
Less: Reclassification for gains included in net income, net of tax 288 1,525
------ ------
Other comprehensive income, net of tax $4,319 $3,647
====== ======
See Notes to Consolidated Interim Financial Statements.
Consolidated Interim Statements of Cash Flows (Unaudited)
(Dollars in thousands)
For the nine months ended September 30, 2002 2001
------ ------
Cash flows from operating activities:
Net income (loss) $ 2,972 $ (11)
Add (deduct) items not affecting cash flows from operating activities:
Depreciation, amortization, writedowns and impairment losses 2,760 1,955
Provision for loan and lease losses 2,939 6,144
Gain on sale of securities available for sale (436) (2,310)
Gain on sale of loans and leases (495) (735)
Gain on sale of investments in unconsolidated entities (11) --
Gain on sale of real estate (1,570) --
Client warrant (income) loss (1,927) 1,957
(Equity) loss in unconsolidated entities (102) 818
Accretion of deferred loan and lease fees and expenses (948) (1,717)
Amortization of premiums/accretion of discounts and writedowns on securities 1,268 801
Other, net 156 (51)
Increase in other assets (12,888) (16,132)
Increase (decrease) in other liabilities 5,133 (20,010)
------- --------
Net cash flows used in operating activities (3,149) (29,291)
------- --------
Cash flows from investing activities:
Capital expenditures (4,117) (3,728)
Purchases of investment and mortgage-backed securities available for sale (197,168) (136,412)
Purchases of investment and mortgage-backed securities held to maturity (68,605) (1,005)
Repayments on mortgage-backed securities available for sale 58,699 64,774
Repayments on mortgage-backed securities held to maturity 2,035 --
Proceeds from sales, maturity and calls of investment and mortgage-backed securities
available for sale 53,654 84,219
Proceeds from redemption and calls of investment securities held to maturity 15,499 5,099
Proceeds from sale of investment in NewSeasons Assisted Living Communities
Series B and C preferred stock -- 1,792
Proceeds from sale of investments in unconsolidated entities 39 --
Proceeds from sale of loans and leases 14,650 21,183
Net cash paid in sale of TechBanc (21,399) --
Proceeds from sale of AMIC division of Progress Reality Advisors, Inc. -- 500
Investment in real estate owned (510) (1,098)
Proceeds from sale of real estate 8,259 3,743
Net (increase) decrease in loans and leases 25,017 (25,710)
Net (investments in) distributions from unconsolidated entities 831 (627)
Other, net (84) (231)
--------- -------
Net cash flows provided by (used in) investing activities (113,200) 12,499
--------- -------
Cash flows from financing activities:
Net increase in demand, NOW and savings deposits 33,367 28
Net increase in time deposits 46,355 12,154
Net increase (decrease) in short-term borrowings 17,494 (68,713)
Proceeds from issuance of long-term debt 3,500 45,500
Repayment of long-term debt -- (10,000)
Extinguishment of capital securities (1,454) --
Dividends paid (340) (677)
Purchase of treasury shares -- (1,105)
Proceeds from sale of treasury shares 183 --
Net proceeds from issuance of common stock under employee benefit plans 441 279
Net proceeds from issuance of common stock in private placement 8,224 --
Other, net (7) --
-------- -------
Net cash flows provided by (used in) financing activities 107,763 (22,534)
-------- -------
Net decrease in cash and cash equivalents (8,586) (39,326)
Cash and cash equivalents:
Beginning of year 32,526 84,997
-------- -------
End of period $ 23,940 $45,671
======== =======
Supplemental disclosures:
Non-monetary transfers:
Net conversion of loans receivable to real estate owned $ 3,326 $ --
======== =======
Notes received in sale of investment in NewSeasons Assisted Living Communities Series
B and C preferred stock $ -- $ 4,180
======== =======
See Notes to Consolidated Interim Financial Statements.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
(1) Basis of Presentation
In the opinion of management, the financial information reflects all
adjustments necessary for a fair presentation of the financial information
as of September 30, 2002 and December 31, 2001 and for the three and nine
months ended September 30, 2002 and 2001 in conformity with accounting
principles generally accepted in the United States of America. These
interim financial statements should be read in conjunction with Progress
Financial Corporation's (the "Company") Annual Report on Form 10-K for the
year ended December 31, 2001. Operating results for the three and nine
months ended September 30, 2002 are not necessarily indicative of the
results that may be expected for any other interim period or the entire
year ending December 31, 2002. The Company's principal subsidiaries are
Progress Bank (the "Bank"), Progress Capital, Inc., Progress Capital
Management, Inc., Progress Financial Resources, Inc. and KMR Management,
Inc. All significant intercompany transactions have been eliminated.
(2) Recent Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of
FASB Statement No. 13, and Technical Corrections" ("FAS 145"). FAS 145
rescinds SFAS No. 4 "Reporting Gains and Losses from Extinguishment of
Debt" ("FAS 4") which required all gains and losses from extinguishment of
debt to be aggregated and, if material, classified as an extraordinary
item, net of related income tax effect. As a result of FAS 145, gains and
losses from extinguishments of debt should be classified as extraordinary
items only if they meet the criteria of Accounting Principles Board Opinion
No. 30 "Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions"
("APB 30"). The Board noted that the application of the criteria in ABP 30
requiring the transactions to be both unusual in nature and infrequent in
occurrence would seldom, if ever, require that gains and losses from
extinguishment of debt be classified as extraordinary items. The provisions
of FAS 145 related to the rescission of FAS 4 are required to be applied in
fiscal years beginning after May 15, 2002, with early application
encouraged. Any gain or loss on extinguishment of debt that was classified
as an extraordinary item in prior periods that does not meet the criteria
in APB 30 is required to be reclassified. FAS 145 also rescinds an
amendment to FAS 4, SFAS No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements" and rescinds SFAS No. 44, "Accounting for
Intangible Assets of Motor Carriers." FAS 145 makes technical corrections
to existing pronouncements which are not substantive in nature. FAS 145
amends SFAS No. 13, "Accounting for Leases" ("FAS 13") to require that
certain lease modifications that have economic effects similar to
sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. The provisions of FAS 145 related to FAS 13
are effective for transactions occurring after May 15, 2002, with early
application encouraged and all other provisions of FAS 145 are effective
for financial statements issued on or after May 15, 2002, with early
application encouraged.
The Company adopted FAS 145 as of June 30, 2002 and has not experienced any
material changes to its financial representation. In accordance with the
rescission of FAS 4, the Company has reclassified an extraordinary loss on
the extinguishment of debt previously reported in the results of operations
for 2001. During December 2001, the Company used current cash on hand to
prepay $10.0 million in long-term FHLB Advances scheduled to mature in
2003. The transaction was reported as a net extraordinary loss of $199,000
(loss of $301,000 gross of a tax benefit of $102,000) or $.03 loss per
share. The transaction was part the Company's risk management strategy and
does not meet the criteria for classification as an extraordinary item in
APB 30. Therefore, for the restated results of operations for 2001, the
loss of $301,000 on the extinguishment of debt has been reclassified to
non-interest income and the $102,000 tax benefit has been reclassified to
income tax expense.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) (Continued)
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("FAS 146"). FAS 146 requires
costs associated with exit or disposal activities to be recognized when
they are incurred rather than at the date of a commitment to an exit or
disposal plan. Examples of costs covered by FAS 146 include lease
termination costs and certain employee severance costs that are associated
with a restructuring, discontinued operation, plant closing or other exit
or disposal activity. FAS 146 nullifies Emerging Issues Task Force Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)" ("Issue 94-3"). Under Issue 94-3, a liability for an exit
cost as defined in Issue 94-3 was recognized at the date of an entity's
commitment to an exit plan. FAS 146 improves financial reporting by
requiring that a liability for a cost associated with an exit or disposal
activity be recognized and measured initially at fair value only when the
liability is incurred. FAS 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002, with early
application encouraged. The Company does not anticipate any material
changes to its financial representation as a result of adopting FAS 146.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions" ("FAS 147"). FAS 147 removes acquisitions of
financial institutions, except transactions between two or more mutual
enterprises, from the scopes of both SFAS No. 72, "Accounting for Certain
Acquisitions of Banking and Thrift Institutions" and FASB Interpretations
No. 9, "Applying APB Opinion Nos. 16 and 17 When a Savings and Loan
Association or Similar Institution is Acquired in a Business Combination
Accounted for by the Purchase Method" and requires that those transactions
be accounted for in accordance with SFAS No. 141 "Business Combinations"
and SFAS 142 "Goodwill and other Intangible Assets." FAS 147 amends FAS 144
to include within its scope long-term customer-relationship intangibles of
financial institutions. FAS 147 is effective for acquisitions occurring on
or after October 1, 2002, and for all other provisions on October 1, 2002
with earlier application permitted. The Company does not anticipate any
changes to its financial representation as a result of adopting FAS 147.
(3) Office of Thrift Supervision Directive
During July 2001, the Company's Board of Directors approved a resolution to
comply with the terms of a directive issued by the Office of Thrift
Supervision ("OTS") that requires the Bank to (i) reduce its lending to
early stage technology companies; (ii) increase its leverage capital ratio
to no less than 8.0% and its total risk-basked capital ratio to no less
than 14.0% by April 1, 2002 through gradual compliance; and (iii) increase
its valuation allowance and implement improved credit review and monitoring
programs. In addition, the Company could not pay cash dividends on its
capital stock until the Bank achieved the required capital levels and had
implemented an acceptable capital plan. As such, the Company had suspended
the quarterly cash dividend on its common stock and its stock repurchase
program and had undertaken measures to achieve capital compliance as
promptly as possible. The increased capital levels reflect the Bank's level
of business lending, particularly in the technology sector, and continued
economic concerns. On July 30, 2002, the Company reinstated its quarterly
cash dividend on its common stock.
On February 7, 2002 the OTS approved the Company's revised Capital
Enhancement Plan and on June 25, 2002 the OTS agreed to extend the dates
that the Bank must comply with the targeted ratio of classified assets to
capital. As revised, the Bank's classified assets to capital ratio must not
exceed 25% on September 30, 2002 and must not exceed 20% on March 31, 2003.
At September 30, 2002, the Bank's classified assets to capital ratio was
approximately 17.8%. The Bank worked aggressively to reduce the ratio and
comply with the terms of the directive. As of September 30, 2002, the Bank
was in compliance with the revised terms of the OTS directive. The Company
has achieved the required capital levels at the Bank and both the Company
and the Bank are in full compliance with the OTS approved capital plan.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(4) Subsequent Events
On October 23, 2002, the OTS released the Company and Progress Bank from
the Supervisory Directive and the Individual Minimum Capital Directive.
On October 23, 2002, the Company reinstated its stock repurchase program
for the repurchase of up to 200,000 shares, or three percent, of the
Company's outstanding common stock. The Company had previously suspended
its repurchase program since June 30, 2001 as a result of the OTS
directive.
On October 23, 2002, the Company announced the declaration its quarterly
cash dividend on its common stock. The cash dividend of $.05 per share will
be paid on November 8, 2002 to shareholders of record on October 31, 2002.
On October 25, 2002, the Company extinguished $2.8 million of its
10.5%capital securities and recognized a gain of $13,000.
On November 8, 2002, the Company issued $10.0 million of variable rate,
currently 4.96% (three-month LIBOR plus 3.35%, capped at 12% until November
15, 2007), capital securities due November 8, 2032 (the "Capital
Securities"). The Capital Securities were issued by the Company's
subsidiary, Progress Capital Trust III (the "Trust III"), a statutory
business trust created under the laws of Delaware. The Company is the owner
of all of the common securities of the Trust III (the "Common Securities").
The Trust III issued $10.0 million of variable rate Capital Securities (and
together with the Common Securities, the "Trust III Securities"), the
proceeds from which were used by the Trust III along with the Company's
$310,000 capital contribution for the Common Securities, to acquire $10.3
million aggregate principal amount of the Company's variable rate Junior
Subordinated Deferrable Interest Debentures due November 8, 2032 (the
"Debentures"), which constitute the sole assets of the Trust III. The
Company has, through the Declaration of Trust establishing the Trust III,
Common Securities and Capital Securities Guarantee Agreements, the
Debentures and a related Indenture, taken together, irrevocably and
unconditionally guaranteed all of the Trust III's obligations under the
Trust III Securities.
(5) Shareholders' Equity
Common Stock Offering and Repurchase Program
--------------------------------------------
On February 11, 2002, the Company closed a private placement offering of
common stock to accredited investors of 1,153,330 common shares priced at
$7.50 a share, totaling $8.6 million, resulting in net proceeds of
approximately $8.2 million.
Under the Company's 2000 stock repurchase program to repurchase up to
285,000 shares, or five percent, of its outstanding common stock, 149,800
shares were repurchased as of May 31, 2001. As discussed above, repurchases
had been suspended since June 30, 2001.
Earnings per Share
------------------
The following table presents a summary of per share data and amounts for
the included periods.
For the three months ended September 30,
(Dollars in thousands, except per share data) 2002 2001
------------------------------- ----------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
------ ------ --------- ------ ------ ---------
Basic Earnings Per Share:
Income available to common shareholders $1,315 6,815,956 $ .20 $933 5,584,133 $ .17
===== =====
Effect of Dilutive Securities:
Options -- 151,730 -- -- 95,881 --
------ --------- ---- ---------
Diluted Earnings Per Share:
Income available to common shareholders
and assumed conversions $1,315 6,967,686 $ .19 $933 5,680,014 $ .17
====== ========= ===== ==== ========= =====
For the nine months ended September 30,
(Dollars in thousands, except per share data) 2002 2001
------------------------------- ----------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
------ ------ --------- ------ ------ ---------
Basic Earnings Per Share:
Income (loss) available to common shareholders $2,972 6,607,985 $ .45 $(11) 5,617,516 $--
=====
Effect of Dilutive Securities:
Options -- 53,690 -- -- 124,363 --
------ --------- ---- --------- ===
Diluted Earnings Per Share:
Income (loss) available to common shareholders
and assumed conversions $2,972 6,761,675 $ .44 $(11) 5,741,879 $--
====== ========= ===== ==== ========= ===
Capital Resources
-----------------
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
specific capital categories were defined based on an institution's capital
ratios. To be considered "well capitalized," an institution must generally
have a tangible equity ratio of at least 2%, a Tier 1 leverage ratio of at
least 5%, a Tier 1 risk-based capital ratio of at least 6% and a total
risk-based capital ratio of at least 10%. Under the OTS directive discussed
above, the Bank was required to increase its leverage capital ratio to no
less than 8.0% and its total risk-basked capital ratio to no less than
14.0% by April 1, 2002 through gradual compliance.
At September 30, 2002, the Bank's tangible equity ratio was 8.29%, Tier 1
leverage ratio was 8.31%, Tier 1 risk-based capital ratio was 14.76%, and
total risk-based capital ratio was 16.01%. As of September 30, 2002, the
Bank was classified as "well capitalized" and met the leverage capital and
total risk-based capital ratios under the OTS directive.
(6) Investment and Mortgage-Backed Securities
The following table sets forth the amortized cost, gross unrealized gains
and losses, estimated fair value and carrying value of investment and
mortgage-backed securities at the dates indicated:
Gross Gross
(Dollars in thousands) Amortized Unrealized Unrealized Estimated Carrying
At September 30, 2002 Cost Gains Losses Fair Value Value
--------------------- --------- ---------- ---------- ---------- --------
Available for Sale:
Equity investments $ 1,928 $ -- $ 2 $ 1,926 $ 1,926
U.S. Government Agencies 1,997 22 -- 2,019 2,019
Bank deposits 163 -- -- 163 163
Corporate bonds 1,925 -- 614 1,311 1,311
Mortgage-backed securities 292,734 6,156 2 298,888 298,888
-------- ------ ---- -------- --------
Total available for sale $298,747 $6,178 $618 $304,307 $304,307
======== ====== ==== ======== ========
Held to Maturity:
Federal Home Loan Bank Stock $ 6,050 $ -- $ -- $ 6,050 $ 6,050
U.S. Government Agencies 3,272 31 -- 3,303 3,272
Municipal bonds 20,456 978 -- 21,434 20,456
Mortgage-backed securities 59,440 1,296 -- 60,736 59,440
-------- ------ ---- -------- --------
Total held to maturity $ 89,218 $2,305 $ -- $ 91,523 $ 89,218
======== ====== ==== ======== ========
Gross Gross
(Dollars in thousands) Amortized Unrealized Unrealized Estimated Carrying
At December 31, 2001 Cost Gains Losses Fair Value Value
--------- ---------- ---------- ---------- --------
Available for Sale:
Equity investments $ 1,923 $ -- $ -- $ 1,923 $ 1,923
U.S. Government Agencies 2,770 4 -- 2,774 2,774
Bank deposits 440 -- -- 440 440
Corporate bonds 1,919 -- 374 1,545 1,545
Mortgage-backed securities 205,741 806 1,401 205,146 205,146
-------- ---- ------ -------- --------
Total available for sale $212,793 $810 $1,775 $211,828 $211,828
======== ==== ====== ======== ========
Held to Maturity:
Federal Home Loan Bank Stock $ 6,500 $ -- $ -- $ 6,500 $ 6,500
U.S. Government Agencies 16,808 81 170 16,719 16,808
Municipal bonds 14,865 240 304 14,801 14,865
-------- ---- ------ -------- --------
Total held to maturity $ 38,173 $321 $ 474 $ 38,020 $ 38,173
======== ==== ====== ======== ========
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(7) Loans and Leases, Net
The following table depicts the composition of the Company's loan and lease
portfolio at the dates indicated:
(Dollars in thousands) September 30, 2002 December 31, 2001
------------------ -----------------
Amount Percent Amount Percent
------ ------- ------ -------
Commercial business $ 83,135 18.14% $123,546 24.47%
Commercial real estate 195,995 42.76 195,105 38.64
Construction, net of loans in process 81,800 17.85 77,380 15.32
Single family residential real estate 27,680 6.04 26,518 5.25
Consumer loans 47,975 10.47 44,821 8.88
Lease financing 24,710 5.39 43,342 8.58
Unearned income (2,958) (.65) (5,770) (1.14)
-------- ------ -------- ------
Total loans and leases 458,337 100.00% 504,942 100.00%
====== ======
Allowance for loan and lease losses (7,100) (9,917)
-------- --------
Net loans and leases $451,237 $495,025
======== ========
(8) Allowance for Loan and Lease Losses
The following table details changes in the Company's allowance for loan and
lease losses for the periods indicated:
(Dollars in thousands) For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2002 2001 2002 2001
------ ------ ------ ------
Balance beginning of period $8,024 $10,309 $9,917 $ 7,407
Charge-offs:
Commercial business 1,183 800 4,049 1,337
Commercial real estate 61 11 757 42
Single family residential real estate -- -- -- 10
Consumer loans 12 -- 12 21
Lease financing 571 533 1,547 1,765
------ ------- ------ -------
Total charge-offs 1,827 1,344 6,365 3,175
------ ------- ------ -------
Recoveries:
Commercial business 282 7 370 10
Single family residential real estate -- 11 -- 11
Consumer loans 1 2 3 3
Lease financing 120 32 236 160
------ ------- ------ -------
Total recoveries 403 52 609 184
------ ------- ------ -------
Net charge-offs 1,424 1,292 5,756 2,991
Additions charged to operations 500 1,543 2,939 6,144
------ ------- ------ -------
Balance at end of period $7,100 $10,560 $7,100 $10,560
====== ======= ====== =======
Specific Valuation Allowance on Impaired Loans $ 314 $ 456 $ 314 $ 456
====== ======= ====== =======
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(9) TechBanc Sale
During January 2002, the Company completed the sale of TechBanc to Comerica
Bank - California, a subsidiary of Comerica Incorporated. Included in the
sale were loans, deposits and warrants of certain TechBanc's
technology-based companies. The aggregate fair value of loans sold
(including accrued interest receivable) was $25.0 million and deposits sold
(including accrued interest payable) totaled $46.4 million with net cash
paid of $21.4 million. At December 31, 2001, the loans were classified as
held for sale and carried at the lower of aggregate cost or market value
consisting of $23.3 million in commercial business loans and $2.3 million
in commercial real estate loans.
(10) Goodwill and Other Intangible Assets
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" ("FAS 142"). FAS 142 addresses the financial accounting and
requires new reporting disclosures for acquired goodwill and other
intangible assets, but not those acquired in a business combination, and
for goodwill and other intangible assets after they have been initially
recognized in the financial statements. Goodwill will not be amortized; it
will be annually tested for impairment using specific guidance under FAS
142. Other intangible assets that have indefinite useful lives will not be
amortized; they will also be annually tested for impairment using specific
guidance under FAS 142. Intangible assets that have finite useful lives
will continue to be amortized over their useful lives, or the best estimate
of their useful lives. FAS 142 is required to be applied starting with
fiscal years beginning after December 15, 2001; however, goodwill and other
intangible assets acquired after June 30, 2001 are subject immediately to
the nonamortization and amortization provisions.
The Company adopted FAS 142 on January 1, 2002 at which time management
reviewed the Company's existing goodwill of approximately $2.0 million,
reclassified eligible intangible assets and ceased amortizing its goodwill.
An existing customer-related intangible asset of $655,000 at the Equipment
Leasing segment was reclassified out of goodwill. The remaining goodwill at
the Banking and Other business segments was tested and no impairment loss
was recognized. Goodwill amortization at the Banking and Other business
segments of approximately $150,000, or $139,000 after tax, will not be
recognized in 2002 due to the adoption of FAS 142. However, during the
first quarter of 2002, there was a reduction in key personnel in the
Company's Other segment resulting in an interim non-tax-deductible
impairment loss of $27,000 based on the expected present value of future
cash flows. The Company performed its annual valuation on the goodwill held
at its Other segment which resulted in a non-tax-deductible impairment loss
of $547,000 during the third quarter of 2002. Management reassessed the
useful life of the Equipment Leasing segment customer-related intangible
asset and adjusted its future amortization from a remaining twelve-year
straight-line schedule to an accelerated schedule based on the remaining
expected future cashflows. This schedule results in an amortization of 79%
of the asset by the end of 2003. The difference between the schedules will
result in additional non-tax-deductible amortization expense of
approximately $273,000 during 2002.
Changes in the carrying amounts of goodwill related to each business
segment for the nine months ended September 30, 2002 are presented below:
(Dollars in thousands) Banking Other Segments Total Goodwill
------- -------------- --------------
Balance, January 1, 2002 $468 $ 851 $1,319
Impairment losses recognized -- (574) (574)
---- ----- ------
Balance at September 30, 2002 $468 $ 277 $ 745
==== ===== ======
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The gross carrying amount, accumulated amortization and net carrying amount
for each of the Company's identified intangible assets subject to
amortization is presented below:
(Dollars in thousands) September 30, 2002 December 31, 2001
------------------------------------ ------------------------------------
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
-------- ------------ -------- -------- ------------ ---------
Customer-related intangible $ 823 $(414) $409 $ 823 $(168) $655
Servicing rights 414 (129) 285 331 (85) 246
------ ----- ---- ------ ----- ----
Total $1,237 $(543) $694 $1,154 $(253) $901
====== ===== ==== ====== ===== ====
The estimated amortization expense on the Company's identified intangible
assets for each of the years ended December 31, 2002, 2003, 2004, 2005 and
2006 is $390,000, $263,000, $144,000, $75,000 and $49,000, respectively.
The following table summarizes the effects of adopting FAS 142 on net
income and earnings per share for the periods indicated:
For the Three Months For the Nine Months
(Dollars in thousands, except per share data) Ended September 30, Ended September 30,
2002 2001 2002 2001
----- ------ ------ ------
Reported net income $1,315 $933 $2,972 $(11)
Add back: Goodwill amortization, net -- 43 -- 131
Add back: Change in customer-related intangible amortization 68 -- 205 --
------ ---- ------ ----
Adjusted net income $1,383 $976 $3,177 $120
====== ==== ====== ====
Basic earnings per common share:
Reported net income $ .20 $.17 $ .45 $ --
Goodwill amortization, net -- .01 -- .02
Change in customer-related intangible amortization .01 -- .03 --
------ ---- ------ ----
Adjusted net income $ .21 $.18 $ .48 $.02
====== ==== ====== ====
Diluted earnings per common share:
Reported net income $ .19 $.17 $ .44 $ --
Goodwill amortization, net -- .01 -- .02
Change in customer-related intangible amortization .01 -- .03 --
------ ---- ------ ----
Adjusted net income $ .20 $.18 $ .47 $.02
====== ==== ====== ====
(11) 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 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, irrevocably and unconditionally guaranteed all of the Trust's
obligations under the Trust Securities. During the third quarter of 2002
the Company recognized a gain of $25,000 on the extinguishment of $1.5
million of the Capital Securities.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) (Continued)
In July 2000, the Company issued 6,000 shares, or $6.0 million, of 11.445%
trust preferred securities, $1,000 liquidation amount per security, due
July 19, 2030 (the "Trust Preferred Securities"), in a private offering
managed by First Union Securities, Inc. The Trust Preferred Securities
represent undivided beneficial interests in Progress Capital Trust II (the
"Trust II"), a statutory business trust created under the laws of Delaware,
which was established by the Company for the purpose of issuing the Trust
Preferred Securities. The Company has fully, irrevocably and
unconditionally guaranteed all of the Trust II's obligations under the
Trust Preferred Securities.
(12) Commitments and Contingencies
At September 30, 2002, the Company had $146.9 million in loan commitments
to extend credit, including unused lines of credit, and $8.0 million in
letters of credit outstanding
(13) Segments
The following table sets forth selected financial information by business
segment for the periods indicated:
Private Equity Insurance/
Equipment Fund Wealth Other
Banking Leasing(a) Management(b) Management(c) Segments Corporate Total
------- ---------- --------------- -------------- -------- --------- -----
(Dollars in thousands)
Total Assets at:
September 30, 2002 $900,588 $22,530 $ 120 $ 446 $ 601 $3,410 $927,695
December 31, 2001 803,588 37,351 10 678 1,175 8,578 851,380
Revenues for:
the three months ended
September 30, 2002 10,626 445 65 472 266 (155) 11,719
September 30, 2001 10,407 1,089 614 306 426 (495) 12,347
the nine months ended
September 30, 2002 29,587 1,611 182 2,078 724 (297) 33,885
September 30, 2001 28,493 3,278 1,843 2,069 1,581 (2,461) 34,803
Income (loss) for:
the three months ended
September 30, 2002 2,579 (156) 31 (22) (535) (582) 1,315
September 30, 2001 2,089 (232) 57 (136) 2 (847) 933
the nine months ended
September 30, 2002 5,550 (319) 33 (40) (612) (1,640) 2,972
September 30, 2001 3,042 96 172 (179) 70 (3,212) (11)
(a) During the first quarter of 2002, management decided to stop
originating leases due to a change in business climate and
subsequently significantly reduced the staffing levels in the
Equipment Leasing segment.
(b) At December 31, 2001, the Private Equity Fund Management segment
exited the venture fund management business.
(c) Beginning the second quarter of 2002, new business generated through
the Insurance/Wealth Management segment has been through an agency
arrangement where the sales personnel are no longer employees of the
Company.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the Company's Consolidated
Financial Statements and accompanying notes and with the Company's Annual Report
on Form 10-K for the year ended December 31, 2001. Certain reclassifications
have been made to prior period data throughout the following discussion and
analysis for comparability with 2002 data.
When used in filings by the Company with the Securities and Exchange Commission,
in the Company's press releases or other public or shareholder communications,
or in oral statements made with the approval of an authorized executive officer,
the words or phrases "will likely result," "are expected to," "will continue,"
"is anticipated," "estimate," "project," or similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements are subject to certain
risks and uncertainties including changes in economic conditions in the
Company's market area, changes in policies by regulatory agencies, fluctuations
in interest rates, demand for loans in the Company's market area and competition
that could cause actual results to differ materially from historical earnings
and those presently anticipated or projected. The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements,
which speak only as of the date made. The Company wishes to advise readers that
the factors listed above could affect the Company's financial performance and
could cause the Company's actual results for future periods to differ materially
from any opinions or statements expressed with respect to future periods in any
current statements.
CRITICAL ACCOUNTING POLICIES
Accounting policies involving significant judgments and assumptions by
management, which have, or could have, a material impact on the carrying value
of certain assets or comprehensive income, are considered critical accounting
policies. The Company recognizes the following as critical accounting policies:
Allowance for Loan and Lease Losses, Goodwill and Other Intangible Asset
Impairment, Stock-Based Compensation, and Unrealized Gains and Losses on Debt
Securities Held for Sale.
Allowance for Loan and Lease Losses: The Company maintains an allowance for loan
and lease losses at a level management believes is sufficient to provide for
known and inherent losses in the loan and lease portfolios at the Banking and
Equipment Leasing segments. Risks within the loan and lease portfolio are
analyzed on a continuous basis by the Company's officers, external independent
loan and lease review consultants, and on a monthly basis by the Company's Board
of Directors. Significant estimates are made by management in determining the
allowance for loan and lease losses. Consideration is given to a variety of
factors in establishing these estimates including current and anticipated
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, the dependence on
collateral, or the strength of the present value of future cash flows and other
relevant factors. Since the allowance for loan and lease losses 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 loan and lease losses could differ materially in the near term.
Although management utilizes its best judgment in providing for loan and lease
losses, there can be no assurance that the Company will not have to increase its
provision for loan and lease losses in the future as a result of adverse market
conditions, future increases in non-performing loans and leases, or for other
reasons. Any such increase could adversely affect the Company's results of
operations. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the allowance for loan and lease
losses and the carrying value of its other non-performing assets. Such agencies
may require the Company to recognize additions to its allowance for losses based
on their judgments of information available to them at the time of their
examination.
Goodwill and Other Intangible Asset Impairment: Quoted market prices are not
typically available in evaluating the Company's goodwill and other intangible
assets; therefore, the Company estimates the fair value of its goodwill and
other intangible assets using the present value of estimated future cash flows.
The Company's best estimate of the present value of cash flows may not
necessarily equate to the market value of the underlying asset. Goodwill and
other intangible assets are carried by the Banking, Equipment Leasing and Other
segments.
Stock-Based Compensation: Under SFAS No. 123 "Accounting for Stock-Based
Compensation" ("FAS 123"), companies had a choice whether to adopt the fair
value based method of accounting for stock-based compensation or remain with the
intrinsic value based method prescribed under APB Option No. 25, "Accounting for
Stock Issued to Employees" ("APB 25") but provide pro-forma disclosures as if
the fair value based method was applied. The Company chose the intrinsic value
based method under APB 25 and provides the pro-forma disclosures required under
FAS 123. In preparing the pro-forma disclosures, the Company estimates the fair
value of employee stock options using a pricing model that takes into account
the exercise price and expected life of the options, the current price of the
underlying stock and its expected volatility, the expected dividends on the
stock and the current risk-free interest rate for the expected life of the
option. The Company's best estimate of the fair value of a stock option is based
on expectations derived from historical experience and may not necessarily
equate to its market value when fully vested. Increasing numbers of constituents
are advocating that companies voluntarily adopt the fair value based method
under FAS 123. If the Company chose to adopt FAS 123, net expense of
approximately $270,000 would be recognized for the Year 2002.
Unrealized Gains and Losses on Debt Securities Held for Sale: The Company
receives estimated fair values of debt securities from an independent valuation
service and brokers. In developing these fair values, the valuation service and
brokers use estimates of cash flows based on historical performance of similar
instruments in similar rate environments. Based on experience, management is
aware that estimated fair values of debt securities tend to vary among brokers
and other valuation services. Debt securities held for sale are carried at the
Banking segment and are mostly comprised of mortgage-backed securities.
RESULTS OF OPERATIONS
The Company recognized net income of $1.3 million, or diluted earnings per share
of $.19, for the three months ended September 30, 2002 compared to $933,000, or
$.17 per diluted share, for the third quarter of 2001. Return on average
shareholders' equity was 8.05% and return on average assets was .57% for the
three months ended September 30, 2002 compared to 7.25% and .41%, respectively,
for the three months ended September 30, 2001.
Net income for the nine months ended September 30, 2002 was $3.0 million, or
diluted earnings per share of $.44, compared to an $11,000 net loss, or no
diluted earning per share, for the nine months ended September 30, 2001. Return
on average shareholders' equity was 6.49% and return on average assets was .45%
for the nine months ended September 30, 2002 compared to a loss on shareholders'
equity of .03% and no return on average assets for the nine months ended
September 30, 2001.
Net Interest Income
Tax-equivalent net interest income for the quarter ended September 30, 2002
decreased $697,000, or 8%, as compared to the third quarter of 2001. The net
interest margin for the third quarter of 2002 was 3.50% compared to 3.78% for
the third quarter of 2001. Tax-equivalent net interest income for the nine
months ended September 30, 2002 decreased $2.4 million, or 10%, as compared to
the same period in 2001. The net interest margin for the nine months ended
September 30, 2002 was 3.55% compared to 3.86% for the same period in 2001.
Average earning assets for the third quarter of 2002 were $852.3 million
compared to $862.1 million for the third quarter of 2001and $834.8 million for
the nine months ended September 30, 2002 compared to $850.3 million for the same
period in 2001. The decline in earning assets during the three and nine months
ended September 30, 2002 from the comparable periods in 2001 was primarily due
to lower commercial business loan volume as a result of the TechBanc sale which
was partially offset with higher levels of investments in mortgage-backed
securities. Tax-equivalent interest income for the third quarter of 2002
decreased $2.8 million, or 17%, over the same period in 2001 while interest
expense decreased $2.1 million, or 26%, for the same period. Tax-equivalent
interest income for the nine months ended September 30, 2002 decreased $10.5
million, or 21%, over the same period in 2001 while interest expense decreased
$8.1 million, or 31%, for the same period.
Provision for Loan and Lease Losses
The provision for loan and lease losses was $500,000 for the quarter ended
September 30, 2002, compared to $1.5 million for the same period in 2001. The
provision for loan and lease losses was $2.9 million for the nine months ended
September 30, 2002, compared to $6.1 million for the same period in 2001. The
higher provision during 2001 reflected the reserve additions to address credit
and economic concerns which have been reduced as a result of the sale of
TechBanc loans to Comerica in January 2002.
At September 30, 2002, the allowance for loan and lease losses amounted to $7.1
million or 1.55% of total loans and leases and 94.14% of total non-performing
loans and leases. At December 31, 2001, the allowance for loan and lease losses
amounted to $9.9 million or 1.87% of total loans and leases and 106.28% of total
non-performing loans and leases.
Non-interest Income
Non-interest income for the quarter ended September 30, 2002 was $4.4 million
compared to $4.3 million for the same period in 2001. The quarter ended
September 30, 2002 included a net gain on sale of real estate of $1.6 million
resulting from a gain on sale of land of $2.5 million which was partially offset
by losses on the sale of two commercial real estate owned properties totaling
$937,000. Income of $466,000 was recognized during the third quarter of 2002
from the sale and liquidating distribution of client warrants. Gain on sale of
securities was $84,000 compared to $1.1 million for the same quarter in 2001.
Fee income for the quarter decreased $776,000 primarily due to the decline in
private equity fund management fees from the Company's subsidiary, Progress
Capital Management, Inc. ("PCM"), as the Company exited the venture fund
management business at December 31, 2001, a reduction in consulting fees from
the Company's subsidiary, KMR Management, Inc. ("KMR"), and a decrease in lease
financing fees. Service charges on deposits amounted to $916,000 during the
third quarter of 2002 compared to $640,000 for the comparable quarter in 2001.
This 43% growth is primarily attributed to new deposit products offered during
the first quarter of 2002.
Non-interest income for the nine months ended September 30, 2002 was $12.1
million as compared to $10.6 million for the same period in 2001. The nine
months ended September 30, 2002 included income of $1.9 million primarily from
the sale of client warrants as compared to losses of $2.0 million from client
warrants for the comparable period in 2001, primarily due to the permanent
impairment of equity securities received from warrants. A net gain on sale of
real estate of $1.6 million was recognized resulting from the sale of land and
commercial real estate owned. Gain on sale of securities for the nine months
ended September 30, 2002 was $436,000 compared to $2.3 million for the same
period in 2001. Fee income for the nine months decreased $2.6 million primarily
due to the decline in private equity fund management fees from the Company's
subsidiary, PCM, as the Company exited the venture fund management business at
December 31, 2001 and a reduction in consulting fees from the Company's
subsidiary, KMR. Service charges on deposits for the nine months increased
$900,000 primarily attributable to new deposit products offered during the first
quarter of 2002. During the nine months ended September 30, 2001, loss in
unconsolidated entities was $818,000, primarily relating to a loss on its
investment in a venture capital fund, compared to equity of $102,000 during the
same period of 2002.
Non-interest Expense
Total non-interest expense was $8.8 million for the quarter ended September 30,
2002 compared to $9.4 million for the third quarter of 2001. Total non-interest
expense was $26.1 million for the nine months ended September 30, 2002 compared
to $28.8 million for same period in 2001. Salaries and employee benefits
decreased by $319,000 and $2.0 million for the three and nine months ended
September 30, 2002 from the comparable periods in 2001, respectively, mainly due
to the Company exiting the fund management and TechBanc businesses and lower
staffing levels at Progress Leasing Company which were partially offset by
additional expense to support the Company's expanded community based banking
strategy. Professional services expenses decreased during the three and nine
months ended September 30, 2002 from the comparable periods in 2001 primarily
due to a reduction in the business activities of KMR in 2002, PCM exiting the
fund management business and legal expenses related to loans to pre-profit
companies during 2001. The Company performed its annual evaluation of goodwill
of KMR which resulted in an impairment loss of $547,000 during the third quarter
of 2002, included in other non-interest expense.
FINANCIAL CONDITION
Total assets increased to $927.7 million at September 30, 2002 from $851.4
million at December 31, 2001. Loans and leases outstanding, including loans held
for sale, totaled $458.3 million at September 30, 2002 compared to $530.5
million at December 31, 2001. This decrease was primarily due to the sale of
TechBanc loans to Comerica totaling $25.6 million during January 2002, which
were primarily commercial business loans, as well the asset-based lending sale,
payoffs of commercial business loans and the runoff of lease financing
receivables. Net increases in mortgage-backed securities were $153.2 million
since year-end primarily due to $256.3 million in purchases partially offset by
repayments of $60.7 million and sales of $47.9 million. Total deposits increased
to $663.0 million at September 30, 2002 from $629.5 million at December 31, 2001
as a result of $79.7 million in deposit growth during the nine months of 2002
partially offset by the sale of $46.2 million in deposits to Comerica in January
2002.
Liquidity and Funding
The Company must maintain sufficient liquidity to meet its funding requirements
for loan and lease commitments, scheduled debt repayments, operating expenses,
and deposit withdrawals. The Bank is the primary source of working capital for
the Company. The Company's need for liquidity is affected by loan demand and net
changes in retail deposit levels. The Company can minimize the cash required
during the times of heavy loan demand by modifying its credit policies or
reducing its marketing efforts. Liquidity demand caused by net reductions in
retail deposits is usually caused by factors over which the Company has limited
control. The Company derives its liquidity from both its assets and liabilities.
Liquidity is derived from assets by receipt of interest and principal payments
and prepayments, by the ability to sell assets at market prices and by utilizing
unpledged assets as collateral for borrowings. Liquidity is derived from
liabilities by maintaining a variety of funding sources, including retail
deposits, FHLB borrowings and securities sold under agreement to repurchase.
The Company's primary sources of funds have historically consisted of deposits,
amortization and prepayments of outstanding loans, FHLB borrowings and
securities sold under agreement to repurchase and sales of investment and
mortgage-backed securities. During the nine months ended September 30, 2002, the
Company reinvested its working capital primarily by purchasing mortgage-backed
securities to maintain its liquidity. For the nine months ended September 30,
2002 cash was used in operating activities primarily due to net increases in
other assets. Cash was used in investing activities primarily due to the
purchases of mortgage-backed securities. Cash was provided by financing
activities primarily due to increases in deposits and short-term borrowings.
Non-Performing and Underperforming Assets
The following table details the Company's non-performing and underperforming
assets at the dates indicated:
September 30, December 31, September 30,
(Dollars in thousands) 2002 2001 2001
------------- ------------ -------------
Loans and leases accounted for on a non-accrual basis $ 7,542 $ 9,331 $ 4,775
Other real estate owned, net of related reserves 872 1,533 1,498
------- ------- -------
Total non-performing assets 8,414 10,864 6,273
Accruing loans 90 or more days past due 2,735 1,125 2,540
------- ------- -------
Total underperforming assets $11,149 $11,989 $ 8,813
======= ======= =======
Non-performing assets as a percentage of net loans and leases
and other real estate owned 1.86% 2.08% 1.16%
======= ======= =======
Non-performing assets as a percentage of total assets .91% 1.28% .72%
======= ======= =======
Underperforming assets as a percentage of net loans and leases
and other real estate owned 2.47% 2.30% 1.63%
======= ======= =======
Underperforming assets as a percentage of total assets 1.20% 1.41% 1.01%
======= ======= =======
Allowance for loan and lease losses $ 7,100 $ 9,917 $10,560
======= ======= =======
Ratio of allowance for loan and lease losses to
non-performing loans and leases at end of period 94.14% 106.28% 221.15%
======= ======= =======
Ratio of allowance for loan and lease losses to underperforming
loans and leases at end of period 69.09% 94.85% 144.36%
======= ======= =======
Non-performing assets decreased from $10.9 million at December 31, 2001 and
increased from $6.3 million at September 30, 2001 to $8.4 million at September
30, 2002. The net decrease in non-performing assets since December 31, 2001 was
primarily the result of principal payments, charge-offs and the sale of a $1.5
million commercial property classified as other real estate owned. The net
increase in non-performing assets since September 30, 2001 was primarily due to
a large non-accrual commercial business loan. The $7.5 million of non-accrual
loans at September 30, 2002 consisted of: $6.1 million of commercial business
loans, $420,000 of lease financing, $158,000 of commercial mortgages, $420,000
of consumer loans and $434,000 of single family residential mortgages.
Accruing loans 90 or more days past due increased from $1.1 million at December
31, 2001 to $2.7 million at September 30, 2002 primarily due to increased
delinquencies of commercial business loans and commercial mortgages partially
offset by payoffs and the acquisition of commercial property as other real
estate owned which collateralized a delinquent commercial mortgage at December
31, 2001. The $2.7 million of accruing loans 90 or more days past due at
September 30, 2002 consisted of: $1.6 million of commercial business loans, $1.1
million of commercial mortgages, $11,000 of lease financing and $3,000 of
consumer loans.
Delinquencies
The following table sets forth information concerning the principal balances and
percent of the total loan and lease portfolio represented by delinquent accruing
loans and leases at the dates indicated:
September 30, 2002 December 31, 2001 September 30, 2001
------------------ ----------------- ------------------
(Dollars in thousands) Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Delinquencies:
30 to 59 days $1,879 .41% $ 4,214 .80% $6,005 1.10%
60 to 89 days 2,328 .51 5,962 1.12 564 .10
90 or more days 2,735 .59 1,125 .21 2,540 .46
------ ---- ------- ---- ------ ----
Total $6,942 1.51% $11,301 2.13% $9,109 1.66%
====== ==== ======= ==== ====== ====
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For information regarding market risk, see the Company's Annual Report on Form
10-K for the year ended December 31, 2001, Item 7A, filed with the Securities
and Exchange Commission on March 22, 2002. The market risk of the Company has
not experienced any significant changes as of September 30, 2002 from the Annual
Report on Form 10-K.
Item 4. Controls and Procedures
Management, under the supervision and with the participation of the Company's
President and Chief Executive Officer (the "CEO") and the Company's Chief
Operating Officer and Chief Financial Officer (the "COO/CFO") have evaluated the
Company's disclosure controls and procedures within 90 days prior to the filing
of this report. Based upon that evaluation, the CEO and the COO/CFO have
concluded that the disclosure controls and procedures were effective. There were
no significant changes in the Company's internal controls or in other factors
that could significantly affect these controls subsequent to the date of the
evaluation.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in routine legal proceedings occurring in the ordinary
course of business which management, after reviewing the foregoing actions with
legal counsel, is of the opinion that the liability, if any, resulting from such
actions will not have a material effect on the financial condition or results of
operations of the Company.
On August 29, 2001, a shareholder's derivative action was filed against the
Company and its directors in the Delaware Chancery Court alleging failure to
comply with the Home Owners' Loan Act, insider trading, and breach of their
fiduciary duty. The plaintiff demands judgment against the Company and its
directors for the amount of damages sustained by the Company as a result of the
directors' breaches of fiduciary duty, awarding the plaintiff the costs and
disbursements of the actions, including expenses of the lawsuit and granting
such other and further relief as the Court may deem just and proper. The Company
believes that this action is without merit and is defending the action
vigorously. On December 7, 2001, the Company filed an Opening Brief and Motion
to Dismiss the Complaint, which the plaintiff filed an opposition to on January
25, 2002. On March 8, 2002, the Company filed a Reply Brief in support of its
motion to dismiss. Oral argument was held on April 24, 2002. The Company is
awaiting a ruling on its motion.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits
99(a) Certification of Chief Executive Officer
99(b) Certification of Chief Financial Officer
(b) Reports on Form 8-K
1. On July 18, 2002, the Company filed a Current Report for July 18,
2002 announcing the second quarter 2002 earnings and the
distribution of an earnings package to analysts.
2. On July 31, 2002, the Company filed a Current Report for July 30,
2002 declaring a cash dividend with the reinstatement of its
quarterly cash dividend.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Progress Financial Corporation
November 13, 2002 /s/ W. Kirk Wycoff
---------------------- -------------------------------------------
Date W. Kirk Wycoff, Chairman, President and
Chief Executive Officer
November 13, 2002 /s/ Michael B. High
----------------------- -------------------------------------------
Date Michael B. High, Chief Financial Officer
and Chief Operating Officer
CERTIFICATION
I, W. Kirk Wycoff, President and Chief Executive Officer of Progress Financial
Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Progress Financial
Corporation (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee of
Registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the Registrant's ability to record, process,
summarize and report financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ W. Kirk Wycoff
----------------------------------------------
Name: W. Kirk Wycoff
Title: President and Chief Executive Officer
CERTIFICATION
I, Michael B. High, Chief Operating Officer and Chief Financial Officer of
Progress Financial Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Progress Financial
Corporation (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee of
Registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the Registrant's ability to record, process,
summarize and report financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ Michael B. High
----------------------------------------
Name: Michael B. High
Title: Chief Operating Officer and
Chief Financial Officer
Exhibit 99(a)
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
The undersigned executive officer of Progress Financial Corporation (the
"Registrant") hereby certifies to the best of his knowledge that the
Registrant's Form 10-Q for the quarter ended September 30, 2002 fully complies
with the requirements of Section 13(a) of the Securities Exchange Act of 1934
and that the information contained therein fairly presents, in all material
respects, the financial condition and results of operations of the Registrant.
/s/ W. Kirk Wycoff
----------------------------------------------
Name: W. Kirk Wycoff
Title: President and Chief Executive Officer
Date: November 13, 2002
Exhibit 99(b)
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
The undersigned executive officer of Progress Financial Corporation (the
"Registrant") hereby certifies that to the best of his knowledge the
Registrant's Form 10-Q for the quarter ended September 30, 2002 fully complies
with the requirements of Section 13(a) of the Securities Exchange Act of 1934
and that the information contained therein fairly presents, in all material
respects, the financial condition and results of operations of the Registrant.
/s/ Michael B. High
---------------------------------------------
Name: Michael B. High
Title: Chief Operating Officer and
Chief Financial Officer
Date: November 13, 2002